The Net Neutrality Paradox

One of the more unfortunate wrinkles in the long debate leading up to the Federal Communications Commission’s 2015 Open Internet Order, better known as net neutrality, was its increasingly commercial focus. There were important civil liberties issues at stake, to say nothing of the interplay of engineering and regulation of critical infrastructure and the private ownership of public goods. But much of the public debate boiled down to an argument over streaming — Netflix streaming in particular.

That was due in no small part to the efforts of Netflix founder and CEO, Reed Hastings, who made himself and his company the poster-children of the net neutrality cause by loudly proclaiming Netflix’s oppression at the hands of ISPs looking to impose interconnection fees on the streaming service.

Although net neutrality proponents eagerly embraced Netflix’s cause and Hastings’ pubic advocacy they worked to color the issue as essentially a commercial dispute between different types of service providers, which, paradoxically, is actually an argument against what the FCC did. Disputes between buyers and sellers are not really the FCC’s bailiwick; that’s more a matter for the Federal Trade Commission and the antitrust division of the Justice Department.

It also, ironically, helped set the table for what is shaping up to be another pitched battle over net neutrality, this time over a new FCC chairman’s plan to turn the issue into an explicitly and exclusively commercial matter.

Chairman Aji Pai, who strongly opposed the FCC’s 2015 order while in the minority under previous chairman Tom Wheeler, is moving quickly to try to settle the score. His plan, basically, is to vacate the current rules, then ask the ISPs nicely to commit to certain net neutrality “principles” in their terms of service and turn over resolution of any commercial disputes or consumer complaints that arise to the FTC.

That will require reversing his predecessor’s decision to reclassify ISPs as “common carriers” under Title II of the Communications Act. Under the so-called “common carrier exemption” in the Federal Trade Commission Act, the FTC has no legal authority over services classified as common carriers, like telephone networks, and to give it jurisdiction Pai will have to un-reclassify ISPs.

But the new chairman could find himself looking through the other end of the net neutrality paradox this time. While he may view the issue as fundamentally a commercial matter that the government should largely stay out of, the commercial and strategic interests now at stake in the streaming economy are orders of magnitude greater than the last time around, and their resistance to any change from the current rules is likely to reflect that increase.

Consider the members of the Internet Association, the Washington, DC, lobbying group formed in 2012 by Facebook, Amazon, Google and eBay. Since the current rules went into effect Google’s YouTube has launched a paid music streaming service, YouTube Red, and this month began rolling out an over-the-top pay-TV service, YouTube TV, that competes directly with the cable TV services operated by the largest ISPs.

Amazon has emerged as a formidable competitor to Netflix in the subscription VOD business and has launched a paid music streaming service. That paid streaming service is tightly connected strategically with Amazon’s Echo voice-activated speaker, which is a pillar of the retailer’s in-home strategy. Amazon also signaled its strong interest in live video streaming earlier this month by spending $50 million for rights to the NFL’s Thursday Night Football franchise.

Facebook has made live video streaming the centerpiece of its strategy to grab a chunk of the $70 billion spent annually in the U.S. on TV advertising, some of which is currently spent with ISP owned pay-TV services. Twitter, another member of the Internet Association, is also placing big bets on live video.

This week the Internet Association sent a letter to the FCC declaring its opposition to any change in the current rules:

IA continues its vigorous support of the FCC’s OI Order, which is a vital component of the free and open internet.  The internet industry is uniform in its belief that net neutrality preserves the consumer experience, competition, and innovation online.  In other words, existing net neutrality rules should be enforced and kept intact.

New players like Roku are also thought to be eyeing the live-streaming business. Last month Roku hired a team of lobbyists in Washington specifically to focus on net neutrality.

(Ironically, Netflix, although a member of IA, is likely to sit this round out, having made its separate peace with the ISPs .)

Major media companies have also seen their direct stakes in the streaming economy grow since the current net neutrality rules were implemented. According to the RIAA, streaming now accounts for more than half the music industry’s revenue and that share is growing rapidly. The major record companies are equity investors in Spotify, the leading streaming service, which is currently valued at $8.5 billion and is preparing to go public.

Likewise, Fox, ABC and NBC own Hulu, the subscription VOD service that is also gearing up to launch a virtual pay-TV service (NBC is barred from having a direct operational role in Hulu under the terms of its merger with Comcast).

Those examples just skim the surface of what the streaming economy has become over the past three years premised in part, at least implicitly, on the current net neutrality rules. Undoing those rules at this point, paradoxically, could represent an even greater intervention into the commercial arrangements of the internet by the FCC than implementing them in the first place.

