Archive for March, 2010

Several canaries in several coal mines:

1.  In a filing in the FCC’s net neutrality proceeding, Netflix notes the “growing concern that [cable companies] will use their control over programming networks to stifle competition, including the growing competition from online video providers like Neflix” and urges the Commission to take a broad view of discrimination:

There is substantial discrimination and consumer harm if a network operator uses its ownership affiliation with a program content provider, or even its bulk buying leverage with a video content provider, to deny attractive programming to a competing online service.

2.  After today, “The Daily Show” and “The Colbert Report” (owned by Viacom) will no longer be available via Hulu.com, which is 1/3 owned by NBCU.  Six companies (Disney, TW, News Corp., Viacom, CBS, and NBCU) control more than 80% of viewing hours in the US.  These companies have the power to yank all must-see video from online sites and put it behind pay walls.

3.  Comcast’s 2009 10-K (available here via Businessweek) notes at p.69 that about 57% of the company’s cable services revenue comes from video content (including regional sports networks), compared to about 23% from high-speed Internet access – and just about 4% for advertising.

4.  According to Broadcasting & Cable (here), if the deal goes forward as planned Comcast’s advertising revenue will jump to 23% of its overall take.  Comcast is very excited about the possibilities for cross-platform advertising – its ability to provide a one-stop shopping place for advertisers who want to reach, say, all affluent women in their 40s who redecorate their homes.

5.  As Steve Burke of Comcast said at a recent conference, “Now more than ever, content and distribution put together can really change everything as long as you’re willing to lean forward.”  He’s talking about the possibilities of addressable advertising.  (Recent post about this here.) Indeed, he suggested at the same conference that the NBCU merger was “a bet that the advertising business wil remain robust.”

6.  If any of the six content giants combine with any of the four major network providers, the resulting vertically-integrated monoliths won’t be interested in supporting online video that isn’t behind a pay-TV wall.  (See the scrap over the Olympics and Sen. Kohl’s questioning.)  Why?

Maybe these are two reasons:  First, the advertising possibilities are so much greater if the resulting monolith can target ads based on everything they know about the user.  Demographic information based on network-provider information, video viewing information, response to ads – all of this added together makes for a powerful targeting arsenal that will be attractive to advertisers.

Second, moving the cable model online (moving sports and other must-have programming behind online pay walls and tying access to this online content to a cable subscription) makes it more difficult for regulators to bust up exclusive deals, potentially avoids regulatory schemes to which traditional cable systems are subject (like must-carry, retransmission consent, program access, and program carriage), makes it easier to destroy local cable competition, makes it easier to discriminate less visibly, and is generally extremely difficult to unwind once it starts happening.

This isn’t good for independent programmers.  Nor is it likely to be good for the American consumer.

Comcast sells a lot of expensive video services (including those all-important sports channels) to Americans.  How about this performance in a recessionary time:

Our average monthly total revenue per video customer increased to approximately $118 in 2009 from approximately $111 in 2008 and approximately $102 in 2007.

That’s a lot.  Will the merger bring these figures down?

I was at the airport this morning on the way back to Ann Arbor after spring break.  CNN was on above our heads, broadcasting the President’s speech at Arcadia University.  Here’s the amazing thing:  most of the people around me were watching attentively.  They paused over their pizza.  They put their Blackberries down.  Some of the passengers even stood up and moved closer to crane upwards at the screen.  The speech was a community event in the town of La Guardia.

The speech carried me back to Election Night and to the reasons why so many people support President Obama:  he is determined, smart, and straightforward.  He knows there’s bad press about his “message” over the past year.  He’s fighting back, almost lunging for our better angels, using all the powers he can summon to reach and convince everyone within range of his voice.

I believed today, listening to him, that his message was authentic:

[W]hen you’re in Washington, folks respond to every issue, every decision, every debate, no matter how important it is, with the same question: What does this mean for the next election? (Laughter.) What does it mean for your poll numbers? Is this good for the Democrats or good for the Republicans?

And on health care:

Now, since we took this issue on a year ago, there have been plenty of folks in Washington who’ve said that the politics is just too hard. They’ve warned us we may not win. They’ve argued now is not the time for reform. It’s going to hurt your poll numbers. How is it going to affect Democrats in November? Don’t do it now.

My question to them is: When is the right time? (Applause.) If not now, when? If not us, who?

Fear of rocking the boat may lead to the boat actually drifting backwards, in irons, sails flapping uselessly.  There is so much fear in DC.  But – “If not now, when?  If not us, who?”

Essentially, my proposal would change three things about the current health care system. Listen up.

Our current President is a teacher.  That’s a good thing.  He’s commanding attention, and he has fully internalized the details of what he wants to do.

This was my favorite part, the part that made me fully remember what it was like at the beginning:

“So let me remind everybody: Those of us in public office were not sent to Washington to do what’s easy. We weren’t sent there because of the big fancy title. We weren’t sent there to — because of a big fancy office. We weren’t sent there just so everybody can say how wonderful we are. We were sent there to do what was hard. (Applause.) We were sent there to take on the tough issues. We were sent there to solve the big challenges. And that’s why we’re there. (Applause.)”

President Obama reminded us today that “We just had an election.”  It’s not time to worry about the next one.  It’s time to do what is hard.

I’ve been talking to lots of people for the last three days, and that’s gotten in the way of completing the blog post I started on Monday.  But on the internet, who knows what time it is?

Here’s the rest of the story.

Back during the Bush(2)-era FCC, the Commission agreed with the cable industry that cable modem Internet access wasn’t a basic “telecommunications” service because pure transport hadn’t been sold separately by them.  By integrating transport with other services (like hosting and caching), the cable industry had deregulated itself.

