One thing to keep in mind with regard to the FCC’s recent ruling to dismantle the current Title II Net Neutrality rules: Net Neutrality is not officially dead just yet.
The new rules don’t take effect until 60 days after they’ve been published in the Federal Register, and New York Attorney General Eric Schneiderman is leading an army of state attorneys general to sue the FCC and reinstate the old rules. Given some of the shenanigans surrounding the FCC’s actions leading up to the 3-2 party-line vote, Schneiderman might have a case. What’s more, there remains the possibility that Congress will get involved, for better or worse — and if Comcast is involved, probably worse.
With that in mind, let’s examine what the internet might actually look like without Net Neutrality rules, and to do that, we need to look at two important bits of data.
Video will make up 82 percent of all internet traffic in 2021, according to forecasts released today by Cisco, which sells networking equipment. Video accounted for 73 percent of traffic in 2016.
Not only are people watching more online video, they’re also watching better quality video, sapping more bandwidth. And cord cutters generate twice as much internet traffic as those who still pay for regular TV, according to Cisco…
Live video is set to be the fastest growing segment of internet video thanks to new video offerings like Facebook Live, Twitter’s broadcast of live sports and live over-the-top bundles from companies like AT&T, YouTube and Hulu.
It’s expected to grow to nearly 25 exabytes (25 billion gigabytes), about 13 percent of internet video traffic, by 2021, up from 1.6 exabytes, or 3 percent of video traffic last year.
Then there’s this tidbit from eMarketer:
Consumers shifting their attention to OTT digital video platforms in place of pay TV options—known as “cord-cutters”—is a key reason for anemic growth in TV ad spending. eMarketer has increased its estimates for cord-cutters substantially for 2017 through 2021. In fact, by 2021, the number of cord-cutters will nearly equal the number of people who have never had pay TV (“cord-nevers”).
This year, there will be 22.2 million cord-cutters ages 18 and older, a figure up 33.2% over 2016. The overall tally is much higher than the 15.4 million eMarketer previously predicted. Meanwhile, the number of US adult cord-nevers will grow 5.8% this year to 34.4 million.
“Younger audiences continue to switch to either exclusively watching OTT video or watching them in combination with free TV options,” said Chris Bendtsen, senior forecasting analyst at eMarketer. “Last year, even the Olympics and presidential elections could not prevent younger audiences from abandoning pay TV.”
In many ways, the push to gut Net Neutrality regulations is entirely about video. If internet users only bothered with text, graphics, and streaming audio, cable companies wouldn’t care, because the bandwidth would be cheap, and those media don’t compete with cable television. Ed Whitacre’s infamous “Why should they be allowed to use my pipes?” rant was laughed off in 2005 for similar reasons. The explosion of streaming video, however, means cable companies have lots of competitors using their networks to deliver more compelling services than they can, and more and more customers are turning to them in favor of the overpriced cable bundle. Suddenly, Ed Whitacre’s words are a battle cry for cable companies.
Why don’t cable companies simply try to compete? One possible reason is that contractual obligations with networks might not let them. The hundreds of channels in the cable bundle are owned by only a handful of large corporations, and those companies have historically demanded to have all their channels in place. Another reason is financial. The price of programming in the cable bundle rises 6.5% per year on average, and for now, that outpaces the number of customers cutting the cord.
As the price of the cable bundle and the number of attractive streaming alternatives both continue to rise, however, cable companies know they have to adjust to market realities — which brings us to why they wanted Net Neutrality struck down in the first place.
Three years ago, Comcast, Time Warner Cable, and AT&T all made sure Netflix’s interconnect points were as congested as possible, which degraded Netflix video quality. All the customer complaints in the world didn’t move these behemoth ISPs at all; their goal was to make Netflix pay for a direct interconnection — which they were forced to do. Title II Net Neutrality regulations prevented ISPs from doing that to anyone else.
Guess what will happen when those regulations get struck down?
Big ISPs aren’t dumb. They know there’s been more than enough bandwidth for blogs, photos, or audio for years. They also know that the moment they try to recreate the Portuguese internet or attempt to block any sort of political content, the public backlash will be deafening, CEOs will be called in front of Congress, and laws will be passed that wreck their business models for good. This does nothing to help their bottom line.
So what does help their bottom line? Replacing the growing revenue losses from cord cutting with another income stream. If customers are ditching the cable bundle for streaming video, cable companies will simply make it up on the back end — by forcing all streaming video providers to pay the same interconnect fees Netflix did three years ago.
In that environment, competition in the video market will shrink, because only the big companies will be able to foot the bill, starting with the biggest names in Silicon Valley — Google, Amazon, Apple, Facebook, and Twitter. All of them will take a slight hit on their profit statement, but they will pay the direct interconnect fees, because they can and they must to avoid laggy video. Likewise, Sony will probably pony up to keep PlayStation Vue viable. Sling TV owners Dish Network will raise the biggest stink over interconnect fees, but they’ll likely end up paying them, too — right after CEO Charlie Ergen schedules another lunch date with John Legere.
In an environment where big cable uses interconnect fees to limit the number of their competitors, Disney’s proposed $52.4 billion buyout of 21st Century Fox makes perfect sense. Disney already owns enough huge swaths of pop culture (Marvel, LucasFilm, Pixar, The Jim Henson Company, etc.) to launch a compelling streaming service — or re-purpose Hulu into one, as Disney would buy out Fox’s share of Hulu and become majority owners. Adding Fox’s entire movie and TV catalog makes that service even more compelling.
What’s more, Disney has a very large bargaining chip with cable companies — ESPN. Disney could theoretically go to any ISP and say, “We’ll give you a discount on all ESPN networks in return for a promise not to throttle our streaming service.” Keep in mind ESPN networks collect more than $10 billion/year in carriage fees, and ESPN alone will take more than $8/month out of each customer’s cable bill in 2018. That’s the perfect leverage to have in this market.
AT&T, meanwhile, has no leverage with DirecTV NOW, so it pursued Time Warner to get HBO and Turner Broadcasting as their own bargaining chips. That, however, seems a bit less likely.
Smaller video providers, meanwhile, will get shafted in a world without Net Neutrality, because they can’t afford to pay the throttling avoidance tax ISPs are eager to charge everyone. Google and Amazon could end up being the biggest beneficiaries of this change in policy. Smaller on-demand video services might find it’s more cost-efficient for them to become an Amazon Channel or a YouTube Red Channel than to launch a stand-alone service. Apple and Facebook could eventually offer similar bandwidth deals to smaller channels. The end result, though, is fewer independent players and more consolidation.
This might be why Silicon Valley giants didn’t step up to defend Net Neutrality much this year — because the end of Net Neutrality not only strengthens their dominance, but it could add many new revenue streams for them in the video sector.
In the end, of course, consumers still lose, because the added costs of these interconnect fees will surely be passed on to them. What’s more, consumers will notice a sudden lack of new options for video, save for whatever service Disney finally launches in 2019. America already suffers from a lack of competition for broadband internet service. All this FCC really did was reduce competition further in the video market by giving big ISPs permission to charge everyone for access to their pipes. They’ll be sure to limit the abuse of this privilege to the video market, which should just enough to keep federal regulators and Congress at bay.
Because let’s face reality — if ISPs really wanted to restore Net Neutrality rules, all they would have to do is start blocking access to Breitbart while Donald Trump is still President. A line like that never gets crossed without swift reprisal.