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.

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.

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.

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.

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.

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.

 

 

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.

 

           

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.

           

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.

 

 

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.

Scale and the Comcast-TWC Acquisition

           Former FCC Chairman Reed Hundt hosts The Digital Show on Business Radio 24/7-- Business Talk from Wharton, channel 111 on Sirius/XM satellite radio.  He invites major thinkers on telecom and Internet issues to chat Mondays from 5-7 p.m. in the Eastern time zone.

            On March 10^th, the program featured prominent buy side analyst Craig Moffett, Comcast E.V.P. David Cohen, Free Press Policy Director Matt Wood and yours truly.  I wish Sirius/XM archived the program, because you would hear the points for and against the Comcast-TWC acquisition in an understandable and comprehensible forum.

 

            Each presenter made his arguments effectively. Mr. Cohen offered the view that the acquisition is not such a big deal, particularly in light of the fact that Comcast and TWC “don’t compete,” while Comcast operates in a fiercely competitive marketplace for both video content and Internet access.

            Clearly Comcast does not operate as a charity, but Mr. Cohen recognized the duty to make the case for the deal based on some articulation of how the public benefits, or at least is “not threatened.” He emphasized that Comcast needs to acquire even greater scale to operate effectively and to provide consumers with the best quality of service, a robust research and development budget and a wealth of next generation services, including a new state of the art set top box.  He did not mention the prospect for lower prices even though larger scale may support the company’s ability to extract lower content prices and better Internet peering terms, in the same manner as Walmart. 

            Chairman Hundt used the phrase “balloon squeezing” to provide a visual reference for the enhanced ability of the company to reduce its costs even as smaller ventures incur higher prices for access to the same content and Internet network links.

            Mr. Cohen provided clarity on why the company wants to acquire greater market share in the video and broadband marketplace.  The merged company would serve about 30 million cable television and broadband households. In broadband, the company’s market share will likely grow significantly in light of the fact that Digital Subscriber Line service cannot increase bit transmission speeds to satisfy growing demand for video downloading.  Additionally, AT&T and Verizon have largely refrained from investing more funds to expand their high speed, digital fiber or hybrid copper/fiber networks.  So Comcast can only improve its ability to extract even higher payments from retail subscribers, particularly broadband users likely to face lower downloading allowances and more expensive tiers of service.  The company also can extract additional peering and transiting payments from upstream ISPs and content providers as evidenced by the recent paid peering deal with Netflix.  Also the company has greater “balloon squeezing” leverage with content providers, far greater than even Google.  That megafirm won’t have anything near the scale of Comcast even with an expanded footprint of 37 or so metropolitan areas.

            Case closed?  Matt Wood offered a fine rebuttal and the case for the FCC and Department of Justice to reject the deal.  The scale argument and the lack of competition among Comcast and TWC stand as two major elements why the issue of bigness is threatening to consumers and to a robustly competitive marketplace.  Standing as a toll bridge or bottleneck  operator between consumers and content sources, Comcast would have even greater leverage to extract higher charges without having to enhance the value proposition on either side.

            My concern focused on what happens when Comcast can buy out a significant player in the cable and broadband marketplace.  The fact that operators like Comcast and TWC have implicitly agreed not to compete (a mutual non-aggression pact) does not mean that their combination will lack impact.  Without TWC, cable and broadband companies have even less incentives to innovate and to sharpen their pricing pencils.

            Consider the wireless marketplace with a company like T-Mobile and one where AT&T acquired the company.  In the former, consumers benefit by having the fourth among equals forced—perhaps kicking and screaming— to compete aggressively.  In just a few weeks T-Mobile departed from conscious parallelism—simply duplicating the price points and service terms of AT&T and Verizon—to becoming an innovator.  The company has made a huge impact with lower rates for consumers who bring their own devices, roam internationally and want to change carriers in fewer than every two years.

