The U.S. Department of Justice has opened a “wide-ranging” investigation into whether cable, satellite and telecom providers are stifling fast-growing internet video services like Netflix, according to multiple reports. The probe carries echoes of recent battles over so-called “network neutrality,” the idea that broadband providers shouldn’t discriminate against rival services.
Netflix, in particular, has complained that Comcast’s use of “data-caps” — monthly limits on bandwidth usage — favors Comcast’s Xfinity streaming service, which the cable giant excludes from the caps. Broadly speaking, the Justice Department inquiry illustrates the challenges facing regulators monitoring industries being disrupted by the rapid proliferation of broadband service, which has enabled Internet upstarts to challenge traditional distribution models, most notably cable television.
For cable giants like Comcast and Time Warner Cable, the federal probe, first reported by The Wall Street Journal, exposes a fundamental dilemma inherent in the services they provide. On the one hand the cable giants deliver entertainment programming — broadcast TV, premium movie channels, and on-demand options — through traditional cable subscriptions. On the other hand, they offer broadband Internet service to consumers through so-called “triple-play” packages. This presents a conundrum for the cable giants: Through their broadband service, they’re facilitating Internet-based entertainment options like Netflix, Hulu and Amazon that could compete directly with their own traditional cable TV offerings.
This has led to cable industry fears of so-called “cord cutting,” in which consumers eschew traditional cable altogether in favor of Internet-based options. Although cord-cutting has thus far not eaten into cable subscriptions, which remain strong, the threat of competition from Internet upstarts is a concern for the industry. Clearly, the cable giants are not thrilled at the prospect that the networks they’ve spent billions building out for pay-TV will become the delivery systems for rival services. (The Dept. of Justice is also reportedly probing whether broadband giants have signed so-called “most-favored nation” contracts for programming on better terms than those available to Internet video services.)
The new federal inquiry is looking at a “data-cap” policy trial Comcast recently announced, according to The Journal, in which the company said it would begin charging customers $10 for every 50 gigabytes used over a 300-gigabyte limit. Comcast and other cable giants say they need the data-caps to prevent so-called “bandwidth hogs” from slowing down service for everyone else. The vast majority of users will never hit the cap: A consumer would have to stream 1o hours of Netflix programming every day for a month to reach it, according to one estimate. But what sparked controversy was Comcast’s decision not to apply the cap to its Xfinity video service, when used on a Microsoft Xbox game console. That prompted criticism from Netflix CEO Reed Hastings that Comcast is effectively using its power as a broadband distribution system against Netflix, while giving its own service Xfinity a free pass on data caps, thus making it more attractive.
Comcast says the difference is that Xfinity is part of the customer’s traditional cable service, sent through the company’s “managed network,” with the Xbox functioning as another cable box. But that didn’t calm the ire of Hastings, who complained the policy violates a “non-discrimination” pledge Comcast made in order to help win Justice Dept. approval for its purchase of NBC Universal. Citing people familiar with the probe, The Journal reported that federal regulators are looking at whether Comcast’s data-cap violated a pledge it made that it would not “unreasonably discriminate” against other Internet content companies. In a note to clients Wednesday, Bernstein Research media analyst Craig Moffett wrote that it is “reasonable to assume that Netflix is a principal mover of the DOJ probe.”
The federal inquiry echoes the multi-year battle waged between Comcast, the Federal Communications Commission, interest groups, and internet video start-ups over network neutrality. After years of legal and political jousting, the FCC finally delivered its Open Internet rules (pdf) in September of 2011, which stated, among other things, that broadband providers “may not unreasonably discriminate in transmitting lawful network traffic.” Netflix has ramped up its net neutrality lobbying in recent months, perhaps hoping to get the FCC to open an investigation, but that agency has so far declined. From Comcast’s perspective, this isn’t about net neutrality at all, because it doesn’t deliver Xfinity over the Internet, it says, but rather as part of cable service.
Traditional network neutrality advocates praised news of the federal probe. “This Justice Department investigation is great news for consumers and cable’s competitors alike,” Matt Wood, policy director at D.C.-based digital rights group Free Press, said in a statement. “For too long, cable operators have used their dominant positions in both the television and Internet service provider markets to kill off innovation, cut off customer choice and keep prices high.”
But Moffett, in a note entitled “Be Careful What You Wish For,” warned of unintended consequences, suggesting that the investigation could end up harming online video companies. “Perhaps counter-intuitively, we would expect the investigation to accelerate the industry’s shift to usage based pricing for broadband, and perhaps precipitously so,” he wrote. “Secondarily, the proceeding is likely to slow the pace of innovation and reinforce the closed nature of the cable infrastructure, reducing the opportunity for outsiders – say, Apple or Google, for example – to get access to cable video feeds. Both would be bad news for online video providers.” Moffett also noted that the FCC Open Internet order contained an “explicit endorsement of Usage Based Pricing.”
A spokesperson for Comcast declined to comment, but the company has stated that it is “committed to an open Internet and has pledged to abide by the FCC’s Open Internet rules — and our policies with respect to Xfinity TV and the Xbox 360 fully comply with those rules and our commitments.”