The pursuit of greater returns on capital resulted in the blurring of telecom, media, and entertainment

Part of the naivete of the net neutrality argument was how it ignored the realities of the broadband industry and the role of capital.  Broadband access to the internet has never been about the democratization of self-expression but about the commercialization of the exchange of information.  Information comes in various forms whether it is scholarly work, news, or entertainment.  As Ivan Seidenberg notes in this piece, the lines between media, telecommunications, and entertainment have been blurring for decades where the silos that once represented media, telecom, and entertainment have finally been broken down.

If investors who put their capital into these industries want to see higher returns, then acknowledging that these walls have broken down is the first step they should take.  Pushing back against government actions that fail to recognize that breaking down these walls is necessary for capital to continue flowing to and growing in these industries should be the second thing to acknowledge.

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Why be afraid of big data?

Posted August 11th, 2015 in big data, Broadband, Federal Trade Commission and tagged , , by Alton Drew

Between April 1982 and November 1984 I worked at a Burger King in Tallahassee, Florida.  I was a student back then at the Florida State University.  The restaurant was located across the street from campus so from time to time I would see some of my friends come into the restaurant to eat.  One would think that putting together a Whopper was no big deal but to some people it is, from getting the condiments right to simply trusting the employee who made the sandwich.

I had two schoolmates that were pretty particular about who made their grub.  One schoolmate, Charlotte Jones, was very particular about me making her food.  One day I was getting off my shift and heading back to Smith Hall. Charlotte was heading to BKs to eat.  She saw me heading to the dorm and asked where I was going.  I said back to my room. At that point she did an about face and headed back to Smith Hall and made sure that she knew my schedule from that day going forward.

Another schoolmate, Candace Pope, liked her fish sandwich done a particular way.  It got to the point that if I saw her coming into the restaurant, I would have her sandwich prepared before she got to the cash register.  All I had to do was say, “It’s up.”  She would then direct the cashier to the sandwich already made.  I was prepared to take care of my friends based on having accumulated data on their buying habits at Burger King. I was able to anticipate their needs.

Fast forward thirty one years and technology is able to do on a massive scale what I was able to do on a micro scale.  Today technology allows business to capture information on their consumers, send that information to data brokers and other information gatherers who categorize and prepare that information for use by advertisers.  It’s an information trade where broadband networks providing the platform upon which information is traded at light-speed.  And part of that information trade takes place in a $120 billion advertising market.

What does this information trade mean for broadband deployment and investment?  The information trade creates the value that signals capital to enter the market.  Capital, seeing high returns from the trade, will move toward entrepreneurs that build digital mousetraps and to broadband facility providers willing to build the infrastructure upon which the digital data trade winds flow.

Data, information, knowledge have been flowing between people, groups and societies from the time man has been on the planet.  My little Burger King example shows how we use business data about consumers every day.  What scares people and in particular regulators, is the abundance of it.  According to Maria Ogneva, 2.5 quintillion bytes of data is created every day.

A forum hosted by the Federal Trade Commission in September 2014 addressed some of these fears, centering on regulator concerns about consumer privacy and the commercial use of data without consumer permission. Panelists were concerned about how data analytic techniques may be either skewing unflattering ads to minority populations, or populating data bases with incorrect or biased information about consumers based on their buying habits or location where they make their purchases.  While only one panelist explicitly mused about regulating data, it was apparent to me that at least some of the panelists were thinking about regulating how data is accumulated, analyzed, and distributed.

