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The Online Video Threat: Protecting Fat Profits From Internet Freeloaders

Phillip Dampier June 24, 2009 Data Caps, Editorial & Site News, Net Neutrality, Public Policy & Gov't 17 Comments
Their secret is out.  The Online Video Revolution will only be televised for "authenticated" viewers.

Cable's Fear Factor: the Online Video Threat

[Updated 12:11pm EDT: Scott McNulty from Comcast notes in our comment section that the TV Everywhere concept will count against the 250GB usage allowance Comcast grants residential broadband customers, and suggests the concept is non-exclusive and voluntary.  We debate Scott on that point — see the Comments below the article to follow along and add your thoughts.]

The best kept secret in the broadband industry is now out.  Stop the Cap! reader Lou dropped us a note to say the New York Times has decided to let cable’s big secret out of the bag in an article published today entitled, “Cable TV’s Big Worry: Taming the Web.”  Lou writes, “finally, the mainstream media is pointing out that the real threat to Time Warner Cable and others is Hulu.”

In addition to the obsession to “monetize” content that is currently given away for free online, many in the cable industry believe the best way to tame the web is to control the content and method of distribution.  If you subscribe to a cable TV package, you’re approved.  If you don’t, no online video for you!  Once accessibility is limited to those “authenticated” to access the content, a handful of companies can determine exactly who can obtain their video programming, for how long, and at what price.  For everyone else not going along, discouraging ‘unauthorized’ viewing and disrupting underground distribution are powerful tools for providers to protect their video business model.

What is the best way to do that?  Internet Overcharging schemes of course.  By raising the alarm that online video growth will create a tsunami-like wave of Internet brownouts and traffic jams, and by trying to pit subscribers against one another based on perceptions of their usage, the message that will be part of any cable industry “education” campaign is that limits, tiers, fees, and penalties are the answer to all of these problems.  Watching Hulu every night?  Naughty. With this 20GB monthly limit, we’ll put a stop to that.  Netflix movie tonight?  Do you really want to risk going over your allowance and incurring “necessary” overlimit fees and penalties that represent more than 1,000% markup over our actual costs?  Wouldn’t it be fairer to your neighbors to watch HBO on your cable package instead?

Is it Fair for Big Trucks to Pay More On the Information Superhighway Because They’ll Wear It Out Faster?

In cities across the country, those interested in Internet Overcharging schemes are already engaged in focus group testing.  We know, because some of our readers have been stealth participants, informing us about all of their pretzel-like logic twisting games designed to convince the public that cable and telephone companies are not going to gouge you again with a higher bill.  Some want to use toll road analogies, others are using gas and electric comparisons, and one had the novel idea of putting a plate of food in the middle of the conference table and asking if it would be fair for just one person to eat 75% of it while the rest “go hungry.”

Unfortunately for them, by the end of the session, two of our readers attending two different panels derailed their efforts and had panels eating out of their hands in opposition to Internet Overcharging schemes, and collected a nice $75 (and uncapped lunch) for their efforts.

The Times piece only adds more evidence to help make the case that Internet Overcharging schemes aren’t about broadband fairness — they are part of a protection racket to protect fat profits earned from selling video packages to consumers.

Aware of how print, music and broadcast television have suffered severe business erosion, the chief executives of the major media conglomerates like Time Warner, Viacom and NBC Universal have made protecting cable TV from the ravages of the Internet perhaps their top priority.

“The majority of profits for the big entertainment companies is from cable programming,” said Stephen B. Burke, the president of Comcast, the nation’s largest cable company.

The major worry is that if cable networks do not protect the fees from paying subscribers, and offer most programming online at no cost — as newspapers have done — then customers may eventually cancel their cable subscriptions.

It’s My Cousin’s Fault

In other words, you and I are probably not the biggest threat the industry faces from the ultimate nightmare of eroding profits.  It’s really my cousin’s fault.  He, like many in their 20s, moved into his new home and didn’t do what many of us routinely did when we moved — start the newspaper service, connect the telephone line, and get the cable TV hooked up.

He did call Time Warner Cable — to only install Road Runner broadband Internet service.  He reads the news online, relies exclusively on a cell phone, and watches DVD’s and online video on his giant flat panel television.

The cable industry is horrified my cousin represents their future.

There is no sign of that happening anytime soon, but a recent poll by the Sanford C. Bernstein research group found that about 35 percent of people who watch videos online might cut their cable subscription within five years.

