Thursday, January 05, 2006

Broadband Futures 2 – The Half & Half scenario

GryffonThe regime governing the next generation of broadband consumer services in the US is up for grabs. Broadband Futures 1 - Who Pays? introduced the players and their motivations. I now turn to how the game might play out. I’ll argue that the most likely outcome is an uneasy mix of proprietary services and traditional Internet access.

I outlined elswhere (Word document, free Word viewer) the pros and cons of four scenarios that span a range of possible futures. To summarize:
  1. “Utility”: Unfettered access to all content over a regulated pipe

  2. “Club Med”: A completely managed experience controlled by the network operator

  3. “Half & Half”: A mixed model where a walled garden and open access Internet co-exist

  4. “Profit Sharing”: Network operator sells Quality of Service interfaces to all comers

The most likely outcome: Half & Half

In the Half & Half scenario, a network operator’s bandwidth is split between “proprietary” services, and “open access Internet” that is more or less strictly regulated by the FCC.

The proprietary side will offer a bundle of entertainment and Internet services with premium performance. For example, the response time on the on-line games offered on the proprietary side will be better than those obtainable on the “open Internet” side. The bundle will probably include multi-channel video, telephony, and on-line games.

The Internet side will be sold as a series of quality tiers; customers will have to pay more if they want better performance. A key question will be whether there will be tiers that would allow 3rd party providers to compete with proprietary offerings, eg in offering a multi-channel video service that competes with the netop’s. Tiers can be constructed to minimize competition, by making the network capabilities required for competitive offers unavailable or expensive; they include caps on throughput speed (to limit streaming TV offers), latency (telephony), and monthly down/upload bandwidth (P2P video services).

It is unlikely that customers will be able to buy “naked” Internet without buying proprietary service. With sufficient legislative pressure there may be forced unbundling, but the naked internet that customers might get will be pretty lousy, e.g. 1 Mbps max throughput, 2 GB/month maximum upload/download, no guarantees that voice or video streams will not be interrupted. In other words: you’ll be able to browse Wikipedia OK, but media intensive sites will be slow, you won’t get decent video streams, Internet telephony won’t work, and you won’t be able to participate in (legal) media file sharing.


Even if suitable tiers offered, the netop could make them so expensive that 3rd party services wouldn’t be competitive with the proprietary offer; for example, the proprietary bundle, which includes video, could cost $50/month and include video, whereas the tier that could support 3rd party video streaming might cost the consumer $47, leaving the 3rd party video provider with at most a $3 revenue opportunity.

Regulation to manage competition between the netops and 3rd parties would be clumsy at best; it will inevitably devolve to price control. If the government specifices but doesn’t set prices for specific tiers of service, a netop could price the relevant tier so high that services offered over it wouldn’t be competitive with their proprietary offer.

Some content will be more equal than others on “Open Internet” side. Customers will be able to access all content on the net, but providers will be able to buy better performance. Customers will be un aware of this activity. They might notice, for example, that Fox News video streams may be interrupted less than CNN’s, or Sony on-line games may have lower latency than X-Box – but they won’t know that it’s because Fox and Sony have struck a side deal with their netop. There may also be “tier hopping”: Real Networks could pay BellSouth a premium to ensure that a Rhapsody media stream gets Platinum Tier treatment even though a customer has only paid for Silver Tier network performance.

Striking deals

This situation will motivate app/content companies like Fox and Sony to strike alliances with netops like BellSouth. It will be tough to get nationwide deals, though. While there is a local duopoly in broadband access (at most one cable company and one telephone company for a given household), there are more players nationally. No netop has a nationwide footprint. In each market there will be (at least) three content players trying to get exclusives with (at most) two network operators, and nobody will be able to sign one deal to cover the entire country.

It’s therefore unlikely that any content player will be able to lock up all markets. This may lead the big content players to try to strike a national deal with the netops – the subject of a forthcoming post.