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| Economics of Collecting by Receiving Carrier: Costs of Internet Go Up (Draft 0.5) |
| Friday, 03 December 2010 09:38 |
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Comcast, AT&T, Verizon and similar have "market power" because of a "terminating monopoly." That allows them to charge far more than a market would to terminate traffic. Comcast and AT&T each have close to a quarter of the U.S. Internet users. As a practical matter, Level 3 discovered they have to pay virtually whatever Comcast asks. They would be out of business if cut off from such a large part of the market.
Setting charges where competition is weak (termination) is less efficient, economically, than where the market is strong. The backbone side, carrying video and other traffic, is reasonably competitive. Half a dozen large companies (Level 3, AT&T, Verizon/MCI, Global Crossing, NTT, Sprint) offer service. That's consistently driven prices down as Moore's Law has reduced the cost of providing the service.
Streaming video as an alternative to TV services failed miserably around 2001 because the price to carry a movie was measured in dollars. Only the highest price content viable. By 2007-8, the price was down to dimes. YouTube and Daily Motion became viable businesses, although still only a fraction of the screen or low quality. In 2010, the price is in pennies. HD television at a low price (Netflix) or advertiser-supported (Hulu) is viable. Compression today is 4-5 times more effective than in 2001, a related improvement.
The best encoded films from Netflix, such as The Tudors, actually look great on Jennie's 50 inch TV. She's connected via DSL at 3 megabits. Verizon's DSL is rock-solid but that limits the streaming rate to 2.5 megabits or so. Live football with lots of motion might require 5-6 megabits for near-perfect HD with today's codecs, but most HD actually watched on U.S. satellite or cable is live encoded to less than that. Pre-encoding in two passes reduces the necessary bandwidth even further, meaning video on demand does not require the same bit-rate as live TV.
Europe is leading the way on reducing terminating charges on mobile phone calls and is finding consumers save money. Consumers can buy minutes and SIM cards from many sources, keeping prices down. Carriers, who would prefer higher charges, are fiercely resisting giving up the right to charge where they have market power.
Only the carrier shareholders benefit by setting the charge at termination. That's why it's accurate to speak of "toll booths on the Internet."
How much is the actual cost difference? For now, significantly less than the rhetoric suggests. Comcast refuses to release the prices they want to charge, but I'm convinced even heavy web video users wouldn't be affected by more than a few dollars. Few would see more than $1 or $2/month in added cost for content. Carriers have incentive to enormously raise these rates to protect their own video offerings, so I fear this could go up significantly and become a major barrier to video or anything else that requires bandwidth.
Isn't this irrelevant because consumers would just switch to another provider? In the U.S., absolutely not. 95+% of broadband customers belong to the local cableco or telco. The duopoly tends to collaborate and both are likely to charge for termination unless government steps in. The argument is more plausible in Britain or France, with four choices for most consumers. Yochi Benkler of Harvard points to that as why European regulators want to go slow on neutrality for now, which I've also heard directly from Ed Richard of Britain's OFCOM. My guess is the terminating monopoly problem is still strong enough to be a problem. In Britain, the carriers are clearly trying to unify and all impose charges on the BBC and other video providers.
Terminating monopoly? What's that? Time Warner Cable, my carrier, has an effective monopoly if you want to deliver video to me. Verizon has an effective monopoly if you want to deliver to Jennie. This becomes crucial if a carrier has enough customers to make ignoring their customers impractical. That's certainly true for AT&T or Comcast (nearly 25%) as well as Verizon and Time Warner (~15%.) Broadband customers in the U.S. tend to be very sticky, typically switching carriers less than once in five years. That makes the terminating monopolies a persistent feature.
Doesn't "two-sided" market theory come to the opposite conclusion? Perhaps on Mars, but not in the broadband networks in any country on Earth, especially not in the United States. With strong competition, carriers would be forced to pass on much of the charge in benefits to consumers. But with weak competition, especially the U.S. duopoly, the benefits go to the shareholders. Because of economies of scale, four or fewer companies are 90% of the market almost everywhere. My observation is that it takes more than four companies for the strong competition to make two-sided markets play out that way.
What about competitive neutrality? Raising the cost of video over the net is not neutral. It gives a huge advantage to the carrier's own video. |