Results tagged “online video”

May 11, 2015 11:25 AM

Does the FCC Understand ISP Incentives?

In its recent Net Neutrality/Broadband Reclassification Order, the FCC justifies the need for the Order's pervasive regulations in essentially one statement, "broadband providers (including mobile broadband providers) have the economic incentives and technical ability to engage in practices that . . . harm[] other network providers, edge providers, and end users."  Order ¶ 78.  The Commission's discussion of the ISPs' incentives/ability to harm consumers and other market participants is almost as conclusory.

The FCC appeared focused on a result that required it to presume an uncompetitive broadband market.  Supporting its premise, the FCC relies on citations from its 2010 Order, and some gerrymandered market shares, in which it defines "markets" by arbitrary selections of speed vs. consumer demand substitution.  See, e.g., Order, n. 134.  By ignoring broadband market performance, the Commission not only failed to understand that ISPs were unlikely to be the problem, but the FCC also missed a chance to conduct a more circumspect analysis of whether consumers could truly access the content of their choice online.

The FCC Didn't Consider Broadband Market Performance

The FCC states that, "[b]roadband providers may seek to gain economic advantages by favoring their own or affiliated content over other third-party sources." Order ¶ 82.  The Commission offers less than a handful of specific examples ISPs "act[ing] to harm the open Internet." Order, n. 123.  

Only in the Madison River example, was the ISP clearly seeking to favor its own service (long distance voice termination).  It is worth noting, though, that the reason Madison River had an incentive to favor its circuit switched voice was because--as a rural ILEC--the FCC set Madison River's rates well in excess of cost; so its incentive was created by one FCC regulation and then preempted by another (later) FCC regulation.  

Nonetheless, the best indicator of a market is performing competitively is whether it is responding to consumer demand by adding capacity, or whether it simply raises prices and takes more profits.  Broadband speeds have consistently moved higher, actually following  the Moore's Law trajectory.  And, the Commission notes, broadband capital investment reached levels in 2013 that had previously only been seen during the telecom bubble.  Order ¶ 2.  Moreover, connected devices, bandwidth speeds, and user adoption of streaming services has soared.  Order ¶ 9.    

The FCC Didn't Consider the Evidence on ISP Incentives

The Commission recognizes that, "the growth of online streaming video services has spurred further evolution of the Internet."  Order at ¶ 9.  But, untethered by evidence to the contrary, the FCC leaps to the [wrong] conclusion that, "these video services directly confront the video businesses of the very companies that supply them broadband access to their customers." Id.

Almost a year ago, AT&T Chairman Randall Stephenson, explained why this theory didn't make sense for most ISPs.  In his prepared testimony for the House and Senate Judiciary Committees about the AT&T's proposed acquisition of DirecTV, Stephenson states its motivation to acquire DirecTV is about trying to earn any profit on TV,

Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer's call. As a result, our video product is, on its own, unprofitable.  
Statement of Randall Stephenson, CEO and President, AT&T Inc., before the House Judiciary Committee, June 24th 2014 at p. 3 (emphasis added).  Thus, the FCC's theory--that ISPs have an incentive to prevent consumers from accessing video content online, because the ISP would prefer to sell them the same content at a loss to the ISP--is simply untenable.

Even if the ISP does earn a profit on video, it would still not have any incentive to discourage their broadband customers from accessing online video content, unless it earns a greater profit from its  video service than from its broadband service.  This is not the case for Comcast, whose broadband revenues and company profits continue to boom, despite continued losses of video subscribers.     

So, if the FCC's theory doesn't even make sense for the Prince of Darkness, then ISPs are unlikely to be the problem.  But, why don't consumers have access to more content over the Internet?

Traditional Linear Content Owners Don't Have the Same Incentives As ISPs

Even though the three largest streaming video providers (Amazon, Hulu, and Netflix) have expanded their content through original programming, and consumers have embraced online streaming video, the fact is that consumers still don't have access to that many more online programming choices than they did in 2010.  If you compare the most popular streaming sites in 2011, with what's available today, the only significant new entrants are Sling TV and HBO Now.  Unfortunately, cord-cutting is more of a media headline than a consumer phenomenon.

