Could a Twitter-Disney combination help close the digital divide on content?

Posted September 26th, 2016 in Broadband, mobile telephone, sponsored data, Twitter and tagged , , , by Alton Drew

Bloomberg has been reporting for the past few hours that Disney has retained an adviser to help the entertainment company craft a bid for Twitter. As the markets go through pre-debate jitters and are currently on a down note, Twitter is up over one percent while Disney is moving in the other direction. Twitter, while among the big social media three that includes Facebook and LinkedIn, has been struggling to define itself and grow the number of subscribers.  Today’s news comes as no surprise to me and I’m happy a media company is making a play versus your run of the mill advertising company (although Salesforce allegedly is interested in the micro-blog.

Twitter picked up a little notoriety last week when it live streamed a NFL game. I enjoyed watching it via Twitter, especially given the quality of the video. Today’s news has me thinking how minority content producers could benefit from a Disney acquisition of Twitter. According to Pew Research, 27% of blacks that use social media use Twitter versus 21% of whites. Also, blacks and Latinos show a tendency to rely more heavily on their smartphones (12% and 13% respectively) than their white counterparts (4%).

While it’s too early to say what Disney would do with Twitter as part of its portfolio, I think such an acquisition would provide Disney with basically another channel for deploying content, especially niche content such as programming produced for minority cultures. Mobile carrier zero rating or free data services could augment such a strategy by providing cost free access to minority-produced content. Not only would it be less expensive for low-income minorities to access content, but members of other communities could be introduced to another culture’s content at a reduced financial cost.

Until then, first things first. A bid will have to be made. Stay tuned.

FCC does not recognize the value cable creates for content

Recently the Federal Communications Commission released a plan for increasing the number of ways consumers can navigate video content. The Commission wants cable companies to provide pay television subscribers with a free app that allows the subscriber to access their video content. The Commission believes that at an annual amount of approximately $231 for set top boxes, households are getting hosed and that additional choice is needed in order to reduce this financial burden.

The Commission appears to be ignoring the capital side of set top box equation. No where in his plan does Commission chairman acknowledge the billions cable companies spend on obtaining licensing to programming or creating their own content.  To extract value from this content, cable companies charge consumers a positive premium for using platforms necessary for accessing the content including set top boxes. The Commission is blatantly circumventing the ability of cable companies to extract the value of the content by requiring that cable companies provide consumers with apps that allow the consumer to avoid monthly fees altogether.

The Commission believes it is correcting some type of market failure by providing consumers access to content at a reduced cost, but by interfering with a market transaction, the Commission is creating an environment that sends a false signal to content providers and navigation technology providers. Device makers may think twice about investing resources into developing hardware where the use of free apps freezes the hardware provider out of the market. Small, non-cable affiliated app developers may have second thoughts as well, especially going up against deeper pocketed cable companies or internet portal companies such as Google who can leverage its advertising revenue to provide video navigation apps for free.

In addition, with the requirement that cable companies provide free apps and the expectation that established internet portals will enter the video navigation application market, smaller entrepreneurs will have a harder time accessing capital as investors view their business model as a source of lower returns.

Sending skewed market signals and reducing small app developer access to capital doesn’t make for good video marketplace policy.

Universal service doesn’t encourage capital for entrepreneurs

Regulating commerce is one thing. Failing to encourage capital formation and distribution of capital to entrepreneurs cannot be acceptable. Section 214 of the Communications Act demonstrates how out of touch current law is with today’s technology and the entities that deliver that technology. The 115th Congress and the next Administration need to revamp universal service such that funding actually encourages new entrants into the broadband market and the innovations that come along with that entry.

Under section 214 of the Act, common carriers designated as eligible telecommunications carriers (ETC) qualify for receiving universal service funds. A common carrier is engaged in providing foreign or interstate communications by wire or radio.  The Federal Communications Commission revamped its 20th century based support program, originally designed to subsidize voice services, to now support deployment of broadband services in high cost areas, areas where broadband providers argue it is cost prohibitive to provide high-speed access services.

