The Age of Internet Bundling Is Here

NEW YORK (TheStreet) -- Perhaps the strangest aspect to the "Net neutrality" debate is that Net neutrality hasn't been around for years.

Disney (DIS) killed it almost a decade ago, through its ESPN unit, with ESPN360, now called ESPN3.

Do you get ESPN3? If you don't, you can't. If you do, you probably didn't choose to.

Disney sells ESPN3, an Internet sports service that offers additional programming not available on ESPN's TV channels, only through some cable operators and other Internet Service Providers.

The cost is tacked onto the bills of subscribers to those ISPs whether or not they want ESPN3. Sports fans whose Internet Service Providers don't pay for ESPN3 can't watch its programming.

This has carried over into apps and other services. Sports fans can watch all of ESPN's programming on their computer, tablet smartphone or Xbox, but only if they receive Internet service through one of the cable operators or ISPs that pays for  ESPN content.

Time Warner Cable (TWC) calls this concept "TV Everywhere," and it is everywhere. Both ABC, also owned by Disney, and 21st Century Fox (FOX) deliver second-day access to their network programs through TV Everywhere services, but only to viewers whose ISPs pay for the content.

Comcast (CMCSA) subscribed to ESPN3 for its subscribers and was thinking about TV Everywhere when it bid $250 million in 2012 to get the rights for three years of the Barclays Premier League in England (and Wales), 380 games per year.

That's far more games than it could show on its fledgling NBCSN service, so it created NBC Sports Live Extra, a TV Everywhere service, to show them. When NBCSN charges Comcast for Internet carriage rights Comcast takes the money out of one pocket and puts it in the other.

Liberty Media (LMCA), which is trying to buy Time Warner Cable through Charter Communications (CHTR), of which it owns 27%, is well aware of this history. Liberty Media owns the Atlanta Braves baseball team, as well as three regional sports networks.

If subscribers think they can escape this bundling through DirecTV (DTV), Liberty Media owns 38% of that, too.

Owning the programming is a sweet deal for a cable company, or an Internet carrier. It's the kind of vertical integration 21st Century Fox gets from its owned-and-operated TV stations. When Fox charges a Fox station for Fox programming, the money stays home.

Want to know why the cost of sports rights, and sports teams, keeps climbing? Vertical integration. Want to know why cable operators and phone companies are now bidding directly for sports programming rights? It's because of TV Everywhere.

When the U.S. Court of Appeals ruled the FCC's Net neutrality rules out of order, activists created an online poster showing a future Internet service bill, with subscribers being charged extra for access to various Web sites.

The assumption built into that was that the carriers would be charging the sites. The reality, however, is that the sites charge the carriers.

This has a huge impact on how investors should be looking at the Net neutrality issue. The fear is that AT&T (T) will charge Netflix (NFLX) for letting subscribers gain access to it. Netflix could easily charge AT&T, getting added to TV Everywhere to give AT&T's U-verse some differentiation.

Under the Court of Appeals ruling there are now all sorts of "bundles" that carriers, most of which already run cable television systems, could now make with Internet content, based on the TV Everywhere model.

Are local newspapers charging for access? Add them to a local bundle. Are magazines charging subscription fees for Internet services? Add a mix of them, maybe through an aggregator. If a carrier doesn't like the price Netflix is charging, it might add Hulu Plus to the bundle instead -- or even Amazon.com (AMZN) Prime. And don't forget Internet radio services such as Pandora (P). They might like to get into a bundle as well.

There's a Wild West atmosphere in all this, but the West was tamed long ago. It's a lot cheaper for an Internet site to take a big check from a carrier than to try and market to millions of individuals and bill them individually -- the deals are there to be made.

The only protest against all this is that subscribers don't get a vote on what goes into their bundles. They either buy the bundle the cable carrier is offering, or they buy the bundle the phone carrier is offering.

If Net neutrality buffs want to stop all this, or even slow it down, they should be demanding what the 1996 Telecommunications Act was designed to give them, the power to demand the rental of phone and cable lines to third parties for the creation of competitive Internet carriers. In short, make them common carriers, and make them compete.

Google (GOOG), which has launched an online campaign against the Court of Appeals ruling, will be watching that carefully.

At the time of publication the author owned shares of Google.



This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

 

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