The underlying enabler of all this — broadband networks — provides an excellent case study in how this might play out. Today we are moving from all-you-can-eat broadband to usage-based pricing as service providers try to reign in the demands on their networks, deliver a return on their investments and also compensate for high prices they pay per subscriber for video content. The battle here is exemplified by the likes of Netflix fighting caps implemented by companies including Comcast.

But at the Fiber to the Home conference held Tuesday in Austin, I saw the battle lines beginning to shift thanks to faster networks and new capabilities. IP networks are about services, which means that a delivery model where services are delivered as different channels becomes a possibility.

Soon, software-defined networking will allow providers to build out those channels virtually on their networks and deliver them a la carte or as a bundle. What’s missing is the business model.

When you combine gigabit networks and software defined networks you get more services delivered via broadband and a network that can adapt to the demands of applications on the fly. Because of this — and the increasing importance of the services one can deliver over gigabit networks — Joe Kochan of U.S. Ignite, a group trying to develop gigabit applications, proposed a different type of pricing model: one where users buy access to set of capabilities for either an application or a genre of applications.

Kochan proposed a medical channel that, for example, might have the security features one needs for relaying medical data, along with a high-speed, low-latency connection required to teleconference with a doctor or nurse. An education channel might have the capacity for interactive video as well as the applications a child might need for their work. Because one could also offer digital rights management, maybe the textbooks could be accessed online via that channel.

Kochan took it a bit further suggesting that you might get both a medical broadband channel and the hardware needed for your particular medical circumstances, but stopped short of explaining who would provide this. I’m not sure that I’d want Time Warner Cable choosing what hardware I should use to track my heart rate, for example.

However, your insurance company might see value in such a service and try to subsidize your gigabit broadband should you use hardware that it has selected. This vision of some kind of a la carte service delivery currently runs anathema to what we have today on broadband networks, and honestly would drive people in the network neutrality circles and consumer interest groups a little crazy. Personally, I’m thinking about what this could mean for my own stance on network neutrality.

Would my broadband provider or doctor dictate my home medical devices?

For example, if there’s some kind of entertainment channel, one could argue that it might support Netflix’s protocols but not those used by BitTorrent or some other entertainment provider that may have a new protocol or alternative delivery mechanism that could result in a richer user experience at the expense of the network. In this case, it depends on how these channels are provisioned and who is in charge of the provisioning.

But what isn’t in doubt is the current model, with everything running pell-mell over the public internet, doesn’t have to be the future in a software-defined and gigabit-capable world. Even today, I am trying to wrangle and prioritize traffic on my home network through a smarter router. But how many consumers are willing to take those steps, or even know what they need to do to ensure their video conference calls aren’t pre-empted by their 13-year-old’s gaming?

With more data and more critical data going over broadband networks, some kind of prioritization and security scheme might make sense. What we’re seeing with gigabit networks from Google and AT&T is the meeting of two diametrically opposed sentiments each preparing to offer new business models.

“We’re seeing the world of telecommunications meet the world of the internet and where those two meet is going to be a series of negotiations about where both will work together,” Kochan said.

These fights will play out in the quest for infrastructure, on Capital Hill and in business models. For example, last week when AT&t announced pricing for its gigabit service, it included an option with a $30 per month discount if users consented to let AT&T monitor their searches and traffic for use in delivering targeted ads.

So perhaps the giants of the internet will consent to this idea of delivering broadband functionality as specific types of channels that will have certain characteristics and apps if it means the end consumer will trust more of their lives, their data and their physical experience to a digital existence. And before that happens I suppose regulators and net neutrality advocates will have to figure out if their thinking needs to evolve and what kinds of protections should be put in place.

From the release announcing the study:

“That consumers are watching more over-the-top video is not itself surprising,” notes Michael Greeson, co-founder of TDG. “But to see such a widespread increase in OTT TV viewing is dramatic, especially as pay-TV subscriptions in the US are experiencing their greatest 12-month losses to date.”

