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Internet commerce flourishes because of market demand not regulation

One peeve I have had with the Federal Communications Commission in past and today is its penchant to describe its role in the broadband market as a facilitator of growth and innovation.  It’s like having cousin Louie visit for a weekend, overstay his welcome, and claim that he helped to build your house.  I’ve had to ask myself if I missed something during my two decades in the regulatory game.  Where did the Commission facilitate growth in the online markets?

There are probably a number of different sources to look at.  I try to keep things simple, so I decided to take a look at what professional market watchers have seen over the past four years.  Not a formal analysis that wreaks of regression analysis and all that, but an albeit cursory review of the findings from three Morningstar reports that covered a broadband provider; an online bookseller; a media company; and an over-the-top video distributor.  Since the Commission continuously refers to the entire internet ecosystem as its unit of regulatory analysis, I figured looking at companies that play in different but connected boxes in the internet ecosystem was an allowable approach.  So here goes.

First, lets go back to a Morningstar analysis of Amazon conducted on 6 December 2010.  The analysis discusses the advantages that Amazon has over brick and mortar companies such as Barnes and Nobles and Borders.  Amazon has been able to leverage the internet to deliver books at the lowest cost point, a cost point achievable because of low overhead costs.  Amazon has also been able to leverage the internet to produce and distribute e-books which, according to Morningstar, has a compelling advantage over hardcover books.  The main reason e-books have been successful is that production and distribution costs are near, if not, zero.  This ability to keep production costs near scraping the bottom has translated into lower prices for consumers.

I read through that report looking for some acknowledgment of the Federal Communications Commission.  I saw none.  Based on this report it seems that the idea of storing books in warehouses and shipping them out to consumers as the result of receiving an order online was part of a business model developed by an engineer by the name of Jeff Bezos.  No mention of the Commission or the Communications Act.

In September 2011, Morningstar sounded kind of so-so on Netflix.  Morningstar made it clear that content owners held the upper hand with the ability to enter into shorter licensing agreements for content and repricing at a higher amount.  Morningstar also noted in 2011 that Netflix faced heightened competition from new entrants and the lack of access to higher quality content.

Fast forward three years.  Netflix has built its own house of cards where orange is the new black.  Just like the Amazon analysis, Morningstar makes no mention of how the Commission’s regulation of the internet contributed to Netflix’s business model or its decision to go outside the box and not just deliver DVDs but stream video as well.

Speaking of content, Morningstar’s July 2012 analysis of Time Warner proceeded from the premise that quality content is king and that Time Warner has been able to take a strong competitive position in content.  The quality of Time Warner’s content, according to Morningstar, increases in value because it can be consumed on multiple devices, including laptops, smartphones, and tablets in addition to televisions.

The decision to deliver it via multiple platforms via multiple devices appears to have been made by private actors with no input, appropriately, from the Commission.

And how about the broadband provider portion of the ecosystem.  The Commission, along with net neutrality advocates, has been harping on the need for robust competition in the broadband space, but according to Morningstar’s August 2012 analysis of broadband provider CenturyLink, for the company to stay competitive with cable companies it would have to invest in network enhancements that facilitate faster download and upload speeds.  Not only does CenturyLink have to compete with cable in providing broadband access, they also compete with cable to distribute video.  Their provision of fiber-to-the-tower finds them competing with not just cable companies but with other competitive local exchange carriers.  CenturyLink also competes with Amazon, Salesforce.com, and Verizon in the provision of cloud management services.

Again, nothing in Morningstar’s analysis that speaks to the Commission’s requirement or even suggestion that CenturyLink enter into these markets within the internet ecosystem.

Growth and innovation have been occurring within the internet without the Commission’s persuasion or regulation and so far the Commission has not demonstrated why applying Title II regulation could add any value to the market-driven actions taken by the firms I just discussed.

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Losing the Internet global market for the broadband access trees

The New York Stock Exchange Tech-Media-Telecom Index fell 101.46 points or 1.35%, partly on news that the European economy was worse for wear.  Equity investors ran for the debt-income hills choosing to move their stash into government bonds.

