With all the talk about over-the-top video and cord cutting, folks don't seem to mention very often just how many, or in this case how few, streaming enabled devices have actually been sold in the market. The good news is that we're starting to see some growth in the number of devices sold, but overall, the numbers are still small.

It will be a couple of year's before devices act as a major catalyst of growth for the online video industry but at the same time, many device vendors are going to have a hard time reaching critical mass. Already we are seeing quite a few companies who started off as box manufactures shift their business model to one where they license their platform. Two years ago I was using maybe 3-4 streaming media devices, connected to the TV. Today, I have more than 20 in my home. The growth of broadband enabled devices has been amazing, but at the same time, I am not convinced that most stand alone boxes will ever truly be able to get to mass-market adoption.

The best selling device to date, connected to the TV and broadband, outside of the set-top-box, is the Xbox 360 and it's taken Microsoft five years to sell 21.9M consoles in North America. A big number when you compare it to the rest of the boxes that have been sold in the market (see below), yet still a small number when you compare it to the sale of TVs, DVD players, mobile devices and other consumer electronics. Note: Some sales numbers updated January 2011.

• Xbox 360: number sold as of Nov. 2010: 21.9M in NA, 45M worldwide (source: NPD)
• PS3: number sold as of Sept. 2010: 16.6M in NA, 41.6M worldwide (source: Sony)
• Roku: number sold as of January 2011: 1M (source: Roku)
• Netgear Roku: number sold to date, too early to know
• Apple TV: number sold as of January 2011: 1M (source: Apple)
• Sony Netbox: number sold to date, too early to know
• Boxee: number sold to date, too early to know
• Logitech Revue Box, Sony Internet TV: number sold to date, too early to know
• WD TV Live/Live Hub: number sold to date, no data released. I estimate less than 2M combined
• TiVo: number sold to date: I estimate 750K TiVo HD units (source: estimate based on TiVo’s subscriber #s of 1.4M)
• Broadband enabled TVs: iSuppli predicts almost 23M by 2013, TDG predicts 43M by 2014, DisplaySearch predicts 31M by 2013, Samsung predicts 20M by 2012
• Broadband enabled Blu-ray players: as of October 2010, the total installed base of Blu-ray Disc playback devices in the U.S. was 21.1M. What percentage of those are "broadband enabled" is not known.

As you can see, even combined these devices still don't have a deep footprint in the living room today. While many are quick to point out the projections for 3-4 years from now, keep in mind that the most important number that matters is the adoption of these devices, not just how many are sold. Nintendo has sold 35.9M Wii consoles in the U.S as of September of this year, yet Nintendo told me earlier this year that 85% of them weren't connected to the Internet. So the real numbers we have to watch are how many of the broadband enabled TVs and Blu-ray players are actually hooked up to the web, not just how many have been sold.

The good news is that the quality of the video on these devices is getting better, the content being offered grows each year and content platforms like Netflix, VUDU, Zune Video, PlayStation Network, MLB, NHL, Hulu Plus and others are helping to create awareness and adoption. But with that awareness comes the problem with massive fragmentation and no standards.

I spend a lot of time at Costco and BestBuy watching how consumers purchase these products and the number one thing they are always confused about is what kind of content is available on what device, in what quality, with what business model. Lots of platforms exist but there are not many similarities between them when it comes to the quality of the video and the business model. Even Netflix, which is on nearly every box in the market, has a service that looks and performs very differently between the PS3 and Apple TV.

What's exciting to me is that these boxes are getting cheaper, the video quality is getting better, we're seeing more subscription based services and devices likes tablets and phones are showing signs of growing pretty fast. Tablets and phones are really for video on the go and aren't primarily used for getting to video to the TV, but they still help with getting consumers to adopt video streaming services.

I'm doing a device showdown presentation today in NYC comparing all of the different boxes on the market and while it is not being webcast, I will make my presentation available online shortly after. And for those who could not attend the event, I will be doing more of them in the New Year.

The call for speakers is now open for the 2011 Streaming Media East show, May 10th-11th in NYC and the Content Delivery Summit, taking place the day before on May 9th, 2011. If you are interested in being considered as a speaker or presenter, please submit a request via the show website. The deadline to submit is the end of this month. I get about 1,000 submissions and only have about 150 speaking spots so getting a submission in on-time is crucial.

Everyone always wants a speaking spot but I simply don't have enough to go around. The key is to get a submission in on-time and for vendors, introduce us to customers. 75% of the speaking spots go to content owners and end-users, the companies who buy and use online video services. I always need introductions to new customers.

