Category Archives: Infrastructure

Comcast: The New Forces at Work

comcast logoMy op-ed today in The Hill (see “The Winter of Our Content,”) argues against those who want to derail the merger of Comcast and NBC Universal.  I don’t know enough to say whether the deal makes good business sense—that’s for the companies’ shareholders to decide in any case.  But I do know that every media or communications merger of the last twenty years has been resisted for the same reason—that the combined entity will both have and exercise excessive market power to the detriment of consumers.

That argument has turned out to be wrong every time.  It will be here as well.

Under the terms of the agreement, Comcast will get a 51% interest in NBC, Universal and several valuable cable channels including MSNBC and Bravo.  Comcast already owns E!, the Golf Channel, and other content, as well as being a leading provider of cable TV access, Internet access and, more recently, phone service.

A wide range of public advocacy groups have already objected that the new Comcast will be too powerful, and will have “every incentive” to keep programming it controls off the Internet, including new services such as Hulu, which is 33% owned by NBC.  Consumer groups also fear that Comcast will dismantle NBC’s broadcast network, all in the service of pushing American consumers onto paid cable TV subscriptions.

Why Comcast would want to use its leverage in the interest of only one part of its business I don’t understand.  But even if that was the goal, I very much doubt that goal would be achievable even with the new assets it will acquire.

As is typical in industries undergoing wrenching and dramatic consolidation and reallocation of assets, the urge to merge is a function of three principal forces, first introduced in my earlier book, Unleashing the Killer App. These forces—globalization, digitization, and deregulation—are themselves a function of the profound technological innovation that all of us know as consumers of devices, services, and products that didn’t exist just a few years ago.

There are several technologies involved here, including standards (the Internet protocols as well as compression and data structures for various media), software (the Web et al), hardware (faster-cheaper-smaller everything) and new forms of bit transportation, including cable, satellite, and fiber.  It’s the combination of these that makes possible the dramatic ascent of new applications—everything from Napster to YouTube to the iPhone to TiVo.  It’s why there are now hundreds if not thousands of channels of available programming, increasingly in high-definition and perhaps soon in 3D and other innovations.

With the advance of digital technology, driven by Moore’s Law and Metcalfe’s Law, all content is moving at accelerating speeds from analog to digital forms of creation, storage, and transport.  (This includes media content a well as user content—email, phone calls, home movies and photos.)  See my earlier post, “Hollywood:  We have met the enemy…”

That fundamental shift has made it easier to create global markets for content use and in turn has put pressure on regulators to open what had been highly-parochial approaches to  protecting the diversity of content.  Until very recently,  in the U.S. that diversity was represented by a whopping three choices of television programming—that of ABC, CBS, and NBC.

As globalization and digitization advance, the pressure to deregulate increases.  Caps and other artificial limitations of media ownership have been falling away over the last twenty years.  Clear rules separating who can transport data versus voice versus video make less and less sense, and have been removed.

Each of these changes has been resisted by consumer groups.  One long-forgotten change to the media industry occurred even before the rise of digital life, in the stone age of 1995.  That was the year the FCC eliminated the “financial syndication” rules, or finsyn, which had been adopted in 1970 to limit the power of the three broadcast networks.  (See Capital Cities v. FCC, 29 F.3d 309 (7th Cir.1994)).

Finsyn, among other controls, limited the ownership in prime-time programming the networks could obtain, and prohibited them from selling the programming they owned directly.  Once a program, say “Gilligan’s Island,” finished its prime-time network run, the networks could only syndicate it through third party syndicators.  The goal was to protect non-affiliated stations (mostly on the UHF band), who might not get a chance to buy syndicated programs at all if the networks kept control.  The networks might have only syndicated to their own affiliates.

Cable TV, which made the weak UHF signal stronger, along with the rise of Fox as a fourth network and independent producers who self-syndicated (particularly Paramount, which produced several made-for-syndication Star Trek series), made clear that the finsyn rules were no longer necessary.  The independent stations and consumer advocates fought to retain them anyway, and lost.

Of course we now have more diversity of programming than anyone in 1995 would have ever imagined possible.  Not because finsyn was repealed, but in spite of that fact.  Technology, left alone, achieved multiples of whatever metric regulators established for their efforts.

Those who object to the reallocation of industry assets see these deals entirely as efforts by vested interests to resist change inspired by what I called “the new forces.”  In part these deals are surely trying to hold back the flood.  They may even be motivated by the belief that consolidation translates to control.

But it never works out that way.  Consumers always get what they want, usually sooner than later, and regardless of what entrenched industry providers may or may not want.  Artificial limits on who can do what do more to hold back the technological inevitability than they do to protect consumers.

