Friday, February 21, 2014
Consumers ought to understand what opportunities and threats arise from an even more non-neutral Internet. Expect existing trends to become entrenched with new impacts.
Better Than Best Efforts Routing Options
The “good old days” of absolute best efforts neutrality in the Internet cloud have long since passed for better and for worse. I haven’t heard any opposition to the use of proxy servers and “better than best efforts” service options provided by companies such as Akamai. When consumers want access to “mission critical” bits, e.g., a weekend mainlining on the entire second season of House of Cards, they might even pay for higher quality of service when the possibility of congestion and degraded service exists.
Expect retail Internet Service Providers, operating the first and last mile broadband link, to offer enhanced quality of service options for a price.
Squeezing Even Higher Broadband Profit Margins
ISPs, affiliated with incumbent ventures such as cable television companies, have come to recognize that they are “first among equals” in the bundling of telephone, home security, video and broadband. Cable operators may want to offer lower margin video services to forestall cord cutting, but the triple digit margins accrue from broadband.
Expect ISPs to press for even higher broadband service rates through general rate increases and additional tiering on the basis of transmission bit rate and download allotments. Also expect a substantial narrowing in the gap of download caps between wireline and wireless broadband options. Currently wireline options have soft caps in the 200-300 Gigabyte range while wireless carriers have hard caps from 250 megabytes to 10 Gigabytes. Wireline ISPs can squeeze out higher margins simply by forcing “bandwidth hogs” onto more expensive tiers.
Options for Avoiding Download Debits
Less generous download allotments reduce the broadband subscription value proposition, but I don’t see consumers pushing back. What competitive alternative do they have? Yes 4G makes it possible for wireless to compete, but their per-megabyte download cost well exceeds the wireline rate even if the latter rates rise significantly. Satellite options offer slower speeds at higher download costs, coupled with some latency (signal delay) issues.
Expect ISPs to “soften the blow” of stingy download caps with expanded opportunities for content and service providers to pay in lieu of metering the download. This might come across as “pay to play,” but heightened consumers sensitivity to a download cap means they are even less likely to respond to additional commercial pitches that debit their download allotment.
New trends will develop slowly, largely because of Comcast’s ambiguous concession commitment to neutrality as a sweetener for securing approval of its NBC-Universal acquisition.I don’t see extortion plays and deliberate dropping of packets as a ploy to force migration by upstream content providers and downstream end users to higher quality of service tiers. However there will be instances where an ISP simply can’t contain its instinct to push the envelope and squeeze that last dollar.
ISPs Demand More Incentives to Upgrade
Expect ISPs to leverage network upgrades in exchange for better interconnection terms with content providers and their downstream Content Distribution Networks. Netflix might even secure the opportunity to install servers on ISP premises, but at a price.
I expect Netflix and consumers to lose the argument that ISPs are entitled only to retail broadband subscriber monthly subscriptions and surcharge payments from upstream CDNs. If Netflix wants to reduce its CDN payments, then it will have to pay ISPs directly.
More Interconnection Compensation Disputes
One might consider increases in peering/transit disputes as an extension of an existing trend. However, the frequency of disputes and the complexity make this a developing trend. A recent and probably temporary surge in broadband demand points to the potential for consumers to experience degraded service. Depending on who frames the issue, congestion recently occurred thanks to Netflix, the weather and a holiday: the House of Cards second season in its entirety, home cocooning due to extraordinary cold and snowy weather and Valentine’s Day. So much for network robustness capable of handling peak demand. But of course consumers don’t know whom to blame. Expect lots of finger pointing.
I hope carriers and content suppliers won’t make excuses for reducing the value proposition of Internet access, but it would not surprise me.
Wednesday, February 19, 2014
FCC Chairman Wheeler has released a statement outlining his thoughts on how the FCC lawfully can press on for open and neutral Internet access; see http://fcc.us/1c2RBzv.
I appreciate what Chairman Wheeler has attempted to do: avoid any unlawful mission creep in light of the strong language in the Verizon decision, but also run as far as possible with Sec. 706 authority. I do think the Commission can move forward with muscular transparency/disclosure requirements. Just now Netflix subscribers don't know the cause of any service degradation so perhaps ISP disclosure requirements might provide some light on how frozen images came about even for subscribers to FIOS service operating at multi-megabit per second speeds.
I do think the Chairman and the Commission will find a less than receptive D.C. Circuit should any order ignore the clear prohibition on the imposition of Title II common carrier requirements on ISPs. I don't see much wiggle room in the no blocking, no discrimination area, nor am I as sanguine as the Chairman in terms of what deference the data roaming decision affords the FCC. That decision emphasized the use of commercial negotiations and the limited role of the FCC and its ability to intervene.
One could draw a parallel between the duty to negotiate, commercially driven data roaming terms and conditions and the similar duty to negotiate retransmission consent between cable operators and local television broadcasters. In both instances the FCC cannot act proactively and has limited powers even to resolve a protracted dispute. Unfortunately for broadband subscribers there won't be a specific "must see" television program that forces one side to capitulate, so degraded service and not so subtle abuses of last mile access may occur.
As you know, the D.C. Circuit Court of Appeals has invalidated network neutrality requirements that impose common carrier requirements. In this blog and elsewhere I predicted an uptick in disputes between content providers and distributors in the absence of unquestionable authority for the FCC to intervene if necessary.
To be clear I favor commercial negotiations that typically resolve interconnection compensation disputes. However, I also suggest that the FCC have authority to resolve intractable disputes as a referee and mediator.
So along comes another dispute between Netflix and retail ISPs such as Verizon and Comcast. See Drew FitzGerald & tzGerald BiograShalini Ramachandran, Netflix-Traffic Feud Leads to Video Slowdown, The Wall Street Journal (Feb. 19, 2014); available at: http://online.wsj.com/news/articles/SB10001424052702304899704579391223249896550?mod=WSJ_hp_LEFTTopStories.
This really should not come as a surprise, even as retail ISPs already receive compensation on both sides of their two-sided market: 1) 3 digit margin monthly broadband retail subscriptions; and 2) transit payments from ISPs, particularly Content Distribution Networks for Netflix such as Level 3.
Retail ISPs want a third revenue stream on some notion that content sources, such as Netflix, are “bandwidth hogs” who should be throttled, or alternatively hit up for direct payments. In particular it must tick off senior management at ISPs, owned by cable television companies, to see Netflix offer a $7.99 value proposition when cable content bundles are 10-15 times as expensive.
I agree that a direct payment should flow from Netflix if and only if it directly interconnects with a retail ISP. If Netflix were to stop using CDNs and seek to interconnect directly with ISPs providing the last mile delivery Netflix surely should pay including the significant electricity used to power onsite proxy servers.
But are retail ISPs right to demand payment from both the directly interconnecting upstream ISP/CDN and even farther upstream from the content source?
I don’t think so, but there’s nothing stopping retail ISPs from trying. Apparently Verizon and others can degrade Netflix traffic delivery—intentionally or not—without much consumer pushback. When consumers don’t get high resolution Netflix content, they do not even know whom to blame. Has Netflix done something wrong, or has the last mile carrier? Who operates the weakest and inferior link when multiple ISPs participate in the complete end-to-end routing of traffic?
Until retail ISPs lose customers or the debate in the court of public opinion expect more interconnection compensation disputes to arise and possibly mess with your Internet access experience.