The Price of Discrimination

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Federal Communications Commissioner Robert McDowell makes an interesting distinction when judging what a cable operator or telephone company does when handling bits of data on its network.

It’s OK to discriminate. This is not the same thing as being “anti-competitive.”

“Discriminatory conduct can be a good thing,” he said in the “Rules of the Game 2008” Webcast conducted this past Wednesday by Multichannel News and Broadcasting & Cable. “In fact, it’s necessary [in order] to run your network. You have to discriminate among bits. Certain bits should get priority over others, just to make the network run properly.”

The comment comes as the FCC probes into whether the nation’s largest cable operator, Comcast, has blocked transmission of large files over its networks by squads of BitTorrent users. Fans of that software use it to share movies and TV shows, most notably, over the Web, by spreading the work over many machines and connections.

Let’s put aside for the moment any question about whether the files being shared are paid for or being swapped freely, in violation of copyrights. Let’s assume it’s all legit.

If you send a lot of data over a network, should you pay more than users that don’t?

That is the question, as more and more video files account for more and more Internet traffic.

By one calculation, such sharing of content between peer computers accounts for 37% of all traffic between users of broadband Internet subscribers in North America, according to Ellacoya Networks.

World Wide Web traffic accounts for 46%. But more than one-third of that traffic is now streaming video. In fact, YouTube alone accounts for 20% of Web traffic.

And, in McDowell’s eyes, there’s nothing unusual about charging more for more usage of a network.

“Historically, the fatter and faster the pipe, the more the network owner has been able to charge for it,” he noted. To use telephone industry classifications, a DS3 line costs more than a T1, a T1 is more expensive than DSL and DSL is more expensive then dialup.

In the postal system, the heavier the letter, the more it costs to move around the network.

But what if charging a fee for a high volume of traffic being sent and received by an individual user itself is not just discriminatory, but anticompetitive?

After all, the two main providers of broadband Internet access are cable operators and telephone companies. And they both now have vested interests in maintaining or building billion-dollar businesses in delivering movies and TV shows for subscription fees and payments per viewing, but not over the Internet. If they’re not getting paid for the video that goes over an Internet connection, they’re fostering competition with the video business they already have or are trying to build.

So now comes Time Warner Cable with its “consumption billing” experiment in Beaumont, Texas. You can pretty much expect heavy users that face extra charges are, in effect, being billed for transferring video files.

Let’s say you get 50 gigabytes for $50. And then variable costing comes in: Each GB after that costs $1, you’re not going to want to spend, in effect, $2 for every standard-def movie (2 GB each) or $4 for each HD movie. You’ll be that much more inclined to keep your viewing on your already-paid TV subscription. Particularly if you actually are paying intellectual property holders at a Net store for the video product. You then pay twice: First, for the movie itself, at, say $5 a whack. Then for the transport of it. The “consumption” tips the scale back toward a cable company or telephone company’s own way of delivering video, if you are a “heavy user” of video, aka a big TV viewer. Charging by the GB, in that lens, can become … anti-competitive.

Cable and telephone network operators can’t afford to carry all their video traffic over their broadband connections. Yet they have built their broadband businesses on all-you-can-eat, flat-fee plans. Now to charge fees for heavy usage could be construed as not just discriminatory, but anti-competitive.

So what’s an FCC commissioner to do?

McDowell — he of the careful distinction — will tread lightly.

“We’ll be inching into probably unnecessary and perhaps harmful economic regulation of these sorts of things if we start capping rates that could be charged or somehow postalizing them,” he said, “and I think we need to be very careful.”

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