Over the Virtual Top: Implications for Hybrid Hetnet Regulation of Digital Service Value Chain Disintermediation

With over 44 million subscribers and over $4 billion in annual revenues, the ‘Over the Top’ services of Netflix now account for a dominant share of total web traffic. Importantly for this paper, the service accounts for over one-third of downstream consumer Internet traffic in the US in peak hours, and over 20% in Europe just 2 years after European service launch. Netflix and YouTube together in the US surpass 50% of downstream traffic in the US. In other words, the 2 leading over the top services already fit the definition of firms in a dominant market position; and are gaining further strength. Naturally, the attention of major network operators among others has been attracted to these services business models and service delivery architectures, as the operators place in the digital service value chain is called into question.Characterizing the economics and business models for these services in terms of ‘network neutrality’ and/or ‘open Internet’ naturally serves the business purposes of certain market participants. However, the new and emerging business models up and down the digital service value chain across hybrid, heterogeneous broadband wired and wireless networks have both greater complexity, and broader regulatory implications for regulators and operators of IP-centric networks, than those concepts capture. These issues will be considered in this paper. Specifically, as carriers and other participants in the digital services value chain explore business market opportunities ‘over the virtual top’ in both consumer and enterprise markets, crossing hybrid, heterogeneous networks, it will expose both virtual and physical bottlenecks and may identify who is, or is not, in a favorable market position in future digital service value chains. The objective of this paper then is to address the challenges cloud operating models for over the top services present to network operators, as well as considering architectural approaches and regulatory implications for the wide range of digital services now being offered and prepared for ‘Over the Virtual(ized) Top’ service delivery. The hypotheses to be tested is that the virtualized architectures and virtual machine service delivery realities of over the top services are more complex than is captured by the phrase ‘over the top’; since a wide array of network providers, data centers, other digital service providers, as well as content delivery networks, may be engaged in paid peering arrangements; and/or in fulfilling other terms specified in Service Level Agreements, across digital service value chains. The analytic methods employed in the paper are digital service value chain (business model) analysis to test the paper’s hypotheses. The data assembled to support these insights have been provided by major carrier networks and cloud platform providers of enterprise digital services. Depending upon timing of certain analyses underway, empirical results may be available illustrating key points on the new cloud economy emerging over the virtual top for consumer and enterprise services. Where these services may intersect with, or possibly conflict with, present regulatory policies will also be identified.Prior presentations developed in cooperation with the TM Forum Enterprise Cloud Leadership Council and presented at industry fora in Nice, France, San Jose, Baltimore, and New York City will provide some graphics as well as conceptual models for the research work proposed to be shared with TPRC.