Todays WSJ:
The FCC Imposes Netflix’s Broadband Policy
And the winner is Big Cable, not consumers seeking faster Internet speeds.
ENLARGE
PHOTO: GETTY IMAGES
By HOLMAN W. JENKINS, JR.
Sept. 1, 2015 7:24 p.m. ET
24 COMMENTS
TV stocks had a cow a few weeks ago when Disney’s CEO announced that ESPN was losing subscribers due to cord-cutting. Surely if ESPN was threatened the jig was up. Live sports were supposed to be the salvation of the existing TV bundle.
For one reason, though, the market’s fear may be exaggerated. A great deal more bandwidth will be needed, and where it will come from isn’t clear. An otherwise inauspicious Obama economy has delivered a better-than-doubling of average wired Internet speeds in America. But as disparate voices pointed out in a late July House subcommittee hearing, what paid for a lot of this bandwidth was the old cable bundle.
The big four cable incumbents, led by Comcast and Time Warner Cable, still earn princely returns on their past investments. But that hasn’t been true of telecom “overbuilders” (who invade cable’s turf) like AT&T and Verizon, and it will get harder for all as profits disappear from the TV half of the equation.
Google, for a supposed disrupter, bringing one-gigabit fiber as harbinger of our unlimited bandwidth future, has talked a lot lately about the importance of old-fashioned TV to drive the take-up of its vaunted Google Fiber service. Customers just aren’t interested in superfast broadband unless it comes with a cable-like television bundle, which Google has to supply at a loss.
As analyst Craig Moffett of the firm MoffettNathanson explained to Congress, “video will become unprofitable and broadband will be left to carry the entire burden of incremental deployment.”
Which brings us to Netflix. More than one-third of today’s expensively rolled-out bandwidth already is consumed in peak hours by a single company, whose customers represent a tiny minority—about 1.2%—of Internet users. Richard Bennett of High Tech Forum calculates: “If 12 percent of the Internet user population is streaming at prime time, the traffic load goes up to 340% of today’s level; and if it rises to 60%, the load goes up to 1700%.” And suppose users want super-high resolution 4k TV, which requires four times as much bandwidth as today’s hi-def?
Make no mistake: The bandwidth used by Netflix is paid for. But it’s paid for inefficiently, by spreading the cost over all broadband subscribers. In the airline industry, if backpackers and grannies had to pay for the frequent connections, last-minute seat availability and other features demanded by business travelers, there would be fewer planes, fewer flights, less connectivity, less travel for everyone—which is a fair model of the future that utility regulation will now create for broadband users.
Unfortunately the entire confused and inane thrust of federal Internet policy lately has been to sustain the Netflix distortion. Even collecting token amounts, as Comcast did, for expanding direct peering to receive the Netflix deluge apparently now will be verboten. And forget about the elegant fix of usage-based pricing, i.e., charging each customer according to his demand on the infrastructure. It’s clearly a nonstarter with regulators and activists.
For whatever bizarre and unthinking reason, the Federal Communications Commission under Tom Wheeler has decided its measure of success will be consumer uptake of over-the-top TV—which, to be sure, would be slowed if its true economic cost were borne by users.
So what does this mean? The oomph behind a regulated Internet isn’t coming from the net-neutrality philosophes. It’s coming from Netflix and its attachment to a particular pricing model for broadband. Indeed, Netflix CEO Reed Hastings said during an earnings call in April that his ideal is a single regulated monopolist serving each home. He’s going to get his wish—and it will be cable.
By the way, we are not stating a Netflix conspiracy theory. Netflix itself probably is bemused and still trying to make sense of how the politics have been developing. But the fact is, regulators are trying like crazy to make the necessary broadband seem like a free lunch to Netflix customers—a short-termism that necessarily undermines the incentive of others to compete with cable’s already-paid-for infrastructure.
And it’s happening: It can be seen in the slow fading of the telco broadband challenge from Verizon and AT&T, those profitless “overbuilders.” It can be seen in the decline of satellite television. It can be seen in cable’s considerable success in reducing “churn” as consumers increasingly find no near-substitute for cable broadband.
No wonder MoffettNathanson and Wells Fargo’s Marci Ryvicker both recently came out with unexpected “buys” on the top cable incumbents despite unbundling pressures.
The cable guys resisted Obama regulation because that’s what cable guys do, but they can be expected to make their peace with a Netflix-FCC agenda that reinforces their incumbency. Meanwhile, in a year or two, expect to notice that the broadband speed increases aren’t coming quite as reliably as they once did.