“We don’t think that it’s a problem now, but we do feel a sense of urgency,” Mr. Burke said.

An Urgency to Overcharge

Like most industries that have grown fat and happy on their traditional business models, the most common first response to a challenge to that model is to resist it.  The cable industry in particular has enjoyed a largesse of profits earned from years of de facto monopoly status in most communities, with the majority of its services being largely unregulated.  Cable rate increases have almost always exceeded the rate of inflation, and the public relations talking points for those rate increases has always been, “due to increased programming costs, which represent the increasing diversity and excellence of the cable channels we provide you….”

With prices for “basic/standard service” cable now approaching $60 a month, many younger customers just aren’t interested anymore.

Watching consumers abandon cable television packages for access through broadband gives executives and Wall Street analysts like Sanford C. Bernstein heartburn.  Until recently, many customers never contemplated the idea of getting rid of video packages and just keeping the broadband service they already have.  Not until Hulu.  That one website now represents a considerable amount of online video traffic from subscribers, and the cable industry isn’t in control of it, much less profiting from it.

Hulu represents a threat to be resisted.

You Use Too Much Internet, So We’ll Create Something That Will Make You Use More

To be fair to everyone, we have to get rid of the flat rate plan you’ve enjoyed for more than a decade and replace it with tiered pricing to be “fair” to subscribers because of enormous traffic growth. That what Time Warner Cable customers heard during a planned nonsensical trial of an Internet Overcharging scheme in four American cities, rapidly shelved when consumers rebelled and New York Congressman Eric Massa and Senator Charles Schumer got interested (Rochester, NY was a selected trial city).

It becomes all the more ludicrous as subscribers learn Time Warner Cable’s answer to the traffic jam is to add even more traffic… their traffic… onto their broadband lines.

Evidently online video is only a crisis requiring urgent action when it isn’t their online video.

One idea, advanced most vocally by Jeffrey L. Bewkes, the chairman of Time Warner, and embraced by many executives, would be to offer cable shows online for no extra charge, provided a viewer is first authenticated as a cable or satellite subscriber.

Mr. Bewkes has called the idea “TV Everywhere,” but others in the industry refer to it by other names: “authentication,” “entitlement,” and Comcast has called its coming service “OnDemand Online.”

“If you look at TV viewing, it’s up, even though the questions and stories are all about the role of video games and Internet usage and other uses of time,” Mr. Bewkes said.

The first test of the new system, which will authenticate cable subscribers online and make available programs on the Web for no additional charge, will be announced Wednesday, between Comcast and Time Warner. The trial will involve about 5,000 Comcast subscribers, and television shows from the Time Warner networks TNT and TBS.

It will be interesting to watch whether or not “no additional charge” means such content will be exempted from Comcast’s 250GB monthly usage limit, and whether Time Warner Cable will change their Subscriber Agreement to exempt their TV Everywhere service from the existing language in their agreement permitting Internet Overcharging schemes.  Time Warner Cable already exempts their “Digital Phone” product.

Ixnay on the Coin Chatter Already

The Times piece also raises eyebrows about the potential for collusion and antitrust violations in secretive meetings among industry executives, although they deny it.

The electronic media chiefs, including Mr. Bewkes, Jeff Zucker of NBC Universal and Philippe P. Dauman of Viacom, among others, have been more careful, so as to avoid being accused of collusion: much of the discussions have been on the telephone and in private, one-on-one chats during industry events. Pricing is rarely, if ever, discussed, according to executives involved in the discussions.

“We can’t get together and talk about business terms, but we can get together to work on setting open technology standards,” said Mr. Dauman, the chief executive at Viacom, which owns cable networks like MTV, VH1, Comedy Central and BET.

Although the representations from the industry seem benign, the potential for something far worse is always there.  Control the keys to unlock the door to online video (and the tools to lock out or limit the “other guy”), and you’ve got a plan to make sure people don’t dare drop their cable video package.  Where did the online video go from your favorite cable channel website?  It’s on TV Everywhere, and you don’t get in without an invitation.

One holdout among the major chief executives appears to be Robert A. Iger of the Walt Disney Company. At an industry conference this year he warned that gambits like TV Everywhere could be “anti-consumer and anti-technology” because such a plan would place cable programming behind a pay wall.

So much for “no extra charge.”

