The pursuit of greater returns on capital resulted in the blurring of telecom, media, and entertainment

Part of the naivete of the net neutrality argument was how it ignored the realities of the broadband industry and the role of capital.  Broadband access to the internet has never been about the democratization of self-expression but about the commercialization of the exchange of information.  Information comes in various forms whether it is scholarly work, news, or entertainment.  As Ivan Seidenberg notes in this piece, the lines between media, telecommunications, and entertainment have been blurring for decades where the silos that once represented media, telecom, and entertainment have finally been broken down.

If investors who put their capital into these industries want to see higher returns, then acknowledging that these walls have broken down is the first step they should take.  Pushing back against government actions that fail to recognize that breaking down these walls is necessary for capital to continue flowing to and growing in these industries should be the second thing to acknowledge.

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Why be afraid of big data?

Posted August 11th, 2015 in big data, Broadband, Federal Trade Commission and tagged , , by Alton Drew

Between April 1982 and November 1984 I worked at a Burger King in Tallahassee, Florida.  I was a student back then at the Florida State University.  The restaurant was located across the street from campus so from time to time I would see some of my friends come into the restaurant to eat.  One would think that putting together a Whopper was no big deal but to some people it is, from getting the condiments right to simply trusting the employee who made the sandwich.

I had two schoolmates that were pretty particular about who made their grub.  One schoolmate, Charlotte Jones, was very particular about me making her food.  One day I was getting off my shift and heading back to Smith Hall. Charlotte was heading to BKs to eat.  She saw me heading to the dorm and asked where I was going.  I said back to my room. At that point she did an about face and headed back to Smith Hall and made sure that she knew my schedule from that day going forward.

Another schoolmate, Candace Pope, liked her fish sandwich done a particular way.  It got to the point that if I saw her coming into the restaurant, I would have her sandwich prepared before she got to the cash register.  All I had to do was say, “It’s up.”  She would then direct the cashier to the sandwich already made.  I was prepared to take care of my friends based on having accumulated data on their buying habits at Burger King. I was able to anticipate their needs.

Fast forward thirty one years and technology is able to do on a massive scale what I was able to do on a micro scale.  Today technology allows business to capture information on their consumers, send that information to data brokers and other information gatherers who categorize and prepare that information for use by advertisers.  It’s an information trade where broadband networks providing the platform upon which information is traded at light-speed.  And part of that information trade takes place in a $120 billion advertising market.

What does this information trade mean for broadband deployment and investment?  The information trade creates the value that signals capital to enter the market.  Capital, seeing high returns from the trade, will move toward entrepreneurs that build digital mousetraps and to broadband facility providers willing to build the infrastructure upon which the digital data trade winds flow.

Data, information, knowledge have been flowing between people, groups and societies from the time man has been on the planet.  My little Burger King example shows how we use business data about consumers every day.  What scares people and in particular regulators, is the abundance of it.  According to Maria Ogneva, 2.5 quintillion bytes of data is created every day.

A forum hosted by the Federal Trade Commission in September 2014 addressed some of these fears, centering on regulator concerns about consumer privacy and the commercial use of data without consumer permission. Panelists were concerned about how data analytic techniques may be either skewing unflattering ads to minority populations, or populating data bases with incorrect or biased information about consumers based on their buying habits or location where they make their purchases.  While only one panelist explicitly mused about regulating data, it was apparent to me that at least some of the panelists were thinking about regulating how data is accumulated, analyzed, and distributed.

The FTC has been recommending that Congress get a bit more aggressive with data brokers, the entities that collect, analyze, and sell consumer data to advertisers.  For example, from a summary of a report the FTC conducted on data brokers in 2014:

“As the Report states, ‘In light of these findings, the Commission unanimously renews its call for Congress to consider enacting legislation that would enable consumers to learn of the existence and activities of these data brokers and provide consumers with reasonable access to information held about them by these entities.’  With respect to brokers that sell marketing products, a majority of the Commission had four specific suggestions for Congress:

  1. Consider giving consumers a way to easily identify which brokers have data about them and where they can go to access it or opt out.  One way to do that:  A central online portal.
  2. Consider whether data brokers should have to clearly disclose that they not only collect raw data, but also combine it with other information to draw inferences about people.  That’s especially important when it comes to sensitive topics like health conditions.
  3. Consider requiring data brokers to reveal more about their sources.  That would make it easier for consumers to track down and correct the source of inaccurate information (for example, a mistake in a public record).
  4. Consider whether consumer-facing businesses should have to clearly disclose that they share information with data brokers and to give consumers choices, including opting out.  For sensitive data – health information is one example – the FTC is asking Congress to consider legislation to require consumer-facing sources to get people’s affirmative express consent before they collect it in the first place.”

Democrats in the U.S. Senate have taken up the FTC’s call for legislative action. Last March S. 668, the Data Broker Accountability and Transparency Act of 2015, was introduced in the Senate, but given the control Republicans have of the Senate and the House, this bill poses little if any political risk to the data broker industry.  The value being brought to the information markets via data brokers continues unhindered by new legislation or regulation.  This is good for broadband deployment as well since, as I stated before, the information trade drives deployment of broadband.

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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.

 

 

 

 

 

 

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Lifeline is about promoting a good society

Today the Federal Communications Commission voted on a notice of proposed rule-making to extend Lifeline services to include access to broadband.  The internet provides modern society an enhanced conduit for sending and receiving messages and data.  This capability allows businesses to provide innovative services on a cost-effective basis and allows consumers an efficient mode for accessing services.

For example, yesterday I met with my new primary care physician.  Not only was I impressed with her personality and knowledge but I was also impressed with how her office uses the internet to manage patient health.  Her patients can get online and register with her information portal in order to review their prescriptions, other medical information, and contact the doctor or her staff with questions.  I can do all this with a laptop and a high-speed internet access connection.

The internet and the high-speed broadband access services that allow us to connect to it provide mechanisms for society to carry out its purpose: to help spread the risks that threaten the abundance of life.  We join societies in order to share resources, maximize our wealth, and increase our security.  Broadband access does that by giving society’s members access to multiple sources of information and data.

Today’s discussion at the FCC unfortunately got hung up on issues such as fraud and waste.  FCC member Mike O’Rielly was correct when he said that today’s vote should have been a five to zero slam dunk but as Chairman Tom Wheeler also noted, it was unfortunate that the issue had become politicized.

If waste and fraud are an issue then the FCC should take consider a couple approaches shared by AT&T’s vice president for external affairs, Jim Cicconi.  In a blog post posted 1 June 2015, Mr. Cicconi  offered the following:

“First, AT&T believes that the government, not carriers, should be responsible for determining Lifeline eligibility and enrollment.  This is the way most federal benefit programs work, and there’s no good reason for handling Lifeline in a radically different way.  Many of the problems associated with Lifeline are rooted in this flawed approach.  Administrative burdens on carriers today are huge, and innocent mistakes can lead to disproportionate punishment—which in turn discourages carrier participation.  And the potential for fraud by less reputable players is very real.  Moreover, consumers are saddled with difficult burdens if they simply want to change carriers.  Government itself should determine eligibility, and can provide the benefit through a debit card approach much like food stamps.  Consumers could then use the benefit for the service of their choice.”

The FCC should keep its eyes on the prize.  It can play an important role in keeping society’s members connected to today’s most important piece of capital, knowledge.  Waste and fraud, albeit important considerations from an operational standpoint should not be a barrier to implementing equitable social policy.

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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.