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December 22, 2010

Network Neutrality: Unintended Consequences

Assuming the Federal Communications Commission network neutrality rules are not invalidated by court decision, or reversed on instructions from the U.S. Congress, the rules, ostensibly intended to protect application providers, might have unintended consequences. Most regulations do have such consequences.

Video entertainment providers such as Netflix have been seen as primary beneficiaries of the new rules, as the FCC (News - Alert) has indicated it wants "best effort" Internet access, with no prioritizing of packets, that could possibly have commercial implications.

Oddly enough, if the rules stand, they are likely to strengthen the position of the linear video providers that otherwise might be thought harmed by a shift to online consumption and alternatives. How is that so?

Since the FCC rules properly do not allow blocking or interference (or, conversely, ensuring quality of) with online video, but do allow tiered pricing based on usage, heavier users of online video are going to find themselves paying higher fees for their broadband access.

Since higher prices discourage buying, there now will exist a higher barrier to adoption of "for-fee" or ad-supported online video services. In other words, as users ponder paying higher access fees to watch online, when they also know they can watch the same content using a linear video service, especially when that service includes digital video recorder features that make a linear experience into an "on-demand" experience, the value-price equation will change.

Where the multichannel video equation had been "everything, at significant prices," compared to "some content online, for free or low prices," the new equation might be "everything, at significant prices, plus online access to some content," compared to "some content online, for free or low prices, but with higher Internet access charges."

The change will not be seen on a widespread scale for some time, but that's the new logic.

Even when a consumer does not prefer to pay for a multichannel video service, plus DVR capabilities, the value proposition will improve, compared to watching some of that content online using Netflix and premium Hulu (News - Alert), for example. Assume a user opts to subscribe to Netflix "streaming only" service for $8 a month, and Hulu Plus for $8, providing access to ABC, Fox and NBC content. A monthly payment of $16 will sound good, compared to $80 to $120 for a linear video service.

If all a user wants is access to some movies, and content from three broadcast networks, and the shows available are a sufficient substitute for over the air broadcast or a full multichannel video subscription, then the value proposition works.

Up to this point, online video has been available on a "no incremental cost" basis. But that won't be the case in the future. To the extent that online distribution becomes a viable substitute for distribution using over the air broadcasting or multichannel video service, it will become a paid, for-fee service. And should consumers start to watch any significant amount of video, they will ultimately face higher broadband access costs.

It might be more accurate to position streaming-only Netflix as a competitor to pay per view or Home Box Office, while Hulu Plus competes more with "basic" or "lifeline" tiers of multichannel video service. Even with higher broadband access costs, that might still work for some subset of TV viewers.

But there are other issues. Since video cannot be offered on a "quality assured" basis, any online video provider experience will be subject to buffering delays and other artifacts at times of network congestion. That will degrade the experience. Linear video, on the other hand, never has to deal with "buffering" issues.

In essence, linear video always has the functional equivalent of quality assurance measures: there is no danger of unexpected bandwidth glitches or other competing applications contending for available bandwidth.

To be sure, under the new rules, assuming they stand, streaming video services will not have to worry about being charged extra to assure quality delivery, and won't have to contend with ISP-affiliated services that use such features to improve user experience. On the other hand, they will have to deal with buffering and other issues that will degrade the experience, compared to linear alternatives.

As a strategic matter, online services offered on a for-fee basis will have to compete against quality of service metrics available to consumers buying linear video services. It will help if end users buy services offering more bandwidth. But that never solves all problems for real-time services. Jitter, basically out-of-order packet arrival, is a separate problem. No matter how much bandwidth an end user has on the access link, that bandwidth does not alleviate jitter issues.

In the absence of other measures to reduce jitter, online streaming of full-length movies or TV serials are going to be quality challenged, compared to linear alternatives. Bigger pipes only help so much, especially at times of congestion when, for example, other family members are doing their own streaming on PCs or tablets or smartphones when another person wants to watch a movie on the main TV screen.

There are certain to be other unintended consequences as well.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Erin Monda

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