Thursday, June 26, 2014

Impact of the Aereo Supreme Court Decision on Broadcasters, Cloud Content Storage

 
              Broadcast stocks rose as much as double digits on the day the Supreme Court released its Aereo decision.  The decision underscores the value in broadcasters’ copyrighted content, but also the importance—and staying power—of income streams accruing to broadcasters.  Any venture seeking commercially to exploit broadcaster content will not readily find a way to avoid having to secure retransmission/copyright consent.

              Because new ventures cannot easily cut out local broadcasters, perhaps network content creators might consider ways to deal directly with new distributors.  Regardless of the technology delivering content to end users, a payment likely will flow upstream.  Accordingly it appears even more unlikely that local broadcasters will participate in an incentive auction to part with all or a portion of their 6MHz channels.  Why abandon recurring and growing compensation for a one time infusion of cash?  Bad news for the FCC and others keen on extracting large swaths of additional spectrum for wireless broadband service.

              The Aereo decision also suggests that one cannot underestimate the power of broadcasters to establish themselves, even now, as benefactors of the public interest, localism, “free” content and candidates for elective office.  In the 1970s Congress amended the Copyright Act to mandate community antenna television (“CATV”) operator payments to broadcasters in exchange for a compulsory copyright license for retransmission, now deemed a public performance.  At that time, candidates for elective office heavily relied on television and radio to get their message out.  The National Association of Broadcasters ("NAB") was considered one of the most effective lobbying organizations on Capitol Hill.  NAB framed the cable issue as one of "siphoning," market fragmentation, a threat to localism and outright thievery. 

        While CATV actually helped expand market penetration into fringe, hinterland locations, it also "imported" signals and jeopardized local broadcasters' shared monopoly.  As Justice Scalia noted in dissent, incumbents have a history of forecasting disaster, e.g., the demise of “free television.”

        In short order (at least for Congress) local broadcasters got relief, including the right to force cable operators to block channels containing duplicative networks and syndicated content, such as Jeopardy and Wheel of Fortune.  Perhaps amending the Copyright Act was the most expedient legislative option to devise a mechanism whereby broadcasters received compensation and consumers, including first time, rural residents, continued to have the opportunity to view content.

        Reliance on 1976 Copyright Act amendments may have an adverse impact on new technologies and entrepreneurial business plans.  Any venture offering cloud-based storage of content now has to consider whether it may incur secondary liability for the direct infringement of their customers.  My free advice: make sure copyrighted content travels a round trip from the content source/distributor to the consumer and then back upstream to the cloud for storage.  In this bandwidth doubling routing, the cloud locker operator has a better legal argument for associating with consumers’ copyright fair use, or non-infringing use.

Wednesday, June 25, 2014

Summary of the Supreme Court Aereo Decision


            The Supreme Court has ruled that the Aereo operates much like a cable television service whose retransmission of copyrighted material constitutes a public performance requiring broadcaster consent. [1] The decision effectively shuts down Aereo and appears to nullify the lower court decision in Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F. 3d 121 (2008) that considered subscriber ordered copying of content a private act that does not violate copyright law.

            Writing for the majority Justice Breyer distilled the case into two questions: “First, in operating in the manner described above, does Aereo “perform” at all? And second, if so, does Aereo do so ‘publicly.’” [2]  The majority decision answers both question in the affirmative.  Aereo performs, because its broadcast signal retransmission and copying function parallels the functions of a cable television venture and satisfies the definition of performance enacted by Congress in the 1976 amendment of the Copyright Act. [3] 

            Referring to the legislative history of the 1976 amendment, Justice Breyer reports that Congress consciously sought to reverse two Supreme Court decisions that considered the cable television retransmission function not a public performance. In Fortnightly Corp. v. United Artists Television, Inc., 392 U. S. 390 (1968), the Court held that a community antenna television (“CATV”) system did not publicly perform copyrighted broadcast television content  when it simply distributed it to subscribers without alteration in much the same way that individuals could have done using their own antennas. In Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U. S. 394 (1974), the Court considered the copyright liability of a CATV provider that delivered broadcast television programming from distant sources that subscribers could not receive if they had erected a rooftop antenna.  The Court had reasoned that cable operators functioned like a private viewer and not a broadcaster, or performer. [4] Justice Breyer reasoned that because Congress expressly created language deeming content transmission a public performance, the Court had to treat the Aereo delivery service as the functional equivalent of a transmission and public performance, notwithstanding the fact that subscribers initiate the transmission and copying functions performed by the company:

This history makes clear that Aereo is not simply an equipment provider. Rather, Aereo, and not just its subscribers, “perform[s]” (or “transmit[s]”). Aereo’s activities are substantially similar to those of the CATV companies that Congress amended the Act to reach. [5] 

            The majority decision rejects as insignificant a difference in the manner by which copyrighted content reaches subscribers. [6] Cable retransmission occurs simultaneously and continuously without authorization, or direction from subscribers while Aereo requires subscribers to initiate the service and determine whether to direct equipment to make copies.    Writing in dissent, Justice Scalia considers this difference significant, because the transmission and copying function does not occur unless and until a subscriber directs Aereo equipment to activate. [7] Justice Scalia analogized the coordination between Aereo and its subscribers to that which occurs when a copy center issues an equipment activation and library card for customers who make copies on their own volition using the copy center’s equipment. [8]

