In its ongoing struggles to offer broadband Internet access, cable company Comcast recently had its hand slapped by the FCC for selectively shutting down access to certain Web services. Now, Comcast has decided in lieu of shutting down legitimate file sharing programs, it will simply limit users' Web access. If a Comcast customer creates more than 250 GB of traffic in a month, the company may terminate their service agreement.
While this is a throwback to the days when folks were charged by the kilobyte for access (remember MCI Mail and CompuServe?), it underscores some deeper problems at Comcast (and perhaps augurs similar problems at other cable Internet providers). Investors and Internet users (okay, all of us) should wonder: The profit margins are ostensibly quite healthy in the online access business, so why would a company go to such extremes—flaunt FCC rules, infuriate customers, hack clients' computers—to restrict Internet access?
It has serious infrastructure problems, very serious infrastructure problems. Clearly Comcast cannot adequately handle the data load of its current subscribers, which means possible failures or tremendous capital expense in the future to keep up. So investors should be leery.
Its premium services, such as video on demand, are struggling. So Comcast wants to restrict movie studios and companies like Tivo from competing with Comcast's own video-on-demand business. The best way to do this is by limiting Internet access and thus preventing people from using those competing services in the future.
The first issue should certainly cause investors to worry. It indicates that the company has not anticipated the demand for Internet services and since it cannot keep up with that demand, the future looks bleak indeed for Comcast. It will either have to extensively upgrade the nodes on its network (the hubs in each neighborhood) or-–worse—add more lines. The latter is so expensive a proposition as to be prohibitive.
The second problem is ineluctable. As more video services become available, it's only a matter of months before more and more customers bump up against the 250 GB limit. Comcast tries to make 250 GB sound like a lot of data; the equivalent of 125 standard definition movies (at 2 GB a movie), the company says. However, people are watching movies in high definition now (what year is it, anyway). Those movies are more in the range of 25 to 33 GB each. Order 10 movies online from the growing number of legit movie sites, and you'll exceed Comcast's limit and your connection could be terminated, according to Comcast.
This way leads Comcast directly into antitrust lawsuits and extensive court battles. That means corporate distraction and declining profits.
Furthermore, while some may claim that 250 GB of data traffic a month is plenty for anyone, they would be wrong.
Increasingly popular Internet services promise to only raise the demand for data. Consider online backup and storage (just backing up a typical PC online would exceed Comcasts limits), and look at applications like Microsoft's Photosynth, and video calling services. These are data intensive, mainstream services. Photo and video sharing on sites like Youtube are commonplace. And online software purchases (want the next version of Photoshop?) can easily account for gigabytes of downloads. And never mind adding a few family members on the home Wi-Fi network who are addicted to World of Warcraft and iTunes. It won't take the average suburban family long to crash the 250 GB limit.
Now will Comcast actually call those families when they exceed the limits? That remains to be seen. However, it does indicate how deep the company's problems run.
On the upside, investors might look more closely at the likes of Sprint. Comcast's problems could be a boon to Sprint and its forthcoming WiMax wireless broadband service. All Sprint has to do is drop WiMax cell towers wherever Comcast has service, and voila, thousands of new subscribers.