At times, the FCC has seemed to (sort of) recognize the problem. A little over a year ago, Chairman Wheeler was telling broadcasters that he was looking out for them with strong net neutrality protections, and that they should embrace Internet distribution of their programming.  Except for the few broadcast channels that are part of the Sling TV package, the Chairman's speech fell on deaf ears.  Chairman Wheeler didn't seem to appreciate that--because the FCC ensures the broadcasters fat margins on retransmission fees (much like Madison River's terminating access margins)--they have no incentive to expand output!  

Similarly, Chairman Wheeler understood that the linear content market had failed last summer, when he asked the CEO of TWC to resolve disputes between TWC's regional sports network (RSN), which carries the Los Angeles Dodgers, and other MVPDs serving the Dodger's home television market.  Because of pricing disputes, when Chairman Wheeler wrote to TWC, a large majority of Dodgers' fans--4 months into the 2014 baseball season--could still not watch the team on TV.

Chairman Wheeler probably thought he understood TWC's incentives pretty well--the company had a merger with Comcast pending before the Commission--when he asked TWC to respond in a competitive manner to consumer demand.  But, RSNs have powerful economic incentives to restrict output.  Thus, Chairman Wheeler was, again, mistaken about incentives.  TWC's merger with Comcast has come and gone, but 70% of the Los Angeles viewing market still cannot watch the Dodgers on TV or online.   
 
A Question of Incentives

As of Friday, Chairman Wheeler was [still] telling cable ISPs they should "overcome their temptations" to favor their TV businesses over their broadband Internet services.   Meanwhile, in an L.A. Times article yesterday, broadcast programmers candidly noted that, despite using public spectrum to distribute their content, they plan to favor even more of their own content over third party sources.  Perhaps the Chairman was talking to the wrong group?    

By now, you probably understand that I think the FCC would have been wise to spend some time thinking about whether the industries it regulates have incentives that are aligned with consumer welfare.  Had the FCC thought about it, they probably didn't need to impose such pervasive regulations on ISPs.  Likewise, if the FCC's rules are distorting the incentives of traditional TV programmers, then the FCC should eliminate these rules, also. 

On the other hand, what if traditional linear programmers simply like their FCC incentives more than those of the competitive broadband Internet, and are simply in "harvest" mode (restricting output/raising prices in the face of a slow decline in demand)?  Broadcasters aren't (usually) ISPs, so who will police them? 

Certainly not the FCC.  But, to be fair, neither have the DoJ or the FTC looked into the matter.  However, some parties are looking out for consumers . . . and the answer may surprise you.  We'll discuss further in the next post. 






 

May 23, 2014 11:24 AM

The Difference between AT&T/DirecTV and Comcast/TWC

After Sunday's announcement that AT&T had entered into an agreement to purchase DirecTV, many parties have rushed to talk about the "media consolidation trend."  The usual suspects have expressed their opposition or express their "skepticism."   Others have applied an equally superficial analysis to come to the opposite conclusion.   

In order to appreciate how the Comcast/TWC merger is different from AT&T/DTV, you have to understand what the two mergers have in common.  One, not-so-obvious thing the two transactions have in common is that one party in each transaction--Comcast and DirecTV--is a co-defendant in major consumer antitrust litigation over the foreclosure of sports programming over the Internet to broadband-only consumers.

These cases are significant, because they should have a direct effect on the outcome of the Comcast-TWC merger, but will, most likely, not affect the AT&T/DTV merger.  It should be noted that these cases have survived a motion to dismiss (opinion), under the heightened Twombly scrutiny requiring antitrust complaints to demonstrate a "plausible" (vs. merely "possible") claim that would establish an antitrust violation, before allowing antitrust plaintiffs to proceed to discovery.  So, we know these cases have some merit.  

Equally noteworthy, these cases are being brought by real consumers (not DC interest groups) in reaction to real behavior in the marketplace; behavior that the DoJ and FCC claimed to be fixed by the Comcast-NBCU merger conditions.  The D.C. interest groups, on the other hand, supported the feckless merger conditions imposed by DoJ and the FCC.  

The Antitrust Litigation

The cases are captioned, Garber v. Office of the Commissioner of Baseball, et al.,  and Laumann v. National Hockey League, et al.  I've mentioned these cases before, here and here.

The plaintiffs are classes of consumers that buy the MLB.TV (or NHL GameCenter Live) online service either by itself or in addition to a subscription TV service.  The defendants in the cases (other than the two named sports leagues) are certain individual teams and some regional sports networks owned by Comcast and DirecTV, and the TV providers themselves.  

