The Future of Video? Beggar Thy Competitor

In an investigation into the “Future of Video” this week, the House Communications and Technology Subcommittee heard testimony from a number of representatives from the cable companies, satellite companies, wireless companies, and providers of “over-the-top” programming on demand via the Internet Protocol (IPTV), including Netflix. The question at hand is whether recent plans by cable companies to shift their Internet pricing from the flat-rate “all-you-can-download” model to tiered rates based on amount of use is anti-competitive. Netflix and Hulu, which deliver programming directly to viewers over a broadband Internet connection say pricing tiers discriminate against them because usage-based data consumption applies their programming, while for conventional cable TV pay-per-view, the usage meter, so to speak, is not running.

My hope is that Congress and any other agencies watching are cautious. Complaints by IPTV providers appear to be just the sort of “regulate my rival” demands that FCC Commissioner Robert McDowell warned about yesterday in a speech in Rome.

Indeed, IPTV and cable companies compete for on-demand business. And consumers may not be interested in the distinction between their respective business models; all they want is greater choice in video options. Thus far, all groups–cable players, satellite companies and IPTV providers seem to be meeting that goal. Moreover, far from being victimized, IPTV providers are making significant inroads into the on-demand sphere. Cable providers, which in 1992 had a 92 percent share of paid television viewers, now hold only about 57 percent of the market, according to data cited by the Washington Post.

But before making any decrees about how on-demand downloads should count in any data metering scenario, regulators must consider that cable companies and IPTV providers have selected different platforms for programming delivery. Each platform has its own set of costs and trade-offs which are not functionally interchangeable.

Cable TV companies have traditionally separated TV delivery from their Internet service. Cable pay-per-view is accessed and delivered via the set-top box through an interface that can exploit inherent set-top box capabilities. Cable companies can use the set-top box interface to provide advertising, promotions, trailers and other information aimed at encouraging a sale.

IPTV is set up as a broadband application delivered via cable modem. The user interface is generally loaded onto TVs and game consoles per agreement with device manufacturers. But compared to cable box counterparts, these interfaces are simpler and scaled down.

The nature of the delivery platform changes the cost equation for a company like Netflix. I’ll admit some more research can be done here, but the Netflix cost-model is closer to client-server than the transmission-distribution model the cable companies use. Netflix doesn’t need to maintain head-ends for satellite signal reception, and fleets of trucks to maintain physical plant.

From the supply side, programmers see cable companies and over-the-top providers as two different distribution channels. The fee structure Comcast pays Disney, Viacom and Fox for programming is vastly different than what Netflix’s. Licensing rules are different. It’s one reason cable companies get pay-per-view rights to film releases within a few months of their theatrical release, or TV episodes the night after they air, while companies like Netflix might have to wait a year. For consumers, the trade-off comes in cost. Generally a recent film release costs $5 to $10 for pay-per-view. Netflix offers unlimited viewing for $8 a month. The difference reflects the cost of the respective platforms.

Finally, IPTV companies also derive benefits from their decision to ride the Internet independent of a relationship with a cable company. As mentioned above, the cable company is responsible for maintaining its facilities, on which IPTV depends for delivery. The ongoing development of cable modems (e.g., the DOCSIS 3.0 specification), funded by the cable industry, makes quality streaming of high-definition IPTV possible.

So that’s why these demands for “fairness” from Netflix and other over-the-top provider ring hollow. Congress should see through this “beggar thy competitor” call for a mandate that forces cable companies to price their own pay-per-view in ways that artificially make IPTV more attractive. There’s no evidence that cable companies are blocking service or otherwise interfering with consumer access to service. It’s difficult to see how bowing to IPTV provider complaints, and essentially forcing the cable companies (and by extension cable company customers) to shoulder the cost of Netflix’s business model trade-offs, would be fair to anyone.