High-Potential Data Services
David J. Waks
System Dynamics Inc.
High-Speed Data Delivery Strategies
for the Cable Industry
April 25, 1996
System Dynamics Inc.
Copyright © 1996
Outline
Data applications have high potential for
cable operators
– Internet and the Web
– SOHO (“Small Office, Home Office”)
– CD-ROM and Multimedia
Data services business very different from
video services
Customer expectations hard to meet
Profitability will be a challenge
Recommendations
Copyright © 1996 System Dynamics Inc.
Slide 2
Near-Term Opportunities
 Residential
Data Services
– Access to Internet and online services
– Personal Web content hosting
– Telecommuting
 Business
Data Services
– Access to Internet and online services
– Business Web content hosting
Copyright © 1996 System Dynamics Inc.
Slide 3
Internet and On-line Services
 WorldWide
Web Growing Rapidly
– 50 to 100 new sites per day
– Standards emerging
Few proprietary obstacles
Entrepreneurial ferment
– Low barriers to on-line entry
Web browsers distributed widely
Web development tools built into applications
Web servers readily available
 Internet
displacing OLS for mass-market content
owners
– Owner controls content and presentation
– Better business terms and evolution
Copyright © 1996 System Dynamics Inc.
Slide 4
SOHO is Important Revenue Source
 Residential
PC Penetration
– 40% have PCs now --> 60% by 2000
– Of these
 ~ 1/3 work at home full-time
 ~ 1/3 work at home part-time
 ~ 1/3 don’t work at home
 Small
Home Office
Small Office
Business PC Penetration
– Very small business (< 10 employees): ~2 PCs
– Small business (10 to 99): ~8 PCs
Copyright © 1996 System Dynamics Inc.
Slide 5
High Near-Term Revenue Potential
Subscription video
services
Annual Revenue (,000)
8,000
7,000
Business data
services
6,000
5,000
4,000
3,000
Residential data
services
2,000
1,000
0
1996
1997
1998
1999
2000
Illustrates cable system with 25,000 homes passed, average industry statistics
Copyright © 1996 System Dynamics Inc.
Slide 6
CD-ROM and Multimedia Situation
 Plenty
of multimedia platforms
– Vast majority of home PCs sold with multimedia:
CD-ROM, sound card, speakers, microphone
 Plenty
of CD-ROM titles
– More than 5000 today
 Shelf
space limits CD-ROM availability
– Average store has 100 titles, big store maybe 250
– “Hit” oriented
– Few big publishers control shelf space
 Hard
for CD-ROM producers to make money
– Cost of production - $350K and up
– Revenue per title sold - $1-3
– 6% of titles (total of 200) generated profit in 1994
Sources: Simba, IMA
Copyright © 1996 System Dynamics Inc.
Slide 7
CD-ROM and Multimedia Revenue Opportunities
 Near
term
– Combine CD-ROM with access to OLS and Web
CD-ROM provides static multimedia content
On-line provides dynamic update
– OLS starting to incorporate CD-ROM
 Longer
term
– On-line multimedia content for CD-ROM and Web
applications
– CD-ROM product demonstration and sales
– Multimedia “pay-per-play”
Existing CD-ROM content
New multimedia content without CD-ROM limitations
Copyright © 1996 System Dynamics Inc.
Slide 8
Many Promising Broadband Data Applications

Near-term
– High-speed access to Internet and on-line services
– Web content hosting
– Telecommuting
– Local community content

Longer-term
– CD-ROM ordering, pay-per-play
– Video enhancements to Internet and on-line services
– Videoconferencing and video telephony
– Multi-player games
– Advertising
– Home shopping
– Direct marketing
– Distance learning
– Software distribution
– Government information and transactions
Copyright © 1996 System Dynamics Inc.
Slide 9
Outline
Data applications have high potential for
cable operators
Data services business very different from
video services
– Different user expectations
– Both content- and communications-centered
applications
– Different business model
Customer expectations hard to meet
Profitability will be a challenge
Recommendations
Copyright © 1996 System Dynamics Inc.
Slide 10
Two Different Businesses
Subscription Video Data Services
Platform
Applications
TV
Entertainment and
advertising
Market
Pricing
Consumer
Flat price
Who pays
Advertiser pays part
Expected
Not very high
reliability
Presentation Video
Data rate
Network
Application
basis
Very high
One way
Purely content
Copyright © 1996 System Dynamics Inc.
PC
Information,
communications,
transactions
Consumer and business
Usage based (above base
price)
Customer
Very high
Text and graphics, audio
and video coming
Low, but getting higher
Two way
Content and
communications
Slide 11
Two Kinds of Applications
Content
Content Paradigm One to many
Communications
One to one
Network
requirement
Connect users to
content
Connect users to one
another
Data rate
High
Lower
Symmetry
Highly asymmetric
Fairly symmetric
Expected
reliability
Not very reliable
Highly reliable
Expected pricing
Flat price
Usage based
Copyright © 1996 System Dynamics Inc.