It’s Time to Investigate

Rep. Eric Massa (D-NY), is the House of Representatives’ watchdog on this issue.  He’s already connected the dots and realizes they lead in only one direction — to consumers’ pocketbooks.  Massa has introduced HR 2902, the Broadband Internet Fairness Act, specifically to prevent broadband providers from falling all over themselves to engage in anti-competitive, anti-consumer price gouging, all to cover their bottom lines.

This legislation, and Rep. Massa, needs your immediate support.  Call Congress and ask your representative to co-sponsor this vitally important bill.  The New York congressman is protecting consumers nationwide, and deserves your thanks and support.

Stop the Cap! also now calls on Congress and the appropriate regulatory bodies to begin an immediate investigation into the industry’s “cooperation” to launch TV Everywhere, and other similar projects. Specifically, we ask that an appropriate and thorough review be conducted to ensure that no collusion or antitrust violations have, are, or will take place as a result of this project.  We also call for a review of the “authentication” model proposed by the cable industry to ensure it does not exclude any consumer that subscribes to a competing video provider (satellite, telephone company, competing independent cable company, municipally owned provider, etc.), and that no “free pass” language be permitted that exempts their project from the terms and conditions that they seek to impose on others not affiliated with this project.

Senator Schumer’s long history of consumer protection would make him an excellent choice to lead such an investigation.

Once again, Net Neutrality must be the law of America’s online land.  Only with the assurance of a level playing field can we be certain no provider will attempt to exert influence or special favor over content they own, control, or distribute.

Currently there are 17 comments on this Article:

  1. BrionS says:

    Anyone with an ounce of logic and common sense can listen to the cable industry and hear them talking out of both sides of their mouths – doublespeak for you 1984 alumni.

    “We predict that if current trends continue, demand will continue to grow to a point at which it outpaces capacity at the access layer. Globally, this will occur in approximately 2011/2012, and dependent on how the current economic state affects provider buildoutbuild out and user demand. In North America, the situation is slightly worse than last year’s projections, in fact, since last year, indications are that sophisticated users already are experiencing capacity limitations.” — Nemertes Research “Internet Infrastructure Study 2008” (http://www.nemertes.com/internet_infrastructure_study_2009_frequently_asked_questions_faq)

    “If you want to watch your favorite TV network or shows through broadband on any device—PCs or mobile—you can do it as long as you subscribe to any multichannel provider. It’s a natural extension of the existing model.” — TW CEO Jeff Bewkes (http://paidcontent.org/article/419-time-warner-ceo-plans-tv-everywhere-but-not-for-everyone/)
    — note the date of the article was before TWC’s announcement of the CBB trials April 1st, also that Time Warner is not the same company as Time Warner Cable although they are related

    On the one hand you have the “exaflood” theory posited by Nemertes Research that Internet usage (in general but with a special nod towards online video as being a more prominent factor) will increase to the point sometime in 2011 or 2012 that “brownouts” occur because network capacity will be reached. It’s the “build out your network now or you’ll be sorry” mantra.

    On the other hand you have Jeff Bewkes of Time Warner saying, “go ahead, stream your favorite TV shows across the Internet, just make sure you pay for it first by subscribing to cable or satellite TV.” And finally you have Glenn Britt, CEO of Time Warner Cable saying their network is fine and will be solid for the next 10 years without upgrade.

    Something doesn’t add up. Logic dictates someone is wrong. One party says the infrastructure can’t handle the growing usage, another party says it can. So either Nemertes is wrong and their study is creating a lot of fear, uncertainty, and doubt (or FUD) which enables companies like Time Warner Cable, Comcast, and others to suggest usage caps may be a way to prevent this horrible future scenario, or Time Warner Cable is lying about their infrastructure in order to assuage their shareholders and keep their stock prices up.

    In both cases, we as the consumer end up getting the shaft either in the form of consumption-based billing or efforts to migrate all online video (and who knows what else) into a gated community only accessible to card-carrying TV subscribers.

    Is regulation the key? Perhaps. I’d prefer to see it work itself out in a free market where people simply refuse to accept this kind of abuse, but the difference between the theoretical free market and the actual one is in the actual free market we have, we don’t have the necessary educated consumers. Our market has too many people who take what their given (or sold) and don’t stop to consider if this is a bad deal for them. An educated free market can identify a bad deal and say ‘no’ to it thus driving that business into a new model or into bankruptcy. That leaves regulation as the only alternative to the educated minority that see bad deals for what they really are.