If you are interested in potentially moderating a session, please contact me ASAP and I'll be happy to discuss your ideas. I am ALWAYS looking for good moderators.

If you have any questions about a submission, ideas you want to run by me, thoughts on what you can do to help the show, call me at anytime at 917-523-4562. I pick up my phone 24 hours a day 7 days a week. I am always reachable. If you want to be involved in the show in some way, now is the time to pitch me ideas and suggestions as I will have locked down the advance program by the end of January.

It's officially December so it's time for me to start the holidays early and give away a bunch of free gear over the next four weeks. More Roku's are coming as well as some Apple TV's, Logitech Revue's and Harmony remotes. But right now, I've got a Boxee Box by D-Link to give away. To enter the drawing, all you have to do is leave one comment on this post and make sure you submit the comment with a valid email address. The drawing is open to anyone with a mailing address in the U.S. and I will select one winner at random in about ten days.

And if you want a NETGEAR Roku player, enter that drawing now as I am picking the winner on Friday, December 3rd February 1st. Good luck!

One of the things I've seen some bloggers, Wall Street analysts and readers commenting on regarding the Level 3 and Comcast dispute, is the idea that Level 3 only won the Netflix business with their low price, because Level 3 thought it could get free peering from Comcast. Many also want to imply that Level 3 only won the Netflix deal because of that low price and suggest that Netflix is somehow sacrificing quality by using Level 3, in exchange for saving some money. None of this could be further from the truth.

There is this false notion amongst many that Level 3 can't make money on the Netflix deal if they have to pay Comcast for peering and that this is the reason Level 3 is so upset. Some have even suggested that Level 3 is being unfair because they don't want to pay for something the other CDNs pay for. I've also seen many suggest that Level 3 didn't know what it was getting itself into when it signed Netflix as a customer or that Level 3's approach to the CDN business is the same one they had four years ago when they first entered. Some want to use the example of how Level 3 might charge Cogent for peering and suggest Comcast is simply doing the same thing except that Cogent is not a last mile provider like Comcast. All of this has me wondering why almost no one has noticed that Level 3 owns the network and has a lower cost which means they can offer a cheaper price in the market to begin with, regardless of whether or not they have to pay Comcast.

I've seen some posts say that without free peering from Comcast it would, "erode Level 3's profitability on the Netflix business." Really? Based on what data? Because if you ask Level 3, and I have, they say they can make money on the business regardless of whether or not they have to pay Comcast simply due to the fact that Level 3 has a lower cost to distribute the content since they own the infrastructure. Not to mention, the fee that Comcast charges Level 3, which is based on each port Level 3 turns up, is not a lot of money. Level 3 is not balking about the price they have to pay, it's not a lot. They are arguing about the principle of what Comcast is doing. The rate Comcast is charging Level 3 today has no financial impact on Level 3's business and you don't see Level 3 or Comcast debating this.

The issue at hand is not about Level 3 getting something for free. It is about Level 3 using their network, which they made a huge investment in, to carry traffic further than anyone else. Any network connection is two way and a CDN connection is one way. So for some to compare Level 3's infrastructure costs to those CDNs who don't own the network is simply not an apples to apples comparison. For some to suggest that this is an "unfair" advantage that Level 3 has, they are wrong. It is an advantage, but it is not unfair, Level 3 spent a lot of money to build out the network. The idea that Level 3 should simply pay Comcast because that's what all of the other CDNs do is not a valid argument. Level 3 is not like the other CDNs.

Capex, space and power are cheaper for Level 3 and they run on a very predictable capex cost decline. Commodity servers, like the ones Level 3 users, as well as some other CDNs, decline at 20-30% per annum. The throughput is then what drives Level 3's cost of that capex on a unit basis. If Level 3 doubles the throughput of their servers they just halved that element of the cost. Since Level 3 has been very focused on a particular segment, broadcast and media and entertainment, the right sort of library and traffic actually improves Level 3's cost base the more they get, as in the case of Netflix. In parallel they do a lot of work on the software to improve the throughput with every code release they do. I'm not sure other CDNs think about this in as maniacal a way as Level 3 does. Maybe they do, but since Level 3 owns and operates a network, they have a different engineering culture.

