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Why MSOs Should Not Switch Directly From MPEG-2 to HEVC

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With all the excitement around HEVC and all the reports we have put out at Frost & Sullivan on the topic, we get asked all the time if multiple system operators (MSOs) should skip AVC and switch directly from MPEG-2 to HEVC. Why is this such an enticing notion, and does the idea actually bear merit? Before you can answer those questions, some history is in order.

As North America transitioned to digital cable back in the 1990s, MPEG-2 was the state-of-the-art compression technology. North America was ahead of the game even with HD, and thus nearly all cable applications relied on MPEG-2 for SD and HD alike. But the industry paid a price for that early innovation -- no sooner was it done with HD deployment than AVC broke onto the scene and fundamentally disrupted the video compression equation. Faced with a weak economical outlook (anyone remember the dot-com crash of 2002?) and having just made major investments in HD rollouts, the cable industry was unable to take advantage, in a meaningful way, of the benefits offered by AVC. In contrast, as Europe began to transition somewhat later in the game, it used MPEG-2 for SD digital cable but predominantly used AVC for HD.

Fast-forward to 2013, when the growth of North American cable subscribers is slowing and IPTV is surging in popularity with its vast array of content and the lure of rich applications enabled by bidirectional connectivity. The writing on the wall is clear to MSOs -- they can transition their primary business to broadband services, or they can dramatically reinvent themselves and the user experience they offer to remain relevant as mainstream pay TV service providers. Therein lies the rub -- how do MSOs meaningfully and strategically invest in infrastructure that will ensure they are state of the art during the next decade?

AVC has matured since its early days, and state-of-the-art AVC encoders offer twice the compression efficiency of first-generation AVC encoders. Transitioning to AVC is the most obvious route to grow the quality and/or quantity of pay TV content without expensive expansions of bandwidth. (Arguably, technologies such as switched digital video are also options, but let’s not complicate the discussion.) The problem is, this is easier said than done. Consider that the U.S. has approximately 56 million cable subscribers, with approximately two set-top boxes per subscriber. Multiply that by a conservative $100 per replacement set-top box, and the cost of transitioning end-user clients alone exceeds a staggering $11 billion. Add to that the costs of truck rolls, upgrading head-ends, overhauling quality monitoring infrastructure, and more, and it’s easy to see why no MSO wants to do this type of systemic upgrade twice.

This brings us to HEVC. In theory, HEVC promises twice the efficiency of AVC. Why, MSOs might ask, should we allow history to repeat itself and spend so much on one systemic upgrade when another disruptive technology is right around the corner? It’s a fair question, but let’s take a look at three of the key assumptions on which it is predicated:

  • HEVC offers twice the compression efficiency of AVC: Well, yes and no. That’s the theoretical advantage, but practical encoders are only offering about 20 percent to 30 percent improvement on HD content and even less on SD content. That, by the way, is the same level of improvement that state-of-the-art AVC encoders can offer over legacy MPEG-2 encoders at this point in time. Moreover, AVC encoders can do this at a fraction of the cost, a fraction of the power consumption, and a fraction of the rack space as MPEG-2 encoders. Given that a large number of modern encoders are built into software (even if they are appliance form factors) rather than rigid hardware, capital expenditure (CAPEX) is not in jeopardy if a service provider upgrades to an AVC encoder immediately and eventually soft-upgrades it to HEVC when that ecosystem is mature and ready.
  • HEVC products are being released very quickly, and if I do not transition, I will fall behind the curve: There’s certainly plenty of buzz around HEVC; it was arguably the hottest hashtag at IBC this year. However, there is a difference between first-generation products that are must-haves for pilot testing and a mature product ecosystem that enables mainstream creation, monitoring, delivery, and storage of a compression format from end to end. The AVC ecosystem is ready and available today, and costs are falling rapidly as commoditization sets in. The opportunity cost of waiting 3 years for HEVC products to mature needs to be weighed against the ability to cost-efficiently purchase and deploy AVC infrastructure immediately.
  • 4K Ultra HD is coming, and HEVC is the key enabler: Again, yes and no. Certainly twice the compression efficiency is critical if you are quadrupling resolution. HEVC’s flexible transform unit size is ideally suited to compressing Ultra HD content. However, there are catches. First, if a service is only deploying one or two channels in the short term, there is usually enough bandwidth already available to achieve this via AVC. Second, there’s not enough Ultra HD source content available yet to justify the deployment of content beyond -- most likely -- nature, sports, and movies. With global penetration of HD at less than 33 percent despite the maturity of the technology, expecting a more rapid pace of deployment for new Ultra HD technology is, well, optimistic. Third, there are gaps in the technology ecosystem -- for example HDMI 2.0, which is necessary to enable full Ultra HD rendering, has not yet been finalized. So Ultra HD may be coming, but it’s not something that will happen as a mainstream movement tomorrow morning.

The metrics behind these assumptions will definitely change in time, and the ROI that HEVC can deliver will definitely improve in time. While it’s clear that HEVC is a solid technology advancement and no mere flash in the pan, it is important to keep in mind that a mature ecosystem takes time to develop. By all means, MSOs must begin evaluating HEVC as a key technology component for future infrastructure. However, there’s little reason to consider jumping straight from outdated MPEG-2 to unproven HEVC. AVC offers concrete benefits immediately, and by selecting software-based products during this upgrade, MSOs can ensure long-term, future-proof returns on infrastructural investments.

We’ve done a lot of work at Frost & Sullivan on the topic of HEVC, and in addition to three reports analyst Avni Rambhia has already published, we’ve done a lot of private research on HEVC for clients. If you’re looking to get more details on HEVC technology, get copies of our reports, or need any custom research on the HEVC market, please feel free to reach out to me for more details.

This article appears in the December 2013 issue of Streaming Media magazine as "Why MSOs Should Not Consider Switching Directly From MPEG-2 to HEVC."

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