The News – 06/13/02

Broadband Content Wars, Part IV

When discussing possible killer apps for broadband, people who should really know better often point to music file sharing. Sure, scofflaws sharing other people’s property on Kazaa, Morpheus, LimeWire and the other services use a huge amount of bandwidth. The top file sharers hog countless megabits of upstream broadband connections serving files from their multi-gigabyte collections.

But there are several fatal flaws in counting on this type of illegal activity to drive broadband adoption. As I mentioned in Part III, even though there are millions of users participating in file swapping, these scum-sucking parasites still aren’t the majority of Internet users. A killer app, by definition, is adopted by the majority.

Second, file-swapping activity really doesn’t generate revenue for anyone. It’s a revenue-destroying app, and thus is not a great candidate for killer-appness. I suppose you could say the same about email, although most of the free email companies today are struggling.

However, the most important reason why file sharing, as currently practiced, won’t become a killer app lies in the nature of its economics. The only reason file swapping can exist is because of flat rate Internet accounts. This simple fact forms the basis of the economic viability of the practice. It’s virtually free to scarf the latest hot album from an obliging host because it costs him (yeah, him) nothing extra to send it to you, and it costs you nothing extra to receive it. So why not share your legally and illegally procured music collection with the world? You can strike a blow against the bloated, corrupt music industry if that’s your thing, or you can just revel in the thrill of getting away with something. And it won’t cost you a penny extra.

Well all that’s about to change. The cable broadband companies are getting ready to pull the rug out from under the economic disparity that makes file swapping viable.

AT&T Broadband, Charter Communications, Cox Communications and other cable broadband providers are planning on moving away from the old flat-fee pricing scheme. No longer will users – scofflaw and law abiding – be able to pony up $50 and get all-you-can-eat bandwidth. New pricing policies could limit bandwidth usage per month and charge additional fees if users exceed set limits.

The demise of at the beginning of this year Excite@Home and its contracts with cable companies has freed cable providers to set new policies. Under the old system, @Home controlled prices and speeds – not all that awfully well, apparently, given their bankruptcy. The thinking now is that “one-size-fits-all doesn't make sense anymore. As more people sign up for broadband, it makes even less sense,” says Mark Kersey, a broadband analyst with ARS in a recent BusinessWeek article. “Now [the cable companies] are in complete operational control, and they can do what they want.”

Great. I’m going to have to pay more for my connectivity because of the abuses of a bunch of self-styled latter-day Robin Hoods.

The unfortunate thing about this change in flat rate policies is that it will probably not stop the file-swapping phenomenon. It’s just too big now to die. File-sharing enthusiasts will either come up with more efficient compression or trading techniques, or, as has already happened, cable hackers will devise ways to turn off bandwidth counters and grab as much capacity as they want. Even the music industry concedes that the new pricing plans won't completely eliminate piracy.

So what will happen? Honest people like you and me will pay higher prices; intellectual property thieves will find a way around the system; and still file sharing won’t be broadband’s killer app. At least it won’t until the music industry adopts some rational policies about online music, and accept the fact that some people just won’t pay, ever.

Incidentally, the best test of a killer app is the Mom test. If your mom wouldn’t use it, it’s not a killer app. In my case, my Mom has never used email, although my Mother-in-law does. My Dad, on the other hand, has a Web site: www.JerryEllsworth.com.

Reader Responses

I got a couple of responses to my request for comments on Part III of this series. The first, from Alert SNS Reader Larry Kuhn, points out a characteristic of broadband that provides part of its appeal: It’s always on.

From what behavioral changes I've observed I would say that the “killer” part of broadband is the “always on-ness.” I would agree with your sentiment that Grandma and Grandma Nontechie don't need high-speed -- but whether they know it or not, they do need always on. The family's relationship with our computer has changed immensely since we got broadband mainly due to the removal of the “dial-up disincentive” - now it is easier to look up a movie show-time or restaurant menu or store hours on the computer than it was to dig out the newspaper or phone book.

So, there's probably a fortune waiting for someone out there who can offer <=$21.95/mo. “always on narrowband” residential access.  If the price is the same and the convenience is more, it will sell.

That's a good point. My family has also experienced the effect of “always on-ness.” I wonder how feasible less-than-broadband always-on service is? You'd have to include the expense of the phone line in the cost equation, and that usually brings you back up to ~$50. Thus you're still talking about some kind of digital solution that would allow you to share a single phone line for voice and data. Kinda sounds like DSL.

The big problem broadband companies have is the tremendous cost of installation. The cable companies really have it bad, as connecting someone requires a truck roll (at $600 to $1000 per). On the DSL side, Earthlink tries to handle installation remotely, and will ship a DSL modem to the user, hoping that they can install it without help. Any sub-broadband digital phone service would need to take a similar approach. The doggone Bells could do it if they just had their act together.

The other response came from a gentleman I really should have quoted earlier in this series, Alert SNS Reader and director of the University of Minnesota’s Digital Technology Center, Dr. Andrew Odlyzko. Professor Odlyzko has a bit of a reputation as a contrarian since he brings a rational approach to often-overhyped new technology. For example, I attended a lecture of his entitled “Content is Not King” which argued that high value content like Video On Demand (VOD) and other content would not now and never had in the past driven technology adoption.