            With its acquisition of TWC, the odds decline even further for a maverick innovator to offer a better value proposition for consumers, e.g., the opportunity to pick and choose networks on an a la carte basis instead of a large “enhanced basic” tier of channels.  Who would evidence “best practices” when doing so results in sleepless afternoons competing and the potential for being targeted by Comcast for balloon squeezing?

            Matt Wood made a series of convincing arguments that most consumers will suffer from the deal, but I would not bet against conditional approval in this politicized, pay to play environment.

Does Sec. 706 Authority Ride Solely on the FCC Continuing to Find Indequate Broadband Competition?

            In the Verizon v. FCC, the D.C. Circuit Court of Appeals briefly addressed the issue of the Commission's assessment of broadband competition.  With some incredulity, the court nevertheless expressed its unwillingness to second guess the FCC on its decision to back off from previously finding adequate market access.  With a new and reversed finding of inadequate access—especially in rural areas—the FCC has a stronger argument for using Sec. 706 of the Communications Act to achieve promotional goals through non common carrier rules and regulations.

            The D.C. Circuit Court of Appeals frequently is not so deferential.  For example, even when the FCC had explicit authority under the Telecommunications Act of 1996 to require local loop unbundling, the D.C. Circuit (in the U.S. Telecom Assn. cases) chided the Commission for lack of granularity and market specific requirements.  Bear in mind the court second-guessed--if not micromanaged--a process involving telecommunications service providers and Title II requirements.  The court appeared quite uncomfortable with the FCC forcing competitors to cooperate on matters where interconnection terms and conditions would not match what arm's length, market driven negotiations would generate.

            The possibility exists that a change in administration, or judicial impatience with regulatory meddling will prompt an appellate court to second guess a finding of insufficient competition.  If that were to occur I suspect the FCC would claim that its Sec. 706 authority does not ride solely on the basis of its annual assessment of the broadband marketplace.  However the Commission would have yet another hard case to make that accessibility in the context of Sec. 706 is measured by factors other than marketplace competitiveness.

Paid Peering a Contradiction in Terms?

            On a listserv in which I participate, another participant suggested that there is no paid peering.  I agree that paid peering has oxymoron characteristics, but these two words have become an accepted term for a peering arrangement that involves payment rather than barter.

            An expert on the subject defines paid peering as: “the business relationship whereby companies (Internet Service Providers (ISPs), Content Distribution Networks (CDNs), Large Scale Network Savvy Content Providers) reciprocally provide access to each others’ customers, but with some form of compensation or settlement fee.” William B. Norton, http://drpeering.net/white-papers/Ecosystems/Internet-Paid-Peering.html.

See also: Confirmed: Comcast and Netflix have signed a paid peering agreement, GigaOm; http://gigaom.com/2014/02/23/confirmed-comcast-and-netflix-have-signed-a-peering-agreement/; Netflix is paying Comcast for direct connection to network; Paid peering agreement will improve Netflix quality for Comcast subscribers; arstechnica; http://arstechnica.com/business/2014/02/netflix-is-paying-comcast-for-direct-connection-to-network-wsj-reports/.

Netflix “Most Favored Nation,” Paid Peering Agreement With Comcast: The Good, Bad and Ugly

            Notwithstanding Comcast’s open Internet access commitment made to close the NBC-Universal acquisition, the company has executed a preferential access deal with Netflix.  For me the primary question is what kind of discrimination does “better than best efforts” routing constitute?

            At the risk of giving an inch so Comcast can take a mile, I consider paid peering a reasonable quality of service discrimination with several caveats.  First the possibility exists that payments flowing directly from Netflix to Comcast are largely offset by reductions in the direct payments the company makes to Content Distribution Networks like Level 3 and Cogent.  Netflix and its customers benefit from higher quality of service with fewer intermediary carriers and routers. 

Of course no one knows, because the parties execute nondisclosure agreements and the FCC has not thought to require disclosure.  Perhaps with its new found emphasis on transparency the FCC will demand disclosure of all “special routing arrangements” complete with redacted public release of the agreements.

