When it comes to regulating the Internet, does it matter what we call it?

With few exceptions, too much of anything can be inefficient and wasteful.  But, wouldn’t it be nice if we had more choices, more competitors in the market, when we were looking to buy access to the Internet for our home or business?  Could you imagine comparing upload and download speeds, quality of service, and prices for a dozen or more broadband options? 

Today, while 70 percent of U.S. households have access to fixed high speed internet (download speed of 25 mbps or higher), only 21 percent have a choice between two or more providers.  Why so few choices?  The upfront investment costs for the distribution plant are in the billions of dollars.  It is why, according to the Leichtman Group, that 95 percent of the U.S. broadband market is served by just 14 telecom and cable providers.  Even Google has dialed back its plans to get in the game.  So, when competition cannot thrive because economies of scale are so significant that the market can only accommodate a small number of firms in each geographical market, regulation is necessary to ensure just and reasonable outcomes.  The question is how much regulation, because, more often than not, regulation is overdone (costly) and extends beyond its “useful” life.  But, until there are changes to technology or the way we consume information services, regulation is all we got.  Calling it “light-touch”, as the FCC did in both its 2015 Order and its reversal of that Order last week, tries to make us feel better about it.  But, that should not be the emphasis.  Let’s get regulatory oversight right.  Let’s ensure that ISPs, privately-held or even municipalities, are incentivized to invest in state-of-the art infrastructure while ensuring that consumers and competitors are not harmed or disadvantaged.  This goldilocks “ask” will not be easy to achieve, given the political climate, the pace of vertical and horizontal consolidation within the industry, and the regulatory flip-flops*.  But, we must try!

*Regulatory History of Telecommunications and Information Services

Date	Discussion
1910-1934	The Mann-Elkins Act of 1910 amended the Interstate Commerce Act of 1887 to extend common carrier regulation to telecommunication services.  By law, common carriers are required to provide non-discriminatory “transport” services to the general public.  The Communications Act of 1934 established the Federal Communications Commission (FCC) as the regulatory body with oversight of interstate telecommunications services. Title II of the Act describes the responsibilities of a common carrier.
1966-1980	The FCC conducted a series of proceedings (Computer Inquiries) to examine and alter policies in response to the convergence of computers and communications. The FCC, in its Second Computer Inquiry (1980), established a regulatory framework that distinguished between “basic service’ and “enhanced service.”  Basic service was “limited to the common carrier offering of transmission capacity for the movement of information” while an enhanced service was “any offering over the telecommunications network” that was more than a basic transmission service.”
1996	The Telecommunications Act amended the Communications Act of 1934 with the intention of significantly relaxing regulations which were seen as impediments to investment and innovation.  Section 706 of the statute directed the FCC to “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”  Telecommunications (basic) service, including access to the Internet over telephone lines (DSL), would continue to be regulated under Title II.  Information (enhanced services) would be regulated under Title I.
2005     2006	In National Cable & Telecommunications Association v. Brand X Internet Services (2005), the Supreme Court upheld the FCC’s decision that cable modem service providers are information service providers (Title I) and not common carriers (Title II).  In 2006, the FCC stopped applying common carrier regulations and Computer Inquiry requirements to broadband internet services provided by telephone companies.
2010-2014	In its 2010 Open Internet Order, the FCC implemented rules against blocking and unreasonable discrimination by ISPs.  The conduct rules were in place for several years until, in 2014, in Verizon v. FCC, the Court struck them down because the rules fell outside the Commission’s “statutory grant of authority” under Title I.
2015	In a 3-2 vote on Protecting and Promoting the Open Internet, the FCC classified fixed and mobile ISPs as common carriers under modified Title II rules and banned blocking, throttling, and paid prioritization.
2017	In a 3-2 vote on Restoring Internet Freedom, the FCC reclassified broadband Internet access service as an information service under Title I and handed over jurisdiction to the FTC in determining if ISPs are engaging in unfair business practices.

