What the Net Neutrality Repeal Could Mean for US Entertainment Audiences

On Thursday 14th December 2017, the FCC (Federal Communications Commission) will hold a crucial vote on the future status of the internet in the US. It is expected that the vote will lead to the repeal of the net neutrality legislation enacted in 2015, which prohibits internet service providers (ISPs) from exerting discretionary control over the flow of data on their service.

By declassifying ISPs in the US as common carriers, this potentially could open up the possibility for the three main ISP’s – Verizon, AT&T, and Comcast – to start charging different rates to internet users depending on what sites and services they wish to access. While it is currently unclear how such measures would be implemented, this service offered by Portuguese ISP, Meo, offers a glimpse at a possible example of how an American ISP may offer “packages” containing select sites and services for its customers:

Nn Image One

If US ISPs were to adopt an approximation of Meo’s model, it could have a profound effect on how entertainment audiences will access in a post-net neutrality internet. It could also lead to a future where the competition among entertainment platforms could be a case of who you are affiliated with rather than who you can reach.

The End of Netflix’s Trickle-down Streaming?

Netflix could be seen as something of a “whale” by American ISPs in a post-net neutrality internet. As of March 2016, Netflix was responsible for 35.2% of downstream traffic in North America. Therefore, post-NN, ISPs could lean hard on Netflix to pay a premium itself to prevent providers from placing the streaming giant behind an exorbitant paywall and keep itself on a level playing field with its competition. Pre-net neutrality, Netflix found itself in disputes with both Verizon and Comcast over its bandwidth usage and eventually agreed to pay a fee to both ISP to ensure an acceptable speed for its customers

Netflix is the current dominant SVOD service in the US streaming market but in a post-NN internet, the streaming giant's dominion could be threatened if the service finds itself paying more than its rivals to be placed in the same tier or fast lane – particularly among lower incomes. We can see below which income segments favour Netflix more as an SVOD provider.

Net Neut 001

While Netflix currently enjoys a comparatively higher penetration with lower and mid-incomes, rival services such as HBO Go and Amazon Prime receive a higher share of the audience in the Top 25% & 10% compared to their penetration in the lower to mid-incomes. These rival services currently use considerably less bandwidth than Netflix (Amazon Prime made up just 4.3% of US downstream traffic in 2016) so it is reasonable to presume that ISPs could charge these services less to remain in the fast lane.

With two new major sVOD services joining the marketplace over the next two years – Disney and Apple – the possibility of a price war in SVOD market could be a distinct one in an attempt to usurp Netflix’s dominance with lower incomes (Disney have already stated they will be offering a lower price point when its platform launches in 2019). Such an outcome would posit a dilemma to Netflix who may not be able to afford to drop subscription prices not only due to a potentially higher ISP cost but also their vast production budgets - estimated to be $7bil for 2018.

It is a probable eventually that if SVOD services get placed behind a paywall, then lower to mid-income audiences could look to offset the additional cost based on subscription price alone and that’s a situation where Netflix may find little room to manoeuvre.

Getting in on the Game

One of the most startling revelations in audience behaviours in 2017 was the reveal of just how big the audience has become for Gaming Video Content (GVC). A report published by Superdata this year shows the staggering size this particular audience has grown to:

Nn Gvc

The sheer size of this audience would make for a tempting target for US ISPs to segregate a service like Twitch, which specialises in live gaming streams, into a premium package. But such a decision could threaten the emergent audience that currently sees more engagement in the lower to mid-incomes.

Net Neut 002

Placing a live gaming stream service like Twitch into a premium ISP package would likely eat away at the lower income audience who can currently engage with the streams for free and any payment is on a purely discretionary basis to the streamers. Likewise this could also prove devastating to streamers themselves who often rely on these voluntary payments from viewers who may no longer wish to contribute directly to streamers having already paid a gateway fee to access the services.

ISPs would need to approach a premium on this audience with caution, if at all, not least because of the vociferous nature of the gaming community but also because games publishers enjoy a tremendous amount of outreach thanks to game streaming. According to Superdata’s report, “two in three viewers watch gaming content to learn more about a title they want to play” meaning games publishers would be highly adverse to GVC being gated off behind a premium charge. In a post-NN internet, this particular audience presents a veritable hornet nest for ISPs that may be best left undisturbed.

Post-Net Neutrality Fears Mobilised

Another area of the US internet that would be affected by the repeal of net neutrality is mobile. By looking at the penetrations of music platforms on smartphones we see a potential situation where one platform receives preferential treatment that taps into many people’s fears over a post-NN internet.

We can see from this survey data from Global Web Index that the music streaming service, Tidal, has struggled for penetration in the US on smartphones:

Net Neut 003

At just 0.5% account usage by US smartphone owners, Tidal is a bit part player in a market dominated by Spotify at 10.2%. But that could change without NN regulation. US telco, Sprint Mobile, has one-third ownership of Tidal which could result in Sprint Mobile users not having to pay a premium to access the platform while market leader Spotify could find their service placed behind a paywall. This would undoubtedly give Tidal a competitive edge on the Sprint Mobile service and presents a stark example that could be extrapolated across ISPs where certain platforms, services, and sites are given discretionary treatment based on the corporate interests of the various providers.

Without delving too far into the “if’s and but’s” of corporations’ abilities to self-regulate and promote fairness, we should be under no doubt that a post-NN internet will be entirely reliant on those abilities. The progenitor of the net neutrality repeal, Ajit Pai, claims the decision would increase competition in the US internet for its betterment. But if the game can be so easily weighted to suit those who control the gateways to the world wide web, it is hard to tell how fair that competition will be.

If you're interested in learning more about the Audience Intelligence solutions we offer here at EntSight then take a look at our website to find out more or drop us a message.

David Murphy

David Murphy

EntSight Researcher