Meanwhile, with the rise in consumption of internet TV there’s a decline in pay TV subscribers. This is the third consecutive quarter of such quarter-over-quarter declines according to investment bank Stifel Nicolas, which notes that the economy is improving and people are building houses again. Growth in housing is generally correlated to growth in cable subscriptions.

So while a whopping 86.8 percent U.S. homes have cable, they are also spending more time enjoying internet services, which may lead more to question the value of paying high cable fees. However, if cable companies can take what consumers enjoy from such over-the-top services like on-demand programming to any device and still keep a lock on quality programming they have an enviable hunk of the market.

A decade ago, a big ticket merger in advertising world wouldn’t merit any attention in Silicon Valley, but we are living in new and exciting times  – media, content and technology are now in a sailor’s knot. Today the idea of what is media is being transformed by the emergence of two new mediums — wired and wireless broadband. All our concepts of media containers — television, newspaper, magazines are being tested by changing demographic and consumer behaviors.

These are as much a challenge (and an opportunity) for startups and new media leviathans like Facebook as they are for advertising companies and that is why I find the merger between two of the six biggest advertising giants — Publicis and Omnicom — interesting.

The deal

The two companies jointly announced their merger plans earlier Sunday and said that the new company — in which each will own a 50 percent stake — will be called Publicis Omnicom Group and will have revenue of $23 billion and market capitalization of $35.1 billion. It will trade under the ticket OMC on the New York Stock Exchange and Euronext. The holding company will be based in Netherlands.

This new company will zoom past current market leader WPP, which has revenue of $5.6 billion and market capitalization of $20 billion. According to AgeAge, Publicis Omnicom’s combined US revenues will be $11.4 billion, twice as much as WPP. Needless to say, there are going to be interesting antitrust implications. And there are other issues. For instance, PepsiCo is an Omnicom account while Coca Cola is with Leo Burnett, a Publicis company. AT&T is with Omnicom and Verizon is a Publicis account. The list of conflicts is about as long as the press release itself.

Internet deflates

The aggregation of clients makes some sense, especially as we continue to see a shift to the digital. Since 1920, US advertising industry revenues have hovered between 1 percent to 3 percent of the US gross domestic product. This pie is now shared between television, newspapers, magazines, radio, cable with Google, Facebook, Twitter, Yahoo and thousands of other digital outlets. Of course, Internet often brings measurability, targeting and interactivity — which leads to a sort of deflationary pressure on industries that have traditionally benefited from ambiguity. Stock brokerages and travel industry were the first two industry to be baffled by this new reality.

According to Understanding the Economics of Digital Compared to Traditional Advertising and Media Services, a report by Joe Burton for 4A’s, a New York-based trade association representing the advertising agency business, “if traditional ad services require staffing and fees that imply an effective commission rate in the range of 12%–15%,” then the digital typically requires “resources equating to an effective commission rate ranging from 25%–30%.” The only difference is that while the agencies are spending more money on digital, the media spend is going to be lower mostly as a result of better targeting, measurement and proven effectiveness increases.” So, the ad-industry’s on-going economic shuffle is one way to understand the imperative of this deal.

The Silicon Valley connection

That said, Publicis Omnicom Group will have a lot of say in Silicon Valley. eMarketer estimates that digital advertising will be a $116 billion market this year, with North America alone snagging $45.12 billion of that total. And spending on mobile advertising worldwide is expected to increase 79.7 percent to $15.8 billion this year, eMarketer estimates, up from just $8.8 billion last year.

Given the reliance of Google, Yahoo and Facebook on ad-dollars and thus their fiscal health leads to them acquiring startups. The new advertising giant will therefore have a bearing on the fortunes of upstarts such as Foursquare, Twitter,  Snapchat and dozens of others that are experimenting with new advertising and marketing formats. The Publicis-Omincom combo controls a lot of dinero!

