Comments Off

FreedomPop applies to FCC to resell services at all international points

On 29 July 2016, STS Media doing business as FreedomPop applied to the Federal Communications Commission to provide resold services from all international points. FreedomPop provides free mobile broadband plans, devices, digital services, and social sharing that allows its subscribers to share data across accounts.

The company was formed in 2011 and counts among its investors Mangrove Capital, DCM, and Atomico. According to its website, the company provides services in the United States and the United Kingdom and plans to roll out services to a dozen more countries this year.

FreedomPop uses Clearwire’s 4G WiMax data network and Sprint’s 4G LTE network.

The California-based start-up has avoided being acquired so far opting instead for raising private capital in a number of rounds. In June of 2015 it was reported that FreedomPop would invest $50 million in raised funds to invest in European and Latin American markets while expanding here in the United States.

STS Media’s application is filed under ITC-214-INTR2016-01757.

 

Comments Off

Has net neutrality decision impacted trading in the telecom sector?

Today the United States Court of Appeals-District of Columbia gave the Federal Communications Commission a victory, holding that the agency has the statutory authority to reclassify broadband providers as telecommunications companies as opposed to the industry favored status of information service providers. Broadband providers and their supporters have vowed that the fight is not over, telegraphing the probability of obtaining a ruling from the full bench of the appellate court or, going all the way to the United States Supreme Court.

The telecommunications services sector seemed to have shrugged off the ruling. The Thomson Reuters G7 Telecoms Sector Index registered a .06% decline at the end of the trading day. The sectors biggest players, AT&T and Verizon, saw their stock values increase .47% and .80% respectively. The response is not surprising since broadband operators such as AT&T, Verizon, and Comcast have been providing their high-speed access services pursuant to an open internet philosophy for decades. Their primary argument has been that broadband regulation should be conducted with a light touch and that throttling access speeds or discriminating against certain content or websites would be bad for business given the level of competition that they face.

Wall Street, unlike the Commission, has not been afraid to declare how competitive the telecommunications sector is. Charles Schwab analyst Brad Sorensen had this to say in a recent report about the telecommunications services sector:

“The telecom sector is certainly not what it was a couple of decades ago, although some investors may not realize it yet. The days of near-monopolistic control of landlines are long gone. These days the sector is driven by fierce competition, with new ways of communicating continually entering the market, and consistent—and expensive—upgrade cycles. To us, this reduces the traditional defensive appeal of the telecom sector.”

The court avoided the question of market power and deferred to the Commission’s predictive judgment on telecommunications companies willingness to invest in broadband network deployment. Although the sector has long left the monopoly environment existing prior to the passage of the Telecommunications Act of 1996, should traders consider not only a throwback to the regulatory world of the 1990s that the court’s ruling has cemented but reorganization of the sector that resembles the Ma Bell days?

The 1990s were the pre-convergence days. Carriers followed a silo model separating, in the case of larger local exchange companies, their long distance operations from their local exchange operations. In order to avoid the disruption that may ensure from increased complaints regarding perceived throttling, suspected paid prioritization, and misunderstood network management techniques, what if larger carriers like AT&T and Verizon decided to spin off their newly created “utility” pieces and focused on providing backbone, mid-mile, advertising, content delivery, and special access services? State public utility commissions, long shut out of the broadband regulatory game, may now view the courts ruling as permission to re-enter the regulatory fray.

Spinning off the telecommunications component and leaving them subject to state and federal regulation may allow AT&T, Comcast, and Verizon to focus on the content and data business and go head to head with Google or Facebook, edge providers, who, though subject to the Federal Trade Commission’s privacy regulation, don’t have to suffer the FCC’s Title II regulation.

A spin off may be good for traders especially if the utility components are subject to rate-of-return regulation thus providing the certainty of fixed-income behavior while the unregulated portions, while subject to the volatility of competition, may generate higher rewards that come with the greater risk.

It’s still early and in the immediate term broadband providers will be focused on continued appellate court action. The long term potential restructure stemming from this action is something traders should keep in mind.

 

Comments Off

Haven’t seen an argument for Title II regulation increasing the output of information services

According to the United States Bureau of Economic Analysis, information services, which includes telecommunications and broadcast services, saw its contribution to gross domestic product increase 10.6% in the fourth quarter of 2015. That was a big jump from the .4% increase in contribution to GDP in the third quarter of 2015. According to the BEA, fourth quarter growth primarily reflected increases in telecommunications and broadcast.

While real gross output increased just 1.4% for the United States in fourth quarter 2015, the information services sector saw its real gross output increase by 10.8% in the fourth quarter of 2015.  For all of 2015, real gross domestic product for the United States increased by 2.4%, but for the information services sector alone, gross domestic product increased 6.3% for 2015.

