The coming Internet video crash

First, it was data caps on cellular, and now caps on wired broadband -- welcome to the end of the rich Internet

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But just as delivering voice is cheaper for a carrier than delivering VoIP, delivering video for a cable or DSL provider is cheaper than delivering Internet video. It gets to send the same video bits to lots of homes at the same time, reducing the bandwidth usage everywhere but the endpoints. For that reason, the carriers want you to watch their channels, not video from the Internet. Given that an hour of video takes between 1GB and 4GB, households that drop their cable TV subscriptions at $60 or more per home and instead watch online video exclusively will quickly consume hundreds of gigabtes per month for no extra income to the carrier -- that video traffic will ride on the Internet service that now costs $30 to $50 per month.

Data caps for broadband will increase the costs for the Internet video crowd and dissuade many people from switching from traditional video to Internet video, maintaining the carriers' revenues. This will stifle the Internet video industry -- not just for TV and movies, but also YouTube, online learning, videoconferencing, telemedicine, and other uses.

The economics, of course, are more complex than I describe. Content providers -- InfoWorld, Hulu, Netflix, and so on -- pay to have their material carried over the Internet, both to content delivery networks (CDNs) and the underlying broadband providers. Thus, broadband providers get some money from Internet video users -- but only a fraction of what they get for their own TV services.

The closest thing to a fair approach
If we had an FCC with the desire and power to regulate the cellular, cable, and DSL providers -- even when the FCC is willing, Congress cuts off its funding or otherwise blocks it -- there are several steps it could take to lessen the damage.

  • Prevent providers from charging more for Internet service when ordered by itself than when ordered as part of a bundle. The practice of tying one service to another is rightfully frowned upon in antitrust situations. Given that wired broadband service is provided by just two companies (one cable provider and one DSL provider) in almost every area of the country, it's clear we're dealing with a duopoly that should be subject to antitrust rules.

    Tying usually involves using one product to create a market for another by bundling; here, the carriers are tying TV with Internet to protect the market for a service that people would begin to abandon, as they are doing with landlines and voice plans in the telephony world. Carriers will argue such a no-tying policy will raise rates, except that most customers can't afford more than what they are now paying -- often $150 to $200 per month. Customer budgets will act as a natural cap in a way that doesn't occur with after-the fact fees added for overages and cap bumps. (That's why hidden fees are so popular at banks, mortgage lenders, airlines, and the like -- people would say no upfront but not when they're too far down the road to turn back.)
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