Of course, the giant company knows that it too has to think about the new digital future. While announcing the deal, Publicis CEO Maurice Levy hinted at the need for advertising agencies to embrace the data culture. The new merged company plans to extensively invest in big data and essentially look for ways to narrow target audiences.

He acknowledged that, like all traditional media companies, the challenge is Google, Facebook and Twitter. Levy has been snapping up digital ad agencies fast, spending $575 million on Rosetta earlier this year and about $1.3 billion on Digitas in 2007. Digital now accounts for 37 percent of Publicis’ revenues, but Omnicom doesn’t share those numbers.

In a plea published in the Wall Street Journal this week, Verizon’s head lawyer, Randal Milch, argues that the International Trade Commission should not have scheduled an import ban on the iPhone 4 and iPad 2 for violating a patent held by Samsung, and that President Obama should exercise his veto power over the agency.

“Unless the administration intervenes, the ban could be in effect by August 5,” writes Milch, adding that the President should signal he will veto this decision and other situations where an infringing patent isn’t that important to the overall product. In the case of smartphones, there are over 250,000 patents that conceivably apply to them, meaning that patents have become strategic weapons that Apple, Samsung and other device makers use to harass their rivals.

Ordinarily, companies sue each other over patent infringement in court. In the last decade, however, they have discovered that the ITC, which is like a Customs agency, is a faster way to press patent claims. The agency’s only tool if it finds infringement is an import ban.

That’s what occurred in June when the ITC found that Apple infringed on a Samsung patent related to encoding technology. In previous cases, including one involving Google’s Android phones, the agency has allowed companies time to tweak their product in order to find a workaround. This time, the ITC provided no such reprieve — meaning that Apple and its partners could run out of the still-popular iPhone 4 in the near future. In a filing last week, Apple warned that the ban will “sweep away an entire segment of Apple’s product offerings.”

While presidents can intervene during the 60 days it takes for an ITC order takes effect, none have done so since President Reagan vetoed an import ban in 1987.

As the Verizon lawyer notes, the case does not have a direct effect on the company because “the products at risk of being stopped at the border run on AT&T’s network not ours.”

In the latest twist, All Things D reports that private-equity firm Silver Lake has folded its cards, leaving DirecTV, Guggenheim Partners, Time Warner Cable and AT&T as the leading candidates. A recent report cited sources who claimed DirecTV would seal the deal by the end of June but, in retrospect, that may have just been posturing by one of the parties in the long-running negotiations.

As it stands, the Hulu sales process is weighed down by conflicting strategic interests and complicated licensing issues. Specifically, Hulu’s current owners — News Corp, Disney and Comcast– all supply the daily shows that are the lifeblood of Hulu, but are conflicted about how to make them available to an outside buyer, including whether a subscription or advertising model is best.

As in the past, Hulu’s current owners and potential buyers remain hung up on content licensing terms. The difficulty lies in the fact that Hulu’s sale value depends entirely on how much content the new owner will be able to take out the door — and for how long. On one hand, the broadcasters don’t want to hand out long term content deals because that would undercut their ability to shop their shows to the likes of Amazon and Netflix; a potential owner, meanwhile, doesn’t want to own a platform that will run out of content in the near future. (The plot thickens further if you consider AT&T’s interest in leveraging data plans).

The bottom line is that yet another phase in the long -running “sale” of Hulu has come to and end — but it’s unlikely this deadline will bring about a sale any quicker than previous ones did.

In many ways it would seem that the rise of gigabit networks would crush the business of providing pay TV, but in fact, if cable companies play it smart, they may find a way to walk the line as their industry transitions to all-IP content delivery over broadband networks. They may even find new sources of revenue by offering IP services such as home security and automation. To understand what cable firms are dealing with, I spoke with Phil McKinney, the president of CableLabs, the industry standards setting body that is responsible for pushing cable’s access technologies.

