Regulatory Implications of Over-The-Top Video

Discrimination, Pricing and Interconnection
Jonathan Carroll TLEN 5380²Future of Video: Tech, Policy and Economics²Fall 2010 University of Colorado Interdisciplinary Telecommunications Program December 7, 2010

Table of Contents
Regulatory Implications of Over-The-Top Video ............................................................... 1 Introduction .................................................................................................................. 1 The Video Market ......................................................................................................... 1
Over-The-Top Internet Video ............................................................................................................ 2 Content Owners and Producers ......................................................................................................... 3 MVPD............................................................................................................................................. 4

Two Business Models Collide ........................................................................................ 5
Not Everyone is Embracing the Revolution ........................................................................................ 6 The Battle for the Internet ................................................................................................................. 6

The Regulatory Boogeyman .......................................................................................... 9
Not All Bits Are Created Equal ......................................................................................................... 9 Closing the All-You-Can-Eat Buffet ................................................................................................. 10 The Only Bridge has a Troll Under It ............................................................................................... 10 If We Touch The Internet It Might Break ......................................................................................... 10

Conclusion.................................................................................................................. 11

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Jonathan Carroll TLEN 5380²Future of Video: Tech, Policy and Economics²Fall 2010 University of Colorado Interdisciplinary Telecommunications Program December 7, 2010

Regulatory Implications of Over-The-Top Video
Introduction
The last two years have brought rapid growth in delivering video entertainment over the Internet (over-the-top video). The content that is being delivered is high production quality video entertainment that has traditionally been delivered by over-the-air broadcasts or through a subscription to a multichannel video programming distributor (MVPD). Many MVPDs are seeing drops in subscriber numbers as over-the-top video continues to grow. In response MVPDs are using their position as controllers of last mile connections to re-shape the way the Internet works that pose some new regulatory questions and warrant revisiting some old decisions.

The Video Market
´Many advocates of network neutrality are fighting to defend openness. But not everyone in the debate is fighting over the social value of the Internet. The 800-pound gorillas, the large industrial players, are fighting over revenue models and the future of an industry. And right now, what they are fighting over is the future of television.µDavid Clark, Internet Protocol Architect(Clark 702)
Television is a constantly evolving medium that originally began as an over the air broadcast medium. Over time cable came to replace over the air broadcasts as the main
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way American·s got their television programming. Television broadcasters were far from accepting of the paradigm shift, and spent years fighting back. Even the FCC was resistant to the change, placing difficult to justify regulations on the upstart cable companies throughout the 1960s and 1970s (Nuechterlein and Weiser 363). Now, television is moving onto the Internet and it looks like there could be another fight.

Over-The-Top Internet Video From the very beginning, the Internet it has had a history of leveling the playing field and opening up markets for competition. The net allowed anyone to make phone calls which cut the phone company out of the picture. It allowed enterprising business to instantly be able to market and sell their products to anyone in the world without costly marketing campaigns. Now the Internet is in the process of shaking up the video entertainment industry. People are flocking to online video sties by the millions to watch their favorite television programs on sites like hulu, laughing at someone hurting themselves on YouTube, or catching some old television content on Netflix. Since hulu·s inception over 2 years ago, it has gone from nothing to a site that attracts around 23.5 million page views a day worldwide (Quantcast). In the past year alone Netflix has added 5.8 million subscribers, bringing the total number to 16.9 million (Kafka). It has even been estimated that during peak Internet usage hours Netflix streaming alone accounts for 20% of all the bandwidth in use on the Internet (Abell). In total, it is thought that online video accounts for 51% of bandwidth usage on the Internet currently(Limelight Networks). Over-the-top video·s meteoric rise doesn·t look like it is stopping anytime soon.

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Based on current growth Cisco estimates that by 2014 online video will represent 91% of IP traffic (Cisco Systems Inc.). Another estimate suggests that the amount of time the average person spends watching video over the Internetper day will surpass broadcast TV as early as 2020 (Roettgers). The rapid growth of the over-the-top video market hasn·t gone unnoticed which will mean competition. Recent reports suggest that Amazon is working on launching their own competing over-the-top streaming service (Wingfield and Schechner). Microsoft also appears to want its piece of the pie and is said to be working on a service that will turn it·s Xbox 360 Gaming console into a over-the-top set top box that might even be the first to become a ´Virtual MVPDµ, as opposed to the time delayed catch-up offerings of the others (Adegoke).