 

Netflix Ponders Life Without Net Neutrality

Netflix CEO Reed Hastings did as much as anyone to shape the Federal Communications Commission’s net neutrality rules. CEO Reed Hastings’ aggressive public lobbying for what he termed “strong” net neutrality, after Comcast and AT&T successfully forced Netflix to pay for access to their last-mile networks, was largely responsible for putting interconnection arrangements between ISPs and edge providers at the center of the debate and helped persuade former FCC chairman Tom Wheeler to push through reclassification of broadband access as a Title II telecommunications service, which gave the commission jurisdiction over those deals.

Yet, as Republicans in Congress and on the commission sharpen their knives to disembowel Wheeler’s hard-won rules Netflix says it no longer needs the protection.

“Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable,” Hastings said in his Q4 letter to shareholders this week.

Translation: we’re too big now even for Comcast to push around, a point Comcast itself obliquely acknowledged in November by integrating Netflix into its flagship X1 set-top box. Read More »

America Exits The World

For all intents and purposes, Donald J. Trump will assume the presidency in January with no discernable policy agenda. Apart from a few signature flights of fancy, such as building a wall along 1,500 miles of southern border and rounding up 11 million immigrants for summary deportation, his policy pronouncements consisted largely of an ever-shifting farrago of ignorance, indifference, truculence, and personal animus boiled down into 140-character outbursts. As a general matter, we simply do not know what the Trump administration might do.

trumpGiven the enormity his election represents, speculating on the fallout for any particular industry could seem petty, if not beside the point entirely. But for what it’s worth, the media and technology industries may be among the first to feel the impact.

As a near-term matter, Trump said on the campaign trail that he would block AT&T’s pending merger with Time Warner and would look to undo already done media mergers, including Comcast’s acquisition of NBCUniversal. Setting aside the question of whether the Justice Department would have legal grounds to do either (and the perhaps more interesting question of whether a Trump Justice Department would feel constrained by established law and precedent), Trump’s rhetoric could cast a pall over M&A activity, just as the media industry seems poised for another round of it in the wake of AT&T-Time Warner. Read More »

While FCC Dithers, Google Ditches The Box

To hear the pay-TV industry tell it, FCC chairman Tom Wheeler’s original proposal to “unlock” the set-top box was essentially a sop to Google, a company many in the industry see as having effectively captured the agency, if not the entire Obama administration, and as coveting the incumbent operators’ position in the TV business.

Those suspicions were only strengthened when Google began offering members of Congress demos of a set-top box that fit remarkably with the sort of navigation device envisioned by Wheeler’s proposal, just days after the proposal was unveiled.

fccwheelergettyoffledeAlarmed, cable operators rushed out its own proposal to “ditch” the set-top box altogether and make their services available, essentially as is, via apps that could run on third-party devices — an idea Google opposed because it would leave the cable operators in control of the user interface and the bundling of channels.

The industry’s move was effective, inasmuch as it forced Wheeler to retreat from his original proposal, and come up with a new plan loosely modeled on the industry’s app-based approach. While Google said it could live with the new proposal, the industry still found much not to like, and an all-out lobby blitz again forced Wheeler to postpone a planned vote on the measure. Read More »

The Coming Wireless Video Wars

Having dropped $48 billion and change last year to acquire DirecTV, AT&T is now earmarking tens of billions more over the next 3 to 5 years to acquire media companies, according to a report this week by Bloomberg. Citing “people familiar with the plans,” the report said AT&T is targeting acquisitions ranging from $2 billion to $50 billion, with an eye toward “owning some of the content it distributes.”

It likely won’t be distributing it through DirecTV, however, at least not via satellite. According to an earlier Bloomberg report, AT&T will begin phasing out DirecTV’s randallstephensonsatellite platform within the same 3 to 5-year window, with any eye toward making internet streaming its primary TV platform by 2020. The company has lately been lining up carriage deals ahead of its planned launch of its DirecTV Now over-the-top service later this year. And it has been aggressively steering its wireless customers toward DirecTV by bundling unlimited wireless data plans with a DirecTV subscription, which so far has been taken up by some 5 million of its wireless subscribers.

DirecTV Now will also be “zero-rated” for AT&T wireless customers, meaning it won’t count against their monthly data cap. Read More »

Why MVPDs, Studios Won’t Take Yes For An Answer on STBs

When Federal Communications Chairman Tom Wheeler unveiled his initial proposal to “unlock” the pay-TV set-top box back in January, pay-TV service providers and programmers howled in protest. Operators complained that the proposal, which called for multichannel video program distributors (MVPDs) to make their video feeds, channel listings, and subscriber entitlement data available to third-party device makers as discreet “information flows,” would require a major and expensive re-architecting of their systems. Programmers complained that making their content available directly to device makers with whom the programmers had no contractual arrangement amounted to a de facto compulsory copyright license, which the FCC had no authority to create or enforce.

FCC_buildingBoth threatened to sue.

