Netflix and the coming war over Web video (yes, it’s still the data caps)

[This is an excerpt from my November Comment piece for Telemanagement, published under the title Data Caps: Traffic Management Tools or Easy Money?]

The anti-competitive twist

Unlike the other four tiers, Rogers’ Lite and Extreme tiers underwent a dramatic and widely covered change this past July. The caps on them were decreased – from 25 to 15 GB for Lite, a drop of 40%; and 95 to 80 GB for Extreme, a drop of 16%. On July 22, Rogers announced the lower caps and in the case of Extreme, a higher speed. A number of commentators drew a causal connection between the July 22 announcement by Rogers and the announcement four days earlier by Netflix that its streaming video service was coming to Canada.

A report in Telemanagement offered the view that Rogers could look forward to making more money from subs who decided to upgrade to a more expensive tier in order to keep the higher cap they once would have enjoyed. The same report also argued that Rogers was making a play to keep its subs away from Netflix – exactly the kind of cheap, over-the-top platform that’s threatening cable’s online future.

Matthew Lasar, at Ars Technica, also took a strong line on what the Rogers announcement really means. He draws a bead on what’s likely to happen when Netflix collides with Rogers’ caps. The key measure here is the bandwidth eaten up by streaming a feature from Netflix, and how much of your cap allowance that represents.

Using an estimate of 2 GB per SD movie download, Lasar writes: “So we’re talking about nine hours of Netflix movie watching per month for Lite users. That assumes a consumer doesn’t do anything else with her account. If she does (and of course she will), she’s running into the Lite-$4.00-per-GB overtime zone, and fast.”

Lasar draws an equally unsettling conclusion about potential anti-competitive effects: “This sudden lowering of the data allowances on two of [Rogers’] key broadband tiers raises the question of how viable the streaming movie business will be, not only in Canada, but anywhere this sort of pricing strategy becomes the norm.”

Patriotism is still the last refuge of a scoundrel

In Canada, of course, we have bigger things to worry about than innovation on the Internet – to wit, our national cultural sovereignty or, in more concrete terms, cultural jobs and territorial licensing rights.

Twenty years ago, Canadian culture was at grave risk because of the new DTH satellites dubbed “Death Stars” by the cable industry and sympathetic editorialists. As the Globe and Mail intoned, “the Canadian television industry as we have come to know it […] has two years to live.” Ted Rogers and his cronies thundered about the need for domestic pay-TV (provided by them) and for greater consolidation, so Canadians could compete in the global market with the likes of Time Warner.

The Internet was supposed to change all that, or least cause some disruption. But if anything, Lasar’s concern about new distribution models, like Netflix, is greatly understated. In September, at the hearing to discuss the Shaw takeover of Canwest Global, Brad Shaw led off with a very familiar sounding warning (as quoted by The Wire Report: paid sub):

Vertical integration is critical to competing with over-the-top applications offering unregulated, on-demand viewing alternatives to Canadians across various platforms, including broadband and mobile devices.[…] Google’s market cap is over $150 billion alone. These companies own and have sufficient bargaining power to licence rights in the world’s most popular content.

The CRTC had no sooner given its blessing to yet another mega-merger, when it announced it was going to look into the dangers of vertical integration and anti-competitive behavior. If the Commission ultimately decides to include some consideration of the effects on consumers of rogue corporate behavior (instead of just on other corporate rogues), we’ll be making some progress.

Unfortunately, the horses have all left the barn and the separation of content and carriage is deader than dead. Bell isn’t going to give back CTV any more than Shaw is going to give back Global. And for all the blather about protection from undue preference and unjust discrimination, the Commission has handed the incumbents both the motive and the opportunity to drive out new entrants like Netflix. Rogers doesn’t need to worry about being caught slowing down Netflix traffic, because, as we’ve seen, it can use data caps and their own hapless customers to do the job for them.

Even if that doesn’t work, Rogers and its soulmates own the pipe and the major services, and retail prices are all deregulated. As competitors take share away in one line of business, the operators can extract the revenue from elsewhere – something US cable operators are already planning. Nothing will change this scenario as long as Ottawa holds to the delusion that broadband is competitive and market forces can be counted on to iron out any distortions.

D.E.

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