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Have some sympathy for the AT&T devil

Oh boo, cellular operators are hurting. Nobody hurts operators better than us

By Faultline, 25 Nov 2016

Analysis When the first fixed-line phone systems were installed, you paid for everything, but particularly for each minute of each call.

Later they had broadband added to the copper and a flat rate began to become the order of the day. As phone calls went to IP, the same applied to calls for the most part. While there are upper limits or caps on broadband data, they are now pretty hard caps to reach and require constant downloading of high quality premium video.

It is likely that in the fullness of time, the same progression happens to cellular data. In essence, we paid for calls, now we have unlimited calls, same for texts, then we paid for data, and then have a specified amount of data, and then have it capped, initially at a low level, but later at something above what most people could possibly use.

We are not there yet, but in the context of that progression, it may well be that AT&T and all cellular operators who wish to have zero rating on video products, might have a point. But only when they offer ridiculously high caps or unlimited data. Perhaps instead of treating them as the devil in this net neutrality equation, we should listen to their point with sympathy, especially in a Trump-run US.

And what is that point exactly? Well, service pricing for OTT video is pretty much well defined (in the US) by a competitive OTT content marketplace at around the $10 a month for an SVoD service, $20 for a small bundle of TV channels + SVoD, and $35 rising later to perhaps $50 for a full bouquet. Some level of advertising can represent a discount to these pricing levels, but that’s not widely established yet and when it comes it may start out as just a few dollars a month.

At full data prices, the cost of streaming a few hours a day of TV would still be prohibitive over cellular, because the data caps are too low and the punitive overage pricing of cellular data, too frightening. Most consumers would never use cellular data to watch video on a phone or tablet without zero rating. So from an operator’s point of view, it either gets the consumer to pay for cellular data, at the currently prohibitive rate, or it gets them to pay for video, but not both – it seems reasonable from their point of view – and if everyone was doing it, it might be reasonable.

But where does that leave companies like Netflix? Well a comment from AT&T’s Bob Quinn, senior executive VP of external and legislative affairs in a letter [PDF] to the FCC, debating the current regime’s “concern” over AT&T’s zero rating, claims that the internal charge to DirecTV is effectively the same as AT&T’s sponsored data program – so Netflix can pay the same as DirecTV is paying and get its data sponsored too.

This is pretty confusing stuff, because what Quinn is really saying is that “Right now, we are adhering to net neutrality principles as we see them,” by equating the internal cross-charges to DirecTV to some notional price list for paying for data for other customers.

That’s all well and fine, but this is the process by which you create monopolies – give them an advantage in a market where they are not dominant, where that advantage is based on a technology where they are dominant – and then accrue customers so rapidly that before you know it, they are a new monopoly and you have to regulate them on antitrust grounds.

But this is what Republicans, specifically the new Republicans whom President elect Donald Trump is planning to put in charge of telecoms regulation - Jeffrey Eisenach and Mark Jamison – are recommending, almost no regulation, and clean up after, once monopolies form.

It would not be a problem and it would be in keeping with Republican dogma, but this would come from an administration which came to power on the back statements about not putting too much power into a single company’s hands, and also on the back of promises to stop political lobbying – this would look too much like the AT&T lobby has got the next generation of politicians in its pockets, if it continues to be played as a favorite, as it has been in all previous Republican regimes.

It’s got to the point where telcos are loved by Republicans and Cablecos are loved by democrats – but essentially they are just two technical approaches to achieving the same thing and they should be treated the same.

But of course, if Title II is abandoned for the internet and no net neutrality regulations are put in place to replace it, pretty soon there would be a need for monopoly rules to come into play. This is because no one really knows what AT&T will charge DirecTV internally for free data, and there is no way of checking if this deviates with what the external world is charged – making for a very non-level playing field – on the back of the telco lobby.

We don’t mean this as a criticism of Donald Trump – more it is an interesting test of how he goes about solving a myriad of conundrums of this type – will he take the view that preventing the drift to monopoly is a good idea, however it is achieved, or take his lieutenants’ view, which is that that he can deal with monopolies after they have formed.

They come to this view believing that no one can see what the outcome of “intervention” is and that until something is palpably broken, you should not meddle with it, no matter how well intentioned you are.

History tells us that this “inaction” results in more monopolies, which create circumstances which are not good for consumers. And they perpetuate themselves through lobbying – but we’re not going to have that going forward, are we?

It depends on your point of view, should America be made great again for AT&T, or should it be made great again for Americans. It may be possible to do both, but it’s not obvious how and anyway one must take priority and the lead. We will be interested to see which way around this all ends up.

Another thing Quinn said this week was that “AT&T will see escalating usage on its mobile network, where video already accounts for a clear majority of traffic. AT&T will need to respond to those new usage demands by making capital-intensive investments…” Did he forget that AT&T has openly said that it will reduce capex over the next 3 to 4 years, helped by the relatively cheap introduction of its Network Functions Virtualization (NFV) program. So will capex rise or fall? He should check before making such claims.

But as we said, all of this is only to be seen as temporary, precisely for the reasons we first noted – post 5G data will be as cheap on cellular as it is in a fixed network – and T-Mobile US has already obviated much of what it has done in video, with moves such as Binge-On, by coming out with a truly uncapped service, T-Mobile One, which doesn’t just offer zero rating for video, but for everything.

Some commentators have suggested that this means Binge-On is dead, but they should again read through the detail – Binge-On triggers any Wi-Fi service which the user has credentials for, in preference to cellular, with the decision taken by a policy manager in the device, not by the user. This essentially cuts down the amount of video you are going to use, to around 30 per cent of what is usual, because of the amount of time you are in reach of home or work Wi-Fi.

In essence, T-Mobile US has used technology to make its position cheaper, the same as AT&T will use NFV to make its data delivery cheaper, although that will emerge in volume much later.

Then we move to a new world order where an OTT service to a carrier like AT&T can either be captive or it can be like a TV channel is today to an MVPD. AT&T will get paid more for it by the consumer that it costs it, as long as its network carries it. And that isolates and insulates it from losing out. The only issue is whether or not that creates a win-win with the likes of Netflix – making it worthwhile to have AT&T sell its services for it, and pay the sponsored usage charges from the remainder and still make money.

If AT&T cannot attract the like of Netflix for such a service, then it will have extinguished the potential for Netflix and similar OTT companies to thrive, and stolen OTT video (potentially) as a monopoly, and it has such market weight in cellular that this would distort the entire OTT video market in the US, harming it irreparably.

Sure, the US Justice Department or the Federal Trade Commission or even a Republican FCC may then step in to change the rules, but by then the goose – in this case Netflix, will have either been killed or changed so radically that all the benefits of OTT will be forever denied to the US consumer. The rest of the world will however have them.

Copyright © 2016, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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