Resistance here is not only futile, it’s counter-productive.

Memo to Andrew McLaughlin: Read the *** Constitution

In response to an earlier post on Net Neutrality, a reader asks if my “position changed since John McCain introduced his ‘Internet Freedom Act of 2009.’”  That bill, introduced as the FCC was announcing its proposed Neutrality rulemaking, is only one page long.  If passed, it would mean that the Commission could not “propose, promulgate, or issue any regulations regarding the Internet or IP-enabled services.”

The reader goes on:  “Essentially, McCain wants to make it so FCC has zero regulatory powers of the internet. So, if COMCAST wants to block Hulu…or charge usuers [sic] extra, then they can and will. It seems all that separates us from a doomsday scenario with the internet is a Republican controlled government, which will happen eventually.”

The short answer is that the McCain bill does not change my position at all.

First of all, I doubt that the bill, or the opposing “Internet Freedom Preservation Act of 2009,” have much chance of passage.  The focus of activity is clearly on the FCC’s proposed rulemaking.  If that fails, or if the courts determine that the Commission doesn’t have the authority to pass neutrality rules absent new powers from Congress, than the action may shift to the legislature.  If it does, I suspect something more substantive would be offered.  The McCain bill seems to have been offered as a sign of unhappiness over the FCC’s rulemaking rather than as a genuine effort to pass a law.

Even if the McCain bill did pass as written, by the way, it’s not entirely correct to say that the FCC would have “zero regulatory powers of the Internet.”  Even in a one-page law, McCain included a number of exceptions to the general prohibition, and the bill also makes clear that any regulations related to the Internet already in place at the time of the bill’s passage would not be superseded.  If, in other words, the FCC had already enrolled the new neutrality rules before the McCain bill became law, those rules would stay in place.

But there’s a much bigger point here I want to make.  The reader believes that absent the FCC’s meddling hands, we face an imminent “doomsday scenario with the Internet.”  It’s true that there would be no law to stop Comcast from blocking Hulu, nor a law that would stop Comcast from charging extra to users who wanted that content.  But that wouldn’t mean Comcast would or could do either of these things.  Even if they did, I don’t understand the hyperbole that doing so constitutes the end of the world as we know it.

To me, the biggest hole in the neutrality-or-apocalypse argument is the idea that the best–indeed, the only–defense against corporate interference with Internet content is the federal government, and specifically the Federal Communications Commission.  Often that argument comes from those who are otherwise, and rightly, skeptical of the motives or abilities of the federal bureaucracy to look out for consumer interests.

But somehow when it comes to neutrality, all of the disappointments, suspicions, and failures of government, in particular the FCC, are put aside.  The government—or anyway the current administration—believes in the open network, the argument goes, so we can trust them to regulate it in our best interests.

I’m not willing to suspend my disbelief in the face of so much evidence to the contrary, visible in communications policy and everywhere else.  But for those who need more evidence that the federal government is less likely to preserve the open network than the communications industry, look no farther than the White House.

As reported two days ago by the Washington Post’s Cecilia Kang, White House Deputy Technology Officer Andrew McLaughlin told attendees at a recent conference that the Obama administration is committed not only to neutrality but to global free speech, and that indeed, neutrality “underlies free speech on the Web.”  The two are “intrinsically linked,” according to McLaughlin, because without neutrality, there is the possibility of censorship.

“If it bothers you that the China government does it, it should bother you when your cable company does it,” McLaughlin, whose was previously responsible for global policy for Google, was quoted as saying.

The First Amendment, in other words, ought to apply to Internet access providers, and the White House sees Net Neutrality as the mechanism for ensuring that it does.

There’s just one problem with this description of the administration’s plans:  it has utterly no basis in the U.S. Constitution.

As any first-year law student (or, indeed, any reader of The Laws of Disruption) knows, the First Amendment protects citizens from interference of their speech by the government. There is no legal basis to McLaughlin’s view that it applies to private actors, whether cable companies, employers, or your mother-in-law.

Private censorship of specific content, of course, is bad.  But it is not a “free speech” problem.

(McLaughlin might be excused from this gaffe by the fact that he was speaking at a conference rather than in writing.  But no, the White House Office of Science and Technology Policy has since defended the comments.)

There are very good reasons why the First Amendment applies only to the government.  The government is the only body that has the coercive power of the military, and the power to deprive individuals of their liberty through imprisonment.  The Founding Fathers had good reason to fear interference with political speech by those with that kind of power.  So under the First Amendment, you can say all you want about McLaughlin’s views.  All he can do is refer you to the NSA for secret surveillance.  Oops.