I don’t think the fall in the tech, media, telecom sector had much to do with comments made today by panelists participating in a Federal Communications Commission forum on the law and economics of net neutrality.  The takeaway from that panel for most was that no matter what net neutrality rules the FCC comes up with, whether based on Title II, section 706, or some ungodly pairing of the two, there will be blood in the form of litigation.

The other takeaway in my opinion is how so far the FCC has completely ignored the opportunity to describe how regulation, especially under a Title II regime, is supposed to help maintain optimum performance of a globally competitive interconnection of 67,000 networks when a significant portion of the globe is experiencing an inept economic performance.

If economic performance stays this sluggish worldwide, information services companies will have to really emphasize to consumers the value of their content and information products if they are to stay afloat.  But when the FCC is seriously contemplating codifying a policy that would give equal treatment of a video of a dancing cat with life-saving online medical services, it is difficult to see capital and investment moving freely to activity that brings the most value.

Morningstar notes that the FCC’s tough stand on competition and net neutrality has deflated the value of wireless Internet access platform providers, casts doubt on pending acquisitions of DirecTV and Time Warner Cable, and lessens the chances of Sprint and T-Mobile walking hand-in-hand down the mergers and acquisitions aisle.  According to Morningstar, the inability to consolidate may make Sprint and T-Mobile’s ability to garner additional spectrum or eek out a profit all the more difficult.

If the FCC wants to maintain its economic regulation focus on the providers of broadband access platforms while positively impacting the end-to-end global nature of the Internet, it may want to ease up on the “consolidation is bad” mantra and either stick to a broadband policy based on section 706 or better yet abandon rulemaking on the Open Internet altogether.

 

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Comcast and Time Warner would like regulators to joint the 21st century

I just finished listening to a hearing in front of the U.S. House Sub-committee on Regulatory Reform, Commercial and Anti-Trust Law.  Eight panelists tried to persuade the committee that the proposed merger between  Comcast Corporation and Time Warner Cable was either great for the delivery of innovative products and services to consumers or would harm consumers with higher prices and restriction on the availability of content.  What I barely heard was any analysis regarding what type of companies Comcast and Time Warner actually are today.

Based on most of the questions posed by the sub-committee members, their constituents look at Comcast and Time Warner as either 20th century cable companies, sitting somewhere with a huge dish catching satellite signals from HBO, Cinemax, or Disney and sending their programming down some cable wire into a consumer’s home or the company’s that connect us to the Internet.  And the discussion regarding whether the merger will be harmful to competition seemed to center on competition in broadband access or the last mile.

Comcast and Time Warner don’t appear to look at their relevant market as just last mile or broadband services.  From the near beginning of their joint testimony Comcast and Time Warner describe their proposed combination as creating a “world-class communications, media, and technology company.”  Not only are Comcast and Time Warner responding to and servicing the commercial activity generated by online companies such as Amazon, Apple, Google, Facebook, and Netflix, but they are now competing against these companies as these edge providers enter the world of digital voice and broadband access.

The question the U.S. Department of Justice will have to answer is why should we treat the services of each company as a silo such that we carve out one relevant market by which to analyze two companies that operate in multiple markets based on the multiple services they provide.  If the Justice Department identifies a relevant market, then can they say that there is a monopoly in the relevant market and was that monopoly power abused?

Yes, Comcast is already a monster of a company.  It has two main businesses; Comcast Cable and NBC/Universal. Assuming that the Justice Department finds that the relevant market is a national one, can the DOJ conclude that Comcast would have a monopoly in cable services?  How about in content production?  In theme park ownership?  In broadcast television station ownership?  In broadband?

Speaking of broadband, will the merger mean no more deployment of broadband facilities?  Probably not.  It would be highly irrational for a going concern that invests in a DOCSIS 3.0 digitized platform to not squeeze the last ounce of value out of it by not selling broadband services to more consumers.  For this reason alone I don’t see broadband adoption being harmed by the merger.

