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A mobile internet subsidized by content providers: ESPN might want it but you shouldn’t

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For the last year mobile carriers have entertained a strange notion: content providers should pay for the mobile data their customers consume on operators’ networks. At first, the big internet players seemed to shrug off the suggestion, but carriers may have found their first taker in sports entertainment giant ESPN.

According to the Wall Street Journal, Disney-owned(s dis) ESPN is negotiating with Verizon Wireless(s vz)(s vod) to let the operator’s customers partake in unlimited quantities of ESPN content without incurring any additional data charges. In essence, ESPN would pay Verizon to exempt its content from its data caps.

The Journal reported that no deal is imminent and ESPN isn’t even sure that the economics will work, but the fact that it’s entertaining the idea is significant. It turns the notion of a neutral mobile internet on its head. The hierarchy of the internet is pretty simple: customers pay for access in the form of data plans, leaving internet players free use of the mobile airwaves to deliver their content either for free or as paid services. If ESPN and Verizon strike a deal that hierarchy gets flipped, and there would be consequences.

The mobile internet has problems, but it works best when it remains neutral

Mobile operators have chipping away at the principle of net neutrality for years, banning certain apps here and restricting competing over-the-top services there. In Europe, carriers are battling with Google(s goog) over carriage fees. But in this case, a carrier appears to be challenging net neutrality with the complicity of a content provider. I can understand why ESPN might be eager to take the plunge into subsidizing mobile data. In fact, I’m surprised a big name player like Netflix(s nflx) or Hulu hadn’t done it sooner.

Google's Lame Defense of its Net Neutrality PactOne of the biggest obstacles to widespread video consumption on the mobile internet is overage fees. Who’s going to watch a 3-hour sporting event on their mobile phone or tablet if it drains your monthly data plan in the process? If ESPN wants to make consumers as comfortable using its mobile apps as they are watching its cable programming and using its web services, then it has to get around those data caps.

But there are enormous consequences to such a deal. The biggest and most obvious consequence is that it favors one provider’s content over another. If all access is created equal, then no content has an inherent advantage over another — which is the whole idea behind the wireline network neutrality rules the FCC established in 2010. But if consumers know they can get ESPN’s content without incurring any additional charge, they’ll naturally gravitate toward that content.

There’s an even bigger risk that ESPN’s competitors won’t just get penalized in the eyes of the consumer. Their traffic flow could be penalized as well. Embedded deep within Verizon’s network are policy servers that can distinguish an ESPN packet from any other packet. Not only could Verizon use that technology to exempt ESPN traffic form data plans, it also could use that technology to prioritize ESPN’s traffic from all others. The Journal’s story didn’t mention anything about traffic shaping, but you can bet its high on the list in any negotiation.

Do carriers really want to go down this road?

I suspect ESPN isn’t the only content provider interested in bargaining with the carriers. And I’m sure the carriers are thrilled at the prospects at an additional mobile data revenue stream. But there are risks for the carriers, too.

verizonOperators have long complained about being reduced to mere dumb pipes, but these kind of subsidy deals would only make their pipes dumber. If all the big destinations on the mobile internet starting paying network fees for the consumer, then operators won’t have much left to sell. Consumers basically would be dealing with the big internet brands to get their content and their access. That leaves carriers selling smaller and smaller mobile data plans to customers who will increasingly gravitate toward those big content providers. Operators will have even fewer ways of distinguishing themselves from their competitors.

What’s more, operators are making the very dangerous assumption that they will always have the upper hand in such negotiations. Last week The New Yorker published a very insightful piece by Tim Wu about the growing threat to net neutrality. While Wu was making his case for wireline neutrality, his points apply to the mobile internet as well:

An important aspect of the Internet’s original design is that many prices were set at zero—what have been called zero-price rules. The price to join the network is zero. The price that users and sites pay to reach others is zero: a blogger doesn’t need to pay to reach Comcast’s customers. And the price that big Web sites charge broadband operators to carry their content is also zero. It’s a subtle point, but these three zeros are a large part of what makes the Internet what it is. If net neutrality goes away, so does the agreement to freeze prices at zero.

If mobile carriers and content providers start negotiating over access the delicate balance of the mobile internet suddenly goes off kilter. Right now it’s teetering toward the mobile operators but that might not always the case. ESPN, Google(s goog), Facebook(s fb) and HBO are enormously powerful brands and their consumer influence is only growing. Meanwhile carriers are becoming increasingly less significant.

