Why Hollywood Should Be Watching For Robust Net Neutrality Rules

Lack of Regulations Raise Ominous Prospects for Content Companies

Comcast Brian Roberts

With FCC chairman Tom Wheeler announcing plans Wednesday to do a rewrite of net neutrality regulations, studios this time around have even more reason to be concerned about how robust the agency makes its rules of the road for the Internet.

As showbiz increasingly embraces over-the-top video via streaming services like Amazon Prime or set-top boxes like Apple TV, the D.C. Circuit’s overturning of the FCC’s net neutrality rules last month left the sobering possibility that Internet service providers could eventually function as middlemen, demanding to be paid.

Adding to the dynamics is Comcast’s proposed acquisition of Time Warner Cable. Already the largest cable operator and the owner of NBCUniversal, Comcast is also the largest ISP in the U.S., and its acquisition would make it even bigger, representing about one-third of all broadband service in the country.

But under the terms of its NBCU acquisition in 2011, Comcast remains bound by net neutrality rules until 2018, regardless of what happens in the courts, and the company promises it will extend the rules to the Time Warner Cable operations as well.

Nevertheless, whether or not the merger is approved, there’s still the lingering fear that without any rules of the road, ISPs could be empowered to start discriminating against services that don’t pay access to premium lanes of traffic — lanes capable of delivering content to consumers at greater speeds and better quality.

The prospect of ISPs suddenly demanding payments for delivery remains a big if, and Hollywood executives are still trying to grasp all of the implications. The studios have always been a bit ambiguous about whether they favor the idea of net neutrality — other than to ensure that service providers have the freedom to control piracy.

The absence of rules puts a great deal of power in the hands of ISPs, which deliver content in the last mile of bandwidth to consumers’ homes, says Mike Mooney, general counsel for Level 3 Communications, a provider of global voice data and video communications services for companies such as Netflix and Major League Baseball.

“If you are an innovator on the Internet — say you are the next Facebook or Twitter — if you know you are going to have to pay a lot of ‘last mile’ money to get that content to consumers, that affects your business plan,” Mooney says.

Netflix called the D.C. Circuit decision “unfortunate,” yet shied away from sounding the alarm.

“If ISPs, especially major ISPs, were to contemplate blocking Netflix or other services, it would certainly fuel the fire for more regulation, which is not something that we’re interested in,” Netflix CEO Reed Hastings and chief financial officer David Wells said in a letter to investors last month.

ISPs like Verizon, which successfully sued to overturn net neutrality, contend that they need flexibility to ensure the evolution of broadband networks. Translated, that means freedom to experiment with different pricing structures.

There is, however, a important caveat to all the what-ifs: Net neutrality isn’t dead yet.

Wheeler expressed confidence that although the D.C. Circuit overturned net neutrality provisions that prohibit ISPs from blocking or discriminating against certain types of content, the FCC can still pursue new rules with solid legal footing under a provision of the 1996 Telecommunications Act.

There also are some powerful corporate voices in favor of net neutrality. When the FCC’s rules were devised four years ago, one of their biggest corporate champions was Google — and its interests were not entirely based on siding with public interest groups that see the issue as one amounting to the nation ensuring democracy.

Among other things, YouTube is one of the biggest sources of streaming video in the U.S.; anything that potentially interferes with ease of access also threatens the site’s growth into an ad-supported series of entertainment networks.

Google has not said anything publicly about the court’s decision, other than to point to the statements of the D.C. lobbying organization it supports, the Internet Assn. That group’s president, Michael Beckerman, says that the lack of net neutrality rules raises fears that Internet providers “now have a green light to charge tolls and erect anti-competitive barriers to content providers.”

Even with net neutrality rules in place, consumers are already vulnerable to getting hit with additional fees. Left open as a possibility when the FCC wrote the rules in 2010 was usage-based pricing, which allows ISPs to charge each customer based on how much bandwidth he consumes  — just like the water or electric company does — instead of using a flat rate.

Ostensibly, Comcast would have an interest in implementing usage-based pricing, but so far it is only experimenting with a plan in some markets in which customers have a data cap of 300 gigabytes a month, and the option of purchasing blocks of 15 gigabytes of data for $10 each.