The two arguments were, in fact, reinforcing. The current carriage agreements TV programmers and distributors have with pay-TV operators are premised in part on pay-TV systems operating in certain ways and not in other ways. Changing how those systems function could cause part of the premise of those licensing agreements to crumble. Read More »

The FCC Chairman’s Tactical Retreat On Set-Top Boxes (Updated)

After months of intensive lobbying by pay-TV providers and TV programmers, as well as mounting pressure from congress, FCC chairman Tom Wheeler has apparently backed off quite a bit from his original proposal to “unlock the [set-top] box” and is preparing to adopt the broad outlines the industry’s app-based counter-proposal. But that doesn’t mean the struggle for control of the set-top is over.

Federal Communications Commission (FCC) Chairman Tom Wheeler gestures at the FCC Net Neutrality hearingIn an ex parte filing with the commission this week, the National Cable & Telecommunications Association, along with DirecTV-parent AT&T, pushed back forcefully against elements of what appears to be Wheeler’s new plan to bring greater competition to the market for pay-TV-compatible set-top boxes, as mandated by congress more than a decade ago.

The new plan, as described in general terms in a series of ex parte filings in recent weeks, will apparently require multichannel video programming distributors (MVPDs) to develop apps that can run on third-party devices but that replicate all of the features of MVPDs’ own services, including making all the operator’s linear and on-demand content available on similar terms.  It will also require MVPDs to make their content searchable by third-party, universal-search applications. Read More »

X1 Marks the Spot for Comcast

Comcast and Netflix this week confirmed an agreement to incorporate Netflix’s streaming service into Comcast’s X1 video platform, signalling a dramatic shift in what has long been a contentious relationship between the companies.

“Comcast and Netflix have reached an agreement to incorporate Netflix into X1, providing seamless access to the great content offered by both companies,” the two said in a joint statement given to Recode.  “We have much work to do before the service will be available to consumers later this year. We’ll provide more details at that time.”

netflix_blockThat’s a far cry from a few years ago when Netflix CEO Reed Hastings was working overtime to turn Comcast into public enemy number one in the net neutrality fight and Comcast was imposing interconnection fees on Netflix for access to its last-mile network.

But the shift is more likely the result of a change in circumstances than a change of heart. Read More »

Court to ISPs: You Really Are Just Dumb Pipes

Back when the clamor began to reclassify broadband access as a Title II telecommunications service, in the wake of the DC Circuit Court’s ruling overturning the Federal Communications Commission’s effort to impose net neutrality rules under its Title I authority, there was a lot of grumbling among Verizon’s peers that the telco should have left bad enough alone instead of challenging the commission’s 2010 rules in court.

Though Verizon won the case, largely on technical legal grounds, it poked a hornet’s next that threatened the far-greater sting of reclassification. But now that the same DC Circuit Court has handed down its ruling on reclassification and the FCC’s revised net neutrality rules, many of those grumbling last time are probably wishing they’d followed their own advice.

FCC_buildingNot only did the FCC win the case this time around, but the court majority’s opinion delivers a series of roundhouse blows to most of the ISPs’ claims about the value of their services, if not yet to their market valuations.

In essence, the court concluded that as service providers, ISPs add almost no value beyond basic connectivity. And that goes for wireless as well as fixed-broadband providers.

Apart from their objections on procedural grounds to the FCC’s rulemaking, the ISPs and their trade associations argued they could not fairly be classified as utility-style telecommunications providers because the services they offer consumers include a range of complex, value-adding information-processing functions, such as email, online storage, content caching and DNS lookup. Read More »

Peak TV and the Politics of Plenty

The formal comment period for the FCC’s controversial set-top box proposal closed this week, after tallying 256,747 submissions. As in any hard-fought rulemaking proceeding these days, most of those were canned comments from “the public” rounded up by PR firms working for parties on all sides of the issue. But it also drew more than 1,000 substantive comments from rights owners, members of the pay-TV industry, technology providers and other agencies of government involved in telecommunications policy, including the White House.

FCC_headquartersI’ve written here before, perhaps excessively, on the relative merits (or lack of them) to the various sides’ positions, so I won’t belabor the debate further. But the latest round of comments revealed another, related issue that bears watching regardless of how the set-top box debate turns out: the very different perspectives on the impact of innovation coming from different corners of the TV business.

The Motion Picture Association of America, representing the 6 major Hollywood studios, has been nearly apoplectic over the FCC’s plan, and its final reply comments — all 50 pages of them — were no exception: Read More »

Disney’s Split UI Personality

Walt Disney Co. CEO Bob Iger this week said he is “very excited” about the user interface Hulu has designed for its planned virtual-pay-TV service launching next year.

