Extending [a] Lifeline!

The FCC Commissioner's plan to extend Lifeline recognizes that times and technology have changed since 1985 when the program was introduced to subsidize landline phone service for low-income households.
Under the proposal, the $1.7 billion program that currently provides a $9.25/month subsidy for wireline and wireless (since 2008) service would be extended to include broadband.  The inclusion  of broadband acknowledges its importance to economic well-being.

http://www.nytimes.com/2015/05/28/business/fcc-chief-seeks-broadband-plan-to-aid-the-poor.html?_r=0

Time to change the rules

In a proposed rulemaking, the FCC is considering a change to the 22 year-old effective competition rule that requires cable operators to prove that there is effective competition in their communities before they can be exempt from local regulation of basic rates.  Under the proposed rule change, there would be the presumption that effective competition exists in all markets.  This would mean that a municipality would have to demonstrate otherwise to gain the authority to regulate rates.  The reason for the change is that the FCC has approved more than 10K effective competition requests, and has not denied any in recent years.

At the time of the initial ruling, in 1993, less than 2% of MVPD customers could choose between two or more cable providers.  Little has changed in that regard.  Gentlemen’s Agreements by the cable operators have continued to limit head-to-head competition among them.  But, beginning in 1999 and accelerating through the early part of the new millennium, DBS providers, specifically DirecTV and Dish, expanded their footprints and today cover all but a very small portion of the U.S.  Moreover, telecom companies, largely Verizon and AT&T, began offering video delivery services in major metropolitan markets in direct competition with the incumbent cable operator. So, today, in most markets, there are two (DBS only) to four (2 DBS, cable, and telco) competitors.  The mere counting of competitors in a market, however, does not suggest that competition is robust.  It merely points that in the vast majority of U.S. communities (34,000+), the current effective competition standard is met.*   “Effective” competition will have to come from new sources, not from interpreting outdated rules. 

*Effective competition is considered to exist if either the municipality or another multichannel video programming distributor (MVPD) offered an alternative service to at least 50 percent of the households in the franchise area and more than 15 percent of those households took service from a company other than the largest one.   Moreover, small cable operators are exempt from rate regulation in franchise areas where they serve fewer than 50,000 subscribers (serve less than 1% of U.S. subscribers, and do not exceed annual revenue of $250 million).

Full steam ahead...with Media M/A

It appears that the media industry set the re-start button on merger activity after last month's derailment of the Comcast-TWC merger.  Reports suggest that Charter is close to announcing a deal to acquire Time Warner Cable and Bright House Networks.  While regulators will have to review the merits of the deal, including assessing the impact on subscribers and competitors, it is highly likely the deal will be approved.  Why?  Many [not all] of the reasons are similar to why the AT&T-DirecTV merger will go through.  Here are they are:
1) A stronger #2 to Comcast.  As a share of the U.S. broadband market, a combined Charter (6%) /TWC (14%) /Bright House (3%) would have 23%, just two percentage points behind Comcast.
(Source: The Leichtman Research Group.  Percentages were of the top providers accounting for 94% of the total market.)
2) Greater scale -- geographical clustering for network efficiencies and stronger negotiating heft to balance the power of content owners.
3) In spite of expanded coverage, there is very limited market overlap.  Where there may be overlap (a few communities in southern California), regulators may require some concessions or divestitures. 4) FCC Chairman, Tom Wheeler, indicated that he is not opposed to industry mergers in spite of the Comcast-TWC decision.

Why the AT&T-DirecTV merger will be approved

About a year ago, AT&T announced its strategic response to the proposed Comcast-TWC merger ...become a bigger (stronger) firm in pay-TV by merging with DirecTV.    The value of the merger?  $48.5B

While the number of  competitors in many local markets will be reduced in this horizontal merger, the merger is likely to be approved by regulators.  Why?
1) No effect on the growing broadband market as DirecTV does not offer broadband
2) While there will be fewer competitors in the AT&T U-verse markets in 22-states, the growth in Pay-TV subscribers has turned negative in the past few years.
3) No vertical restraint issues as AT&T/DirecTV have very limited content ownership interests
4) The hope/promise of a stronger competitor (better pricing bundles, service) to Comcast and TWC in local markets
5) Greater bargaining power with content owners
6) Promise of broadband expansion to more rural communities
7) Regulatory approval concessions

Will consumers be better off?  Who knows!  Maybe the best we can hope for is not to be any worse off.

Skinny bundles: Can a la carte pricing be around the corner? Verizon says NO.

A 2014 Nielson survey showed that the average US TV household watches just 17 channels but pays for 189.  While the size of program packages has expanded significantly over the years and prices have risen greater than 2x the rate of inflation, the average number of watched channels as changed very little.*  

Not surprisingly, cable customers, for decades, have advocated for a la carte pricing.  It never came. But, change came in another way and it has forced video providers to offer more pricing options.

It began with over-the-top programming that allowed consumers to view shows anytime, anyplace.  Cord-cutting, cord-skimming, and cord-avoiding shifted some bargaining power to consumers.  While they still don't have a la carte pricing, slimmed down product bundles, like Verizon's Custom HD for $55/month, might be a "step in the right direction" (Tami Erwin, Verizon Fios President on a recent CNBC interview).

Will this make some of us happy for now?  Verizon and the other MVPDs certainly hope so!  The rest of us aren't so sure.


*Today, if a TV bundle is $90/month, the price per watched channel is more than $5/month.  

What if...

the Comcast-TWC merger doesn't go through?  We know that the Charter-Bright House deal would be called off.  The AT&T-DirecTV deal would be under even greater regulatory scrutiny and the likelihood of approval would diminish.

But, would customers of these ISPs be worse off?  The ISPs argue that they need greater scale in order to negotiate favorable programming terms.  However, in a CNBC interview on Friday, April 17, the President of Verizon Fios, Tami Erwin, indicated that at 9 million broadband customers currently ( a third of the size of a combined Comcast-TWC) the firm has "sufficient mass".*

Who do we believe?  Bigger is not always better.  In fact, it could be a lot worse.  Just look to the financial services industry.


*This excludes the impact of a pending sale to Frontier of California, Florida, and Texas systems, with 1.6 million subscribers.

A Match Made Out of Necessity. Who's Next?

About ten days ago, Charter announced its plans to purchase Bright House Networks LLC for $10.4B.  Charter, the third largest cable broadband provider (behind Comcast and Time Warner Cable, is in line to add 3.4 million subscribers through acquisitions this year (2 million from Bright House and an additional 1.4 million from TWC if its merger with Comcast is approved by regulators.)  Increasingly, the focus is on scale, primarily as it relates to negotiating favorable terms with content owners.  Among cable and telco firms, Charter will be near the subscriber count of Verizon if the deals go through.  It begs a few questions...

1) Are more deals likely?  Might the likes of Cablevision and the next-tier of cable providers or even Verizon feel a need jump into the acquisition fray?
2) What's the "right" size for an ISP given the changing landscape of video delivery services?