Comments Off

Democrats plan to counter GOP attempts at defunding net neutrality

Senator Ed Markey, Democrat of Massachusetts, and Senator Al Franken, Democrat of Minnesota, will like to thwart their Republican colleagues attempts at reducing the amount of money the Federal Communications Commission will have to enforce net neutrality.  Mr. Markey wants to organize enough Democrats in the Senate to block a rider in the GOP appropriations bill that would make it harder for the FCC to enforce the new rules.

From a capital flow perspective, some investor advocates argue that the wrong net neutrality regulatory framework may disadvantage start-ups who do not have the deep pockets of incumbents.  For example, paid prioritization has been cited by the National Venture Capital Association as an example of how larger, well financed firms can leverage their advantages stemming from their greater access to capital.

But as Harold Furchtgott-Roth argues in a piece for Forbes Magazine, capital expenditure growth in the information sector has been sub-par when compared with capital expenditures in the rest of the economy.  Between 2010 and 2013, capital expenditures in the information sector grew at an annual rate of 8.2% while capital expenditures in the remainder of the economy grew at 10.7%.

But if paid prioritization is the primary concern of venture capitalists like Marc Andreesen, their fears could be partially allayed by Republican willing to meet Democrats half-way by codifying in legislation net neutrality principles of no paid prioritization, no throttling, and no favoring of particular websites over other sites.  If the paid prioritization concern can be put to rest by legislation, then maybe a budget fight (which the Democrats will lose) or the pending lawsuit against the FCC in the federal court of appeals can be terminated.

Congress should not fund a FCC with misplaced priorities

Free Press has been calling on its constituents to encourage the Republican-controlled Congress to vote against a House appropriations bill that would significantly reduce funding for the Federal Communications Commission.  For Fiscal Year 2016, the FCC asked Congress for $388,000,000 in offsetting collections. This represents a $48 million increase over the FCC’s request for Fiscal Year 2015, which ends tonight at midnight.

House Republicans have been blatant about their unwillingness to fund the FCC’s net neutrality regime.  So serious are they about taking the wind out of the so called open internet that they have a budget bill that would provide the FCC with only $314,844,000 for Fiscal Year 2016.  If federal budgets represent national priorities, it is clear that net neutrality is not a priority for the GOP, whose members have railed against how onerous the rules are.

While the rules are burdensome, what is more telling is the FCC’s unwillingness to get out of the narrow vision box.  The FCC is still stuck on the concept of encouraging competitive telecommunications networks.  In the 21st century why would the FCC be concerned about a concept calling for a multiple number of firms providing point-to-point voice communications services via wire or wireline?

What the FCC should be concerned about is promoting the development of the information and data markets that are being created and transacted in over internet infrastructure.   Information and data are the currency being exchanged on digital networks.  Also the returns on stock that investors are seeing should be an indication as to where the economy via the internet is going.

According to data from Morningstar, the telecom services industry saw one-year returns on stock at 8.42%.  Three-year returns were 9.82% while five-year returns were at 9.64%.

In the information technology services industry, one-year returns amounted to 10.93%; three-year returns came in at 10.41%; and five-year returns were 12.16%.

The internet content and information industry saw first-year returns of 17.04%; three-year returns of 23.90%; and five-year returns on 18.70%.

I don’t pretend to be a stock analyst but if the FCC really wants to encourage competition on the internet, shouldn’t the agency promote entry into the higher performing industries?  If the FCC wants to convince me that they are interested in economic growth, their analysis should be based on the current reality of the internet economy and the data and information markets.

Comments Off

How can the FCC help expand the broadband economy

Yesterday Michael O’Rielly provided a definition of the internet economy during remarks made before the Internet Innovation Alliance.

“Here is a simple truth.  The Internet thrives today on aggregating information for the purposes of increasing advertising revenues and the use of data analysis for multiple purposes.  Data and advertising are why Internet-related companies are valued so highly by investors and Wall Street, and why those companies that cannot monetize such activities face harsh realities and uncertain futures.”

In other words, regulators need to understand that the commercial internet is an infrastructure that facilitates data trade and that the regulations they implement can limit the type of data collected over the internet by internet-related companies.  Broadband operators are involved in this data trade.  For example, Comcast collects non-personally identifiable data that they may share with third-parties for the purpose of targeting advertisement.  This non-personally identifiable data may include IP and HTTP header information; a consumer’s device address; a consumer’s web browser; or a consumer’s operating system when using Comcast’s web services.  Where a Comcast subscriber is trying to personalize the use of Comcast’s web services, the consumer may provide to the broadband provider for storage the consumer’s zip code, age, or gender information.

The competition that gets ignored by regulators is the competition broadband providers face in the capture and sale of consumer data.  This competition includes cloud storage companies, content creators, and app developers.  It also includes companies in the internet, publishing, and broadcasting industry with familiar names like Facebook, Google, and Yahoo. According to Hoover’s, these companies publish content online or operate websites that guide information consumers to the content they are seeking.

Demand for this industry’s services is driven by consumer or business needs for information and other forms of content. Profit is created when these companies deliver relevant information to consumers while offering advertisers a targeted audience.  According to Hoover’s, sales of online advertisements account for just over half of U.S. industry revenue with 75% of advertising revenue coming from search and display advertising formats.

