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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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The FCC needs to practice spectrum supply neutrality

The Federal Communications Commission may like net neutrality for broadband providers but when it comes to its own gate-keeping rule, equal access to spectrum auctions is not the FCC’s cup-of-tea.  The Hill.com is reporting that a number of GOP congressmen have written the FCC to urge the regulator to take off the reins on AT&T and Verizon and allow them to bid on broadcaster spectrum without being foreclosed by a revenue floor.

“Under Wheeler’s plans, some companies — especially AT&T and Verizon — would be kept from bidding on certain blocks of airwaves in each market once that auction has reached a yet-to-be-determined revenue benchmark”, reports Kate Tummarello. “This is not how a market-based auction should function; it is how a cartel controls price.”

Cartel is probably the wrong phrase.  A cartel by definition is a group of firms with an explicit formal agreement to fix prices and output shares in a particular market.  There is no explicit agreement between the FCC, Sprint, and T-Mobile to fix any prices (I would hope).  Besides the FCC is not a firm and would not benefit financially from any price fixing, even if in the form of discounts to Sprint and T-Mobile; discounts because AT&T and Verizon would be locked out of offering a premium on top of any market price for the spectrum.

The FCC’s projected action would keep the market from searching for, identifying, and determining market signals and prices.

No, the FCC is a monopoly.  It controls the distribution of spectrum licenses, even those in the secondary markets since it must approve spectrum transfers.  While monopolists do sell the same product to different markets at different prices (think of the electric utilities that Susan Crawford is so fond of), they don’t restrict customers from entering a market.

What the FCC needs to practice is spectrum neutrality.  All wireless carriers get to show up and engage in the sale and the purchase of spectrum.   There is no logic to restricting access to an auction unless you simply want to the FCC to make the least amount of money for its efforts?

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Fred Campbell points out flaw in FCC “pick winners” strategy

If the Federal Communications Commission is really interested in ensuring the deployment of broadband, its broadcast spectrum policy of allowing Sprint and T-Mobile to get more low band spectrum in hopes of getting broadband rolled out to rural customers may be dead on arrival.  That’s my takeaway from a blog post by Fred Campbell of the Center for Boundless Innovation in Technology.

Mr. Campbell highlights Sprint and T-Mobile’s earlier conclusions that deploying mobile rural broadband is an expensive proposition.  having spectrum is one thing.  Building the actual infrastructure is another.  Deployment is still about the bottom line and building towers and laying cabling over less densely populated areas relative to urban areas is still not cost effective.  Quoting Mr. Campbell:

“As a result, Sprint and T-Mobile have chosen to rely primarily on roaming agreements to provide service in rural areas, because it is cheaper than building their own networks. The most notorious example is Sprint, who actually reduced its rural coverage to cut costs after the FCC eliminated the spectrum exemption to the automatic roaming right. This decision was not driven by Sprint’s lack of access to low frequency spectrum — Sprint has held low frequency spectrum on a nationwide basis for years.”

I would go one step further.  By taking away from AT&T and Verizon the opportunity to get more lower frequency spectrum and shifting it to Sprint and T-Mobile, broadband deployment suffers a double whammy.  Not only will rural customers not see additional mobile broadband deployment from Sprint and T-Mobile, rural and urban consumers won’t see additional broadband deployment by AT&T and Verizon either.  All this picking and choosing does is erode AT&T and Verizon’s ability to grab a little more market share while serving their current customers and adding new urban and rural consumers.

This is not how you enhance a competitive environment in wireless.

 

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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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FCC’s monopoly creates a monopoly on the H block

The Federal Communications Commission may be getting closer to fulfilling FCC member Jessica Rosenworcel’s worst nightmare for the H block spectrum auction, where instead of selling 65 megahertz of airwaves as authorized by Congress in the Middle Class Tax Relief and Job Creation Act, only 10 MHz will be sold and that sale will likely be to Dish Networks.

“I fear this approach fails the test”, Mrs. Rosenworcel stated back on 13 September 2013.  ”That is because holding a single auction of all 65 megahertz at once is bound to yield more interest, more bidders, and more revenue than dividing this spectrum up and holding an auction of the 10 megahertz H block alone.  As Wall Street analysts have noted, splitting this spectrum up for auction will likely limit interest in the H block to only one or possibly two bidders.  If that is true, we will have a retail sale–not an auction.”

Telecommunications analyst Larry Downes reiterated Mrs. Rosenworcel’s concerns in a piece for Forbes.com, arguing that not only has the expected competition for the H block been stymied, but the FCC has once again shown that picking winners and losers in a market results in failure versus letting market-based competition determine spectrum value while inviting more participants to bid.

In my opinion, the FCC is naive as to its own market power, that of a monopolist.  With the U.S. Department of Justice and the FCC playing anti trust tag team on large companies preferring to acquire spectrum in the secondary markets, the FCC is a bottleneck channel to additional spectrum.  Whatever supply signals the FCC sent out to the big four wireless carriers to ensure a multi-carrier demand, those signals probably didn’t have enough spectrum themselves.  AT&T and Verizon did not bid, which does not surprise me given their preference for the good stuff in the 600 and 700 megahertz range, and T-Mobile and Sprint decided to opt out.  Sprint, after jockeying for terms to its liking in the end decided it didn’t like the terms of the auction.  Mr. Downes writes:

“Sprint’s about-face is hard to explain.  According to an article in The Kansas City Star, Sprint CFO Joe Euteneuer surprised financial analysts in announcing that the company was walking away from the auction just a few weeks before bidder applications were due. Euteneuer ‘said the company took issue with the rules governing the auction,” according to the article, “but didn’t specify any complaints.’ “

Dish created a monopolist’s worse nightmare.  It became the only buyer of spectrum on an aggregated, national basis and with no other buyers available to bid up the per megahertz per population rate, the FCC, as Mr. Downes puts it in his article, was left holding the bag.

If this auction foreshadows the possible outcome of the reverse auction for broadcast television spectrum, the FCC should make sure that no restrictions are placed on carriers that wish to participate.