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Aereo should not call itself a cable company

Aereo is trying to reinvent itself after its June 2014 loss in the U.S. Supreme Court where the high court held that Aereo activities were substantially like those of a cable company; therefore it met the definition of performance under the Copyright Act and was required to compensate broadcasters for the performance of their content.  Aereo, like other cable companies, should have to pay re-transmission fees to over-the-air broadcasters whose signals Aereo was capturing via miniature antennas and providing to Aereo’s subscribers.

Aereo’s reportedly new approach will be to ask the courts to treat the company as such, as a cable company, so that Aereo can move forward with a business model that allows it to make some money fast.

Well, Aereo may not want to move too fast with that classification redux.  According to U.S.C. 47 sec. 522 (5), a cable operator means any person or group of persons (A) who provide cable service over a cable system and directly or through one or more affiliates owns a significant interest in such cable system, or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system.

A cable system is defined as a facility consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but such term does not include (A) a facility that serves only to transmit the television signals of one or more television broadcast stations; (B) a facility that serves subscribers without using any public rights of way; (C) a facility of a common carrier which is subject, in whole or in part, to the provisions of sub-chapter II of this chapter, except that such facility shall be considered a cable system (other than for purposes of section 541(c) of this title) to the extent such facility is used in the transmission of video programming directly to subscribers, unless the extent of such use is solely to provide interactive on demand services; (D) an open video system that complies with section 573 of this title; or (E) any facilities of any electric utility used solely for operating its electric utility system.

Yes, I know that’s a mouthful, but bear with me.  I believe one can make the argument that while Aereo looks like a cable operator because it grabs broadcast signals out of the air and retransmits them to subscribers, under the Communications Act the company isn’t a cable company.  Aereo falls under the exception carved out in section 522(B) because its antennas are stored in a warehouse, not in a public rights-of-way.  The signals are distributed to subscribers via wireless spectrum licensed to a wireless company or via fixed wired facilities owned by a telephone or cable company.

Aereo itself may be buying access to a wireless or wired broadband provider but again these facilities are probably owned by these carriers.  Even if Aereo owned facilities that connected its warehouses to a broadband provider, that ownership would not amount to enough to be described as a cable operator.

I believe Aereo fails under section 522 (A) of the Communications Act also since, according to its published business model, Aereo captures and re-transmits the signals of broadcast television channels only.

Aereo may be able to sell its technology to an existing cable company or to some other upstart that wants to get its unique content into the hands of subscribers, but Aereo, in my opinion, would only dig itself a deeper hole if it tells the 11 cities it was providing services in that it is now a cable company.  Its financial woes would only be compounded if it held itself out to a local franchise authority as a cable company only to find itself being squeezed by the regulatory gestapo located in a cable office in some county or city government.

Not labeling itself a cable company would give Aereo and its investors some wiggle room as it determines its next best course of action.

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Question is, why does government have to regulate cable black outs

The Federal Communications Commission is seeking comment on whether it has the authority to eliminate its sports black out rules.  These rules prevent cable companies, satellite companies, and open video network companies (typically local exchange companies) from importing a signal carrying a live sport event from a broadcaster located outside a local viewing area where the very same live sporting event is taking place not being carried by the local station.  The rule was first applied to cable companies forty years ago and has been extended to satellite companies and open video networks over the subsequent three decades.

The NFL initiated black outs of local games to protect the gate receipts of the local team.  In order to not have a local game see a fall off in gate receipts due to another game being broadcast in its local area, local television stations and later cable companies were prohibited from carrying those games.  The FCC decided to supplement the NFL’s policy by instituting the black out rules basing its rationale on a consumer welfare theory that “to ensure to the greatest extent possible the continued availability of sports telecasts to the public.”

That rationale is pretty suspect, in my opinion.  The FCC was concerned that the NFL and other professional sports associations would extend their black outs to all distant broadcasters just to protect the revenues at the gates.  Question is, why should the state, in the form of the FCC, care about viewer access to a sporting event where the viewer is more than 35 miles away from venue where the live game is being played?  If they want to see the game that bad, then pay a premium on the ticket and drive or fly to the city where the game is being played. The FCC will vehemently deny that it ws subsidizing ticket sales at the gate with this supplemental policy but that appears to be the result.

