Requiring access to cable-owned content creates a barrier to entry for smaller content providers

Yesterday Federal Communications Commission chairman Tom Wheeler announced his intent to ask his fellow commissioners to sign off on a rule that would require cable companies to provide over-the-top video distributors with access to cable company-owned content.  According to Mr. Wheeler, the intent of the rule modification is to provide consumers of content “more alternatives from which to choose so they can buy the programs they want.”

What this change to the rules will actually do is create a barrier to entry by smaller content providers.  Mr. Wheeler’s rule amendment, much like the statute passed in 1992 and its subsequent rule, will simply give incumbent content an additional platform from which to be seen.  “Law and Order: Criminal Intent” will now be seen on cable, satellite, and over-the-top video distribution.  Over-the-top providers can now take a short cut to content and forgo negotiating contracts for new content from new entrants.

For start-up, minority-owned, or woman-owned content production companies there will be a lost opportunity to showcase more of their content to over-the-top distributors.  Smaller content providers may have to reduce the price offerings for their programming just to get one of fewer remaining slots on a over-the-top’s network.

If the FCC is so concerned with competition throughout the internet ecosystem, it should let all stakeholders in the ecosystem enter into contracts on their own without government interference.  Also it should provide smaller content providers the opportunity to enter into strategic partnerships that get their product in front of the public.

The best broadband play for minorities is to own its intellectual property

There has been plenty of discussion about the minority community’s lack of access to broadband.  Evidence supporting that narrative includes findings by the Pew Research Internet Project showing that while 87% of whites use the internet, only 80% of blacks do so.  In addition, 74% of whites have broadband at home while only 62% of blacks access the internet using broadband from their residences.

Arguments have been made that given this disparity in access between white and black Americans that blacks are falling behind on accessing economic opportunities especially when it comes to competing for jobs.  Even though blacks are over-indexed on smartphone ownership and access to the Internet via mobile devices, it is very difficult to create or submit business proposals or resumes using a smartphone.

Honestly, I’m no longer that concerned about access to the broadband protocol for transmitting and accessing information over the internet.  Part of the reason is that given the level of investment in deployment over the last decade and a half, approximately 99% of Americans have access to broadband.  In my opinion, if minorities are to garner any true wealth creation from the broadband, it will have to come in the form of intellectual property with a particular emphasis on owning patents.

In addition to pursuing job opportunities, the discussion of wealth generation via broadband access has centered on creating content.  From the distribution of movies and television shows via Netflix to Maggie Watson providing fitness tips on YouTube, there is an abundance of video content.  Netflix and YouTube account for 50% of North American internet trafficThe other well-known and not so well-known traffic generators bringing up the rear include:

Apple: 4.3%

Twitch: 1.8%

Hulu: 1.7%

Facebook: 1.5%

Valve: 1.3%

Amazon: 1.2%

Pandora: .5%

Tumblr: .4%

Not only are these companies sending content downstream, but they are aggregators of content and as such create bottlenecks to producers that want to get their content in front of as many eyeballs as possible.  Bottlenecks increase the costs of doing business for content providers making it even more difficult to create market niches.

With the abundance of content, however, comes the reality that creating a wealth-generating niche becomes increasingly difficult as content providers compete for more space.

And let’s not talk about apps.  The number of apps in existence is well over one million, but the vast majority of these apps generate little revenue.  For example, for the developer creating an app for Apple, the average revenue is around $4,000.

So where are the opportunities on the internet for minorities?  First, let’s look at the future needs of the internet and its sub-component, broadband transmission protocol.  In September 2014, Accenture released a report documenting the opportunities for growth in services, products, and revenues via the “Industrial Internet of Things.”  Accenture found that global investment in IIOT is expected to top $500 billion in 2020. According to Accenture’s report:

“Companies that introduce automation and more flexible production techniques to manufacturing can boost productivity by as much as 30 percent, and predictive maintenance of assets can save companies up to 12 percent over scheduled repairs, can reduce overall maintenance costs by up to 30 percent and can eliminate breakdowns by 70 percent.”

One path to increasing productivity via IIOT is through innovation via intelligent technologies.  Again, according to Accenture:

“Manufacturers soon will be building intelligence into every machine they produce and the innovative applications that accompany these smart machines will be vehicles for driving new revenue streams out of product-service hybrids. To reap the full benefits of the Industrial Internet of Things, says Accenture’s report, companies must exploit sensor-driven computing, industrial analytics and intelligent machine applications and weave together enterprise and machine-generated data to create new monetization opportunities.”