Favoring Your Own Content

Once again we are shaking our heads….As the DOJ filed to block the $85 billion AT&T-TW merger today because of foreclosure concerns (e.g. favoring your own content), the FCC announced that, beginning this week, it plans to roll back net neutrality rules. 

The current Title II (Common Carrier) rules tightly regulate the internet, including preventing preferential treatment for those content providers who can pay more or are owned by the distributor.  

Never a fan of Title II regulation of the internet, I think a slight pull back on net neutrality to Title I is warranted and the AT&T-TW merger should go through with some behavioral remedies (e.g. no favoritism).

FOR SALE: 21st Century Fox

Nothing should surprise us anymore in the media industry, but, this gets close.  Supposedly, three of the largest firms (Disney, Comcast, and Verizon) have been talking to 21^st Century Fox about acquiring some of its most valuable movie and television production assets. 

In light of the DOJ’s recent statements about possibly attaching structural remedies to the AT&T-Time Warner deal, other huge deals, vertical (distribution-content) or horizontal (content-content) may get a lower approval probability from the start.  But, then again, there is the Trump factor and the President likes FOX a whole lot more than CNN.

The FCC in action on Thursday, November 16

Acknowledging the rapidly changing competitive landscape, the FCC, in a split vote along party lines (3-2), removed the long-standing ban on cross-ownership of a newspaper and TV station in a major market and made it easier for media companies to own multiple TV stations in the same market.  The changes should spawn consolidation deals among media outlets and pave the way for Sinclair Broadcast Group’s $4 billion purchase of Tribune Media Group.  If this particular deal goes through without divestitures, the combined firm would own 233 stations and cover over 70 percent of the country.

“Trumping” the deal

He hates CNN so maybe President Trump has more influence with the Department of Justice than he admitted a week or so ago.  (See link to CNN article.)

It was announced today that the DOJ is offering AT&T two asset sale options in order to gain approval of its merger with Time Warner – one is to sell off its TV assets (e.g. CNN) and the other is to unload DirecTV, an asset it has only owned for two years but has fully integrated into its packages and marketing efforts.  With declining viewership and a Trump-bashing “agenda”, unloading CNN is the more likely of the two options for AT&T to choose.

http://www.cnn.com/2017/11/02/politics/donald-trump-justice-department-fbi/index.html

Could it be...

..that two media powerhouses, particularly in the area of content creation (versus distribution) might combine?  According to news reports, Disney and 21^st Century Fox have held talks that involve 21^st Century Fox selling its cable networks, TV and movie studio, and international distribution operations to Disney while retaining its broadcast network business.  The motivation for the merger is for Disney to bulk up its content, but to remain fairly agnostic regarding distribution (with the exception of its direct-to-consumer streaming service planned to launch in 2019 using its newly acquired BamTech platform).

Once again, we wait and ponder if a media deal might happen, and if it did, how might competitors, on all fronts (MVPDs, content owners, OTT providers, telecoms), respond.

 

We often worry about regulatory approval too when deals are huge and horizontal.  But, content is so fragmented these days, I imagine this deal will not get much regulatory attention. 

Four is better than three

Sprint and T-Mobile announced today that they have decided to end recent merger talks and continue to go their separate ways in the U.S. wireless telecom market.  This is good news for consumers.  

According to research firm, Mosaik (and cited in the WSJ, 11/4/2017), two-thirds of U.S. counties would have lost a provider if the merger went through.  With one less competitor in the market, the three remaining firms would have benefited from an increase in market power – possibly resulting in higher prices and less innovation.

The Art of the Deal

On Thursday, the Department of Justice (DOJ) signaled that they might sue to block the AT&T-Time Warner mega merger.  Does this put in question the high probability that analysts place on the likelihood that the vertical merger will be approved or is it a ploy by the DOJ to extract rents from the firms?  For sure, it is the latter.

