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Pay-TV providers like Comcast and DIRECTV are joining other large companies in shifting from expensive dedicated hardware for running network services to software on cheaper commodity servers.
The trend is reflected in the softening global revenue for equipment used in receiving and transmitting video, Infonetics Research said in a recent report.
In the first half of 2014, video broadcast equipment revenue dropped 4% globally to $810 million, the study found. While sales for the full year are expected to be slightly up year over year, the shift away from proprietary hardware is expected to keep revenue from growing more significantly, Infonetics analyst Jeff Heynen said.
"This trend started in the IT space, and it's clearly in the data center space, and now it's making its way into retail pay-TV networks as well," Heynen said.
Using NFV for digital video formatting
The use of software on commodity hardware for executing services is called network functions virtualization (NFV), which pay-TV providers are using for video encoding, decoding, transcoding and encryption, Infonetics said.
Encoding is the process of turning video into a digital format optimized for efficient transmission. Decoding is the conversion of the video back to the original format for playback. Transcoding is the process of adapting the video for viewing on a smartphone, tablet, PC or TV.
NFV will lessen revenue growth in the video-equipment market but won't cause a decline, Heynen said. That's because consumer demand for streaming movies and TV shows is increasing at a pace fast enough to ease the impact from the technology shift.
"We do expect [equipment] revenue to continue to grow," Heynen said.
Video equipment revenue drivers
Helping to keep revenue heading north are sales of servers used in delivering video on demand. Revenue rose 20% in the first half of last year, Infonetics found. Much of that growth is due to demand for Hollywood movies in China and the Middle East.
Also contributing to equipment sales is the increasing number of companies joining Netflix and Amazon in streaming video to consumers on mobile devices. These services are now available from HBO, Comcast, DIRECTV and others.
As a result, revenue from edge servers, which are used to store and deliver video to a geographical location in a content delivery network, will increase at a compound annual growth rate of 14% through 2018, Infonetics predicts.
Technology suppliers covered in the study include Alcatel-Lucent, Cisco, Ericsson, Huawei Technologies Co. Ltd. and ZTE Corp.
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