The trouble with giving something away for free is it becomes terribly hard to start charging for it later.

Even free evangelists like Mike Masnick understand that you are forced to make money off of things around the free, as opposed to the free product itself.  Masnick often cites musicians as the case study – just accept the fact that you’ll never make money off the music and instead sell concert tickets and t-shirts.

So the newspapers pooched the deal when they went online for free, undercut their own business, and now cannot move to a pay model.

The video content industry would be wise to learn from this, but often seems doomed to repeat the mistakes of both music and newspapers.  More and more programmers are handing their content out for free; and not just the broadcasters who have always been free.  They seem to be operating under the same ridiculous construct that killed news – “this is the future, so we better get on board or be left behind.”

But television isn’t music, nor is it newspaper.  There is an absolute glut of news and music in the world.  Anyone can create either with minimal effort.

Compelling, stimulating, on the edge of your seat video is something altogether different.  Any monkey can pick up a camera and shoot video.  YouTube has proven that. But very few people watch YouTube 160 hours per month. News doesn’t approach that figure and neither does music. Only TV generates that kind of consumption.

Video is different.

Programmers need to figure that out and do it quickly.  Giving away compelling video for free is a recipe for disaster just as it was for news.

Fortunately, programmers have a tool the music and news industries never did – the app store.  Just yesterday Warner Bros made news by releasing Inception and The Dark Knight as apps.

While The Daily is attempting to create an app based news outlet (and charging 50 bucks a month for it), I expect that pilot program will be dead by this time 18 months from now.  There is simply too much news available for free.

For programmers, however, it’s not too late.

Programmers should follow Warner Bros lead and immediately start thinking of ways to protect their content within their own apps.  Why give the content away for free through Hulu, or your own website, when you can do it through an app, and protect the content.

Video delivered via apps (whether desktop or mobile) would allow rights management, and provide a revenue stream, not a revenue hole. Want to watch Lost via your iPad?  There’s an app for that.

The High Cost of Free

The suggestion that content owners move to an app delivered model should scare the bejeezus out of the free radicals like Free Press and Public Knowledge.  They want content to be freely accessible to all.  This model flies in the face of that.

The fact is there is simply no business model in “free” for the video industry.  Broadcasters have come to realize this and are pushing four fold increases in retransmission consent deals so cables paying subscribers can underwrite the free viewing of others.

Everytime you see your cable bill rise, thank “free”.  But that’s an unsustainable model.  More people will get tired of price hikes, and switch to free.  As more people switch to free, and fewer people pay, more content will go away – unable to pay the bills on a declining number of subscribers.

True A La Carte

Moving to an app model should be cheered by anyone who advocates for a la carte.   Under an app model, programmers could make all of the content from a channel available (which would likely be very expensive) or have different apps for different shows.

Buying all of the content from a channel would be the realization of those who pursue a la carte cable.  Alternately, you could buy all the episodes of a show under something like the Kindle model – that is the app is free, and you buy content within it on a per show basis.

But wait, you say, doesn’t iTunes already do that?  Yes, but as GigaOm notes in the article linked above, iTunes movies are available in fewer countries, so apps open up a whole new market for content creators.

Net win for the programmer.

Granted, programmers would need to pull their content from sources like Hulu and Netflix, and invest in the development of proprietary applications, but the cost of that over the long term is significantly less than the cost of going out of business.

Like most who extol the virtues of cord cutting, Pegoraro also cited cord cutters as the reason for the loss of cable subscribers in two quarters of 2010.  As I have previously noted, the real story was somewhat different.

This isn’t to say that the cable industry doesn’t face challenges from online video.  It’s just that the challenge is somewhat different from what’s being reported.  Occasionally, in all the cord-cutting froth, you have someone actually takes time to think it through and get it right.  Such is the case with Nielsen’s Howard Shimmel.  He cites two things that are clearly going on, and when added together, paint a picture of the real challenge cable faces.

First, Shimmel notes, there is a lot of “cord swapping” taking place.  That is people will drop one MVPD and switch to another to get a better deal.  That results in headlines that show cable declines, but gains by other providers, those usually add up to a net gain in subs.

