There is quite a hullabaloo going on over Comcast’s decision to cap bandwidth for consumer users at 250 Gb. Typical of the wails of protest are say here at GigaOm:

Karl Bode over on DSL Reports reports that Comcast will institute a 250 GB cap on its broadband connections starting Oct. 1. Expect other carriers to follow suit and make tiered broadband a reality. Much as I would like to think otherwise, this is the end of the Internet as we know it.

The caps are a move to ensure that the gouging scheme put in place by Comcast and other cable providers stays intact and they can continue to sell their video-on-demand services. It was a point I made when I wrote, Why Tiered Broadband Is The Enemy of Innovation. I will say this again: this is to stymie services like Hulu, NetFlix and Amazon On-Demand.

Is this the “end of the internet as we know it” - well yes - but that’s because the last few years’ “internet as we know it” was economically unsustainable - it was largely subsidised by distributors charging sub-economic prices to encourage the filling of their pipes (which most of them got at cut price after the dotcom bust - a one off benefit). But web video changes all this, as it puts a huge load on the pipes, threatening to fill them to bursting. At this point the distributor either has to build more capacity, or restrict usage. Building more capacity is non trivial, because its not clear where the money will come from. The “game theory” of the situation can be summed up as in the diagram below:

Digital Media Value Chain - Who pays for Video?

below:

Quite simply, today there is a mismatch over who is bearing the costs and who is gaining the benefit. In a way Distributors have themselves to blame, as they have subsidised the pipes in order to fill them, indulging in price wars and thus creating unrealistic expectations of bandwidth pricing. This is because the economics of any high capital cost utility is to get as much usage as possible as fast as possible. The problem is the huge growth of video is now threatening to fill the pipes to overcapacity, and in order to handle that the pipe owners have to change strategy. There are only two options available right now:

(i) Upgrade the pipes - but this is enormously expensive, and in the current Internet model no one will pay for this except the distributor - which gives them unacceptable risk. Solution - y meter usage and extract payment from either upstream or downstream users.

(ii) Regulate the flow along the existing pipes, by capping the heaviest users

(A third option is to improve compression, but that is a ways off)

And, being the Distributors with company cultures we all know and love, they will be heavy handed, arrogant, clumsy etc in how the execute this - but it doesn’t mean they are wholly wrong.

Aggregators (and some content providers) also share some of the blame, they have in many cases built their business models on the assumptions of a continued “free ride” (or at least heavily subsidised one) over these pipes, and are now reaching for all sorts of straws (such as “Net Neutrality”) to continue this practice.

The user has enjoyed the largesse primarily by getting low cost, unmetered bandwidth. This has created a false view of the price of bandwidth.

The “path of least resistance” for the distributor is to cap the heaviest users of the pipes, by imposing financial penalties. This both (i) reduces the rate of pipe filling and (ii) extracts revenue to pay for the upgrades. And despite all the hullabaloo, this is fairly standard in any utility. (Someone willl have to explain to me how the same people who call the ‘Net a utility “cloud” one week can wail about utility based pricing the next)

The main unanswered question question in the value chain is to ask who shall help pay - right now the upstream players pay very little, payment is nearly all from the users and via distributor subsidy. Yes some of the worst offenders are upstream, and some of them (GooTube) make superprofit. This implies that the upstream end will be asked to fund some of the capacity buildout - and since at the end of the day they run over the distributors pipes, they have no choice but to pay. (Which is of course why Google is building its own network - they are smart people, they can see the game is up).

Which brings us to the heart of the “Net Neutrality” debate, and its endgame. The Net Neutrality argument is that if the upstream players are asked to fund the pipes, then only the richest will have access and this will deny newer small players and thus innovation. The solution to that is simple of course - the downstream user must then pay more. However, another tenet of the Net Neutrality position is that heavy users must not be penalised. (Conflating “free” as in equal opportunity to access with “free” as in pay nothing)

Now, as the chart above shows, the only way you get both of those freedoms is if the distributor picks up nearly all the costs. That ain’t going to happen again, so it will now be a test of how much users will want to pay for a “neutral” net, vs how much they really care about the type of content the neutral net is dishing up.

(For the record - we believe that the Neutral Net should allow equality of access, and the user should pick up the tab for the services they consume as they would in any other utility model)