But there is no right to free speech that U.S. citizens or their government can assert against private actors.  You have no right to proselytize your religion in the office.  You cannot stage a protest on behalf of native plants in the middle of the Safeway.  You don’t get to walk into the local newspaper and demand they print your version of the news on page one.  Your five year old cannot practice foreign curse words in school without fear of being suspended.

As those examples suggest, extending the First Amendment to everybody to assert against everybody else would be catastrophic.  Democratic society depends on a “marketplace of ideas” free of government interference.  But free of private restrictions, the marketplace becomes noise and the participants a mob.

Internet access providers can, do, and should limit what their customers do in a variety of ways for a variety of reasons.  They can limit the amount of shared bandwidth a customer can use at any given time.  They can block applications for wireless customers that the wireless network doesn’t have the capacity to handle.

And yes, they can even decide that certain websites aren’t suitable for their customers based on whatever misguided reason they have.  (Many local cable companies do in fact limit the channels their subscribers can watch based on personal morality.)  Doing so would be bad business, but it would not be a violation of “free speech.”

McLaughlin has it backwards.  The First Amendment protects even bad business decisions from interference by the government.  “Free speech” doesn’t underlie the open network.  Rather, it restricts the FCC from telling access providers what content they can or cannot promote or block.

Thank goodness it does.  Because there’s absolutely no doubt what the government would do if it had that power.  In the last ten years, administrations under both Republican and Democratic control have passed three different laws banning “indecent” content from appearing on the Internet.  (President Clinton signed the first and worst of these, “The Communications Decency Act.”)  State governments have tried even more offensive “experiments” with controlling Internet content, as I describe in Law Three, “Social Contracts in Digital Life.”

The Supreme Court rejected two of the federal laws as violations of the First Amendment; the third was narrowly upheld as a restriction on libraries accepting government funding.  The FCC, meanwhile, still relishes its narrowly-allowed content control powers over broadcast television to ensure errant nipples and swear words don’t appear on live broadcasts.

It’s more than a little ironic that the White House is accusing cable companies of Chinese-style censorship for twice blocking bandwidth-hogging peer-to-peer applications.  All the evidence we have is that it is the government that would have done the real damage to the free flow of information on the Internet.  Would have, that is, if they hadn’t been blocked by the First Amendment.

In any case, it’s not as if all that stands between Internet users and the gaping abyss is an empowered FCC.

Who else will protect consumers from misguided or even evil corporations?  How about the consumers themselves?  Many would be unhappy with any significant interference with the free flow of information imposed for financial or other reasons by an Internet access providers.  Believe it or not, even communications companies have to be responsive to customers sometimes.

At least for the past 200+ years of American history, most complaints and disagreements between service providers and their customers have been resolved efficiently and quickly by market forces.  If consumers don’t like restrictions imposed by a service provider, they are free to find a more enlightened or more generous provider, or pay higher fees to use more resources, or work with their local municipality to implement free WiFi service.

You can even start your own ISP—and if you do, the FCC will make sure the phone company leases its entire network to you at bargain basement prices.

If the market is broken—if real censorship takes place, and consumers find they have no other choices, and structural problems exist that make it unlikely other choices will emerge—the government already has the overused and misunderstood tool of antitrust to fix it.

But before you start storming the Bastille demanding the micromanagement or nationalization of the communications industry, consider for a moment not the odd examples where the system doesn’t work but all the times when it does.

And then consider how much worse it might be if the FCC took over “enforcement” of the open network principle.  The current administration might have one set of priorities about what constitutes “open,” but the rules will live on much longer than that.  The FCC’s proposal is not to establish specific rules in any case, but to evaluate complaints of non-neutral behavior on a “case-by-case” basis.  You know, like they do with broadcast content today.  How’s that working out for us?

We don’t need “free speech” to protect us from access providers.  We need it to protect us from the wolves in sheep’s clothing who claim to be working for our best interests.

SOC: Tempest in the Back of Your TV

mpaa logoI’m fascinated by the firestorm that has erupted over what sounds on paper like the most boring combination of a legal and technical discussion: the recent appeal by Hollywood for a waiver from the FCC’s Selectable Output Control (SOC) rule.

First a little background, greatly simplified. (Those wanting the gory details can read the excellent coverage of the story over at Ars Technica.) Older television sets receive cable programming through analog component wires. Newer TVs include the old analog interface but also added digital ports, such as HDMI, that can reproduce a higher-quality picture.

The SOC rule, adopted in 2003, prohibits content providers (including cable and phone companies offering television content) from manipulating transmissions in a way that turns off or otherwise disables the analog ports, which would have forced consumers either to use the digital interface or, if they don’t have those ports, buy a new set that does.