The crux of the complaints is that the sports leagues, and integrated RSN/subscription TV companies, allocate markets through what are, essentially, agreements not to compete with one another.  Unlike a typical horizontal territorial allocation scheme, though, these are the result of a series of industry-wide "vertical" distribution agreements with sports leagues and the TV companies' RSNs--the success of the scheme being contingent on identical terms in all agreements.

How the Agreements Work

When the RSN pays all that money for the rights to broadcast all of a team's games, what do they get for their money?

First, the RSN gets the rights to show the games of that team on TV for the home team's "market area".  This means the RSN can set the prices that other subscription TV companies in the home market area have to pay in order to give their viewers access to the games.  This right is exclusive to the RSN for the market area.  Thus, even though when the home team plays away games, the away team also has rights to the game, the contracts are written so that the away team will not sell its broadcasts back into another RSN's "home market."

Second, and most importantly, while the vertically-integrated RSN is technically only buying TV rights, it effectively also gets a promise that the league's online streaming provider (i.e., MLB.TV or NHL GameCenter Live) will refuse to deal--at any price--with broadband-only customers within any teams' home market areas.  (If you want to check for yourself, here's the link to the MLB.TV blackout section.)  Thus, there is some foreclosure value being offered in exchange for the ridiculously high fees being paid by cable RSNs for regional sports rights.

How Does the Antitrust Litigation Affect Analysis of the Two Mergers?

Knowing this important commonality, we can try to understand how the big media mergers will change things.  The Comcast/TWC merger is likely to make things worse for customers and competitors of Time Warner Cable.

According to a study, published last year by Navigant Economics Principals, the "vertical integration premium [the relatively higher fees charged by a vertically-integrated RSN] increases significantly with the local downstream market share of the RSN's affiliated distributor."  The paper isn't available for free, but you can access the presentation to the FCC staff here.  

So, in all likelihood, Comcast's increased share of certain markets (e.g., New York and L.A.) could be expected to lead to increased prices for TV consumers (of any provider) in those former TWC markets. (Comcast will also increase its L.A. market share through its Charter deal.)  Nor would Comcast's accretion of TV market power be likely to change its opposition to the sports leagues making "in market" games available over the Internet.

On the other hand, AT&T's incentives would be expected to change markedly for the better, relative to a standalone DirecTV.  DirecTV, only a few weeks ago, questioned why it would even bother creating and promoting an online video package.  AT&T, though, just last month, AT&T announced its intentions to get behind over the top content in a big way. 

AT&T has different incentives than Comcast with respect to online video, because--according to the Leichtman Research 1st quarter report on broadband additions--AT&T has a much lower share of the market in terms of video-speed broadband than the cable companies.  If you massage the information available from Leichtman (which groups T and VZ together), an overly optimistic approximation (which only includes Comcast and TWC in the denominator) gives AT&T and VZ less than a 40% share of video-speed broadband subscribers.  

AT&T has already announced plans to dramatically expand its very high speed broadband footprint.  AT&T's successful deployment of higher broadband speeds is dependent on consumers having a reason to purchase higher capacity service.  This is why AT&T will want to push--more content online--especially linear content that consumers want.  

By understanding what has kept linear content--specifically, the sports programming that is so important to consumers--off the Internet, it is easy to see why broadband consumers will be better off with AT&T owning DirecTV than they are now.

February 25, 2014 3:04 PM

Netflix, Comcast, and the WWE: Why CDN-ISP Agreements Work

On Sunday, Netflix and Comcast announced that they had reached an agreement to provide better quality traffic delivery for the Netflix customers using Comcast's ISP.  The terms of the agreement have not been disclosed, but many assume that Netflix will be paying Comcast for the additional capacity necessary to ensure better service delivery.

Some have correctly explained that this isn't really news.  See this excellent piece by Dan Rayburn, and this one by Richard Bennett, which is also very good.  Both commenters point out that Netflix was, presumably, paying something to its "CDN" partners, Cogent and Level 3 for the poor performance it was previously receiving, so Netflix was able to improve its position by reaching the direct agreement with Comcast.

Make no mistake, though, it is absolutely normal for content providers (that care about their customers' experience) to pay ISPs for the additional inbound capacity needed to ensure the customer gets good quality service.  However, a few articles (e.g., here, here, and here) suggest that the Netflix-Comcast agreement somehow changes the dynamic of "the Internet."  It does not.

