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Did the FCC just bless a capped, two-tier Internet?
By Nate Anderson
You like the idea of Internet data caps and overage charges, right? And the prospect of paying your ISP separate fees for "the Internet" and for "managed" IP services like voice, video, VPN, telehealth, and smart grid applications, even when these directly compete with similar Internet-delivered services?
Okay, you probably don't—if you're a business or home Internet user. But if you're a major Internet provider, you love both of these ideas a lot... and you found support for both of them in Wednesday's "net neutrality preview" from the Federal Communications Commission.
"Broadband rationing"
When FCC Chair Julius Genachowski previewed his net neutrality proposal this week, he mentioned "usage-based pricing" and failed to mention "managed services." Neither item was accidental, and it didn't take long for interested observers to read the tea leaves.
Craig Moffett, an influential Wall Street tech analyst, said after the speech that "broadband rationing is now the order of the day" once Genachowski gave his support to the idea. It's something of a strange comment, since usage-based pricing has not been either regulated or illegal, and in fact data caps are now common even though many are high (such as Comcast's 250GB/month limit). Still, the FCC's endorsement of the idea should provide a bit of cover to wireline ISPs who want to try it.
Moffett added, "We would expect the introduction of UBP [usage-based pricing] plans from major cable [ISPs] to follow in short order, and we would expect that their stocks will respond well to such introductions."
NCTA, the influential lobby for the major cable operators, today quoted Moffett and expressed its own support for UBP as a way to "focus on what best serves consumers." CEO Kyle McSlarrow says he doesn't support any particular model (and likes flat-rate himself), but that ISPs need the flexibility to experiment in order to help "price-sensitive consumers at the lower end of the socioeconomic ladder."
In response to Moffett's quotes, a senior FCC official sent us a statement making clear that data caps, overage charges, and the like would be watched carefully for signs of price gouging in the limited-competition wireline ISP market.
"Usage-based pricing can create more choice and flexibility for consumers," said the official. "But practices that are arbitrary, anti-consumer, or anti-competitive would cause serious concern. The FCC will be a cop on the beat for consumers."
But Genachowski does support the idea, and the ISPs are glad of that explicit support. There's nothing wrong with the idea, in our view, when implemented fairly, but it's not popular with the public in large part because past attempts to implement it have correctly been viewed as a massive cash grab by ISPs that already make insanely high profit margins.
When the cable companies roll out $5 data-capped Internet access to make it easy for poor families to get online, it's hard to envision much opposition. But of course, that's not what we've seen.
We're excellent "managers"
Imagine that you are Netflix boss Reed Hastings. You're busy trying to eat the cable companies' collective lunch by offering on-demand Internet streaming video; sure, you're not there yet, but it's clear this model has a bright future… except for one little worry.
The cable companies and telcos you rely on to deliver your bits also compete with you, offering profitable video services of their own that don't come through "the Internet" but are increasingly based on IP and use the exact same pipe. Should those companies be allowed to offer managed quality of service enhanced video streams over a segregated section of the last-mile Internet pipe to directly compete with your own best-effort Internet offering? And how could this possibly be a fair fight?
We don't need to imagine Hastings worrying about this scenario, though, since Netflix has made its concerns clear in writing. Back in January, the company warned the FCC about letting "managed services" swallow up the open Internet.
"The fact that network operators control the delivery pipes and generate significant revenue from content that travels over those pipes provides both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators," Netflix warned. These developments "exacerbate the growing concern that [video providers] will use their control over programming networks to stifle competition, including the growing competition from online video providers like Netflix."
The FCC itself recognized the potential for these kinds of problems when it issued its call for comment on the open Internet (PDF), but it also didn't want to hinder genuine innovation in a nascent market.
"We recognize that these managed or specialized services may differ from broadband Internet access services in ways that recommend a different policy approach," it said at the time, "and it may be inappropriate to apply the rules proposed here to managed or specialized services. However, we are sensitive to any risk that the growth of managed or specialized services might supplant or otherwise negatively affect the open Internet."
