Again with the domination and control thing.

Dr. John Malone is wasting no time reacquainting the cable industry with the kinds of classic power plays he used while running Tele-Communications, Inc. (TCI), then America’s largest and most powerful cable operator. Malone’s latest salvo: proposing new broadband pricing schemes that run afoul of Net Neutrality by charging consumers higher broadband prices if they watch online video services like Netflix.

Malone, increasing his influence over Charter Communications before launching the next wave of cable company consolidation, implied the industry is hurting from the lack of power and dominance it used to enjoy when it had an unfettered, territorial monopoly back in the 1980s. Malone told an audience at the annual shareholder meeting of Liberty Global he advocates getting the industry’s mojo back by returning to “value creation” pricing models — code language for new ways to charge customers higher prices or add-on fees.

Malone sees raising prices for Internet service key to bringing the industry back to the golden profits it used to enjoy selling television subscriptions, even as customers faced massive rate increases that doubled, tripled, or even quintupled rates for certain services.

Malone’s assessment of the eight current largest cable operators wiring the country: Snow White (Comcast) and the Seven Dwarfs (Everyone Else). The disorganized agendas of various cable operators are troublesome to Malone, who wants the industry to act in lock step with a unified, cooperating voice. Consumer groups call this kind of friendly cooperation “collusion.”

Malone also thinks it is time to discard reliance on cable television to bring home the revenue and profits Wall Street expects. The industry should instead turn its earning attention to broadband, a product few Americans can live without. Malone believes the cable industry is not only positioned to control content distributed on its TV Everywhere online video platform for authenticated cable subscribers, but also have a say in competing content from Netflix, among others, which are totally reliant on the broadband pipes provided by ISPs.

With Netflix consuming a growing percentage of cable broadband resources, and possibly contributing to cable TV cord cutting, Malone does not advocate crushing its competition. Instead, he wants a piece of the action. How? By demanding online video providers pay for using cable broadband infrastructure. Consumers also face surcharges on their broadband accounts if they watch online video services like Netflix, Amazon, YouTube and other over-the-top-video. Malone also advocates the implementation of Internet Overcharging schemes like consumption billing and usage caps.

Malone’s “world of the future,” is, in reality, not much different from AT&T’s 2005 proclamation that use of AT&T’s broadband pipes should come at a cost to content producers.

Then-CEO Ed Whitacre’s public statements fueled support for Net Neutrality, which forbids broadband providers from traffic discrimination techniques like charging extra for certain content or artificially degrading service for producers who refuse to pay.

Malone’s incendiary ideas may be letting too much of the cat out of the bag, say some observers worried Malone’s rhetoric will remind people he was once labeled “the Darth Vader of Cable.” His statements could attract unnecessary attention that could be used to organize opposition.

Last week, the Wall Street Journal reported that broadband providers and content producers were already secretly cutting deals to exchange bandwidth for money without the public scrutiny Malone’s comments will generate.

The newspaper reports some of the biggest Net Neutrality proponents around, particularly Google, are quietly paying millions to large cable companies to guarantee their content reaches customers as quickly and smoothly as possible.

Among the top recipients: Comcast, which collects $25-30 million a year and Time Warner Cable, which nets “tens of millions of dollars” from Google, Microsoft, and Facebook.

The payments are buried in the murky world of “interconnection agreements” governing the backbone pipes carrying huge amounts of web traffic from popular websites and those owned by large telecom providers. Originally, content and broadband providers agreed to peering arrangements that would trade traffic without payment to each other. But as bandwidth-heavy online video began to turn those shared connections into lopsided floods of movies and TV shows headed into subscriber homes against a trickle of content coming back from broadband customers, the cable and phone companies began crying foul.

Netflix has so far navigated around paying Internet Service Providers directly to support their video content. Instead, it is building its own specialized content distribution network intended for ISPs to more effectively and efficiently deliver high bandwidth video. Connections to the Netflix network are free of charge to participating providers, but many ISPs are demanding to be paid.

Some content providers are fearful if they don’t pay, the free “peering” links will become hopelessly overcongested and slow web pages and services to a crawl.

For Verizon customers, that may have already happened as Netflix streams began stuttering and buffering earlier this month.

Cogent, which supplies Verizon with a considerable amount of Netflix traffic, immediately pointed the finger at the phone company for artificially degrading the Netflix viewing experience. Verizon promptly shot back:

Cogent is not compliant with one of the basic and long-standing requirements for most settlement-free peering arrangements: that traffic between the providers be roughly in balance. When the traffic loads are not symmetric, the provider with the heavier load typically pays the other for transit. This isn’t a story about Netflix, or about Verizon “letting” anybody’s traffic deteriorate. This is a fairly boring story about a bandwidth provider that is unhappy that they are out of balance and will have to make alternative arrangements for capacity enhancements, just like any other interconnecting ISP.