Professor Odlyzko, thankfully, said in his note that he agreed with my position on killer apps and sent along a letter to the editor that he was asked to write by the magazine, Issues in Science and Technology. He’s given me permission to quote from it, and some of his points appear below.

The rates of adoption of dial Internet access, as well as the utilization patterns of data networks, proved many years ago that the "insatiable demand for bandwidth" was a myth. New products and services take time to diffuse widely. Today, when offered the choice, most people vote with their pocketbooks for extremely narrowband wireless phones over comparably priced DSL or cable modem links.

This is a very good point. People think very little of spending $50 a month on a cell phone, yet the same amount for broadband seems out of the question for many. To pick up my thread from Part III: What do we do on cell phones? Among other things, we tell each other stories. While you may argue that the utilitarian side of cell phone use is its killer app, I know plenty of people who are buying them primarily for the free long distance so they can yack with friends and family.

Although mobility currently trumps broadband in the market, that may not persist forever. Adoption rates for broadband, although disappointing by the expectations of Internet time, are high, higher than those of cell phones at a comparable stage in the development of the wireless industry. The question is whether we should strive to increase these rates, and if yes, how to do it.

I agree with this point as well, as is obvious from Part III, in which I presented the really pretty remarkable growth rate of broadband over the past couple of years. Professor Odlyzko also tackles the question of government subsidies as a stimulus for broadband adoption:

As the example of South Korea (with over 50% broadband penetration) shows, lower prices can do wonders for demand, and some “spending initiatives or subsidization efforts,” if well targeted, might lower prices in the US. However, [it] is likely right that it would be unwise to make giant investments of public money in this area, where technology and markets are changing very rapidly.

See? What’d I tell you? Everyone likes to use South Korea as the shining example. Notice, however, that Professor Odlyzko credits the lower price as the factor driving adoption, not government intervention per se. He goes on to propose three possible methods of stimulating broadband adoption in the US, “one intriguing but totally impractical, one very practical but incremental, and one speculative.”

The impractical method for stimulating broadband adoption is to make music free on the Internet. [ . . . ] Napster and its cognates have been among the main reasons people buy broadband connectivity. Instead of using the law to choke file swapping, perhaps we should encourage the telecom industry to buy off the music studios. Total recorded music sales in the US come to a grand total of about $15 billion per year, while telecom spending is over 20 times higher. Thus in the abstract, it might be a wise investment for the phone companies to buy out the studios. This is of course wildly impractical for business and legal reasons, but it would quickly stimulate demand for broadband. (It would also demonstrate that the content tail should not be wagging the telecom dog, as it too often does in political, legal, and business discussions.)

I love this idea! We should lobby our congresspersons to make it happen. Then the network could institute rational charging schemes for the use of copyrighted intellectual property.

A more practical method for stimulating broadband is to encourage migration of voice calls to cell phones (which currently carry well under 20% of total voice traffic). This would force the Baby Bells to utilize the competitive advantage of wired links by pushing broadband connectivity. This migration could be speeded up by forcing the Baby Bells to spin off their wireless subsidiaries, and by making more spectrum available for cell phones.

What a truly evil idea! And the coolest thing is, it only accelerates a change that is happening anyway. Just last night, two people told me, in separate conversations, that they were considering getting rid of their phone lines and converting entirely to cell. When you consider how gawd awful even the best cell phone connections are, that’s pretty incredible.

The third technique for stimulating broadband is to encourage innovative new wireless technologies, such as those using the unlicensed bands (as in 801.11b, AKA Wi-Fi) and Ultra Wide Band. The technical and economic feasibility of these technologies for providing connectivity on a large scale is unproven as yet. However, if they do work, they might offer a new mode of operation, with most of the infrastructure owned and operated by users.

This idea, which builds upon a trend that is already rapidly accelerating, represents the true threat to the Bells and other wired and wireless telecoms. More and more people all over the country are putting up Wi-Fi hotspots and allowing strangers to use their Internet connections. See the SNS issues from last August and this past March for more information. While the Wi-Fi threat to things like wireless 3G networks is pretty easy to see, add in something called Voice over Wireless LAN (VoWLAN, which sounds like a religious thing) and the threat to voice networks becomes clear. Talk about your killer app: Imagine wandering through a major metropolitan area talking for free to friends all over the world, courtesy of groups of anonymous altruistic geeks with Wi-Fi hotspots (GAAGWots).

You know, the funny-but-true aphorism for the Internet used to be “On the Internet, nobody knows you’re a dog.” Nowadays it seems this truism might be replaced by “On the Internet, no router knows what it routes.” Cahners InStat, taking a pretty pedestrian view of the explosive potential of VoWLAN, predicts shipments of half a million VoWLAN handsets annually by 2006. If this stuff works even halfway decently, I think that estimate will be blown away, and the Bells and the wireless carriers could be in deep sheep dip.

Once again, I encourage your comments.

Broadband Content Wars, Part I
Broadband Content Wars, Part II
Broadband Content Wars, Part III

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