Remaining neutral
By Paul Sweeting -- Video Business, 2/3/2006
FEB. 3 | WASHINGTON—Politics, as they say, can make for strange bedfellows. One of the stranger pairings could emerge this month as Congress turns its attention to telecommunications reform.
On the contentious issue of ’Net neutrality, the major studios could find themselves on the same side as the various electronic civil liberties groups, such as the Electronic Frontier Foundation and Public Knowledge.
In the past, those groups have clashed with the studios on issues like file-sharing, digital rights management and fair use. But on the question of ’Net neutrality, their position could actually benefit the studios, raising the possibility that the often-bitter opponents could make common cause.
They could, that is, if the studios were paying attention. So far, however, they haven’t weighed in on the issue. Yet it’s one that could have significant implications for their business.
“’Net neutrality” refers to the principal that broadband networks should be open to all on a non-discriminatory basis, just as telephone networks are open to anyone willing to pay.
Under prevailing FCC rules, however, broadband networks are classified as “information services,” rather than “communications services,” as phone networks are.
While that may seem like the sort of distinction only a lawyer could love, the ruling had profound consequences. “Communications” networks are required to operate as “common carriers” open to all.
“Information services,” in contrast, have no such regulatory requirement. The owners are broadband networks and are legally permitted to act as gatekeepers, rather than merely toll collectors.
To network providers, that’s as it should be. They’ve spent billions putting their high-speed infrastructure in place, and as they see it, they should have some say over who gets to build Web-based businesses on top of it.
In a now famous interview with Business Week, SBC CEO Ed Whitacre put the issue neatly.
“Now what they would like to do,” Whitacre said of online content providers like Yahoo and Google, “is use my pipes free, but I ain’t going to let them do that, because we have spent this capital and we have to have a return. … The Internet can’t be free in that sense, because we and the cable companies have made an investment, and for a Google or Yahoo or Vonage or anybody to expect to use these pipes [for] free is nuts!”
The network providers would like to charge higher prices for bandwidth-intensive uses. If you want your content to move at the maximum available speed, you should pay more for it—like hot lanes on the freeway—than someone willing to go more slowly.
To the civil liberties groups, that sort of market mechanism will serve only to benefit the already-big content providers at the expense of the little guy, and they want Congress to change it.
To the studios, however, although they’re clearly in the already-big category, it could become a critical issue of cost.
As the studios move to embrace various forms of electronic delivery, such as Warner’s plan to launch a download-to-own service in Germany, bandwidth cost could become a serious economic constraint on how rapidly those businesses develop.
Right now, the bandwidth cost of delivering movies over the Internet does not hit the studio’s P&L. But that doesn’t mean it’s free.
Whitacre is correct that building a high-capacity broadband network represents a significant capital investment, and that investment has to be paid for.
So far, network providers have been able to spread those costs over a growing base of broadband users. But movies are bandwidth hogs, and as online delivery grows, the even distribution of costs may be harder to justify.
Whitacre’s comments represent the first warning that network providers may try to push the growing bandwidth cost back up the pipeline onto content owners.
That gives the studios a significant stake in the question of ’Net neutrality.