Cable giants like Malone see the battle as one the cable industry will have a hard time losing, because it is the only technology present in most communities that can handle the traffic and the growing demand for faster speeds.

Cable operators think content companies have a license to print money, especially since their success is built partly on broadband networks they don’t own or pay for delivering content to customers. At the same time, content companies fear they could be forced out of business if the cable industry decides to give itself preferential treatment.

[flv width=”504″ height=”300″]http://www.phillipdampier.com/video/WSJ Paying ISPs to Move Content 6-20-13.flv[/flv]

Reporters from The Wall Street Journal discuss the secret payment arrangements between content producers and some of America’s largest ISPs. (4 minutes)

Phillip Dampier

It is no secret that there is an urban-rural broadband divide.

The market-driven, private enterprise broadband landscape delivers the best speeds and service to urban-suburban areas, particularly those in and around large cities, short-changing rural communities.

This is true regardless of the technology: the fastest fiber optic services are delivered in large population centers, and wireless speeds are fastest there as well. But as the National Telecommunications and Information Administration has discovered, the further away you get from these urban sectors, the poorer the service you are likely to get.

The NTIA’s findings present a significant challenge to phone company claims that rural customers would be better served with wireless broadband instead of spending money to support and upgrade landline infrastructure, which supports DSL and is upgradable to fiber optics.

The NTIA finds these rural wireless networks to be severely lacking:

Not only are far fewer rural residents than urban residents able to access 4G wireless services (i.e., at least 6Mbps downstream), but a further divide also exists within rural communities. For wireless download services greater than 6Mbps, Very Rural communities have approximately half the availability rate of Small Towns, and Small Towns have about half the availability rate of Exurbs (10, 18, and 36 percent, respectively).

This represents nothing new. AT&T and Verizon have shortchanged their rural customers with catastrophically slow DSL service (or none at all) for years:

For wireline download service, Very Rural communities also have the least availability of all five areas. Though a rural/urban split continues to be useful in providing generalized information about availability, a five-way classification uncovers a more refined picture of the divide in broadband availability across the nation. For example, at wireline download speeds of 50Mbps, broadband availability varies from 14 percent (Very Rural), 32 percent (Exurban), 35 percent (Small Town), 62 percent (Central City), to 67 percent (Suburban), even though the overall broadband availability was 63 percent in urban areas compared to 23 percent in rural areas. In addition, wireline and wireless broadband availability, particularly at faster speeds, tends to be higher within Central Cities and the Suburbs compared to everywhere else.

Why the disparity? It is a simple case of economics. Wealthy suburbs can afford the ultimate triple play packages, so providers prioritize the best service for these areas, even above less costly to serve urban centers. Rural residents either get no service at all or only basic slow speed DSL. The Return on Investment to improve broadband is inadequate for these companies in rural areas.

Source: NTIA

The same is true with wireless 4G service. Rural areas struggle for access or endure poor reception because fewer towers provide service away from major highways or town centers.

The NTIA observed wireless download speeds of 6Mbps or more were available to 90% of urban residents, but only 18% of small town residents. Wireless upload speeds of 3Mbps or greater were found in only 14% of small towns.

Dee Davis, president, Center for Rural Strategies, based in Whitesburg, Va. said the implications were clear.

“The market’s always going to go to the well-heeled communities,” Davis observed. “It’s going to go to the densest population.”

Folks in rural communities end up paying more for a lower level of service, Davis said.

“That also means that they don’t get the same chance to participate in the economy,” Davis added. “They don’t get to bring their goods and services to market in the same way. They don’t always get to participate.”

The economics of cutting off rural landlines delivers most of the benefits to providers, and assures decades of inferior service to consumers.

Economic market tests, including Return on Investment, that impact rural broadband availability will not disappear if AT&T and Verizon abandon their rural landline networks. While cost savings will be realized once rural wired infrastructure is decommissioned, there is no free market formula that would encourage either provider to pour investment funds into rural service areas. For the same reasons rural customers are broadband-challenged today, their comparatively smaller numbers and economic abilities will continue to fail investment metrics for innovative new services tomorrow.