            On the issue of whether Aereo publicly performs copyrighted material, the Court majority determined that the company did despite having installed a dedicated antenna for the exclusive use of one subscriber.  Even if the Court were to accept the view that Aereo initiated a new performance in its reception and retransmission function, the majority still considered the performance public. [9]  Justice Breyer reasoned that Congress intended on protecting broadcasters’ copyrights even if technological innovations involved subscriber interaction with equipment and content streams did not flow instantaneously and constantly to subscribers:

[W]hy should any of these technological differences matter? They concern the behind-the-scenes way in which Aereo delivers television programming to its viewers’ screens. They do not render Aereo’s commercial objective any different from that of cable companies. Nor do they significantly alter the viewing experience of Aereo’s subscribers. Why would a subscriber who wishes to watch a television show care much whether images and sounds are delivered to his screen via a large multisubscriber antenna or one small dedicated antenna, whether they arrive instantaneously or after a few seconds’ delay, or whether they are transmitted directly or after a personal copy is made? And why, if Aereo is right, could not modern CATV systems simply continue the same commercial and consumer-oriented activities, free of copyright restrictions, provided they substitute such new technologies for old? Congress would as much have intended to protect a copyright holder from the unlicensed activities of Aereo as from those of cable companies. [10] 

            The majority opinion interprets the Transmit Clause contained in the 1976 Copyright Act amendments[11] as applicable regardless whether there are multiple, geographically diverse, discrete, time-delayed or subscriber-initiated transmissions from Aereo equipment.[12] While sensitive to the possibility that its decision at least temporarily block technological and entrepreneurial innovations, the Court suggests that Congress can and will act, just as it did in response to the onset of cable television. The Court also recognizes that fair use may allow some innovations to flourish and also seeks to exempt the decision from related questions about Internet-based, “cloud” storage of content.



[1]           American Broadcasting Cos., Inc. v. Aereo, Inc., ___ U.S. ___ (June 25, 2014) (slip op.); available at: http://www.supremecourt.gov/opinions/13pdf/13-461_l537.pdf [hereinafter cited as Aereo Revesal].
 
[2]           Id. at 4.
 
[3]              17 U.S.C. §101 et seq. (2012).
 
[4]           “Although the Court recognized that a viewer might not be able to afford amplifying equipment that would provide access to those distant signals, it nonetheless found that the CATV provider was more like a viewer than a broadcaster.” Aereo Reversal at 6.
 
[5]           Id. at 8.  “Aereo’s equipment may serve a ‘viewer function’; it may enhance the viewer’s ability to receive a broadcaster’s programs. It may even emulate equipment a viewer could use at home. But the same was true of the equipment that was before the Court, and ultimately before Congress, in Fortnightly and Teleprompter.” Id. at 9. 
 
[6]              Given Aereo’s overwhelming likeness to the cable companies targeted by the 1976 amendments, this sole technological difference between Aereo and traditional cable companies does not make a critical difference here.” Id. at 10. 
[7]           “Rather, it assigns each subscriber antenna that—like a library card—can be used to obtain whatever broadcasts are freely available. Some of those broadcasts are copyrighted; others are in the public domain. The key point is that subscribers call all the shots: Aereo’s automated system does not relay any program, copyrighted or not, until a subscriber selects the program and tells Aereo to relay it.” Justice Scalia Dissent at 6.
 
[8]            “A comparison between copy shops and video-on-demand services illustrates the point. A copy shop rents out photocopiers on a per-use basis. One customer might copy his 10-year-old’s drawings—a perfectly lawful thing to do—while another might duplicate a famous artist’s copyrighted photographs—a use clearly prohibited by §106(1). Either way, the customer chooses the content and activates the copying function; the photocopier does nothing except in response to the customer’s commands. Because the shop plays no role in selecting the content, it cannot be held directly liable when a customer makes an infringing copy.” Id. at 4. “Aereo does not “perform” for the sole and simple reason that it does not make the choice of content. And because Aereo does not perform, it cannot be held directly liable for infringing the Networks’ public-performance right.” Id. at 6.
 
[9]           “When an Aereo subscriber selects a program to watch, Aereo streams the program over the Internet to that subscriber. Aereo thereby “communicate[s]” to the subscriber, by means of a “device or process,” the work’s images and sounds. §101.And those images and sounds are contemporaneously visible and audible on the subscriber’s computer (or other Internet-connected device). So under our assumed definition, Aereo transmits a performance whenever its subscribers watch a program.” Aereo Reversal at 12.
[10]            Id. at 12.
 
[11]            17 U.S.C. §101.
 
[12]          “Therefore, in light of the purpose and text of the Clause, we conclude that when an entity communicates the same contemporaneously perceptible images and sounds to
multiple people, it transmits a performance to them regardless of the number of discrete communications it makes.” Aereo Reversal at 14. “So whether Aereo transmits from the same or separate copies, it performs the same work; it shows the same images and makes audible the same sounds. Therefore, when Aereo streams the same television program to multiple subscribers, it ‘transmit[s] . . . a performance’ to all of them.” Id.

Friday, June 6, 2014

Leo Google

           Of late it appears that the FCC must be running a sale on merger authorizations given the glut of questionable attempts.  With so much occurring in the incumbent world to retrench, buy market share and close ranks one can easily fail to see a major, forward looking initiative by Google.

