Wednesday, July 13, 2011
Regulators often confront stakeholders keen on changing the rules of economics to secure a competitive advantage. Currently in Canada the CRTC has under consideration an incumbent carrier proposal that would mandate metered service even for wholesale rates. Incumbent carriers try to make metered service come across as more efficient and fair.
On its face metered service makes sense: who wants to subsidize a heavy user? But whether a subsidy exists depends on such factors as the cost of service, what the carrier charges and whether the heavy users/potential subsidized users cause the carrier to invest in new plant capacity. Put another way the incremental cost to provide even a heavy user one additional unit of capacity trends toward zero unless and until providing that incremental additional unit forces the carrier to make new capacity investments.
Consider a parallel between an Internet minute of use and water contained in a reservoir created by a dam. Unused Internet packet delivery capacity is similar to unused water that eventually flows out of the reservoir downstream. For Internet switching and routing foregone usage occurs instantaneously on a regular basis, while the water in a lake or reservoir appears to stay there even as water flows out also on a regular basis.
It appears quite clear that when carriers hanker for usage based pricing they want to competitively disadvantage resellers. Would these very same carriers completely abandon the offering of unmetered “private lines” to end users?
Before the proliferation of video content, consumers tolerated “least objectionable programming” as the major broadcast networks worked to amass the largest possible audience.. Cable television and the now the Internet show how narrowcasting can accrue ample profits. So far Netflix has had the opportunity to provide subscribers with mass market (and mega-budget) blockbusters as well as content toward the end of a very long tail.
Whether motivated by a significant increase in content costs, or a foolish strategy to press its perceived “must have” content role, Netflix will increase rates as much as 60%. The company wants to migrate subscribers to its online service, despite the fact that this service is comparatively inferior both in terms of access to blockbusters and long tail content. I think Netflix has overplayed its hand, but its tactics will provide another opportunity to see just how price sensitive consumers are in the video content marketplace.
When television viewers had few choices they tolerated mediocre, mass market content. Given choices consumers have fragmented the market in exchange for the obligation to pay more. Virtually overnight, Netflix forces subscribers to reconsider both the value proposition of a general subscription to diverse video content as well as the incrementally greater value of access to an even larger inventory of postal delivered content.
I’m abandoning my subscription in its entirety and returning to Redbox and that somewhat dismissed strategy of “surfing the web.” I found myself tolerating less than ideal movies ostensibly to justify the current rental rates, particularly for streaming content. Netflix has encouraged me to pay Redbox on its pay per view basis, and to renew my search for Web serendipity. In other words this subscriber is quite price sensitive and has no tolerance for a 60% rate hike. My verdict: a way too clever company forgot the old adage that bulls and bears can make money in markets, but pigs get slaughtered.
Monday, July 11, 2011
As one who has criticized the FCC for shoddy, results-driven decision making and data collection, I think the Commission deserves credit when it plays it straight. The Commission does a quite good job in a recent Report that compiles data comparing U.S. broadband penetration with that occurring in other nations. See See International Comparison Requirements Pursuant to the Broadband Data Improvement Act, International Broadband Data Report, IB Docket No. 10-171, Second Report, DA 11-732 (rel. May 20, 2011); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-11-732A1.doc.
The FCC provides more helpful comparisons, including consideration of service prices and delivered versus advertised delivery speeds. The international comparison largely corroborates statistics compiled by the Organization for Economic Co-Operation and Development (“OECD”) showing that the U.S. ranks high in wireless broadband and cable modem wireline service, but mediocre in DSL broadband service. “Based on OECD data, the United States ranks ninth for mobile broadband adoption on a per capita basis, and 12th for fixed (e.g., DSL or cable) broadband on a per household basis. U.S. fixed broadband adoption lags behind such countries as South Korea, the United Kingdom, Canada, and Germany, but exceeds adoption rates in Japan and the EU average. This Report also compares data on average actual download speeds reported by a sample of consumers in a number of U.S. and foreign cities and finds that some large European and Asian cities exhibit a significant edge over comparable U.S. cities in reported download speeds, though reported speeds for some other international cities are roughly comparable to speeds in many U.S. cities.”