Out of Control

The service, which AT&T says will require a minimum 500 Kb/s connection, allows users to watch a full screen video feed on a desktop or laptop PC. Other than that, all that’s needed is Microsoft Explorer and Real Networks' RealPlayer. More sophisticated users, using media center PCs or products like Apple’s iTV (also introduced today), may be able to transfer the streaming video on their TVs. This process stands to become much easier with the release of new PC operating systems, such as Microsoft’s Vista, currently set for January 2007. (On a large TV screen, however, the Internet video may not be as high quality as a cablecast. AT&T says the service is not designed to outright replace cable or IP video).

The initial AT&T line-up is comparable to a basic cable tier, but priced at $20 per month, lower than most basic cable packages and, perhaps with the exception of sales tax, devoid of the additional surcharges and fees municipalities and states tack onto cable service. While beyond a few high-profile channels, the pickings right now may be sparse, AT&T Broadband TV marks the entry of a major U.S. broadband player into Web-based TV, a segment that has been populated by small but growing companies such as YouTube and Akimbo and that, until now, has been flying below regulatory radar.

Back in May I discussed the implications of aggregated Web-based content on the future of traditional cable TV and the local franchise regime to which it is closely connected.

AT&T Broadband introduces portable, facilities-independent programming to the competitive mix. Subscribers will be able to access programming anywhere over any Internet connection, including Wi-Fi. Twenty channels are just a start; AT&T says more will be added in the next 30 to 60 days. It remains to be seen if the company can engineer deals with extremely popular cable channels such as ESPN or CNN, which demand hefty rates for carriage. Still, with wireless networks proliferating, a major differentiation point for AT&T’s service will be its ability to be accessed anywhere.

Business issues aside, Web-based video content is about to go big time and its impact on cable franchise regulation is going to be profound. AT&T Broadband stands to make every ISP a video service provider. This threatens the already-asymmetric regulation of cable companies on the basis of the service they provide—video—as opposed to purely the municipal right-of-way they use. Although AT&T has supported video franchise reform, it also has argued that local taxes, right-of-way fees, rules and regulations should not arbitrarily change just because video has joined voice signals over its existing network. The Connecticut PUC and the Oklahoma state attorney general have sided with AT&T on this issue.

While states have been looking at the franchise reform from the regulatory perspective, everyone might get trumped by technology. Certainly ISPs will not stand still if local authorities attempt to collect video franchise fees for delivering third-party content services they don’t own or control.

(An aside here: municipal wireless networks will be just as capable of carrying the AT&T video service as any other, raising all sorts of conflict-of-interest questions within city operations. City IT agencies and their national partners, like EarthLink, would likely want to promote TV-over-broadband as a market driver. This would put them in direct policy opposition with other municipal officials who would want to tax it or ban it.)

Cable companies, which have been defending the status quo, can’t afford to continue fight for a regime that forces them to pay five to seven percent of their revenues when their own customers will be able to use their own cable modems to subscribe to Internet TV.

The downside of much of the franchise reform we are seeing is that merely elevates the same local regulations to the state level. True, reform speeds cable competition because it grants statewide franchises in one fell swoop, but the asymmetric tax and fee burden remains intact. Just like incumbents, new entrants are still asked to pay fees based on “gross video revenues,” which can include advertising, commissions from home shopping channels and promotional payments from programmers. As third parties offer video over the underlying network, the case for using video to define franchise fee liability gets murky. It would be wiser, fairer and certainly less costly to consumers if franchise liability were defined by the infrastructure. The best outcome is a regime that allows municipalities to recoup the actual cost of providing right-or-way, and ends any revenue relationship to specific services and applications that ride the network. As Internet video gains momentum, these revenues will decrease anyhow. The network is a transparent mechanism. It would be best if video franchising worked the same way.