            Folks the prospect of overlapping and globally ubiquitous wireless broadband is REALLY BIG! See http://spectrum.ieee.org/tech-talk/aerospace/satellites/google-aims-for-billion-dollar-satellite-fleet-to-spread-internet-access; https://gigaom.com/2013/06/24/googles-other-plan-to-connect-the-unconnected-satellites/.  Google has the deep pockets to follow through and many factors now favor non-terrestrial options rather than handicap them.

            Google can combine low earth orbiting satellites, blimps, drones and whatnot to cobble together a near complete footprint, not just one serving equatorial locations. Innovators, such as Iridium, Globalstar and Thuraya have proved the concept even if they led on a bleeding edge of innovation.  Motorola showed that it could manufacture satellites on an assembly line, “off the rack” basis instead of designer, one-off birds.  Inter-satellite linking works instead of each satellite having to make a downward transmission.  Handsets have shrunk as has the cost of low earth orbiting (“LEO”) satellite networks.
 
            More important perhaps we now have a better sense of how far terrestrial broadband can penetrate the hinterland, the cost of securing rural backhaul and challenges even for 4G and 5G networks to handle full motion video and peak demand.

            By way of full disclosure, before accepting a professorial position at Penn State I worked for Motorola on the Iridium project.  I preached the LEO gospel at the International Telecommunication Union and the FCC.  Ample spectrum now exists to support mobile satellites and the relative close proximity to earth makes LEOs a low latency inter-modal alternative to terrestrial options.
 
            If Leo Google enters the marketplace, it could disrupt many of the mergers aiming to buy out the competition and “stabilize” the marlketplace.

Wednesday, May 21, 2014

The Costs and Benefits of Bundled Information, Communications and Entertainment (“ICE”) Services

            Companies such as Comcast and AT&T use the benefits of bundling as one of the rationales supporting their proposed megamergers.  Have you considered the alleged benefits and offset them with applicable costs?  Didn’t think so.

            It seems that consumers like the bundling concept, perhaps because they perceive savings, or even freebies when they surely do not exist.  Consider the bundling of wireless handsets with service.  Ask most consumers and they blithely report how they got a “free” handset.  Not exactly.

            They get to use a handset on an installment sales basis: during their compulsory two year service commitment, with hefty early termination penalties, consumers not only reimburse carriers for the “free” handset, but pay well beyond the actual cost of the device.  The bundled handset plus service rate substantially exceeds the carrying cost of the handset and the cost of providing the wireless service.  Each and every wireless carrier mandated bundling until TMobile offered a cheaper “bring you own handset” plan after it could not enjoy the fat and happy life of selling out to AT&T.

            The triple play and quadruple play offered now and in the future combines desirable and less desirable services just as cable television program tiering blends desired networks and channels you might never watch. The triple play bundles voice, Internet access and video.  Packaging voice regularly triggers a double payment if you have both wireless and wireline service. With wireless packages now offering “free and unlimited” voice and text, you do not need a cable or wireline telephone option, but that gets bundled in with the video and data that you want.

            Bundling may save you money, but you really should price out the individual and desired service elements and compare their total cost with that of a bundled option.  At the very least claims of technological convergence, corporate synergies and efficiencies are overstated.  Most ventures would rather you not subscribe only to “naked” broadband and cobble together the voice (VoIP), video (IPTV) and data services you want.

Monday, May 19, 2014

Incumbents Closing Ranks and the Urge to Merge

            Another day, another $50+ billion dollar merger announcement.

            AT&T must have billions of dollars burning a hole in its figurative pockets.  Perhaps stung by its inability to buy wireless carrier market share, the company has shifted strategy from horizontal to vertical integration.  AT&T should have an easier time securing approval from the FCC and the Department of Justice with an acquisition that combines two types of content distributors as opposed to two types of ventures operating in identical markets.

            So what does AT&T get for its 50+ billion acquisition? It secures marketing access to 20+ million additional customers, who make sizeable recurring monthly payments.  AT&T also has the privilege of selling rather than reselling direct broadcast satellite video content which presumably already competes with the company’s U-Verse wired bundle.

            AT&T also get the privilege of buying into a technology that has significant, and arguably increasing risks.  First on average one out of every three satellite launches fail to place the bird in proper orbit. A single DBS satellite costs more than $100 million, but in this age of scale and deep pockets that looks like chump change.  Once activated satellites last for about 10 years and the risk for collisions with space junk increases.

            I marvel at satellite technology, but have to report that geostationary orbiting satellites 22,300 miles above the earth, suffer comparative disadvantages (e.g., signal delay) when providing data services as compared to terrestrial options.  Also DBS video market share has started to decline, because increasingly nomadic and impatient consumers expect video access anytime, anywhere, via any device and in any presentation format.  The cable/satellite model of “appointment television” has begun to lose its control over access.  See my discussion of “cord nevers”: http://telefrieden.blogspot.com/2014/05/revenge-of-cord-nevers.html.

            AT&T gets to pitch a bundle of video, data and voice services via networks it owns and operates.  AT&T appears to consider this strategy an insurance policy of sorts against market forces that may penalize ventures that cannot bundle all desired services.  The company also may think that joining forces with another incumbent, offering an existing, but increasingly risky technology, somehow achieves greater market resiliency for both ventures.

