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Twin announcements on Monday, Mar. 28, illustrated the yin and yang of the streaming market. Amazon 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 delivers to Canadian customers because ISPs in that country are capping subscribers' services at usage rates as low as 25 GB per month.
On one hand, 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 further headaches from trying to watch movies or listen to songs across multiple digital devices. On the other hand, the gigabyte meter constantly ticks 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 bandwidth caps or low-gigabyte buckets affect few users in the short term, more will be affected eventually.
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 that 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, chief executive officer of BitTorrent—that if operators were really concerned about congestion, they would implement pricing based on patterns of peak demand as opposed to creating bandwidth buckets or making people pay per byte.
Back in the telephone days, it was said that you built your voice network to handle Mother's Day calls, although voice call volume was generally fairly predictable. For broadband, the peak time is between 9 p.m. and 1 a.m, according to 2009 data from Cisco. For his part, Klinker found in his article that the usage peak comes between 7 p.m and 10 p.m.
Broadband traffic, however, isn't a stable, slow-growing phenomenon. The amount of gigabytes my household consumes has jumped over time as I have added more devices and streamed more content. I'm not alone. Comcast has seen its median use jump in the last few years, from a range of 2 GB to 4 GB consumed per month to a far higher range of 4 GM to 6 GB monthly. My consumption rose from 30 GB per month to 40 GB per month after I introduced an iPad.On the wireless side, Cisco predicts data traffic will grow twenty-six-fold from 2010 through 2015.
This isn't a growth curve that wireline or wireless operators know from their telephone days, when they built out a peak that would change rapidly. By implementing new limits in the form of monthly caps, wireline and wireless operators can better predict growth and manage capital spending.
Operators imply that the boost in data traffic has prompted a cycle of capital spending that subsidizes the world's Googles and Netflixes to the operators' peril. That's hard to see. Take a quick look, for example, at the margins associated with AT&T's wireline and wireless business over the last two years. The company shows fluctuating operating margins in both businesses, but the wireline business's margins range from 11.1 percent to 13 percent while the wireless margins run from 22.9 to 29.9 percent. Others have shown that for cable companies, broadband service provides a huge share of 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. It might have been one of the last honest moments in telecommunications regarding 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.
After all, operating a 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 as streaming becomes more popular and consumers seek access to content anywhere, on any device. It's rather like how the recording industry tries to sell more songs by using the threat of piracy to make it hard for someone who owns a single copy of one to share it across a variety of devices.
ISPs are hiding 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 from it. T heir strategy just might work.
Also from GigaOM:
Why HBO's TV Everywhere Economics Don't Make Sense (subscription required)