Second, Shimmel notes the role that age plays in many of these numbers.  Shimmel cites figures that show consumers age 25-34 are often choosing online video as their media of choice.  Shimmel says these people are choosing to skip cable because of economics and lifestyle choices.

This is what I referred to in the post last September (linked above) as the lifecycle dynamic that affects cable.  Most of the subscriber shift in cable comes at the opposite ends of the age spectrum.  As older subs die, they are replaced by younger subs connecting for the first time.

However, many potential subs in the lower age bracket weren’t becoming cable customers even before OTT options came along.  The lifestyle Shimmel refers to keeps them out of the active audience because they are often not home to watch TV.  They fit into Pegoraro’s model of cord-cutters, but rather than cutting the cord, they were never attaching the cord.  Now, they’re attaching a different cord.

In a more traditional model, those same young consumers may have had no pay TV service at all since it didn’t make sense to pay for TV you didn’t watch.  As those younger consumers age, get married, spend more time at home, and have kids, they would normally become your traditional cable household.

That disconnect in media viewing habits is apparent when you consider the average viewer consumes 279 minutes of online video per month (roughly 4 ½ hours) but consumes nearly 160 hours of television. Those numbers are different by age group but include viewers like me who don’t replace TV with online video, but complement it instead.

So the real question, based on the lifecycle dynamic and the availability of new over the top services, is what happens when those people begin to age.  Will they eventually look to cable for more viewing options than are afforded them by OTT services?  Or will they be content with what they have?  That is a much more difficult question to answer given the nascent state of the OTT market.

It may be years before we see the actual effect of OTT plays on cable.  However, given multichannel video is probably close to 100% of the market it will ever reach, it’s likely that there will be sub loss as older consumers leave the market and younger viewers don’t convert.

Another variable that will have significant impact is the differing capabilities of the platforms that are developed to compete and how well they complement the business models of the content producers.

As an example, I own an Apple TV and a Roku box.  The content available on the two is dramatically different.  I have been much happier with the Apple TV than the Roku.  I could make the case for sticking with Apple over the long term, but the ROKU could never support my family’s viewing habits. We simply don’t watch that much cricket.

That said, the content on Roku is much cheaper than the true a la carte pricing of Apple.  For that reason, content owners will likely prefer the Apple model over time.

With regard to the younger consumers, my personal expectation is these people, having had access to good content via OTT services, will actually be more inclined to look for more programming, and more entertainment options as they age.  Just as someone who had broadcast or basic cable would move to cable or premium channels as they got older, today’s OTT customers may easily become tomorrow’s cable customers as they look for larger packages of content at a bundled price.

The challenge for cable will be to a) focus on premium content, b) protect that content, and c) differentiate its product from whatever else is out there.

HBO and Showtime have demonstrated that premium content delivered to smaller audiences is a viable business model.  Shows like Sex and the City, Entourage, Dexter and Californication are only available to a subset of cable subscribers, but have a much larger place in the broader content landscape than those numbers would typically justify.

In other words, cable needs to return to its original business model – more exclusive, more engaging, and more valuable content than what is available for free elsewhere.

Let’s tackle the last one first.  Free Press’ Tim Karr tweets that this is what a world without net neutrality would look like.  The problem with his assertion is I am not aware of any version of net neutrality legislation that would prevent the owners of websites from enforcing their own terms of use.  Under Tim’s vision of the Internet, apparently I am unable to control what my own audience sees or does.  You run a blog?  You better not filter spam comments under Tim’s plan.  That would be a net neutrality violation.

In the case of T-Mobile, the lines are a little more muddled, but made even more so by the misrepresentations of groups like Public Knowledge.  While it appears the basic facts are not at issue – T-Mobile did block EZ Texting – the reason isn’t quite clear.

Mike Masnick at TechDirt describes this as a wireless provider “blocking messages it doesn’t like”, and interfering with “legal medical marijuana dispensaries.”

Let’s tackle that in reverse order as well.  To begin with, the suggestion that these are “legal” dispensaries is in serious dispute.  Just last week the Drug Enforcement Agency and FBI raided five of these legal dispensaries in Nevada.  It turns out that the states consider them legal, but the federal government does not.

