How can the FCC help expand the broadband economy

Yesterday Michael O’Rielly provided a definition of the internet economy during remarks made before the Internet Innovation Alliance.

“Here is a simple truth.  The Internet thrives today on aggregating information for the purposes of increasing advertising revenues and the use of data analysis for multiple purposes.  Data and advertising are why Internet-related companies are valued so highly by investors and Wall Street, and why those companies that cannot monetize such activities face harsh realities and uncertain futures.”

In other words, regulators need to understand that the commercial internet is an infrastructure that facilitates data trade and that the regulations they implement can limit the type of data collected over the internet by internet-related companies.  Broadband operators are involved in this data trade.  For example, Comcast collects non-personally identifiable data that they may share with third-parties for the purpose of targeting advertisement.  This non-personally identifiable data may include IP and HTTP header information; a consumer’s device address; a consumer’s web browser; or a consumer’s operating system when using Comcast’s web services.  Where a Comcast subscriber is trying to personalize the use of Comcast’s web services, the consumer may provide to the broadband provider for storage the consumer’s zip code, age, or gender information.

The competition that gets ignored by regulators is the competition broadband providers face in the capture and sale of consumer data.  This competition includes cloud storage companies, content creators, and app developers.  It also includes companies in the internet, publishing, and broadcasting industry with familiar names like Facebook, Google, and Yahoo. According to Hoover’s, these companies publish content online or operate websites that guide information consumers to the content they are seeking.

Demand for this industry’s services is driven by consumer or business needs for information and other forms of content. Profit is created when these companies deliver relevant information to consumers while offering advertisers a targeted audience.  According to Hoover’s, sales of online advertisements account for just over half of U.S. industry revenue with 75% of advertising revenue coming from search and display advertising formats.

Comcast was hoping to make major inroads into advertising with its proposed acquisition of Time Warner.  Writing for Adage.com in February 2014, Jeanine Poggi wrote:

“Assuming the deal is approved, however, it will make Comcast become a more important partner for advertisers, said Ken Doctor, affiliate analyst, Outsell. Its expanded role as both a content producer and content distributor will make it all the more competitive for ad dollars with companies like Yahoo, AOLGoogle, and Facebook. “It will become more of an ad competitor as selling of TV [and] digital inventory blurs,” he said.”

Writing further, Ms. Poggi points out that:

“A merged Comcast reaching 30 million U.S. households, along with the national reach of DirecTV and Dish Network, creates an alternative to buying national advertising from the TV networks, said Jason Kanefsky, exec VP-strategic investments, Havas Media.”

Unfortunately for Comcast investors, the Federal Communications Commission and the U.S. Department of Justice bought into the pseudo net neutrality argument pushed by grassroots groups and Netflix that mergers such as Comcast and Time Warner would somehow thwart the average man’s ability to express themselves online and that a larger Comcast would be a detriment to competition in broadband access.  Allowing the merger it appears would have given advertisers, from large corporations to small entrepreneurs, alternatives for online advertising.  The economies of scale that a Comcast-Time Warner marriage would have produced may have lead to lower advertising rates especially for smaller companies.  The FCC’s new Title II rules for broadband companies may only serve to further foreclose such scale.

The issue is, under the current rules and statutes, should broadband providers be prohibited for sharing data with advertisers or other third-parties seeking to target ads at a broadband provider’s subscribers?  I believe the answer is no and investors should lobby the FCC to ensure that no such rules are drafted.

47 CFR 8 of the FCC’s rules for protecting the open internet provides no explicit prohibition on a broadband operator providing third-parties with subscriber data that could be used to deliver advertisement.  Section 8.11 of the rules, in my opinion, gives broadband operators an argument for providing customer data to third-parties, particularly edge providers.  Specifically, the rule says:

“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.”

Section 222 of the Communications Act does not expressly prohibit use of consumer information for advertising purposes, but given that the statute is written for telecommunications companies, Congressional action would be needed to amend the section with language that reflects how broadband and other internet companies use consumer information.

If the FCC wants to help expand the broadband economy, it will have to persuade Congress to make these language changes lest leave investors in a state of uncertainty.

 

 

 

 

 

 

No. More telecom mergers won’t adversely impact net neutrality

In an opinion piece written for Forbes.com by Professor Warren Grimes of Southwestern Law School argues that there is a link between mergers in the telecommunications industry and net neutrality regulation.  Specifically, Professor Grimes argues that:

“Large telecom providers usually favor mergers and oppose government regulation. Meanwhile, content providers and consumer groups typically hold opposite views: they oppose the mergers and favor the regulation. Sound policy requires more nuance. The public interest and the long term interests of industry participants are best served by limiting mergers and, as a direct result,  minimizing the need for government regulation. Competition, not government regulation, is the best way to ensure that consumers receive what they want at a fair price. But this result is possible only if mergers do not create powerful firms that suppress competition and undermine consumer sovereignty.”