The ISPs were aghast at the idea that the FCC might limit them from setting up priority access deals both on the Internet and through these separate managed services. While selling an increasingly fast raw pipe to the 'Net (with neutral congestion management and even customer-directed QoS) might sound like a boon to consumers, ISPs dread the thought of becoming mere bit haulers. The real money comes when you can charge people once for the open Internet, once more for IP voice, a third time for IP video, and another five or six times for various smaller IP services.
They've been lobbying against the idea for months, almost always insisting that "managed services" are about "telehealth" or "smart grids." And you don't hate healthy people, do you?
In the end, the ISPs got their way. Despite the many questions raised by the FCC about managed services, Genachowski's speech didn't mention it once. That was no accident.
Our understanding is that the proposed open Internet rules include nothing about managed services, leaving it entirely unregulated. The FCC has apparently decided—and this is certainly a legitimate point—that no one really knows what services will develop and that it's just too early in the game to lay down any sort of detailed rules. Such rules might, in fact, be counterproductive if offered too early and could squelch a nascent market.
We know the FCC has such concerns because Genachowski stated them explicitly in relation to wireless, where he also accepted the ISPs' arguments that "wireless is different" and doesn't need neutrality rules (transparency is good enough). Instead, the FCC will "monitor" the situation in this young market and act if needed.
The ISP industry has been lobbying for a "light touch" when it comes to open Internet regulation, and they got it; if the touching here were any lighter, it would be nonexistent. The cable industry sees things the same way—and they love it.
"We further understand that the rules do not preclude or inhibit our ability to innovate and deploy new and specialized services," said NCTA after the speech. "Importantly, they appear to reflect Chairman Genachowski’s previously stated position that such rules will not and should not result in price regulation and to recognize the value of flexible business models such as usage based pricing."
Of course, the ISPs aren't in the managed services game because "telehealth" and "distance education" are going to butter their bread, though there is certainly some cash in these services. (Looking for a fun drinking game this weekend? Dig up public references to "managed services" by CEOs and lobbyists and do a shot whenever you see "telehealth" trotted out.)
No, they're in it in order to do things like earn cable-TV-style fees from millions and millions of users, as Google and Verizon at least had the decency to admit earlier this year. ISPs should be free to manage their networks, the two companies said, and "they should also be free to offer managed network services, such as IP television."
Like usage-based pricing, this isn't necessarily a bad idea—who wants their Sunday football games to buffer or glitch out?—but we continue to have real worries about how this affects competition and how it might be implemented. (And this isn't all speculative, either; AT&T already reserves part of its U-Verse connection for IP video and can squeeze Internet traffic when home users are watching more HDTV. Is that good for home TV watchers, bad for innovation at the network edge, or both?)
Arms merchants love an arms race
The FCC has its concerns, too, but it won't act, at least not now. Instead it will "monitor." Those who own the last-mile pipes have permission to continue their experimentation with managed services.
Fortunately, though wireline broadband isn't as competitive as many would like, the major ISPs remain susceptible to public and political pressure that will place constraints on their ability to do anything too outrageous—at least in one giant step. (See the flood of anger at Time Warner Cable's pricing plan experiments in 2009—anger that reached Congress—for a good recent example.)
But what will happen by slow degrees as ISPs condition Internet content providers and the public to pay for more and more services, and to accept certain forms of usage-based pricing?
Verizon already knows—the "open Internet" will take a back seat to the managed "broadband platform."
As the company's top lobbyist, Tom Tauke, put it this summer, "Certainly nobody believes that the promise of broadband is Internet access and video, which is what we have today." No, the future is "'other services' that should be available over the broadband pipe. They need unique creativity and partnerships to make them work. It’s the communications company partnering with the power company to do the smart grid. It’s the communications partnering with the health care provider to do heart monitoring at home. [Editor's note: drink up!] That requires a different set of rules than the rules that govern the best-efforts Internet."
It's a model where ISPs extract rents on every service they can imagine. The danger, of course, is one that Google warned about in a slightly different context: "creating incentives to monetize scarcity rather than build capacity, to generating an 'arms race that benefits only the arms merchants' (where broadband providers increase their income but not overall speeds), to fashioning an Internet where only those who can 'pay to play' will fare well and others will be relegated to a slow lane."
Will that happen? ISPs say no. We're about to find out.
Excerpted from Did the FCC just bless a capped, two-tier Internet?
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