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.

           

Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.