In addition to quality, the other relevant difference between analog and digital outputs is that the latter can be programmed to obey increasingly sophisticated forms of digital rights management (DRM), used to limit the reception, quality and use of received content. HDMI interfaces, among other features, support signal encryption that ensures the output is being directed to an authorized device—a television set registered for on-demand viewing, for example.

The MPAA has asked the FCC for a waiver to allow studios to broadcast new movies before they are made available on DVD. To make such broadcasts more secure, the MPAA wants permission to block the signal from being output through the analog interface. While digital outputs can be hacked and DRM bypassed, the MPAA believes that the most likely and most dangerous form of piracy of these early releases would come from users with active analog ports–what is sometimes referred to as “the analog hole.”

If the waiver is granted, content providers would be able to disable analog ports when transmitting early-release movies to the set. The digital ports could then be manipulated to ensure that the programming was not copied in violation of the new service’s terms.

The MPAA’s request is being supported by content providers including cable TV, satellite, and phone companies, as well as some device manufacturers. The principal opposition is coming from the Consumer Electronics Association, the main trade group for device manufacturers, as well as a coalition of public interest groups including Public Knowledge and the EFF. (See CEA President Gary Shapiro’s open letter to the FCC on The Huffington Post and John Bergmayer’s “SOC in Context” at Public Knowledge, as well as Ars Technica’s Matthew Lasar’s response to the cable industry.)

This is not an open-and-shut case, though both sides would like to characterize it as such. The objectors argue that consumers who only have analog outputs (25 million, according to CEA) should not have their TV’s “broken” by SOC, in essence forced to upgrade to newer TVs if they want to watch early releases of new movies.

They also point out the there is no evidence that content piracy has anything to do with home viewers intercepting transmissions and translating them to media or file-sharing copies through analog interfaces or otherwise; that, indeed, the most significant source of piracy for new movies comes from insiders who get hold of production copies before or soon after movie releases.

The public interest groups are particularly concerned that a SOC waiver here is at best a Trojan Horse, giving the entertainment industry a foot in the door to control the use of more kinds of broadcasts, including those for which today there are no or fewer restrictions.

The waiver could be a start, in other words, toward more restrictive content limitations, along the lines of so-called “broadcast flag” technology embedded into TV sets that Hollywood had earlier convinced the FCC to mandate. (A federal appeals panel laughed the FCC out of court on that one, reversing the Commission as wildly out of its jurisdiction.)

Ultimately, the public interest groups believe, the SOC waiver could lead to the end of long-established rights for viewers to record and time-shift programming, a right that the Supreme Court underscored nearly 25 years ago when the same parties asked for a ban on VCRs.

The requested waiver, however, doesn’t apply beyond the “narrow” exception of the early-release movies. (A number of companies, including TiVo, have urged the FCC to allow the waiver, but only after significantly tightening up just how narrow the exception really is.) And supporters point out that without the SOC waiver that new service simply won’t be offered, harming everyone.

As the National Cable & Telecommunications Association (NCTA) put it in a letter to the FCC, “MPAA has sought waiver of the ban on SOC to permit [content providers] to provide consumers with more viewing options, which can only be made available if the ban on SOC is waived.” (emphasis added)

The implication of that statement is that the SOC waiver is a kind of technological requirement for early-release movies, which isn’t the case. What the NCTA means is that without the waiver, Hollywood won’t risk showing movies before DVD releases for fear that piracy will undermine the subsequent market for media.

Well, maybe. But even absent rampant piracy, the likelihood is that DVD and other media purchases will continue to decline (see “Hollywood: We Have Met the Enemy”) and the studios will be forced into new (potentially more-profitable) on-demand and/or subscription models. Indeed, Warner Home video is already experimenting with early release video-on-demand for new movies even without a SOC waiver.

I share the public interests groups’ fears of a slippery slope. As I write in “The Laws of Disruption,” since the advent of the Gutenberg Press, content industries have demonstrated an uncanny consistency in lobbying and litigating against every new consumer technology that threatens their control over distribution and use, including several that have, ironically, saved them from extinction.

Consumers are understandably wary of promises from their content providers and the entertainment industry that a small inconvenience is needed in order to give consumers what they want. There’s something frankly irritating not so much in the argument but in the tone with which the NCTA is making its case (“sounds like a slam dunk to me, but surprisingly, some object” NCTA head Kyle McSlarrow writes. Come on!)

On the other hand, the SOC waiver, more narrowly defined, won’t take away any abilities or rights consumers have now. Though the analogy isn’t perfect, consumers who want to see HD broadcasts must buy HD television sets. The MPAA is arguing that it won’t offer pre-release movies if it can’t stop them from coming out an analog interface. (Technically, of course, they can come out that interface.)

