Online Video at the Heart of Net Neutrality Order

It will take some time before the full effects of the FCC’s recent net neutrality order take hold. But one thing is clear: Over-the-top video and the ability of third-party online video sites to operate and innovate is at the heart of the commission’s rules. That’s because cable and IPTV distributors, many of which are also ISPs, would have an incentive to degrade traffic that could be seen as competitive to their pay TV services.

The possibility of ISPs blocking or degrading online video content comes up as an increasing number of content owners seek to make their content available online, through ad-supported and subscription video services. As the FCC Net Neutrality order:

Local broadcasters are experimenting with new approaches to delivering original content… In addition, broadcast networks license their full-length entertainment programs for downloading or streaming to edge providers such as Netflix (s NFLX) and Apple. (s AAPL) Because these sites are becoming increasingly popular with the public, online distribution has a strategic value for broadcasters, and is likely to provide an increasingly important source of funding for broadcast news and entertainment programming.

At the same time, the Internet has lowered the bar for creation and consumption of original video content; no longer do content creators need to secure distribution from broadcasters or cable providers to have their works seen. A whole new generation of original web content has found an audience that would previously have been impossible in a world in which distributors acted as gatekeepers.

But while broadcasters and content creators are finding new means of distribution and monetization online, cable companies are becoming increasingly concerned their pay TV services could be cannibalized by content being delivered over their broadband pipes. We’ve seen the total number of pay TV subscribers decline by 330,000 over the past two quarters, with losses heavily skewed toward cable providers. Comcast (s CMCSA) alone lost 275,000 TV subscribers during the third quarter.

At the same time that cable providers are seeing their pay TV base dissolve, broadband traffic continues to increase unabated, with the vast majority of the traffic growth coming from the same streaming video services that threaten to undercut their pay TV offerings. Netflix, for instance, reportedly accounts for some 20 percent of peak data traffic, according to one report.

With all that as a backdrop, the FCC says cable providers and telcos could have an incentive to degrade the quality of video from third-party competitors like Netflix from traveling over their data networks. As a result, subscribers would be less likely to subscribe to these increasingly competitive services. As the FCC writes:

[O]nline edge services appear likely to continue gaining subscribers and market significance, which will put additional competitive pressure on broadband providers’ own services. By interfering with the transmission of third parties’ Internet-based services or raising the cost of online delivery for particular edge providers, telephone and cable companies can make those services less attractive to subscribers in comparison to their own offerings.

While last-mile providers could alter traffic for competitive services, there’s also the possibility that they could charge content providers for improved access to their customers. That would mean only large incumbents might be able to afford the distribution of content to end users, which would discourage small, innovative firms from entering the competitive online video space. In fact, the FCC even suggests that some companies would not have survived and thrived in such an environment.

“If broadband providers had historically favored their own affiliated businesses or those incumbent firms that paid for advantageous access to end users, some innovative edge providers that have today become major Internet businesses might not have been able to survive.”

Despite this, the FCC is clear in the order that it views content deliver networks and fights such as the peering disagreement between Comcast and Level 3 as issues that fall outside of network neutrality. While CDN services can provide a better quality of experience for the end user, the FCC argues that unlike ISPs, CDNs don’t control the last-mile connection with the end user. They also don’t cause harm to third-party traffic that isn’t delivered by the CDN, unlike some network management schemes by ISPs.

Although protecting competitive voice and video services from being discriminated against by incumbent last-mile providers is top of mind for the FCC, it’s making its net neutrality rules applicable to all applications and traffic types, saying that “limiting our rules to voice and video traffic alone could spark a costly and wasteful cat-and-mouse game in which edge providers and end users seeking to obtain the protection of our rules could disguise their traffic as protected communications.”

Now the FCC has rules in place to help keep a level playing field between incumbent TV programmers and distributors and the nascent online video industry. But if the commission can successfully enforce them and how successful those rules will be in ensuring competition has yet to be seen.

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