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Verizon makes it clear. They are a media company

Verizon’s Craig Silliman published a blog post discussing the appropriate regulatory framework for the application of net neutrality principles. He reiterated the broadband provider’s support for no blocking, no throttling, no paid prioritization, and a general conduct standard for protecting consumers and competition. What I found interesting was Mr. Silliman’s description of Verizon’s media efforts. In Mr. Silliman’s words:

“We have invested billions in businesses that depend on the ability to reach customers over the networks and platforms of others. We invested in digital ad technology through our $4.4 billion purchase of AOL and own content through properties like the Huffington Post, MapQuest, and TechCrunch. We have an expanding presence in the digital media and entertainment space; Verizon Digital Media Services helps content companies deliver their services in digital form to any screen or device, anywhere in the world.”

To me, Verizon sounds more like a content delivery network. A content delivery network is a large distributive system of servers deployed in multiple data centers across the internet. The goal of a CDN is to serve content to end users with high availability and high performance.

Akamai, a company that touts itself as the global leader in content delivery services, might vehemently disagree with me about Verizon being a content delivery network given Verizon’s position as a gatekeeper to end-user customers. End-users don’t use Akamai to get on to the internet. Access is that functionality that pulls Verizon into the Federal Communications Commission’s sandbox.

As Verizon continues to evolve in the media space, however, it increasingly distinguishes itself from T-Mobile and Sprint whose claim to broadband fame is strictly as a mobile broadband access platform.

Although Verizon has expressed its willingness and the importance of complying with net neutrality principles, should those principles intrude into its content delivery operations? If yes, then should content delivery services provided by edge providers like Akamai also fall under the Commission’s transparency principles? Why should Verizon’s content delivery components be treated differently from Akamai’s content delivery services? Verizon’s evolution will force the Commission to address these questions.

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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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Paid prioritization would get the GOP bill closer to ideal

Today the hashtags, #openinternet and #netneutrality were used extensively as the Senate Committee on Commerce, Science and Transportation and the House Sub-committee on Communications and Technology listened to testimony that they hope will help refine draft legislation designed to rein in the Federal Communications Commission while bringing clarity on paid prioritization, unreasonable network management, discrimination against network traffic, and access to legal websites.

The bill expressly prohibits paid prioritization, which allows content providers to enter agreements with broadband providers that allow traffic higher priority for certain traffic to end-users.  The argument against paid prioritization has been that smaller content providers would not be able to compete with the big dogs who have deeper pockets and can afford to pay to get their traffic placed before the rest of the dog pile.  But what this view fails to consider is that firms willing to pay for priority treatment of their traffic recognize the value to their subscribers that their traffic has and paying to get that traffic to content subscribers is a cost that will generate benefits.

Content providers are not shy about the how failure to get traffic to subscribers in a timely fashion might impact their business models.  Take for eample the investment information firm, Morningstar.

Morningstar is in the information and services delivery industry.  The Chicago-based firm provides independent investment research to subscribers around the globe.  It relies on internet technology to deliver its services, thus an ability to upgrade to the newest technology is necessary if content providers like Morningstar are to remain competitive.  Outages of their network data centers can result in lost customers and lost revenues.  According to Morningstar:

“Many of our client contracts contain service-level agreements that require us to meet certain obligations for delivering time-sensitive, up-to-date data and information. We may not be able to meet these obligations in the event of failure or downtime in our information systems. Our operations and those of our suppliers and customers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures or disruptions, computer viruses, and other events beyond our control. Our database and network facilities may also be vulnerable to external attacks that misappropriate our data, corrupt our databases, or limit access to our information systems.

Most of our products and services depend heavily on our electronic delivery systems and the Internet. Our ability to deliver information using the Internet may be impaired because of infrastructure failures, service outages at third-party Internet providers, malicious attacks, or other factors. If disruptions, failures, or slowdowns of our electronic delivery systems or the Internet occur, our ability to distribute our products and services effectively and to serve our customers may be impaired.”

Question is, would a statutory ban on paid prioritization benefit Morningstar or other firms in the information delivery services industry where, again, timeliness ois of the essence?  If contracts with their clients call for liabilities where data is not delivered in a timely manner or where quality is eroded, can Morningstar afford prohibition from entering priority contracts?