Building intelligence into every machine calls for inventive activity and this is where I see the best opportunity for Americans in general and people of color in particular.  Closely related to inventive activity is the ownership of the patented technology that can drive innovation.

The Brookings Institution reports that the average patent is worth approximately half a million dollars, a much more attractive sum than the paltry $4,000 for an Apple app.  Although patent values are increasing, the U.S., according to Brookings, has to face certain challenges in order to remain competitive, including maintaining funding for research and development and ensuring access to high-quality education, especially for lower income students.  If students are not prepared academically to contribute to research and development and the inventive activity necessary for keeping America innovative, the innovation system would be deprived of people that can make or market important discoveries.

I believe that this is where more black and Hispanic Americans should place their focus; on being inventive and innovative.  Finding better ways to efficiently and effectively deploy internet infrastructure including broadband technology is still a challenge especially in rural areas.  Also, developing new and better technology for the more efficient use of spectrum is necessary for connecting mobile devices to the internet.

To be true players in the content and information industries, inventiveness and ownership is where it’s at for minorities.

If Netflix was attempting rent seeking, any success may be short-lived.

Gerald Faulhaber and David Farber today published a post questioning the need for open internet rules.  The authors expressed a sense of irony that after decades of successfully running a communications platform built on open network architecture that technologists and engineers today would need the help of the Federal Communications Commission in keeping said network of networks open.

Online video distributor Netflix has been documented as thinking that the Commission should be riding to the rescue of content providers by advocating that the Commission implement strong net neutrality rules.  By strong net neutrality rules Netflix means that the Commission should prohibit the payment of tolls by content providers to broadband operators such as AT&T, Comcast, or Verizon. According to Netflix:

“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position.”

Netflix tried to invoke a little altruism asking the Commission to imagine the plight of smaller content providers facing the threat of escalating toll charges assessed year of year at an increasing rate by broadband providers.

It appears the real plight that Netflix is concerned with is the uptick in competition resulting from an HBO or ESPN streaming their content.  For example, an analysis last week by Morningstar questioned the long term profitability of Netflix in the face of competition from content owners.  According to Morningstar:

“Video distribution firms (cable, satellite, phone) have suffered from inertia in building out TV Everywhere, which would allow customers to stream current channels on the device of their choice. Aside from HBO GO and Watch ESPN, the ability to stream channels is much weaker than we would have expected in the present day. Still, we view this service as inevitable within the next two to three years and believe the market is underestimating the potential negative impact on Netflix when most cable channels with fresh content can be streamed.”

This competitive threat, in my opinion, has Netflix seeking rents with net neutrality and Title II as the vehicle.  According to Investopedia, rent seeking is defined as when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.  An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the special-interest group.

Time Warner’s HBO, Disney’s ESPN, and Viacom’s CBS apparently recognize the need to respond to Netflix’s disruptive model with a little innovation of their own, thus their proposed streaming services.

Would consumers of video content via the internet benefit if competing online streaming providers were ensnared by additional regulations flowing from Title II or net neutrality rules?  No, they would not because fewer online content providers would step up to challenge Netflix and consumer welfare would shrink because of reduced access to video content.

The Commission should recognize that net neutrality and calls for Title II regulation are nothing but attempts at rent seeking.  If Netflix and other content providers believe their content or services are of value to the consumer, they will not need the Commission to intervene in this market.

Morningstar report shows that wireless environment is competitive

This morning I came across an analyst report on Morningstar.com that described how Verizon is under more competitive pressure from wireless rivals such as AT&T, Sprint, and T-Mobile.  Analyst Ryan Knutson wrote the following:

“Verizon is under more pressure from rivals now than at any time in years, especially as Sprint Corp. recently began aggressively cutting prices and AT&T Inc. has been reacting to T-Mobile US Inc.’s continued momentum. Verizon has lowered its prices and mimicked some of Sprint’s offers to increase the size of data buckets. So far, it seems to have helped it avoid customer losses. An important metric to monitor is churn, or the percentage of customers leaving each month. Verizon has done well keeping that percentage below 1%. A figure much higher than that is a sign things are getting tougher.”

Mr. Knutson went on to say that while Verizon was still adding more post-paid subscribers than losing them and that the company’s churn rate (percentage of customers leaving the service) was below 1%, the company is being challenged by T-Mobile which added 1 million subscribers in this quarter.  Mr. Knutson also estimated that Verizon plans to spend approximately $10 billion in upcoming spectrum auctions.