 

While there are anticompetitive concerns with the size and scope of this merger (e.g. foreclosure, vertical price squeeze, and higher entry barriers), regulators typically approve vertical mergers.  But, more likely than not, AT&T will have to commit to “good behavior” and some other minor concessions so that the DOJ gets a “win” too when they approve the deal.

Disruption is all around us!

Congratulations to Richard Thaler of the University of Chicago for winning the 2017 Nobel Memorial Prize in Economics.  Thaler is being recognized for his important work in Behavioral Economics, which arguably has upended mainstream economics (and its assumptions), as much as Amazon and Netflix have disrupted brick-and-mortar retail and traditional Pay-TV, respectively.

https://www.nytimes.com/2017/10/09/business/nobel-economics-richard-thaler.html

Is it time for some football?

For the right to stream the broadcast feed of eleven NFL games to its Prime Video Service subscribers this fall, Amazon paid the League $50 million or $4.55 million per game.  For the Thursday night game (9/28) between the Chicago Bears and Green Bay Packers, the streaming service averaged 372K viewers, or .6% of Prime members and approximately 2.5% of the 15M+ in total who viewed the game on CBS, the NFL Network, and other digital platforms.  If you divide the game’s programming cost by the number of viewers, it comes to approximately $12.  

So, what is the per viewer cost threshold that Amazon would have to get to that would support the continuation of paying for and streaming live sporting events? Will this be a short-term (failed) experiment or a long-term winner for the firm?  I’d never bet against Amazon, but I’m not sure about this one. 

They are at it again!

By the weekend, more than half of Altice’s 5 million subscribers could find themselves without access to the Walt Disney Company’s networks (ABC, Disney, ESPN) if the distributor and content owner cannot come to terms in the renewal of their retransmission agreement.  The disruption, if it happens, would impact Altice’s Optimum subscribers in the New York metro area.  The dispute is a continuation of the tug of war on where the value lies between content and distribution in the rapidly evolving marketplace of how, where, and when households view video content.  

Going it alone

This week, Disney announced plans to provide its own over-the-top service to delivery Disney (2019) and ESPN (2018) content direct to consumers.  In doing so, it will severe its relationship with Netflix.  

Disney’s broadcast rivals, Comcast and CBS, are already vertically integrated from content creation all the way to distribution.  In many ways it makes sense for Disney to do the same so that it cannot be “held up” by distributors unwilling to provide its content on reasonable terms.  (This may seem absurd since the Disney brand is so recognizable and valued, but having complete control cannot be dismissed.) 

The questions are… What will it cost Disney to be a distributor and can it price the service so that “enough” consumers are willing to purchase it as a stand-alone product?  The media industry is evolving so rapidly that these questions are not easy ones to answer at the moment.  It's definitely a huge risk and only time will tell whether it will be considered a brilliant strategy by Disney.

What's Next?

It was revealed yesterday that Sprint is in talks with Charter to merge.  For both parties, it would be in response to the consumer preference to have one-stop, discounted bundles for all telecom and media needs as the two industries continue to converge.  What makes things a bit more interesting in this case is that Charter and Comcast agreed in May to get each other’s blessing if they planned to sign a deal with a wireless company.  

And, then, there is the question of who else is talking or should be talking?  Verizon and …?  Disney and …?  CBS and …?  Viacom and …? T-Mobile and …?  Netflix and ...? I get the feeling that before the music stops, we will have a handful of media/telecom super giants that “do it all”.  Is that what consumers want?

Have the Democrats improved the odds of the AT&T-Time Warner Merger Being Approved?

When AT&T and Time Warner announced their merger plans last year, the immediate reaction by many politicians and some others was that the mega media deal was too big and would negatively impact the competitive landscape of the media industry. 

