In the wake of the D.C. Circuit Court’s vacating most of the FCC’s net neutrality rules, tallying up the likely winners and losers has become a popular parlor game.Topping most lists on the loser side of the ledger are Netflix, YouTube, Hulu and other major content providers who are now seen as vulnerable to being hit with heavy tolls for the bandwidth their users consume.
Missing from many of those tote boards, however, is a sense of just how complicated the business relationships among many broadband providers and content providers truly are and how those complexities could constrain — in practical if not legal terms — ISPs’ aggressive rent-seeking, or of how countervailing forces could still shift the relative leverage among the players.
As we saw in last summer’s retransmission fight between CBS and Time Warner Cable, the networks increasingly view the revenue cable-based ISPs earn from the broadband side of their business as fair game in disputes over retrans fees. By cutting off access to CBS.com to TWC subscribers nationwide during the dispute, CBS essentially reversed the logic of net neutrality. In effect, CBS sought to treat broadband carriage as simply another form of cable carriage, for which the carrier, not the network, had to pay. The creeping cable-ization of consumer broadband should be as much a worry as ISPs’ power to discriminate.
Pure over-the-top players like Netflix, of course, don’t have the leverage of retransmission consent to do what CBS did, but that doesn’t mean Netflix will be easy to squeeze. The more original programming that Netflix, Amazon, Hulu and other big OTT players create, more like traditional cable channels they become, albeit delivered via IP. And in the long history of carriage disputes between programmers and MVPDs, it’s hard to find a lot of cases where the content provider has not prevailed.
Cutting off Netflix, moreover, could easily backfire on an ISP. As BTIG Research analyst Rich Greenfield put it in a blog post Wednesday:
For cable operators, who manage the largest ISPs in the country, the key driver of their financial performance is now broadband. Broadband revenues are being driven by strong subscriber growth (given the superior speeds cable offers vs. DSL) and increasing ARPU, as subscribers migrate to higher price points to gain access to faster speed tiers of service. When you look at what consumers are doing with their fatter, faster broadband pipes, you find two key services: Netflix and YouTube. Together, these two services account for over 50% of downstream bandwidth and about 45% of aggregate (upstream/downstream) bandwidth, as shown in the Sandvine charts in our November 2013 blog post (click here).
If all of a sudden, an ISP said to Netflix “pay us for access to our broadband customers or we will slow you down,” and Netflix refuses to pay, the ISP ends up hurting its own customers and discouraging those subscribers from using the service that is driving them to pay for faster broadband speed tiers in the first place. Great way to drive ARPU down!
As was obvious at CES, both Netflix and YouTube are also doing all they can to hurry along adoption of high-efficiency codecs that will help rein in their bandwidth use and make it harder for ISPs to justify demands for payment.
That’s not to say there is nothing to be concerned about in this week’s ruling. The real danger falls on information providers and services that do not have 40 million subscribers, as Netflix has, and are indeed now vulnerable to discriminatory treatment by ISPs (unless and until the FCC comes up with some new way to skin the net neutrality cat). But much of the focus on Netflix, YouTube and other OTT poster boys has been too one-dimensional.
The impact of the week’s ruling will not play out in a vacuum. It will play out in a business environment of overlapping relationships, complex and countervailing forces, and often conflicting incentives for the players involved.