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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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No. More telecom mergers won’t adversely impact net neutrality

In an opinion piece written for Forbes.com by Professor Warren Grimes of Southwestern Law School argues that there is a link between mergers in the telecommunications industry and net neutrality regulation.  Specifically, Professor Grimes argues that:

“Large telecom providers usually favor mergers and oppose government regulation. Meanwhile, content providers and consumer groups typically hold opposite views: they oppose the mergers and favor the regulation. Sound policy requires more nuance. The public interest and the long term interests of industry participants are best served by limiting mergers and, as a direct result,  minimizing the need for government regulation. Competition, not government regulation, is the best way to ensure that consumers receive what they want at a fair price. But this result is possible only if mergers do not create powerful firms that suppress competition and undermine consumer sovereignty.”

The premise that an alleged lack of competition for broadband access or content provision has a negative impact on net neutrality is faulty because net neutrality has nothing to do with either. Net neutrality is about content providers’desire to pay zero for sending traffic across a broadband provider’s last-mile network. Just look at Commercial Network Services’ complaint against Time Warner Cable that it should be allowed to interconnect with the broadband provider for free.  To CNS, Time Warner Cable is “degrading its ability to exercise free expression.” And here we thought the “attack on democracy” argument was being used to advocate for consumer rights to internet traffic, not for corporations.

Do consumers really want a diverse amount of content? No, they don’t. Out of an average of 129 available cable channels, consumers watch an average of 17, according to an article in Arstechnica.com.  And of the 961,554 active websites today, consumers visit less than ten a day for their news, entertainment, shopping, and other information.  The British communications industry regulator, Ofcom, determined in 2012 that the average number of domains visited per month by an internet user was 82 in January 2012.

Mergers may be an appropriate way for less viewed sites to gain not only viewership but capital, especially if they have a niche brand that an acquiring firm wants to leverage for growth in market share. Writing off mergers on the false pretense that they stifle a competitive offering of content is the wrong approach. Instead, regulators should view mergers as strategic partnerships that help get little viewed content some more traction.

If net neutrality really has anything to do with treating all traffic equally then regulators should be interested in ensuring that content providers have an organizational structure that can best help a content provider get eyeballs to its traffic.  Just saying traffic should be treated equally does not make traffic worthy of equal treatment by the market.

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Why can’t broadband competition proponents focus on the real picture?

The Center for Public Integrity released a post yesterday that has me questioning their economics integrity.  In the post, the Center describes how broadband providers avoid competition by arguing that the “Internet service grew out of the old telephone and cable TV systems, where only two companies owned direct lines to U.S. households.”  Sorry, but that’s only half the story.  As I shared in my comments on the post:

“Advocates for competition in the broadband access platform market need look no further than the localities that ensure that only the provider with the deepest pockets are able to get entry into a market. Onerous financial, regulatory, and technical barriers keep ouyt smaller players. Richard Bennett makes a powerful point about legacy carriers having no incentives to go beyond service territories they negotiated for or acquired when initiating services.

In addition, there is too much emphasis on the “number of carriers” narrative. This is a capital intensive business and unless new players can muster up the cash, then you won’t see a third wireline carrier entering a market.

Finally, when will “competition proponents” come out and give a definitive number for the amount of carriers in a market necessary for a declaration of competition. Two, three, or four carriers still reflects an imperfect competitive market.”

Not only are Federal Communications Commission rules not promoting broadband deployment, but local government policies are adding to the hindrance.  No one complains about whether Interstate 4 connecting Tampa and Orlando should have a duplicate interstate running along it.  The concern is whether there is enough commerce running over the highway to spur economic growth and justify widening the existing lanes.

For example, according to comScore.com’s report , 2015 U.S. Digital Future in Focus”, in 2014, mobile app usage made up the majority of digital media activity.  Traditional television ratings fell as more Americans obtained content from emerging online platforms.    Seventy-five percent of all digital consumers over the age of 18 use desktop and mobile platforms to access Internet content.

Another sign of mobile’s encroachment on the desktop is growth in smartphone use.  According to comScore, smartphone use increased 16% in 2014.

I just started watching “House of Cards” (Okay, I’m a late bloomer) so now I’m counted as one of 7 of 8 Americans watching video content online, with half of these consumers watching content online on a daily basis.

And about that commerce moving along the roadway?  E-commerce grew 14% in 2014 with businesses raking in $268.5 billion.

All this content and e-commerce activity happening while consumers allegedly are “abused” by a lack of broadband access platform competition.  Policy makers shouldn’t waste their time on making an oligopoly a larger oligopoly.  The focus should be on clearing spectrum for greater use of the internet and ensuring that the provision of data, whether in the form of video or text, is not interfered with.

