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Independent and minority programmers will have to demonstrate value to cable companies

The Federal Communications Commission wants to promote diversity of programming provided over cable networks. Commission chairman Tom Wheeler shared in a blog post last month arguing that the Commission wants consumers to have the choice to watch independent and diverse programming via traditional video distribution networks, i.e. cable. The Commission will review and vote on a notice of inquiry at their next open meeting on 18 February 2016.

The Commission should consider the reality of new entrants into the video distribution marketplace. A considerable amount of capital is needed to start and sustain a cable programmer on air. Programming has to be either created in-house or purchased. Technical and marketing staff have to be hired. Equipment has to be purchased. Cable companies have to be convinced that a programmer should get some cable “shelf-space”; that the programmer’s content will attract the right number of eyeballs to justify the taking up of network capacity needed to carry the programmer’s channel.

These minor details have probably been the main reasons, ever since the passage of the Cable Communications Policy Act of 1984, that smaller programmers have had a hard time finding distribution space on cable company’s network. The Commission will have statutory authority to address the question of diversity of programming distributed by cable companies. Section 522(a) of the Communications Act of 1934 requires the Commission to “promote competition in the delivery of diverse sources of video programming and to assure that the widest possible diversity of information services are made available to the public from cable systems in a manner consistent with growth and development of cable systems.”

One statutory constraint the Commission should face in developing any policy to promote diversity is the cap on capacity allocated to non-affiliated programmers. For example, under Section 532(b) of the Communications Act, a cable operator with 36 to 54 activated channels is to allocate ten percent of channel capacity to non-affiliated programmers. A cable operator with 55 to 100 channels has to allocate 15% of its network to unaffiliated programmers while an operator  with more than 100 activated channels must also allocate 15% of its network to unaffiliated programmers.

The question is when an independent or minority programmer enters the market to sell its content to distributor, what should the exchange be built on? It should be built on value. The value of the cable operator to the programmer is the operators ability via its network to get the programmer’s content before a lot of eyeballs. The value that the programmer should bring to the cable operator is content that will entice consumers to watch; to stay on the cable operator’s network. If an independent or minority programmer were able to occupy a cable operator’s channel and not bring this type of value, then the cable operator would have a gross resource allocation problem on its hands. Dropping the programmer would be the correct thing to do.

But should the Commission be in the business of persuading a cable operator as to which programmers provide value and which ones do not? No. This should be a market condition that cable operators and independent/minority programmers work out. Politically, this might be a lame duck move on the part of the Commission. Should a Republican grab the White House this fall while the rhetoric surrounding diversity may survive with a Republican chairman, an intense commitment to the diversity issue may subside.

We’ll have to wait until the Commission issues its notice of inquiry on 18 February to determine how far the Commission is willing to go tentatively.

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Virgin Islands senator raises concern about power outages and communications

Posted December 29th, 2015 in Broadband, cable company, economy, U.S. Virgin Islands by Alton Drew

The following is a press release from U.S. Virgin Islands senator Tregenza Roach regarding recent power outages in the U.S. Virgin Islands and the impact on subscribers with bundled internet, cable, and telephone services:

TAR# 80-2015
FOR IMMEDIATE RELEASE
MEDIA CONTACT PERSON: ANNICE CANTON 340-693-3613

Senator Roach is Concerned with Loss of Communication Services during Blackout

Senator Tregenza A. Roach, Esq. says the recent power outage which left St. Thomas, St. John, and Water Island without power for several hours has revived his concern that residents who rely on one connection for telephone service, Internet services, and cable television will be left without access even to emergency services in the event of an extensive, long-lasting outage.

Senator Roach said he has raised the concern with both Innovative and the Public Services Commission (PSC) on previous occasions, and that these entities have both responded with assurances connected to the use of a back-up battery which should ensure connectivity for several hours of an outage.

But clearly Tuesday’s outage which left many residents without telephone, Internet and cable services proves otherwise, Senator Roach, said. To compound the problem, the Senator observed that the situation also extends to the Territory’s business community, as all card transactions which require a telephone phone line are also affected. The same applies to ATM transactions as well.

At the least, the telephone company should be required to provide each of its landline households a low-cost cell phone which can be used only in the event of an emergency. Certainly our residents are worth such an investment, Senator Roach said.

“This is huge,” Senator Roach said, “It can cripple the Territory just like that.” Roach said he will bring his concerns to the PSC again and believe that VITEMA, the Virgin Islands Territorial Emergency Management Agency, should also have the concern about the inability of residents to communicate in the event of another outage, a hurricane, or other type of emergency.

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Is FCC net neutrality policy forcing investors to play broadband providers off of video streaming services?

Do we regulate vans when used to deliver newspapers to grocery stores or pharmacies?  Do we ask grocery stores or pharmacies to disclose the contracts they enter into for displaying The Wall Street Journal or People Magazine on their shelves?  Renting a van to deliver magazines or striking placement deals with grocery stores and pharmacies is the cost of doing business that magazines and newspapers incur when distributing their product and I don’t see why online content providers like Netflix should avoid the same costs of business under a disingenous practice of open internet or net neutrality.

The Federal Communications Commission so far has successfully skirted this argument, having phrased net neutrality as a consumer’s rights issue versus what it truly is: a cost-of-doing business issue for content providers who would rather not pay Comcast, Verizon, or Time Warner a fee to interconnect opting instead for a “bill and keep” scenario.  But like any other media company, Netflix, Hulu, or Amazon should be responsible for putting together their own content production and distribution network.