Eventually, the 25 million analog-only TV sets left in the U.S. will be replaced anyway, and the “analog hole” will be plugged with more secure (though hardly bulletproof) digital technology. At that point the analogy is a little better: if you want the new service, you need to plug it into a port you will likely have and not one that you have but which isn’t permitted.

In the end, I’m with TiVo and Sony (both a content producer and a device manufacturer), who “now believes that under certain, very narrow, circumstances, SOC could bring benefits to consumers that on balance would outweigh any potential drawbacks.”

At the same time, I’d sure like to see Hollywood and its partners stop listening to consumers with such a tin ear. If they devoted even a fraction of the energy they put into trying to control the uncontrollable into experimenting with a holistic approach to offering access through all the channels—media, on-demand, virtual libraries, etc.—consumers are interested in, these fights could largely be avoided. Profits would be higher and more secure, and the pressure for piracy would be greatly diminished.

As Internet Research Group’s Peter Christy puts it, “The Internet is playing a fascinating role here by enabling experimentation. In the end the content owners are king, and their objective is maximum revenue capture from a menu of distribution alternatives. I think they are starting to know enough data not to act in way that will cost them money.”

I’m not quite that optimistic.  But I hope he’s right.

Hollywood: We Have Met the Enemy…

tivo

Strategy under The Law of Disruption requires attention to detail.

Two recent articles with competing views of the fate of Hollywood content producers caught my attention.  The first, by CNET’s Greg Sandoval, reiterates long-standing predictions that for current industry giants the Internet spells doom.   “[T]he end is coming,” Sandoval concludes, “for DVDs, traditional movie rentals and yes, much of your cable money…..”

The second, from New York Times reporter Bill Carter, reported surprising results from a recent change by ratings agency Nielsen.  In determining whether consumers are watching commercials and, therefore, what “rating” to assign a broadcast program, Nielsen now includes DVR views within three days of airing if commercials aren’t skipped.

The surprising result is that more than half of all DVR viewers don’t skip the commercials, even though they have a button that lets them do so with relative ease.  For some shows, including “Heroes” and “Fringe,” actual ratings jumped after taking the new data into account.  The DVR, seen as the destroyer of commercial television, may save the major networks, which are averaging a 10% increase in ratings under the new system.  “It’s completely counterintuitive,” the article quotes the president of research for NBC.  “But when the facts come in, there they are.”

Ah, facts.  The hobgoblins of pundits everywhere.

So is Hollywood dead or is it doing better than ever?  Let’s split the difference here.   The content industries are clearly in crisis.  But their doom is not inevitable.

Sandoval is right that digital technology, held back for years by litigation and cost, is now in the midst of thoroughly disrupting the entire content supply chain, from creation through consumption.  The lawsuits have failed (the MPAA recently fired its general counsel in a housecleaning) and, thanks to Moore’s Law, digital content is everywhere.

Sandoval  thinks that the availability of cheap copying and rebroadcasting technologies (file-sharing, streaming, and of course the Internet everywhere) poses an insurmountable foe for the content industry.  After the fall, he says, “What will come out the other side is still uncertain but will likely be very much smaller.”

I don’t agree.  In fact, I think the answer is just the opposite, and the DVR data Nielsen is now collecting (in the teeth of initial opposition from the broadcasters, who thought it would lower their commercial-viewing share points) gives the best clue as to why.  More on why in a moment.

First, let’s be clear on the source of the crisis.  Though it’s convenient for media executives to see it this way, consumers aren’t evil–they aren’t breaking the rules because they hate rules.  They’re breaking them because they want something they aren’t getting.  And they don’t understand why broadcasters would object to their efforts to enjoy entertainment content however they like.  Legally speaking, we’re all felons.  But who taught us to think of broadcast content as something that magically appeared on the TV for free in the first place?

Consumers break the industry rules (and, often, the law of copyright) not because they want to destroy the industry but because they have access to technology that lets them do something they want to do but otherwise can’t.  Consumers want to watch what they want, when they want to, on whatever device they want it.

When the only way to do so was on the broadcaster’s timetable, on media (over the air, cable, videocassettes, DVDs, Blu-Rays) controlled by content owners, paid for by advertiser support, media purchase, cable subscription fees, or all of the above, that is the way media was consumed.

Now that there are other options–including legal ones such as Hulu (ad-based), iTunes (fee-based) and Netflix (subscription-based) that remove some of the artificial constraints on time, quality, media, and frequency of viewing.  Consumers are embracing these, even as they continue, in smaller numbers, to buy media versions of movies and TV programs.

