Results tagged “program access”

May 19, 2015 12:33 PM

Who Profits from Keeping Your Favorite Content Off the Internet?

In the last post, we discussed how the broad new regulatory framework that the FCC's Net Neutrality/Broadband Reclassification Order imposes on ISPs is predicated on a few, demonstrably erroneous, presumptions about the incentives of broadband ISPs.  Contrary to the FCC's assumptions, the evidence demonstrates that broadband ISPs have a powerful economic incentive to efficiently increase output of their most profitable product--broadband Internet access.   

But, incentives--and their impact on how consumers receive content today, vs how consumers would like to receive that same content--could use some further fleshing out.  After all, if someone didn't have an incentive to keep your favorite content off the Internet--you wouldn't be paying the same company two fat bills--for TV and broadband Internet--every month, would you?

Internet Consumers Love Content, and ISPs [Don't] Love to Sell It

While consumers love the high quality content that broadband providers offer through their MVPD service, TV distribution is not a profitable service for many broadband ISPs and is not the most profitable service for any broadband ISP.  See, e.g., this recent AP article, citing SNL Kagan figures, that cable companies earn 60% cash flow margins on broadband service vs. 17% on video service.   

But, even though most wireline ISPs would rather not be in the pay-TV business, there is a strong correlation between consumers that purchase pay-TV service and those that purchase broadband Internet service.  In the AP article cited above, Comcast says that about 70% of its video customers also purchase broadband Internet service.  For non-incumbent cable companies, the correlation may be much higher.  See, e.g., Randall Stephenson, Statement to House Judiciary Committee, June 24 2014, at 3 (More than 97% of AT&T's video customers also purchase another AT&T service.)  The fact is that broadband ISPs believe they must offer pay-TV service in order to compete for the best broadband Internet customers. 

Big Content Loves Consumers' $$ . . . Just Not Consumers

As noted in the last post, the big content companies do not seem to be as responsive to consumer demand as broadband ISPs.  In fact, companies like CBS, Comcast, Disney, Fox, Time Warner, Viacom, and various cable/satellite-owned regional sports networks generally don't make their "linear" (sports, news, and primetime) programming available online at any price, unless the customer is also a TV subscriber.  

And, it's not cheap to be a TV subscriber.  In its most recent Video Competition Report the FCC notes that, in 2012-2013, the price of the most popular tier of channels increased at a rate 3x the rate of inflation for the same year. 16th Annual Video Competition Report, table 5.  (5.1% vs. 1.7% inflation)  Comcast recently disclosed that its programming costs increased by almost 7.8% in the past year--almost 10x the inflation rate!  According to Nielsen, consumers now purchase an average of 189 channels per month, but watch only 17.

The FCC [Still] Doesn't Understand that Incentives = Profit

It's clear that, despite the evidence, the FCC still believes that, for most ISPs, it's more profitable to distribute programming for "Big Content" than it is to produce and deliver their own broadband Internet access service.  That's the only explanation for why Chairman Wheeler would offer this counsel to ISP/MVPDs at NCTA's recent INTX show:  

History proves that absent competition a predominant position in the market such as yours creates economic incentives to use that market power to protect your traditional business in a way that is ultimately harmful to consumers. . . . Your challenge will be to overcome the temptation to use your predominant position in broadband to protect your traditional cable business.
Remarks of Chairman Tom Wheeler, NCTA-INTX 2015, (as prepared) at 6. 

Chairman Wheeler points out that MVPD's spent $26 billion on programming in 2013, but he doesn't mention that as this number grows, MVPD profit declines.  Wheeler Speech at 3.  According to data relied on by the FCC, programming costs (as a percentage of revenue) were the highest in 2013 that this expense had ever been. 16th Annual Video Competition Report, at ΒΆ 89.   Meanwhile, also in 2013, the same companies invested even more in the means of production for broadband Internet service ($28 billion (according to U.S. Telecom data) vs. >$26 billion (which includes non-ISP DBS firms' spending on content).

If Profit = Incentive, Who Profits from Keeping Content Off the Internet?

Chairman Wheeler is correct in his (implicit) premise--that the parties that benefit most from the status quo do not tend to willingly embrace disruption of the status quo.  But, the Chairman is mistaken about who benefits from maintaining the inefficient, and artificial, separation of the function of content delivery into the "MVPD" business and the "broadband Internet."  If the FCC ever thought to ask itself why these two businesses were still separate businesses at all, the Commission might want to "follow the money."

Profit Margins ISPs v Big Content3.jpgThe table above compares profit margins (income/sales) of the largest ISPs and the largest providers of MVPD content over the past 4 years.  Looking at the relative profitability of content distribution, versus broadband Internet/MVPD--and recognizing, as noted earlier, that the ISPs would be more profitable without their MVPD businesses--then there's really no question that the group which benefits most from the "traditional cable business" is not the ISPs/MVPDs, but rather, Big Content.  

But, even though Chairman Wheeler's assumptions about ISP's incentives are mistaken, he correctly observes that,

      The Internet will disrupt your existing business model. It does that to everyone.

Wheeler Speech at 6.  But, if you're a big content guy, at least he wasn't talking to you--you still get to distribute your content through the free-from-Internet-competition biosphere of the federally regulated MVPD model.  It could be worse, look at Netflix's profit margins . . .
Netflix Profit Margins 3.jpg
The graph above was part of a Seeking Alpha article by Amit Ghate.  Of course, the Big Content companies would probably expect to earn much better profit margins than Netflix, because they have more--and better--content.  But, still, how much better? 

Until now, the Big Content companies have been lucky that the FCC thinks their content needs to be protected from the ISPs.  At some point, though, its always possible that the FCC--or Congress--could start questioning whether parts of the existing pay-TV regulatory scheme are insulating content from the disruptive forces of the Internet.  If I was a content company, though, I would only get worried when they stop inviting me to secret meetings about MVPD mergers. 