            The acquisition comes across as the opposite of “if it you can’t beat ’em join ’em.”  AT&T is not acquiring a maverick, start up with leading edge technology and a new business plan—just the opposite.  If you can’t beat ‘em, join ranks and hope that your combination—like others out there—will continue to lock content access to incumbent technologies. 

             Interested in watching NFL football on your smartphone, or tablet using cutting edge IPTV/OTT technology?  You’re going to have to ask AT&T for permission.

Friday, May 16, 2014

Can the FCC Turn a Network Neutrality Triple Play?

        Despite the remarkably large amount of coverage and analysis of the network neutrality debate, not everyone appreciates the wants, needs and desires of the major stakeholders.  Let’s step back and consider their motivations and incentives of the three primary stakeholders: consumers, retail ISPs and upstream carriers and sources of content.

            Consumers
 
            Consumers expect their monthly broadband subscription payments to guarantee a predictable level of service in terms of bit transmission speed and amount of downloadable (and uploadable) content allowed per month.  This expectation is not contingent on their service provider’s ability to demand and receive surcharge payments from upstream carriers and content providers.

            When common carrier phone companies provided dial up Internet access, consumers typically paid for unmetered service.  With the conversion to broadband, service terms increasingly have bitrate delivery commitments and generous, but metered caps on data downloading.  Retail ISPs complained about having to increase bandwidth without sharing in the windfall generated by their carriage of increasingly valuable and plentiful content.  Nevertheless these carriers upgraded their networks with only minor rate increases and without major episodes of congestion.

            Now consumers face rate increases, tiering of bit transmission speeds and efforts by their ISPs to make reliable service contingent on surcharge payments and/or bit prioritization offers.  Consumers now confront the prospect of greater cost of service and increased risk of degraded service, particularly for bandwidth intensive service like Netflix.  Consumers are not happy about this and may become more vocal advocates for network neutrality simply on grounds that the status quo of best efforts routing used to work fine, until ISPs got greedy.

            But aren’t some consumers becoming greedy themselves?  With the onset of full motion video services like Netflix and YouTube, Internet demand increases significantly.  Consumers want a medium capable of handling “mission critical” video bits representing “must see” television.  Real congestion can occur, not because retail ISPs play games with how many ports and bandwidth they allocate for Netflix traffic, but perhaps primarily because Netflix releases an entire season of must see programming and bandwidth hogs gorge themselves with possibly hundreds of gigabytes.
 
            Consumers want their Netflix video streams to arrive on time and seamless at the same time as they long for the kinder, gentler and less bandwidth intensive days when best efforts routing always worked fine. 

            Retail ISPs

            Retail ISPs provide the essential last mile delivery of content to relatively captive eyeballs.  While retail broadband subscribers can choose between various wireline and wireless providers, one and only one carrier typically provides all carriage.  Churning from one carrier to another can occur, but not without some consumer inconvenience and motivation.

            Having regularly upgraded their networks and enhanced the value proposition of service, retail ISPs predictably seek to recoup this sizeable investment and earn a generous return.  They have evidenced a growing interest in increasing revenues and profits not just by raising retail subscription rates, but also by demanding new or increased compensation from upstream carriers and even content providers directly.

            Retail ISPs like to frame their compensation rights in terms of a two-sided market: 1) downstream to end users paying monthly broadband subscriptions and 2) upstream to other carriers who either barter transmission capacity through peering agreements, or pay transiting fees when downstream and upstream traffic is not equal.

            Retail ISPs do not have a legal or guaranteed right to a double source of revenue.  In a possibly analogous situation, cable television operators benefit from some instances of a double-sided market, but not always.  Cable operators combine end user subscriptions with a share of the premium subscriptions paid for access to premium content such as HBO.  But cable operators also pay upstream sources of content, e.g., in copyright fees for the privilege of delivering content to subscribers. 

            Arguably retail ISP subscription rates should cover both the network cost of content delivery plus at least some of the value represented by the upstream content the Internet cloud access subscription provides.  In this scenario, retail ISPs do not operate like a credit card company that can capture payments from both credit card users and vendors, but instead have to rely solely on subscriptions and advertising.

            Of course retail ISPs do not see any need to compensate content providers for the value of what broadband subscribers seek.  Retail ISPs do not share in the advertising revenues flowing to upstream content providers and readily embrace a telephone company view that terminating carriers deserve payments from upstream carriers or content sources, particularly when traffic balances become disproportionately one sided.

            Retail ISPs cannot press the telephone service model too far, because of the concept of “cost causation” favors upstream payments.  Arguably ISPs and their subscribers trigger the cost of content carriage: a demand pull, instead of supply push rationale.

            Content Providers

            Content providers want downstream carriers to deliver increasingly robust volumes of content using the existing interconnection and compensation models that primarily rely on end user subscription payments.  When facing pushback primary content sources note that consumers agree to pay fees that have generated triple digit rates of return for carriers.  Alternatively content sources design ways to distribute their product at possibly lower costs by co-locating equipment on ISP premises.  In what they would consider the worst case scenario, content providers agree to new, more generous compensation agreements with retail ISPs as occurred in the Netflix-Comcast paid peering arrangement.

            Content providers do not share their subscription fees with downstream carriers, as HBO does.  On the other hand, retail broadband subscribers expect their Internet cloud access to include access to any source of content without regard to how much of the total bandwidth any single source requires.  Certainly the Netflix business model assumes low and unmetered broadband delivery charges ironically not like the physical delivery of disks model that has both higher total costs and is metered.
 