The premise that an alleged lack of competition for broadband access or content provision has a negative impact on net neutrality is faulty because net neutrality has nothing to do with either. Net neutrality is about content providers’desire to pay zero for sending traffic across a broadband provider’s last-mile network. Just look at Commercial Network Services’ complaint against Time Warner Cable that it should be allowed to interconnect with the broadband provider for free.  To CNS, Time Warner Cable is “degrading its ability to exercise free expression.” And here we thought the “attack on democracy” argument was being used to advocate for consumer rights to internet traffic, not for corporations.

Do consumers really want a diverse amount of content? No, they don’t. Out of an average of 129 available cable channels, consumers watch an average of 17, according to an article in Arstechnica.com.  And of the 961,554 active websites today, consumers visit less than ten a day for their news, entertainment, shopping, and other information.  The British communications industry regulator, Ofcom, determined in 2012 that the average number of domains visited per month by an internet user was 82 in January 2012.

Mergers may be an appropriate way for less viewed sites to gain not only viewership but capital, especially if they have a niche brand that an acquiring firm wants to leverage for growth in market share. Writing off mergers on the false pretense that they stifle a competitive offering of content is the wrong approach. Instead, regulators should view mergers as strategic partnerships that help get little viewed content some more traction.

If net neutrality really has anything to do with treating all traffic equally then regulators should be interested in ensuring that content providers have an organizational structure that can best help a content provider get eyeballs to its traffic.  Just saying traffic should be treated equally does not make traffic worthy of equal treatment by the market.

Lifeline is about promoting a good society

Today the Federal Communications Commission voted on a notice of proposed rule-making to extend Lifeline services to include access to broadband.  The internet provides modern society an enhanced conduit for sending and receiving messages and data.  This capability allows businesses to provide innovative services on a cost-effective basis and allows consumers an efficient mode for accessing services.

For example, yesterday I met with my new primary care physician.  Not only was I impressed with her personality and knowledge but I was also impressed with how her office uses the internet to manage patient health.  Her patients can get online and register with her information portal in order to review their prescriptions, other medical information, and contact the doctor or her staff with questions.  I can do all this with a laptop and a high-speed internet access connection.

The internet and the high-speed broadband access services that allow us to connect to it provide mechanisms for society to carry out its purpose: to help spread the risks that threaten the abundance of life.  We join societies in order to share resources, maximize our wealth, and increase our security.  Broadband access does that by giving society’s members access to multiple sources of information and data.

Today’s discussion at the FCC unfortunately got hung up on issues such as fraud and waste.  FCC member Mike O’Rielly was correct when he said that today’s vote should have been a five to zero slam dunk but as Chairman Tom Wheeler also noted, it was unfortunate that the issue had become politicized.

If waste and fraud are an issue then the FCC should take consider a couple approaches shared by AT&T’s vice president for external affairs, Jim Cicconi.  In a blog post posted 1 June 2015, Mr. Cicconi  offered the following:

“First, AT&T believes that the government, not carriers, should be responsible for determining Lifeline eligibility and enrollment.  This is the way most federal benefit programs work, and there’s no good reason for handling Lifeline in a radically different way.  Many of the problems associated with Lifeline are rooted in this flawed approach.  Administrative burdens on carriers today are huge, and innocent mistakes can lead to disproportionate punishment—which in turn discourages carrier participation.  And the potential for fraud by less reputable players is very real.  Moreover, consumers are saddled with difficult burdens if they simply want to change carriers.  Government itself should determine eligibility, and can provide the benefit through a debit card approach much like food stamps.  Consumers could then use the benefit for the service of their choice.”

The FCC should keep its eyes on the prize.  It can play an important role in keeping society’s members connected to today’s most important piece of capital, knowledge.  Waste and fraud, albeit important considerations from an operational standpoint should not be a barrier to implementing equitable social policy.

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Should investors be concerned about FCC Lifeline funding policy? No

Posted June 8th, 2015 in Uncategorized by Alton Drew

Back on 28 May 2015, Federal Communications Commission chairman Tom Wheeler announced a policy initiative to target the Lifeline $9.25 per household subsidy toward broadband services for low-income consumers.  Lifeline was established in 1985 during the Reagan Administration and was designed to help low-income consumers maintain telephone services on a monthly basis.  The subsidy is funded via a monthly charged assessed on telephone subscriber phone bills.

Lifeline is not a threat to the typical telephone company’s business model.  If you take a look at AT&T or Verizon’s 10-K filings you will not find mention of Lifeline eating into company profits in any meaningful way.  Instinctively one would think that a program that encourages an increase in wireline or wireless subscribers would be a good thing anyway, especially when that increase is being funded by the vast majority of consumers.