More direct traffic routing probably accords Comcast greater leverage upstream with Netflix and similarly situated content providers.  Without adequate oversight nothing prevents Comcast from making paid peering—and the surcharge it incorporates—standard operating procedure.  In other word little remains of plain vanilla “best efforts” routing: Comcast can demand similar payments from other content providers and distributors backed up by a not so veiled threat that it simply will not have adequate downstream delivery capacity to accommodate even what it previously was able to handle. 

Such contrived congestion forces almost every upstream venture, with the financial resources available, onto some type of premium service provisioning.  In other words there probably will be a rush to “Most Favored Nation” quality of service making it the default standard, even though ISPs previously accommodated increasing network demand without upstream carrier surcharges.  Retail ISPs either absorbed the cost of upgrades as a cost of doing business, or they raised retail rates.  Now they can do both.  Just last week AT&T announced significant increases in retail broadband access rates.

Perhaps other content providers, generating less traffic, can continue to squeeze by with standard best efforts routing.  But why would a competitor of Netflix risk the consequences knowing that ISPs like Comcast can throttle, degrade and create artificial congestion without FCC sanction.  Bear in mind that retail ISPs can create bitstream delivery problems without their broadband subscribers knowing the cause and the responsible party. 

Consumers can complain all they want about a reduced value proposition from their $30-75 monthly subscription payments, but competitive carriers are scarce and unlikely to refrain from such higher rent extraction options themselves.  

Netflix must have decided that the sooner it can lay to rest the risk of artificial or real downstream congestion the better.  It also must have considered a near term solution as according it the cheapest option, knowing that going forward Netflix competitors also will have to pay perhaps on less generous terms.  So Netflix secures a competitive advantage even as retail ISPs extract more revenues.

Expect Netflix to respond with new service tiers and higher rates.

Consumer Impacts of a Net Biased Ecosystem

            Consumers ought to understand what opportunities and threats arise from an even more non-neutral Internet.  Expect existing trends to become entrenched with new impacts.

Extended Trends

            Better Than Best Efforts Routing Options

            The “good old days” of absolute best efforts neutrality in the Internet cloud have long since passed for better and for worse.  I haven’t heard any opposition to the use of proxy servers and “better than best efforts” service options provided by companies such as Akamai.  When consumers want access to “mission critical” bits, e.g., a weekend mainlining on the entire second season of House of Cards, they might even pay for higher quality of service when the possibility of congestion and degraded service exists.

            Expect retail Internet Service Providers, operating the first and last mile broadband link, to offer enhanced quality of service options for a price.

            Squeezing Even Higher Broadband Profit Margins

            ISPs, affiliated with incumbent ventures such as cable television companies, have come to recognize that they are “first among equals” in the bundling of telephone, home security, video and broadband.  Cable operators may want to offer lower margin video services to forestall cord cutting, but the triple digit margins accrue from broadband.

            Expect ISPs to press for even higher broadband service rates through general rate increases and additional tiering on the basis of transmission bit rate and download allotments.  Also expect a substantial narrowing in the gap of download caps between wireline and wireless broadband options.  Currently wireline options have soft caps in the 200-300 Gigabyte range while wireless carriers have hard caps from 250 megabytes to 10 Gigabytes.  Wireline ISPs can squeeze out higher margins simply by forcing “bandwidth hogs” onto more expensive tiers.

            Options for Avoiding Download Debits

            Less generous download allotments reduce the broadband subscription value proposition, but I don’t see consumers pushing back.  What competitive alternative do they have?  Yes 4G makes it possible for wireless to compete, but their per-megabyte download cost well exceeds the wireline rate even if the latter rates rise significantly. Satellite options offer slower speeds at higher download costs, coupled with some latency (signal delay) issues.

            Expect ISPs to “soften the blow” of stingy download caps with expanded opportunities for content and service providers to pay in lieu of metering the download.  This might come across as “pay to play,” but heightened consumers sensitivity to a download cap means they are even less likely to respond to additional commercial pitches that debit their download allotment.

