Plans for Google Fiber

With an estimated cost of $1 billion to enter a market with its network, Google Fiber installations stalled at about a dozen metropolitan areas (and surrounding cities).  A re-boot was possible in 2016 when it acquired Webpass, a point-to-point wireless technology, as a means to accelerate deployment and reduce installation costs.  Three years later, though, Google Fiber’s market presence (% coverage), nationwide and in the markets it has operations, is not that impressive.  Moreover, it is up against well-established incumbents like Comcast Xfinity, AT&T, Charter Spectrum, and Grande Communications, who fight to block entry and, if entry occurs, compete vigorously with offers and bundles to entice customers not to switch.  A pivot to wireless will not lessen the competitive pressures.

So, where does Google Fiber go from here?  Without plans for an expansion blitz, is it time for Google to consider looking for a buyer of its network assets?  Maybe.  Just maybe!

City	% Coverage
Grandview, MO	100
Mission, KS	99.9
Prairie Village, KS	99.5
Shawnee, KS	98.8
Lenexa, KS	98.6
Olathe, KS	97.3
Provo, UT	96.9
Lees Summit, MO	96.0
Kansas City, KS	95.4
Kansas City, MO	94.7
Meridianville, AL	88.5
Morrisville, NC	75.9
Overland Park, KS	67.4
Raymore, MO	47.4
Stilwell, KS	41.6
Stanford, CA	35.6
Austin, TX	34.6
Leawood, KS	25.5
Marina, CA	24.9
Neck City, MO	23.7
Huntsville, AL	22.8
New Market, AL	19.0
Brownsboro, AL	16.7
Avondale Estates, GA	16.6
Riverside, MO	15.2
Pleasant Grove, UT	14.9
Clarkston, GA	10.9
Salt Lake City, UT	10.8
Noel, MO	10.2
Augusta, MO	9.1
Raleigh, NC	8.9
Charlotte, NC	8.6
Cary, NC	8.1
Lithia Springs, GA	7.7
Jackson, MO	7.7
Millersville, MO	7.6
Del Valle, TX	7.5
Pleasant Hill, MO	6.9
Alexander, KS	6.5
Toney, AL	6.3
Nortonville, KS	6.1
Duluth, GA	5.0

Source: https://broadbandnow.com/Google-Fiber

Searching for the "Right" Price

Over the past few weeks, competitors in the video streaming business announced different pricing strategies.  Netflix, with 58 million domestic subscribers and an extensive library of licensed and original content, announced it was raising the monthly price of its basic plan by $1 ($7.99 to $8.99), its most popular plan by $2 ($10.99 to $12.99), and its high-end plan by $2 ($13.99 to $15.99).  Similar to the “old” argument made by pay-TV providers, higher prices are necessary to cover the higher programming costs.   But, with the 12.5 percent to 18 percent price increases, Netflix is testing the loyalty of its subscribers and the elasticity of demand of its product at a time when the market is becoming more crowded and fragmented.  Legacy content owners like Disney and NBCUniversal are testing demand for their own stand-alone direct-to-consumer offerings.  At the moment, Disney has announced that it is breaking its ties with Netflix when it launches Disney+ at the end of the year.  By contrast, NBCUniversal indicated that it will continue to license its content (like The Office to Netflix) when it enters the fray in 2020.  (Ironically though, this is the same year its Netflix agreement is up for re-negotiation.)

Hulu, with 25 million subscribers and soon to be 60 percent owned by Disney, recently announced that it was leaving its ad-free service price unchanged at $11.99, while lowering the price of its most basic plan by $2, from $7.99 to $5.99.  The price for Hulu Live, the service that most closely resembles pay-TV, will jump by 12.5 percent, from $39.99 to $44.99.

With multiple plans offered by each competitor, the choice of what to subscribe to has and will continue to become more difficult and more frustrating for consumers.  Trapped in a “box”, will consumers feel like they are getting the “bang for their buck” they were seeking in a shift towards a la carte pricing. 