Nine months later, Trump has come around, seemingly less concerned about the concentration of power, in spite of his disdain for CNN, one of Time Warner’s key assets.  Meanwhile, Democrats are still not fans of the deal as revealed in a seven-page letter to the DOJ penned by a group a prominent players in the party (e.g. E. Warren, B. Sanders).  The opening paragraph of June 21 letter reads:

“We have strong concerns that the combined company's unmatched control of popular content and the distribution of that content will lead to higher prices, fewer choices, and poorer quality services for Americans - substantial harms that cannot be remedied with unreliable, unenforceable, and time-limited behavioral conditions. Our constituents face significant and growing costs for telecommunications services. Before initiating the next big wave of media consolidation, you must consider how the $85 billion deal will impact Americans' wallets, as well as their access to a wide-range of news and entertainment programming. Should you determine that the substantial harms to competition and consumers arising from the transaction outweigh the purported benefits, you should reject the proposed acquisition.”

Given their high level of dislike for each other, will this letter actually “encourage” the DOJ (Jeff Sessions) to approve the deal?  I think it just might!

Content, Content, Content

On Tuesday, it was revealed that Discovery Communications and Scripps Network were in advanced talks to merge.  If it happens, non-fiction content assets such as Discovery, Animal Planet and OWN would be combined with HGTV, Travel Channel, and the Food Network.

Without a doubt, the move is in response to threats, namely increased consolidation among distributors and cord-cutting.  Larger Pay-TV providers pitted against smaller content owners “win” in retransmission negotiations, especially if the content is not highly valued by viewers.  The creation of lower priced skinny bundles that may or may not have space for less in-demand programming fortifies the challenges faced by the likes of Discovery and Scripps.  But, does a combined firm change any of that?  I believe it does/will not.  The programming has to be better – more engaging and more interesting.  Without that, viewers, particularly millennials, will not have a willingness to pay, regardless of the scale and scope of the firm that owns them.

It's back...Net Neutrality

Today, FCC Chariman, Ajit Pai, spoke on "The Future of Internet Freedom" at the Newseum in Washington D.C.  In his remarks, he advocates reversing the 2015 classification of broadband providers as Title II common carriers back to the light-touch regulation of Title I information services.  Pai stated that "It's basic economics.  The more heavily you regulate something, the less of it you're likely to get."  The topic will be on the FCC's May 18th meeting's agenda.

Let the fireworks begin (again)!

http://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0426/DOC-344590A1.pdf

It Only Takes ONE to Tango

At today’s FCC meeting, the Commissioners voted along party lines to phase in the elimination of price caps on Business Data Services (BDS) provided by traditional phone companies if, within a county, 50% of the businesses are within a half mile of a location serviced by a competitive provider or if 75% of census blocks are served by a cable operator.  If the percent threshold is met, the market (the entire county) is deemed sufficiently competitive.

http://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0420/DOC-344487A1.pdf

The FCC Chairman, Ajit Pai, argued that “Price regulation—that is, the government setting the rates, terms, and conditions for special access services—is seductive.  Who can possibly resist the promise of forcing prices lower right now?  But, in reality, price regulation threatens competition and investment.”  Pai hopes the rule change will lure new entrants.  Opponents believe that the rule change will mean higher prices for a large number of businesses.

Let's Make a Deal

It’s looking more and more likely that the $85B AT&T-Time Warner deal will happen.  Why?  

First, President Trump seems to be less concerned about the deal than Candidate Trump did 6-months ago.  Second, the FCC, on Monday, approved Time Warner’s $70M preemptive sale of its Atlanta TV station to Meredith.  The broadcast station was the only one of Time Warner’s stations regulated by the FCC.  Had the FCC decided the review the merger, the requirement to transfer station licenses may have been an issue.  Third, the new head of the Antitrust Division of the DOJ, Maken Delrahim, does not see the merger “as a major antitrust problem” as it does not reduce the number of direct competitors in the marketplace.  This is in spite of the merger’s size and potential foreclosure issues.  

As the probability of this deal happening increases, could the announcement of others be far behind?