The federal government, via the FCC, also regulates wireless carriers.  Given a choice between the state of California’s read on marijuana laws and the Fed’s, who do you think a wireless provider would support?

As such, it is entirely likely that T-Mobile was less concerned with what it did and did not like, and more concerned with not running afoul of the federal government’s drug laws.  I don’t claim to be an expert in safe harbor laws that apply to selling drugs via text message, but I suspect they are hazy on the subject at best.  Why run the risk of being an accessory to drug trafficking when you can restrict the ads instead?

So yet again you have two cases where Free Press and Public Knowledge cry foul, and two cases where there is either no argument to be made, or a specious argument at best.

It is unfortunate that the advocates of net neutrality have so little to actually buttress their arguments that they strain credibility to make their case.

As is always the case when someone bangs their gong so loudly, the noise drowns out the real story.

Yes, cable saw a net reduction.  As many have pointed out, part of the reason for this is the still-struggling economy.  A larger, and considerably more important factor, may have been the DTV transition.

But how, you ask, can that be?  The DTV transition took place a year ago.  How could its impact linger into cable sub numbers for Q2 2010?

Expiration of Cable Discounts Factor Heavily

As America prepared for the transition, the cable industry created deep discounts on cable packages to provide service to those concerned with losing their OTA broadcasts.  In some cases those discounts resulted in $10 a month for service.  In Q1 and Q2 of 2009, cable MSOs reported increases that were significantly higher than normal.  This represented people who signed onto low dollar packages to avoid any potential service interruptions.

If we take the increase from 2008, and use those numbers instead, we see the difference above.  The dashed line shows the increase based on the artificial demand spurred by the transition, while the solid line indicates what that number should have looked like absent the DTV pickups.

If you subtract out those who dropped cable when their discount expired, cable actually netted about 100,000 new subscribers in Q2 (which isn’t a huge number, but consistent with what you would normally see in the second quarter.)

The fact is Q2 is always the low point for MSOs.  There is a hit on subs people head to vacation homes and student customers disconnect for the fall.  On their quarterly earnings call, Comcast’s Steve Burke noted that the more successful they are in Q3, the more pronounced the difference is the following year.

In the case of Q2 2009, the numbers reflect not only that seasonal shift, but also the expiration of low cost packages that customers decided not to renew.  Keep in mind these were primarily customers that didn’t have cable before the transition. They may not be watching a lot of TV anyway.

What The Numbers Don’t Show

The one clear takeaway, when you realize that cable subs would have actually grown absent the external stimuli of government mandates, is that cord-cutting continues to be an urban legend promulgated by those who wish it to be so.

There are certainly people who don’t consume TV much.  Those people will add or drop cable all the time – and that was true before the Internet. In my early 20s, I added and dropped cable depending on whether it interfered with beer money that month.  There will always be reasons people tune out.

The Life Cycle Dynamic

Perhaps the most interesting thing to note is the growth of cable versus the growth of actual housing units.

In the third quarter of last year, cable subs actually began to outpace the construction of new housing units. In short, there were more subscriptions for new cable than homes built.  New subs were coming from existing homes.  The dashed line above still represents the DTV households.  Subtracting that out still shows a net add from existing homes.

The life cycle dynamic suggests that as older cable subs die, they are replaced by younger households.  There is obviously play in the middle, but the industry generally accepts that the interplay between customers at either end of the spectrum.  For the numbers above to hold true, absent the DTV subs, MSOs would be adding younger households at a rate higher than what that they’re losing.

In other words, far from losing young customers, at least in the short term, cable is signing more up – possibly as many as twice the number of elderly subs it is losing.  While that may not always hold true, it appears to be true for now.

The Situation (and not the one from Jersey Shore)

States typically have two kinds of taxes that apply to retail sales – sales taxes and use taxes.

Sales taxes are the easiest to understand.  When you walk into a store and buy just about anything from a pack of gum to new tires for your car, the state and local governments take their share in the form of a direct tax on your purchase.  Purchases at online retailers are exempt from the collection of sales taxes because of a 1992 Supreme Court ruling (Quill v. North Dakota) that held that companies do not have to collect sales taxes in states where they do not have a physical location (or nexus, in the court’s terms). This ruling has also been applied to collection of taxes via Internet orders.

