Use It vs. Lose It:  The Threat of Internet Rationing

AT&T's announcement that it would start to throttle the "heaviest users" on its wireless network is only the latest in a series of developments that place the idea of a thriving, useful Internet at risk.

No one knows why rationing schemes like data caps are triggered, what they are supposed to do, much less if they are successful.  Serious doubts have been raised whether caps are necessary at all to manage networks or to cover costs from increased Internet use.  But consumers who wants to use the Internet more are the ones who will suffer.

Some institutions, like the New York Times editorial page, the news pages of the Washington Post, and Canadian regulators, are paying attention.  Some institutions, like the Federal Communications Commission (FCC), are not.

Over the couple of weeks, the stories have swirled around each other, two seemingly unrelated threads which in reality more in common than might appear obvious.

Let's call the first thread the "use it" thread.  These are new deals that are being announced seemingly every day.  Amazon, for example, is expanding its streaming business in a challenge to Netflix, signing deals with NBC and CBS to add thousands of new shows to its catalog.  Netflix, by splitting its DVD business from the video streaming, is emphasizing the online part of its offerings.  The Sundance Institute, which produces the famous film fest and has its own channel, signed a deal to expand its streaming universe to include Amazon, iTunes, Netflix and other outlets.

Wireless companies are aggressively advertising devices new tablets to watch video at high speeds and programmers like HBO are pushing customers to watch their TV not only on a traditional TV but also on tablet devices from any number of manufacturers.

The idea that a customer can watch a show at any time on any device is gaining acceptance (even as Hulu is mired in self-immolation through the intransigence of its owners about who can watch what when.)

Meanwhile, Amazon, Google and other companies earlier this year started "cloud" storage services to compete with existing companies like Dropbox, Sugarsync, Mozy or Carbonite, among others.  There are consumer versions and corporate versions, but the idea is the same -- instead of keeping information locally on servers, data is kept remotely and can be retrieved from anywhere via the Web.  This is developing into a good business for many companies.

On the other hand, there is the second thread, which we'll call the "lose it" thread.  These are the counterpoint to the first. The "use it" group is filled with a vibrant, diverse group of companies, large and small, that are fulfilling their entrepreneurial visions in creating new businesses and new opportunities.

The "lose it" crowd couldn't be more different, consisting of some of the largest companies in the world, which offer, and control, the means by which all of those other services can be offered and the means by which they can be choked off and have their futures put in jeopardy.  AT&T, Verizon and Comcast are already imposing rationing on their Internet services, a combination of caps and "throttling" for those who "use" more bandwidth than they are supposed to be using as calculated by some magic formula.

One group creates new businesses and opportunities; the other has the potential to choke them off. The other has the potential to choke them off and to make sure charges for consumers who use all those new devices to watch movies or TV or play games will go through the roof.

The prime example of the stifling affect of these policies is Andre Vrignaud, a Seattle gaming consultant who was kicked off of Comcast's Internet system because he exceeded his "usage" not by downloading music or videos, but by uploading material to a remote storage service.  He broke the 250 GB limit, which Comcast set in 2008 and hasn't changed even as the capacity of the Internet service has been upgraded.  It's no wonder he raised serious questions about the rationing.

Yet while he is the first, he is surely not the last person who will run afoul of the telecom giants. All of that video is going to count and all of that streaming that flows to those tablets is going to count.  Throttling and caps are the easy way out.  As Sen. Al Franken (D-MN) noted in his letter to the Justice Department and the Federal Communications Commission (FCC) opposing AT&T's takeover of T-Mobile, AT&T should have recognized the demand that would accompany the iPhone, but did not.  It should have increased its investments, but did not.

Canadian regulators, to their discredit, allowed what they call Usage Based Billing (UBB), despite the strident protest over the practice.  To their credit, however, they also are re-examining the issue, and the comments submitted in the docket, particularly some studies put into the record by Netflix, are the closest example we have to a formal examination of an issue fraught with uncertainties.  Veteran network engineer Bill St. Arnaud, in a paper, "Myths and Fallacies about Usage Based Billing," goes a long way to exploding the concepts that throttling or caps are even needed at all.  They certainly are not needed because the transfers of data cost too much, he wrote:  "So even though video streaming or other applications may increase the volume of traffic it has little or zero impact on the cost of operating the network."  In fact, he said the costs work out to about 30 cents for an extra  gigabyte (GB) for DSL and 10 cents for cable, both significantly less than what telcos and cable companies charge.

He noted that network architecture has worked to lower costs through the use of new content delivery networks, which handle much of the transport of streaming video and other products and take the burden from the telephone and cable companies. 

St. Arnaud also raised the specter of anticompetitive behavior, noting that cable and telephone companies operate competing video streaming services over the same last mile, yet their usage is not based on price and they "somehow seem able to avoid congestion as well as provide the service for a fraction of a price of what they charge for the delivery of the same video content delivered over the Internet."

University of Ottawa Law Professor Michael Geist found a similar angle to Internet rationing-- it can be a profit center.  He noted that Bell Canada argued that while the rationing program affects only a small percentage of subscribers, "it is the primary driver of increased revenue from its Internet access services division." 

Geist also found the costs to supply the data above the cap far exceed what consumers are charged.  A "high estimate" is 8 cents per FB, yet overage charges run as high as $10 per GB.  As a result, Geist said, Canadian Internet rationing "bears little relation to actual cost" but is a function of the lack of a competitive market."  He noted as well that major companies in Canada have admitted that their UBB, "is at best only loosely related to network congestion."

As Geist and others have said, it's pretty much a "black box" when it comes to figuring out network costs.  Internet providers won't disclose their costs voluntarily, and in this country the FCC has so far shown no inclination to investigate the issue, despite a couple of requests from Public Knowledge and others.

The Times editorial about caps on July 22 was right on point: "Caps must not impede development of broadband."  Absent a competitive market and absent any regulatory examination, that's exactly what could happen.












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