April 21, 2009

Time Warner Cable’s decision to put off its usage-based billing experiment was a stunning example of how fires can quickly burn through acres of Internet opinion with no chance of near-term containment. Did Time Warner back down? Was this appeasement? It doesn’t really matter. What’s done is done. But there are larger issues at play here, all of which should concern every player with a stake in the broadband future. That includes cable operators, programmers, advertisers and even third-party content creators trying to make a go at Internet-distributed TV movies and TV shows.

The merciless drubbing Time Warner Cable took last week (and how about COO Landel Hobbs taking one for the team? Give that man a gold star—or at least a stiff drink) proves that the Internet “digerati” is an immensely powerful force. It’s not just a bunch of bloggers and techno-junkies flaming into the echo chamber of cyberopinion; these maverick-minded geeks and advocacy groups are organized and getting stronger. In a way, the concerted effort to “protect the Web” from evil cable corporations morphs alliances forged during the net neutrality fight into a bonafide movement to preserve the current bandwidth-pricing status quo. The grassroots intimidation used against Time Warner Cable was impressive in its skill, organization and effectiveness. Free Press and its allies deserve a lot of credit for political acumen and populist chutzpa. It doesn’t matter whether you think they are right or wrong. It doesn’t matter whether cable “built these networks with private risk capital.” It doesn’t matter whether it might make sense that people who consume massive amounts of bandwidth should pay more than those who don’t. The people have spoken—at least the vocal ones. The cable industry has to take another look at this before Verizon, AT&T and perhaps even DirecTV and Echostar, figure out a way to exploit this firestorm to their own competitive advantage.

But let’s take a step back here. Let’s assume the bandwidth dogmatrons get what they want: Broadband providers continue to sell bandwidth based on speeds and not consumption for the foreseeable future. What are the upsides and downsides? The upside is simplicity and flexibility for consumers, which primarily helps content owners ensure maximum exposure of online video. A metering model would naturally cause many users to ratchet down their consumption out of fear they might go over their caps or otherwise incur extra charges. On the surface, that would seem like a boon to cable operators, which would be able to steer worried consumers back to the linear platform and its VOD environment to get that video (no bandwidth restrictions there). But it’s unclear that frustrated consumers would return to Mother Cable. And in a strange way, bandwidth caps might also encourage piracy as users go to underground sites where they can download compressed (ie, “zipped”) versions of TV shows, which might eat up fewer bits than streaming shows in real time from legit sites like Hulu and Fancast. Meanwhile, cable telco competitors could peel off perturbed subscribers with all-you-can-eat plans that might be more palatable for them because they have fewer subscribers fighting for bandwidth. The resulting churn might be worse for operators than simply spending the money to keep upgrading networks to handle the increasing online video traffic under current pricing schemes. The upgrades will really never end, by the way. Just wait until people start bouncing HD around the net with reckless abandon. Next up: 3D TV. Who knows what that will mean for future bandwidth needs?

For cable programmers, which benefit greatly from all-you-can-eat because their fans don’t need to think twice about how much online video they’re consuming, the idea of metering access has its serious downsides. Advertisers are just starting to warm up to the online video world, and they are particularly excited about the hyper-targeting that can occur in cyberspace. Metering would likely lower the number of eyeballs—and therefore create downward pressure on CPMs at a time when content owners’ ad revenue is under tremendous pressure because of the bad economy. One potential upside is that advertisers might return some dollars to linear TV and, at some point, pump them into the dynamic VOD ad insertion that Canoe Ventures hopes to make a reality in the coming months. But that would seem to help operators more than programmers, for whom online video has become a fabulous promotional tool and viewer retention device (not to mention, a nice add-on for advertisers who want to engage viewers in a more interactive environment).

Cable has a choice. The big MSOs can either institute usage-based pricing models and take their licks from the bandwidth dogmatrons, or they can continue under the status quo and avoid their wrath. Time Warner Cable and other cable operators shouldn’t expect any praise, by the way, for putting off usage-based billing… just fewer lashings and a period of relative détente.

At the end of the day, this is all an extension of the continuing net-neutrality debate—only this time the issue is usage-based billing rather than fear that cable operators might do exclusive deals with big content owners to favor their bandwidth over “the little guy.” To be fair, small voices are indeed worth protecting. The content they produce has fueled the Internet explosion of the last decade, allowing cable operators to sell those high-speed packages in the first place. So defending independent producers (even if they’re riding a pipe someone else paid for) is an understandable and seemingly noble goal for society at large. But this doesn’t mean that such creators can live forever on the current business model. Over time, forcing pipe owners to stay within a particular business model box tends to sap investment and numb the will of those participants to innovate. Without business models that keep this capital-intensive business fed, participants will stop trying to make it better. And the ultimate losers in that scenario are the very consumers the bandwidth dogmatrons say they want to protect. For everyone’s sake, let’s hope that the ultimate solution comes through compromise by all parties rather than an ideologically dogmatic stance by one side or the other. There’s still time. But not a lot.