    This is not intended to be condescending to anyone, simply an observation that in our Wal-Mart America (by and large) we don’t critically analyze businesses’ actions or their impact on our lives. We let it slide under the guise of the free market and the “right” to unlimited profits at any cost. Clearly readers of this site have enough education and common sense to know something’s wrong and are here to try and find out what we can do about it.

    • Brion, the other key point you leave out is that to have a true free market, there has to be real competition, and in the broadband and cable TV arenas, these companies, in most cases, have monopolies (de facto or not).

    • Smith6612 says:

      What is with these companies and the year 2011/2012? Has anyone noticed that every company out there complaining about online video and such is always stating year 2012 (which according to the Mayan calendar the Earth is supposably going to explode anyways?). Thought I’d point that out.

  2. preventCAPS says:

    It is so scary that there are so many consumers (and congress/policital represenatives ) who just don’t know or care; enough that the fat cable heads can get this far with their plans.

  3. Hey there, Scott from Comcast here and I just wanted to clear up something, and offer an additional piece of information about TV Everywhere and On Demand Online.

    First, to answer your question about whether or not this content will count against the 250 GB data usage, it will.

    The other point that I wanted to highlight is that this effort is voluntary and non-exclusive. That means content creators can decide if they want to distribute their content using On Demand Online, or not… and even if they do they can still offer it on other sites, or their own site, if they like.

    You can check out a blog post about this on our corporate blog:

    http://www.comcastvoices.com/2009/06/on-demand-online-and-tv-everywhere.html

    Which highlights the set of principles that we announced today along with Time Warner, which I think help to address some of these questions.

    Thanks!

    • Thanks for your reply, Scott. We will add your information to the mix.

      I think your characterization that this is “voluntary” is difficult to believe in the context of public remarks from the nation’s largest cable operators hammering home warnings that their patience is running out with programmers “giving away” online video while they pay to carry those networks on their cable systems. Under this kind of pressure, it’s as voluntary as a protection racket. Let’s review:

      “Putting content online for free is not a business,” Jeff Shell, president of the Comcast Programming Group, said, to agreement from other top cable-network executives on the panel. (Multichannel News 6/22/09)

      “Scripps Networks Interactive CEO John Lansing called streaming video “the elephant in the room” that could crush the current cable-network revenue model.” (Multichannel News 4/6/09)

      “Rainbow Media CEO Josh Sapan, a passionate critic of putting shows online for free, argued the $25 billion in license fees a year that networks generate from cable operators could be in jeopardy if those affiliates believe that the core linear cable product is compromised by the availability of the same programming on the Web.” (Multichannel News 4/6/09)

      “My view is a little different,” she said. “I think Hulu doesn’t work in the end. Because I think everyone in this room should be hammering away at your programmers to stop giving the Internet free programming. They are destroying your business by hurting your margins.”

      Cable has been lucky in that top network-backed sites Hulu (NBC and Fox), TV.com (CBS) and ABC.com aren’t sharing content and making it more convenient for consumers to find the shows they want online. And while Time Warner Cable’s Glenn Britt and other operators are pressing programmers, NBC and Fox are in turn squeezing Hulu for “more economics” to help them offset the risk of upsetting their cable-operator affiliates, she said.

      “Eventually the programming guys are going to have to make a decision, and you want to really put pressure on them so they decide that, even though the consumer wants everything for free, you actually want to run a business model, and you need their programming to do that,” Martin said.” (Multichannel News 2/27/09)

      As far as “non-exclusive,” we also understand what that will almost certainly mean. Samples and limited content available to tease viewers on the free side, but a newly erected wall to prevent programmers from offering the breadth and depth of content they formerly leveraged on their own web sites to garner visits. This new TV Everywhere concept will work either on a broadband provider’s website or the original programmer/network website, using the same “authentication” model to be sure, but it would be folly to suggest a network like Comedy Central will get away with leaving their full content library open and available to all instead of moving much of that content to TV Everywhere. To do otherwise would knock out the foundation of the original principle of TV Everywhere — to give existing cable TV subscribers access to that content online, while not contributing to the erosion of that business model.

      • preventCAPS says:

        I think this is kind of similar to music lables seeing the internet as a threat because music producers can cut out the middle man. Just because a technology eliminates a middle man dosn’t mean it’s bad. It just means the middle men need to grow some cahunas and find another profession.

