The reported deal between Comcast, the nation’s largest cable operator and NBC-Universal, part owner of Hulu, could have serious consequences for the Internet’s most popular destination for online television shows and movies.

In just a year, Hulu has enjoyed a quadrupling of visits well into the millions, streaming dozens of network television series, specials, and movies, all supported by commercial advertising.  Devised to help combat online video piracy and earn additional advertising revenue from web watchers, Hulu partners NBC, Fox and Walt Disney Co., have been successful at drawing scores of Americans to the video website.  Program distributors have also been pleased, earning money from shows like Lou Grant that haven’t been on network television in decades.  But after the economic crash of 2008, the venture has proven costly for the partnership, challenged by an advertising marketplace on life support and outright hostility by broadband providers, cable operators, and Wall Street investors, upset that the service is giving it all away for free.

Among the loudest to complain is Comcast, which is now angling to acquire NBC, and its 30% ownership stake in Hulu.

Comcast CEO Brian Roberts has repeatedly complained about the implications of giving away online video, which for some have begun to replace cable television subscriptions.

“If I am any one of these programmers, not just ESPN but the Food Network and I have a business in that 50 percent, 60 percent, 70 percent of my business comes from subscriptions, I want to think long and hard before I just put that content out there for free and not think through what it is going to mean to my business,” Roberts said at an investors conference in May.

Roberts view was shared by the CEO of the nation’s second largest cable operator, Glenn Britt of Time Warner Cable.

“If you give it away for free, you’re going to forego that subscription revenue,” Britt said. “And if you actually think the ad revenue can make up for that, then God bless you and go on your way. But I don’t think that’s the case, and (networks) don’t really think that’s the case either.”

The difference between Comcast and Time Warner Cable is that the former could gain part ownership in the largest service now giving it all away for free, and that has major implications for Hulu’s future.

“Would Comcast put an end to the Hulu model of using the Web to distribute free TV content?” asked Michael Nathanson, senior media analyst at Sanford C. Bernstein & Co. “Will Comcast continue to support Hulu?”

The Los Angeles Times reports there is already a precedent for Hulu limiting content for online viewers in response to complaints:

Hulu already has limited users’ access to certain cable programs, including FX’s “It’s Always Sunny in Philadelphia,” in response to an outcry from the TV producers and cable companies that object to paying TV programmers hundreds of millions of dollars each year for shows that are offered free online.

“Arguably, their ability to shape online content distribution, and to recast windows for video on demand, would be an important attribute of any deal,” wrote Craig Moffett, a cable industry analyst at Sanford C. Bernstein.

Comcast’s interest in NBC Universal would dramatically expand its entertainment portfolio with such attractive cable channels as USA Network, MSNBC and CNBC as well as the Universal Pictures movie studio. The proposed Comcast-NBC Universal venture also would give the cable operator a greater role in deciding how and when TV shows and movies are distributed online and at what price to consumers.

Comcast’s influence would primarily be felt in cable network programming streamed online, as Comcast has a vested interest from the millions it currently pays those programmers to carry their networks on Comcast cable systems nationwide.  Comcast could advocate Hulu become a partner in the TV Everywhere cartel, providing video content only to “authenticated” pay television subscribers, or it could limit the number of episodes available for free, or when those episodes appear on the service.

Soleil Securities media analyst Laura Martin thinks an even more likely possibility would be charging a fee for some of its more popular content.  Martin points to Hulu’s own financial problems, a consequence of the crash in the advertising market.  Soleil estimates that the three partners subsidize $33 million of the losses at Hulu even after earning $123 million this year from advertising.  Even worse, Martin says, is the cannibalizing of the networks’ own advertising earnings from broadcast runs of those shows now available online.  She told the Times that for every viewer who migrates to the Internet, the companies forfeit $920 a year in ad revenue.

But not everyone believes the Comcast-NBC deal is such a great idea.

Time Warner CEO Jeff Bewkes today told an industry conference in Manhattan that large media mergers have had a lousy track record.  Still, he said the merger would probably benefit the cable industry as a whole, because broadcast networks content with giving away content for free online will now be a part of the very industry hurt by that formula and will be more friendly towards arguments to stop it.

