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.

 

Apple TV Needs To Get Off The Couch

Earlier this month Apple poached Timothy Twerdahl from Amazon, where he had headed up the Fire TV unit, to serve as VP in charge of Apple TV product marketing, raising hopes that Apple is gearing up for another try at transforming Apple TV from a hobby into a meaningful product line. But if so the transformation won’t be immediate.

Apple is reportedly testing the next iteration of the Apple TV set-top box, which could be released later this year. But early indications are that it will be another study in incrementalism, adding support for 4K streaming but no groundbreaking new functionality.

Apple is also rolling out two new original TV series, a long-form version of James Corden’s Carpool Karaoke segments from the “Late Late Show,” and reality TV-type series called “Planet of the Apps.” But neither series is being launched under the Apple TV banner. Instead, as Apple content chief Eddy Cue explained at the Code Media conference this week, both will be made available through Apple Music in a bid to boost subscriptions to the music streaming service. Read More »

Have Netflix, Will Travel: EU Digital Single Market Inches Closer

Negotiators for the European Commission, the European Parliament, and European Union member countries this week reached agreement on new rules that will allow citizens from one EU country to access digital services they subscribe to, such as Netflix, Spotify, and sports live streams, when traveling in another EU country starting in 2018.

Up to now, exclusive territorial licenses between rights owners and online services, as well as other rules, have generally prevented services from granting access to subscribers from outside their home country.

“Today’s agreement will bring concrete benefits to Europeans. People who have subscribed to their favourite series, music and sports events at home will be able to enjoy them when they travel in Europe,” EU vice-president in charge of the Digital Single Market Andrus Ansip said in a statement. Read More »

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 »

Apple Tip-Toes Into Original Video

The Wall Street Journal reported this week that Apple has begun talks with producers in Hollywood about buy rights to original TV series and movies. If true it would represent at least the third attempt by the iPhone maker to crack the TV code, so far without notable success, although its strategy this time appears to be different from its previous efforts.

I say “appears” because, according to the Journal, Apple itself  “is still working out details of its business strategy built around original content.”

The new shows, which could begin appearing by the end of this year, will reportedly be made available to subscribers of Apple Music, suggesting this isn’t an attempt (yet) to build a direct competitor to Netflix and Amazon Prime. The fact that Apple is targeting individual movies and TV series rather than networks suggests this is also not some sort of skinny bundle play to compete with Sling TV and the new Hulu service. Read More »

A Measure of Success: Frank Ocean, Netflix and the Value of Data

Frank Ocean’s surprise release “Blonde” debuted at No. 1 this week on the Billboard Top 200 album chart, racking up sales of 275,000 units, despite its not being released as an album in any physical format.

frank-ocean-blonde-x750So what were those 275,000 units? Some 232,000 of them were paid digital album downloads, according to Nielsen Music. The other 43,000 consisted of “equivalent album units.”

Say what?

An “equivalent album unit” (shouldn’t that be “album-equivalent unit?) is a metric devised by Billboard in 2014 to accounting for streaming activity and individual track downloads for charting purposes. Ten individual track downloads from an album as measured by Nielsen, or 1,500 on-demand streams of individual album tracks as reported to Billboard by the major streaming services, are counted as an equivalent album unit. In the case of Blonde, individual track downloads were not available at the time of the albums initial release, but they accrued 65 million streams. Dividing that 65 million by 1,500 yields 43,000 equivalent units. QED. 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 »

We’re All Netflix, Now

On April 10th Showtime will make all 13 episodes of its new Steven Soderbergh series “The Girlfriend Experience” available on its VOD platform in a single, binge-ready dump. So too will Starz, with all six episodes of the new Andrew Dice Clay comedy “Dice,” as the pay-TV networks increasingly ape the strategy pioneered by Netflix.

They don’t have much choice. Bingeing is how Americans watch TV now. According to Deloitte’s latest Digital Democracy survey, 70 percent of viewers admit to binge-watching, defined as viewing three or more episodes in a single sitting, and one in three say they binge at least once a week. The average number watched during a single binge, fact, is an astonishing five episodes, which in the case of a drama series could easily eat up four or five hours. Millennials in the survey average six episodes per sitting.