It’s not hard to imagine a day when ESPN asserts itself in mobile just as its done in the cable industry, turning the tables on the operators. One day carriers may have to pay ESPN for the privilege of delivering its sports content.

Featured photo courtesy of Shutterstock user Lane V. Erickson; Verizon photo courtesy of Flickr user slgckgc

10 Responses to “A mobile internet subsidized by content providers: ESPN might want it but you shouldn’t”

  1. I can’t help thinking I’d be down for the Netflix example. A big reason for buying a 4g tablet was to be able to watch Netflix on long train/bus rides in the city. If I could have unlimited mobile Netflix for my 8 bucks a month plus a “cheap” (because all tablet plans are ridiculous) prepaid plan for everything else I would be PSYCHED!

    Mobile internet will be messed up in the nearish future just as phones are now; the only question is how.

  2. Stakeholder

    ‘ Cable broadband, which costs almost nothing to provide once the infrastructure is built…which costs almost nothing to provide once the infrastructure is built…’ is a red herring of a statement.

    Just take a look at the capital expenditures (CAPEX) that every network operator has to spend to accommodate the explosive growth in traffic.

    For the year ending 2013, Comcast had 6.2B in income and spent 5.7B in CAPEX.

    Net neutrality was a solution in search of a problem years back as there were just a couple of violations, and most of them were in Canada. Why is it still on anyone’s radar? Who is Tim Wu being paid by that he keeps flogging this dead digital horse?

  3. Jack N Fran Farrell

    Another fallout of Google Fiber. ATT is faced with Sophie’s choice. What to let die. It’s favorite PR script ‘we can’t deliver high speed, it cost to much, or money on the money tree waiting to be picked. ESPN is staring down the barrel of ala carte sports programming, delivered by Google Fiber, sees the existential threat. ATT thinks Congress will stay bought.

  4. Kevin Fitchard

    Hi Txpatriot,

    I can see that side of things as well. If you’re an ESPN fan, then it’s great: suddenly you can view as much ESPN video as you like on the mobile network and not worry about astronomical overage fees. But what if you’re a fan of another sports or video service? Not only will it cost you to consume that content, but your experience might wind up being degraded if paying content providers are given network priority. Of course, the answer might be that those competing sports apps could pay Verizon as well. But what about smaller apps that don’t have the deep pockets of a Disney? They wind up being shut out. It helps reinforce ESPN’s domination at the top of the mobile sports app heap.

    I’m not saying this is immoral or anything like that. But I do think it’s fair to point out there are consequences we may not be foreseeing if this model takes hold.

  5. txpatriot

    This is a “good thing” for sports fans.

    The public interest groups like PK trying to spin this as bad reminds me of the telcos back in the 80s spinning local rate increases as “good” for customers.

    They just come across looking like idiots.

    • John Gibson

      If there is no preferential treatment given to the traffic than it may be acceptable but the problem is almost certainly par of the agreement will be to give traffic from ESPN preferential treatment and that is bad for sports fans who prefer over espn or any other “non preferred” partner. If the experience on worsens because has preferential treatment, that would be a “bad thing” for sportsfans.

  6. Kevin Fitchard

    Hi Will,

    I think the idea is that preference wouldn’t matter any more. Today people seek out Wi-Fi to consume high-bandwidth services because of data caps. But if all of ESPN’s content is exempt from caps you no longer have to make that calculation when tuning into sports center or streaming a game from your phone.

  7. Will Merydith

    I just need to ask the obvious question: are people really going to prefer consumption of video on carrier plans and not wifi?

  8. Marinperez

    I think it matters how much these content providers will pay the carriers. They don’t want to be a dumb pipe because it’s not as profitable but if Google, Facebook, ESPN and others are showering carriers with cash, I think they’d be okay with being a pipe.

    • Kevin Fitchard

      Hi Marinperez,

      I see your point, but I’m not sure there is a net gain for the carriers here. It seems the costs switch from the consumer to the content provider, and I think the content provider is a lot savvying when it comes to paying for mobile data. There are a lot of consumers that buy 2 GB plans and only use a few hundred megabytes. Google is only going to pay for exactly as much data it uses, and it’s certainly not going to pay the same per-MB rates carriers charge consumers. And as a consumer, if all of sudden all of my big bucket-draining services like video are suddenly subsidized, I no longer need a 2 GB or 5 GB anymore, and I start downgrading my contract plan.

      Maybe your’re right, and hese types of deals would increase mobile data usage by such high volumes that carriers can only benefit. But it seems like a dangerous game.