The FTC has been recommending that Congress get a bit more aggressive with data brokers, the entities that collect, analyze, and sell consumer data to advertisers.  For example, from a summary of a report the FTC conducted on data brokers in 2014:

“As the Report states, ‘In light of these findings, the Commission unanimously renews its call for Congress to consider enacting legislation that would enable consumers to learn of the existence and activities of these data brokers and provide consumers with reasonable access to information held about them by these entities.’  With respect to brokers that sell marketing products, a majority of the Commission had four specific suggestions for Congress:

  1. Consider giving consumers a way to easily identify which brokers have data about them and where they can go to access it or opt out.  One way to do that:  A central online portal.
  2. Consider whether data brokers should have to clearly disclose that they not only collect raw data, but also combine it with other information to draw inferences about people.  That’s especially important when it comes to sensitive topics like health conditions.
  3. Consider requiring data brokers to reveal more about their sources.  That would make it easier for consumers to track down and correct the source of inaccurate information (for example, a mistake in a public record).
  4. Consider whether consumer-facing businesses should have to clearly disclose that they share information with data brokers and to give consumers choices, including opting out.  For sensitive data – health information is one example – the FTC is asking Congress to consider legislation to require consumer-facing sources to get people’s affirmative express consent before they collect it in the first place.”

Democrats in the U.S. Senate have taken up the FTC’s call for legislative action. Last March S. 668, the Data Broker Accountability and Transparency Act of 2015, was introduced in the Senate, but given the control Republicans have of the Senate and the House, this bill poses little if any political risk to the data broker industry.  The value being brought to the information markets via data brokers continues unhindered by new legislation or regulation.  This is good for broadband deployment as well since, as I stated before, the information trade drives deployment of broadband.

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The FCC’s IP transition order doesn’t slow down data markets, yet

The Federal Communications Commission approved an order yesterday that provides broadband operators with requirements for how they should approach the transition from analog-based networks to 21st century internet protocol networks.  The FCC’s focus was, as expected, on the impact the transition would have on consumers.  Broadband providers are to provide consumers with three months notice of any plans to replace copper with fiber.  Broadband providers are to give interconnecting carriers six months notice of a transition from plain old copper to fiber.

FCC member Ajit Pai raised the argument in a dissent to the order that the FCC’s notice requirement would have a negative impact on the deployment of fiber facilities and investment of capital.  He says:

“First, by dragging out the copper retirement process, the FCC is adopting regulations that ‘deter rather than promote fiber deployment.’”  Mr. Pai questions the logic of requiring capital be invested in maintaining old legacy networks when the deployment of fiber could remedy issues presented by an aging copper network.

FCC member Michael O’Rielly warned edge providers in his dissent that they would be negatively impacted by the requirement that broadband providers seek permission first from the FCC before discontinuing a legacy service.  ”Every communications and edge provider better think long and hard before introducing new services because you may be locked in to providing them for a very long time.”

The irony is that by forcing broadband providers to maintain legacy networks to end users, the FCC runs the risk of creating the degradation of service it hoped to avoid when it implemented its net neutrality rules.  Take for example the FCC’s findings in its 2010 Open Internet Order.   In the order the FCC describes the “virtuous cycle of innovation” that is spawned by the openness of the Internet.[1]

“This openness promotes competition.  It also enables a self-reinforcing cycle of investment and innovation in which new uses of the network lead to increased adoption of broadband, which drives investment and improvement in the network itself, which in turn lead to further innovative uses of the network and further investment in content, application, services, and devices.  A core goal of this Order is to foster and accelerate this cycle of investment and innovation.”

The FCC went on to point out in the 2010 Order that a lack of transparency in terms of network management put edge providers at risk especially where a broadband provider’s activity led to blocking or degrading of content.  The irony is that while the FCC appears focused like a laser beam on promoting competition in the provision of broadband services by making legacy networks available for use by interconnecting and competitive carriers, it has taken its eye off of the real competition on the internet, namely between edge providers that aggregate, display, and distribute data.  These edge providers want their exchange of data to traverse high-speed networks from their location to the end-users.  While their business models may not be directly impacted in the very short run by the FCC’s IP Transition Order, in the immediate run they may find users unwilling or unable to subscribe to their services because deployment by broadband providers of last-mile high-speed facilities are being delayed by the FCC’s latest notice requirements.

