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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.

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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.

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Losing the Internet global market for the broadband access trees

The New York Stock Exchange Tech-Media-Telecom Index fell 101.46 points or 1.35%, partly on news that the European economy was worse for wear.  Equity investors ran for the debt-income hills choosing to move their stash into government bonds.

I don’t think the fall in the tech, media, telecom sector had much to do with comments made today by panelists participating in a Federal Communications Commission forum on the law and economics of net neutrality.  The takeaway from that panel for most was that no matter what net neutrality rules the FCC comes up with, whether based on Title II, section 706, or some ungodly pairing of the two, there will be blood in the form of litigation.

The other takeaway in my opinion is how so far the FCC has completely ignored the opportunity to describe how regulation, especially under a Title II regime, is supposed to help maintain optimum performance of a globally competitive interconnection of 67,000 networks when a significant portion of the globe is experiencing an inept economic performance.

If economic performance stays this sluggish worldwide, information services companies will have to really emphasize to consumers the value of their content and information products if they are to stay afloat.  But when the FCC is seriously contemplating codifying a policy that would give equal treatment of a video of a dancing cat with life-saving online medical services, it is difficult to see capital and investment moving freely to activity that brings the most value.

Morningstar notes that the FCC’s tough stand on competition and net neutrality has deflated the value of wireless Internet access platform providers, casts doubt on pending acquisitions of DirecTV and Time Warner Cable, and lessens the chances of Sprint and T-Mobile walking hand-in-hand down the mergers and acquisitions aisle.  According to Morningstar, the inability to consolidate may make Sprint and T-Mobile’s ability to garner additional spectrum or eek out a profit all the more difficult.

If the FCC wants to maintain its economic regulation focus on the providers of broadband access platforms while positively impacting the end-to-end global nature of the Internet, it may want to ease up on the “consolidation is bad” mantra and either stick to a broadband policy based on section 706 or better yet abandon rulemaking on the Open Internet altogether.

 

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Google says “We love net neutrality. Why don’t you?”

Google is no longer silent on its position on net neutrality.  It wants to see strong net neutrality, as this blog post in The Washington Post points out.  In fairness to the company, however, it came out of the net neutrality closet to investors a few months earlier based on language in its February 2014 10-K, its annual financial report to the U.S. Securities and Exchange Commission.

Without using the terms, “net neutrality” or “Open Internet”, here is how Google described how the risk stemming from a lack of an open Internet would impact the company:

“business depends on continued and unimpeded access to the internet by us and our users. Internet access providers may be able to block, degrade, or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users and advertisers.
 
Our products and services depend on the ability of our users to access the internet, and certain of our products require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant market power in the broadband and internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies, and government-owned service providers.
Some of these providers have taken, or have stated that they may take measures, including legal actions, that could degrade, disrupt, or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings.
Such interference could result in a loss of existing users and advertisers, and increased costs, and could impair our ability to attract new users and advertisers, thereby harming our revenues and growth.”
Google has actually shown it prefers taking action when it comes to net neutrality versus engaging in esoteric debates over an open Internet, as preferred by numerous grassroots advocates.  Back in February 2010 when Google announced its intent to deploy one Gigabit Internet access service, it made clear its intention was “to incorporate the policies we’ve been advocating for in areas like network neutrality and privacy protection.”
If Google Fiber is to have any impact on incumbent broadband operators such as AT&T, Comcast, or Verizon, it may only be in forcing them to upgrade the speeds at which the incumbents provide high-speed access.  By incorporating net neutrality principles in its high-speed service, Google is merely following AT&T, Comcast, and Verizon’s model for complying with net neutrality; they’ve been following net neutrality principles without Google’s help.
I don’t see why the Federal Communications Commission would be moved by Google’s announcement of its position on net neutrality.  If anything the Commission should be asking Google what took you so long to verbalize your support.