We binge-watch so much TV in fact that we’re making ourselves anxious, depressed and lonely, according to a separate study by researchers at the University of Toledo. Yet our appetite is only growing. According to Deloitte, all age groups in its study binged more in 2015 than they did in 2014.

The seemingly irresistible trend, however, poses a dilemma for traditional linear networks. Making new series or seasons available for bingeing risks undercutting primetime ratings. Read More »

What’s In A Network Name? Linear TV Brands Still Looking for Traction Online

HBO added 2.7 million subscribers during the fourth quarter according to Time Warner Inc.’s latest earnings report, “about 800,000” of which, or just under one-third, came from HBO Now, it’s standalone over-the-top offering. That suggests that, barely eight months in, HBO Now has emerged as an important contributor to HBO’s overall subscriber growth.

Since HBO Now is sold direct-to-consumer at $15 a month, moreover, those subscribers are likely worth more to HBO on a revenue basis than pay-TV subscribers, for which revenue is shared with operators.

Time Warner officials pronounced themselves pleased with the results so far.

sports_centerWall Street, however, had a different view. Analysts were expecting as many as 1.4 million OTT subs by now and investors responded by sending shares of Time Warner down by nearly 5 percent.

To be fair, Warner announced its results on a day when media shares got slaughtered across the board and Time Warner’s losses were in line with other media victims. On the other hand, Time Warner’s results, along with Disney’s the day before, were major triggers for the sell-off, as investors continue to fret about subscriber losses among among cable networks as consumers cut the cord or shift to cheaper, skinnier bundles.

Disney got dinged for subscriber losses at ESPN, despite posting a record-breaking quarter on the strength of “Star Wars: Force Awakens.” Read More »

The Value of Binging

Ever since Netflix began producing its own series, traditional network TV executives have driven themselves to distraction over its refusal to disclose viewership numbers, or to cooperate with outside measurement companies like Nieslen. Steeped as they are in the world of ratings and advertising CPMs, TV executives have never quite groked that Netflix reckons the value of content differently.

Their obsession has sometimes led to odd spectacles, such as NBC research president Alan Wurtzel’s recent big reveal of purported Netflix “ratings” derived by the network-backed ratings system Symphony, which passively measures Netflix viewing using audio recognition technology, Manchester_by_the_Seaand which Wurtzel seemed to think proved something, although what that was was not entirely clear.

Netflix does not monetize content, as traditional media companies do. It monetizes viewers. How many people watch a particular episode of a particular series within a certain time window, therefore, really isn’t relevant to its value to Netflix. What matters is whether the people who are watching the series continue to do so, and whether that continued viewing enables Netflix’s recommendation engine to surface other series they’ll go on to view. People who continue to watch a series will, presumably, continue to pay their monthly subscription fee.

As discussed here before, Netflix’s different calculus puts a premium on producing and acquiring a broad range of programming, rather than on trying to pick shows that will have a broad appeal and therefore generate high ratings. That, in turn, is attracting a growing roster of A-list talent to Netflix, Amazon and other subscription services, drawn by the opportunity to break out of the creative constraints of ratings-driven television. Read More »

What Broadcasters Are Talking About When They Talk About Netflix ‘Ratings’

The chattering and sniping touched off by NBCUniversal research head Alan Wurtzel’s release of purported ratings data for Netflix last week during the Television Critics Association winter meeting, taken from network-backed Symphony, is still going strong.

After blasting the numbers released by Wurtzel as “remarkably innaccurate,” Netflix piled it on in its Q4 letter to shareholders this week:

The growth of Netflix has created some anxiety among TV networks and calls to be fearful. Or, at the other extreme, an NBC executive recently said Internet TV is overblown and that linear TV is “TV like God intended” [sic]. Our investors are not as sure of God’s house-of-cardsintentions for TV, and instead think that Internet TV is a fundamentally better entertainment experience that will gain share for many years. The challenge for traditional media companies, most of whom see the future pretty clearly, is to use the revenue from Netflix and other SVOD services to fund both great content and their own evolution into Internet TV networks. Seeso, BBC iPlayer, Hulu, CanalPlay, HBO Now, and CBS All Access are the beginnings of these efforts.