Proponents of Title II common carrier regulation and open internet rules have not given their preferred regulatory framework any credit for the performance of the information services sector. For example, a review of Federal Communications Commission chairman Tom Wheeler’s blog posts and statements at the time BEA released its report in April 2016 reveals no reference to the information services sector’s contribution to GDP. In a March 2016 blog post. Mr. Wheeler acknowledged the negative impact rate regulation could have on innovation and investment:

“But the 1996 Act did not change the basic economics of building and running large communications networks.   Whether they are wireless or fixed, operating these networks is a capital-intensive undertaking.   It requires the purchase of expensive inputs like spectrum, optical fiber, and radio antennae, plus the additional administrative and legal expenses of deploying these resources in the cities, towns and rural communities where network users live and work.  While the FCC has taken many steps over the years and is still working to promote competition among network service providers, the fact remains that the financial barriers to building these networks are formidable, and most American consumers have few or no choices when it comes to this service.   Our most recent Broadband Progress Report, for example, found that only 38 percent of Americans have more than one option for fixed advanced telecommunications technology.

One of the biggest challenges I have confronted in my time at the Commission is facing down the false choice between investment and openness.  I believe our Open Internet Order took the right approach, by protecting entrepreneurs and small businesses’ free and open access to the Internet, while also forbearing from sections of Title II like rate regulation and unbundling that might reduce network owners’ incentives to continue building out their networks and investing in new technologies like 5G.”

If Mr. Wheeler believes that forbearance from rate regulation will provide incentives for continued investment in broadband networks, then investors should expect continued positive growth in the integrated telecommunications services industry which has seen market value increase 2.69% over the past year, just as long as Mr. Wheeler keeps his word. I don’t believe Mr. Wheeler has any incentive to go back on his word to forbear. To do so would put the final dagger in the heart of the initiative to apply Title II to broadband providers and prove the anti-Title II constituency’s argument that Title II is bad for growth and investment.

So while we haven’t seen an argument that Title II regulation is responsible for information services positive contribution to growth, I wouldn’t expect to see one any time in the near future.

Comments Off

African American communities shouldn’t wait on the State to close the digital divide

I have to wonder if the broadband digital divide is more a question of the broadband financing management. I believe more could be done with revenues collected by the black church when addressing the digital divide, particularly in the area of ownership of technology and content delivery platforms.

By some estimates, black churches have collected $420 billion in revenues since 1980. That’s close to $12 billion in annual revenues. I know some black churches invest in businesses within their communities; and while a very small fraction of the venture capital community, African Americans are joining the ranks of venture capital firms.

Venture capital likes areas of that offer large returns and for venture capital those areas are primarily technology. Historically when we talk about the digital divide we talk about access to broadband, but I don’t buy into that definition. African Americans are over-indexed on smart phone ownership and use of social media. Where African Americans are not over-indexed on is platform ownership. While on the energy end the argument has been that the capital intensity for building a grid makes it near impossible for minority ownership of electric utilities, the open architecture of the internet chips away at that notion.

And waiting on government is not a wise plan, if you want to call waiting a plan. The Federal Communications Commission is more concerned with underwriting broadband providers via its Connect America Fund versus promoting the deployment of content delivery networks. Private sector initiatives like those taken by Facebook, Google, and Microsoft to build their own global private networks are best for deploying content delivery networks, not only for the delivery of content but to capture and analyze data as well. This is where the money is, in my opinion, for communities of color and where venture capital generated in communities of color should be going.

Comments Off

Do the markets see an entry problem for new content providers?

On 18 February 2016, the Federal Communications Commission issued a notice of inquiry asking for comments on how regulation can best address reducing barriers to entry to the video content provider market. The Commission believes that cable companies and other multi-channel video programming distributors are in a position to impede the entry of smaller video content providers into the video market. But do video content providers really need the Commission’s help to enter the content provider market? I don’t think so. Rather than going through the twists and turns of a legal argument on whether the Commission has the authority to address the question, why not let the markets determine what content gets offered and accepted by its participants?

Take for example Netflix. Netflix started out as a supplier of rented DVDs distributed via the U.S. mail. While the company still rents out movies in DVD format, it’s its online format that Netflix is best known for today. Consumers now download video content that Netflix has a license to present or can download content produced originally by the online content provider. While its stock has taken a beating over the last twelve months, traders still look at the online video provider as competing ably with the likes of a Comcast or Time Warner’s video product.

From the programming perspective, Netflix produces original content i.e. “House of Cards”, “Orange is the New Black”, and “Marco Polo”, as a hedge, according to Morningstar analyst Neil Macker, against other content programmers that may be holding back their own content from distribution. Netflix, as a result of data captured from its user base, is able to develop or purchase content that suits its viewers’ needs. In other words, Netflix has properly reinvested its capital and other resources to provide a superior content experience as well as built rapidly on an older business model after recognizing and taking advantage of new technology.

Other content providers are going down Netflix’s path. Amazon not only distributes content via the internet but also produces its own content. Hulu is reportedly purchasing original content for distribution as well.

The Commission is running the risk of promising a more open environment for all content imaginable; sending a message that all content is created equally. The Commission is ignoring the fact that there are limited number of distribution channels, whether via cable or over-the-top, and that this natural limit in distributors will create a bottleneck through which only the content deemed attracting the greatest demand will be able to wiggle through. Content that attracts the greatest demand will draw the most see capital investment creating the vicious cycle that smaller entrants will face and the Commission naively assumes it will regulate away.