Extended Trends

            Better Than Best Efforts Routing Options

            The “good old days” of absolute best efforts neutrality in the Internet cloud have long since passed for better and for worse.  I haven’t heard any opposition to the use of proxy servers and “better than best efforts” service options provided by companies such as Akamai.  When consumers want access to “mission critical” bits, e.g., a weekend mainlining on the entire second season of House of Cards, they might even pay for higher quality of service when the possibility of congestion and degraded service exists.

            Expect retail Internet Service Providers, operating the first and last mile broadband link, to offer enhanced quality of service options for a price.

            Squeezing Even Higher Broadband Profit Margins

            ISPs, affiliated with incumbent ventures such as cable television companies, have come to recognize that they are “first among equals” in the bundling of telephone, home security, video and broadband.  Cable operators may want to offer lower margin video services to forestall cord cutting, but the triple digit margins accrue from broadband.

            Expect ISPs to press for even higher broadband service rates through general rate increases and additional tiering on the basis of transmission bit rate and download allotments.  Also expect a substantial narrowing in the gap of download caps between wireline and wireless broadband options.  Currently wireline options have soft caps in the 200-300 Gigabyte range while wireless carriers have hard caps from 250 megabytes to 10 Gigabytes.  Wireline ISPs can squeeze out higher margins simply by forcing “bandwidth hogs” onto more expensive tiers.

            Options for Avoiding Download Debits

            Less generous download allotments reduce the broadband subscription value proposition, but I don’t see consumers pushing back.  What competitive alternative do they have?  Yes 4G makes it possible for wireless to compete, but their per-megabyte download cost well exceeds the wireline rate even if the latter rates rise significantly. Satellite options offer slower speeds at higher download costs, coupled with some latency (signal delay) issues.

            Expect ISPs to “soften the blow” of stingy download caps with expanded opportunities for content and service providers to pay in lieu of metering the download.  This might come across as “pay to play,” but heightened consumers sensitivity to a download cap means they are even less likely to respond to additional commercial pitches that debit their download allotment.

Developing Trends

            New trends will develop slowly, largely because of Comcast’s ambiguous concession commitment to neutrality as a sweetener for securing approval of its NBC-Universal acquisition.

ISPs Demand More Incentives to Upgrade

            Expect ISPs to leverage network upgrades in exchange for better interconnection terms with content providers and their downstream Content Distribution Networks.  Netflix might even secure the opportunity to install servers on ISP premises, but at a price. 

I expect Netflix and consumers to lose the argument that ISPs are entitled only to retail broadband subscriber monthly subscriptions and surcharge payments from upstream CDNs.  If Netflix wants to reduce its CDN payments, then it will have to pay ISPs directly.

More Interconnection Compensation Disputes

One might consider increases in peering/transit disputes as an extension of an existing trend.  However, the frequency of disputes and the complexity make this a developing trend.  A recent and probably temporary surge in broadband demand points to the potential for consumers to experience degraded service.  Depending on who frames the issue, congestion recently occurred thanks to Netflix, the weather and a holiday: the House of Cards second season in its entirety, home cocooning due to extraordinary cold and snowy weather and Valentine’s Day.  So much for network robustness capable of handling peak demand.  But of course consumers don’t know whom to blame.  Expect lots of finger pointing.

I hope carriers and content suppliers won’t make excuses for reducing the value proposition of Internet access, but it would not surprise me.