In 2017, a fan of Atlanta Braves baseball living in Douglas County, Georgia will be able to watch a game on her tablet, iPad, lap top, desk top (if she is brave enough to admit she still has one), or smart phone.  She may not want to or be able to afford to drive to Cobb County to watch them play or even be able to afford a ticket, but at a fraction of the cost, can afford to watch via a broadband connection.  Should the Braves and the MLB prevent a transmission of the game to her if the Braves fail to sell out their new stadium?  Yes, they should.  Would it make good business sense?  No, it wouldn’t.  Should the state in the form of the FCC care either way?  No, it shouldn’t.

If anything, given its social policy of encouraging the use of broadband by all Americans, the FCC might be expected to prohibit black outs where viewing a game via a broadband connection would be discouraged, but even in promoting broadband adoption, the FCC would encroach on the business judgment of the Braves and the MLB, robbing them of their economic liberty to make a choice to sell or not to sell viewing time.

In addition, Public Knowledge and the Media Access Project do make a solid point that the FCC’s rules on black outs are anti-consumer.  They do not expand consumer welfare.  They work to diminish the value the consumer has in using alternative means to view content.  This rationale, however, should not be extended to reach to the business judgment of the content provider, in this case professional sports.  Any fall off in viewership should be punishment enough.

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Free State reminds us how market manipulation skews markets

So why should the Federal Communications Commission keep conduct a least restrictive spectrum auction for broadcast spectrum?  Because, according to the Free State Foundation, tying conditions to an auction negatively impacts the outcome in terms of pricing and the number of firms that leave the auction with any spectrum at all.

In a recent blog post, the Foundation shares a couple examples of how interference by the FCC, in the form of aiding what the agency deemed as financially weak competitors, resulted in less spectrum being released. In describing the PCS C Block and 700 MHz auctions, the Foundation stated that:

“In the PCS auction, the FCC extended long-term credit to financially weak bidders, with the apparent intention of encouraging small businesses and rural bidders. This manipulation of the auction resulted in a decade of bankruptcy litigation, delayed the availability of spectrum, and cost consumers over $65 billion according to some estimates. In the 700 MHz C block auction, the FCC required the winner of the 22 MHz C license to provide non-discriminatory network access for all devices and applications. This vague “open access” mandate lacked detail on the freedom of a new licensee to set prices or innovate and disincentivized bidding. This condition-encumbered C block sold for 29% of the price as comparable or even less valuable blocks. Additionally, in auctioning the D block in the same 700 MHz auction, the FCC imposed significant conditions on the use of the spectrum and imposed eligibility rules on bidding. The results of this auction were also unsuccessful, since the D license failed to sell even for a reserve price that was one-third of the average obtained for other comparable licenses. As Tom Hazlett, Professor of Law & Economics at George Mason School of Law stated, “this is evidence that regulatory rules and spectrum allocation procedures continue to distort markets.”

This time, the FCC is considering providing help to smaller wireless carriers by either keeping larger carriers out of the auction, or limiting the amount of spectrum larger carriers can walk away with.  Rules have yet to be promulgated for the reverse television spectrum auction so there is still time to consider this: if a carrier is financially weak, what is the likelihood that carrier is able to stay in the market long enough to acquire the customers necessary to be successful?

Whether credit is extended, larger carriers excluded from the auctions, or the amount of spectrum garnered is subjective to caps, why should the FCC spread the small carriers’ risks to taxpayers?  The FCC seems dead  set on getting into market scuffles between investors.  The FCC, like any regulator, manages to maintain too much focus on the companies (the investor facade) versus the investors themselves.  This is a result of the FCC not including in its mandate the balance between consumer and investor.  The FCC can easily pursue the hands off approach to regulation overall and the spectrum auctions in particular if it remembers that investors in these wireless carriers, whether publicly or privately held, accepted risk when they purchased their shares.  The risk investors in smaller companies took on was the chance that larger carriers would continue, through marketing and quality of service, to widen their lead by better serving their customers.

Should larger carriers be punished for leveraging their historical advantages? I hope not.