Among the criticisms of the program is its inefficiency. Specific concerns have been raised about funds supporting services in areas where competition already exists. On reflection why is this a problem? If a carrier sees the opportunity to take a single-digit percent of market share where garnering such a share covers her fixed and variables costs while generating a profit, so what if other choices already exists? New entrants enter the fray when they believe that they have an innovative way of providing services and eventually taking market share. This is part of the adventure of applying venture capital; digging in for a period of time a generating returns based on new ideas.

The Commission’s concerns about funding services in areas where there is already competition also stems from locking itself into an approach that results in common carriers being funded as opposed to wireless internet access providers. Again, current law paints a box where only common carriers can play. Wireless internet access providers may not want to build infrastructure for the purpose of being common carriers. It is too expensive and unnecessary to duplicate existing networks where instead their focus is rightfully on bringing value to those networks and consumers alike by providing alternative methods of accessing them. The Commission speaks of innovation too frequently to then turn around and pass up an opportunity to put its money where its mouth is.

Until the Commission decides to recognize the value that non-common carrier innovators bring to broadband deployment, the universal service fund as currently constructed will continue to be a pool of capital unavailable for use by certain new entrants.

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The reality for BDS is increased prices

The Federal Communications Commission, based on a review of its April 2016 order on tariffs and pricing methodology for business data services, doesn’t pay attention to pending decisions of its sister agency, the Federal Reserve. This Friday, Federal Reserve chairman, Janet Yellen, is expected to give a speech in Jackson Hole, Wyoming that may provide some signals on what the U.S. central bank may decide to do regarding its federal funds rate. The federal funds rate is the overnight rate banks assess each other when lending their reserves to one another.

The Federal Reserve has set a target federal funds rate between .25% and .50% and if there is to be a rate increase this year, it is expected to occur after the November general elections.  Raising rates, the theory goes, is a part of a central bank’s strategy for moderating the growth of a heated economy. Raising overnight rates incentivizes banks to keep their reserves in the Fed’s vaults thus limiting the supply of money. Following the laws of supply and demand, money gets more expensive because banks are lending less to the public.

What does this have to do with telecommunications services, particularly business data services? As a capital intensive industry, telecommunications providers will depend on the bond markets to finance the construction and deployment of facilities necessary for delivering future services. For example, Verizon, in its February 2016 10-K filing with the U.S. Securities and Exchange Commission, argues that adverse changes in the credit markets could increase its borrowing costs and access to financing. The company, as of December 2015, has $110 billion in debt. Verizon argues that an inability to retire debt could make it more difficult to access the additional financing necessary for obtaining working capital or making additional capital expenditures.

Placing restrictions on a telecommunications service provider’s ability to raise prices signals the markets that there is increased risk to the rate of return investors expect from selling money to telecommunications providers.  Pricing restrictions by the Commission combined with a Federal Reserve decision to raise the fed funds rate could work to reduce the supply of business data services, an outcome that runs counter to the Commission’s stated public policy of increasing choice for consumers of business data services.

The Commission should take the external economic environment into account, an environment heavily influenced by the Federal Reserve, when it considers going forward on regulating business data services prices.

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Nothing in Wheeler’s Aspen Institute Remarks sparked my investment juices

Posted August 16th, 2016 in Broadband, Federal Communications Commission and tagged , by Alton Drew

Yesterday, Federal Communications Commission chairman Tom Wheeler made remarks to the Aspen Institute. He focused on the evolution and importance of networks as conduits for social and economic growth. As usual his analysis was more consumer-centered than producer centered with no specific discussion of how the Commission would facilitate signals for domestic or foreign direct investment in the telecommunications sector. There was not much to note here at all other than subtle a couple swipes at the GOP mantra of “making America great again.” Mr. Wheeler reminded the audience that America’s greatness didn’t have to be rebooted but was going through continuous evolution.