The WWE's Bold Experiment

Yesterday, the WWE launched its online video channel  available through its website.      Most in telecom policy are probably unaware of this launch, because, you know, the content isn't erudite enough.  But, since every article lamenting the Netflix-Comcast announcement also predicts devastating effects on the hypothetical "new entrant" it's worth considering the newest streaming video entrant.

The WWE's online channel is notable for a couple reasons:  1) it's the first time an established, successful provider of live entertainment has offered a subscription service directly to the public that is designed to circumvent subscription TV distribution, and 2) its streaming channel is available in beautiful high definition over practically any/every Internet-connected device.  Everything you would want to know about the new channel is available in this excellent article

How does a new entrant that competes directly with its existing subscription TV partners make sure its customers get a great online experience over those same companies' ISPs?  Well, it certainly helps if the new entrant is a company that offers methyltestosterone  at the coffee machine, just to make the coffee "taste right" to their super macho employees.  

hulkster.jpgBut the real "magic" for the WWE, and tons of other quality video providers, is that they use a company that long ago made quality content delivery their main service--Akamai.  Significantly, Akamai has paid ISPs to place its servers are as close as possible to ISP distribution and they have adequate capacity to the ISP's network access point.  This is why the Olympics, ESPN, the NBA, NHL and MLB also use Akamai for their live, streaming high definition services.  Akamai is a premium CDN (see its customer list).
akamai_logo_color.jpg

Why Netflix Traffic Seems to Make News

Netflix's traffic is always in the spotlight, because the company is so successful at acquiring, and creating, video content that customers want--accounting for more than 30% of peak time downstream, fixed line Internet traffic.  But, Akamai also carries (cumulatively) a lot of high definition, premium traffic, and you never hear complaints from the customers of Akamai customers.

house of cards.jpg


If I had to guess, I would say that Netflix has wisely chosen to spend its limited resources on building quality content, rather than video delivery quality. Why do I say this?  Well, recall that Netflix has its own CDN--called Open Connect.  Netflix also publishes the delivery performance of various ISPs that carry its traffic. The ISP that performed the best in January was Google Fiber.  

Google Fiber is directly interconnected with Netflix. Google Fiber sells no service to its customers slower than 1,000 mbps, yet its Netflix throughput was a relatively meager 3.78 mbps.  No other Open Connect ISP partner even achieved 3 mbps.  Thus, all Netflix customers were paying for much higher speeds from their ISPs than they were getting from Netflix.  

So, the Netflix ISP Speed Index tells you more about Netflix's CDN performance than ISPs' Internet access performance.  In fact, GigaOm recently noted that the best Netflix could say about Open Connect was that it "sucked less" during peak hours for ISP partners than others.

When the minimum necessary speed for even low-level high definition video is at least 4 mbps, it's clear that Netflix has a little ways to go in order to provide higher quality online video delivery.  But, direct interconnect agreements with ISPs--like the Comcast deal--position Netflix with much better control over its service quality than it has today.

Why Content Delivery Services Need to Exist

A lot of media coverage (e.g., here) has mistakenly appropriated any story involving Netflix traffic as a proxy for some kind of meta-online video policy issue with reverberating consequences.  But the ISP is not the "troll on the bridge" and the CDN is not a hapless victim.

The ISP is in the business of providing Internet access from the customer premise to the ISP's point of interconnection with the Internet.  If the ISP was responsible for augmenting ingress capacity from a content provider's backbone to the ISP's point of access every time inbound capacity surged based on an application's popularity, then the ISP would have to involuntarily shoulder the risk of an entirely different business model.

For example, 10 years ago My Space was the dominant social networking site.  Today, it's a relative ghost town.  If the ISP's had born the cost of carrying My Space's swelling downstream demand at the time--by building capacity dedicated to carrying My Space traffic from its backbone provider(s) to the ISP point of access--this would now be stranded, wasted capacity.  These costs would have been absorbed by all of the ISP's customers (including the ones that never even used My Space).  

Netflix is a great service, but it isn't the ISP's service. Moreover, it can be quickly abandoned by the ISP's customers if a better substitute comes along.  The ISP shouldn't have to bear the risk of someone else's Internet business model--especially when there are firms like CDNs that are in the business of accepting risks associated with delivering content to the ISP.