On the content side these companies will hire their own staff to create content in-house or hire a production company to provide them a set amount of programming.  They will, in the case of movies or television, pay licensing fees that enable them to re-broadcast a television or theatrical production.

The distribution side is trickier.  Netflix depends on mid-mile providers like Cogent and last mile providers like Comcast to connect their content to final end-users or consumers.  To keep these distribution costs low, Netflix would prefer to interconnect at no costs with last-mile providers. In its latest 10-K report filed with the U.S. Securities and Exchange Commission, Netflix describes risks related to its relationship with last-mile providers:

“We rely upon the ability of consumers to access our service through the Internet. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our member acquisition and retention could be negatively impacted. Furthermore, to the extent network operators create tiers of Internet access service and either charge us for or prohibit us from being available through these tiers, our business could be negatively impacted.
Most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. As such, many network operators have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. For example, Comcast exempted certain of its own Internet video traffic (e.g., Streampix videos to the Xbox 360) from a bandwidth cap that applies to all unaffiliated Internet video traffic (e.g., Netflix videos to the Xbox 360).
While we believe that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential treatment to their data as opposed to ours or otherwise implement discriminatory network management practices, our business could be negatively impacted. In some international markets, these same incentives apply however, the consumer demand, regulatory oversight and competition may not be as strong as in our domestic market.”

The irony of Netflix’s statement on the threats broadband operators impose on their streaming business is that a few paragraphs prior to this statement, Netflix describes these providers as partners, specifically when it comes to streaming over devices provided by cable and telecommunications companies:

“We currently offer members the ability to receive streaming content through a host of Internet-connected devices, including TVs, digital video players, television set-top boxes and mobile devices. We have agreements with various cable, satellite and telecommunications operators to make our service available through the television set-top boxes of these service providers. We intend to continue to broaden our capability to instantly stream TV shows and movies to other platforms and partners over time.

If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing or other impediments to delivering our streaming content to our members via these devices, our ability to grow our business could be adversely impacted. Our agreements with our device partners are typically between one and three years in duration and our business could be adversely affected if, upon expiration, a number of our partners do not continue to provide access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.

Furthermore, devices are manufactured and sold by entities other than Netflix and while these entities should be responsible for the devices’ performance, the connection between these devices and Netflix may nonetheless result in consumer dissatisfaction toward Netflix and such dissatisfaction could result in claims against us or otherwise adversely impact our business. In addition, technology changes to our streaming functionality may require that partners update their devices. If partners do not update or otherwise modify their devices, our service and our members’ use and enjoyment could be negatively impacted.”

The consumer-centric statement caters to the public net neutrality argument of supposed threats posed by broadband providers but the statement describing broadband providers as partners, in my opinion, captures the reality of the relationship between content providers like Netflix and broadband providers.  The way to look at how a seamless internet service experience is provided is to look at the components necessary for getting digital product to the consumer.  Netflix has to coordinate via contract the prodiuction of content and its distribution.  It has demonstrated that it can and has entered into the necessary agreements with wireline and wireless providers to get its content distributed to consumers.

As a going concern I expect Netflix to take initiative in reducing its costs of delivery but using government regulation as the method for mitigating costs eventually is not in the consumer’s best interest nor in investor best interests.  Broadband providers will pass on the increased costs of traffic delivery and net neutrality regulatory compliance to consumers.  Increased costs of broadband access will cause consumers to look for other cable or wireless platforms, including different tiers of service which will have a negative impact on broadband operator revenues in the longer run.  Netflix may see a temporary bump in profits but as consumers decide to downgrade service, access to Netflix may be one of those services consumers may end up doing without.

 

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In the wake of City of Roswell, can you trust locality’s power over broadband market?

The United States Supreme Court today issued a ruling in a tower siting case.  On the surface it was no big deal.  The City of Roswell Georgia thought that a cell tower proposed by T-Mobile would be an eyesore for the community so the city denied T-Mobile application.  T-Mobile cried foul, claiming that the city violated the Communications Act by failing to explain its reasoning.  The Court held that although Roswell was in its right to not include in its denial letter its reason for denying the application, the city’s reasons should have been provided to T-Mobile right around the time the wireless carrier received its denial letter.

What I found downright scary was the City’s argument for not providing a written explanation along with the denial.  The City believed that an obligation to provide a reason took away from its local zoning authority.  In addition at least one city council member believed that Roswell had enough cellular coverage that it was not necessary for the city to leverage the playing field for T-Mobile.

The court said, whoa; hold up a minute.  The reason you explain your denial is to prevent that very attitude toward new entrants.  Localities are required to state their reasons for denying applications in order to prevent unreasonable discrimination among providers of functionally equivalent services.

Now consider Roswell’s attitude in light of President Obama’s announcement that he would like to see the Federal Communications Commission pre-empt any state legislation that restricts municipalities from providing their own broadband facilities.  Localities are the gatekeepers to companies entering local markets to sell broadband services.  If localities took this attitude toward wireline and wireless broadband providers seeking franchise agreements to provide services, there would be a disincentive on the part of the private sector to invest in, build out, and deploy broadband facilities.

It’s tough enough having to negotiate franchise agreements with localities.  Competing against them for the provision of broadband only makes market entry all the more difficult.

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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.