Weekly Update

The other side of net neutrality

Forget fast lanes and slow lanes. Viacom has headed straight for the off-ramp from Phoenix-based cable operator Cable One’s broadband platform.

The MTV and Comedy Central parent confirmed earlier this month that it is blocking online access to its content by Cable One broadband subscribers as part of a pay-TV carriage dispute with the operator that has led to Viacom channels going dark on the system.

“Cable One has chosen to no longer carry Viacom programming and, as a result, it is no longer available to Cable One customers in any form,” Viacom said in statement. 

Viacom’s tactic takes a page from CBS’ playbook, which saw the broadcaster block online access for Time Warner Cable broadband subscribers as part of a retransmission consent dispute between the broadcaster and the MSO. In that case, CBS blocked online access to TWC subscribers nationwide, even though only a few systems in Los Angeles and Dallas were actually involved in the retrans dispute with local CBS stations. The Viacom blackout also affects Cable One’s entire footprint, although the operator has fewer than a million subscribers, concentrated in Arizona.

At a hearing on Capitol Hill this week, FCC chairman Tom Wheeler said he is concerned about the the growing number of cases of such reverse blackouts and intends to look into them.

It should also give pause to those who have fixated on the possibility of fast and slow lanes on the internet in the wake of the net neutrality rules Wheeler proposed last month. It’s far from clear yet where the ultimate balance of power will be between content owners and ISPs.

Fear of fast lanes (FOFL) comes in two primary flavors. Some fear that allowing paid prioritization will enable the biggest content providers — Netflix, YouTube, the NFL — to pay for exclusive fast lanes, relegating everyone else inevitably to slow internet lanes. The other type of FOFL, expressed primarily by large content providers like Netflix and YouTube but echoed by others, is that permitting paid prioritization, particularly if coupled with unregulated peering policies, will leave them vulnerable to extortion by last mile ISPs. That is the essence of Netflix’s complaints about Comcast and Verizon: They shook us down for “interconnection” fees because they could. Given legal cover by the FCC, they fear, the shake downs will only become more common and more onerous.

Those two propositions are not quite mutually exclusive. But they strongly suggest we’re not all talking about the same thing when we talk about fast lanes and slow lanes. In the former, it is Netflix we the rest of us need to fear; in the latter, Netflix is imagined to be powerless against ISPs.

Into that mix we are now starting to see cases, such as CBS-Time Warner Cable and Viacom-Cable One, in which content owners are able to exercise ultimate leverage over ISPs in order to extract tribute — in effect treating ISPs as simply another type of pay-TV distributor from whom carriage and retransmission fees are their due.

To the consumer, of course, it’s a distinction without a difference. Whether online content is being blocked at the whim of the content owner, or at the whim of their ISP the content is equally unavailable, and the end user typically has little recourse in either case.

Insofar as the FCC is charged with protecting the interests of the public, that’s a pretty good argument for treading cautiously for now in setting out regulations. The danger in laying down hard and fast rules now is that they could lock in structural dynamics in the market for online content when we don’t really know how those dynamics will ultimately evolve.

Netflix may feel it has no choice but to pay tribute to Comcast now to protect its subscribers. But as BTIG Research analyst Rich Greenfield recently pointed out in a smart blog post, that’s at least partly a function of relative size. Today, Netflix has 35 million subscribers in the U.S. But if five years from now Netflix were to have 60 or 70 million subscribers streaming upwards of two hours a day worth of content those negotiations might come out quite differently.

To see the danger of premature rule-setting you need look no further than the broadcast retransmission regime, which as established by Congress and given full regulatory heft by the FCC. Those rules, as currently written, heavily favor broadcasters over pay-TV provider, leading to absurdly one-sided “negotiations” over retransmission fees that lead to ever-higher prices for consumers. As CBS made plain with its blackout of TWC broadband subscribers, in fact, broadcasters are more than happy to try to stretch their legally sanctified leverage in the pay-TV market into the nominally unregulated online market.

Wheeler may not be making a lot of friends right now with his net neutrality proposal. But there’s something to be said for leaving some breathing room in the rules for now.