If Netflix was attempting rent seeking, any success may be short-lived.

Gerald Faulhaber and David Farber today published a post questioning the need for open internet rules.  The authors expressed a sense of irony that after decades of successfully running a communications platform built on open network architecture that technologists and engineers today would need the help of the Federal Communications Commission in keeping said network of networks open.

Online video distributor Netflix has been documented as thinking that the Commission should be riding to the rescue of content providers by advocating that the Commission implement strong net neutrality rules.  By strong net neutrality rules Netflix means that the Commission should prohibit the payment of tolls by content providers to broadband operators such as AT&T, Comcast, or Verizon. According to Netflix:

“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position.”

Netflix tried to invoke a little altruism asking the Commission to imagine the plight of smaller content providers facing the threat of escalating toll charges assessed year of year at an increasing rate by broadband providers.

It appears the real plight that Netflix is concerned with is the uptick in competition resulting from an HBO or ESPN streaming their content.  For example, an analysis last week by Morningstar questioned the long term profitability of Netflix in the face of competition from content owners.  According to Morningstar:

“Video distribution firms (cable, satellite, phone) have suffered from inertia in building out TV Everywhere, which would allow customers to stream current channels on the device of their choice. Aside from HBO GO and Watch ESPN, the ability to stream channels is much weaker than we would have expected in the present day. Still, we view this service as inevitable within the next two to three years and believe the market is underestimating the potential negative impact on Netflix when most cable channels with fresh content can be streamed.”

This competitive threat, in my opinion, has Netflix seeking rents with net neutrality and Title II as the vehicle.  According to Investopedia, rent seeking is defined as when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.  An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the special-interest group.

Time Warner’s HBO, Disney’s ESPN, and Viacom’s CBS apparently recognize the need to respond to Netflix’s disruptive model with a little innovation of their own, thus their proposed streaming services.

Would consumers of video content via the internet benefit if competing online streaming providers were ensnared by additional regulations flowing from Title II or net neutrality rules?  No, they would not because fewer online content providers would step up to challenge Netflix and consumer welfare would shrink because of reduced access to video content.

The Commission should recognize that net neutrality and calls for Title II regulation are nothing but attempts at rent seeking.  If Netflix and other content providers believe their content or services are of value to the consumer, they will not need the Commission to intervene in this market.

Morningstar report shows that wireless environment is competitive

This morning I came across an analyst report on Morningstar.com that described how Verizon is under more competitive pressure from wireless rivals such as AT&T, Sprint, and T-Mobile.  Analyst Ryan Knutson wrote the following:

“Verizon is under more pressure from rivals now than at any time in years, especially as Sprint Corp. recently began aggressively cutting prices and AT&T Inc. has been reacting to T-Mobile US Inc.’s continued momentum. Verizon has lowered its prices and mimicked some of Sprint’s offers to increase the size of data buckets. So far, it seems to have helped it avoid customer losses. An important metric to monitor is churn, or the percentage of customers leaving each month. Verizon has done well keeping that percentage below 1%. A figure much higher than that is a sign things are getting tougher.”

Mr. Knutson went on to say that while Verizon was still adding more post-paid subscribers than losing them and that the company’s churn rate (percentage of customers leaving the service) was below 1%, the company is being challenged by T-Mobile which added 1 million subscribers in this quarter.  Mr. Knutson also estimated that Verizon plans to spend approximately $10 billion in upcoming spectrum auctions.

Mr. Knutson’s report supports an argument made earlier today by Verizon’s Libby Jacobson.  Ms. Jacobson, in describing the competition Verizon faces in wireless, stated:

“One of the hallmarks of the wireless industry – from devices to applications to service plans — is the broader range of choices available to consumers enabled by the various differentiated arrangements and business models in the competitive and still-rapidly-evolving wireless business. Such flexibility is particularly important so that wireless services can continue to develop into a more full-throated competitive option to the higher speed wireline services that, in many places, may only be available from cable operators.”