Mr. Knutson’s report supports an argument made earlier today by Verizon’s Libby Jacobson.  Ms. Jacobson, in describing the competition Verizon faces in wireless, stated:

“One of the hallmarks of the wireless industry – from devices to applications to service plans — is the broader range of choices available to consumers enabled by the various differentiated arrangements and business models in the competitive and still-rapidly-evolving wireless business. Such flexibility is particularly important so that wireless services can continue to develop into a more full-throated competitive option to the higher speed wireline services that, in many places, may only be available from cable operators.”

In a competitive marketplace, we should expect to see changes in the relationship between wireless services consumers and producers of those services reflected in pricing, notably price decreases.  In the classic Hoteling example, we should see firms moving closer together in prices and services as they try to persuade more consumers to buy their product.  We are seeing that in the wireless space, but wireless report after wireless report, the Federal Communications Commission refuses to draw the conclusion that the market for wireless services is a competitive one.

Would making a declaration that the market for wireless services is competitive somehow undermine the Commission’s role in communications?  Given the light touch treatment extended by the Commission on to the wireless industry, saying that the market is competitive would be the scissors that cuts an umbilical cord that quite frankly has not been needed for decades.  The fear that somehow wireless providers would reverse course by taking actions that would make the wireless market less competitive should also go the way of the Dodo bird.

Would shifting to an internet-pipe only service get broadband providers out of the FCC’s cross-hairs?

Recently The Wall Street Journal reported on Viacom’s CBS and Time Warner’s HBO’s intent to establish a stand-alone streaming service for their content.  For cord cutters that dream of putting together their own portfolio of video content, this may seem like the a la carte approach that consumers and policymakers have been asking for.  While these moves are not indicative of a tsunami of movement by programmers from traditional cable, I have to wonder what the media world would look like if all content providers took the Netflix, over the top approach to getting programming to the consumer.  What would be the new consumer behavior?  Would net neutrality become a non-issue?

Regarding consumer behavior, consumers may feel emboldened by this increase in consumer choice, especially given the cost of cable service.  According to data from the Federal Communications Commission, as of January 1, 2013, the average price for cable service in all communities is $64.41.  Where there is effective completion, average price for cable service is $63.03, but where effective competition is non-existent, average price is $66.14.

I can see consumers combining Netflix programming at $8 per month with ESPN at $30 per month; CBS at $6 per month; and AMC at $10 per month.  I can’t pass up on “The Walking Dead.”  I agree with The Journal article’s conclusion that cord cutting may become more expensive than traditional bundling packages.  This becomes apparent when you look at the stand alone prices for internet access.

Again, according to data from the FCC, the price for stand-alone, 1-5 Mbps, internet access service is $35.  Consumers that want faster service ranging from 5-15 Mbps pay on average $44, while consumers feeling the need for more speed ranging from 15-25 Mbps pay on average $56.50.

If consumers make the decision solely on price, I don’t see much migration from current bundling options for cable.  According to an article in ArsTechnica.com, American cable subscribers receive an average of 189 cable channels but only watch 17 of them.  Assuming consumers could subscribe to 17 stand alone streaming internet channels at a price of $6 per channel, plus the broadband capacity sufficient for streaming video, consumers would still pay over $100 for service while given up 170 channels.  That may be okay for some subscribers if exercising consumer choice through a la carte service is that important to them.

If I’m paying that much to stream “Game of Thrones” strictly via the internet, I don’t want my service slowed down because my video bits have the same priority as a cat video on YouTube.  I would be willing to designate which content traffic should get higher priority to ensure that I see whether the Lannisters win the Iron Throne.  Netflix, HBO, or Viacom may not want the quality of their services degraded either due to equal treatment of their traffic and the traffic from a website showing the best way to apply lipstick.  This emerging on-demand/streaming model for video may see consumers driving the demand for paid prioritization.

Seeing how the FCC would manage the political fallout from telling consumers that consumer prioritization is a no-no would be very interesting.  Telling Viacom that it cannot meet consumer demand by entering prioritization agreements with backbone or last-mile broadband operators on the premise that such arrangements would put a cat video at a disadvantage would have content providers thinking twice about innovation in online video distribution.

As Hal Singer shared with me in a tweet, net neutrality is a Trojan Horse and Title II regulation is the end game.  I don’t see either approach advancing CBS or HBO’s new services.