Level 3 uses their own colocation facilities to house their own servers. They know exactly what the difference is between their cost and the price of colocation because Level 3 also sells it. It's a big gap and one that is increasing as colo rates have been going up steadily over the last few years. Yes some of the other CDNs have servers that are in "free" facilities within ISPs but not the ones that drive most of their traffic. I think we all know by now the fallacy of "thousands of locations" used to deliver large objects. Akamai, Limelight and Level 3's distribution architecture is very similar for that sort of traffic. And other CDNs are in third party colocation facilities, including Level 3's.

Last mile delivery is the same. Level 3 users their own network and they sell the same thing. While prices are not going up for this offering, Level 3 can still make a healthy margin and their cost is a lot less than what their competitors pay for IP bit delivery. And they all buy IP Transit, again some from Level 3. Here it gets a little trickier to access though because Level 3's competitors do peer and they do also get free delivery where they have persuaded an ISP to embed their servers in their network for free. But peering isn't free. You need a routing edge to deliver traffic to your peers. That's exactly the same as Level 3's, but at far less scale. No one even approaches Level 3's cost to deliver bits at the edge. For the free bits delivered inside an ISP network (without a router), you have to consider that it might be free, but Level 3 gets paid to deliver a portion of their bits. So even here free isn't low enough.

These are some of the advantages Level 3 has of network ownership. But it is also a very particular network ownership. One that owns colocation; one that operates at the greatest scale; one that sells IP transit to ISPs. There aren't too many of those. Even amongst the biggest IP networks Level 3 has the lowest cost.

As for the idea that Netflix is sacrificing quality for a cheap price, that's laughable. For those that don't know, Netflix is very particular about the quality of their suppliers and hands-down one of the most sophisticated content owners in the industry in how they determine that quality. Netflix has employees on staff called "Business Intelligence Architects" and employees in their product development group who build the analytic systems Netflix uses to measure performance and usage of their streaming service. Any Netflix member knows that Netflix routinely sends out emails asking customers to rate the quality of the video they just watched and Netflix has an incredible amount of data on what the real-world experience is for their customers at any given time.

Not to mention, Netflix now sees the delivery of video via streaming media as their core business and the DVD business second. That means in order for Netflix to grow their business, they have to focus on the quality of the video they are delivering. It's laughable to think that Netflix is going to purposely deliver a poor quality video experience and put their business at jeopardy just so they can save money. Yes, price is always an issue, but Netflix is balancing performance AND price together and they do not and cannot separate the two.

Some are also writing about the five to one ratio of the volume of traffic taking place between Comcast and Level 3 and using that as an excuse to suggest that it's unfair to Comcast. Comcast used the word "dump" on their blog saying that Level 3 was dumping traffic onto their network yet Level 3 is simply sending content to Comcast's subscribers who have requested it. Level 3 is not "dumping" anything. For those that think the five to one ratio of traffic is out of whack and not fair to Comcast, go read Rob Powell's post on TelecomRamblings.com which very clearly explains how when connecting to a last mile network on the internet, that ratio is the norm, not unique.

Some have suggested that Level 3 could just refuse to pay Comcast and buy transit from those who peer with Comcast but the way Comcast's network is setup, it keeps Level 3 from even having that as an option. Level 3 could go deeper into Comcast's network, but so far, Comcast is not looking at this as a solution, even though it would remove a lot of burden from Comcast, which is what they are complaining about. If the networks interconnect in 5 cities but there were ultimately more cities where the ISP has customers then obviously connecting in more cities is getting deeper. Comcast operates in 40 metro areas in the US for example and typically, interconnection in the US between large networks is done in less than ten cities.

Hot potato routing is used predominantly on the Internet (see here for details). What that means is that packets sent from one network to another will exit the first network as soon as they can. If network x is interconnected to network y in both LA and NYC and a packet needs to get from LA to NYC then it will be handed over in LA and carried right across the country by network y. In order for that not to happen (for network x to carry it further) you first need to connect in more cities.

Then the net receiver of traffic (the last mile network) needs to use elements of BGP like MEDs, communities and/or selective route announcements (see here for details). This means they announce details that the net sender can then use to carry the traffic further before handing it over. A CDN can do part of this but there is always a network connection from a CDN device and the consumer. So a combination of the two gives ultimate flexibility of who carries what packets how far. And of course CDNs are simply not used for all traffic exchanged by interconnecting networks.