CableLabs is the organization behind the DOCSIS 3.0 standard, which has helped cable companies roll out 100 Mbps and faster speeds. Unfortunately, those speeds have a practical limit that won’t help cable providers like Comcast or Time Warner Cable compete with Google’s gigabit networks. And if AT&T or municipalities get aggressive about deploying such networks, cable providers might find themselves selling the equivalent of feature phones in a smartphone world.

Getting cable to a gig

Enter DOCSIS 3.1, the next generation of the cable access technologies. The new standard will allow cable firms deploying D3.1 equipment to deliver up to 10 gigabits per second down and 1 gigabit up. The technology uses OFDM technologies familiar to the wireless industry to cram more bits into a single megahertz of available spectrum used in the cable plants (it’s 11 bits per hertz if you care). Thus, cable providers can then deliver more bandwidth using their existing radio frequencies.

These RF channels are part of cable’s legacy of delivering analog television signals over coaxial cable. In today’s hybrid fiber and coax networks some of the overall transmission is digital, but the coaxial and RF frequency limits remain in some parts of the network.

Cable firms still haven’t gone all-IP, which means that most cable companies are dedicating some of their spectrum to their pay television business and some to delivering broadband. One technology uses IP and the other uses QAMs. But as people demand more bandwidth and higher definition TV channels, cable operators must decide where to allocate their limited spectrum, or lose market share they have gained in the broadband market.

McKinney is also touting new compression codecs like HEVC that help lower the number of bits in a stream but still deliver high-definition quality. It uses half the information that MPEG-4, the current standard, uses. That gives cable companies a little more room on their spectrum to allocate for more broadband channels or more TV channels. McKinney notes that CableLabs is moving faster than it has ever moved in order to get DOCSIS 3.1 out to constituents — achieving in two and half years what it took five to do for previous standards. Comcast says it expects to start deploying DOCSIS 3.1 in 2015.

But what about the business model?

And speed is important, because widespread access to high-speed broadband is threatening the cable industry’s core business — packaging a bunch of channels together and selling it to end consumers, as well as selling some advertising against those channels. On one side there are people cutting the cord — canceling their subscriptions and relying on content from Netflix, Hulu or even just over-the-air broadcasts. On the other side are content companies pushing for higher fees from cable operators, especially for things like live sports, which many analysts believe are the main reason people don’t dump their cable packages altogether.

But the cost of cable is rising, something consumers are fighting as they become more accustomed to picking and choosing their own content on demand. To satisfy those consumers cable companies are offering their own IP-delivered services that bring on-demand content to subscribers’ tablets and phones, even when they are outside their home.

That embrace of technology though, can require tradeoffs for cable providers. For example, Comcast now delivers all of its video on demand content via IP, which means it divides its available spectrum into three chunks. One is for the traditional cable TV that’s broadcast, one is for broadband and one is for delivering the bandwidth for its IP-based Xfinity VoD service. AT&T has done this with its U-Verse services on its copper lines, but Comcast got in trouble for it last year when people questioned if that practice violated network neutrality, since Comcast doesn’t count its Xfinity content as part of its bandwidth cap.

Recouping lost revenue in an all-IP world

With DOCSIS 3.1, Comcast may have more headroom to raise its caps if its network is truly congested at the cable plant, but the business challenge remains. It must also figure out how to keep customers from dumping a $200 monthly charge for both TV and broadband and choosing instead a $50 broadband package. Adding faster speeds and charging more for those speeds might be one way to keep revenue up. And despite cable industry fear-mongering about upgrade costs, McKinney estimates that the upgrade to DOCSIS 3.1 gear should cost cable companies less than the upgrade to DOCSIS 3.0, which analysts put at roughly $100 per home.

Chart courtesy of Stifel.

But aside from charging more for better broadband, cable companies shouldn’t have to give up on pay TV. Already companies like Time Warner Cable are experimenting with cheaper programming bundles in additional to concessions like allowing customers to watch any show, anywhere, on any device. The pay TV providers already have relationships with the content companies, and while they may not be the only path to mass market anymore for the Disneys and HBOs of the world, they still are an important channel.