“We love to see our competitors taking risks,” Bewkes said.

[flv width=”400″ height=”300″]http://www.phillipdampier.com/video/CNBC Hulu 9-7-09.flv[/flv]

CNBC’s Julia Boorstin talked with Hulu CEO Jason Kilar in September about the desire for the company to partner with the cable industry’s TV Everywhere project.

A Wall Street Journal article this morning calls the imminent introduction of Net Neutrality policy “a boon for consumers […] to use their computers or cellphones to enjoy videos, music and other legal services that hog bandwidth.”

The article refers to the widely expected announcement today by FCC Chairman Julius Genachowski that Net Neutrality should be adopted as the fifth principle governing Internet service in the United States.

But Journal reporter Amy Schatz’s judgment about who wins and who loses in the Net Neutrality debate is framed by the flawed broadband provider arguments she adopts as reality:

The proposed rules could change how operators manage their networks and profit from them, and the everyday online experience of individual users. Treating Web traffic equally means carriers couldn’t block or slow access to legal services or sites that are a drain on their networks or offered by rivals.

The rules will escalate a fight over how much control the government should have over Internet commerce. The Obama administration is taking the side of Google, Amazon.com Inc. and an array of smaller businesses that want to profit from offering consumers streaming video, graphics-rich games, movie and music downloads and other services.

Setting aside the inappropriate use of the word “hog” to define broadband usage, which comes straight out of the broadband industry’s public relations strategy, Schatz ignores the fact some of the biggest drains on these networks will soon come from the industry’s own efforts to dominate online video — TV Everywhere.

In fact, the excuses for imposing Internet Overcharging schemes in 2009 do not reference much beyond online video growth as a justification to impose speed throttles and price increases on consumers.

Schatz adopts industry positions as fact in a number of places throughout her piece, which belongs on the Editorial page of the Journal:

If the FCC does force U.S. wireless carriers to open their networks to data-heavy applications like streaming video, it could push them beyond the limited capacity they have. Already, in areas like New York and San Francisco, a high concentration of iPhones has caused many AT&T customers to complain about degrading service.

In fact, many wireless carriers already provide their own wireless video to customers, and don’t seem to be engaging in a lot of hand-wringing over that.  Should Net Neutrality force open the wireless platform, the quality of the service, not the provider’s self interest will govern the success and failure of individual applications.  AT&T, which has earned massive revenue from its exclusive iPhone arrangement with Apple, can and should continue to invest some of that revenue into expanding their network to meet the demand.  If they cannot, it is an open question why they would allow any online video or other data-heavy applications on their networks until those networks can handle the traffic.

In such a scenario, wireless carriers may have to rethink how much they charge for data plans or even cap how much bandwidth individuals get, said Julie Ask, a wireless analyst at Jupiter Research.

This ignores the fact providers have already rethought about how much they charge for data plans.  Some providers are now compelling subscribers to choose data plans as part of their two year service agreements, while the industry is replete with 5GB usage caps on wireless data services today.  Someone should ask Ask what she thinks is forthcoming that hasn’t already happened.

The FCC’s proposal will take into account the bandwidth limitations faced by wireless carriers, according to people familiar with the plan, and would ask how such rules should apply to current networks.

…which takes the wind out of the sails of the argument Net Neutrality would be ruinous to wireless providers.

The proposals come as the FCC faces a federal appeals court case over its authority to regulate Web traffic. Comcast is fighting an FCC decision last year to ding it for violating the agency’s “net neutrality” principles when it slowed traffic for some subscribers who were downloading big files. Comcast said it didn’t violate any rules because the FCC had never formally adopted any, but it did change how it manages its network.

In reality, Comcast’s speed throttle targeted files small and large, all because they were delivered over a specific network Comcast didn’t like: peer to peer.  That’s a protocol that relies on a group of people obtaining files by sharing pieces already downloaded with one another until the file is complete for everyone.  That involves uploading and downloading file pieces, often over a lengthy period.  Comcast’s network was built with the assumption most customers would download far more than they upload, and peer-to-peer challenged that model with its file sharing methodology.  The surge in upload traffic challenged their network at times, so Comcast decided to throttle the maximum speeds consumers could use while engaged in peer-to-peer file sharing.