If you cut through all of this, my opinion is that Comcast sells a competitive product to Netflix and is simply scared of over-the-top video. I think that's the real issue here with regards to Comcast and that they will do anything they can to try and combat it, including finding creative ways to try and get paid as many times as possible. But none of that has to do with how Level 3 operates their network and the cost advantage they have as a result of owning and operating it.

Yesterday, Comcast posted another entry on their blog entitled, "10 Facts About Peering, Comcast and Level 3". Amongst some of the points that Comcast wants us to believe is that this entire debate with Level 3 is "not about online video". Comcast says that it is simply an, "old-fashioned commercial peering dispute." If that's the case, why is Comcast imposing this new fee to Level 3 only a few short weeks after Level 3 announced a new contract with Netflix? We all know that the growth of traffic on the net is coming from video and for Comcast to say that this is "not about online video," is laughable. Companies like Comcast are struggling with trying to combat over-the-top services like Netflix. That's exactly what this debate is about – video.

Another one of Comcast's points is the idea that Level 3 is forcing the burden and cost onto Comcast's customers, which again, is absurd for them to suggest. Comcast says, "This is all about Level 3 gaining an unfair advantage over its competitors by gaining enormous additional capacity at no cost to itself, instead shifting the financial costs to Comcast's high speed data customers."

Level 3 has spent billions building out a network. The idea that there is no "cost" to Level 3 to support all of the additional video traffic they have to deliver is just wrong. Did Comcast listen to Level 3's last earnings call when Level 3 said they expected to spend $14M in capex, in the fourth quarter, just to support Netflix? Of course there is a cost to Level 3. In addition, how can Comcast say that Level 3 is "shifting" the costs to Comcast's "customers"? The customer is the one who is demanding this content. The customer is the one who is paying Comcast for the ability to get the content. Next thing you know Comcast is going to raise their rates again, and then blame Level 3 for it. Does Comcast really think we are this stupid?

Comcast also says that, "our customers can and do watch video from any online video provider, including Netflix and dozens of others, on our high-speed Internet service." Only if Level 3 agrees to Comcast fees they can. If they don't, it's going to be hard for Comcast customers to get Netflix content unless all of the requests from Comcast's network gets delivered by Limelight Networks or Comcast caches Netflix's entire library inside the Comcast network, which I don't see them doing any time soon. Comcast also makes a point to say that, "our agreement with Level 3 is no different than our agreements with its competitors." Really? What CDN, that owns their own network, does Comcast have this kind of agreement with? Akamai and Limelight don't count.

And finally, Comcast says that, "we charge a flat fee for our high-speed Internet service and do not charge any additional price to consumers to watch these online video services." So when Comcast says only four months ago that they are raising rates to help offset the costs associated with their Xfinity streaming service amongst other digital products, that's their idea of calling the service free? I don't think so.

Comcast is trying to treat the industry and consumers like we're all a bunch of idiots and don't know what type of content is growing or what we're consuming. Not a smart move on Comcast's part.

Updated post: Level 3’s Lower Cost Comes From Owning The Network, Not Free Peering

Yesterday, Level 3 went public with a statement saying that Comcast was for the first time demanding, “a recurring fee from Level 3 to transmit Internet online movies and other content to Comcast’s customers who request such content.” Level 3 is saying such actions by Comcast are at the heart of the network neutrality debate and as one would expect, we’ve seen a great deal of thoughts, posts and comments about this whole subject in the past 24 hours.

Some posts have done a really good job of educating readers on how things like settlement free peering work and have brought to light how content is delivered on the Internet and what some of the relationships amongst carriers and MSOs look like. Other posts I have read have strayed far off the subject, in some cases accusing Level 3 of “stealing” bandwidth from Comcast and many other posts simply want to make this whole issue out to be about money, or Netflix. There are a few points that I think are important that I haven’t seen addressed and are what I feel the real discussion should be about.

For starters, this is not simply about money. While Level 3 said that have, “agreed to [Comcast’s] terms, under protest, in order to ensure customers did not experience any disruptions“, the actual terms of the deal and the money being exchanged between the companies is not substantial. Everyone assumes we’re talking big dollars here, but we’re not. The real argument by Level 3, which in my mind is fair, the idea that last mile providers are asking for a payment when there is absolutely no competition and no other options for Level 3 if they say no. There is no one else that Level 3 could buy something off to get access to Comcast’s eyeballs. Comcast could make any rules they want, and if Level 3 wants to continue to distribute their customers content to Comcast eyeballs, Level 3, or any other carrier, would have to agree to Comcast’s demands.