What is going on in the brick-and-mortar retail space is much like…

what is happening in the cable industry.  DISRUPTION by new entrants.  It started with Amazon (and e-commerce) in retail and Netflix (and other streaming services) in home entertainment.

 

In the 1980s/90s, retailers like Macys and JCPenney built-out their footprints at mall locations across the country.  At those locations, they largely sold the brands of unaffiliated merchandisers.   Consumers spent a lot of time at the mall to shop.  All was good in the retail space.

In the MVPD industry in the 1980s/90s, cable firms provided access to content owned by third-parties.  If consumers wanted to watch a live-sporting event, their favorite show, the nightly news, they turned on the television.  There were 90+ million MVPD households.  All was good in the TV business.

All was good because, in each industry, the relationship between the owners of “the box” and the owners of “the stuff” made available through the box was one of mutual dependency.  If you built it, “they” would come.  But, there was a change, a technological one, which shifted the preferences on how consumers shopped and watched programming.

In response, MVPD providers are consolidating, creating their own content, and providing different packaging options for consumers (e.g. skinny bundles and online access).  Retailers are merging and closing locations, creating their own merchandise, and expanding their online presence.    

http://fortune.com/2017/03/17/jcpenney-stores-closing/

It's time for the details on infrastructure policy

Seven years ago this Friday (3/17/2010), the FCC released the National Broadband Plan that outlined ways the government can influence the build-out of the broadband ecosystem, including ensuring robust competition that maximized innovation and investment, efficient allocation of government managed or owned assets to encourage network upgrades and competitive entry, support deployment of broadband to high-cost areas and ensure its affordability to low-income households, and reform laws and policies to maximize benefits in education, health care,  and government operations.  At the time, approximately 200 million individuals had access to broadband (4 mbps) at home.   (See: https://www.fcc.gov/general/national-broadband-plan ). 

In it's 2016 Broadband Progress Report, the FCC reported that nearly 10% of Americans (34 million) still lacked access to fixed broadband at speeds of at least 25 mbps. The difference in the unserved percentage by market density ranged from 39% in rural areas to “just” 4% in urban areas. 

In his recent address to Congress, President Trump reiterated a commitment to infrastructure spending.  While no details were presented on broadband, it is assumed that some federal money will be allocated and there will be efforts to reduce regulations/laws that have limited private sector network build-outs.  Hopefully, some policy ideas will be floated soon in order to get market reactions.  

Time can often kill a deal, but this time it may help one

On Wednesday, newly appointed FCC Chairman, Ajit Pai, stated that he would allow an independent review by commission attorneys of his decision not to examine the proposed AT&T-Time Warner merger because there are no broadcast license transfers in the $85B deal. 

Assuming the position stands, that leaves the DOJ as the sole regulatory agency reviewing the merger.  And, it is likely that, with the passage of time (last 6-months or so), the deal is much more likely to get approved in the months ahead, in spite of President Trump’s disdain for the deal when first announced.  What has changed?  Believe it or not, there are greater consumer choices for distribution and content and the providers continue to chip away at the stranglehold traditional Pay TV operators (AT&T) have had in the vertical chain.  Choices from Hulu, Apple TV, Amazon Prime, Netflix, SlingTV, PlayStation Vue and now YouTube TV are formidable competitors, so let them duke it out in the marketplace.

The unraveling begins!

Once in the minority position of FCC decisions under the Wheeler administration, the new Chairman, Ajit Pai, is working quickly to dismantle/unravel some of those previous decisions.  

First up…nine (of the 900) ISPs sanctioned to provide subsidized communication services to low income households through the FCC’s Lifeline program have been stopped from doing so.  The FCC wants to address fraud in the program before advancing it further.

Second up…not pushing cable providers, at the moment, to unlock the set-top so that others could interconnect their own boxes with TV programming.  If it ever came to pass, the “competition” would take a huge bite out of the lucrative monthly cable box rental fees enjoyed by the cable guys.  And, while that sounds too good to be true, it is.  Copyright and technical issues have to be addressed for it to work and be fair.