Here’s the key point: they are consuming much more media, whether legally or otherwise. They want more choices and more content. If Hollywood won’t give it to them, the Internet will. But it’s not as if we really care who gives us what we want. We’re willing to make all manner of trade-offs on quality, cost, ease-of-use.  If, that is, there is a real choice.

Consumers will always reject artificial constraints where technology allows them to do so.  Inherently, they understand that information is an inexhaustible commodity–that no matter how and how often and in what quality they watch “Star Wars” or last week’s “Flash Forward,” the programming is still intact, undamaged, and available any time in the future for them or any other viewer–simultaneously, if desired.

Now that most everything has been translated to bits (or starts life that way in the first place), the curtain has been lifted.

There are two ways to make consumers pay for this content in a manner that that make it profitable for creators, distributors and others in the supply chain to continue to produce it.  One way, the pre-Internet way, was to give them no choice.  Watch these commercials because you can’t skip them.  Buy these videotapes because there’s no other media.  Pay your cable bill because that’s the only way to get the channels you want.

The second way, which will now determine who wins and who loses in the content industry of the future, is to use whatever information you can get your grubby hands on about what consumers are actually doing with technology and learn from it.

Now that both the content and information about the content have become digital, the media industry needs to learn what it is that consumers actually want–that is, what consumers actually value–and offer it to them.

The DVR data, as a  starting point, tells us two interesting things.  First, that many consumers don’t mind watching commercials, either because they like them, or they’re too dazed to skip them, or because they understand that the commercials subsidize the programming.  Media buyer Brad Adgate, quoted in the Times piece, notes something that hasn’t changed about the viewing experience:  “It’s still a passive activity.”

(To exploit that passivity, sponsors are going back to the original model of embedding product placements and commercials into the programming–a la “Top Chef” and “The Biggest Loser” and probably every other show that does it with more subtlety.)

But the second and more interesting insight from the DVR data is that resisting information because you think it will deliver bad news is a self-destructive behavior, especially during times of industry transformation.

Ten years into the digital revolution, Hollywood is still firmly stuck in the first stage of grief–denial.  Not only are they resisting change, they are resisting any knowledge about how the change is taking place.  Even when, as here, that knowledge tells them something valuable about how to thrive in the emerging new order.

(History repeats itself:  recall the industry reaction to the VCR, which MPAA President Jack Valenti famously equated to the Boston Strangler–the violent, insane destroyer of his industry.  In retrospect, the VCR saved Hollywood from itself.)

I don’t agree with Sandoval’s conclusion that the Hollywood of the future “will likely be much smaller.”  The popularity of YouTube and other user-produced content services, the explosion of cell phone apps for enjoying content, the success of Indy studios and niche channels, and the continued interest of consumers in “collector edition” and other high-end media artifacts all suggest that the public’s appetite for entertainment is unfathomable.

Three networks, we have already learned, aren’t enough.  Hundreds of specialty cable channels aren’t enough.  Content produced and delivered on a take-it-or-leave-it basis in a vacuum of consumer insight beyond gross demographics and what-worked-last-year strategies is no longer a sustainable model.

But what will come out “the other side,” as so often happens when disruptive technologies rewrite the rules, will be a much bigger industry, with more profits to share.  True, the Hollywood of tomorrow won’t look much like the Hollywood of today.  But then, the Hollywood of today has almost nothing in common with the original industry model, dominated by the studio system and a handful of powerful decison-makers.  For one thing, it’s a whole lot bigger by any measure.  Technology makes things better–always, if eventually.

Here’s what else the DVR data tells us.  In the future, information about media consumption will prove as valuable as the entertainment itself.  Strike that:  it’s already happened.  For the first fifty years of its existence, TV Guide, which merely printed local listings summarizing what was on the few channels a household received, made more money than all three of the major broadcast networks combined.

Existing players in the collapsing Hollywood supply chain can either learn new ways to add value and thrive, or they can continue to resist the inevitable, close their eyes to valuable data, insist on business as usual, sue everyone and everything, and go the way of buggy whips and analog broadcast.  Add value, as a client once summarized it for me, or adios.

I know which one I would choose.  But then, I don’t run a multi-billion dollar public company.

Yet.

The Case Against the FCC's Neutrality Rules – CNET

CNETMy analysis of the FCC’s proposed neutrality rules appears this morning on CNET.

No surprise, I think the FCC’s plan is a bad idea, and I think, more to the point, that the FCC is the wrong organization to be “saving” the open Internet. Among other crimes, as the Electronic Frontier Foundation points out, the FCC is the same regulator who has ramped up the penalties and frequency of fines for “indecent” content over the airwaves.