The Commission is slated to discuss Mr. Wheeler’s initiative on 18 June 2015 during their monthly open meeting.

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Is FCC net neutrality policy forcing investors to play broadband providers off of video streaming services?

Do we regulate vans when used to deliver newspapers to grocery stores or pharmacies?  Do we ask grocery stores or pharmacies to disclose the contracts they enter into for displaying The Wall Street Journal or People Magazine on their shelves?  Renting a van to deliver magazines or striking placement deals with grocery stores and pharmacies is the cost of doing business that magazines and newspapers incur when distributing their product and I don’t see why online content providers like Netflix should avoid the same costs of business under a disingenous practice of open internet or net neutrality.

The Federal Communications Commission so far has successfully skirted this argument, having phrased net neutrality as a consumer’s rights issue versus what it truly is: a cost-of-doing business issue for content providers who would rather not pay Comcast, Verizon, or Time Warner a fee to interconnect opting instead for a “bill and keep” scenario.  But like any other media company, Netflix, Hulu, or Amazon should be responsible for putting together their own content production and distribution network.

On the content side these companies will hire their own staff to create content in-house or hire a production company to provide them a set amount of programming.  They will, in the case of movies or television, pay licensing fees that enable them to re-broadcast a television or theatrical production.

The distribution side is trickier.  Netflix depends on mid-mile providers like Cogent and last mile providers like Comcast to connect their content to final end-users or consumers.  To keep these distribution costs low, Netflix would prefer to interconnect at no costs with last-mile providers. In its latest 10-K report filed with the U.S. Securities and Exchange Commission, Netflix describes risks related to its relationship with last-mile providers:

“We rely upon the ability of consumers to access our service through the Internet. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our member acquisition and retention could be negatively impacted. Furthermore, to the extent network operators create tiers of Internet access service and either charge us for or prohibit us from being available through these tiers, our business could be negatively impacted.
Most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. As such, many network operators have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. For example, Comcast exempted certain of its own Internet video traffic (e.g., Streampix videos to the Xbox 360) from a bandwidth cap that applies to all unaffiliated Internet video traffic (e.g., Netflix videos to the Xbox 360).
While we believe that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential treatment to their data as opposed to ours or otherwise implement discriminatory network management practices, our business could be negatively impacted. In some international markets, these same incentives apply however, the consumer demand, regulatory oversight and competition may not be as strong as in our domestic market.”

The irony of Netflix’s statement on the threats broadband operators impose on their streaming business is that a few paragraphs prior to this statement, Netflix describes these providers as partners, specifically when it comes to streaming over devices provided by cable and telecommunications companies:

“We currently offer members the ability to receive streaming content through a host of Internet-connected devices, including TVs, digital video players, television set-top boxes and mobile devices. We have agreements with various cable, satellite and telecommunications operators to make our service available through the television set-top boxes of these service providers. We intend to continue to broaden our capability to instantly stream TV shows and movies to other platforms and partners over time.

If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing or other impediments to delivering our streaming content to our members via these devices, our ability to grow our business could be adversely impacted. Our agreements with our device partners are typically between one and three years in duration and our business could be adversely affected if, upon expiration, a number of our partners do not continue to provide access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.

Furthermore, devices are manufactured and sold by entities other than Netflix and while these entities should be responsible for the devices’ performance, the connection between these devices and Netflix may nonetheless result in consumer dissatisfaction toward Netflix and such dissatisfaction could result in claims against us or otherwise adversely impact our business. In addition, technology changes to our streaming functionality may require that partners update their devices. If partners do not update or otherwise modify their devices, our service and our members’ use and enjoyment could be negatively impacted.”

The consumer-centric statement caters to the public net neutrality argument of supposed threats posed by broadband providers but the statement describing broadband providers as partners, in my opinion, captures the reality of the relationship between content providers like Netflix and broadband providers.  The way to look at how a seamless internet service experience is provided is to look at the components necessary for getting digital product to the consumer.  Netflix has to coordinate via contract the prodiuction of content and its distribution.  It has demonstrated that it can and has entered into the necessary agreements with wireline and wireless providers to get its content distributed to consumers.

As a going concern I expect Netflix to take initiative in reducing its costs of delivery but using government regulation as the method for mitigating costs eventually is not in the consumer’s best interest nor in investor best interests.  Broadband providers will pass on the increased costs of traffic delivery and net neutrality regulatory compliance to consumers.  Increased costs of broadband access will cause consumers to look for other cable or wireless platforms, including different tiers of service which will have a negative impact on broadband operator revenues in the longer run.  Netflix may see a temporary bump in profits but as consumers decide to downgrade service, access to Netflix may be one of those services consumers may end up doing without.