New FCC rules leave online video stuck in neutral

Net Neutrality The full text of the FCC’s memorandum and order in its “open internet” proceeding hasn’t been released yet so the details of the new net neutrality regime are not yet fully clear. But from what was announced at the commission’s open meeting Tuesday where the new rules were adopted by a 3-2 vote they won’t provide much holiday cheer for online and OTT video providers, largely because the rules leave the most important questions unanswered, or at least unclear.

On the plus side for online video providers, the new rules will prohibit the blocking of any “lawful” content or application, and will bar “unreasonable discrimination” against third-party content or services by broadband access providers. That would include things like an ISP blocking Netflix because it competes with the ISP’s cable TV service. While probably a good principle to enshrine, there are already remedies for such blatantly anti-competitive behavior with the anti-trust divisions of the FTC and Justice Department, so the FCC ban will likely be of little practical utility to OTT video providers.

At the same time, however, and contrary to some earlier expectations, the FCC made clear the definition of “unreasonable discrimination” is likely to cover the paid prioritization of bits. To wit:

A commercial arrangement between a broadband provider and a third party to directly or indirectly

favor some traffic over other traffic in the connection to a subscriber of the broadband provider (i.e.,

“pay for priority”) would raise significant cause for concern.

While the banning (or strong discouragement) of “toll roads” will shield some online content providers from a shakedown by last-mile access providers, for the most popular online services, as Netflix CEO Reed Hastings acknowledged in his recent colloquy with Netflix shorts (a story in its own right, that), that dynamic is often reversed.

Per Hastings:

A valid concern over the long-term is how much power the consumer ISP networks will have to charge data suppliers (i.e. content). In the case of ESPN3, however, it is the reverse: ESPN3 charges consumer ISP networks like Comcast for the privilege of transporting the ESPN3 data to the ISP’s consumers (in essence, Comcast and peers are forced to share some of the revenue of the $45 per month broadband package with ESPN3). We don’t have any plans to go the ESPN3 route, but the odds of material negative Netflix P&L impact from broadband pricing trends in 2011 are very low.

In any case, such commercial arrangements — whether they benefit content or access providers — now appear to be out-of-bounds.

More to the point, even if Netflix were not planning to start cutting deals with last-mile service providers the possibility of doing so would have been useful to it. Big content providers like Netflix, Hulu and ESPN3 spend millions on paid prioritization now, but they do it indirectly, by paying CDNs to cache their content as close to the last-mile as possible to minimize the distance and the number of “hops” between networks their bits must traverse to reach the customer. Being able to cut deals directly with last-mile providers, or even just the threat of such deals, would have increased content providers’ leverage to better manage their total delivery costs.

More crucially, the new rules apply only to last-mile access providers, not to the internet backbone networks that connect the disparate last miles and haul traffic in bulk. Thus they will do nothing to bring clarity to the type of dispute that arose recently between Level 3 and Comcast over internet peering agreements between backbone providers, or between backbone providers and last-mile ISPs.

As I discussed in a previous post, the real long-term issue  for online video providers regarding network management is going to be quality of service. As traffic increases and the internet gets more crowded, the ability to ensure end-to-end quality of service is going to be a critical competitive issue for content providers. It won’t take much buffering or loss of picture quality for users to sour on a particular service, particularly if there are competing services readily available. Thus, online video providers will need some means of assuring that a QoS deal made with one network operator will be honored by others as their bits travel from server to subscriber.

As we learned from the Level 3-Comcast dispute, however, there are currently no regulations governing such peering agreements among network operators, and content providers’ like Netflix can easily become pawns in the gamesmanship when disputes arise. Unfortunately for Netflix, Hulu, etc., nothing the new net neutrality rules will provide much shelter from that danger.

Finally, the FCC will not apply the new rules as strictly to wireless broadband services, at least for now:

In addition, existing mobile networks present operational constraints that fixed broadband networks do not typically encounter. This puts greater pressure on the concept of “reasonable network management” for mobile providers, and creates additional challenges in applying a broader set of rules to mobile at this time.

That means service providers like Verizon Wireless and AT&T, as well as platform providers like Apple, will continue to be able to play a gate-keeper role when it comes to delivering content to mobile devices.

Copyright owners fared better on their priorities. The FCC’s emphasis on “lawful” content and applications, and its blessing of “reasonable” network management, means nothing in the new rules are likely to prohibit the use of technical measures to combat online piracy.

Indeed, MPAA interim CEO Bob Pisano praised the new rules in a statement issued Tuesday:

Combating IP theft is especially critical in an online world. Consistent with statements by the Obama administration and recent law enforcement initiatives, the commission understands that stemming the rising tide of online theft requires active participation by Internet service providers. Notably, Internet service providers may take reasonable measures to address copyright infringement without running afoul of open Internet rules. Under no circumstances should open Internet rules be used to shield copyright infringers.

Whether viewed favorably or unfavorably, however, the FCC is not likely to have the last word on the matter. Even as a majority of the commissioners approved the new rules Tuesday, they acknowledged the near-certainty that they will be challenged in court, setting up a long and probably bruising legal fight.

Many Republicans on Capitol Hill also denounced the new rules setting up what’s likely to be a long and probably bruising political fight.

Settle in, folks, we’ll be here awhile.