Use taxes are a bit more complicated.  When you buy something from an out-of-state vendor (formerly through mail or phone orders, but more commonly now through teh Interwebs) you are actually required to report the value of that transaction to your state and pay a tax on it.

States are watching sales taxes dry up as consumers are increasingly turning to online retailers.  They’re no longer getting their vig, and just like the mob would be if they stopped getting their cut, the states are very upset about it.  So they are getting creative and looking for ways to get their money back.  These generally fall into three approaches:

• Laws that would force Amazon to charge and collect use taxes (since they can’t be force to collect sales taxes.)
• Laws that declare Amazon affiliates or eBay sellers to be functionally equivalent to storefronts, and therefore require collection of sales taxes.
• Laws that would require online retailers to hand your transaction history over to the state so they could assess use taxes on your purchases.

Rarely are these efforts “new” taxes, but rather they are new ways to collect taxes that are already on the books.

The Players

Against
Amazon, and companies like it.  Since they do not have to collect sales taxes, and the obligation is on you to report use taxes (which almost nobody does), it appears that your Amazon purchase is tax free.  It’s not.  Use taxes still apply, we just haven’t been paying them.  If you have filed taxes recently, you have no doubt seen a new question that asks how much stuff you bought online last year.  You likely said “none” and went about your business.  Had you actually entered a number, the form will help you figure your use tax.

Online retailers like Amazon, eBay and others without physical stores are opposed to efforts that would force them to levy taxes on purchases.  Laws that assume affiliates are equivalent to store fronts would require assessment of use taxes.  If you live in New Mexico, and make a purchase through the affiliate account of a friend in New York, Amazon could be required to collect the use tax for New Mexico and/or the sales tax for New York.

For
Traditional retailers (like Best Buy, Target, etc) who have physical locations are forced to compete with Amazon on price and convenience.  Now they face several big disadvantages.  First, they have massive overhead that come with the stores, and they also have to tack on 5-10% for sales tax.  When Amazon throws in free shipping, not to mention their low cost “Prime’ option shipping and new same day delivery, the retailers are at a significant disadvantage. On cost, convenience, and taxes, brick and mortar companies are taking it in the shorts.

They have been active in pursuing the collection of taxes by the online guys because it is a way to increase their costs (hiring accountants, lawyers and programmers to deal with the increased complexity of transactions would drive up Amazon’s costs.)

Where Things Stand

Many states are pursuing their own options to get a handle on the situation.  Those laws are being fought hard in state legislatures nationwide, and in courts.  The Appellate Division of New York’s Supreme Court is currently deciding on a law passed there, and challenged by Amazon.  Depending on the outcome, that case could get kicked up into Federal court and, some suspect, all the way to the US Supreme Court.

Within the past few weeks Bill Delahunt (D-MA) introduced a bill in Congress that would eliminate the mail/phone/Internet sales tax loophole and require state sales taxes to be collected.  This would please state governements to no end since estimates of tax that would be collected top out in the $20 billion range.

Something is very likely to happen in the near future, it’s just not clear what.

This may seem to be yet another case of large companies on either side of an issue attempting to use government policy to their own advantage.  It seems that way because it pretty much is that way.  That’s not to undervalue the argument that states are losing money, but states were pushing for Internet sales tax long before their shortfalls began.

Ultimately, it’s likely that the consumer will lose.  You’ll notice that nowhere in the argument does “just don’t charge sales taxes to offline retailers, either” appear as an option.  States rely on them.  One way or another, be it through Congressional action or court challenge, it’s likely that you will end up paying taxes of some sort on your Internet purchases.

IMHO, I just hope that the option of handing our transaction history over to the state is avoided at all cost. That would be an egregious violation of our rights – even by the standards of a government that has already shown willful and reckless disregard for protecting our privacy.

If there is one thing I learned on “the Street,” it’s this: People work for who pays them.”

Granted, Reactor and I may have had completely different experiences, but I would completely disagree with that implications of that statement. I shared my feelings with him there, but the comment warrants further discussion, so I thought I would start a new thread.