Content Owners and Producers Content has done surprisingly well embracing over-the-top video. Three of the four major broadcast networks are joint owners of hulu. An increasing amount of content is available online to stream for free across a number of different services, all thanks to the cooperation. The consensus seems to be that they make less money with over-the-top per viewer, but gain other benefits such as advertisements that can·t be skipped on sites like hulu which has become a problem with more frequent DVR usageamong MVPD users. They also see a loss in revenues because normally the MVPD pays in addition to advertising revenue; in over-the-top video they only see advertising. Content is still holding out on making content available online immediately when it first airs, making traditional MVPDs the only option for the most impatient television viewers.

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MVPD The future of the MVPD landscape has looked less optimistic since the explosion of over-the-top video. At first it appeared that over-the-top video would supplement MVPD subscriptions as an additional service, but the last 6 months have proved existence of a new group of consumers, ´cord cuttersµ. From the beginning of 2010 through the end of Q3 American MVPDs have lost a combined 335,000 subscribers, the largest loss in their history (Schechner). Some are suggesting that the drop in subscribers is because of a weak economy combined with MVPD subscription prices rising at 10% a year, while others attribute it directly to online video. One thingis clear; despite the perceived reason, fewer people are subscribing to MVPD packages while an increasing number of people are watching overthe-top video on the Internet. This shift hasn·t gone unnoticed by the MVPDs. Comcast is doing its part by launching their own XFinity Fancast offering over-the-top streaming content to their subscribers and a more limited library to the general public. Time Warner Cable has been the first to break away from the traditional MVPD bundles and offer a cheaper ´TV Essentialsµ MVPD product at a much lower price point by removing some of the most expensive and popular channels like ESPN, Comedy Central, TNT, and Fox News among others (Worden). It is too early to tell if their efforts will be effective at retaining subscribers. Despite a loss of 335,000 subscribers, MPVD providers in America have a combined subscriber base of around 100 million and are still the major player in this market (Schechner).

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Two Business Models Collide
´Now what they would like to do 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 on it. So there·s going to have to be some mechanism for these people who use these pipes to pay for the portion they·re using. Why should they be allowed to use my pipes? 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!µ -Ed Whitacre, Former AT&T CEO(Fisher)
The Internet has a long history of being a battleground for industry revolution. With the advent of MP3 players, CD burners and large hard drives music lovers didn·t hesitate to start building digital libraries of their collection. The music industry was threatened and instead of embracing the new technologies they rejected them, leading to years of long drawn out battles with their would be customers. Today the music industry is generating revenue again, but many record labels and companies that were once major players in the industry no longer exist. There also exists a monopoly in digital music sales through Apple who has a solid grip on the distribution channel. There are other players but their sales pale in comparison. Imagine how different the music industry would look today if major music distributors hadn·t tried to fight the Internet revolutionizing their industry. Would there be more distributors, more competitive pricing, and more record labels? The video content industry seems to be trying to avoid the mistakes that were made by the music industry by embracing their revolution, putting content online for free and for sale, even if it means making less money in the hopes that down the road they can do better. What are the MVPDs supposed to do faced with both losing MPVD subscribers and seeing an increase in internet traffic, both resulting in a loss of revenue?

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Not Everyone is Embracing the Revolution To better understand what is at stake it is important to have an understanding of the MPVDs business model. An MPVD negotiates for channels to carry on their network. In exchange, the MPVD agrees to pay the channel a certain amount, usually broken down to a certain price per subscriber per channel per month. The MPVD is allowed to sell ads on the channel along with the ads that the channel runs. The MPVD will then go and create large bundles of these channels to sell to consumers. This means that the MVPD makes money not only from subscriber fees, but also from advertising on the channels. Even without a loss of subscribers, an increase in online viewing coinciding with a decrease in MPVD content viewing means a loss in revenue from ad sales. This is because current MVPD pricing models give unlimited Internet for a fixed price, causing an increase in Internet traffic to result in increased costs to them with no revenue. MVPDs are businesses that exist to make money, it can be expected that if they begin to see decreases in revenue they will take action to stop it. It seems unlikely that they are going to fight this battle over control of the video industry because of their interests in not upsetting the content industry that they depend on, instead it will center around the Internet.