Cable companies have tools they can use to protect content, they still have relationships with more than 80 percent of the U.S. households and they are aggressive about offering content in a way that consumers want. So, if they can transition to more of an a la carte option, using IP to deliver those choices on demand, they could still provide a service that consumers are willing to pay for. And thanks to new standards described above, the bandwidth is there to do this.

So cable providers just need to walk the line between cannibalizing their traditional pay TV business with IP-delivered services, while upgrading their networks to ensure they can still deliver a quality experience while maintaining their revenue and profits. The big telcos walked this line a few years back when they had to transition people from wireline networks to cellular service without hurting their own profits and revenue.

The cable business is a little tougher because they have the content companies in there demanding more money and seeing new avenues for distribution, but as disruptive as this shift is, I think in a few years we might see an even bigger one once pay TV providers realize they can take all of their content and deliver it over the top. Maybe the internet won’t eat the cable company after all.

Of course, they would say that — more video over LTE is good for the carriers. It lines their pockets and it puts strain on the networks, which means they buy more gear from Ericsson. Okay, with that caveat out there, let us look at some of the salient data points from Ericsson’s report:

• Total global smartphone subscriptions hit the 1.2 billion mark in 2012. We will see 4.5 billion smartphone subscriptions by the end of 2018.
• Smartphones accounted for around half of all mobile-phone sales in Q1 2013, compared with roughly 40 percent for the whole of 2012.
• So it is no surprise that mobile-broadband subscriptions are growing really fast — during the the first three months of 2013, they grew 45 percent faster than the same period in 2012 and now stand at around 1.7 billion.
• More smartphones means more demand for data, ergo, data traffic volumes doubled between Q1 2012 and Q1 2013. Data traffic growth between Q4 2012 and Q1 2013 was 19 percent. Ericsson forecasts that the data traffic on mobile networks will grow 12-fold by 2018.
• During 2013, overall mobile data traffic is expected to continue the trend of doubling each year.
• Of course, a lot of this growth will come as a result of faster networks. Ericsson expects 60 percent of the world’s population to be covered by LTE in 2018.
• Across the world 20 million new LTE subscriptions were added in Q1 2013.
• In North America, driven by the U.S., LTE will account for majority of subscriptions in the region in 2016, growing to around 70 percent in 2018.
• In comparison, by 2018, LTE will penetrate around 35 percent of the subscriptions base in Western Europe.
• LTE subscriptions are expected to exceed 1 billion in 2017.
• So what do we with all that speed? Spend more time on social networking: an average of up to 85 minutes per day in some networks. Looks like that Facebook addiction of ours is going to become super expensive!
• And we don’t really spend that much time talking on the phone. Voice traffic growth between Q1 2012 and Q1 2013 was 4 percent. Ouch!
• Ericsson says that web browsing and social networking will each constitute around 10 percent of the total data traffic volume in 2018.
• Of course, we watch video — a lot of it.  According to Ericsson, the video traffic on mobile networks grew by 60 percent annually.
• On some networks, video consumption is on average 2.6GB per subscription per month. That should make the network operators break into evil grins — more of our money into their pockets.
• Of course, worried about its carrier overlords, Ericsson makes no mention of over-the-air communication apps in this report.

Now for more details about the mobile world at large:

• Global mobile penetration was at 90 percent in first quarter of 2013 and mobile subscriptions now total around 6.4 billion. However, the actual number of subscribers is around 4.5 billion, since many people have multiple subscriptions.
• China alone accounted for around 25 percent of net additions, adding around 30 million subscriptions during first quarter of 2013.
• India added over 10 million, as did Indonesia. Brazil and Nigeria both added over 5 million subscriptions during the first quarter.

We will parse some of the data in separate posts later.

Broadband caps are spreading across the U.S., and even if Comcast did recently raise its cap of four years from 250 GB a month to 300 GB, the growth of usage based broadband is a negative and insidious trend that could hurt our ability to innovate. So I’ve documented which ISPs have caps, and how they have structured them in the chart below, as a way to help people understand who is capping their service and why. The chart contains the top ISPs, and covers more than 80 percent of actual subscribers.