My experience in nearly 20 years of politics is that money tends to follow opinion, not the other way around.

My posts here at Digital Society and elsewhere are my opinion and mine alone.  Would I take money from Verizon or AT&T if they felt the desire to pay me? Sure. But it wouldn’t at all change what I am saying, and they would likely be doing so because of what I was saying, not in spite of it.

I have rarely ever seen a group hire someone to be a spokesperson (disclosed or not) because that person held a contrary position or view.

I have been crystal clear that am a vocal supporter of free markets, and think the government tends to screw up 99% of what it touches. That belief system tends to align with business a lot of the time.  If businesses want to support the efforts of someone that tends to agree with them, I see no shame in that.  It would not, in my case, give them editorial input into my writing.

Now, if you want to question my ideology, and challenge it on the merits, that’s fine. I have a lot of friends on the left and we have a great many arguments along that line. I am more than prepared to defend my belief system.

However, trying to discredit someone as a “shill” or “astroturf” is simply an argument of weak intellect. It’s even worse when, as Free Press did, you then get caught engaging in the same behavior. (It’s actually even worse in their case because they falsified the signatures.)

It has been my experience that people are unlikely to shill for someone they disagree with philosophically just because of a check. I’ve seen people try, and they usually end up with horrible reputations and a different line of work.

I’m not saying it doesn’t happen, and Reactor may have seen more of it than I have. My experience leads me to believe those cases are exceptionally rare.

It’s somewhat hard to see in the image above, but if you’re interested, click through to the report and jump to page 55.  The graph represents the growth in data traffic for NTT DoCoMo and Vodafone for a four year period from Q2 ’05 to Q2 ’09.  The results show NTT’s data traffic jumping from about 30% to around 90%, and Vodafone jumping from the mid 40s to north of 70%. Many people noted AT&T’s similar jump with the release of the iPhone.

With data traffic consuming that much of the network, it’s not surprising that the network operators would begin to package bandwidth the way they package minutes.  When your data traffic goes from being less than a third to ninety percent in four years, there is a pretty good driver for changing your pricing models.

Data used to be viewed as an add-on service that complemented your traditional voice service.  In that context, all-you-can-eat made sense.  However, data is rapidly becoming the principal technology of wireless carriers.  In that model, it makes sense to a) price differently, and b) use price as a means of traffic control.

A lot of people complained when AT&T made the move to tiered, metered billing.  However, those tiers will likely affect consumer behavior, preventing the heavy users that are the bane of wireline networks.

Just as $4-$5 per gallon gas changes the way we drive, high prices for bandwidth will change the way we consume data.  That may annoy consumers, but it may improve the network experience.

For those unfamiliar, astroturfing is a charge frequently thrown around in political fights.  Depending on who you ask, the definitions can vary wildly.  For some, astroturf is simply the act of being paid to speak out on an issue.  That is the crime Tim accused me of, though he failed to demonstrate who was paying me despite my offer of $1,000 for proof.

For others, astroturf is creating the appearance of a grassroots movement where none actually exists.  It is this latter definition that becomes fairly important today.

According to an article in The Daily Caller today, groups that Free Press listed as signatories to its pro-net neutrality agenda not only didn’t sign it, but had no recollection of ever being asked.

People working with groups like the Dr. Pepper Museum and Operation Catnip were asked why they support net neutrality. They could offer no explanation as to how their names, and those of their organizations came to be on the letter. This article comes on the heels of the Juvenile Diabetes Research Foundation making a specific request to be removed from the letter after it found itself as an unwitting signatory.

Free Press has previously “outed” groups for allegedly astroturfing on telecom policy issues.  It’s not clear what explanation they will offer for their astroturfing, but I, for one, would be curious to see how many signers of their past letters have no idea that they were included.

As for the Huffington Post, I will post this so its readers can judge for themselves.  I have fully disclosed my employment and my viewpoint.  Will Free Press fully disclose whose names they have signed to letters without their knowledge or consent?

I weigh in on telecom policy issues because it is a subject I care about, and because I feel the government should not get involved in regulating anything as important as the Internet.  But at least I know I weighed in.  It is unfortunate that those speaking on behalf of Free Press don’t even know they are doing so.