In a competitive marketplace, we should expect to see changes in the relationship between wireless services consumers and producers of those services reflected in pricing, notably price decreases.  In the classic Hoteling example, we should see firms moving closer together in prices and services as they try to persuade more consumers to buy their product.  We are seeing that in the wireless space, but wireless report after wireless report, the Federal Communications Commission refuses to draw the conclusion that the market for wireless services is a competitive one.

Would making a declaration that the market for wireless services is competitive somehow undermine the Commission’s role in communications?  Given the light touch treatment extended by the Commission on to the wireless industry, saying that the market is competitive would be the scissors that cuts an umbilical cord that quite frankly has not been needed for decades.  The fear that somehow wireless providers would reverse course by taking actions that would make the wireless market less competitive should also go the way of the Dodo bird.

Would shifting to an internet-pipe only service get broadband providers out of the FCC’s cross-hairs?

Recently The Wall Street Journal reported on Viacom’s CBS and Time Warner’s HBO’s intent to establish a stand-alone streaming service for their content.  For cord cutters that dream of putting together their own portfolio of video content, this may seem like the a la carte approach that consumers and policymakers have been asking for.  While these moves are not indicative of a tsunami of movement by programmers from traditional cable, I have to wonder what the media world would look like if all content providers took the Netflix, over the top approach to getting programming to the consumer.  What would be the new consumer behavior?  Would net neutrality become a non-issue?

Regarding consumer behavior, consumers may feel emboldened by this increase in consumer choice, especially given the cost of cable service.  According to data from the Federal Communications Commission, as of January 1, 2013, the average price for cable service in all communities is $64.41.  Where there is effective completion, average price for cable service is $63.03, but where effective competition is non-existent, average price is $66.14.

I can see consumers combining Netflix programming at $8 per month with ESPN at $30 per month; CBS at $6 per month; and AMC at $10 per month.  I can’t pass up on “The Walking Dead.”  I agree with The Journal article’s conclusion that cord cutting may become more expensive than traditional bundling packages.  This becomes apparent when you look at the stand alone prices for internet access.

Again, according to data from the FCC, the price for stand-alone, 1-5 Mbps, internet access service is $35.  Consumers that want faster service ranging from 5-15 Mbps pay on average $44, while consumers feeling the need for more speed ranging from 15-25 Mbps pay on average $56.50.

If consumers make the decision solely on price, I don’t see much migration from current bundling options for cable.  According to an article in ArsTechnica.com, American cable subscribers receive an average of 189 cable channels but only watch 17 of them.  Assuming consumers could subscribe to 17 stand alone streaming internet channels at a price of $6 per channel, plus the broadband capacity sufficient for streaming video, consumers would still pay over $100 for service while given up 170 channels.  That may be okay for some subscribers if exercising consumer choice through a la carte service is that important to them.

If I’m paying that much to stream “Game of Thrones” strictly via the internet, I don’t want my service slowed down because my video bits have the same priority as a cat video on YouTube.  I would be willing to designate which content traffic should get higher priority to ensure that I see whether the Lannisters win the Iron Throne.  Netflix, HBO, or Viacom may not want the quality of their services degraded either due to equal treatment of their traffic and the traffic from a website showing the best way to apply lipstick.  This emerging on-demand/streaming model for video may see consumers driving the demand for paid prioritization.

Seeing how the FCC would manage the political fallout from telling consumers that consumer prioritization is a no-no would be very interesting.  Telling Viacom that it cannot meet consumer demand by entering prioritization agreements with backbone or last-mile broadband operators on the premise that such arrangements would put a cat video at a disadvantage would have content providers thinking twice about innovation in online video distribution.

As Hal Singer shared with me in a tweet, net neutrality is a Trojan Horse and Title II regulation is the end game.  I don’t see either approach advancing CBS or HBO’s new services.

