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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Ted Cruz’s voice on broadband

Posted July 25th, 2016 in Broadband and tagged , by Alton Drew

Ted Cruz caught a little media heat for not endorsing Donald Trump for president of the United States. His snub may provide additional ammo to a party establishment that have never really cared for the U.S. senator from Texas. Mr. Cruz, however, has been a consistent voice against additional or onerous regulation of broadband services. He reiterated his opposition to more regulation during his convention speech which was refreshing to hear given that neither Hillary Clinton or Donald Trump have spoken at any length on the importance of broadband, especially for economic development.

I don’t pretend to be a Ted Cruz fan, but if the Democrats were to take the Senate and the Republican establishment continues its snub, then an important voice in opposition to more broadband regulation would be made even less relevant.

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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.

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On March 31st, the FCC will immerse itself further into information markets

Posted March 28th, 2016 in Broadband, edge providers, Federal Communications Commission, privacy and tagged , , by Alton Drew

The Federal Communications Commission will issue a notice of proposed rulemaking on 31 March 2016 providing requirements that internet service providers should follow in order to protect personal information of consumers. Commission chairman, Tom Wheeler, describes the proposed rules as an initiative that gives consumers the “tools they need to make informed choices about how and whether their data is used and shared by broadband providers. Mr. Wheeler has constructed his rules within a framework of three principles: 1. Consumer choice, where consumers exercise meaningful choice over what data an ISP can use and how it can be shared; 2. Transparency, where consumers are made aware of what types of information an ISP is collecting and how that information is being used; and 3. Security, where ISPs have an obligation to protect information where ever it is carried over a network and stored. While consumers can “opt-out” from having their personal information used by ISPs in order to market additional services to the consumer, the consumer must opt-in to the use of their information for any other purposes. Anyone following the Commission since Mr. Wheeler’s ascent to the chairmanship acknowledges that this is a partisan commission and leading the opposition on this notice of proposed ruling is Commissioner Mike O’Rielly. Mr. O’Rielly refers to the proposed rules as “troubling and conflicting” given that these rules may not apply to other internet companies like Google and Facebook.  Mr. O’Rielly also takes issue with the Commission flirting with issues such as data security and data breach, issues, he argues, that are not covered by the Communications Act. And Mr. O’Rielly is correct. Data breach and security are not covered by the Communications Act. Nor does the Communications Act describe broadband access providers as telecommunications companies. In addition, ISP access to consumer proprietary information is limited, according to research conducted by Peter Swire, Justin Hemmings, and Alana Kirkland. Also, other companies have access to more information and a wider use of personal information than ISPs. Mr. Wheeler is playing with judicial uncertainty betting that the U.S. Court of Appeals-District of Columbia will uphold the Commission’s reclassification of broadband services as telecommunications services thus extending the 20th century protections of Section 222 of the Act for telephone customer personal information to consumers subscribing to 21st century broadband access services as well. Will Mr. Wheeler’s rules lead to an increase in deployment of broadband facilities? I don’t see it. Ironically, Mr. Wheeler’s rules may cause a conflict between sections 1302 and 222 of the Communications Act.  Why would ISPs, pursuant to the Commission’s directive under section 1302 of the Act, want to increase deployment of broadband access platforms if their ability to gather, package, and sell consumer information is going to be heavily regulated by rules, supported by section 202 of the Act, that don’t apply to social media networks that are increasingly gathering more consumer data than ISPs?

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Do the markets see an entry problem for new content providers?

On 18 February 2016, the Federal Communications Commission issued a notice of inquiry asking for comments on how regulation can best address reducing barriers to entry to the video content provider market. The Commission believes that cable companies and other multi-channel video programming distributors are in a position to impede the entry of smaller video content providers into the video market. But do video content providers really need the Commission’s help to enter the content provider market? I don’t think so. Rather than going through the twists and turns of a legal argument on whether the Commission has the authority to address the question, why not let the markets determine what content gets offered and accepted by its participants?

Take for example Netflix. Netflix started out as a supplier of rented DVDs distributed via the U.S. mail. While the company still rents out movies in DVD format, it’s its online format that Netflix is best known for today. Consumers now download video content that Netflix has a license to present or can download content produced originally by the online content provider. While its stock has taken a beating over the last twelve months, traders still look at the online video provider as competing ably with the likes of a Comcast or Time Warner’s video product.

From the programming perspective, Netflix produces original content i.e. “House of Cards”, “Orange is the New Black”, and “Marco Polo”, as a hedge, according to Morningstar analyst Neil Macker, against other content programmers that may be holding back their own content from distribution. Netflix, as a result of data captured from its user base, is able to develop or purchase content that suits its viewers’ needs. In other words, Netflix has properly reinvested its capital and other resources to provide a superior content experience as well as built rapidly on an older business model after recognizing and taking advantage of new technology.

Other content providers are going down Netflix’s path. Amazon not only distributes content via the internet but also produces its own content. Hulu is reportedly purchasing original content for distribution as well.

The Commission is running the risk of promising a more open environment for all content imaginable; sending a message that all content is created equally. The Commission is ignoring the fact that there are limited number of distribution channels, whether via cable or over-the-top, and that this natural limit in distributors will create a bottleneck through which only the content deemed attracting the greatest demand will be able to wiggle through. Content that attracts the greatest demand will draw the most see capital investment creating the vicious cycle that smaller entrants will face and the Commission naively assumes it will regulate away.