Third up…stopping inquiries into zero-rating plans thought to be anti-competitive.  On the issue, Pai said “Going forward, the Federal Communications Commission will not focus on denying Americans free data. Instead, we will concentrate on expanding broadband deployment and encouraging innovative service offerings.”

Is Net Neutrality next up?

It's time

In response to New York State’s petition to receive Verizon’s share of the Connect America money it turned down in 2015, the FCC voted YES.  The State of New York plans to auction off the $170 million (combined with additional state funding of $200 million) to ISPs willing to ensure access to high-speed Internet service to all residents by the end of 2018.  While the State of Pennsylvania filed comments on the NY petition, it did not file its own.  It’s now time to do so!

Zero Rating ≠ Net Neutrality

Last week, the FCC Wireless Telecommunications Bureau released its Policy Review of Mobile Broadband Operators’ Sponsored Data Offerings for Zero-Rated Content and Services.  The report examined the 2016 sponsored data and zero-rating initiatives of mobile broadband providers.  Specifically, the Commission examined T-Mobile’s Binge One, AT&T’s Data Perks, AT&T’s Sponsored Data, and Verizon’s FreeBee Data 360.    The focus of the evaluation was “the potential harm to consumers and competition in downstream industry sectors that could result from upstream network operators’ unreasonably discriminating in favor of select downstream providers that are affiliates”. 

The FCC found that T-Mobile’s Binge One and AT&T’s Data Perks “did not discriminate against or disadvantage edge providers or end users.”  However, the FCC found that AT&T’s Sponsored Data to third party content providers were offered at less favorable terms and conditions compared to what was offered to DIRECTV (benefiting DIRECTV NOW), an AT&T affiliate.   (Note: Verizon’s sponsored data plan was also shown to benefit its affiliate service, go90, but since go90 is much smaller than DIRECTV NOW, the magnitude of the current anticompetitive harm was estimated to be much less.)

The Commission concluded that “Given the powerful economic incentives of network operators to employ these practices to advantage themselves and their affiliates in various edge service markets, we are equally concerned that – absent effective oversight – these practices will become more widespread in the future.”

Why shouldn’t Pennsylvania get to keep the CAF Phase II money?

A brief overview of the Connect America Fund (CAF).  As an extension of the Universal Service Fund, CAF is the FCC's program to expand access to voice and broadband services to un[der]served, rural communities.  Phase I, which began in 2012 and ended a year later, combined millions of public and private funds to expand broadband services to unserved, rural areas.  Phase II began in 2015.  In the second phase, the FCC will provide over $1.5 billion per year for six years to price-cap carriers to subsidize their “cost of building new network infrastructure or performing network upgrades to provide voice and broadband service in areas where it is lacking” (fcc.gov).  

The support comes with strings attached.  After all, there is NO SUCH THING AS A FREE LUNCH!  If a carrier accepts CAF Phase II money, it must provide the broadband service at speeds of at least 10 megabits per second (Mbps) downstream and 1 Mbps upstream, and at reasonably comparable rates found in urban areas.  Verizon evaluated the tradeoff as not being worth it.  But, where does that leave residents of rural communities in the state of Pennsylvania?   The PUC and Sen. Bob Casey believe that the PA funds should not be at risk for leaving the state in a competitive bidding process.  Instead, the state should be entitled to “keep” the CAF funds.  Specifically, other providers in the state who have agreed to participate in the program (like CenturyLink or Windstream) should get the money.  Let’s see what the FCC thinks of that idea.

https://www.fcc.gov/reports-research/maps/connect-america-phase-ii-final-eligible-areas-map/

Blackout averted, for now!

There was no resolution, just delay, in the contract talks between Charter, the MVPD, and Comcast, the content owner, over carriage of NBC-U programming on Charter's distribution pipes.

See:  http://delivermyshows.com/