This is what a failed democracy looks like…

Really? A regulatory agency trying to work with companies it regulates to understand the possible consequences and formulate policy that won’t be actively harmful is what ‘failed democracy’ looks like?

[T]he mere existence of these private meetings reveals to us a chairman who has fallen far short of expectations. Instead Genachowski is shying from the need to fortify the Internet’s open architecture in favor of deals made between DC power brokers.

They’re really unhappy with Julius, aren’t they?

During that period, more than 85 percent of comments received by the agency called for a strong Net Neutrality rule. Look at it this way: If a candidate received more than 85 percent of the vote, wouldn’t she have a mandate to decide on the public’s behalf?

Because Free Press and its sheep submitted BS filings in a nonsensical policy process, they should, absent any engineering expertise, get to decide telecom policy for the US?  That’s a fabulous idea.  We’ll just run the US Government like it’s a hackneyed spinoff of American Idol.  Whoever gets the most people to text their vote should be President, I suppose.

In Chairman Genachowski’s alternative view of reality, though, the public is immaterial, and industry consensus supreme.

This isn’t about industry consensus.  As CNBC noted this week, the last time bad telecom policy became the law of the land, AT&T alone cut capital spending by better than half.  Cable executives will tell you of the stagnation and decline of investment following the 1992 Act.  After four years of job loss, reduced investment, and a derailed industry, Congress realized the scale of their disaster and wrote the 1996 Act to clean up their mess.

If, by actually meeting with the companies that are putting tens of billions of dollars into these networks, the FCC can head off a repeat of that debacle, then by all means meet with them.  The minute Free Press starts raising capital to build its own networks, I’ll be more than willing to hear them out on what makes that easier or harder.

Please note: This post is purely conjecture.  I have no evidence to suggest the theory suggested is true.  This post is offered purely as speculation and should not be relied upon as factual for any reporting.

I’ve been discussing Google’s improperly collected payload data, and their reluctance to hand it over, with a lot of people.  Most of the discussion comes down to the legal implications of violating privacy laws twice – once by gathering information surreptitiously, and then by handing that ill-gotten data over to a third party.  But occasionally that discussion comes down to a question of what is in the data.

When countries have asked Google to destroy the data, they have been more than happy to comply.  When asked to produce the data, Google has hedged.  Is that simply a function of legal compliance? Or could there be some “there” there?

To find an answer, I asked the following questions:

• How much data could Google actually gather from your network while driving past the house at 20-30 miles per hour?
• What kind of data would actually be useful?

The answers to the first question is “not much.”  That actually makes the answer to the second question more interesting.  Google has described the data collected as “only fragments of payload data.“  So what sort of fragmented data would be useful?

I have one possible theory, but no evidence to specifically suggest this is true.  It’s just the only explanation that I can come up with for something useful in a very small amount of data.

As the street view car passes by, the street view car could detect an open connection.  It could then attempt to connect.  Assuming a successful connection, it could move a small piece of data upstream/downstream over that connection.  It would only have a second or two at best, but could move a small piece of data in that time.

What would that give Google? Well, first, it could tell them who your ISP is.  Second, it could give them a very rough sense of your connection speed. As explained to me by an engineering friend, the accuracy of that speed test would be “worst-case”.  There is just not enough time to do a thorough test with the car moving at speed.

However, when aggregated with many readings in the same geographic area (especially many readings from what’s likely the same ISP or ISPs), a fuller picture of coverage, and coverage area could be obtained.

Google could be using its street view cars to map out broadband service areas and capabilities.  They’re driving through the most heavily populated areas of the world.  They’re scanning for networks and grabbing traffic from them.  An analysis of that traffic would give you a pretty good sense of ISP footprints and speeds.

Pair that with a project to do something really ambitious (like a fiber rollout, perhaps), and you would have a competitive advantage in terms of where to build, where – precisely – the best customers would be, what they’re currently getting from their ISP.

Google has said they have no interest in competing with ISPs, and the fiber initiative is simply an experiment.  However, a robust picture of ISP plant and capacity could give you the upperhand in competition.

Gathering that map by spying on open wi-fi connections could prove to be a PR nightmare, however.