Republicans are likely to oppose the FCC’s new proposal — both at the FCC and in Congress — arguing that the FCC is trying to fix problems that don’t exist and that the agency should take a more hands-off approach to the fast-changing industry.

“With only a few isolated instances of complaints alleging net neutrality-like abuses ever having been filed, it is a mistake,” said Randolph May, president of Free State Foundation, a free-market oriented think tank.

It’s difficult to fathom exactly how much more “hands-off” the agency can get with respect to broadband, an unregulated service in the United States.  That “hands-off” policy was responsible for the establishment of de facto monopoly/duopoly broadband service in most American cities, wireless broadband that charges nearly the same price for the same usage capped service, and is tinkering with Internet Overcharging to leverage that market status into higher pricing for all consumers.

May’s argument is akin to calling the fire department only after a fire has consumed half of your home, not when the smoke detector first goes off.

As a result, both the cable companies and phone companies had incentives to create conditions on the Internet — either through pricing or slowing or speeding up certain sites — to favor their own content.

This sentence, buried towards the end of the piece, exemplifies exactly why Net Neutrality is so important.  Let’s put this fire out before it burns out of control.

Mark Cuban, owner of HDNet, maintains a personal blog

Mark Cuban is on another tear this week.  Stop the Cap! reader Michael referred us to the latest.  This time it’s TV Everywhere, the cable industry’s answer to online video they get to own and control.

TV Everywhere is a concept put out by TV distributors that basically says that if you pay for cable or satellite, you should be able to watch the content you want, where you want. Everywhere. To some people this is not a good idea.  As is always the case,  many people think tv programming should be widely available for free on the internet.  Of course the content is never free. Someone has to pay to create it and we purchasers of cable and satellite services pay the subscription fees that pay the content companies and allow them to create all that content. Someone always must pay for free. Its unfortunate that there are some incredibly greedy people who think their entertainment needs should be subsidized. We aren’t talking healthcare, we are talking The Simpsons.  No one in the country has the right for their Simpsons to be subsidized.

I am uncertain why Mark is tilting at windmills here, fighting a battle with arguments that are beside the point.

He should know, as an independent programmer, permitting another cartel for video program distribution online has the potential to place control of that content in the hands of the pay television industry.  Agreements to carry a cable network on a cable system could easily become contingent on participation in TV Everywhere once it becomes more established.  Mark knows all about restrictive carriage agreements.  Some of his networks were trapped in a mini-premium HD tier on Time Warner Cable, despite his wishes to see them a part of the general HD lineup.  Once Time Warner Cable threw his networks off their cable systems nationwide, presumably so would go our online access to it as well.

For consumers, the basic concept of TV Everywhere seems like a positive development, if it brings online video content people want to see without charging them yet another fee on their pay television bill.  Consumers, raise your hand if you have a problem with more online video.

In fact, the loudest concerns about the entire endeavor these days are coming from the content producers and owners themselves.  They are the ones worrying about giving content away.

The Wall Street Journal chronicles the concerns:

While 24 networks are taking part in the Comcast trial, including Time Warner’s Turner cable networks, broadcaster CBS, AMC, BBC America, and Hallmark Channel, Walt Disney Co. (DIS) has so far avoided the “TV Everywhere” experiment because it doesn’t offer the Disney networks enough money in return for allowing their shows to be streamed over the Web.

“A new opportunity to reach consumers is very attractive … [but] we want to do so in a way that delivers proper compensation [to us] for that value,” said Disney Chief Financial Officer Tom Staggs, who spoke at the Goldman Sachs media conference on Tuesday.

That brought out Jeff Bewkes, Time Warner CEO, who scoffed at the demands for compensation.  Bewkes reminded Disney who is paying the bills.

“[The content providers are] not the ones who are going to the effort and expense of making this possible,” he remarked. “The ones that are making this possible are the distributors – the telcos, the satellite companies, the cable companies.”

