iPlayer and ISP Business Models

IanFogg | April 09, 2008, 06:58 PM

The debate raging between ISPs and the BBC over the iPlayer catch-up TV service highlights the strain that ISP business models are under.

In essence, a combination of fierce inter-ISP competition and the confusing marketing of broadband packages, has led to a tailspin of residential broadband pricing as consumers choose the cheapest offer. ISPs are simply receiving less and less (broadband Internet) revenue from each consumer, so they are seeking revenues from other sources such as content providers ie the net neutrality debate (read this net neutrality report), or through behavioural advertising models (e.g. Phorm and soon others), or through multiplay bundles (read this report on multiplay).

Alongside this declining per user revenue, Internet traffic is increasing due especially to the rise of video services such as iPlayer (UK), Hulu (US), 4oD (UK), Sky Anytime (UK), Joost, Babelgum, Youtube, Flickr, etc. etc. as well as the pirating of tv programmes and movies using peer to peer networks. So, ISPs' bandwidth costs are rising.

ISPs are attempting to control these traffic costs. Some ISPs have opted to impose explicit data volume usage limits on broadband users. Others have increased the degree of traffic management they deploy so reducing broadband speeds for consumers that exceed (sometimes secret) preset thresholds, or lowering speeds for certain applications (e.g. p2p) . Some of the ISPs that used the above tactics, have continued to market their broadband as 'unlimited', or in a couple of cases as fibre optic. Both of these tactics are misleading and encourage consumers to pick the cheapest broadband product available.

So, it's not a surprise that Tiscali are complaining about iPlayer and are looking to achieve revenues from content providers rather than consumers. As a service, iPlayer has gone from having zero users to a reported more than a million weekly users in just nine months.

Unless either: (1) ISPs can agree on a way to market broadband clearly, so consumers can differentiate between them, and understand the benefits of more expensive packages; or (2) charge content providers for priority carriage, then ISPs will continue to struggle to make any money out of broadband directly and will have to reply on other parts of a bundle to drive profitability.

iPlayer could be the final nail in the coffin for pure-play ISPs. I don't see blocking or degrading iPlayer as being a viable option for any ISP as it is a BBC service. So, iPlayer could drive further ISP consolidation and lead to less consumer choice.

Most pure play ISPs are small operations, Tiscali are alone among the UK's main ISPs in being mainly a broadband play: Carphone Warehouse have a stated strategy to use broadband to drive profits from the bundled telephone service with broadband serving as an acqusition carrot; likewise VirginMedia see broadband as an acquisition tool for the other parts of their quad play; Sky plan to use broadband to deliver on demand TV; BT likewise, see broadband as a strategic plank of their business and central to retaining retail customers; Orange and O2 seek to do fixed-mobile bundles and will in time attempt to offload mobile traffic onto consumer DSL connections.

Only Tiscali is a classic ISP business and tellingly they are almost certainly up for sale.