The FCC’s Dilemma
 
            The FCC faces an extraordinary quandary in trying to forge a compromises that satisfices these three constituencies.  No one can achieve total satisfaction here. Consumers will have to pay more for broadband.  Retail ISPs will not have unlimited opportunities to raise rates, particularly for content sources that can get by without prioritization of traffic absent deliberate strategies by retail ISPs to degrade basic service.  Content providers—particularly the major causes for ever increasing bandwidth demand—will have to pay more as well.

            The FCC has to forge a compromise where consumers can secure “better than best efforts” delivery of video at a price, but without making it possible for retail ISPs to demand a surcharge from every source of content.  I continue to believe that the FCC does not have to reclassify broadband access to achieve this compromise. 
 
            In large part marketplace negotiations can resolve the most pressing problems.  However network neutrality advocates make a convincing argument that non-charities like Comcast will have little self-restraint in their quest for new profit centers.  The FCC has to stand ready to discipline and sanction ISPs when they resort to strategies and tactics that degrade service as a nudge or a push to force the payment of unnecessary surcharges.

Thursday, May 15, 2014

Reclassifying Internet Access as a Title II Regulated Telecommunications Service

           Today’s Notice of Proposed Rulemaking on Internet access reportedly contains a section inviting comments whether the FCC should reclassify Internet access from largely unregulated information service to telecommunications service.  Should the Commission opt to do this—something months away, if at all, in light of grave political impediments—any and all concerns about discrimination do not miraculously evaporate.

            Comcast EVP David L. Cohen and others correctly note that even Title II-regulated common carriers have the option of offering different tiers and categories of service.  Telecommunications service providers cannot discriminate among “similarly situated” carriers, but nothing prevents common carriers from offering different tiers of service, i.e., to offer different price points and levels of service. Put another way, even common carriers can engage in price and quality of service discrimination provided the differentiation is cost-based and available to anyone meeting a fair list of qualifying criteria.  Nothing prohibits the FCC from approving a tariff that contains this type of permissible discrimination applied to retail broadband subscribers, or upstream to other carriers and content providers.  Additionally nothing prevents the FCC from eliminating the requirement that Internet Service Providers even file tariffs.

            Title II regulation does not toggle on an all or nothing pivot.  Section 160 of the Telecommunications Act of 1996, allows the FCC to streamline and forbear from applying most common carrier regulations.  The FCC could reclassify information service at the same time as it forbears from applying most of the possibly unnecessary, costly and burdensome regulations.

             On the other hand Title II makes it clear that a carrier cannot engage in deliberate discrimination, such as dropping packets, simply to disadvantage a competitor, or to extort a surcharge payment from an upstream carrier satisfied with best efforts routing.  Title II regulated ISPs would have to operate more transparently and probably could not get away with tactics designed to generate artificial congestion as may have occurred with the slowdown of Netflix streaming video traffic.

             Here's another tricky issue from the Title II, telecom world: normally the carrier triggering the need for carriage--on behalf of its customers--incurs the cost of this service.  The FCC used to use the term "cost causative" carrier.  Under a pure ("old skool") view, it would appear that Comcast would have to compensate upstream carriers for the Netflix traffic and other demand from Comcast customers.   I don’t see this happening, just as I don’t see the FCC risking a show down with incumbents on a reclassification gambit.

Tuesday, May 13, 2014

Deconstructing the “If Only” Rationale for Megamergers in Telecommunications

            Year after year telecom ventures aspire to get bigger though mergers and acquisitions.  Buying market share serves to increase scale which presumably guarantees greater efficiency and greater profitability.

            Acquiring companies do not operate as charities, but they regularly launch charm offensives to explain how the deal will benefit consumers.  One often hears the assertion that a merger will “promote competition” presumably by making the acquiring company better able to compete with other mega firms.

            Acquiring companies use the If Only gambit to claim that they can only generate the benefits of enhanced competition if and only if they absorb a competitor.  Does this pass the smell test? 

            A company acquiring market share has to make a strategic decision.  Can it accrue more revenues by offering the same terms and conditions as its competitors, or can it do better by deviating from the status quo service terms and conditions?  Consumers have no guarantee that when a market becomes even more concentrated the remaining firms will become more energized to innovate and sharpen their pencils.  They could just as easily agree implicitly to avoid sleepless afternoons competing.

            Let’s consider Sprint’s If Only campaign.  Sprint claims that if and only if it can acquire T-Mobile, the merged company will become a vigorous competitor of Verizon and AT&T.  So what exactly is keeping Sprint from being the kind of competitor it claims it will become if only it can acquire T-Mobile? Does Sprint lack access to the debt and equity market even with an owner like Softbank?  Does Sprint lack the ability to bid for more spectrum?  Will Sprint’s questionable management suddenly get better with the infusion of T-Mobile talent?  What does Sprint’s costly acquisition of Nextel tell us about companies that combine incompatible technologies?

            And while we’re in the inquisitive mood: what does the behavior of T-Mobile tell us about the wireless marketplace.  From my perspective T-Mobile got serious about competing only after its sweetheart “merger” with AT&T did not occur.  Thanks to the failure to become a part of AT&T, T-Mobile became a far more aggressive innovator and competitor.  There would have been no chance that somehow AT&T would implement: bring your own device discounts, reduced or eliminated international roaming charges and aggressive pricing particularly for data plans.