Second, nobody is arguing that TV programming should be given away “free” online with absolutely no compensation.  The existing online video models are primarily advertiser supported.  The advertisers pay the costs to make the service available, and viewers endure online commercials during each ad break.  Some networks want to cram a ton of ads equaling the number a viewer would see on their television (get ready for more Snuggie and door draft stick on tape ads). Others are more realistic and will place a maximum of 30 seconds of commercials during each break.  Finding the right balance will be important — too many ads and consumers will pirate the content to avoid the ads.  Run smaller amounts and consumers will easily tolerate them.

Third, nobody I am aware of is arguing TV needs to be “subsidized.”  What does that even mean?

Besides the skirmish between content providers and the companies that want to distribute TV Everywhere, the concerns I’ve seen expressed include:

• The concentration and control of online video content through a cable industry-controlled authentication system that is long on generalities and short on specifics regarding how it will operate.  How do non-cable subscribers get “authenticated.”  What procedures are in place to protect the competitive data other providers will have to share with any authentication process?  How about customer privacy?  Is there equity of access to TV Everywhere regardless of the pay television service the consumer subscribes to?
• The credibility of the broadband providers’ argument that their networks are already overcrowded to the point they must “experiment” with usage caps, consumption billing, and other Internet Overcharging schemes.  Apparently their networks aren’t nearly as congested as they would have us believe, considering the fact they are participating in a project to place an even greater load on those networks.
• Mark seems to support content portability, namely the ability for a subscriber to place that content on any device for viewing.  Good luck.  Content producers go bananas over content that can be downloaded and viewed on any device or computer, because such open standards are also open to rampant piracy.

TV Everywhere can be a consumer value-added service for pay television providers, if it’s handled in a consumer friendly way.  The cable industry does not have an excellent track record of keeping their customers in love with them.  My personal concern is that what TV Everywhere gives away for free to “authenticated” subscribers today will tomorrow be packed with advertising, carry an additional fee for access on your cable bill, and will be just one more excuse to try and ram usage caps and consumption billing down the throats of the broadband customers trying to take advantage of their broadband service.

Speedy internet connections have yet to take off in many parts of South Africa because of a shortage in bandwidth.

One leading internet provider says it is not to blame for the slow connection, but frustrations have led one IT group to adopt an unusual method of delivery.

Al Jazeera’s Haru Mutasa reports on the pigeon that beat the internet in Johannesburg.

Service providers across the continent blame the expensive and slow Internet reality for much of Africa on a shortage of connectivity, particularly between Africa and the rest of the world. One African-owned firm, Seacom hopes to change that with the introduction of a new fiber optic cable that went live in July. The new connection enhances service between much of East Africa, including South Africa, Tanzania, Kenya, Uganda and Mozambique. The cable also provides a new path to reach Europe and Asia at speeds superior to what used to be common across Africa.

But while bandwidth may slowly be on the increase, savings are much harder to find. Businesses routinely pay $600 per month for 1Mbps service. But some providers suggest that does represent savings. Satellite service at the same speed is priced at an average of $3,000 per month.

Consumers in South Africa find broadband pricing very high, with most relying on Telkom, the nation’s primary phone company, for DSL service. Usage caps are prevalent across the continent as well, stifling the development of African broadband services and making services like online video all but unaffordable.

Africa's Internet Connectivity

Thanks to Stop the Cap! readers Jeff, Bones, Terry, and a few others who let us know about this story.

Back in the mid-1980s, I first got involved in the fight against the cable television industry’s consumer abuses.  Cable had gotten cocky, and began to use their monopoly position to extract ever-increasing amounts of money from consumers, providing lousy service and engaged in anti-competitive abuse all over the marketplace.  Back then, competition for the overwhelming majority of consumers came from just one place – giant 10-12 foot satellite dishes.  These were the days before Direct Broadcast Satellite providers like Echostar/DISH and DirecTV (and PrimeStar, the cable industry’s own satellite provider that claimed to ‘compete’ with cable) provided competition to cable.