Slide 12
Continuum of Electronic Applications
Communications
Content
Subscription video services
Telephony
Broadcast radio and TV
Proprietary
content
Commercial online services
(AOL, Compuserve, Prodigy)
Email, chat,
forums
WorldWide Web
Internet
Electronic mail
Telecommuting
CD-ROM “pay per play”
Video telephony and
teleconferencing
Software distribution
Information on
products and services
Download
Copyright © 1996 System Dynamics Inc.
Electronic Commerce
Interactive games
Transactions and
support
Play
Slide 13
Value Chain - Content-centered Applications
Content
Creator
Media
Companies
Print
Publishers
Aggregator Application
Host
/ Packager
On-line
Services
Internet
“Malls”
On-line
Services
Internetwork
Transport
Provider
Internet
Access
Providers
Local
Access
Provider
End
User
MSOs
LECs
Web Sites
IXCs
Advertising
Agencies
Copyright © 1996 System Dynamics Inc.
Slide 14
Value Chain - Communications-centered Applications
Application
Host
Email hosts
Video
Teleconferencing
Bridge services
Copyright © 1996 System Dynamics Inc.
Internetwork
Transport
Provider
Internet
Access
Providers
Local Access
Provider 1
End
User 1
Local Access
Provider 2
End
User 2
MSOs
LECs
IXCs
Slide 15
Outline
Data applications have high potential for
cable operators
Data services business very different from
video services
Customer expectations hard to meet
Profitability will be a challenge
Recommendations
Copyright © 1996 System Dynamics Inc.
Slide 16
Customer Needs and Expectations...
 “I
get it when I want it”
– “I don’t have to wait for my modem to dial”
– “I don’t have to wait for the screen to paint”
 “I
get it when I need it”
– “I don’t have to keep looking for something I’m
waiting for”
 “I
can depend on it”
– “It connects every time”
– “It doesn’t cut me off”
 “Someone
problems”
will hold my hand if I run into
Copyright © 1996 System Dynamics Inc.
Slide 17
...Implications:
 Cable
data delivery should satisfy expectations
of initial customers
– Early adopters
– Fast connect time (seconds, not minutes)
– High data rates (megabits per second, not kilobits)
– Little contention for available bandwidth
 May
be hard to keep customers satisfied
– Internet neither fast nor reliable today
– Performance likely to degrade over time with more
users and higher bandwidth needs
– Ongoing reliability requires network management
infrastructure
– Later subscribers require informed and attentive
customer support
Copyright © 1996 System Dynamics Inc.
Slide 18
Outline
Data applications have high potential for
cable operators
Data services business very different from
video services
Customer expectations hard to meet
Profitability will be a challenge
Recommendations
Copyright © 1996 System Dynamics Inc.
Slide 19
Profit is Harder than Revenue
 Pressure
for flat-rate pricing
– Strong customer preference
– Much simpler recordkeeping, billing
 Data
services cost structure very different from
subscription video
– Video has known margin, independent of usage
– Data services margin depends on many factors
Number of users
Simultaneous use
Application mix
Bandwidth per user
User tolerance for performance variations with load
...
Copyright © 1996 System Dynamics Inc.
Slide 20
Decreasing Margins Will Force Repricing
 Online
services have been prone to “runaway” applications
– Prodigy examples
 Data
services will quickly absorb valuable
cable bandwidth
– More users
– More simultaneous use
– Increasing bandwidth as applications include
multimedia elements
 Operators
will need to balance pricing
against costs
– Higher flat rate
– Usage-based pricing
Copyright © 1996 System Dynamics Inc.
Slide 21
Outline
Data applications have high potential for
cable operators
Data services business very different from
video services
Customer expectations hard to meet
Profitability will be a challenge
Recommendations
Copyright © 1996 System Dynamics Inc.
Slide 22
Recommendations for Cable Operators
 Consider
tomorrow’s applications when
choosing today’s technologies
 Install supporting infrastructure along with
modems
– Network management for reliability
– Traffic management to understand usage patterns
 Pay
attention to SOHO potential
– High penetration and willingness to pay
 Avoid
promising long-term flat-rate pricing
– “Run-away” applications will force change
 Assume
you’ll have to fulfill customer
expectations to succeed
– Reliability
– Customer support
Copyright © 1996 System Dynamics Inc.
Slide 23
For More Information:
System Dynamics Inc.
18 Beaver Ridge Road, Morris Plains, NJ 07950-1901
(201) 644-4739
Fax (201) 538-6003
Dave Waks: [email protected]
Sandy Teger: sandy @system-dynamics.com
http://www.gti.net/davewaks
(after 9/1/96: http://www.system-dynamics.com)