Comcast: 2018 v. 2019

Despite losing in the bidding war with Disney for the Fox assets, 2018 turned out to be a pretty good year for Comcast. It successfully acquired and integrated the Sky assets that now extends its reach into Europe.  While cable communications video and voice revenues were down for the year, overall cable communications revenues were up by more than $2B ($53.1B to $55.1B), in large part due to the 9.3% jump in high speed internet revenues ($15.7B to $17.1B).  Business Services and Advertising also saw big year-over-year percentage gains of 10.7% and 14.1%, respectively.  Additionally, NBCUniversal contributed $35.8 billion in revenue in 2018, an 8.9% jump from 2017.

Comcast reported 30.3 million customer relationships at the end of the year.  92% or 28 million were residential customers.  Of its residential customers, nearly 70 percent had at least two Xfinity products.  In the fourth quarter, Comcast added 351K internet customers, while losing only 29,000 video subscribers.

How does Comcast top 2018?  Simply, it leverages all its content, new and old, over all distribution channels, including those it owns here and abroad.  It continues to invest in technology and original content and bundle products and services.   It passes on “opportunities” to acquire other pay-tv operators or businesses that are shrinking. 

The Box Office

In 2018, Disney dominated the box office with a 26 percent market share, including having the top three and five of the top ten movies.  With over $3 billion in box office receipts, Black Panther, Avengers: Infinity War, and Incredibles 2 accounted for nearly $1.99 billion or 64 percent of the Disney’s total.  Ant-Man and the Wasp and Solo: A Star Wars Story added another $430 million or 13.9 percent. 

As a sharp contract, Lionsgate had a very disappointing year with just a 3.3 percent share of box office receipts and its top movie, A Simple Favor, bringing in $53 million (ranked #52).  In a recent memo to employees after announcing the lay-off of 25 (of 1,600) employees, Joe Drake, chairman of Lionsgate Motion Picture Group, wrote "We are constantly looking at ways to better align our company with our industry's evolving landscape and therefore the needs of the audience and our customers.  We couldn't be more thrilled about what 2019 has in store for us as a company, our exciting upcoming film slate, the new leadership team, as well as the agility that has always been a cornerstone of the company, allowing us to implement new ideas quickly and efficiently." 

With the stock trading about half its value from a year ago, 2019 will need to be a pivotal year for Lionsgate.  If it doesn’t materialize, expect that, by the end of the year, it will be owned by a tech/media company looking to add or scale content production assets.

https://www.boxofficemojo.com/yearly/chart/?yr=2018&p=.htm

Can Disney top 2018?

While Disney stock performance was flat in 2018, it was in a year that the S&P 500 fell by more than 6 percent.  While pay-TV cord-cutting continued to take a huge toll on its cable (e.g. ESPN) subscriber counts, other parts of the Disney portfolio of assets (e.g. studio entertainment, parks and resorts) more than compensated.  While some of its media competitors invested billions in original content, Disney had the successful bid (over Comcast) to acquire Fox’s 30 percent stake in Hulu and its production and studio assets.  It also initiated its direct-to-consumer strategy by launching ESPN+.  While it may pale in comparison to Netflix’s sum of 112, Hulu, 30 percent owned by Disney, nabbed 27 Emmy nominations (vs. 2 in 2016 and 18 in 2017).  And, for agreeing to stay on through 2021, Bob Iger picked up an additional $26.3 million in stock options bringing his 2018 compensation to approximately $66 million, making him one of the highest paid CEOs in the U.S.

2019 will be a huge year for Disney as it completes the acquisition of the Fox assets in the first quarter and ends its long-standing relationship with Netflix in the fourth quarter when it launches its second streaming service (Disney+).  For his efforts in leading the beloved brand in a more complex and fragmented media industry, Bob Iger, Disney’s CEO, will continue to be one of the highest paid executives in the U.S.