This isn’t two commercial companies having a commercial discussion because the discussion is completely lopsided. And while Comcast is not gouging Level 3 today and the two companies aren’t really fighting as many make it out to be, Level 3’s point is that this could become a problem down the road and they feel someone has to stand up to it. Level 3’s argument is that the FCC should establish guidelines on how these relationships should work. Also, Level 3 is not “pushing” traffic to Comcast. This is content being requested by Comcast’s own subscribers, and being pulled from Level 3. The idea that Level 3 is simply trying to dump all of this traffic onto Comcast’s network is laughable. It’s Comcast’s traffic.

I’ve seen some suggest that Level 3 should just say no to Comcast, but that’s not a realistic approach since that immediately puts all of Level 3 customers, who are the content owners, in jeopardy of not being able to get their content to the consumer, who is Comcast’s customer. Of course some are making this whole story out to be about Netflix, but that’s not what this is about. If Level 3 had not announced their new contract with Netflix to distribute their content, no one would even be mentioning Netflix in this story. This about the underlying principle of just how much control any last mile provider should be allowed to have and whether or not they should be allowed to prioritize traffic.

Of course when you bring the whole NBC subject into the picture, then this gets even more interesting with some suggesting that if the deal with NBC goes through, Comcast could give the delivery of their content more priority over another content owner, from another carrier. On Comcast’s blog, the company was quick to say that, “Level 3 has inaccurately portrayed the commercial negotiations between it and Comcast. These discussions have nothing to do with Level 3’s desire to distribute different types of network traffic.” That may well be the case – today. But the real explosion of traffic on the Internet is from video, so while Comcast is not specifically calling out video related content from Netflix or anyone else, that’s really what we we’re talking about.

Another really big issue that seems to be missed in this whole discussion is that for the traffic that’s moving, there is no change to Comcast’s cost base. Level 3 may be sending Comcast more traffic, due to Comcast’s customers demanding it, but that does not mean it costs Comcast more money to deliver it. I simply see Comcast as using this as an opportunity to try and charge Level 3 money, hoping that folks won’t really ask what the real cost impact is on Comcast. You will notice that in the Comcast post on their blog where they commented on Level 3’s statement, nowhere did Comcast say that the additional traffic from Level 3 was costing them more money. And if it does, it’s Comcast’s burden to bear as it’s content that their customers are demanding. Comcast is basically asking Level 3 to subsidize their service by charging Level 3 a fee and this is where things become scary if Comcast is allowed to get away with this.

What I don’t see Comcast talking about, or anyone else suggesting, is the multiple ways that Comcast could work with Level 3 to help alleviate the traffic and cost on Comcast’s network. One way to do this would be for Level 3 to deploy deeper into the Comcast network, which would help alleviate the issue, yet I’m hearing that Comcast isn’t looking at this as an option. If Comcast expanded its peering and improved its internal network and worked with Level 3 to allow them to be deployed deeper in their Network, Comcast could even deliver better service while lowering its costs. The idea that they only way Comcast can combat this is to charge Level 3 is simply not the case. If there is an imbalance in traffic, like Comcast suggests, then why isn’t Comcast allowing Level 3 to carry the traffic further into their network to equalize the cost? No one at Comcast seems to be willing to answer that question.

Due to Comcast’s actions, Level 3 says it is, “approaching regulators and policy makers and asking them to take quick action to ensure that a fair, open and innovative Internet does not become a closed network controlled by a few institutions with dominant market power that have the means, motive and opportunity to economically discriminate between favored and disfavored content.” From my perspective, I’m glad to see Level 3 making this issue public and bringing it to everyone’s attention, as the topic needs to be debated. The discussion should not be about Netflix or the CDN business as that’s not what the crux of this is about. Net neutrality is really the heart of this debate.

On Wednesday December 8th, I'll be hosting a special event for Wall Street investors demonstrating the leading over-the-top devices and content platforms. The event takes place in NYC, (midtown) and starts at 5:00pm with cocktails and hands-on Q&A at 6:30pm.

Device demos will include the Roku, Apple TV, Boxee, Xbox 360, PS3, TiVo Premiere, Google TV and will showcase content platforms from Netflix, Hulu Plus, iTunes, Amazon Video On Demand, Blockbuster and Walmart (VUDU).

If you are a financial analyst and would like to attend the event, please email or call me and I will give you the details. Also, I will be doing more of these special device presentations in 2011 so please contact me if you want to be notified of when they take place.