Net Neutrality and the ‘Cable-ification’ of the Internet

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It was a long time coming. So when a judge in a US district court approved AT&T’s $80 billion bid for Time Warner on June 12, giving the nod to the formation of one of the world’s biggest content-creation-and-distribution companies, media industry participants and consumers across the country braced for a heavy blow.

The deal, originally proposed in October 2016, essentially draws together a provider of internet transport and a creator of content. Many industry members fear that this exclusive union could end up squeezing out competitors and holding consumers as ransom over what content they can receive and how much they must pay for it.

The tie-up was initially blocked by the Department of Justice on antitrust grounds, leading to a lengthy lawsuit. It was also opposed by the administration of President Donald Trump, who has long derided news channel CNN (a key Time Warner asset). Vertical mergers such as this generally face less scrutiny.

AT&T also cited the competition it faces in video from Facebook, Apple, Amazon, Netflix and Google, an argument that has apparently won. Daniel Petrocelli, AT&T’s counsel, says that with the combined group worth $300 billion, it would still be far behind what they estimate competing companies to be worth. “We’re chasing their tail-lights,” he complained.

The announcement of the agreement was followed almost immediately by cable group Comcast making good on an intention to bid for the key assets of Rupert Murdoch’s 21st Century Fox, offering $65 billion for the entertainment business on June 13. Walt Disney had already made an agreement to buy Fox, and on June 20 re-entered the bidding war by raising its offer to $71.3 billion.

Neutrality Repealed

In the same week, the US media landscape was further disrupted by the repeal of the Obama administration’s 2015 rules on net neutrality. That legislation had prohibited broadband providers from blocking or slowing down traffic and offering so-called fast lanes to companies willing to pay more to reach consumers more quickly than their competitors. Broadband was also reclassified as a utility, putting it in the same category as the telecoms networks.

The reversal of this ruling on June 11 hands huge power to telecoms companies and ISPs as it means they will be in a position to prioritize their own content offerings, leading some analysts to suggest that the “cable-ification” of the internet is underway.

In the past, large service providers did not provide much content. But AT&T’s Time Warner deal will vastly expand its library to include businesses such as Warner Bros., CNN and HBO. Similarly, Comcast would gain a great deal of creative content if it succeeds in wrestling Fox away from Disney.

The new landscape means that video-on-demand streaming services might have to pay a premium to get their content to consumers, affecting big players such as Netflix, Amazon Prime and Alphabet-owned YouTube, but especially squeezing out smaller start-ups, which may well not have the money or negotiating power to enter the fray.

State-Level Legislation

There will be complications to the net neutrality repeal, however, with various US states passing their own legislation. The states of Oregon and Washington have already brought in net neutrality laws, while New York, Connecticut and Maryland are in the process of preparing legislation.

California had been pushing to introduce what would be the country’s strictest net neutrality law and set a new nationwide “gold standard” for internet protection. However, on June 20 a proposed bill was diluted, with AT&T coming under fire for pressuring local politicians to make changes that strip it of its most important neutrality measures.

The state’s proposals include barring ISPs from offering sponsored content, from zero rating – providing free internet access with conditions such as only allowing access to certain websites, or subsidizing services with advertising – or from making deals that might provide a financial incentive to broadband providers to discriminate against content going through their networks.

It also aims to ensure broadband providers adhere to net neutrality at so-called interconnection points, meaning they cannot slow or block access to services from content providers that use their networks, such as Netflix.

Senator Scott Wiener, who introduced the original bill, says the amendments negated the rules: “It is, with the amendments, a fake net neutrality bill.”

Next Steps

The big streaming services have options to fight back. Alphabet has a wireless project called Google Fiber, which has undertaken the installation of fibre-optic cables in American towns. Cutbacks mean the project has languished in recent years, but a counter-move would be to launch in key Comcast markets.

Meanwhile, Netflix will have to enter the connectivity market somehow. The streaming operators could potentially find strength in numbers by teaming up against the cable-content groups.

There are wider concerns over the principle of a free internet, with predictions of a slow degradation of the experience for the end-user. With content curated by internet providers and fewer start-ups with a chance to become the next Netflix or YouTube, consumers are likely to see markedly fewer innovative services.

“Internet rights are civil rights,” says Jay Stanley, an American Civil Liberties Union senior policy analyst. “Gutting net neutrality will have a devastating effect on free speech online. Without it, gateway corporations like Comcast, Verizon and AT&T will have too much power to mess with the free flow of information.”