“So far, in our trials, we are finding that this cap does not apply to 98% of our customers,” says Comcast spokesman Charlie Douglas. Douglas says Comcast is also examining a reduced pricing structure for low-end users “who use maybe 5 gigabytes a month.”

It’s a pricing model similar to what is already in place in the wireless data world, which is exempt from net neutrality’s anti-discrimination rule. But there’s fear that another new business model that has begun to take root in wireless could also make its way to wireline and translate into additional costs for content services.

In January, AT&T unveiled its Sponsored Data service, which allows advertisers to cover the charge subscribers would incur watching videos of their ads, exempting the consumption from counting against their metered billing plans. While Sponsored Data signed up marketers like UnitedHealth Group as their inaugural partners, it makes you wonder whether networks and studios could be next.

Some net neutrality advocates have suggested that if usage-based pricing becomes ubiquitous across the mobile and wired Internet, paying for a user’s video consumption will become the route of choice for studios and networks anxious to get their ad-supported content seen.

“The concept of having a media company — say, ESPN — pay for the transport function rather than the other way around is, on its face, a mind-bender, and certainly isn’t one that media companies would eagerly embrace,” analysts Craig Moffett and Michael Nathanson wrote in a recent blog post. “If this works at AT&T, perhaps the content industry will turn around and ask the NFL to pay them for the usage charges of distributing their content!”

To underscore their point, the analysts did a pricing model of what it would cost a content provider to buy that special access, and the results don’t bode well for any studio or network that has enjoyed free access to Web users.

But perhaps the biggest check against a worst-case scenario is the consumer.

Cable TV is held out as the bogeyman of what the Internet may become, and for good reason. Just like the Internet, the infancy of the cable business in the 1970s was filled with talk of interactivity, diversity, niche choices and few barriers to entry.

Decades later, the industry is criticized for doing little to embody any of those attributes (though it remains phenomenally successful just the same). No wonder nary a month goes by without one politician or another going public with complaints on behalf of their constituents decrying the absence of a la carte and moderate pricing.

Consumer concern has already figured prominently on the Internet: Hollywood got blindsided in its effort to pass the Stop Online Piracy Act. A campaign was launched that claimed Big Media was going to block broadband connections, and the storm of protest was rooted in the idea that free and open access to the Web was at stake.

Netflix’s Hastings has already invoked the specter of tapping into consumer ire if net neutrality is threatened. “Were this draconian scenario to unfold with some ISP, we would vigorously protest, and encourage our members to demand the open Internet they are paying their ISP to deliver,” he said.

Internet service providers, meanwhile, characterize net neutrality as a solution in search of a problem, an issue chock full of alarming scenarios that have failed to materialize.

What makes independent content creators wary, though, is the history of new technology — whether it be cable TV or homevideo — tending to morph into a business environment that’s commanded by conglomerates.

“What is interesting is that after all the hoopla (of what may happen), the issue really remains the same,” says Jean Prewitt, president and CEO of the Independent Film & Television Alliance, which represents indie companies. “We are seeing very powerful forces in favor of vertical integration on the Internet.”

Among those speaking out is Lloyd Kaufman, co-founder of Troma Entertainment, who says that his company has survived because of the Internet, yet would have a rough go of things if it were forced to buy access to the Internet. “What I do predict,” he said, “is that successful companies like Netflix will make sweetheart deals, and they will close the gate behind them.”

Added Alfredo Barrios Jr., writer and executive producer of USA Network’s “Burn Notice”: “Once you give the power to close off the pipeline to a handful of companies, then we are basically choking off all the new possibilities that streaming is providing.”

Whatever happens is likely to be brought about by gradual, incremental experiments in pricing or special lanes to consumers, and the Comcast-Time Warner Cable merger will only add to the scrutiny of future ambitions. To many advocates of net neutrality who watched consolidation of content suppliers play out in the 1990s despite confidence that networks and studios would stay at arm’s length from each other, the slow approach is even more worrisome.

Says John Vezina, political director of the Writers Guild of America West, “We don’t want the Internet to turn into something where rich people can get anything they want, to any site they want, and poor people have a whole separate Internet.”