The primary reason broadband speeds are lower in rural areas is inferior network infrastructure. Providers argue it does not make economic sense to invest in network upgrades to boost speeds for such a small number of customers. While wireless technology can be cheaper to deploy than the upkeep of a deteriorating landline network, it is not cheap or robust enough to deliver comparable broadband speeds now available in urban areas, especially as broadband usage continues to grow.

Verizon’s chief financial officer Fran Shammo admitted as much during remarks at the at JPMorgan Global Technology, Media and Telecom Conference in May:

If you recall, way back I guess about two years ago we did a trial with DirecTV in Erie, Pa., where we did broadband on the side of a house and offered a triple-play, if you will, which consisted of broadband, voice, and linear TV provided by DirecTV.

What we found was people were adoptive to the broadband; but because of the consumption of broadband through that LTE network, it was really detrimental to the spectrum and to the network performance. Because they used so much data, it soaked up so much of the spectrum.

So what we felt was LTE for broadband works in certain rural areas, but you can’t compete LTE broadband in those dense populated areas because you can’t — first of all, you can’t match the speed with a 50-megabit or a 100-megabit delivery between cable and FiOS and U-verse. And you literally don’t have enough spectrum to be able to use that much consumption.

So what we felt was by partnering with the cable companies, and delivering our LTE network with voice and data, and having that hardwired connection into the home was a better financial way to do it than trying to go LTE broadband. Because we just didn’t see where the spectrum could hold up to the volume that would be demanded.

Without rural cable companies to partner with, Verizon’s decision to move rural broadband to wireless guarantees rural Americans will not benefit from ongoing speed and capacity upgrades that are necessary to support the evolving Internet.

Werner

Cable operators are getting ready for competition from Google and other fiber providers with an upgrade to the cable broadband standard DOCSIS that will support up to 10/1Gbps service.

Comcast chief technology officer Tony Werner told attendees at the Washington, D.C. Cable Show that DOCSIS 3.1 will deliver about a 50% improvement in spectrum efficiency.

The new standard relies on orthogonal frequency-division multiplexing (OFDM), a standard already used by the wireless industry to get tighter performance from existing wireless spectrum.

The cable industry’s weakness remains its broadband upstream capacity. Standards originally developed for cable broadband assume users will download far more content than upload, so the focus has always been on download speeds. Upload speeds have been anemic in comparison. Until recently, cable technicians worried they would have to dedicate considerably more bandwidth for faster upstream speeds, but with improved standards, that may no longer be true.

Time Warner Cable’s chief technology officer Mike LaJoie is convinced his company will not have to widen upstream bandwidth. Time Warner has been among the stingiest providers of broadband speed upgrades,  still offering residential customers in most service areas a maximum of 50/5Mbps service, even as Comcast has upgraded to 305Mbps in certain markets, mostly in the northeast. This week Comcast demonstrated 3Gbps broadband, primarily to prove the cable broadband platform will be able to compete with fiber technology.

LaJoie

The first trials of the new broadband standard are anticipated in 2014, with modems for sale later that year or early 2015. Comcast is expected to begin buying and deploying DOCSIS 3.1-capable modems “when it makes financial sense.”

Major speed increases will require cable companies to accelerate the transition to all-digital video platforms to free up available cable spectrum. The faster the offered speeds, the more channels must be dedicated to providing broadband. Operators don’t see a space crunch anytime soon, especially if they move towards an all-IP platform that would support all services through a giant broadband pipe.

Cox Cable, for example, is planning to move more of its analog channels to digital to free up capacity for faster broadband speeds.

But exactly when consumers will be able to use the faster speeds possible from DOCSIS 3.1 is up to your provider.

Time Warner Cable is not convinced customers even need or want 100Mbps speed, so expect some cable companies to not even attempt gigabit broadband for years to come.

LaJoie dismissed triple digit megabit speeds as a novelty that is not “very deeply penetrated” in the marketplace — marketspeak for “not attracting many customers.”

“There has not been a demonstrated appetite for it,” LaJoie said.

Cable companies, including Time Warner Cable, are offering a mix of threats and financial incentives to keep popular cable programming away from online video competitors.

Bloomberg News today reported the private discussions primarily target upstart streaming video services from companies like Intel, Apple, and Google, which are all proposing multichannel streaming video services that could one day replace the local cable company.

All three would-be competitors have been stymied, some for years, from signing contracts with popular cable networks like HBO, USA, ESPN and Comedy Central. If a viewer wants to watch those networks, they usually have to authenticate themselves as existing cable, satellite, or telco-TV customers to get access to live and recorded programming. The cable industry prefers it that way as a customer retention tool.

