It's Hard to Be Neutral about Net Neutrality

It's been fascinating reading the comments on this piece and everyone is right in their own way thus, if nothing else, justifying the title above! Of course Google is in the fiber and ISP business, of course the ISP's fear cord cutting and of course content companies don't get a free ride. The key question remains who pays who for what. From a media guy's perspective the funding model has always been a hybrid of subscription, one off payment and advertising. The monetization of content and infrastructure have always been co-mingled. This is no different; it's interesting to provoke a discussion about where the burden should lie.

The principle of net neutrality is that the providers of broadband infrastructure have to treat all users of bandwidth equally, with the proviso that the content is legal. The recent decision in the District of Columbia Federal Circuit Appeals Court removes that obligation.

The theoretical winners in this case are the infrastructure companies who own the cable and cellular networks that carry Internet content. If the ruling stands they will have the ability to make commercial decisions about carriage pricing that may increase the costs to the biggest consumers of bandwidth and, in theory at least, be able to control the quality of service in terms of data delivery speed for or against companies with whom they may have more or less favorable terms.

The provision of bandwidth is an expensive business. AT&T and Verizon are number 1 and 2 in the U.S. in total capital expenditure across ALL industries. This investment has enabled a massive increase in data capacity and the mass distribution of sophisticated devices and access to content and services that were not even imagined when the Motorola Razr was the 'must have' device only a decade ago. Is it unreasonable for them to apply a charging structure for capacity that rewards content and service providers with whom they have beneficial economic relationships?

The headlines of in-home and mobile data consumption are these. In home / household data consumption is approximately 150 to 200 times greater than mobile consumption. Google (including YouTube) and Netflix account for 45% of fixed broadband traffic. iTunes, Facebook, Amazon and Hulu account for a further 6% in aggregate. Google and Facebook account for 42% of mobile data with Netflix, Pandora and iTunes taking an additional 14%. (For more detail see Sandvine's data at https://bit.ly/1fMD2qU, it makes for fascinating reading.)

What this tells us is that the exploitation of bandwidth use is concentrated in the hands of a very few parties all of who have a clear path to revenue and all who can legitimately be engaged in a conversation about the funding model of their businesses in respect of the costs of rights, development and distribution; and the revenue model in respect of direct costs to the consumer set against revenue sources such as advertising and commerce.

It seems unlikely that the infrastructure providers will enter into an aggressive, "pay or throttle", battle with Netflix as they (Netflix) could argue with reason that their service is one of the principal reasons for broadband adoption at scale and the willingness of consumers to pay for service. Similarly Apple, as an important player in the device ecosystem, might also be protected. The same may not be true for Google, a competitor in many ways to the infrastructure companies, and others who depend on the ecosystem, but on whom the ecosystem does not depend. If these companies force up costs to the infrastructure companies it would be interesting to see which would absorb the costs and which might (like Netflix) seek to charge consumers directly.

It has been suggested in some quarters that the end of net neutrality may act as a brake on innovation as a new (price) barrier to entry will be erected. This is unlikely as all parts of the value chain benefit from innovation; costs will only rise when it is clear that a service gains traction at which point asking "who pays the ferryman" is a legitimate question for all of carriers, entrepreneurs and investors.

For advertisers there is a theoretical outcome in which an offset of increased bandwidth costs may be the increased availability of ad units in content which was previous ad light or ad free. The idea of a 60 second pre-roll before a Netflix movie has an almost hallucinogenic quality for media buyers. This may be a long shot but a reduction in total hours of ad free entertainment is a strong possibility if the economics change, as passing on direct costs to the consumer is always a high risk endeavor.

A version of the piece below appeared on mediabizbloggers.com on January 21st 2014

@robnorman

Photo: Konstantin Sutyagin/Shutterstock.com