            Comcast’s If Only campaign comes across as even more bogus.  The company surely has no problem borrowing funds given the value of its stock and the ease with which it can borrow funds.  Comcast does not lack any resource, like spectrum, that only an acquisition can provide.  The company touts as a virtue the “fact” that Time Warner Cable and it do not compete.  In fact the company does not emphasize how the deal will benefit consumers in terms of service rates.

             We need vigorous examination of mergers and acquisitions, particularly for markets lacking robust facilities-based competition.  But of course in these contentious times, there will always be ample lobbyists and sponsored researchers available to tell decision makers how robustly competitive any and all markets are, despite all evidence to the contrary.

Monday, May 12, 2014

Unintended and Intended Disinformation in Telecom Policy Discussions

           On too many occasions, I have tried to set the record straight in the face of untruths in telecom policy debates that become all too real, or at least accepted as conventional wisdom.  For years I dutifully prepared a rebuttal to just about every Wall Street Journal editorial, or op ed on telecommunications.

            Of course not one rebuttal ever made its way to print, either in the original publisher, or elsewhere.  Being an independent, unsponsored researcher, I don’t have a built in constituency or publicist.

            Generally I have given up on this never-ending endeavor. I want this blog and my academic work to orient toward the future.  But today I have to make an exception.   

            A prominent listserv covered AT&T’s campaign to convince the FCC not to reclassify Internet access as a telecommunications service, subject to Title II regulation.  See http://arstechnica.com/tech-policy/2014/05/att-claims-common-carrier-rules-would-ruin-the-whole-internet/.  For reasons other than AT&T’s, I conditionally support opposition to this reclassification.  However I did attempt to refute one of the premises in the AT&T campaign.   

            On this prominent list serve, one of AT&T rationales generated a supporting comment.  AT&T asserts that the FCC has a congenital inability to use a light regulatory touch should it reclassify ISPs and reacquire legal authority to regulate.  
 
            A prominent academic, with a longstanding record favoring deregulation, made the following assertion:   
Everyone who is supporting Title II seems to believe that the FCC will use only light touch regulation (never actually seen that, have you?) and it won't be like regulating the Bell System.  I personally think that is just what it is going to turn into; that's where the logic of regulation takes you: price, entry, exit, quality regulation.  To pretend that this time, the FCC will be much lighter seems farcical.

             I took issue with this statement, based on the fact that the FCC has a longstanding and consistent history of engaging in regulatory restrain by streamlining and forbearing from regulation when sustainable competition exists:

            I am not in the camp that believes Title II regulation should apply to ISPs.

            However, [the list serve Moderator and the author of the above assertion] should give the FCC credit for using a provision in the Telecommunications Act of 1996 (Sec. 160) to forbear and streamline Title II regulation.  When it has empirical evidence that facilities-based competition exists, the Commission has reduced regulation.  Examples include inter-exchange services, such as long distance, and many local exchange services.

            The facts do not support the premise that the FCC has a congenital inability to use a light regulatory touch---ever.

 
            Just like the Wall Street Journal, the listserv Moderator did not publish my response.

           Call me crazy, but I saw the need to prevent yet another instance of unintentional, or intentional misreading of the facts.  From my perspective, I see ample evidence that the FCC can forebear and streamline regulation.

            Doesn't the FCC have a record of using Sec. 160 to streamline and even forbear regulation? 

            I am disappointed that even at the list serve level, an attempt at respectfully challenging an assertion of the facts didn't get distributed for reasons that don’t pass the smell test.

 

 

Tuesday, May 6, 2014

Revenge of the Cord Nevers

            More and more young users of the Internet will access the cloud without ever having used a corded device--what older folks know as telephones and personal computers.  These “Cord Nevers” do not have to accept the limitations of wired telephone and cable television service.  A nomadic species, Cord Nevers have little tolerance for tethered telephones and “appointment television” where content creators and distributors decide when, where and how often viewers can access programs.  Cord Nevers want access anytime, anywhere, via any device and in any format allowing them to talk, text and watch video content via different screens on their terms.                        

            Cord Nevers are technology agnostic.  They care little about the medium used to deliver service, only that access occurs quickly, reliably and without impediments.  Netflix and some new media players understand this mindset and try to accommodate it.  For example, Netflix allows subscribers to binge on an entire season of “must see” video content by downloading all episodes, instead of applying the appointment television model that rations access to one episode per week.  HBO appears ready to become more accommodating by offering Amazon customers access to some programing without requiring proof of a cable television subscription.

            Cord Nevers appear quite flexible on the size and quality of the screen used to view content.  They want flexibility on the device they use to access content, but appear willing to tolerate much smaller screens than what televisions and computer monitors have to offer.  While screen size does not matter much, the interface providing access has to operate in a user friendly and intuitive way. 

            Cord Nevers may appear both fickle and loyal.  On one hand they constantly seek the next great application and cloud enhancement, quick to jettison one site for another.  Few even recall the early social networking success of MySpace.  On the other hand, Cord Nevers appear willing to stick with a brand, such as Apple, and even pay a premium if a device or service continues to enhance the perceived value proposition. 