While the bill is a good start toward bringing clarity and closure to the net neutrality debate, Congress needs to focus on the commercial aspects of the internet and keep in mind that speed and capacity are the characteristics that make the exchange of information over the internet far more superior, productive, and profitable than any other medium.  Paid prioritization is about meeting customer needs and recognizing the value certain content brings not only to the subscribing end users but to the economy as a whole.

 

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Broadband, capital, and the politics of the ignorant

Broadband is capital that is used by information service providers to produce an information service.  It is the copper, fiber, cable, electronics, and software created, deployed, and used as capital inputs in the production of information services that end-users eventually consume.  By extension the Internet is also an input in the production of information services.  The cables, routers, and servers on the Internet connect over 67,000 global networks making it possible to create and sell information.

By information services, I refer to services that either generate, store, or provide end-user access to content.  This would include broadband access operators such as Verizon or Comcast; router and server providers such as Cisco; back haul providers such as L-1; Internet search engines such as Yahoo or Google; and content providers such as Netflix or Hulu. They all use broadband capacity and the Internet as inputs for the production of information services.

End users or consumers buy information services for final consumption.  They are not using fiber, cable, copper, software, or network electronics to create anything.  They have no property claim or property interest in these components.  Many end-users have no clue as to how these inputs are used much less could define them.  All they know is that they point and click on a link to get their information on current events, gossip, or the recipe for making holiday season rum cakes.

Unfortunately the noise from net neutrality proponents, specifically those pushing Title II regulation of the subset of information services providers known as broadband operators, has obscured this view of broadband as a capital input.  In addition claiming that broadband is a civil right or platform for promoting social justice is also misleading and clouds the discussion.

And the Federal Communications Commission is doing nothing to clear the air on the issue, choosing instead to fan the flames of ignorance surrounding what broadband truly is, a mere input in the production of a service.

The Commission and net neutrality/Title II proponents make this mistake easily because they fail to identify the appropriate market for analysis; the information market.  We develop, deploy, and maintain our communications networks for that sole purpose, to facilitate information exchange.  Because information is a prime component in our knowledge economy, public policy’s main focus should be on how best to promote the deployment of capital so that the exchange of information becomes easier and faster.

Net neutrality/Title II proponents may rebut this line of reasoning by saying that putting into code the principles of transparency of network management, non-discriminatory treatment of content traffic, and no blocking of access to websites of choice based on Title II is the best way to ensure information flows across 67,000 globally interconnected networks.  I beg to differ.

Title II regulation does not address the basic market components of demand and supply for information.  Demand for news, entertainment, and advice drives the supply of information.  A priori, this demand never recedes.  It continually increases.  The economy, in particular the information markets, have created a way to supply increasing demand for information by funding the development and deployment of capital inputs that make accessing and delivering information easier and more efficient.

Title II’s focus is on price regulation and transparency of agreements between network operators.  Title II’s language says nothing about the demand for information services.  Title II does not say anything about encouraging the supply of information services nor does it speak to leveraging of capital inputs to supply services.

Title II’s primary objective is to ensure that in a monopoly market for voice telecommunications that the consumer of voice communications gets a fair and reasonable rate for her voice service and the Commission is aware of all network operators involved in delivering voice services.

Title II is not a public policy tool for the 21st century.  It’s time for the Commission to diffuse the narrative that end users have the right to tell private parties how to leverage capital inputs used for providing a commercial service in a free market.  Diffusing this narrative is easier if the Commission properly describes what broadband and the Internet really are and focus on the true market for analysis: the information markets.

Once the Commission realizes that this is the market that should be promoted and that the private sector has been doing a great job in building the networks necessary for information to flow, maybe then we’ll start moving in the right policy direction.

 

 

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What type of political pressure can Netflix put on the FCC? Not much

Posted September 10th, 2014 in FCC, Federal Communications Commission, Government Regulation, net neutrality and tagged by Alton Drew

September 15 is fast approaching and comments are still streaming in from consumers hoping that the Federal Communications Commission will promulgate rules that regulate the Internet and codify open internet principles.

Not only are individuals trying to influence the Commission but so are corporate entities such as Netflix, Mozilla, and Reddit.  Netflix makes no secret that it wants strong net neutrality.  It has also entered into agreements with Verizon and Comcast that would help Netflix, a video-over-the-top, get traffic to its customers.

While protesters are loud and larger companies burn through some cash, the results may be less than hoped because of the structure of the FCC.  The FCC is made up of five independent members and since neither face re-election from the masses, they can ignore them.