US Pay TV market overview

Recent earning reports from DirectTV, Dish, and Comcast have indicated substantial subscriber growth in the industry. I want to compare the metrics in these companies and also compare them with over the top player such as Netflix.

motion chart for US pay TV market

I have to make some assumptions to build the chart as I need to consolidate financial reports from different companies.  I will write some articles on my takeaways in the next few days.  The chart is work in progress and I will keep updating as I learn more about the companies.


Over the top streaming video primer

According to a recent study by Sandvine titled “Fall 2010 Global Internet Phenomena”, Netflix, a popular streaming video service, represents 20% of downstream internet traffic in the US during peak hours (8 – 10 PM local time).  This is the time slot where Americans typically sit back and relax to either surf the web or watch TV.  The study suggests a significant shift is happening on how Americans consume their entertainment and media content from traditional broadcast media such as cable TV to the internet where contents are on demand and available when they want and where they want.

Mass adoption of internet video does not take place over night.  As early adopters are embracing the newly found freedom of on demand internet video, there is a large percentage of people that are resisting the shift to internet video for various reasons.  Some are not comfortable with the paradigm shift of connecting their consumer electronics devices to the internet where the network setup could be daunting.  Others are not satisfied with the quality of the internet video and want the same level of experience as playing DVD/BluRay disc with instant and guaranteed high quality playback.

A number of factors affect the quality of user experience when streaming video over the internet.  Some of the problems arise from the characteristics of the underlying network used to stream video.  For example, the internet is a packet switch network that is designed for scalability but offers no guarantee on how fast packets can be delivered between two endpoints on the network.  Also packets can get lost during transmission due to network congestion, malfunctioned hardware, or routing problems.  Packet loss and retransmission during video stream has an adverse effect on the experience where video playback could glitch and stop for a period of time or image on the screen is distorted.

In addition, the farther away the video client is to the streaming server implies there are more intermediate routers along the way that need to route/forward the video packets to its destination.  The more intermediate router hops raises the time delay, packet round trip time and packet drop probability.  As round trip time increases, TCP flow control and TCP sliding window protocol further exacerbates the problem by reducing the effective bandwidth of the connection and hence degraded the video stream quality.

Another important thing to consider is video bit rates and coding algorithm.  As a rule of thumb, video quality for a particular coding algorithm gets better with higher bit rates video.  For example, standard definition DVD disc streams up to 10 Mbps MPEG2 video while 1080p high definition BluRay disc requires up to 40 Mbps.  In contrast, advanced video encoding algorithm such as H.264 can compress 1080p high definition video at 6-8 Mbps bit rates.  As a result, most streaming video services have chosen advanced algorithm such as H.264 to produce the highest quality video at the smallest bit rates.  This technique requires powerful CPU and video engine on the client devices to keep up with decoding complex algorithm and processing DRM at the same time.  In general, Moore’s law and competition in the semiconductor industry will solve this problem over time.

Other major factor to think about is the speed of video client’s broadband internet connection.   Broadband bandwitdh must exceed the video bit rates to allow continuous and uninterrupted playback of video streams.  Broadband services are available from multiple different ISPs and each ISP offers different level of service depending on the equipments that they have deployed in a particular area.   As an example, AT&T can offer broadband service up to 30 Mbps in some areas where they have installed VDSL network while they can only offer up to 2 Mbps in some rural areas.  This presents a challenge for streaming video services company to offer unique service for each customer by enabling the best quality video that their broadband speed allows.

The last factor that is often neglected is the lack of service level agreement (SLA) between subscribers and their ISP to allocate bandwidth and prioritize streaming video traffic over other traffic competing for the same broadband bandwidth.  As an example, with 6 Mbps broadband speed, bittorrent traffic from other endpoint such as a PC on the home network could potentially hog the download bandwidth and try to take all the available 6 Mbps bandwidth.  Even though this bandwidth is typically sufficient to deliver HD quality H.264 video streams, the presence of the bittorrent traffic prevents HD playback of the video.

To mitigate network congestion problem, client device can pre-buffer video streams before playback.  This allows client device to account for variation in delay and packet loss in the network and ensuring uninterrupted video stream.  Buffering does have a negative side effect because playback does not start immediately.  Typical DVD/BluRay disc plays within 20-30 seconds after inserting the disc.  Sufficient bandwidth that exceeded the streamed video bit rates is needed to meet disc playback experience.  If the bandwidth is not there, buffering the same amount of video data could take longer than 30 seconds and impacted the quality experience.

To offer uniform experience to users present at disparate locations in the world with different proximity to the streaming server, a widely adopted method is to use Content Delivery Networks (CDN) service.  CDN service provider has thousands of servers deployed worldwide typically at the ISP’s access network and these servers cache video contents locally.

Adaptive streaming technology addresses the network congestion issue and variation in broadband speeds by dynamically changing the streaming bit rates to accommodate bandwidth availability.  The server collects information about the client’s network characteristics in real time and selects an ideal video bit rates with the goal of minimizing video interruptions and providing best playback.  The server accomplishes this by storing multiple video files that have the same content but with varying video bit rates to match each client’s unique bandwidth.  Adaptive streaming not only helps in providing uninterrupted video playback but also helps in reducing operational cost as fewer bits are served through the CDN.

When other traffic on the network are competing for the same broadband bandwidth, home router gateway can offer additional qos feature to automatically prioritize and allocate more bandwidth for video streams compared to other traffic.

In summary, internet streaming video services are at the inflection point of mass market adoption where subscribers are growing exponentially and delivery experience is good enough for early adopters to create momentum for the rest of the consumers.  Streaming video experience will get even better in the future as broadband speed increases, Moore’s law raises processing power capability, and video coding algorithm improves.