Comcast was hoping to make major inroads into advertising with its proposed acquisition of Time Warner.  Writing for Adage.com in February 2014, Jeanine Poggi wrote:

“Assuming the deal is approved, however, it will make Comcast become a more important partner for advertisers, said Ken Doctor, affiliate analyst, Outsell. Its expanded role as both a content producer and content distributor will make it all the more competitive for ad dollars with companies like Yahoo, AOLGoogle, and Facebook. “It will become more of an ad competitor as selling of TV [and] digital inventory blurs,” he said.”

Writing further, Ms. Poggi points out that:

“A merged Comcast reaching 30 million U.S. households, along with the national reach of DirecTV and Dish Network, creates an alternative to buying national advertising from the TV networks, said Jason Kanefsky, exec VP-strategic investments, Havas Media.”

Unfortunately for Comcast investors, the Federal Communications Commission and the U.S. Department of Justice bought into the pseudo net neutrality argument pushed by grassroots groups and Netflix that mergers such as Comcast and Time Warner would somehow thwart the average man’s ability to express themselves online and that a larger Comcast would be a detriment to competition in broadband access.  Allowing the merger it appears would have given advertisers, from large corporations to small entrepreneurs, alternatives for online advertising.  The economies of scale that a Comcast-Time Warner marriage would have produced may have lead to lower advertising rates especially for smaller companies.  The FCC’s new Title II rules for broadband companies may only serve to further foreclose such scale.

The issue is, under the current rules and statutes, should broadband providers be prohibited for sharing data with advertisers or other third-parties seeking to target ads at a broadband provider’s subscribers?  I believe the answer is no and investors should lobby the FCC to ensure that no such rules are drafted.

47 CFR 8 of the FCC’s rules for protecting the open internet provides no explicit prohibition on a broadband operator providing third-parties with subscriber data that could be used to deliver advertisement.  Section 8.11 of the rules, in my opinion, gives broadband operators an argument for providing customer data to third-parties, particularly edge providers.  Specifically, the rule says:

“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.”

Section 222 of the Communications Act does not expressly prohibit use of consumer information for advertising purposes, but given that the statute is written for telecommunications companies, Congressional action would be needed to amend the section with language that reflects how broadband and other internet companies use consumer information.

If the FCC wants to help expand the broadband economy, it will have to persuade Congress to make these language changes lest leave investors in a state of uncertainty.

 

 

 

 

 

 

Comments Off

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.

 

Comments Off

Replace “telecommunications carrier” with “broadband access provider and voila, privacy rules

The Federal Communications Commission today issued some guidance on protection of consumer privacy.  Short of any specific privacy rules, the FCC will apply provisions of Section 222 of the Communications Act to providers of broadband access services.  In other words, substitute the term “telecommunications carrier” with the phrase, “broadband internet access service provider” and we will have a template for broadband access providers to follow when determining how to use consumer information that they collect either from consumers themselves or the other broadband access providers with which traffic, data, and private information are exchanged.

Which has me asking.  Just what type of consumer information do broadband providers collect and how do they use it? To provide an example of information collected and how it is used, I took a look at the privacy agreement provided by All Points Broadband, a broadband provider located in Loudon County, Virginia.  The company collects personal information including a subscriber’s name, billing address, credit card information, service address, and the nature of the devices used by the subscriber.

Personal information provided by the subscriber to the company may be combined with other personal data gleaned from the company’s Facebook page, the company’s affiliates, third party operators, market research firms, or credit reporting firms.  All Points also collects non-personal information such as the specific device identifier for a subscriber’s device, the browser being used by the subscriber, or the page requested during a subscriber search.

The company also collects information about the use of their network including the equipment used on the subscriber’s premises, time when the service is being used, the type of data being transmitted, the content received and transmitted by the subscriber, and the websites visited by the subscriber.

And just how is this data being used?  Network information is used by the company to monitor the performance of the company’s network.  The company, using network information, assesses how the subscriber uses the company’s services including the amount and type of data beineg received and transmitted.

Personal information may be used to send the subscriber marketing and advertising messages about the company’s servivces and website.  While disclosure of personal information to third parties is provided only with a subscriber’s consent, the company reserves the right to disclose non-personal information or any other information that the subscriber decides to make public.

In an era of big data, broadband companies are sitting on a treasure chest of information that can generate up to 10% economic value, depending on the quality of analytics, both from internal and external monetization points of view.

Could the FCC’s application of Section 222 to data collected by broadband providers threaten a provider’s revenues and profits?  My answer is yes.  For example, take Section 222(c)(1) of the Communications Act.  Under this section, broadband access providers receiving customer proprietary network information would only be able to use this network information in the provision of broadband services from which the information was derived or for service necessary for providing broadband servivces.

Broadband providers would have to make the argument that network information has a distinct meaning from personal  or run the risk of losing revenues from the acquisition and distribution of this data.  Should the FCC’s network neutrality rules survive court challenge, the agency should consider making a distinction in its rules between network information and personal information.