            Cord Nevers have the potential to disrupt the status quo in many segments of the Internet ecosystem.  The expectation of anytime, anywhere content access threatens the longstanding distribution model that relies on several “windows” of access at different price points. Disruption will occur when movie access deviates from a standard course of theatrical display, limited and locked down access on a pay per view basis, DVD release, rental and download opportunity, availability on cable television premium networks, etc.  

            However disruption does not mean destruction of business plans and revenue streams.  When cable television made its market debut, movie theater operators and their content producers feared annihilation.  In reality accommodation occurred and so too will Cord Nevers trigger change without causing incumbents to fail. 

            Incumbents need to think strategically rather than simply conclude that Cord Nevers constitute a threat to their intellectual property and livelihoods.    Cord Nevers will pay for content, sometimes in ways that generate more profit than via previously limited commercial options.  For example, some cellphone subscribers regularly paid more for 20 seconds of a song for use as a ringtone, than for access to a disc or file containing the entire song.  Yes, many Cord Nevers think nothing of violating copyright laws, but if the content is compelling and the interface friendly, most will pay for convenient access.

            Incumbents—particularly telephone and cable television companies—appear quick to consider Cord Nevers as threats, rather than premier customers.  Cord Nevers are vilified as bandwidth hogs, copyright thieves and cheapskates.  Many incumbent punish them for these tendencies by throttling the bit transmission speeds of heavy users, threatening litigation and sneaking new billing line items.  A more profitable strategy seeks to reward and accommodate power users, particularly when doing so migrates them to more profitable service tiers.

            Cord Nevers bring their televisions and computers with them everywhere they go.  Incumbents should understand that such expanded access can translate into more services and higher revenues.

 

           

Monday, April 28, 2014

Cable Retransmission/Channel Placement Negotiations and Commercially Reasonable Internet Connections

            Back at the drawing board, Chairman Wheeler and staff have attempted to find the sweet spot where ISPs can negotiate paid traffic prioritization so long as it’s “commercially reasonable.”  Libertarians and a lot of other observers would conclude that all commercial negotiations reach a reasonable outcome between two willing parties.  So absent coercion or evidence of an unfair—okay call it unreasonable—trade practice, the negotiation should produce a mutually beneficial outcome.

            Such outcomes do not prevent one side from exercising superior bargaining leverage.

            In broadcaster-cable television retransmission consent negotiations, the former enjoys a superior bargaining position for two reasons: 1) broadcasters have exclusive access to “must see” television such as the regular season of professional football and 2) cable operators face severe restrictions on their ability to negotiate with a distant broadcaster if the local station imposes unreasonable demands. So arguably the deck is stacked in favor of broadcasters.

            What does the Commission do in this situation?  Nothing for two reasons: 1) the Commission lacks specific statutory authority to impose terms and conditions; and 2) the Commission wisely refrains from interfering with “marketplace driven” negotiations knowing that eventually the parties will reach closure, particularly after the regular NFL season begins.  The Commission limits its intervention to defining what constitutes good faith negotiations.

            I acknowledge that the consequences of regulatory reticence to act can more significantly harm consumers when ISPs cannot come to terms.  The pain threshold arrives almost immediately when access to the Internet cloud becomes congested, or when specific sites become inaccessible.  Many would assert that reliable and neutral Internet access has more significance than whether cable television subscribers can watch a football game. 

            Similarly the D.C. Circuit Court of Appeals has instructed the FCC that it lacks jurisdiction to supersede cable operators’ channel placement and content tiering decisions. Absent a “voluntary” commitment, as occurred when Comcast agreed to limits on its channel placement freedom, the FCC cannot mandate neutrality and fairness.  Comcast can place its owned and operated Golf Channel on the basic tier and relegate the Tennis Channel to a more expensive tier viewed by fewer subscribers.   Was this a commercially prudent decision, or one designed to disadvantage the Tennis Channel?  The court in effect said it does not matter.

            The FCC has a model in retransmission consent and case precedent that it may not consider applicable.

           

Wednesday, April 23, 2014

Better Than Best Efforts Routing of Mission Critical Traffic and the FCC

           It appears that the FCC will permit exceptions to the standard, plain vanilla best efforts routing standard for Internet traffic, such as the paid peering arrangement recently negotiated between Comcast and Netflix.  In both academic and applied papers I have supported this option, with several major conditions.  See, e.g., Net Bias and the Treatment of 'Mission-Critical' Bitshttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422842.

            With no opposition that I have seen, companies like Akamai offer better than best efforts routing of “mission critical” traffic from content source to last mile, “retail” Internet Service Providers. This service improves the odds for congestion-free delivery of “mission critical” traffic, e.g., live video streaming.  It appears that the FCC intends to permit better than best efforts routing options for retail ISPs.

            I have no problem with ISPs throughout the Internet ecosystem providing different tiers of service, provided the most costly differentiation offers a true enhancement.  Put more simply better than best efforts should not foreclose the best efforts option, particularly for ventures and individuals whose traffic volumes have no possibility of causing congestion.  Comcast and other retail ISPs should have the option of providing companies like Netflix with an insurance policy of sorts so long as all ventures and individuals do not have to follow suit.  Without transparency and reporting requirements companies like Comcast can punish anyone refusing to upgrade from the old standard best efforts option by all but guaranteeing congestion and degraded service. 

            ISPs should have the opportunity to offer an enhanced deliver option with less latency, faster delivery speeds and improved odds for high quality of service.  But the enhancement should not become necessary for any and all users. 