Our titles are watched on the go and at home on a wide range of devices, making measurement of the viewing of any given title difficult for third parties. We don’t release title‐level ratings as our business model is not dependent on advertising or affiliate fees. Instead, we release “ratings “ for Netflix as a whole every quarter with our membership growth report (75 million and counting!). It is member viewing and satisfaction that propels our growth.

It’s that bit about Netflix not being dependent “on advertising or affiliate fees” that is at the core of the controversy. Read More »

Netflix Is A Ratings Winner

NBCUniversal president of research and media development Alan Wurtzel got a bit cheeky with Netflix this week, leaking some preliminary data from Symphony, the network-backed rating system (still in beta) that uses audio-recognition technology to measure viewership of unrated OTT channels like Netflix.

According to Wurtzel, Symphony measured the average audience in the 18-49 demo for each episode of Netflix original series within 35 days of their debut on the service between September and December, and over that time Netflix’s most-watched show was “Jessica Jones,” which averaged piper-orange-is-the-new-black4.8 million viewers per episode. “Master of None” was second, with an average audience of 3.9 million, while “Narcos” pulled in 3.2 million per episode. “Orange is the New Black” remains Netflix’s most-watched series, according to Wurtzel, but the current season was released in June and most of the viewing happened during the summer. During the period covered by the study, OITNB averaged 644,00 viewers per episode.

In comparison, the most watched scripted series in the 18-49 demo on linear TV channels during the 2014-2015 TV season, in the live-plus 7-day window, AMC’s “The Walking Dead” averaged 13.2 million viewers per week, followed by Fox’s “Empire” at 9.0 million and CBS’ “Big Bang Theory” at 8.3 million. Read More »

Zero Tolerance

As the FCC awaits the fate of its open internet order (a.k.a. net neutrality) in the D.C. Circuit Court of Appeals, language that could have mooted much of the legal case by limiting the commission’s authority to regulate internet access was stripped at the last minute from the 2000-page omnibus spending bill unveiled by congressional leaders Tuesday night to keep the government running into 2016.

The removal of the rider was a blow to ISPs, which had lobbied to keep the language in the spending bill, but net neutrality advocates have found plenty of other things to complain about lately regarding the behavior of ISPs. Top of the charts: the growing number of streaming services ISPs are selectively exempting from data caps.

FCC_buildingIn just the past three months:

  • T-Mobile introduced its Binge On plan, which allows mobile users to stream video from roughly two-dozen “partner” services, including Netflix, HBO Now, Sling TV, MLB.tv, Showtime and Starz, without those bits counting against a subscriber’s data cap;
  • Comcast launched Stream TV in a handful of markets, a live and on-demand streaming service that, unlike Netflix, for instance will not count against Comcast subscribers’ data caps where those are in place (as no doubt they soon will be everywhere);
  • Verizon launched Go90, its in-house streaming service for which data usage is “sponsored” by advertisers and therefore isn’t counted toward the user’s data cap;
  • AT&T hinted broadly that it, too, will launch a mobile streaming service that, like Verizon’s Go90, would be “sponsored” by someone other than the user.

Read More »

Amazon’s On-Demand MVPD

At a congressional oversight hearing last month, FCC chairman Tom Wheeler indicated that his earlier proposal to classify certain over-the-top video services as “multichannel video programming distributors” (MVPDs), a regulatory term of art that applies to cable and satellite providers, was on more or less indefinite hold.

“The purpose of rulemaking is to learn,” Wheeler told the committee. “We learned that [a] vast number of things are developing very rapidly, and we have not moved forward on that notice of proposed rulemaking and don’t see, until situations change, we would.”

Among those “vast number of things,” no doubt, were Amazon’s confidential plans to bundle third-party OTT services in with Amazon Prime, monitor_globeallowing Prime Instant Video users to put together a package of OTT channels through a single subscription. As first reported by BloombergBusiness, Amazon Prime customers “will have the option of adding other online subscriptions to their accounts, including major, well-known movie and TV channels, and Amazon will also sell prepackaged bundles of its own creation…[T]he new feature may go live as soon as next month.”

The offering would “resemble something between a cable-TV subscription, though without live programming, and the online array of video offered through devices from Roku Inc., Apple TV or Amazon’s own Fire TV,” according to Bloomberg. Read More »