Time Warner Cable CEO Glenn Britt admitted to Wall Street analysts attending this week’s Cable Show his company probably insists on contract language that bars programmers from providing content to online video services.

“We may well have ones that have that prohibition,” Britt said at the conference in Washington. “This is not a cookie-cutter kind of business.”

Some cable company contracts are more benign, only requiring programmers to license content on the same terms offered to their online competitors. Britt said some of Time Warner Cable’s contracts fall into this category.

Britt

Britt has repeatedly emphasized Time Warner wants to license content more broadly to allow the company to include it in its TV Everywhere platform, which streams video content to wireless devices. The cable operator adopted a policy in 2009 that sought to deliver content to customers on any device they wish. Restrictive contracts have kept that policy from being fully implemented.

AT&T U-verse says it won’t pay full price for cable programming sold to its online competitors.

“If they’re going to go over-the-top, then that’s a very different conversation and a very different value for our customers,” Jeff Weber, president of content, said last month at an investor conference. “Exclusive versus non-exclusive has materially different value for our customers. And I think we would want that reflected.”

Restrictive contracts are all about protecting the existing pay television ecosystem, according to Charter’s chief financial officer, Chris Winfrey.

“It’s in everybody’s mutual interest that we are protecting the ecosystem in a way that continues to keep the value of that programming that we have and the way it’s delivered to our subscribers today,” Winfrey said added.

Consumer groups say restrictive contracts are the epitome of anticompetitive industry behavior that should be examined by the Justice Department.

“Is it anticompetitive generally? Of course it is, they are keeping programming from their competitors,” said Gigi Sohn from Public Knowledge.

Satellite companies were originally in this same position, unable to carry popular cable networks on reasonable terms at fair prices until the 1992 Cable Act mandated reforms that required non-discriminatory access to cable programming. Online video providers have not yet been able to demand the same terms for their competing services.

Powell

You and I may think America can do better providing fast and inexpensive broadband service. But a former chairman of the FCC now representing industry interests waved shiny keys of distraction to explain away why cable companies are still delivering Internet speeds slower than those found in Romania, Latvia, South Korea and Japan.

Michael Powell, the poster child of D.C.’s “revolving door” problem gave a well-compensated, rousing (yet fact-lacking) defense of an industry he was supposed to oversee in the public interest as the Bush Administration’s FCC chairman from 2001-2005.

“America is home to the world’s very best Internet companies,” said Michael Powell, chief executive of the National Cable and Telecommunications Assn. at the annual Cable Show in Washington, D.C. “We have worked hard to reach everyone, and now offer service to 93% of American homes. Despite our success, many people like to denigrate U.S. broadband by painting false comparisons to other countries. There are some nations doing very well, but it is foolish to compare countries like Latvia and France to the United States of America.”

Powell’s response is hardly a fact-filled defense for cable company broadband that still delivers slow speeds at high prices. Instead of attempting to call the statistics inaccurate, he tried to explain away the discrepancy by complaining people are ignoring the size of the country and its population.

In denial

Powell’s arguments might have some merit if the cable industry did not make a point of bypassing vast rural areas that do not meet Return on Investment tests. It is difficult to claim cable companies cannot deliver comparatively fast service in rural Iowa when they don’t offer any service at all.

The People’s Republic of China’s population is far larger than our own and is now a vital market for fiber optics manufacturers and suppliers. While some of America’s cable industry CEOs repeatedly argue America does not need fiber broadband or gigabit broadband speeds, the Chinese government has insisted that every new housing development be pre-wired with fiber that will easily and inexpensively supply those speeds in the near future.

Powell is correct to say speeds are improving in the United States, but there is growing evidence they are improving even faster overseas, especially in countries that are basing their primary telecommunication infrastructure on fiber optics, which can support enormously fast Internet speeds. As those fiber networks are lit, America will fall even faster in broadband rankings as long as cable operators continue to insist there is no demand or interest in the next generation of high-speed service. At the prices they charge, they may just prove their own “no demand”-argument, at least in this country.

Powell himself helped lay the foundation for America’s broadband duopoly by deregulating the industry with one hand while ignoring the need for competitive checks and balances with the other. At the end of Powell’s tenure, his greatest achievement was constructing an industry-friendly personal resumé to win lucrative employment as a telecommunications lobbyist.

Who better to speak with “authority” on telecommunications matters than a well-connected former FCC chairman that does the industry’s bidding? The NCTA hired him to deliver just the kind of defense cable operators hope Americans will believe.

Those that are aware of what broadband is like abroad don’t.