Five Reasons the DoJ’s Investigation of Data Caps is Misguided

Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called “over-the-top” on-demand video providers like Netflix, Walmart’s Vudu and and YouTube.

The Wall Street Journal reported last week that DoJ investigators “are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks.”

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.

Cable companies set data caps high, really high. Comcast, for example, currently sets its residential data limit at 250 gigabytes (GB). Searching around the ‘Net, I’ve found that a rule of thumb is 1 GB equals 1 hour of video, although quality, frame rate and resolution may affect this measure. However, this 1 hour = 1 GB tracks with my own household downloading, which varies between YouTube and iTunes downloads, and Netflix HD.

Also, despite the use of the word “caps,” residential Internet users are not cut off when they reach the 250 GB threshold. Comcast customers are just charged $10 for another 50 GBs, that is, another 50 hours of video.

The idea of a threshold is not unreasonable. Video delivery requires greater network management to address issues such as latency and error correction, adding costs to network operation. The alternative is for service providers to raise the base price of “unlimited downloads” for all users, essentially spreading the cost of a small percentage of high-volume users across the entire subscriber population. That in itself raises fairness questions. It’s a simple trade-off, do we want higher prices across the board, or should the top tier users bear the costs they are responsible for imposing?

The pay-per-view market is crowded, and cable has a right to compete. Consumers have a fair degree of choice among pay-per-view providers. Cable companies, along with Amazon, Vudu, Cinema Now and Apple’s iTunes all have solid selections in terms of recent film releases and TV episodes. These virtual rentals generally cost $5 to $7 for a 24- to 48-hour period. Most also offer viewers an option to buy a digital copy. While Netflix’s on-demand menu lacks the timeliness of the others, it compensates in terms of depth, and thousands of titles are available for a relatively low $8 per month subscription fee. Then there’s Google’s YouTube, the largest server of Internet video, which is trying to expand off the desktop PC and onto the living room big-screen by funding development of new “channels.” Although the first fruits of this venture, channels such as The Nerdist seems a bit, come across as a bit, well nerdy, we should know by now not to discount anything Google attempts.

The point is that cable is not somehow shutting down “low-cost” access to video, as the DoJ claims. In truth, alternatives to cable pay-per-view can be less expensive and more varied.

“Cutting the cable cord” involves a value proposition. Like telephone service before it, household video delivery no longer depends solely on a single hard-wired monopoly infrastructure. For someone not particularly interested in watching TV news, reality shows and real-time sports events, it is possible to do away with cable TV entirely and get one’s video fix through DVDs, digital downloads via wireless service providers. Or one could even chose the lowest-priced cable tier, essentially local channels, with Internet access.

But the landline telephone analogy has limits. Wireless service is replacing wireline because it offers much more value than the old home phone. For starters, wireless makes communications truly personal: your phone is associated with you, not a geographic location like your home office. Today’s wireless phones also are as much information appliances as they are communications tools.

True, cable companies don’t get much love from consumers, but there’s still something to be said for watching the NBA playoffs on a 50-inch HD big screen. And contrary to what the DoJ thinks, there is no consumer “right” or entitlement to this service at below-market rates. Saying so–and assigning the social cost on one segment of the value chain, namely the infrastructure owners, stands to create all sorts of problems. For example, why hold the cable company responsible for low-cost video and not the TV manufacturers? Why shouldn’t all DVDs rentals be priced at $1 rather than $3 for “new releases?” Why should Apple’s iTunes be permitted to charge extra for TV episodes delivered “free” the night before?

The answer is that there are costs and trade-offs associated with each. An Amazon customer may be able to buy all of season one of Game of Thrones for the cost of one month’s subscription to HBO, but she must wait almost a year for the opportunity to do so. In this model, the cable company leverages timeliness, HBO is protects its distribution partners, yet, in the the long run, the programming is available to those who don’t want to pay the cable premium. It’s difficult to see where consumer rights are being violated.

Wireless is the wild card. As alluded to above, wireless service may yet be a substitute for cable connections. Spectrum scarcity, however, makes wireless connections more expensive, and therefore usage caps are much lower (unless you’re piggybacking on a household WiFi supported to a cable modem). But this is just one more reason to speed ahead with spectrum re-allocation.

Here’s where current policy works at cross-purposes. Fostering greater consumer choice is a laudable goal. But that goal can be achieved faster and more cost-effectively if policy is aimed at increasing market mechanisms – which spectrum auctions, unencumbered by conditions, will do. It beats creating cumbersome regime of subsidized service and mandating prices, which, at the end of the day, is nothing but raiding the wallets of average users to pay the cost of heavy bandwidth consumers.

The TV game is changing. Looking at the current video landscape, I have trouble seeing the cable companies as having any sort of advantageous position right now. Their big competitive differentiator, wide scope of programming, is becoming commoditized. Television audiences are fragmenting, which means even the most popular shows draw lower ratings than in the past. oard. DVRs, DVDs and iTunes allow audiences to avoid advertising, which means the one-time stalwart business model that supported free content since the beginning of broadcasting is changing.

Truth be told, no one really knows exactly how TV programming content and delivery will change over the next ten years–only that it will. As broadband data capacity and management becomes more germane to video delivery, bandwidth tiers may yet be an important to pay for it and keep content free. At the same time, there is enormous potential for unintended consequences if unwise policy courses are taken. The worse thing right now is for any government agency to start fumbling around with mandates, regulations and directives on broadband video entertainment, whether they address pricing, platforms or business models.