The Battle for the Internet Most fear of providers taking control of the internet centers around Net Neutrality.It is complicated in principal, with many different ideas and embodiments. Put most simply the idea that all traffic is treated equally and that content providers and customers aren·t charged extra to use a particular service. It has been feared that last mile providers would favor certain services or charge extra for increased priority, charging customers extra to use certain services or protocols and even blocking certain services. When Comcast began
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degrading both the legal and illegal file sharing of their customers the FCC attempted to stop them, testing the authority it would need to enforce net neutrality under current regulation. Comcast ended up challenging the authority of the FCC to do so and it was concluded that the FCC didn·t have the authority to do so in April of 2010 (Comcast Corporation v. Federal Communications Commission and United States of America). In the six months since the decision it doesn·t appear that Comcast or any other last-mile Internet provider has practiced any real traffic discrimination outside of degrading illegal bit torrent traffic along with the 11% of bit torrent traffic that is thought to be legal (Layton and Waters). Simply blocking bit torrent traffic hasn·t given net neutrality the momentum it needs to succeed on its own and in a political climate that is very anti-regulation it seems unlikely to happen anytime soon. Last-mile providers know that network discrimination will attract public attention and could give network neutrality the momentum it needs to succeed in congress so it seems unlikely that they will pursue discrimination as an option. There has been a lot of consolidation in both the Internet backbone and last-mile provider markets since the Telecommunications Act of 1996 was passed. Many of the largest tier 1 backbones like AT&T and Verizon have also become last-mile providers of broadband access. A lot online content delivery has moved away from using traditional internet backbones and are now using content delivery networks (CDN) to deliver content, especially video (Limelight Networks). CDNs connect directly to the last-mile providers network, cutting out the Internet backbone completely. This can sometimes lead to faster delivery, but generally results in increased costs because CDNs pay the last mile providers to connect to their network, as opposed to more traditional no-exchange peering that happens

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between large last-mile providers and Internet backbones. CDNs would be the wildest dreams come true of the ´pay to use my pipesµ mindset of the last mile providers if it weren·t for those Internet backbones without last mile residential customers they let put on traffic on their network for free creating competition. If the last-mile providers raise the price of what they are charging CDNs too much they could fairly easily buy transit from one of the Internet backboneswithout last-mile subscribers where pricing is competitive. Up until the end of December 2010 Netflix used one such CDN to deliver their content and decided it would switch to using Level 3, one of the largest Internet backbones in the world, because of lower costs (Charytan and Waz). Level 3 was previously exchanging traffic with Comcast for free but when they informed their peering partner of the increased traffic they would be sending them because of the dealComcast took the opportunity to set the precedent of having one of the largest networks in the world pay to send traffic onto their network. This puts Comcast and other last-mile providers in a powerful position to turn the entire Internet into a CDN that has to pay them for access if the practice expands to other providers. This would allow them to collect usage-based fees on the content and subscription fees from their customers.They would also be in a position to demand whatever price they want for access and since most interconnection agreements are under NDA it would allow them to discriminate between services by price in secret. Another possible move of last-mile providers is to move away from the unlimited use pricing and move to a pay-for-use model. Wireless providers are already shifting to the model to help control the load streaming video users were putting on their networks. A usage based pricing model would allow them to charge users based on the amount of data

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they use and therefore collect more money from users that stream more video. This would likely have a huge negative impact on over-the-top video if users had to keep track of usage and overage leading to less online video being viewed, possibly leading to increased MVPD subscriptions.

The Regulatory Boogeyman
´The Internet is the first thing that humanity has built that humanity doesn't understand, the largest experiment in anarchy that we have ever had.µ -Eric Schmidt, Google CEO (CNET)
The classic description given to describe Internet regulation in the United States is ´lightly regulatedµ. Most broadband service providers are more heavily regulated than telephone or cable companies, but a hands-off approach was taken to regulating the Internetservices that they offer. This is in part because there was healthy competition between last mile providers because dial-up was widely used when regulation was written. Today consolidation has resulted in far less providers in the internet backbone markets prompting new regulatory questions.

