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Will Content Streaming Make ISPs Rich?

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Two announcements on Monday night illustrated the yin and yang of the streaming market. Amazon (s amzn) announced a cloud storage drive and cloud music service that looks pretty sweet. And Netflix said it would have to degrade the quality of video streams it delivered to its Canadian customers because the local ISPs capped subscribers’ services at usage rates as low as 25 GB per month.

On one side, the ease of use and freedom associated with getting content wherever you are is wonderful, especially for those of us sick of sideloading, DRM pitfalls and other headaches that come from trying to watch a movie or listen to a song across multiple digital devices. On the other side is the constant ticking of a gigabyte meter as both wireless and wireline ISPs implement caps, throttling and tiered pricing in response to what they claim are worries about network congestion. Operators tend to argue two things when they institute such caps: heavy users degrade the experience for everyone and most people won’t be affected. That may be true in the short term, but we’ve consistently shown that caps and tiered pricing aren’t an effective way to deal with congestion. And even if the short-term impact if capping bandwidth or low-gigabyte buckets doesn’t catch most users, eventually more will be affected.

Congestion Is a Red Herring

But is congestion really the issue, or are these plans really about profits? Earlier this month, I explained how ISPs may not be implementing caps merely to protect their pay TV businesses, but because they recognize the coming culture of streaming content stands to create a revenue stream that flows as long as the digital content does. I have argued — and so has Eric Klinker, CEO of BitTorrent — that if operators were really concerned about congestion, they would implement pricing based on times of peak demand as opposed to creating bandwidth buckets or making people pay per byte.

Back in the telephone days, it was said you built your voice network to handle Mother’s Day calls. If one considers broadband, the peak time is between 9 p.m. and 1 a.m, according to 2009 data from Cisco. In his article, Klinker claims the peak time is between 7 p.m and 10 p.m.

Voice calls were fairly predictable in terms of the number of people on the network and the limit of how many minutes there are in a day. Broadband traffic, however, isn’t a stable, slow-growing phenomenon. The amount of gigabytes my household consumes has, I’m sure, jumped over time as I have added more devices and streamed more content. I’m not alone. Comcast (s cmcsa) has seen its median use jump in the last few years from 2-4 GB consumed per month to 4-6 GB per month. My consumption rose from 30 GB per month to 40 GB per month after I introduced an iPad (s aapl). On the wireless side, Cisco (s csco) predicts wireless data traffic to grow 26-fold from 2010 through 2015.

This isn’t a growth curve that wireline or wireless operators are familiar with from their telephone days, when they built out a peak that would change rapidly. Wireline and wireless operators aren’t familiar with this kind of growth curve, but by implementing new limits in the form of monthly caps, they can better predict growth and manage capital spending.

Bring in the Bits, Bring in the Profits

Operators imply the boost in data traffic has resulted in a cycle of capital spending, which subsidizes the Googles or the Netflixes of the world to the operators’ peril. But that’s hard to see. For example, take a quick look at the margins associated with AT&T’s (s T) wireline and wireless business over the last two years. They show fluctuating operating margins in both businesses, but the wireline business’s margins still range between 11.1 percent and 13 percent, and the wireless business’s margins are between 22.9 and 29.9 percent. Others have shown, for example, that for cable companies, broadband service provides a a huge share of the profits even after accounting for investment in the networks.

Back in 2005, Ed Whitacre, then-CEO of AT&T, famously declared that the likes of Google would have to pay him if they wanted to make money off his pipes, in perhaps one of the last honest moments in telecommunications on this topic. When ISPs see the likes of Google pulling in 30-percent margins using their pipes, they want a piece of that profit and growth too.

After all, operating utility is hardly sexy on Wall Street. This is why ISPs are messing with app makers by claiming congestion. By implementing caps or tiers, they extract a toll for themselves when consumers can get access to content anywhere, on any device, as streaming becomes more popular. It’s almost like how the recording industry wants to sell more copies of songs, so it uses the threat of piracy to make it hard for someone to own a single copy of a song and share it across a variety of devices. ISPs hide behind a fear of congestion and capital spending, not because they want to stop the streaming revolution, but because they want to make more money off it. And it just might work.