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Wall Street carrying ESPN’s ball

Tue, 06/16/2009 - 5:35pm
Brian Santo
It looks like Wall Street is going to encourage more of a type of deal between Web sites and ISPs that is arguably anti-competitive and anti-consumer. A deal between Disney/ESPN and Comcast last week elicited the objections of the American Cable Association. Now a prominent analyst with Pali Research has come out in favor of the ESPN maneuver, drawing the ACA’s ire.

The word “arguably” tends to be used indiscriminately, but the spat now involving the ACA and Disney/ESPN marks profound disagreement on an issue that could easily get tangled in the network neutrality debates and take months to play out.

ESPN has been withholding access to its ESPN360.com site from the subscribers of ISPs until those ISPs agree to pay a per-sub fee. That conforms to the model for cable TV programming that has been in effect for decades, but until now has been completely alien on the Web. Comcast bit, though; it’s signed on with ESPN.

ESPN’s demands got the ACA up in arms, enough to complain to the FCC in a recent filing with the Commission. The ACA argues that this will be horrible for consumers. First, in a forum – the Web – that’s supposed to be open, access will inevitably be denied to some consumers.

Second, should ISPs comply, it will force them to turn around and pass on the costs; the ISP’s subs will be charged for access whether they want it or not (denying choice). If the model catches on, the cost of broadband for consumers would snowball. Furthermore, the ISP has to take the heat for price increases largely out of its control.

Richard Greenfield, an analyst with Pali Research who has proven himself astute when it comes to the media business, loves the idea. “We firmly disagree with the ACA and believe content owners should be aggressively seeking monthly fees from ISPs for their content/services,” he wrote (Greenfield’s comments here; registration required).

Greenfield sidesteps the argument about rising costs. Instead, he notes that broadband is a high-margin product and that MSOs will have to get used to slimmer margins.

His bottom line? “Content owners need to create dual revenue streams in an online world, and we do not believe billing consumers directly will be a successful strategy; billing ISPs makes far more sense (particularly as the business model is already in place within the multichannel video world).”

In other words, content owners need to make more money, and if they must do so at the expense of cable operators, so be it.

The ACA is having none of it. “If the publicly traded media conglomerates and Web giants know they can curry Wall Street’s favor by pursuing these ‘closed Internet’ business models, then you can guarantee that we’ll see other groups following Disney’s lead.”

The organization says it’s happening already. The Epix Web site, backed by Paramount, Lionsgate and MGM, is ready to start with a business model the ACA says is similar to that of ESPN360.

It’s a fascinating argument. On the one hand, you have a cable industry association echoing many of the arguments employed by advocates of a la carte programming, an approach fiercely resisted by the cable industry.

On the other hand, while that bundled-programming model has worked for the cable industry, with heavily watched channels making room for less-watched channels, programmers also learned how to squeeze MSOs, coercing MSOs into accepting channels they don’t want and forcing MSOs to raise their rates (the ACA has always fought that injustice).

Of course, the ACA can’t rail against Comcast, an occasional ally and the biggest gorilla in the cable cage, but Comcast has some culpability too for accepting ESPN’s terms. The deal appears to benefit Comcast in that it secures valuable content for its subscribers, which should be a competitive advantage.

From a big-corporation viewpoint, Greenfield is right. Companies should be able to try to suck as much money as they can out of consumers any way they can get away with. And if anyone has margins to shave, it’s Comcast.

But for smaller companies like the ACA’s members, and for consumers, this type of deal sucks about as bad as it gets.

The Internet is supposed to be open. If an ISP block were to block access to a Web site, the site owner would scream bloody murder, and justifiably so.

But it’s OK for a Web site owner to block content from subscribers of specific ISPs? You’ve got to be kidding, right? If consumer groups like Public Knowledge and Free Press don’t jump all over ESPN on this, I’d be disappointed.

Ultimately, I believe Greenfield is only right in the short term. Rising prices and shrinking margins don’t really help much of anyone.

The hatred people have for cable companies over rising cable rates is almost palpable; it’s one of the key factors in the successes of satellite TV, and now FiOS TV and U-verse. Why not shift that hatred over to the broadband market, where MSOs actually have some good will stored up?

Because eventually customers figure it out when they’re being screwed, and they will revolt.

Or is that OK, though, as long as you can rake in some of their cash before they do, and just move on to the next scheme?
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