 

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As more people move to urban centers, shouldn’t broadband policy follow demand

I came across an interesting blog post on The American, a blog maintained by the American Enterprise Institute. The post’s author, Ryan Streeter, discusses the concept of agglomeration economies. According to the National Bureau of Economic Research, agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters. Even as transportation and communications costs fall, according NBER, agglomeration economies are still important.

It seems we like to cluster. In Mr. Streeter’s 2010 analysis, the world continues to urbanize with 70% of the world’s population expected to live in cities and metro centers by 2050. Due to this expected change in demographics, Mr. Streeter reasoned that state public policy will have to adjust to the increasing role cities play in driving national economies. States will have to place greater emphasis on issues of construction, green space, and traffic within cities if states themselves are to stay competitive. Rural influence in national politics will decrease as electoral districts become urban. Washington will have to take on a progressively urban mindset.

If Washington is concerned about increasing American productivity and job growth, it will have to educate itself on the relationship between urban densities and higher wages. Americans are probably moving to cities and metro areas for higher wages and probably not cognizant of the issue of higher productivity, but I would wager that not only does the availability of wired and wireless broadband help increase productivity but bottle-necking the availability of additional spectrum would adversely impact urban economies and commerce.

I would argue that the desire to work in close proximity of other entrepreneurs drives the move to cities, although I have no empirical data to back this up. The increase in co-working areas in Atlanta, Baltimore, and other urban centers may add some weight to this observation.

What does this mean for wireless broadband? It creates an exigency in the spectrum crunch. Further urbanization places increased demand on existing facilities and creates the need for innovative solutions to acquire more spectrum. It means that the Federal Communications Commission cannot afford to delay auctions and in particular must get on with crafting rules for its reverse auction for television broadcast spectrum.

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Fifteen percent of Americans don’t go online … and that’s okay

A survey released yesterday by the Pew Internet and American Life Project has me wondering if broadband providers have been put in the position of Doctor John Faustus, having to be in league with a regulatory devil in order to attain the very resources needed to meet its mobile broadband needs. The Federal Communications Commission has touted for the last four years its social policy of making broadband services available to 100 million households; the number of households for a list of reasons that has not adopted broadband services.

The FCC finds less that socially acceptable anything less than universal access e.g. 100% connected. Broadband carriers have recommended public policy for garnering spectrum based in part on the FCC’s goal of universal broadband, but the FCC seems to overlook (as usual) the consumer side of the market in terms of what consumers are demanding and according to Pew, that demand is not 100%.

Fifteen percent of American adults do not use the Internet at all, and an additional nine percent may use it at work, but do not use it at home. Among the Internet non-users, 34% fail to see the relevance of the Internet, either having no use for the Internet, seeing it as a waste of time, or too busy to use it. In addition, 32% of non-users question the usability of the Internet finding themselves too old to use it, concerned about their privacy, or thinking themselves physically unable. Some non-users cite affordability or lack of access to the Internet to even bother to adopt Internet use.

The FCC is aware of these barriers to consumer demand and the wireless industry, in my opinion, has gone along with the FCC’s zeal to get the unimpressed online whether or not the unimpressed consumer sees that broadband as being important to their daily lives. The problem with this zeal is that it serves as premise for unnecessary regulations, notably net neutrality. “More transparency is needed to ensure consumers adopt broadband”, says the FCC. “Without broadband, consumers won’t get a job”, says the FCC.

The FCC should not be about playing Madison Avenue nor should broadband providers feel relegated to being the FCC’s national broadband plan cheerleaders. Internet access providers have been meeting the needs, whether by dial-up, wired broadband, or wireless broadband for two decades. Those with higher levels of education and income have always driven and will continue to drive demand for access to the information markets via broadband. The primary focus should be on removing bottlenecks to spectrum and barriers to rights-of-way.

By removing these barriers we may see decreases in broadband rates as more service gets to those willing and able to pay for it. We shouldn’t stubbornly pursue the stubborn 15%.

Alton Drew serves as a managing director of The Drew Fonza Project, a public policy research and consulting firm. He provides public policy analysis for municipal bond investors, private equity firms, hedge funds, investment banks, industry associations, and individual investors. Visit http://www.drewfonza.com to purchase reports on political environments surrounding municipal bond issues or to request a customized report. E-mail him at alton@drewfonza.com.