FCC's pay-as-you-go Internet plan raises video, access questions

By Cecilia Kang
Washington Post Staff Writer
Tuesday, December 7, 2010; 8:11 PM

As details emerge about the Federal Communications Commission's controversial proposal for regulating Internet providers, a provision that would allow companies to bill customers for how much they surf the Web is drawing special scrutiny.

Analysts say pay-as-you-go Internet access could put the brakes on the burgeoning online video industry, handing a victory to cable and satellite TV providers.

The practice is legal, but had been discouraged by the FCC and by protests from consumers and public interest groups. But wireless companies are moving rapidly in that direction - all major cellphone providers offer subscribers tiered data plans for Internet service. AT&T doesn't offer flat-rate wireless plans for new customers.

And although FCC Chairman Julius Genachowski said last week that his so-called net-neutrality proposal would generally prohibit broadband service providers from tampering with Internet traffic, he added that he is open to new billing models that charge by how much data a user consumes.

Public interest groups say that trend will lead to a widening gap in Internet use in which the wealthiest would have the greatest access. And it could place limits on how much consumers use Web video, which eats up an enormous amount of bandwidth and could carry higher costs under a tiered pricing plan.

"The question is how this will be enforced because it has the potential to do a lot of harm," said Art Brodsky, communications director for Public Knowledge.

By blessing tiered pricing practices, Genachowski said he wanted to strike a balance between consumer protection and promoting "network investment and efficient use of networks, including measures to match price to cost such as usage-based pricing."

An FCC official said in a statement that it would be a "cop on the beat" for "arbitrary, anti-consumer, or anti-competitive tiered pricing plans."

The FCC will vote Dec. 21 on the proposal, which could could tilt fortunes toward cable and telecom companies battling to keep users from abandoning paid television services for new Internet options such as Apple TV and Hulu.com, analysts say. Those providers are struggling to manage overburdened networks that are seeing a surge in streaming video traffic from sites such as Netflix, which alone occupies 20 percent of all peak broadband traffic in the United States.

"If people are forced to pay per kilobit it's like they are forced to pay per word of a book," said Todd Weaver, chief executive of Ivi, a Seattle-based video streaming company.

Craig Moffett, an analyst at Bernstein Research, wrote in a note to investors Tuesday that the impact of pay-as-you-go broadband access "can't be overstated."

"Usage-based pricing will preserve, and even enhance, the economics of cable's infrastructure . . . even if consumers eventually get some, or even all, of their video content over the Web," Moffett wrote.

At a UBS investors conference Tuesday, Comcast chief executive Neil Smit said the cable and Internet giant doesn't have plans to move to usage based pricing. The firm, which is seeking regulatory approval for its merger with NBC Universal, has a cap on Internet use to 250 gigabytes - enough data to provide hours of streaming video viewing.

Kyle McSlarrow, president of trade group the Nation Cable and Telecommunications Association, wrote in a blog post that usage-based pricing gives cable companies the flexibility they need to experiment with new business models.

"A usage-based pricing model, for instance, might help spur adoption by price-sensitive consumers at the lower end of the socioeconomic ladder," he wrote.

It is also a way for cable firms to prevent users from "cutting the cord," or canceling their television services, analysts say.

Genachowski's draft proposal is vague on language about how broadband providers could charge partners to serve up their sites faster, according to one source at the FCC who has seen a draft of the rules. Known as "paid prioritization," the FCC's proposal could make it easier for Time Warner Cable, for example, to strike a deal to serve up faster downloads of Hulu.com. With tiered usage caps, that could lead to higher Internet charges for subscribers of bandwidth hogging sites such as Netflix.

"Usage-based pricing is a clear positive for cable, telecom, and wireless providers, but it also might be a concern for Netflix," said MF Global analyst Paul Gallant. "Depending on where the tiers were set, usage-based pricing on wire line broadband could end up deterring some people from dropping cable for over-the-top video."

Netflix has argued against paid prioritization of services over the Web. In its third-quarter conference call, chief executive Reed Hastings said the company is watching usage pricing with concern.

"We have some vulnerability depending on cap usage and what happens," he said.

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