    • BrionS says:

      Thanks for the link Scott, though I’m rather disappointed that the ability to leave comments is moderated and the only two comments I see so far are praising this venture.

      I guess I’ll have to keep checking back to see if there are any other comments that aren’t so excited about it.

      • We do moderate comments, but only to ensure they stay on topic and aren’t abusive to each other or the poster (we outline the rules of the blog on this page: http://www.comcastvoices.com/about.html). I think if you look at the comments on some of the other posts on Comcast Voices you’ll see we aren’t filtering out negative comments.

        • preventCAPS says:

          Scott, I want to praise you for representing Comcast here on STC and engaging consumers in friendly conversations. I would hope that this trend continues and that other providers catch the drift and join up too.

          • BrionS says:

            Both Comcast and Time Warner Cable have representatives on Twitter who regularly engage in dialog with customers as well.

            While I may disagree with some directions the companies are taking, it’s refreshing to see them engaging in the communication networks that more and more of their subscribers use.

            It opens the opportunity for faux pas and lingual slip-ups, but it’s also much more human interaction. Frank posts on forums like this, tweets on Twitter or posts on facebook give these corporations a much more human side than we’re used to seeing. I see that only as a benefit for the corporations.

            On the flip side the consumer needs to be a bit more vigilant to avoid being lulled into a sense of security because of this more comfortable human side of the large corporations. A touch of skepticism with a larger dose of humanity. 🙂

  4. Craig says:

    I dont see the point in this On Demand or TV Everywhere or whatever you want to call it. All of the shows I care about I can find online (Mythbusters is the only show I can not seem to find). I do not have a cable subscription because the price is far to high for what is actually provided.

    So why would anyone pay a cable subscription to get what you already pay for with your broadband bill? What is the point, you say on your site that its going to have more content then whats available online, but how can you promise that? The only way that could happen is if you manage to strong arm content providers to stop distributing their content online outside of your On Demand service, which is shady at best and borderline infuriating at worst.

    Secondly, how do you justify this On Demand service with a 250G cap, if you pay for Cable and you say “now you can watch this all free online” well its not free if you cut people off @ 250G or charge them usage fees if they go over 250G. And are you going to stream advertisements with the On Demand video? If i run up against a cap or have overage fees I better not be seeing advertisements on my On Demand.

    Was the whole point of the 250G cap to stop people from using all your precious bandwidth? And now Comcast and Time Warner turn around and say, you know what forget about what we said before if you would only sign up for our cable service you can watch all the online video you want!

    Until Cable offers a service that is better then what I get for my broadband connection I don’t see a use for it.

    (Please note my broadband connection is not free I pay for it so saying “free on the internet” has no baring on the cable company, its only “free” to me if your looking at it from a content provider stand point and last i checked the broadband company did not provide me with any content)

    • BrionS says:

      A couple points in response to your comments (gleaning from what I’ve read here and elsewhere):

      – The point is to provide access to all *cable* shows online, most of which are not presently available without bending or breaking the law. FX and Comedy Central are two exceptions.

      – The implied point is that you should pay for cable so you can watch all your TV shows online (not just some of them)

      – According to Comcast they believe the 250GB cap is sufficiently high to not impact customers who take advantage of this service (i.e. they shouldn’t exceed it unless they’re already a very heavy Internet user like constant BitTorrent use — the parenthetical is added by me)

      – Many cable broadband providers also provide content to their customers in the form of a portlet or on-demand video as Time Warner Cable does (and I suspect Comcast may as well)

      But I completely agree with you regarding usage. If the point of caps is to make everyone use less so there’s less congestion and then they introduce a bandwidth-intensive service and encourage everyone to use it that sort of makes their caps disingenuous.

    • preventCAPS says:

      Most of the TV I watch is on the main networks (CBS,NBC,ABC,FOX). They offer their stuff for free OTA in un-recompressed HD as well as on their web sites. Too many of the cable channnels are filled with garbage to make the few channels I woud watch worth while at a cost of $50-60 a month.

      • infojunkie says:

        Your posting illustrates the need for a la carte cable subscriptions. Why pay for what you don’t want? Surely the technology is here to handle it.

        • PreventCAPS says:

          I don’t think that’s going to happen. It would mean less $$$ for cable companies. Yes, they would gain new consumers, but not enough to offset the many consumers who would trim the fat from their existing service.

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