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I don’t see how the FCC set top box policy adds value to content

On 27 October 2016 the Federal Communications Commission will take up the issue of competition in the navigation device or set top box space. The Commission wants to see the video content distribution industry move from requiring subscribers use of set top boxes to the use of free apps to find content. The main driver of the proposed policy, according to the Commission, is subscriber avoidance of onerous set top box fees that allegedly average $231 a year. With today’s app and internet technology, argues the Commission, subscribers should be able to find content without paying navigation device fees.

The process for getting to a decision is driving some content developers bonkers.  According to a report in Broadcasting & Cable, some content developers are concerned about the proposal’s lack of transparency and whether the Commission will play an intrusive oversight role in contracts between content distributors and content programmers.  Contracts lay out terms for compensation and channel placement, items I would think that the Commission should not really be interested in. Rather, the Commission should be interested in whether the telecommunications sector is bringing value to the overall economy. While content creation is ancillary to the sector, without information, data, or knowledge flowing over networks, the network itself loses value.

From the content programmer’s perspective, while concerned with carving out a niche in a competitive content space, the content developer, where he can seize the opportunity, wants to recover as much of a premium as he can from his product. That means cashing in on as much exclusivity as he can. He will do this in two ways. One, produce content that generates traction. Two, make sure that given the traction, he makes the content as exclusive as possible so that he can extract higher rents. Free apps do not meet either of these conditions. Free apps providing you navigation to licensed and unlicensed content eliminates exclusivity. Content competition is increased which drives down the prices content programmers can charge. This leads to lower returns on capital. If returns on capital are seen as too low, no investment is made, no infrastructure deployed, no workers hired.

All this to save $231 a year.

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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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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.

Ajit Pai asks Netflix what gives on net neutrality

Federal Communications Commission member Ajit Pai yesterday wrote a letter asking Netflix to explain why it is not participating in the development of open standards for video streaming and why, according to press reports, the largest generator of online traffic in North America is using its own proprietary software to cache its traffic.

Mr. Pai is curious about the reports that Netflix may be charting its own course for delivering video services including the development of of fast lanes for its own traffic, all while advocating for equal treatment by internet service providers of content provider traffic.

Open standards, as defined in a paper by Ken Krechner, represent common agreements that enable communications.  Open standards help provide interoperabilty on the internet and maximize access to resources.  I guess what drives Mr. Pai’s curiosity is if the concept of net neutrality is based on transparency of management practices and the equal treatment of data, why would Netflix want o use proprietary caching technology to speed up the transmission of its video services at the cost of competition with other content providers?

Mr. Pai has asked Netflix to respond to his letter by 16 December 2014.

 

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Would shifting to an internet-pipe only service get broadband providers out of the FCC’s cross-hairs?

Recently The Wall Street Journal reported on Viacom’s CBS and Time Warner’s HBO’s intent to establish a stand-alone streaming service for their content.  For cord cutters that dream of putting together their own portfolio of video content, this may seem like the a la carte approach that consumers and policymakers have been asking for.  While these moves are not indicative of a tsunami of movement by programmers from traditional cable, I have to wonder what the media world would look like if all content providers took the Netflix, over the top approach to getting programming to the consumer.  What would be the new consumer behavior?  Would net neutrality become a non-issue?

Regarding consumer behavior, consumers may feel emboldened by this increase in consumer choice, especially given the cost of cable service.  According to data from the Federal Communications Commission, as of January 1, 2013, the average price for cable service in all communities is $64.41.  Where there is effective completion, average price for cable service is $63.03, but where effective competition is non-existent, average price is $66.14.

I can see consumers combining Netflix programming at $8 per month with ESPN at $30 per month; CBS at $6 per month; and AMC at $10 per month.  I can’t pass up on “The Walking Dead.”  I agree with The Journal article’s conclusion that cord cutting may become more expensive than traditional bundling packages.  This becomes apparent when you look at the stand alone prices for internet access.

Again, according to data from the FCC, the price for stand-alone, 1-5 Mbps, internet access service is $35.  Consumers that want faster service ranging from 5-15 Mbps pay on average $44, while consumers feeling the need for more speed ranging from 15-25 Mbps pay on average $56.50.

If consumers make the decision solely on price, I don’t see much migration from current bundling options for cable.  According to an article in ArsTechnica.com, American cable subscribers receive an average of 189 cable channels but only watch 17 of them.  Assuming consumers could subscribe to 17 stand alone streaming internet channels at a price of $6 per channel, plus the broadband capacity sufficient for streaming video, consumers would still pay over $100 for service while given up 170 channels.  That may be okay for some subscribers if exercising consumer choice through a la carte service is that important to them.

If I’m paying that much to stream “Game of Thrones” strictly via the internet, I don’t want my service slowed down because my video bits have the same priority as a cat video on YouTube.  I would be willing to designate which content traffic should get higher priority to ensure that I see whether the Lannisters win the Iron Throne.  Netflix, HBO, or Viacom may not want the quality of their services degraded either due to equal treatment of their traffic and the traffic from a website showing the best way to apply lipstick.  This emerging on-demand/streaming model for video may see consumers driving the demand for paid prioritization.

Seeing how the FCC would manage the political fallout from telling consumers that consumer prioritization is a no-no would be very interesting.  Telling Viacom that it cannot meet consumer demand by entering prioritization agreements with backbone or last-mile broadband operators on the premise that such arrangements would put a cat video at a disadvantage would have content providers thinking twice about innovation in online video distribution.

As Hal Singer shared with me in a tweet, net neutrality is a Trojan Horse and Title II regulation is the end game.  I don’t see either approach advancing CBS or HBO’s new services.