The FCC is also the organization that has tried repeatedly to push through, at the behest of the media industries, the notorious “broadcast flag,” which would force electronics and software companies to limit the legal use of broadcast content.

Meanwhile, the agency that now believes there is a severe lack of competition in broadband provisioning–severe enough to regulate–has done everything it can to stop alternative broadband technologies, including broadband over power lines and municipal wireless projects.

The open Internet is a great thing, but the FCC is wrapping itself in the flag of Internet freedom and consumer advocacy in a most unconvincing manner.

Net Neutrality Debate: The Mistake that Keeps on Giving

fcc logo

Again, a long post on Net Neutrality.  Again, my apologies.

The fallout continues from FCC Chairman Julius Genachowski’s call to initiate new rulemaking to implement Net Neutrality principles promised by candidate Obama during the campaign.

The bottom line:  what proponents wish with all their hearts was a simple matter of mom and apple pie (“play fair, work hard, and get ahead” as Craiglist’s Craig Newmark explains it) is in fact a fight for leverage among powerful interests in the communications, software, and media industries.  Net neutrality, if nothing else, is turning out to be a complex technical problem—technical in both the engineering and regulatory sense.

As I write in Law Four of The Laws of Disruption, there’s nothing neutral about the rules under which Internet provisioning is regulated today, with broadband offered by phone companies subject to one set of rules (“common carrier”) and access offered by everyone else subject to, for the most part, no rules at all.  (Wireless Internet providers, who have far less bandwidth to offer, greatly restrict user behavior, but Genachowski indicated they too would be brought under the neutrality principles he outlined.)

There’s also nothing rational about the current rules.  That’s becoming abundantly clear as neutrality proponents start to back away from the firestorm they helped fund and as the messy details of current network management behavior becomes clearer.  As Vishesh Kumar and Christopher Rhoads of The Wall Street Journal noted in late 2008, Microsoft, Yahoo and perhaps Amazon have quietly backed away from their initial enthusiasm for more FCC oversight of Internet access and traffic management.  Microsoft’s official position:  “Network neutrality is a policy avenue the company is no longer pursuing.”

Nor should they.  Even as the regulatory process grinds on at its naturally-slow pace, Moore’s Law continues to change the technological landscape with breathtaking speed.  Which is a good thing.  Despite all the think-tank and lobbyist hand-wringing, every aspect of digital life has improved dramatically in the last decade—access options, connections speeds, applications, content, devices, you name it.  It’s possible that in the future all of this could come to a grinding halt because of uncompetitive and ultimately irrational behavior by a few market dominators.  But why legislate ahead of a problem in the area most certain to change dramatically regardless of regulation?

Here are just a few of the most recent developments:

  • Google complains to the FCC about Apple’s rejection of Google Voice from the iPhone (The full letter, originally redacted, is now available here)
  • AT&T complains to the FCC about Google Voice’s refusal to connect certain calls (a luxury that common carriers don’t have)
  • Seventy-Two Democrats urge the FCC to tread carefully into Net Neutrality, encouraging Genachowski to “avoid tentative conclusions which favor government regulation.”
  • Wireless network providers object to being included under the Chairman’s proposed six rules for Net Neutrality (“The principles I’ve been speaking about apply to the Internet however accessed, and I will ask my fellow Commissioners to join me in confirming this.”)

AT&T’s complaint about Google Voice is informative.  On October 8th, the FCC announced it was investigating Google Voice’s treatment of calls to certain rural areas, where under FCC rules common carriers are required to pay higher connection fees to complete calls from their subscribers.  These fees are intended to help offset the extra costs rural phone companies must otherwise absorb in order to serve a dispersed customer base.  Unfortunately, as everyone knows, the local companies have abused that rule by hosting a variety of non-local services, including free conference call services and sex chat lines and then splitting the profits with the service providers.

(The technical implementation of Google Voice is largely confidential.  The application, among other features, provides its users a single phone number and  routes incoming calls to any phone device they have and places outbound calls managed by Google (through its wholesale partner Bandwidth.com), for free or a small charge.  Free, that is, in the sense of being supported, of course, by ads.)

The response from Google?  Google Voice, as the company acknowledges, “restricts certain outbound calls from our Web platform to these high-priced destinations.”  But Google Voice is a “Web-based software application,” not a “broadband carrier,” and so is not subject to common carrier rules or existing Net Neutrality principles.  “We agree with AT&T,” Google says, “that the current carrier compensation system is badly flawed, and that the single best answer is for the FCC to take the necessary steps to fix it.”