Not All Bits Are Created Equal It appears that network neutrality in the form of non-discrimination is going to be less of an issue moving forward than was once thought. Most network operators realize it wouldn·t be in their best interest to block or degrade services maliciously. It also appears that in the future some sort of discrimination may actually be needed to keep other services such as VOIP and gaming operating smoothly with huge video growth on the horizon.

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Closing the All-You-Can-Eat Buffet Pay for use Internet seems to be on it·s way whether it is good for consumers and online video or not. The change could be coming sooner rather than later with the FCC chairman suggesting it will be on the agenda at the upcoming meeting (Genachowski). The real question should be whether pay-for-use Internet pricing should have more heavy price regulation and oversight placed on it. The Internet has become a vital utility for many American·s and is important in day-to-day life much like other pay for use utilities such as phone service, energy and water. All of these utilities are under heavy price regulation and oversight, if Internet service is moved to this sort of model should it be subject to similar regulation?

The Only Bridge has a Troll Under It If more last-mile providers move towards charging for traffic coming onto their network such as in the case with Comcast and Level 3 it would give complete control of pricing to the last mile providers. This would eliminate the competitive market in transit and interconnection that currently exists, allowing the last-mile providers to set the prices for anyone to put anything online (Benjamin, Lichtman and Shelanski 975). The largest impact of this would be on video as it continues to use more bandwidth moving forward. Will this require regulating interconnection on the Internet to maintain competition similar to what is required of phone networks?

If We Touch The Internet It Might Break Historically there has been a hesitation to regulate the Internet with the fear of hampering innovation. A lightly regulated Internet is what helped it evolve into what it is today, but does that mean that will always be the case? What if innovation is hampered
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because of a lack of regulation? Is there a definite tipping point at which we need to regulate?

Conclusion
´The fundamental issue is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a 'price' for that access that effectively discriminates against competitors of Comcast's cable and Xfinity content.µ ²John Ryan, Level 3 CLO (The Wall Street Journal)
The Internet has evolved a lot in the last 15 years since the days of using a dial up modem to connect to a third party service provider through the phone lines at painfully slow speeds. Now Internet access is purchased through broadband connections from the phone and cable companies, both of which are now usually in the business of selling subscription video services. Americans can instantly access thousands of TV shows, movies and music with the click of a mouse or tap of a touch screen, even on cell phones and portable music players over the Internet wirelessly! Imagine how strange and alien it would feel to suddenly be teleported from the days of dial-up Internet, say 1995, into current time and see all this. You don·t have to imagine, just take a look at the Telecommunications Act of 1996. This is the most recent piece of legislation to address the Internet, and was written with the technology and landscape of the time in mind. How the Internet is regulated as a whole needs to be carefully re-evaluated as it becomes more video centric. There still isn·t true competition in the broadband market for most consumers and a change to a pay per use pricing model could have a huge impact on the emerging over-the-top video market. Consolidation in backbone markets and a growing
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tendency for last-mile networks to charge content to ´use their pipesµ puts them in a position to have total control over pricing in what is now a highly competitive transit bandwidth market. If it is deemed that regulation is necessary the FCC may already have the authority to take action on the items mentioned. The authority to regulate backbone interconnection pricing in the name of competitionis given to the FCC under section 706 of the Communications Act but has never been used historically because there was sufficient competition in this market (Benjamin, Lichtman and Shelanski 956). The regulation of pricing on the consumer side or network neutrality in the form of non-discrimination would likely require reclassifying internet services under Title II as a telecommunications service. The current FCC chairman claims they have the authority to do so if they choose. The other possibility would be for congress to pass legislation giving the FCC more authority to regulate the Internet. Congress probably isn·t in the best position to make rules governing the future of the Internet given their history of describing the Internet as a ´series of tubesµ and heavy lobbying from last-mile providers. Future regulation is best left up to experts at the FCC if it is deemed necessary.

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