The coming Internet video crash

People are still getting used to the notion that unlimited data plans are dead and gone for their smartphones. The option wasn’t even offered for tablets. Now, we’re beginning to see the eradication of the unlimited data plan in our broadband lines, such as cable and DSL connections. It’s a dangerous trend that will threaten the budding Internet-based video business — whether from Netflix, Hulu, iTunes, Windows Store, or Google Play — then jeopardize Internet services of all sorts.

It’s a complex issue, and though the villains are obvious — the telecom carriers and cable providers — the solutions are not. The result will be a metered Internet that discourages use of the services so valuable for work and play.

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When AT&T broke from the pack and said it would end unlimited data plans for smartphone users, I understood and even supported the rationale: Bandwidth is limited, so giving everyone unfettered access would sap the capacity and let the most aggressive data hogs crowd out everyone else, destroying the value of cellular data.

I also knew that, for the carriers, bandwidth scarcity was an excuse to meter services and, in essence, raise the price of cellular connectivity, as well as favor their own services over those of other providers. However, it makes sense to not take limited resources like water or spectrum and open them up to unlimited use and, thus, waste.

How we got into this mess Bear with me on the roots of the issue before I get to the coming Internet video crash — the background will explain why there’s no easy solution.

The wireless spectrum belongs to the people, not the carriers, and the federal government rents out the spectrum in exclusive bands in return for accepting regulations on how it’s used. But the Federal Communications Commission has done a poor job of overseeing the carriers, which constantly lobby a Congress to which they donate much money. Their goal is to have the rules relaxed so that they can gouge customers at their pleasure. Like the financial service industry, the carriers have learned how to exploit a corrupt relationship with the government.

Still, a basic principle is enshrined in the law, no matter how weakly enforced, that restrains the highly profitable cellular carriers’ worst instincts. Under President Barack Obama, the FCC finally started to do its job and block some egregious practices the carriers wanted to introduce, such as ending Net neutrality so that they could discriminate against competitors and steer us to services of their choosing. The FCC is now publicly musing about revisiting the issue of cellular data caps, which it supported a few years ago, as it sees what carriers have done with them.

That government counterweight is less available in the world of wired broadband, where there is no limited spectrum that justifies ownership by the government to ensure fair use. The broadband industry builds its own “spectrum” by adding more and more capacity in its cables and networks. Much of that infrastructure runs through public property, such as streets, but broadband carriers can add capacity theoretically forever. That’s why the government has less power to stop egregious practices, even if wanted to. It doesn’t, again thanks to carriers’ lobbying power.

Where the government does have a role is in granting licenses to carriers to offer cable and DSL service, a power that municipalities gained for two historic reasons:

1. Cable started as a competitor to TV, which was distributed through the public airwaves. Government wanted a level playing field so that local TV would be available to all citizens, no matter whether through antennas or cable jacks.
2. Carriers wanted to ensure a large enough customer base to justify the massive capital investments, so they were willing to trade exclusive service for the “must carry” rules for local TV and some regulation over rates. In the 1980s, Congress took away local officials’ rights over most cable providers, leaving that to a federal government unwilling to confront industry.

All this explains why the cable and DSL providers, having seen cellular carriers impose data caps as part of pricey data plans this summer, are confident they can do the same. But unlike cellular carriers, they can’t claim scarcity, which exposes the caps as moneymaking schemes, both through higher rates via tiered plans and by steering customers to their services rather than those of competitors. The risk of the latter is much greater in the world of cable connections than in cellular ones.

Internet video will be the first victim Cable and DSL carriers say their caps will be very high: several hundred gigabytes per month, though some are testing lower caps. Almost no one will be affected because, they claim, most people use a couple dozen gigabytes or less.

That’s the same argument the cellular carriers made, and we’ll see a similar result. There’s a big shift under way as users get more video over the Internet rather than though standard TV channels. Premium channels such as Showtime and HBO have limited their shows’ availability in the rental market (physical and streamed) to stem the loss of subscribers, but that’s the tip of the iceberg.

Within a decade, people might get most of their video content from the Internet rather than watch traditional TV. When that happens, the cable and DSL carriers stand to lose billions of cable TV fees as households drop their “triple play” services to Internet-only. The phone portion of the triplet is also migrating fast to cellphones, and calling in general is shrinking as people send texts and email instead.

That’s why Verizon Wireless and AT&T now charge a “network access” fee instead of a calling fee — they know call volume is going down, and people have been dropping their minutes. The solution: End the notion of minutes and charge a flat fee whether you call or not. You can easily predict the same pattern in the cable and DSL industry (the main DSL providers offer TV services).