 

           

           

Aereo Lessons

            The Aereo technology and litigation offer several insights on how we will access video entertainment going forward and who has superior bargaining leverage.  Once upon a time—back in the age of “appointment television,” broadcasters controlled access to “must see” television.  We dutifully selected the network television channel at the appointed time and watched knowing any repeat access option was also subject to great specificity several weeks later.

            The onset of the analog video cassette recorder “empowered” viewers by facilitating time shifting and multiple viewing options.  With digitization consumers have greater options for shifting content between and among different recording and playback devices.  So one trend favors consumers with greater flexibility and the prospect of access to content anytime, anywhere, via any device and in any format.  Technology agnostic consumers have little interest in the medium of delivery, but surely expect on demand access to any and all screen: television sets, pc, smartphones and tablets.

            So far so good, but no one should be surprised when content creators and distributors responded in ways that lock down access and attempt to reestablish control.  While they failed to secure FCC regulations mandating television set processing of broadcast flags limiting content access flexibility, (American Library Assn. v. FCC  347 F.3d 291, 293 (D.C. Cir. 2003)) content creators and distributors achieved success in restricting copying and device shifting when the an HDMI cord handles the carriage, e.g., from a Blueray DVD player to a television set or PC.  Score one for the incumbents who now can use Digital Right Management technologies to prevent what might otherwise qualify as fair use, the right of consumers to make copies and switch access between devices for private, non-commercial use.

            Broadcasters in particular score additional points when they successfully accrued billions in retransmission consent fees for content they have to offer “free to air” for the 9 percent of the viewers still using the broadcast spectrum option. Copyright fees appear to matter more to broadcasters than advertising revenues which arguably Aereo technologies would increase in light of possibly higher ratings.

            So along comes a “disruptive” Aereo technology that mimics old school broadcast television reception.  The crux of the copyright litigation lies in whether the reception design of Aereo sufficiently mimics the private reception of public media via each dime sized antennas routing content via the Internet.  If the Supreme Court views this reception as a private performance, then Aereo would not incur copyright liability.  There is case law that suggests broadcasters have little control over content they “freely broadcast.” Bear I mind that this stakeholder group has benefitted for so many years with such benefits as free spectrum in light of their service in the public interest.  Converting free content into content available only subject to a retransmission consent fee dilutes any claim credible claim for such preferred status.

            If Aereo loses, perhaps broadcasters should lose the benefits of a status deeming them “trustees” of scarce and valuable spectrum, including the billions that otherwise might accrue by relinquishing control of some spectrum in an incentive auction.

 

 

Saturday, March 22, 2014

Netflix Has Buyer’s Remorse Over Its Paid Peering Deal with Comcast

         Soon after capitulating to Comcast’s surcharge demand for improved treatment of its traffic, Netflix got better downstream delivery speeds.  Apparently Comcast did not have to undertake a major bandwidth expansion program.  Much to the immediate relief of Netflix, Comcast merely needed to allocate more ports for Netflix traffic.  So with a reallocation of available bandwidth, Comcast solved Netflix’s quality of service dilemma apparently without degrading service to anyone else, upstream or downstream.
 
          Rather than make Netflix satisfied with its surcharge payment, Comcast has triggered buyer’ remorse.  Netflix CEO Reed Hastings now rails against the deal he cut as payment of a unfair toll; see http://nflx.it/1pgX4cd.  
 
         
          Haven’t we heard this scrip before?  Yes.  Level 3 used words like toll bridge and surcharge when Comcast hit that company up for more compensation.  See http://telefrieden.blogspot.com/2010/11/comcasts-demand-for-video-surcharge.html.
         
          Comcast surely can exploit a bottleneck in the sense that it exclusively controls the “last mile” link to its sizeable share of broadband subscribers.  Acquiring Time Warner Cable would increase Comcast’s market share, and most consumers don’t have a faster, cheaper, or better alternative. 
         
          Comcast has won the game of chicken, because Netflix and content providers have to fix the problem of subpar download delivery speeds as soon as they occur, or risk inconveniencing their subscribers.  Comcast and retail ISPs have greater leverage, because Netflix has to ensure high quality of service across the entire link to its subscribers.  Comcast can deliberately degrade service by refusing to allocate sufficient ports, but Netflix subscribers don't care who has caused the deterioration.  Netflix has to "fix the problem" immediately even if Comcast has leveraged inferior delivery to force a return to the status quo in terms of downstream service quality.
         
          Upstream content providers and carriers appear to have declining leverage in forcing retail ISPs to accommodate any and all increases in downstream demand.  Arguably Comcast could have hit its subscribers with higher rates, but the company has embarked on a strategy designed to maximize payments from upstream content providers and carriers, but also from downstream retail subscribers.  Netflix, Level 3 and Content Delivery Networks get hit with surcharge demands, but at the same time Comcast and other retail ISPs can raise retail rates across the broad, or create more tiers of service resulting in higher rates for large volume subscribers.
         
           Going forward I believe it will be quite a stretch for content providers to wrap themselves around a network neutrality banner when a downstream carrier manipulates the allocation of ports and bandwidth for maximum leverage.  This “network management” function does not constitute deliberate blocking of packets.  Similarly Comcast will reframe the issue as one of commercial negotiations about access to property rather than discrimination and an unfair trade practice.