Thursday, April 30, 2009

The Death of Free (The end of free music, movies and text on the internet)

This is the end of free. You might not have noticed it yet, but it is. This is not a post about piracy or copyright law or compensating creators of content. This article is an economic - pure market capitalism, hypothesis about the end of free content. Over the past few years, a lot of real and digital ink has been used to discuss the ever decreasing perceived value of content - be it music, movies, games, journalism, etc. Anything that could be freely copied was, and revenues continue to collapse in media industries, especially music.

That's all about to change. The era of file-sharing is coming to an end. Because it no longer makes economic sense for internet service providers. They do have a very real economic incentive to control bandwidth. Internet subscriber growth in the US is slowing. ISPs are going to have to move from a model of growing subscribers to increasing per-subscriber revenue. Bandwidth caps. Time Warner is not abandoning them, they will be back. And they will make the work for consumers. P2P traffic - file-sharing, bit torrent downloads, make up between 60% - 95% of ALL internet usage now. ISPs will not write that off much longer.

One hurdle remains - how to get consumers on board without surprising them with a $3,000 bandwidth bill? How do ISPs explain what a megabyte or a gigabyte is? Here's how it will happen:

1) ISPs will add a simple bandwidth meter to customer account pages.

2) Like a gas pump, ISPs will throttle down the connection speed as limits approach, to reduce and prevent outrageous overages.

3) Preferred partnerships. This will be the tipping point. ISPs will offer bandwidth-intensive service providers: say iTunes, Netflix, Google, Amazon, Hulu revenue sharing deals in which customer content from included partners is not counted against their bandwidth cap.

This is a market-oriented solution and end-around net neutrality. For a small per download share or cut of advertising, Comcast and Time Warner will say "no iTunes or Hulu purchases or streams will count against your cap. Eat as much as you want." Once these large counter-parties are included in the scheme, there will be no counter-weight to lobby consumers or others against bandwidth caps. In fact, it will be in iTunes and Hulu's interest to support, as they will demand more market-share in sales, streams and content supported advertising revenue.

When consumers have to pay for bandwidth usage to not just download, but host and upload free content files, p2p will dry up. There will certainly be all-you-can eat ISPs catering to the avid file-sharers, but the vast majority of users will be with an ISP that caps bandwidth at some level, thus discouraging them from using for file sharing. Not because file-sharing is illegal or wrong, but because it is expensive and non-profitable for the ISPs. Their economic interest will drive them to ask consumers to share in the cost via bandwidth caps. And consumers will reduce and guard their usage, just like they would if a neighbor asked to tap into their electricity, water or gas connection.

It's coming. The death of free. In future posts I'll explore how DashGo thinks this will reverberate to content owners, to consumers, to internet startups and other players.