Then the Supreme Court deferred to the Commission’s classification of cable modem services in 2005 (Brand X).  Justice Scalia characterized the Commission’s argument for deregulation as “[W]hat the Commission hath given, the Commission may well take away – unless it doesn’t.”

Right after the Brand X decision came down, the Commission announced that it was deregulating DSL access to the internet as well.

For both of these steps, the Commission decided to place internet access under what it called its “Title I” ancillary jurisdiction.  It could have decided not to apply some elements of Title II common carrier jurisdiction instead (“forbearance”), but it didn’t take that path.

These decisions left the providers of high-speed internet access free to discriminate in any way they chose.

Around the same time, there was further consolidation in the telephone services market.  SBC merged with AT&T and took the AT&T name; Verizon merged with MCI.

Internet access, meanwhile, continued to replace telephone as Americans’ general-purpose communications network.

When Comcast in the fall of 2007 started throttling BitTorrent, the Commission declared that this amounted to unreasonable network management.  It said that its authority to issue this kind of declaration came from its ancillary Title I jurisdiction.  Now the DC Circuit has signaled that it is likely to find that the Commission didn’t have the authority it claimed under Title I to say anything about what Comcast had done.

This signal has caused a good deal of consternation in many quarters.  Now what?  Where does the FCC’s authority to say anything about the basic transmission of Internet communications come from?  If the FCC lacks this authority, can it say anything about universal service obligations shifting to support high-speed internet access, or anything else having to do with transmission?

That’s where we are today.  The FCC could re-classify high-speed Internet access as a Title II service.  There is no longer a nondiscriminatory basic network to which Internet access attaches – this basic assumption behind the earlier classification decision has disappeared.  Internet access itself is the basic network.  And internet access is no longer inextricably intertwined with other services, like email, hosting, or domain name lookup services – this second assumption behind the earlier classification has also disappeared.

The incumbents suggest that such a reclassification would necessarily affect all of the online services that use transmission – like nytimes.com, or eBay, or Google.  Responses to the incumbents’ letter say that the FCC could instead leave online services in the “enhanced” nonregulated bucket while being clear that transmission via a general purpose, interactive network is different.  And “forbearance” is an available route to avoid imposition of unnecessary regulation on the transmission layer under Title II.

Last week’s letter to the FCC from the network provider industry has a lot of people talking.

For lots of reasons, the US government for a hundred years required basic general-purpose interactive networks – you can lable them “telephone” and “telegraph” – not to discriminate.  There’s also been a requirement to interconnect with other networks.

Over the last forty years or so, the US government also made strenuous efforts to require those basic general-purpose interactive networks to be subject to competition.  The government removed barriers the network-owners had created to both non-network-owner equipment (modems, handsets) and non-network-owner transport facilities (microwave networks).  Indeed, the US government went pretty far, breaking up the AT&T monopoly in 1984 and passing the 1996 Act to introduce and support competition.  We had the idea that competitive access to natural-monopoly communications networks could catalyze entry, investment, and innovation. And so the 1996 Act required incumbent local telephone companies to make their lines into peoples’ homes and businesses available to their competitors, to unbundle their services and sell elements separately to competitors, and to allow competitors to co-locate their equipment in the offices of the incumbents.

And, again, we assumed that basic general-purpose communications networks would be subject to nondiscrimination and interconnection obligations.  We eventually allowed providers of general-purpose communications networks into the business of providing “enhanced” services (sometimes now called “information” services, but that’s inside baseball), but only if basic services continued to be provided separately in a nondiscriminatory fashion.

When the commercial Internet took off in the mid/late-1990s, the government wanted to shield the new Internet access providers that were being dialed into by subscribers from heavy universal service charges.  (At that point, Internet access providers were businesses that were separate from the network providers.  They were taking advantage of the carriers’ nondiscrimination and interconnection obligations in order to provide connections to the Internet.)

To protect these Internet access providers from having to pay into the universal service fund, the FCC decided that Internet access was an enhanced, not basic, service.  This determination was based on two assumptions:  (1) that there would continue to be basic service providers that would be providing pure transport to customers, and (2) that ISPs would be providing other services like mail servers, hosting web pages, and operating caches.

At the time the 1996 Act was passed, telephone companies were treated like providers of basic general-purpose networks – common carriers. When they started providing high-speed DSL access to the Internet over their own copper lines (using electronics to enhance the speed of communications), they were still treated like common carriers and required to unbundle this high-speed service for sale to competitors who wanted to resell it.

By contrast, the FCC had never regulated cable operators like common carriers. Instead, they were subject to a very light-touch regulatory regime – they were viewed essentially as entertainment broadcasters who were not broadcasting using public airwaves and thus were not subject to the full range of broadcaster “public trustee” obligations.  Cable system operators (initially) were also not providers of general-purpose two-way communications networks and thus were not subject to common carriage non-discrimination requirements drawn from telegraphy and telephony.

When cable operators got into the business of providing Internet access via cable modems, these regulatory wires (or traditions) crossed. The FCC was initially unwilling to say how this service would be treated as a regulatory matter. From the “level playing field” perspective, what cable operators were doing was exactly like what DSL providers were doing: providing physical transport for high-speed connections to the Internet over the “last mile” between their offices and the user’s home or business. This perspective would argue for treating cable operators just like telephone companies with respect to their Internet access function.

But the FCC decided in 2002 that because telephone companies had been required to offer pure transmission (general-purpose, basic transport) historically, they were telecommunications (basic) providers even when what they were selling was DSL access to the Internet. But because cable operators had never been subject to the pure transmission requirement, they could avoid regulation by continuing to refuse to provide pure transmission services – effectively deregulating themselves.  Cable got treated differently as a result.

Make sense?  We’re not even halfway through this story.  More tomorrow.