Friday, 7 March 2014

NetFlix deal with Comcast; a monumental disaster for the nascent digital economy




Not the right time!

NetFlix announced a ‘paid peering’ deal with Comcast last month.  This which will see Netflix pay Comcast for better access to its customers is seen as a knock-out blow for Net Neutrality.  In peering, large providers normally exchange data among themselves, no fees paid.  It could mean costs going up for consumers.  It will make it harder for the innovative internet start-ups. 

It began with the courts finally (previous attempts by the carriers failed) handling Sprint a victory to strike down Net Neutrality in the US.  Before this ruling, ISPs are obliged to deliver content equally among all content providers.  With this ruling, the broadband providers can speed up delivery of specific content when a content provider pays them extra.  This is what happened with the Netflix-Comcast deal.  Remember, previously this payment cannot even be made because all content providers had to be treated equally by law.  Now, what happens when say a video streaming startup (typically cash-strapped as with most start-ups) can’t afford to pay Comcast extra?  However good their service is, they are handicapped at the starting block because their content is delivered slower than Netflix.  More likely than not, they will fold. One implication is that the ruling favours the largest companies.

There are two issues here, the Netflix-Comcast deal and the ruling against Net Neutrality.

With Net neutrality, all data on the internet are to be treated equally.   Internet service providers cannot discriminate or charge differently by user, content, service or site.   They cannot charge a different rate to carry different content.  They cannot discriminate against certain services or content by prioritizing or impeding access to any particular site or application through blocking or slowing bandwidth.  They cannot advantage a paying content provider to deliver their content faster.  They cannot block content (except banned content) from any content provider.  It is to prevent unfair discrimination by the ISPs.  It is the preservation of an open internet, important for the ecosystem with the argument that this approach is the reason for the free flow of ideas and inventions and by association good for the economy.

The whole issue boils down to FCC’s not treating internet service as a utility like telephone services and therefore not classifying broadband providers as a telecommunications service.  Which of course it is, the ISP is the future telco!!  This lead to the ruling against Net Neutrality quickly followed by the Netflix-Comcast deal. This article “THE WRONG WORDS: HOW THE FCC LOST NET NEUTRALITY AND COULD KILL THE INTERNET” explains it well.  See http://www.theverge.com/2014/1/15/5311948/net-neutrality-and-the-death-of-the-internet. The Federal Communications Commissioner (FCC) is the US telecommunications regulator.

This reminds me of the 2008 financial crash, a failure of regulation.  Businesses will do what it takes to maximise profits and with a regulated industry, it is the government’s job to prevent what eventually could be granting of excessive powers that takes years to unravel.  It is now widely acknowledged that the US government failed to do this with the financial industry leading to 2008.  I hope they realise the gravity of Net Neutrality and do something to correct the recent court ruling.  This and the Netflix-Comcast deal is a massive blow to the emerging digital economy.  It will hamper this still nascent industry.  Regulations should protect these mostly minnows but instead chose to side with the giants.  To me, they endorsed giving more power to the already powerful! 

The problem is that there is currently no true free market in the ISP industry (although it is liberalised), if there was, Net Neutrality wouldn’t be needed.  And revenue of the dominant broadband providers (mostly the incumbent telcos in Asia) continues to rise.  It is not even falling.  They do not need to be further advantaged.  Worst, telcos in the past only played a secondary role in the economy as enabler for communications, but now they have a direct impact on an economy that’s increasingly digital ie. impact is now primary and much greater.  I wonder if the powers that be realise this.  The large carriers ought not to be allowed to strangle it for their own sake.

The rest of the world tends to follow the US’ lead in such matters so it has a global impact.  In Malaysia, Net Neutrality is law but we need to watch the space.  The Netflix-Comcast deal may embolden the telcos to attempt the same.

For the sake of the internet industry, I hope there would be a response.  And just yesterday news broke that the merger of Time Warner Cable with Comcast will go through an antitrust investigation.  A good start but the Net Neutrality ruling needs to be re-instated.