But just as delivering voice is cheaper for a carrier than delivering VoIP, delivering video for a cable or DSL provider is cheaper than delivering Internet video. It gets to send the same video bits to lots of homes at the same time, reducing the bandwidth usage everywhere but the endpoints. For that reason, the carriers want you to watch their channels, not video from the Internet. Given that an hour of video takes between 1GB and 4GB, households that drop their cable TV subscriptions at $60 or more per home and instead watch online video exclusively will quickly consume hundreds of gigabtes per month for no extra income to the carrier — that video traffic will ride on the Internet service that now costs $30 to $50 per month.

Data caps for broadband will increase the costs for the Internet video crowd and dissuade many people from switching from traditional video to Internet video, maintaining the carriers’ revenues. This will stifle the Internet video industry — not just for TV and movies, but also YouTube, online learning, videoconferencing, telemedicine, and other uses.

The economics, of course, are more complex than I describe. Content providers — InfoWorld, Hulu, Netflix, and so on — pay to have their material carried over the Internet, both to content delivery networks (CDNs) and the underlying broadband providers. Thus, broadband providers get some money from Internet video users — but only a fraction of what they get for their own TV services.

The closest thing to a fair approach If we had an FCC with the desire and power to regulate the cellular, cable, and DSL providers — even when the FCC is willing, Congress cuts off its funding or otherwise blocks it — there are several steps it could take to lessen the damage.

• Prevent providers from charging more for Internet service when ordered by itself than when ordered as part of a bundle. The practice of tying one service to another is rightfully frowned upon in antitrust situations. Given that wired broadband service is provided by just two companies (one cable provider and one DSL provider) in almost every area of the country, it’s clear we’re dealing with a duopoly that should be subject to antitrust rules. Tying usually involves using one product to create a market for another by bundling; here, the carriers are tying TV with Internet to protect the market for a service that people would begin to abandon, as they are doing with landlines and voice plans in the telephony world. Carriers will argue such a no-tying policy will raise rates, except that most customers can’t afford more than what they are now paying — often $150 to $200 per month. Customer budgets will act as a natural cap in a way that doesn’t occur with after-the fact fees added for overages and cap bumps. (That’s why hidden fees are so popular at banks, mortgage lenders, airlines, and the like — people would say no upfront but not when they’re too far down the road to turn back.)

• Require providers to count their services’ bits last, so any overages or cap bumps can’t be blamed on competitors. You know the carriers will try to offer “free” or “included” video services that eat up the data cap, while others’ services push people over the edge and end up being the first to be cut. When providers charge for access to services that compete with their own, they can’t be trusted to be fair.
• Require progressive rates, so the rates per gigabyte increases with more use. Progressive rates are effective for other utilities and once were effective for income taxes, so they are proven. For example, the first 300GB in a wired broadband service might cost $40, the next 100GB $20, and the next 100GB after that $30. Progressive pricing should definitely be the standard for cellular carriers, which now start with a high base rate, then add more data at increasingly large tranches for the same incremental cost (usually $10) — penalizing light users and giving a price break to the data hogs. Today, for example, Verizon charges $50 for the first 1GB of cellular data, $10 more for the next 1GB, and $10 more for the next 2GB. It should be $20 for the first 2GB, $10 for the next 1GB, $15 for the next 1GB, and $20 for the next 1GB.
• Disallow double-charging for network access. This is another practice already in place for cellular carriers and surely to be copied by cable and DSL providers. For example, Verizon (the most egregious example) charges a $40 “network access” fee to use your smartphone, then it starts its data plan at $50 for 1GB. It’s essentially charging you twice: one for voice and text and once for data, though they’re the same network. That’s just wrong. If the network access is built into the first tier’s price, it should not be charged for elsewhere. A fair approach would entail a $40 network access fee, then a $10 charge for the first 1GB, or there would be no network access free, but charge $50 for the first 1GB — not both as it is now.

At the end of the day, businesses will get away with as much as they can — that’s what they’re supposed to do to make profits. But certain types of providers are essentially public utilities — Internet access these days is as essential as water, electricity, telephone, and postal mail — and need to be more accountable to the public good.

Left to their own devices, they will skew their services in a way that will stunt if not destroy Internet video services, then threaten other bandwidth-using services such as cloud storage, telemedicine, and remote computing. In other words, they won’t stop at Internet video.

You can’t use the Internet without having available bandwidth, and if that bandwidth costs too much, you price the Internet out of reach. Bandwidth should not be free, but it should not be expensive or channeled, either.

This article, “The coming Internet video crash,” was originally published at InfoWorld.com. Read more of Galen Gruman’s Smart User blog at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.