Tom Nolle
Tom Nolle is the president and founder of CIMI Corporation and the principal consultant/analyst. Tom started his career as a...
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Tom Nolle | April 24, 2014 |


Netflix, Aereo, and the Future of the Internet

Netflix, Aereo, and the Future of the Internet Everyone in the ecosystem must be able to earn a fair profit from their contribution--otherwise the food chain is broken...and so is the Internet.

Everyone in the ecosystem must be able to earn a fair profit from their contribution--otherwise the food chain is broken...and so is the Internet.

Underneath the technology shifts that the Internet has created are a series of business shifts perhaps even more profound. In networking, when business and technology issues collide, it's often regulations and the courts that cast the defining vote, so it's fair to say that the future of the Internet may depend on legal wrangling created by OTT (over-the-top) content in general, and Netflix in particular.

The Netflix issue is the broader one because it potentially impacts all Internet traffic. There's general consensus among regulators globally that ISPs can't interfere with "lawful traffic", particularly to hinder services that might compete with the ISPs' own.

This narrow but almost universal principle of "net neutrality" was expanded by the FCC under its previous Chairman, Julius Genachowski, to include a strong presumption that any Internet model of service settlement that allowed a content provider to pay for expedited handling is "non-neutral". When the DC Court of Appeals overturned the Net Neutrality Order, Comcast indicated it wanted to get settlement from OTT providers like Netflix to provide not just premium handling but also "carriage" of the traffic. Netflix says this makes the Internet into a "toll road".

Neither Netflix nor Comcast are villains here, just opportunists. Netflix knows that if they have to pay for delivery of their movies they'll lose some customers, and Comcast knows that if video for a portion of their customers forces infrastructure upgrades, every customer will end up paying.

The fact is that cable broadband in particular is vulnerable to congestion created by video because of the shared nature of cable infrastructure, and the fact is also that we have many companies who have launched under the presumption that the Internet is a "pay-to-attach-then-send-what-you-like" proposition. There's no way out of the face-off that's truly fair to either party, or to customers or shareholders.

The irony here is that the current model hurts "the Internet". Lack of settlement among ISPs means there's no way to compensate anyone for carrying premium traffic, so we have a pure best-efforts service. Instead we've thrown money into storing content locally in CDNs (content delivery networks), bypassing everyone but the access ISPs who have complained about the lack of settlement. Netflix pays those guys now; would it be better if they paid for real-time transport of videos from anywhere on the Internet, without local storage? It could make content more populist, for sure.

In the case of Aereo, a TV streaming service, we have an additional issue, one that the Supreme Court is actually focusing on at the moment. The issue is the rights of a content source (in this case, the broadcast TV channels and networks) to the reuse of material they've broadcast. Nobody questions that there's a copyright here, they just question whether Aereo infringes by letting users pay for itty bitty antennas to collect content they can get over the air, then sending that content over the Internet to the user for time-shifted viewing.

Aereo might be a sideshow but for the fact that the way the Court decides the case could have an impact on "the cloud", something that Justices have already noted in their questions to both sides. If storage and delivery of copyrighted material is illegal, then does every cloud media service create a violation, including cloud storage of music and video? Perhaps. But if you are able to argue that broadcast material can be reused in a totally different way than the owner intends without further compensation, could we see the end to over-the-air TV, or perhaps see Aereo expand into providing cable services the same way?

What's really behind these issues is the financial industry, both hedge funds and VCs. The way to make money on stock is to exploit what's called beta, or change. A stock that doesn't move is hard to earn money with. On the VC side, the goal is to find something you can start for next to nothing and sell for a fortune. Both these profit strategies work best when what we call "The Internet" consists of a combination of hard-pressed telcos and cablecos and TV channels/networks at the bottom, feeding a community of startups that are built on exploiting something they don't have to pay for (whether that's right or not).

And of course we're all to blame, personally. A healthy ecosystem isn't created by a model where a bunch of predators eat all the prey, then each other. Ad sponsorship can build a social network or content provider, but not global network infrastructure (the global ad spend in total isn't as much as a single quarter's revenue of a single big Tier One carrier). Somebody has to pay for something, and of course in the long run everyone has to pay a fair share.

The problem with the old FCC order, and the problem with an Aereo decision that makes "content" the next all-you-can-eat-any-way-you-want, is that fairness isn't natural. Everyone wants their own position preferenced, and that only works if markets can hammer out a survivable accommodation, a goal that regulations and the courts are likely to inhibit as often as help.

The FCC, the financial industry, and consumers all have to grow up a little here, and accept a market model where everyone in an ecosystem can earn a fair profit from their contribution. Otherwise they don't contribute, and the food chain is broken...and so is the Internet.

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