John Sununu and Harold Ford (and the Large MVPD/Broadband Providers) Would Like You to Know Netflix is Unfair to All Americans. Really?
Bill Niemeyer, Senior Analyst
This week in the San Jose Mercury News, former U.S. Senator John Sununu and former U.S. Congressperson Harold Ford wrote (or at least bylined) an editorial titled "Subsidizing Netflix." Mr. Sununu and Mr. Ford are the honorary co-chairmen of "Broadband For America," an organization whose members include the eight largest cable and telco IPTV operators, who also provide the high-speed Internet for about 80% of U.S. broadband households.
The primary theme of the editorial is that Netflix wants a "free ride" on networks that have cost "more than $250 billion" to build and maintain. According to Sununu and Ford, it “…hardly seems fair to make users of these services pay more in order to subsidize Netflix's costs of delivering their videos online."
The call to action of the editorial? Regulatory support for "…a fairer pricing model and a more realistic long-term investment strategy." While not specified in the piece, this likely includes a walk-back on network neutrality, allowing broadband operators to charge content providers for network access, as well as supporting operators in their efforts to charge subscribers overage fees for higher consumption.
Unfortunately, Mr. Sununu and Mr. Ford use a variety of questionable points in support of this call to action. That "hardly seems fair."
First, some background on Broadband For America. BFA is a self-described "growing coalition of over 300 members ranging from independent consumer advocacy groups, to content and application providers, to the companies which build and maintain the Internet." Its members include eight of the top 10 Multichannel Video Program Distributors (with the exception of DIRECTV and DISH) including Comcast, Time Warner Cable, AT&T, and Verizon. In all, the top 10 MVPDs who are BFA members also provide the high-speed Internet service in about 80% of U.S. broadband households. (Interestingly, while I noted the presence of quite a few major broadband/cable vendors, other than Comcast I did not find any content providers I recognized.)
As to Netflix's "free ride," I'm confident that its CFO does not regard current payments to CDNs for bandwidth use as free or even small. Netflix spends a great deal of money with CDNs to deliver its content to the networks of the major broadband providers. (Interestingly, I did not find a single major CDN listed as a member of BFA.)
Of course, Netflix is paying very low streaming rates as it is a very large consumer of CDN bandwidth. But that's a normal aspect of a free market setting prices. The capital spent by the CDNs and Internet backbone providers (likely part of $250 billion cited) is not a direct pricing consideration in a supply/demand driven market. However, capital expenditures are used to set prices in the regulated private utility model. Are Mr. Sununu and Mr. Ford in favor of broadband service becoming a regulated utility? I suspect not.
It seems the two are under the impression that Netflix subscribers are unusual in their predilection for watching video on broadband. Nothing could be further from the truth. TDG's consumer research shows that almost 80% of Internet users watch online video, hardly a niche activity that is burdening the majority with costs generated by a few. It is a mainstream activity of the many that has become one of the primary motivations for purchasing broadband in the first place.
One line in the editorial particularly got my attention. "But many increasingly question a service that forces tens of millions of non-customers to pay for something they never use."
It's ironic that Mr. Sununu is on the Board of Directors at Time Warner Cable, because a very prominent example of millions paying for something they never use is cable TV's ESPN. ESPN, via a strong negotiating position and tightly constructed contracts, is in effectively every U.S. MVPD household. At a conservatively estimated carriage fee of $4.50 per month per subscriber (the highest of all networks) and 101 million MVPD households (according to the NCTA), ESPN is receiving $5.5 billion a year in fees.
ESPN is certainly a popular network, but even if only 20% of MVPD households never watch it, that's at least $1 billion a year being added to consumer cable bills "for something they never use." In that spirit, will Mr. Sununu be bringing forward a motion at the next TWC board meeting to make ESPN an a la carte service? I suspect not.
Without doubt, for both consumers and content providers the issue of fair pricing for broadband delivery is important. As are how pay TV services set their channel bundles and the impact they have on consumers, networks, and operators. But singling out Netflix as the poster child for placing an unfair burden on consumers doesn't stand up to scrutiny, especially since this charge is being leveled by an organization whose funding is more than likely dominated by the top broadband/multichannel TV providers.
Netflix and other over-the-top (OTT) video services are competing with these same broadband provider MVPDs and the TV networks they carry for consumer viewing and subscription dollars. Therefore, Congress and the FCC need to tread very carefully in considering how regulations may negatively impact OTT, and to the benefit of the TV incumbents. What is "fair" is a playing field as level as possible so consumer choice can have the greatest impact regarding competition between incumbent companies and new entrants.
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