Cries of the big bad broadband wolf by the opponents of the merger tells me that they are still living in the late 1980s.  Comcast and Time Warner aren’t cable companies anymore.  Ironically it is because they have grown beyond their original core cable service and gotten larger in the process that they are able to escape antitrust concerns, assuming regulators admit they are in the 21st century.

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Dear Al Franken. You’re missing the globe for the bushes

The U.S. Senate Judiciary Committee met today to give their thoughts about the proposed merger between media companies Comcast and Time Warner Cable.

Wait a minute.  Did I say media companies?  Yes I did.  Comcast and Time Warner Cable provide end-users with access to content, whether they purchase that content from programmers such as ESPN or produce that content themselves, such as through their regional sports networks or other entertainment networks.  The questions posed by most of the senators displayed either their ignorance or fear of Comcast and Time Warner’s new roles as content providers.  Their unique position as owners of video distribution pipes that go into the homes of consumers shouldn’t lessen their primary roles as content providers nor should ownership of transmission mediums be the primary determinant of the legal and regulatory framework for their oversight.

Senators like Al Franken, Democrat of Minnesota, have the tendency to focus on small issues that generate the most political excitement and this tendency results in myopic analysis of the issue in front of them.  The senators rather focus on consumer issues of increased prices for ESPN and sports blackouts.  They would rather cater to testimony from content providers complaining about their inability to get their products displayed the digital version of a grocery store shelf, complaining that the store brand is getting the prime spot in the middle of the eye level shelf.

Take for example the testimony of James Bosworth, chief executive officer of Back9Network Inc.  Back9Network provides video programming that promotes the golf-lifestyle.  Mr. Bosworth argues that for independent programmers like his company, it will be near impossible to compete against similar programming provided by Comcast.  Mr. Bosworth would like the merger halted because he believes his firm will not be able to compete with Comcast’s other golf and/or lifestyle programming.

Could the real issue be that programmers such as Back9Network don’t bring much value to the end-user much less the “digital grocery store” that is Comcast to put it in a deserving position for more eyeballs?  In an industry allegedly valued at $177 billion with approximately 26 million golfers, maybe Back9Network, still an infant having been in business only since 2010, hasn’t come up with that compelling business model that Comcast’s David Cohen admits is necessary for the company to place a network in its network line up.  Maybe programmers need to focus on creating something that people want to see in the first place.

But there is something more fundamentally telling in this debate over the merger of Comcast and Time Warner.  If there are so many independent programmers out there jostling for room on a media company’s platform, maybe it’s time for programmers to explore technological alternatives for getting their products into market.  For example, why couldn’t independent programmers combine their content, establish a network, and distribute their programming to end-user laptops, tablets, and smartphones via Roku devices similar to the services provided by Aereo.

Mr. Franken and other senators would rather see the media bottleneck forcibly widened by denying mergers like the proposed Comcast-Time Warner combination.  Instead, politicians and policymakers should promote alternative methods of distribution, especially for content providers who are still trying to make a compelling case that their content provides consumer markets sufficient value.

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Regarding Comcast, what would be the best scenario for content providers?

How would entrepreneurs, providers of information and services via the internet, be disadvantaged by this deal? Would they see any difference in terms of access to their consumers? Probably not. The current monopolist would be replaced by another monopolist.

Should content providers have to pay broadband providers to carry their content to consumers? In an ideal world, broadband providers should pay to acquire content and then resell it to their subscribers. Unfortunately that would mean either paying every rinky-dink content provider in the known universe or providing access to much fewer content providers.

The best option for the content provider would be for Comcast to enter into Time Warner Cable’s local franchise areas and compete head-to-head. That scenario could reduce content provider cost of access and increase a content providers profits.

Unfortunately for Comcast or other broadband providers they must face onerous and costly local franchise authority requirements just to enter a market.  A company of Comcast’s size is well aware of the franchising process and used to how long it takes, but this is not the issue of the day.  For Comcast it is about better leverage over programmers and reducing costs.