Layer3 TV: 1TB Data Caps Are Too Low

Comcast has expanded its rollout of broadband data caps across more US markets in recent months, meaning that at-home subscribers who go above a certain level of Internet usage during a billing cycle are charged an overage fee for additional data consumption. Yet, while consumer advocates rail against data caps on principle, Comcast at least has always been perceived as generous in the thresholds it sets for monthly usage. The cable company first increased its data ceiling from 100 megabytes to 300 megabytes, and then moved broadly to 1-terabyte caps in many markets earlier this year.

As Comcast Corp. (Nasdaq: CMCSA, CMCSK) likes to say, "more than 99 percent of our customers do not use a terabyte of data and are not likely to be impacted by this plan."

However, Layer3 TV CEO Jeff Binder thinks that 1 terabyte of data per month isn't enough, and he has good reason for saying so. When and where data caps are enforced, they will have a direct impact on Layer3's business.

"I think that the 1-terabyte caps are too low," noted Binder at last week's S&P Global Market Intelligence's 7th Annual Multichannel Summit in New York. He pointed out that when consumers are viewing 4K Ultra HD content online, 1 terabyte is only equivalent to between 15 and 20 hours of streaming video.

Speaking to the future of 4K, Binder added, "I think there may be some sort of truth in lending [issue] around how operators cap things, and whether they can actually sell these services that have fairly high bitrates, but yet fundamentally you could never use them for anything remotely approaching even a week [of normal activity]."

According to Binder, the right threshold for a broadband data cap is probably somewhere between 1 terabyte and 10 terabytes, "and I think that ultimately service providers will get it right."

Layer3 TV has marketed itself as a managed video service; one that also offers 4K content, integration of Internet apps and other premium features for a promotional price of $79 per month. But the CEO has clarified that in its two primary markets today -- Chicago and Washington DC -- the service gets treated just like any other network traffic in the last mile of delivery. And that means that usage of Layer3 TV counts toward any data cap that an ISP wants to apply. (See Layer3 TV Comes to Town, Hints at Future.)

To be clear, Layer3 is not a classic over-the-top video provider. It has invested heavily in video infrastructure, including a backbone network, cable headends, set-tops, service installers and support staff. But it is partnering with ISPs to use their last-mile networks, and that makes it hard to categorize. After all, Netflix Inc. (Nasdaq: NFLX) also invests significantly in infrastructure, but the streaming giant is clearly classified as an OTT service. So what's the difference?

Binder pointed out at the Multichannel Summit that "it would be a substantial portion of Netflix ARPU (average revenue per user) to pay for what we do in terms of managing QoS (quality of service). It would be very difficult for a skinny bundle to operate in the way we do."

Dane Jasper, the CEO and co-founder of ISP Sonic.net Inc. , had another way of making the distinction in recent tweets on the subject, noting that while Netflix may peer with last-mile providers Layer3 requires peering. That means it's always being delivered over a private network. "Private network only, thus not 'OTT,'" tweeted Jasper.

But he added, "It's admittedly muddy and I can argue both sides ... Traffic isn't separated [i.e. it counts toward any usage cap] and that's an OTT characteristic."

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The issue of data caps has always been a controversial one, but where caps have been higher than nearly anyone needs, the arguments over caps have always been more philosophical than practical. That changes if suddenly average usage starts to bump up against caps for a lot of people, as it may with 4K video.

Additionally, the threat of oversight on the overlapping issues of data caps, zero rating (where a provider exempts its own service from usage caps) and broadband pricing appears now to be diminished. In a Republican-controlled FCC, the industry expects there will be more of a "light-touch" regulatory approach, which is a huge advantage for incumbents. (See Trump Win Will Reshape FCC and AT&T & Trump Tangle Net Neutrality's Web.)

Further, because cable companies are by far the dominant broadband providers in the US, they have an added edge. The cable industry in particular is under both minimal regulatory and market pressure to keep broadband prices low and data caps well above average usage rates.

Layer3 TV is an interesting test case where caps are concerned, but it won't be the only one as other video service providers start to add more 4K content.

Layer3 is also an interesting example of how video service models are evolving. As a hybrid service, it doesn't fit squarely into any category, making it more difficult to evaluate as a business and to understand how it should be treated by the market and government regulators. In that aspect too, it won't be the only company to challenge TV and even OTT video norms. There is more disruption to come.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

msilbey 11/22/2016 | 10:15:16 AM
Re: Caps.. It is absolutely a financial mechanism and not necessarily bad on principle... if there is a competitive environment. I'd really like to see some more solutions dealing with peak broadband usage where there is congestion. Or perhaps, just more discussion of them. It's probably time to review network management practices. 
KBode 11/21/2016 | 2:27:08 PM
Caps.. I think the conversation over whether caps are high enough obscures the fact that they're not financially or technically necessary in the first place. They are a glorified price hike on uncompetitive broadband markets. With the added potential for abuse in order to hamstring competitors like Layer3 simultaneously by making streaming more expensive, and by zero rating the incumbent's TV service..
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