What we talk about when we talk about caps.

The rise in caps has let ISPs influence the internet in subtle ways — most of which seem harmful to innovation. The first is to take away the idea that wireline broadband is an unlimited service, despite the ability of smaller ISPs to build out networks that don’t come equipped with caps. As you can see from the chart below, most of the ISPs are implementing overage charges associated with their caps. This isn’t really about managing their networks for congestion. If it were, they’d implement a different type of pricing model that cost users more to surf at peak times. No, this is about protecting their entrenched TV businesses as well as keeping the price for service high, despite the decreasing costs to send traffic over the network.

It’s also about grabbing more of the profits from the growth in internet services such as Netflix and Google, although caps take out those frustrations on users as opposed to the over-the-top providers. Instead of providing faster speeds for users and encouraging the growth of services that would require users to upgrade to those speeds, ISPs have taken their control of the last mile and are charging for bytes. So instead of paying more for better service, customers will pay more for what they use. This is a model that works for certain industries (think gasoline and electricity) but when it comes to encouraging more usage and innovation on the internet, the utility model seems short-sighted. Other ISPs may be thinking this same way.

For example, what if Intel had told game developers or Microsoft not to write software that would stress its chips — or penalized programmers for every megahertz of performance they used over a certain threshold? We’d end up with crappy software running on slower machines. Instead Intel encouraged people to write software for its chips and invested billions in making them faster so people would upgrade. Along the way it opened up market after market for the PC. Utility industries aren’t typically hotbeds of innovation.

The Federal Communications Commission, which is charged with tracking the spread and quality of U.S. broadband, has so far been quiet on this issue, not even collecting data to track how the shift to capped broadband has affected users, much less the industry. That may be changing. But it’s time that we ask if we want the internet to look like the utility or a source of continued innovation.

Comcast and other cable companies are getting a big share of data dollars mostly because they are offering higher speed packages. In comparison to the cable companies, phones companies are seeing their slower DSL business whither away. In the first quarter of 2012, AT&T lost about 616,000 broadband customers while Verizon added 103,000 customers.

In comparison to broadband, during the first quarter of 2012, Comcast lost 37,000 video customers during the first three months of 2012, and added 164,000 voice customers. It now has 22.3 million video customers and 9.51 million voice customers.

In the first quarter, combined Video, High-Speed Internet and Voice customers increased by 565,000, driven by High-Speed Internet customer net additions, up 5% over the prior year. As of March 31, 2012, Video, High-Speed Internet and Voice customers totaled 50.4 million, an increase of 2.8% over last year’s first quarter. [Comcast Press Release]

On December 31, 2011, video, high-speed internet and voice customers totaled 49.8 million, an increase of 3.0% over the prior year, Comcast said.

According to the Leichtman Research Group, the top 14 MVPD operators — which collectively cover about 94 percent of all pay TV homes in the U.S. — added 380,000 subscriptions in 2011. That was about 175,000 fewer than it added in 2010. The blood loss slowed for cable in 2011, Leichtman found. The top 10 cable companies in the U.S. lost just over 1.6 million subscribers last year, a slight improvement over the nearly 1.8 million they hemorrhaged in 2010.

But top satellite carriers DirecTV (NYSE: DTV) and Dish Network (NSDQ: DISH), which helped drive MVPD growth in 2010 with 696,000 net additions, added only 496,000 in 2011.

Meanwhile, telco-based services Verizon FiOS and AT&T (NYSE: T) U-verse also slowed down their additions, with 2011′s net subscriber increase coming in at 1.5 million compared to just over 1.6 million the year before.

Subscriber growth did, however, pick up for the top 14 MVPD companies in the fourth quarter of last year, with net additions coming it at 230,000 compared to just 90,000 at the end of 2010.