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I don’t see how the FCC set top box policy adds value to content

On 27 October 2016 the Federal Communications Commission will take up the issue of competition in the navigation device or set top box space. The Commission wants to see the video content distribution industry move from requiring subscribers use of set top boxes to the use of free apps to find content. The main driver of the proposed policy, according to the Commission, is subscriber avoidance of onerous set top box fees that allegedly average $231 a year. With today’s app and internet technology, argues the Commission, subscribers should be able to find content without paying navigation device fees.

The process for getting to a decision is driving some content developers bonkers.  According to a report in Broadcasting & Cable, some content developers are concerned about the proposal’s lack of transparency and whether the Commission will play an intrusive oversight role in contracts between content distributors and content programmers.  Contracts lay out terms for compensation and channel placement, items I would think that the Commission should not really be interested in. Rather, the Commission should be interested in whether the telecommunications sector is bringing value to the overall economy. While content creation is ancillary to the sector, without information, data, or knowledge flowing over networks, the network itself loses value.

From the content programmer’s perspective, while concerned with carving out a niche in a competitive content space, the content developer, where he can seize the opportunity, wants to recover as much of a premium as he can from his product. That means cashing in on as much exclusivity as he can. He will do this in two ways. One, produce content that generates traction. Two, make sure that given the traction, he makes the content as exclusive as possible so that he can extract higher rents. Free apps do not meet either of these conditions. Free apps providing you navigation to licensed and unlicensed content eliminates exclusivity. Content competition is increased which drives down the prices content programmers can charge. This leads to lower returns on capital. If returns on capital are seen as too low, no investment is made, no infrastructure deployed, no workers hired.

All this to save $231 a year.

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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.

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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.

 

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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.

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How Congress and the FCC can avoid future Section 257 proceedings

On 25 March 2016, the Federal Communications Commission circulated an item regarding a Section 257 market entry barriers proceeding. The purpose of the proceeding is to prepare and distribute a report to Congress detailing regulatory barriers to entry faced by telecommunications and information service providers. The Commission is also expected to promote policies that favor diversity of media voices, vigorous economic competition, and technological advancement.

I think the biggest barrier to information services providers is not a bunch of rules or the Communications Act itself. It is the philosophy behind describing information services; a philosophy that is still silo-based; that separates broadband access providers from websites, information portals, and search engines. All these platforms have the exchange, gathering, repackaging, and sale of data or information in common and it is time that the Commission recognize this basic characteristic of the digital jungle.

The anti-ISP posse will argue that firms like Verizon and AT&T should not be viewed as mere information service providers because they also sell access services; that content providers and consumers rely on these gateways to access information. The anti-ISP posse have a very limited point when they distinguish Verizon or AT&T from other information services based on their access services. The New York Times, an online digital content provider, may be able to hire delivery boys but it won’t shell out billions for deploying networks just to deliver one publication to their subscribers. Paying last mile, mid-mile, or content delivery networks is more economically feasible for them to get their content out. But if we treated the information markets as an exchange, I believe there is an opportunity to create a model that increases opportunities for smaller content providers while getting the Commission and probably Congress out of the business of trying to make the information markets efficient.

Congress and the Commission should explore a blended exchange/independent system operator model for internet service providers. ISPs trade on information. The information markets in this blended model would be coordinated by a “central ISP”, similar to the regional transmission or independent system operators found in the electricity markets. Carriers, such as AT&T or Verizon, would voluntarily turn over functional control of their networks to this central ISP. In order to trade on this central ISP platform, information service providers such as Facebook, Hulu, Amazon, Google, etc., would buy seats on the central ISP’s exchange, similar to a stock market exchange. As a member, the information service provider would have a say in how the exchange is managed. As long as the information service provider has the annual fee to get a seat or membership, they must be allowed to join.

Yes, I hear your next question. “But what about the lone blogger who wants to get his content out there or the start-up information service provider who can’t afford a seat?” My first response would be “value.”  My second response would be, “tough nookies.”

ISPs are looking for content of great value. Smaller content providers will have to step up their game and demonstrate to ISPs that their content should be added to the ISPs portfolio of video and text goodies. And if a content provider cannot demonstrate this value, then tough. The content provider will have to either find another way to distribute content digitally or accept that the digital content world isn’t ready for her…yet.