By Cecilia Kang
Washington Post Staff Writer
Sunday, December 19, 2010; G01
America's beloved television is getting an extreme Internet makeover, and questions over what shows viewers will see online and how much they pay for them could soon be resolved by the Federal Communications Commission.
Those deliberations would create first-time rules affecting how television series and movies reach consumers with Internet connections and how much companies can charge for the service. It's the government's strongest effort yet to lay out some boundaries in the headlong rush for online video.
The picture looks fuzzy for Internet users. As drafted, the policies under deliberation may slow the trend of consumers breaking free of their cable and satellite bundles to watch cheaper or free episodes of shows such as "Mad Men" and "Dancing With the Stars" online. The changes also may make it harder for new online start-ups to compete with television giants, some experts say.
Sources at the FCC say draft rules could open the door for Internet service providers to charge companies such as Apple TV and YouTube for faster delivery of videos, while potentially providing Internet videos of their own or from partners to subscribers for free.
The agency is also blessing pay-as-you-go billing plans, which could relieve Internet users who don't do a lot online. But it could make viewers think twice about watching enough streaming Netflix movies to blow past their monthly data limits.
Comcast's merger with NBC raises additional issues for the FCC - and fears among competitors and consumer groups. How those are resolved will also affect the future look of TV.
With about 23 million cable subscribers and 16.7 million Internet subscribers, Comcast controls a vast market. Some critics worry that if the cable giant owns NBC, it will have incentives to withhold its content from Web competitors. Those critics are pushing the government to set conditions on the merger to prevent such favoritism and send a signal to the rest of the industry.
"This is a big moment that could make or break online video companies and determine who are the next winners of the Internet video space," said Barbara Van Schewick, a professor of law and computer science at Stanford University.
Internet access providers say those concerns are overblown. They say any rules should be flexible for cable and telecom firms to experiment with new partnerships on the Web, and that wireless networks should be largely free of regulation because they get congested more easily. That idea that doesn't sit well with Web companies such as Skype and Google, which argue that consumers are increasingly getting entertainment and news over smartphones and tablets.
"I see consumers winning with video every day with all the options that are out there, and companies deserve the opportunity to figure out what best meets consumer needs or fail in trying," said Kyle McSlarrow, chief executive of the National Cable and Telecommunications Association, a trade group.
Those debates are taking center stage at a significantly weakened FCC, which is struggling to be the nation's Internet watchdog as more people use the Web as their main medium for communications and entertainment. The uncertain outcome casts a shadow over multibillion-dollar business plans as television networks, cable and telecom firms, and Web giants such as Google and Apple jockey to lead in the nascent Internet video industry.
They are taking their fights outside the boardrooms of Silicon Valley and Wall Street, lobbying the FCC on their positions as Chairman Julius Genachowski attempts to fulfill a year-old promise for new rules governing Internet access. His proposal for "net neutrality" restrictions will face a commission vote Tuesday. Meanwhile, the FCC and the Justice Department are expected to wrap up their reviews of Comcast's merger with NBC Universal early next year.
Silicon Valley companies such as Craigslist, Microsoft and Cisco have expressed support for Genachowski's net neutrality rules. Investor John Doerr of venture capital firm Kleiner Perkins and angel investor Ron Conway say the rules are a good balance of consumer and corporate interests.
But other companies, like Netflix, Amazon and Skype, and investors in start-ups such as Twitter and Foursquare say the FCC's proposal has loopholes that could harm Web companies as they compete with cable, satellite and telecom giants. The rules don't apply to wireless service providers, which allows Verizon and AT&T to pick and choose which applications are delivered on the next releases of Droids and iPhones.
AT&T and Comcast have offered tepid support for Genachowski's plan, which at least doesn't recast their broadband Internet networks as more heavily regulated telecom services - something the chairman threatened earlier this year.
Gillis Cashman, a partner at MC Venture Partners in Boston, said his investments in broadband and wireless firms would lose value with overly strict government rules. But he said Genachowski's blessing of usage-based pricing gives cable companies leeway to charge the heaviest users more and return the investment into their networks.
"When you think of video and the huge economic bandwidth hog it is and that consumers pay much less per megabit for video, the model has to change dramatically," Cashman said.
One of the biggest bandwidth hogs is Netflix, whose 17 million subscribers produce 20 percent of traffic on broadband networks during peak hours.
Level 3, a company that delivers movies for Netflix and other partners over fat broadband pipes between big cities, said Comcast is already trying to squash competition by charging more to connect its services to Comcast's subscribers. It has called for the FCC and Justice Department to consider putting conditions on the merger that would prevent that practice.
Comcast argues that it would have no incentive to withhold NBC shows from online services such as YouTube and Netflix, because it wants as many eyeballs on its shows as possible. But it also resists conditions on the merger that would force it to offer, say, CNBC and "The Real Housewives of Beverly Hills" to all Internet video distributors on identical terms.
And Comcast has rejected the accusation that it is deliberately penalizing Level 3, saying the issue is more that Level 3 did not secure good terms in its partnership with Netflix.
"We can certainly understand Level 3's motivations," said Joe Waz, senior vice president of public policy at Comcast. "That company seems to have cut a very bad business deal to distribute content."
Public interest groups say the details of the merger - as well as the broader net neutrality debate - involve far more than business technicalities. They say the FCC's actions over the next few months could set the course for the development of Internet video for years.
Some in the industry are mainly concerned that the government not overreact, because the market is still in its infancy. Jeremy Allaire, chief executive of Brightcove, which delivers videos for Discovery Communications and Fox Entertainment, said the landscape will be much clearer in about a year.
"The underlying pricing dynamics and competitive issues will start to surface in a very material way at that point," Allaire said, "so this is the right time to think these issues through, but they should be thought out very carefully because there hasn't been a galvanizing business event to sharpen the focus on it."