1.Federal Communications Commission. Open Internet Order. 2010. https://apps.fcc.gov/edocs_public/attachmatch/FCC-10-201A1_Rcd.pdf

 

 

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What FCC approval of AT&T-DirecTV means for bond investors?

Posted July 25th, 2015 in AT&T and tagged , by Alton Drew

We saw a big regulatory event last week when the Federal Communications Commission approved DirecTV’s request to transfer its spectrum licenses to AT&T, clearing the path to AT&T’s acquisition of the satellite service provider.  For debt holders their concern may be how does approval impact yields on the bonds that they hold.

Consolidation in the telecommunications industry may cause event risks to run high where that risks is an increase in the debt burden of the company doing the acquiring.[1]  The telecom industry is plagued right now with declining consumer spending, falling profits, rising expenses, and heavy debt loads.[2]

AT&T will assume $18 billion of DirecTV’s debt.[3] In light of the impact on debt consolidation may have in the telecommunications industry, investors may be happy with the FCC’s decision because of the increase in earnings AT&T is expected to enjoy as a result of enhanced video offerings and reduced programming costs. [4]

1. Harper, David. “Corporate Bonds: An Introduction to Credit Risk.” Investopedia. http://www.investopedia.com/articles/03/110503.asp

2. Sorensen, Brad. “Telecommunications Sector Rating: Underperform.” Charles Schwab. 11 June 2015.  http://www.schwab.com/public/schwab/nn/articles/Telecommunications-sector

3. Lindenberger, Michael A. and Gary Jacobson. “FCC Approves AT&T Merger with DirecTV, with Conditions.” Dallas Morning News. 24 July 2015. http://www.dallasnews.com/business/technology/headlines/20150724-fcc-approves-att-merger-with-directv-with-conditions1.ece

4. Zack’s Equity Research. “AT&T (T) Q2 Earnings Beat as Wireless Subscribers Increase.” 24 July 2015. http://www.zacks.com/stock/news/183161/atampt-t-q2-earnings-beat-as-wireless-subscribers-increase

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Al Franken up in arms about the false concept of competition

Posted July 22nd, 2015 in Department of Justice, economy, edge providers, Facebook, Government Regulation and tagged , by Alton Drew

Multichannel News‘ John Eggleton today reported that Senator Al Franken, Democrat of Minnesota, is up-in-arms about Apple’s streaming service.  He believes that Apple is preventing competitors to its streaming service from communicating with consumers about similar streaming products.  According to the Multichannel News:

“Apple’s licensing agreements have prevented companies from using their apps to inform users that lower prices are available through their own websites, to advertise the availability of promotional discounts, or to complete a transaction directly with a consumer within their app,” he said. “These types of restrictions seem to offer no competitive benefit and may actually undermine the competitive process, to the detriment of consumers, who may end up paying substantially more than the current market price point.”

Subject to check, if the alleged snub is the result of a licensing agreement, then tough cookies for the app developers.  They didn’t have to sign the agreements. If terms agreed upon included a “no informing customers of your service because we are afraid of the competition clause, then the app developers are obligated to follow the agreement.

I’ve discussed before how unnerving the “it’s not fair. I can’t compete” argument is.  Unless you are admitting that consumers are pieces of capital just like land, labor, and air is, then competition for consumers needs to be a mantra that goes the way of the dodo bird.  Competing for the finite resources that go into making products for end-user consumption is a valid argument.  You need financial capital in order to purchase the labor and land resources necessary for creating and distributing a product so pushing against the bottlenecks to these resources is expected.

Applying the argument to end-users gets no points with me, however.  If your product is whacked and you can’t convince the consumer to buy it in an open market as we have here in the United States, then belly-aching how unfair it is that you can’t sell said product is noise wasted on closed ears.  America’s antitrust concept is weak for this reason.  No one is guaranteed success in our economic environment.