Developing Trends

            New trends will develop slowly, largely because of Comcast’s ambiguous concession commitment to neutrality as a sweetener for securing approval of its NBC-Universal acquisition.

I don’t see extortion plays and deliberate dropping of packets as a ploy to force migration by upstream content providers and downstream end users to higher quality of service tiers.  However there will be instances where an ISP simply can’t contain its instinct to push the envelope and squeeze that last dollar.

ISPs Demand More Incentives to Upgrade

            Expect ISPs to leverage network upgrades in exchange for better interconnection terms with content providers and their downstream Content Distribution Networks.  Netflix might even secure the opportunity to install servers on ISP premises, but at a price. 

I expect Netflix and consumers to lose the argument that ISPs are entitled only to retail broadband subscriber monthly subscriptions and surcharge payments from upstream CDNs.  If Netflix wants to reduce its CDN payments, then it will have to pay ISPs directly.

More Interconnection Compensation Disputes

One might consider increases in peering/transit disputes as an extension of an existing trend.  However, the frequency of disputes and the complexity make this a developing trend.  A recent and probably temporary surge in broadband demand points to the potential for consumers to experience degraded service.  Depending on who frames the issue, congestion recently occurred thanks to Netflix, the weather and a holiday: the House of Cards second season in its entirety, home cocooning due to extraordinary cold and snowy weather and Valentine’s Day.  So much for network robustness capable of handling peak demand.  But of course consumers don’t know whom to blame.  Expect lots of finger pointing.

I hope carriers and content suppliers won’t make excuses for reducing the value proposition of Internet access, but it would not surprise me.

FCC Chairman Wheeler’s Open Internet Strategy Post Verizon v. FCC

            FCC Chairman Wheeler has released a statement outlining his thoughts on how the FCC lawfully can press on for open and neutral Internet access; see http://fcc.us/1c2RBzv.

             I appreciate what Chairman Wheeler has attempted to do: avoid any unlawful mission creep in light of the strong language in the Verizon decision, but also run as far as possible with Sec. 706 authority.  I do think the Commission can move forward with muscular transparency/disclosure requirements.  Just now Netflix subscribers don't know the cause of any service degradation so perhaps ISP disclosure requirements might provide some light on how frozen images came about even for subscribers to FIOS service operating at multi-megabit per second speeds.

    I do think the Chairman and the Commission will find a less than receptive D.C. Circuit should any order ignore the clear prohibition on the imposition of Title II common carrier requirements on ISPs.  I don't see much wiggle room in the no blocking, no discrimination area, nor am I as sanguine as the Chairman in terms of what deference the data roaming decision affords the FCC.  That decision emphasized the use of commercial negotiations and the limited role of the FCC and its ability to intervene. 

    One could draw a parallel between the duty to negotiate, commercially driven data roaming terms and conditions and the similar duty to negotiate retransmission consent between cable operators and local television broadcasters.  In both instances the FCC cannot act proactively and has limited powers even to resolve a protracted dispute. Unfortunately for broadband subscribers there won't be a specific "must see" television program that forces one side to capitulate, so degraded service and not so subtle abuses of last mile access may occur.

 

Post Network Neutrality Feud Number 1: The Netflix (Traffic) Jam

            As you know, the D.C. Circuit Court of Appeals has invalidated network neutrality requirements that impose common carrier requirements.  In this blog and elsewhere I predicted an uptick in disputes between content providers and distributors in the absence of unquestionable authority for the FCC to intervene if necessary. 

To be clear I favor commercial negotiations that typically resolve interconnection compensation disputes.  However, I also suggest that the FCC have authority to resolve intractable disputes as a referee and mediator.