Not surprising, AT&T argues that Google is violating both common carrier and Net Neutrality principles.  AT&T reports that its tests of Google Voice indicate the service blocks calls to ALL numbers of the rural exchanges, not just those for sex chat lines and teleconferencing services.  (Note in the quote above that Google says only it restricts calls to “high-priced destinations,” leaving it unclear whether by “destination” they mean the over-priced services or the actual area codes.)

The argument between the two companies breaks down to two simple but largely irresolvable questions:  (1) do Internet phone applications that look like traditional phone services, but which rely on customer-leased connections to initiate and terminate calls, need to abide by common carrier rules? (2) does non-Neutral behavior by an application mimicking many of the core functions of a broadband provider violate Net Neutrality, or do the principles (and those proposed by Genachowski) apply only to providers of last mile service?

Regardless of the answers the FCC reaches, here’s the point:  common carrier rules cannot be untangled from the Net Neutrality debate.  Personally, I believe consumers would be better off without either, a position neither company has publicly taken.

In a seemingly unrelated story, Wired’s Ryan Singel reports that Google appears to pay nothing to broadband carriers for its Internet connections.  This despite the fact that Google, in significant part because of its ownership of YouTube, may now account for as much as 10% of all Internet traffic.  That’s because during the great telecom meltdown that followed from the dot com boom, the company wisely snapped up a great deal of unused new fiber optic capacity on the cheap.  Google is now trading (the technical term is “peering”) that capacity with broadband providers in exchange for the company’s own connection.

The story has some interesting quotes from Arbor Network’s chief scientist, Craig Labovitz.  “[T]he real money is in the ads and the services in the packets, not in moving bits from computer to computer,” he told Wired.  Then this:  “Who pays whom is changing.  All sorts of negotiations are happening behind closed doors.”  Most of the net’s architecture, as Singel notes, “remains a secret cloaked in nondisclosure agreements.”

Don’t get me wrong.  I think Google is a great company that has introduced a tremendous range of innovative products and services to consumers, nearly all of which are paid for by an advertising model (which increasingly raises the ire of privacy advocates, but that’s another story).  Consumers, as I said before, have benefited from the technical and business decisions of the companies now publicly airing their dirty laundry in the Net Neutrality fight.  We get more stuff all the time, we get is faster and, for the most part, the cost is either holding steady or declining.

But irony, as Bart Simpson once said, is delicious.  The peering arrangements almost certainly means that Google traffic is getting priority.  Not necessarily transit priority—that is, special privilege through the network.  But they do get what Internet Research Group’s Peter Christy calls “ingress priority,” that is, how you get into the provider’s network.  As Christy says, “If you go through some kind of general exchange then it is sort of a free for all and if traffic is heavy there may well be congestion and packet loss at this point.  With specific private peering you can assure that your traffic will get into the network unimpeded.”

It may not be a “fast lane,” in other words.  But it is a dedicated on-ramp.

So, does ingress priority through peering arrangements violate Net Neutrality?

Consider this explanation for why Neutrality is imperative:  “Some major broadband service providers have threatened to act as gatekeepers, playing favorites with particular applications or content providers, demonstrating that this threat is all too real.”

Guess who?  That’s right—it’s from Google’s own policy blog from 2008. The post goes on: “It’s no stretch to say that such discriminatory practices could have prevented Google from getting off the ground — and they could prevent the next Google from ever coming to be.”

Well I think that’s an awfully big stretch—now, and in 2008.  Nonetheless, if the company continues to beat the drum for completely open gates, they will find themselves increasingly hard-pressed to justify peering arrangements, content restrictions on use of their applications, and other deals aimed at improving performance for Google applications.  “Such discriminatory practices” could just as easily prevent new services—competitors to Google—from “getting off the ground.”  AT&T’s complaints that Google is straddling both sides of the fence sound increasingly accurate, regardless of their motivation for saying so.

(At the end of 2008, recall, the company was similarly forced to beat a rhetorical retreat when it was revealed that it had been negotiating peering arrangements for edge-caching devices—that is, for co-locating Google servers with broadband provider equipment to ensure faster access to Google content when consumers called for it.  What seemed again a contradiction to Net Neutrality principles was explained weakly as a “non-exclusive” arrangement that any content provider could also negotiate.  Any content provider with money to spend on caching servers and unused fiber optic cables, that is.)

It’s just going to get worse.  The FCC can no more likely navigate its way through these murky waters than it can decide whether an errant nipple on a live broadcast violates its broadcast decency rules.  (An appellate court recently threw out the Janet Jackson fines.)  The Commission is quite simply the worst possible arbiter of these complex business and technical problems.

So here’s an open invitation to Google, AT&T, Apple, and everyone else in the Net Neutrality slugfest.  Let’s call the whole thing off, before someone—that is, consumers—really gets hurt.