Random thoughts on consumer choice of content

Progressives have expressed concerns about consumer access to content of their choice; that decisions to access lawful content not be undermined by the end-user’s broadband access provider.   Consumer choice implies that the consumer has placed some value on the content he or she wants to receive.  One consumer may place a greater value on using their bandwidth to reading up-to-the-minute press releases on PR Newswire and business news content.  Another consumer in Florida may place greater value on gaming with his friends in Wisconsin.  Should net neutrality proponents be concerned about a consumer’s value-maximizing decision where the very small websites that net neutrality proponents claim to advocate for are not accessed as a result of consumer versus broadband provider “blocking?”

Utility or value maximization is nary mentioned by net neutrality proponents.  They have beaten around the bush by discussing it indirectly in the guise of non-discrimination or non-blocking principles.  Saying non-blocking or non-discrimination provides a false sense of speaking truth to power by putting the “bad guy” taint on broadband providers.  It also helps to embolden their status with their constituency, the consumers who believe that a handful of documented net neutrality violations is indicative of how broadband providers will behave even when millions if not billions of transactions occur every day without a net neutrality hitch.

But highlighting actual consumer choice, a consumer’s ability to place higher priority of certain websites over other content doesn’t seem to be the progressives’ cup of tea.  An enhanced analysis of the content markets should have as an issue whether consumers can make this type of choice and whether public policy should encourage it.  My bet is that progressives prefer consumer choice light versus strong, robust consumer choice.

The reason why this proper market analysis won’t be entertained by net neutrality proponents goes back to the “V” word; value.  Small content providers don’t have much in capital or time to garner the traction and eyeballs that larger, more entrenched content providers have.  It’s the economics of net neutrality.  Larger content providers have sunk millions into the marketing necessary to gain traffic.  Some are merely leveraging their legacy infrastructure.  For example, I’m a fan of The Economist.  Not only do I subscribe online, but I also get the print version so that I can read it on the plane or MARTA rail.  The Economist leverages its print reputation to attract readers online.  Online magazines that can establish pay walls and maintain loyalty with superior content will make revenues, hopefully have profits, and maintain barriers to entry.

Unfortunately for the smaller content providers progressives are so concerned about, energy is being directed toward a public policy initiative that won’t do anything for their marketing or their profit.  It’s also unfortunate that nary one of the grass roots advocacy groups pushing net neutrality have made a cogent economic argument that could give the Commission any proper guidance.

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My response to Keith Ellison’s Huffington Post op-ed

Posted October 9th, 2014 in Broadband, Internet, net neutrality, Network Compact, open internet and tagged , , by Alton Drew

Yesterday, U.S. Representative Keith Ellison, Democrat of Minnesota, voiced his support for net neutrality and asked the Federal Communications Commission to implement rules that would protect Internet openness while ensuring that communities of color have a place at the digital table.

Mr. Ellison expressed concern that Internet service providers were in a position, by choosing to not treat traffic equally, to squelch the voices of minority communities on issues of particular importance such as the shooting this past summer in Ferguson, Missouri of Michael Brown, an unarmed teenager.

Mr. Ellison is wrong on the issue.  There has never been equal treatment of traffic. From the early days of the Internet treatment of traffic has always depended on the type of traffic coming across the pipes.

As noted Internet pioneer Nicholas Negroponte recently noted, the idea of equal treatment of bits is “crazy.” A book is about one megabyte of data, yet one second of video represents more than one megabyte.

E-mail came to your computer a lot faster than video back in the early to late 1990s.  Remember buffering? Today that problem is resolved in part by providing the bandwidth necessary for moving video from the producer to the ISP and eventually to the consumer.
Mr. Ellison raises the big “if” when it comes to potential blocking or discrimination on the part of ISPs. The reality is that ISPs did not block the content provided by people on the ground in Ferguson. ISPs do not want to risk the value of their last-mile networks by sending competitors the signal that their networks are unreliable.

Ironically, that very video traffic that Mr. Ellison refers to would never get through to end-users unless backbone providers and ISPs agreed to the provision of greater bandwidth for video.

Mr. Ellison has simply made the anti-net neutrality argument.