So along comes another dispute between Netflix and retail ISPs such as Verizon and Comcast.  See Drew FitzGerald & tzGerald   BiograShalini Ramachandran, Netflix-Traffic Feud Leads to Video Slowdown, The Wall Street Journal (Feb. 19, 2014); available at: http://online.wsj.com/news/articles/SB10001424052702304899704579391223249896550?mod=WSJ_hp_LEFTTopStories.

This really should not come as a surprise, even as retail ISPs already receive compensation on both sides of their two-sided market: 1) 3 digit margin monthly broadband retail subscriptions; and 2) transit payments from ISPs, particularly Content Distribution Networks for Netflix such as Level 3.

Retail ISPs want a third revenue stream on some notion that content sources, such as Netflix, are “bandwidth hogs” who should be throttled, or alternatively hit up for direct payments.  In particular it must tick off senior management at ISPs, owned by cable television companies, to see Netflix offer a $7.99 value proposition when cable content bundles are 10-15 times as expensive.

I agree that a direct payment should flow from Netflix if and only if it directly interconnects with a retail ISP.  If Netflix were to stop using CDNs and seek to interconnect directly with ISPs providing the last mile delivery Netflix surely should pay including the significant electricity used to power onsite proxy servers. 

But are retail ISPs right to demand payment from both the directly interconnecting upstream ISP/CDN and even farther upstream from the content source?

I don’t think so, but there’s nothing stopping retail ISPs from trying.  Apparently Verizon and others can degrade Netflix traffic delivery—intentionally or not—without much consumer pushback.  When consumers don’t get high resolution Netflix content, they do not even know whom to blame.  Has Netflix done something wrong, or has the last mile carrier?  Who operates the weakest and inferior link when multiple ISPs participate in the complete end-to-end routing of traffic?

Until retail ISPs lose customers or the debate in the court of public opinion expect more interconnection compensation disputes to arise and possibly mess with your Internet access experience.

A Free Pass for Comcast to Acquire Time Warner, Because They Don't Compete With Each Other?

            Two rationales supporting the Comcast acquisition of Time Warner don’t make sense to me. 

First Comcast touts the existence of Netflix, Hulu and Google as ample evidence that content competition exists.  Of course the two sources of content mentioned reach end users primarily via last mile broadband providers like Comcast.  Goggle Fiber serves three metropolitan areas and is nothing more than a test and demonstration project that Gigabit fiber is commercially and technically viable. 

Would Comcast meddle with Netflix traffic, say to tilt the competitive playing field in favor of Comcast’s pay per view options?   Why would it, particularly if in a two-sided market total revenues might decline if Comcast were to retard broadband demand?  So Comcast would have no incentive to throttle traffic and otherwise mess with the traffic of content competitors who need its network to reach end users.

Does this rationale pass the smell test?  Was Comcast merely “experimenting” with network management techniques when it previously meddled with peer-to-peer traffic?  Why are retail broadband carriers demanding surcharge payments from Netflix on top of the transit payments they receive from Content Distribution Networks like Level 3, plus the end user subscriptions that have three digit margins? 

Absent a four year network neutrality commitment as part of its acquisition of NBC, profit maximizing Comcast surely would try to squeeze every last dollar, particularly from competitors who need its downstream delivery.  Remember what Ann and Gordon told us: “Greed is good.”

Second, Comcast asserts that because it does not compete with Time Warner, no one should worry about lost competition and consumer welfare.  Would not a more concentrated cable television market have even less likelihood that some operator somewhere would experiment with new pricing models, e.g., offering ala carte channel access in lieu of bloated channel bundles? Isn’t it easier for Comcast to reduce the broadband value proposition by capping download allotments and upselling higher amounts, or agreeing not to debit the now single digit Gigabyte allotment in exchange for a surcharge paid by content sources?  Note that AT&T Wireless announced such a "toll free data” option just a few weeks ago.

Bottom line: Comcast may not compete with Time Warner, but a bigger Comcast makes it more likely that the company can claw back consumer welfare gains and reduce the value proposition of both cable television and broadband subscriptions without significant customer churn.