NBCUniversal's New Streaming Service

On Monday, NBC announced plans to launch its own streaming service in early 2020.  The move is in response to similar offerings by their broadcast competitors, CBS and Disney/ABC.  The ad-supported service, which will consist of television episodes and movies produced by NBC Universal, will be free to the 52 million Comcast and Sky subscribers and available for $12/month to non-pay TV customers.  (Note:  The news came about a week after Comcast and many other MVPDS (e.g. Charter, AT&T/DirecTV, Dish) announced rate hikes because of rising costs to retransmit broadcast channels and distribute sports programming.

While NBCUniversal, in its press release, states that it is committed “to license content to other studios and platforms, while retaining rights to certain titles for its new services,” is it a matter of time that it, like Disney, ends its long-term relationship with Netflix?  The year or so gap between the streaming service launch and contract renewal with Netflix in 2021 will give NBC plenty of time to evaluate what to do.  And, if NBCUniversal determines that it doesn’t “need” Netflix does it “need” Hulu either?  Time and data will tell.

http://www.nbcuniversal.com/press-release/nbcuniversal-announces-direct-consumer-streaming-service-and-new-leadership-structure

What to expect in 2019: Disney's interest in Hulu

Last week, Hulu reported that in 2018 it added 8 million new subscribers to its ranks bringing its total subscriber count to 25 million.  With that gain, it tops the largest pay-TV provider, Comcast, by about 3 million, but still falls way short of Netflix’s counts of 58 million and 137 million in the US and worldwide, respectively.  With its 85K episodes in its on-demand library and 27 Emmy nominations last year, Hulu is thriving in all areas except turning a profit.

Conditional on the sale of Fox’s 22 regional sports networks, Disney is expected to complete the Fox acquisition by early March.  When it does, it will have a 60 percent ownership share in Hulu.  Comcast with 30 percent and AT&T with 10 percent will have the remaining interests.  Bob Iger, CEO of Disney, has stated that Hulu is one of the firm’s top priorities in 2019.  The question is in what way.  As both a complement and substitute to its other distribution channels, including pay-tv partnerships and its own direct-to-consumer offerings (ESPN+ and Disney+), should Disney try to maintain, shrink, or expand its ownership stake in Hulu as it attempts to have greater control of its own fortunes as subscribers cut the pay-tv cord and it cuts the cord with Netflix?  (Note: when the firm launches Disney+ at the end of the year, it will end its relationship with Netflix.)

Short term (next year or two), Disney will most likely maintain the status quo and offer its streaming services as stand-alone and bundled offerings.  It will collect data: an advantage of owning the customer relationship.  But, what about the long term?  If it looks to increase its share to 90 or 100 percent, Disney risks losing the content of its partners and reducing the appeal of Hulu as a distinct offering or part of a Disney bundle.  If it looks to sell its 60 percent Hulu stake (to say Comcast or a third party), it gets cash (for another venture maybe) but it gives up a valuable asset to a competitor.  Oh, what to do!  For now, the course of action should be maintain and evaluate, but be nimble because in this industry you never know who might be interested in making a deal.

What to expect in 2019: AT&T-Time Warner merger

On December 6^th, the 3-judge panel in the D.C. Circuit Court of Appeals, consisting of David Sentelle, Robert Wilkins, and Judith Rogers, heard oral arguments in the DOJ’s appeal case to overturn federal Judge Richard Leon’s decision to approve, without conditions, the $85 billion vertical merger of AT&T and Time Warner last June. For the government to win this case, the judges needed to be convinced, without new evidence, that there was clear error(s) made in the district court.  From statements made by those in attendance, it seemed that the judges (at least Rogers and Sentelle) were not buying the government’s arguments.  A decision by the Appeals Court is expected in February.  

If this vertical merger stands, it will green light others like it in the media space as firms recognize the increasing benefits of being in both distribution and content ownership/creation in the changing industry landscape.

