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The threat to the “golden era” of video

FCC commissioners 2015

FCC chairman Wheeler says we are in a golden era for the delivery of video services. He also says it is under threat from pay-TV providers “playing both ends against the consumer.” What does that mean and why does it matter?

Speaking at the INCOMPAS Policy Summit on Monday FCC chairman Tom Wheeler said that we are in what he characterized as the third age of video. He laid out the three stages as:

  1. A scarcity of programming in the broadcast age, characterized by a few local broadcasters and fewer national networks
  2. An abundance of programming from one or two providers, including 500-channel packages on dedicated video networks
  3. An even greater abundance of programming from many providers, where programming comes to the user over all the older networks and the Internet.

This third age, the age of competition, Mr. Wheeler sees as the best yet, but he fears it could be short-lived:

Tom Wheeler FCC“It can be artificially blunted by incumbent pay-TV providers, who can play both ends against the consumer in the middle – by supplying broadband connectivity to online video providers while at the same time competing with these emerging video providers for viewers.”

What exactly does Mr. Wheeler mean by this statement and why is the consumer in the middle?

Online video providers (OVPs) like Netflix and Amazon need broadband to deliver service to their customers (obviously!) Big ISPs, like Comcast and TimeWarner Cable, are forcing big OVPs to pay them a fee for this access. Naturally enough, the OVPs don’t like this. If they don’t pay, their services perform badly, and for them that is a deadly state of affairs.

At the same time, companies like Comcast and TimeWarner Cable are competing with OVPs for customer attention using their broadband. They are providing video over broadband through TV Everywhere services like Xfinity Go and TWC TV app, and in standalone broadband services like Comcast Streampix.

The operator services have advantages over Internet based OVPs. Because they are delivered within an operator’s network and the streaming servers are closer to the users, performance should be better. As well, there are ways for operators to actively favor their own services over the OVPs. A simple way is to bundle them in for free with broadband, as Comcast is doing with Streampix for Internet Blast Plus and Internet Plus customers. Another way is to prioritize the broadband traffic from an operator service over an OVP service, giving the operator service better viewing performance. Comcast has been accused of doing this in the past with its Streampix. Operators can also exempt their services from data caps. Comcast has been incorrectly accused of doing this with its IPTV service Stream.

An analogy to this situation between OVPs and operators might be if a toll-road owner were to start up a freight hauling company. It could favor its trucks by not charging them tolls or allowing them access to car pool lanes or locating loading areas right by the toll road entrance. In this way it could beat the competition using the toll road because it can charge less for hauling goods, or deliver goods faster. Other freight hauling companies are stuck paying tolls and delivering more slowly.

Why is the user caught in the middle, in Mr. Wheeler’s statement? Ironically, the consumer ends up paying twice to access their favorite OVP service. They must pay for broadband to get access, and they will have to pay slightly more for the OVP service as the provider passes along the amount it must also pay the operator to deliver good service to them.

Looked at another way, the operator is ”playing both ends” because it gets paid twice for the bandwidth to deliver an OVP video service: once by the broadband customer and again by the OVP.

Today, the amount paid by OVPs to operators is not crippling, and the evidence of direct favoritism of operator services over OVP service on broadband is scant. However, Mr. Wheeler clearly fears it will not stay that way.

Why it matters

The FCC chairman believes the Internet has ushered in a golden age of video, with increased competition and choice.

He also believes that pay-TV operators that are also ISPs have the potential to derail this favorable situation for consumers.

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(4) Comments

  1. Everybody watches Netflix, nobody watches Streampix. Consumers will ultimately prevail, especially if the government represents the people as it should. However, over-regulating Internet providers isn’t the answer either. If Internet providers are going to keep video providers like Netflix from running on their pipes, then I should be able to find another Internet provider. COMPETITION and the will of consumers should drive this, not government regulation – even if there are bumps in the road along the way. We pay our Internet providers to give us unimpeded access to Internet-based services, they don’t also get to choose what I access or not (within “pipe” limitations I pay for of course), or I should have other provider choices. Get the government out of the middle and “TV” will evolve at the will of the markets.

    • Alas, in many places in America there simply isn’t any competition. Rural telcos and cablecos very often are the sole providers to many communities.

  2. Dear Paul,

    As a charter member of the Paul Hamm fan club it pains me to disagree with you my friend. I think you have the right sentiment but you are missing a key element in the equation. I agree with you regarding Competition but you have to recognize that the system exists in two markets – the wholesale and the retail. The Consumer can only enter at the retail level which means they can only respond to what is being offered to them. This does not mean they do not influence the wholesale market but it exerts far more control then people realize. The system itself is highly Regulated at its origins where it granted extraordinary monopoly power to a few key companies. These companies have grown so large in scope and size – and have benefited so much from the new technologies – that they are nearly locked into permanent positions giving them control over the wholesale market. This control badly skews the marketplace in their favor as Wheeler is pointing out. We need to recognize that we need better regulation that either breaks them into smaller pieces or keeps them from controlling the wholesale market. The opposite of a “free market” is actually a “competitive market” that only works if we safeguard against the consolidation of market power. Both in the US and Canada we are way, way too consolidated and the market power is skewed so far that is thwarts competition. Wheeler’s warning is prescient because we have to make choices now if the system is a public good or if it is a going to be a permanent private monopoly.

  3. Brad, I suppose I can see (and argue) both sides, but here I am thinking about this more from the perspective of “content” than “network”. The Internet is at least beginning to democratize content, something that wasn’t really in existence during the era of the “networks” and “studios” deciding what we watch. Even w/r to Colin’s comment, the Internet potentially brings content competition to the monopoly networks, perhaps even in rural areas. As you know, I am on the side of “OTT”, so net neutrality has its appeal. But my other challenge is more general, which is any time the government dictates or takes over the fate of an industry, it’s usually to the benefit of the bureaucracy and not the consumer, unfortunately (even though the picture is painted differently, i.e. illusion). If the government gets into the Internet pipes much more, I fear the unintended (or maybe intended) consequences.

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