Verizon PAYS Content Provider

at&t Chairman Ed Whitacre said that content providers who expect to use “his” pipes for free are “nuts”. Maybe he’s right: if a recent Verizon deal is any indication, at&t will have to pay content providers to use their pipes. 

According to a Wall Street Journal article, Verizon has agreed to pay about $.50 per subscriber to CBS “for the right to carry its television stations on Verizon's fledgling home TV service…”. The companies themselves have not disclosed the terms of the deal either than to say it is mutually advantageous (gee) but WSJ apparently has sources.  Most other media simply carried the bland AP version of the story which did not mention this payment.

Whitacre, of course, wants content and service  providers to pay at&t for some ill-defined “priority” service.  He complains that otherwise at&t will not get a return on its investment in enhanced network.  Apparently payments from us subscribers and the payments Google and other service providers make to connect to the network don’t count.  BTW, Verizon is paying to carry this CBS content on its newest physical network – Fios TV.  This despite Verizon CEO Ivan Seidenberg (as quoted by Om Malik) saying: “We have to make sure they [content and service providers] don’t sit on our network and chew up our capacity.”  No wonder Verizon didn’t want to make the terms of the deal public.

IN A COMPETITIVE MARKET, I would have little fear of Whitacre making good on his threat.  Traditionally networks pay for content – not the other way around.  Cable networks pay for many premium channels which they sometime bill their subscribers for and sometimes don’t (directly).  Channels don’t pay to be on cable networks.  Sometimes there are disagreements, of course, over how much to pay and other arrangements – New Yorkers remember a dispute between Cablevision and the NY Yankees which meant that Cablevision subscribers couldn’t see the Yankees for a while.  But, even in that dispute, there was no suggestion that the Yankees pay Cablevision to carry them.

No one will hook up to a network without content.  In this sense, at&t and other are lucky that service providers like Google and Vonage and Skype provide their content and services on the Internet model which does NOT include charging the network operator.  In fact, these services do pay for their own connections to the network.  And the availability of content and services is the reason we subscribers pay to hook up.  Would you buy general purpose Internet access without Google?  Would you buy Internet access on which certain popular websites were slow or where your choice of VoIP providers was restricted?  NOT IN A COMPETIVE MARKET.

Right now the competition between cablecos and telcos keeps either one from selling less than the best Internet access they can (but what we are offered in the US is woefully inadequate compared to what is available in most other developed countries).  But what if the telcos (now really only at&t and Verizon) – who, despite many promises, really don’t compete with each other except in wireless – what if they win their battle and bury the cablecos?  The telcos have better lobbies and are no longer frustrated by the old intramural quarrels between long distance and local carriers since SBC and Verizon acquired AT&T and MCI.  The FCC is telco friendly – to put it mildly.  The telcos still are the beneficiaries of their existing local monopolies.  They could win.

Even if cablecos continue to exist, a duopoly is not sufficient protection against predatory – or at least inefficient – behavior.  We pretty much have a duopoly in broadband access today since – in most localities – exactly one telco and one cableco had a franchise to dig up streets and reach houses.  We have gotten some benefits from the competition between the two – the price of DSL keeps coming down and the bandwidth of cable access keeps going up.  But we don’t have the bandwidth we should (judging by other countries like Japan and Sweden) for the price we are paying.

The real answer to any fears about monopoly is competition.  Verizon’s willingness to pay for content in order to compete with cablecos is evidence of that.  Government regulation is as likely to end up reinforcing monopolies as controlling them.  But do we have sufficient competition in the US?  I don’t think so.  Do we need interim regulation to assure “network neutrality”? Maybe although the cure may end up worse than the disease.