What to expect in 2019: Sprint and T-Mobile Merger

With Japanese telecom firm Softbank and Germany’s Deutsche Telekom as the primary shareholders of Sprint and T-Mobile, respectively, the Committee on Foreign Investment in the United States (CFIUS) had to review the merger.  About a month ago, CFIUS gave its approval, At the same time, Team Telecom (DOJ, Homeland Security, Department of Defense) filed with the FCC that it had reviewed the potential national security, law enforcement, and public safety issues and had no major objections to the merger.

Next up are the antitrust decisions by the DOJ and FCC expected to be completed over the next few months.  As a potential signal of how things might go, at least at the FCC, is the hiring by the agency of UT economist David Sibley to assist in the merger review.  In the early 2000s when he was the Deputy Assistant Attorney General for Economics at the DOJ, Sibley wrote about issues in antitrust review of merger cases, including the relationship between increase in market concentration and successful coordination among the remaining market participants.  In their paper, Selected Economic Analysis at the Antitrust Division: The Year in Review, the authors, Sibley and Heyer, suggested that other relevant variables such as asymmetric costs, product characteristics, and discount rates across firms may influence the [un]likelihood of coordination and should be factored into merger analysis.  Will the agency’s analysis show that T-Mobile is likely to continue to be an industry disruptor post a hypothetical merger with Sprint because of its differences in cost and market approach with the market leaders, or is it more likely it will “get in line” and begin to implicitly conform with its competitors? 

Sibley, David and Ken Heyer. (2003). Selected Economic Analysis at the Antitrust Division: The Year in Review. Review of Industrial Organization 23, 95-119.

What to expect in 2019: Net Neutrality

In the next week or so on this blog, I want to look at major issues in the media/telecom space and predict, with some analysis, what might happen in 2019.  First up is net neutrality. 

What will the new Congress, comprised of a Republican majority in the Senate and now a Democrat majority in the House mean to changes in net neutrality rules/regulations?  The answer…. nothing.  While federal legislation may pass the Senate with help from the three Republican senators who voted last year in favor of overturning the FCC’s net neutrality decision using the Congressional Review Authority (CRA) and it will pass in the House with the Democrats pushing it through, President Trump will support FCC Chairman Pai and veto the legislation.  That means nothing changes at the federal level until at least 2021 when there is possible change in the White House.  By then, a reassessment of the web landscape will be necessary and may make the rules as proscribed in 2015-2017 unnecessary or different.

That leaves things up to the states.  Last January, twenty-one states* and the District of Columbia filed a protective petition for review in the United States Court of Appeals, D.C., seeking a determination that the FCC’s Restoring Internet Freedom Order “is arbitrary, capricious, and an abuse of discretion…” and therefore request that the Court “hold unlawful, vacate, enjoin, and set aside the Order”.  This case is expected to go to oral arguments before three judges (1 Republican and 2 Democratic appointees) in February.   The decision will provide a critical pivot point on the issue.  If the states win, expect a continuation of EOs and laws passed and enacted at the state level, particularly in BLUE states.  If the FCC wins, expect more court battles, particularly on whether the FCC can preempt states from enacting their own net neutrality rules.  (Note: in 2018, a handful of states signed Executive Orders (EOs) and passed legislation that advanced net neutrality principles.  Except for Vermont, the small number of states that passed EOs and laws had democratic governors.)

http://www.ncsl.org/research/telecommunications-and-information-technology/net-neutrality-legislation-in-states.aspx

Signees of Protective Petition for Review*

	Governor
State	Rep	Dem
California		1
Connecticut		1
Delaware		1
Hawaii		1
Illinois		1
Iowa	1
Kentucky	1
Maine		1
Maryland	1
Massachusetts	1
Minnesota		1
Mississippi	1
New Mexico		1
New York		1
North Carolina		1
Oregon		1
Pennsylvania		1
Rhode Island		1
Vermont	1
Virginia		1
Washington		1
D.C.
	6	15