The FCC Imposes Netflix’s Broadband Policy
And the winner is Big Cable, not consumers seeking faster Internet speeds.
ENLARGE
PHOTO: GETTY IMAGES
By HOLMAN W. JENKINS, JR.
Sept. 1, 2015 7:24 p.m. ET
24 COMMENTS
TV stocks had a cow a few weeks ago when Disney’s CEO announced that ESPN was losing subscribers due to cord-cutting. Surely if ESPN was threatened the jig was up. Live sports were supposed to be the salvation of the existing TV bundle.
For one reason, though, the market’s fear may be exaggerated. A great deal more bandwidth will be needed, and where it will come from isn’t clear. An otherwise inauspicious Obama economy has delivered a better-than-doubling of average wired Internet speeds in America. But as disparate voices pointed out in a late July House subcommittee hearing, what paid for a lot of this bandwidth was the old cable bundle.
The big four cable incumbents, led by Comcast and Time Warner Cable, still earn princely returns on their past investments. But that hasn’t been true of telecom “overbuilders” (who invade cable’s turf) like AT&T and Verizon, and it will get harder for all as profits disappear from the TV half of the equation.
Google, for a supposed disrupter, bringing one-gigabit fiber as harbinger of our unlimited bandwidth future, has talked a lot lately about the importance of old-fashioned TV to drive the take-up of its vaunted Google Fiber service. Customers just aren’t interested in superfast broadband unless it comes with a cable-like television bundle, which Google has to supply at a loss.
As analyst Craig Moffett of the firm MoffettNathanson explained to Congress, “video will become unprofitable and broadband will be left to carry the entire burden of incremental deployment.”
Which brings us to Netflix. More than one-third of today’s expensively rolled-out bandwidth already is consumed in peak hours by a single company, whose customers represent a tiny minority—about 1.2%—of Internet users. Richard Bennett of High Tech Forum calculates: “If 12 percent of the Internet user population is streaming at prime time, the traffic load goes up to 340% of today’s level; and if it rises to 60%, the load goes up to 1700%.” And suppose users want super-high resolution 4k TV, which requires four times as much bandwidth as today’s hi-def?
Make no mistake: The bandwidth used by Netflix is paid for. But it’s paid for inefficiently, by spreading the cost over all broadband subscribers. In the airline industry, if backpackers and grannies had to pay for the frequent connections, last-minute seat availability and other features demanded by business travelers, there would be fewer planes, fewer flights, less connectivity, less travel for everyone—which is a fair model of the future that utility regulation will now create for broadband users.
Unfortunately the entire confused and inane thrust of federal Internet policy lately has been to sustain the Netflix distortion. Even collecting token amounts, as Comcast did, for expanding direct peering to receive the Netflix deluge apparently now will be verboten. And forget about the elegant fix of usage-based pricing, i.e., charging each customer according to his demand on the infrastructure. It’s clearly a nonstarter with regulators and activists.
For whatever bizarre and unthinking reason, the Federal Communications Commission under Tom Wheeler has decided its measure of success will be consumer uptake of over-the-top TV—which, to be sure, would be slowed if its true economic cost were borne by users.
So what does this mean? The oomph behind a regulated Internet isn’t coming from the net-neutrality philosophes. It’s coming from Netflix and its attachment to a particular pricing model for broadband. Indeed, Netflix CEO Reed Hastings said during an earnings call in April that his ideal is a single regulated monopolist serving each home. He’s going to get his wish—and it will be cable.
By the way, we are not stating a Netflix conspiracy theory. Netflix itself probably is bemused and still trying to make sense of how the politics have been developing. But the fact is, regulators are trying like crazy to make the necessary broadband seem like a free lunch to Netflix customers—a short-termism that necessarily undermines the incentive of others to compete with cable’s already-paid-for infrastructure.
And it’s happening: It can be seen in the slow fading of the telco broadband challenge from Verizon and AT&T, those profitless “overbuilders.” It can be seen in the decline of satellite television. It can be seen in cable’s considerable success in reducing “churn” as consumers increasingly find no near-substitute for cable broadband.
No wonder MoffettNathanson and Wells Fargo’s Marci Ryvicker both recently came out with unexpected “buys” on the top cable incumbents despite unbundling pressures.
The cable guys resisted Obama regulation because that’s what cable guys do, but they can be expected to make their peace with a Netflix-FCC agenda that reinforces their incumbency. Meanwhile, in a year or two, expect to notice that the broadband speed increases aren’t coming quite as reliably as they once did.