In the mid and late 1980s, your choice was a giant TVRO (TV-Receive-Only) satellite dish in the backyard or you hooked up to cable.  A tiny handful of communities had wireless cable, a service that was supposed to compete with cable but was seriously limited in channel capacity (in many communities, wireless cable ended up providing access to ‘adult’ content that cable wouldn’t carry as their biggest selling point) and quickly faded from view by the mid 1990s.

The abusive practices were all over the place back then:

• Cozy arrangements between cable companies and local governments resulting in outright bans of satellite dishes for aesthetic reasons, using zoning laws either prohibiting their installation or requiring landscaping to hide them from view (to the neighbors and to the satellites they were trying to receive, making them useless), or requiring expensive permit fees;
• A rush to scramble/encode satellite signals and then require consumers to purchase, outright, a costly descrambler from General Instruments called the VideoCipher II for $399 (or have it incorporated within a satellite receiver that typically cost $800-1000 and was available only for purchase), only to be replaced a few years later by the VideoCipher II+ (which consumers were also forced to purchase).
• Cable companies, which had ownership interests in most cable networks (which was nearly a pre-condition for getting your network on cable systems), often had exclusive rights to sell that programming, and frequently provided it “only on cable” or to satellite customers who could not subscribe to cable.  Some networks refused to sell to competitors, including dish owners, at any price.
• Anti competitive pricing was by far the biggest problem.  Prices for programming packages encrypted on satellite were sold to consumer dish owners in small or large bundles at pricing comparable or above what cable subscribers paid, despite the fact all of the costs to provide, install, and service reception equipment were borne by consumers.  No cable TV company overhead, no infrastructure or staffing and support costs, yet satellite dish owners were expected to pay the same high costs that cable subscribers paid, and also purchase their own equipment.  That was quite an investment: a 12 foot dish, satellite reception equipment, decoder, and installation routinely ran well over a thousand dollars, depending on the equipment and installation complexity, and that was before programming costs were factored in.

Rural consumers really got the short end of the cable stick, not able to buy cable even if they wanted to, and forced to spend big money, upfront, just to get satellite TV.

That inspired the consumer groundswell of support for legislation to stop the abuses, which overrode a White House veto by President George H.W. Bush.  Among other things, the Cable Act of 1992 put a stop to exclusive programming contracts which denied competitor access to cable networks.

Without that legislation, there would be no DirecTV or DISH today.

Now the cable industry is back, high-fiving over their victory to have the 30% ownership cap dispensed with, and are now taking on the next provision of the 1992 Cable Act they don’t like — the ban on exclusive programming contracts.

That’s right, it’s Back to the Future as Comcast and Cablevision take their legal business to the same friendly DC Court of Appeals that savaged the 30% cap, now seeking an immediate repeal of the exclusivity ban as well.

Oral arguments start September 22nd.

Most amusing of all is the argument made by Comcast and Cablevision, who claim despite the time and attention they are spending on overturning the law, not to mention the legal expense, the practical effect of an end to exclusivity bans would be… absolutely nothing.

“Widespread withholding is now implausible,” said the attorneys in the filing. “[T]here are proportionally fewer services to withhold. The limited withholding that may still occur will not threaten competition: most vertically integrated services have closely similar substitutes, and, when competitive MVPDs [multichannel video programming distributors] have sunk massive investments, withholding can no longer cause market exit.”

That’s right.  Big cable companies throw money away on attorneys who will presumably fight this case and the inevitable appeals for the next few years for no practical change whatsoever in the current competitive landscape.  The believe people will accept that an industry that had to be forced by regulation to compete on a level playing field will continue to respect that playing field once they plow it up.

Just trust us.  We’re your cable company.  You love us.

So it could be “nothing” as they suggest, or it could be a defensive response to challenges of their business plans from telephone company TV and online video competition.  Would you subscribe to a competitor that didn’t offer the networks you wanted to see because they were “exclusively” available only from the cable company?

Be it usage caps, consumption billing, exclusive contracts, “price protection agreements” that hold customers in place for 12-24 months (or longer), the war to keep consumers from choosing when, where, and how they access content is becoming fully engaged.

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Satellite television in the mid-1980s was highlighted by Granada Television