“We’ve seen the interface because we’re partners [in Hulu]” Iger said Wednesday at the MoffettNathanson Media & Communications Summit. “It’s a great interface, a tremendous user experience, and we’re in discussions with them about our channels and about prices.”

hulu_nocbs-1He also used the opportunity to take a swipe at traditional pay-TV operators for the lack of innovation in their UIs over the years.

“I’ve been frustrated over the years by the UI” of cable and satellite TV services Iger said. “Maybe because I’m getting older I don’t have the patience anymore, but we’re all getting more and more spoiled by what technology makes possible,” in terms of surfacing, discovering and accessing content.

According to Iger, consumers raised on digital platforms today simply won’t tolerate any glitches or difficulty in access the content they want when they want it, and the traditional pay-TV industry simply hasn’t kept up with the times. Read More »

In Cable, The Rich Get Richer

Daniel Frankel, over at FierceCable, noted an interesting pattern in the Q1 data from cable operators this week. All of the vaunted rebound in video subscribers during the period was concentrated among top-tier providers.

Comcast, Time Warner Cable and Charter collectively added 89,000 video subs.

Mid-size operators, however, all experienced continued erosion among video subscribers. Cablevision lost 15,000; Cable One lost 13,000; and Mediacom lost 2,000 across its two operating units.

money_bagsFirst-quarter data on smaller providers, which is compiled by SNL Kagan, is not yet available. But it would be surprising if the pattern there were different from that of the mid-size providers.

In both cases, operators are increasingly making a de facto, if not quite formal, decision not to fight very hard to attract or retain video subscribers because of the high programming costs that come with them and to focus their business primarily on their broadband service.

“The lower end of the market can no longer afford the big bundle; the number of disruptive OTT technologies and vendors are now multiplying rapidly; and the millennial generation has very limited interest in traditional TV viewing,” Cable One CEO Thomas Might told Fierce. “These patterns will inevitably bring an end to the ubiquitous fat bundle, but only slowly and painfully.”

Slowly and painfully perhaps, but the data also suggest it could happen at very different speeds in different markets, depending on the size of the local providers’ national footprint. Read More »

What UI Voodoo Will Hulu Do In Linear Debut?

One of the more interesting subplots to Hulu’s apparently pending rollout of an over-the-top bundle of linear channels will be what it does with the user interface.

As I’ve noted here previously, the traditional programming grid that still drives navigation on most pay-TV systems today is at the core of the current tussle over Federal Communications Commission chairman Tom Wheeler’s proposal to “unlock” the set-top box to allow third-party devices and applications to interoperate with pay-TV services. And apart from pay-TV operators themselves, the loudest objections to Wheeler’s proposal have come from programmers, who fear those third parties will not honor the agreements networks have with operators concerning their position within the traditional pay-TV UI.

“ArmHulu_homepage’s length agreements between MVPDs and programmers provide the necessary licenses to transmit the content, and in exchange the MVPDs agree to a range of license terms, including security requirements, advertising rules, [electronic programming guide] channel placement obligations, and tier placement requirements,” the Motion Picture Association of America wrote in comments submitted to the FCC. “These terms are material to the grant of the copyright license, and to copyright holders’ ability to direct the exploitation of their works in a manner that enables them to continue to invest in the high-quality programming that viewers expect. ..The only terms the proposal would explicitly recognize are copy, output, and streaming limitations. Extensively negotiated terms on matters including “service presentation (such as agreed-upon channel lineups and neighborhoods), replac[ing] or alter[ing] advertising, or improperly manipulat[ing] content,” are all left unaddressed by the FCC’s proposal.” Read More »

The FCC Plays For Time in Charter-TWC Merger

The Federal Communications Commission and the U.S. Justice Department this week each signaled their intent to approve Charter Communication’s $65 billion acquisitions of Time Warner Cable and Brighthouse Networks, subject to several conditions.

The mergers will create the second largest cable-TV provider in the country, with 17.4 million subscribers, behind Comcast’s 22 million. Strikingly, though, none of the conditions attached by the FCC and DOJ have to do with the provision of cable-TV service. Instead, they deal almost entirely with promoting over-the-top video as a viable competitor to cable.

FCC_headquartersUnder the deal with the FCC, the merged company will be prohibited from imposing usage-based pricing or data caps on its 19.4 million broadband subscribers, a tactic many cable internet providers have turned to lately to discourage video cord-cutting by indirectly raising the cost of using OTT services like Netflix.

Charter will also be prohibited from charging Netflix and other OTT providers with interconnection fees for delivering traffic to Charter broadband subscribers.

Under the agreement with the Justice Department, Charter will be barred from inserting or enforcing most-favored nation (MFN) clauses in its carriage agreements with programmers — a tactic many pay-TV providers, particularly TWC, have used to discourage programmers from making their content available on OTT platforms. Read More »