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Random thoughts on consumer choice of content

Progressives have expressed concerns about consumer access to content of their choice; that decisions to access lawful content not be undermined by the end-user’s broadband access provider.   Consumer choice implies that the consumer has placed some value on the content he or she wants to receive.  One consumer may place a greater value on using their bandwidth to reading up-to-the-minute press releases on PR Newswire and business news content.  Another consumer in Florida may place greater value on gaming with his friends in Wisconsin.  Should net neutrality proponents be concerned about a consumer’s value-maximizing decision where the very small websites that net neutrality proponents claim to advocate for are not accessed as a result of consumer versus broadband provider “blocking?”

Utility or value maximization is nary mentioned by net neutrality proponents.  They have beaten around the bush by discussing it indirectly in the guise of non-discrimination or non-blocking principles.  Saying non-blocking or non-discrimination provides a false sense of speaking truth to power by putting the “bad guy” taint on broadband providers.  It also helps to embolden their status with their constituency, the consumers who believe that a handful of documented net neutrality violations is indicative of how broadband providers will behave even when millions if not billions of transactions occur every day without a net neutrality hitch.

But highlighting actual consumer choice, a consumer’s ability to place higher priority of certain websites over other content doesn’t seem to be the progressives’ cup of tea.  An enhanced analysis of the content markets should have as an issue whether consumers can make this type of choice and whether public policy should encourage it.  My bet is that progressives prefer consumer choice light versus strong, robust consumer choice.

The reason why this proper market analysis won’t be entertained by net neutrality proponents goes back to the “V” word; value.  Small content providers don’t have much in capital or time to garner the traction and eyeballs that larger, more entrenched content providers have.  It’s the economics of net neutrality.  Larger content providers have sunk millions into the marketing necessary to gain traffic.  Some are merely leveraging their legacy infrastructure.  For example, I’m a fan of The Economist.  Not only do I subscribe online, but I also get the print version so that I can read it on the plane or MARTA rail.  The Economist leverages its print reputation to attract readers online.  Online magazines that can establish pay walls and maintain loyalty with superior content will make revenues, hopefully have profits, and maintain barriers to entry.

Unfortunately for the smaller content providers progressives are so concerned about, energy is being directed toward a public policy initiative that won’t do anything for their marketing or their profit.  It’s also unfortunate that nary one of the grass roots advocacy groups pushing net neutrality have made a cogent economic argument that could give the Commission any proper guidance.

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Consumer behavior makes net neutrality a none issue

A lot of content on the Internet is straight up “ratchet”.  For those who do not spend too much time in the inner city, the term ratchet refers to poor, ignorant, nonsensical.  This is one of the advantages of having a twelve year old.  You get to keep up with the latest urban lingo.  With all the talk coming from net neutrality advocates about the impact a lack of net neutrality rules will have on consumer choice of broadband providers and media diversity, I’ve become curious as to who Americans are visiting online, ratchet or otherwise.

The first thought we may have is that people are primarily visiting social media websites; that these sites are getting the most visits.  Actually these sites are the second most visited.  Using data from Alexa.com, I determined that 17% of the top 100 websites visited in the United States were social media/network websites.  Facebook and YouTube came in at number 2 and number three, respectively, while Linkedin and Twitter came in at number eight and number nine, respectively.

Taking the number one spot in websites visited in the U.S. are retail oriented sites.  Twenty-one percent of websites in the top 100 visited sites were in the retail category.  Coming in third are the entertainment oriented sites with 16% of the top-100 sites falling into this category.

What I found disappointing was what I refer to as the encyclopedia/research websites.  Five percent of the top-100 websites fell in this category.  I would hope that as we move further into a knowledge and information economy that these sites would get more visitors, but it appears that shopping and socializing receive higher amounts of value perception from people online.

For the record, coming in at number four were news and media sites.  Fifteen percent of the top 100 sites fell into this category.

Consumers are apparently placing a higher value on Internet traffic from retail, social media, and entertainment and quite frankly this is no different from how consumers parceled their time before the Internet came along.  We have always preferred to shop, hang out with friends (albeit real), and be entertained.  As long as potential providers of these services saw some profit opportunity they would enter the market to provide them.  That was the case before the Internet and that is the case in the two plus decades we have been going online.

Broadband providers realize this, which is why blocking access to and discriminating against providers of these services does not serve a broadband provider’s self-interest, whether a consumer’s taste is ratchet or not.