November 27, 2009 8:52 PM

Net Neutrality: Down the Rabbit Hole (Vertical Integration Ignored)

"In another moment down went Alice after it, never once considering how in the world she was to get out again.
 
The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down what seemed to be a very deep well.

Either the well was very deep, or she fell very slowly, for she had plenty of time as she went down to look about her, and to wonder what was going to happen next. First, she tried to look down and make out what she was coming to, but it was too dark to see anything . . .

'Well!' thought Alice to herself 'After such a fall as this, I shall think nothing of tumbling down-stairs! How brave they'll all think me at home! Why, I wouldn't say anything about it, even if I fell off the top of the house!' (which was very likely true.)
"

In keeping with our Adventures in Wonderland approach to the Net Neutrality NPRM, it only seemed appropriate to keep the long quote from Down the Rabbit Hole (Chapter 1) intact--especially when discussing vertical integration.  As noted in the last post, we'll look at real harms caused by vertical integration in one market--and not addressed by the Commission--and compare these circumstances to the empty theories posited in the NPRM.

You see, so many of the potential "threats" to the public that are postulated in the world of Internet commerce are only speculative in the NPRM . . . BUT . . . the Commission is in possession of a great deal of "data driven" information on the harms to consumer welfare resulting from unhealthy vertical integration.  Where?  Why in the only communications market where prices have been escalating in both real and nominal terms since Congress passed the Telecommunications Act of 1996--the market for subscription TV services.  This is a market characterized by unchecked price hikes resulting from a lack of competition in the programming and distribution markets.  We've been over the Commission's data before, and don't need to repeat it in this post.

Suffice it to say, though, that the Commission could look back on their previous failure to pursue a "data-driven" pro-consumer approach to much steeper prices caused by vertical integration in a real industry subject to the FCC's regulation, and (rather than sound the alarm about consumer welfare concerns related to vertical integration in any Internet-related market)--like Alice--say "[a]fter such a fall as this, I shall think nothing of tumbling down stairs!"  Later on, I'll put on my Nostradamus hat and predict--but with much more specificity--why the first problem, the real, data-driven, harms to consumers in the subscription TV business--may well continue to go unaddressed, as the Commission thinks nothing of "tumbling down the stairs" of imagined vertical integration in the Internet ecosystem.

Not to beat a dead horse, but take a look at the "data-driven" chart in the post addressing the consumer harms of vertical integration ignored in the subscription television market. There is considerable concentration in both the cable programming, and cable distribution markets.  These facts have been documented in this blog in multiple posts (look at the tag cloud under "high subscription TV prices."  Moreover, according to some of the same parties supporting the Net Neutrality NPRM, this concentration is only increasing with the recently proposed Comcast-NBC merger. Comcast is already the largest single owner of cable television programming, and, unlike Internet backbone services, there does seem to be some scarcity/exclusionary value in vertical integration through ownership of cable programming, rather than simply purchasing it through contract.

Continue reading Net Neutrality: Down the Rabbit Hole (Vertical Integration Ignored)
March 26, 2009 8:02 PM

How Content Integration Has Produced Consumer Welfare Disintegration . . . or How Come Prices Keep Going Up Even with Telco Video Entry?

OK, yesterday's post was all about the relatively-recent propagation of companies with applications, features, or hardware designed to allow the consumer to bypass traditional subscription TV.  Why the effort?  Do I have to throw out the purported Willie Sutton quote? Of course, because--at least to many entrepreneurs and large businesses--this is where the money is.  But why is the money here?  In yesterday's post, I referred to an unsustainable program/programmer-distribution "price spiral."  What I was referring to was the "clubby" kind of way in which large programmers, and large distributors of subscription programming (sometimes the same firms), have reinforced a certain mutually-beneficial co-dependence to the detriment of the consumer.  It's gotten to the point that even new entry--by a Verizon, an AT&T, or other competitor--doesn't reduce prices as much as you'd think.  Why?  Because the programming is so darned expensive!  Why?  Because that's the way the status quo wants it!

The anti-consumer symbiosis goes something like this:  programmers insist on price increases--either outright, or through tying more popular to less popular channels.  This happens on both the "programmer-to-distributor" level (distributor has to take ESPN Classic if it wants ESPN), and on the "distributor-to-consumer" level (MSOs agree to put each other's programming into "expanded basic tier" regardless of its popularity).  Content distributors, led by the regionally-dominant cable MSOs, have been only too happy to oblige with their own price increases, either by reducing the number of channels available on the "basic" tier, or simply by eliminating the basic tier altogether.  No doubt, large programmers and distributors would be happy to continue this happy state of economic hegemony indefinitely. 

Consumers, on the other hand, have not been so happy.  The benefits to the large content providers extend beyond the immediate benefits of higher prices (which are always appreciated), but also have the effect of foreclosing other content competitors, because these same companies--by requiring distributors to carry both the "regular" digital versions of their channels AND the high definition versions, can use the same content to take up at least twice as much bandwidth on the distribution networks.  Thus, large programmers protect themselves from competition from small, independent, programming by effectively "crowding out" valuable bandwidth "shelf space."  This is yet another reason why the firms mentioned yesterday are trying so hard to bypass subscription TV, and deliver video content over the Internet.

For a really enlightening dialogue on the issue of Internet-distributed television/video content, it's really worth it to take a look at the dialogue between Avner Ronen, Boxee CEO, Mark Cuban of HDNet, a subscription TV channel. 


Continue reading How Content Integration Has Produced Consumer Welfare Disintegration . . . or How Come Prices Keep Going Up Even with Telco Video Entry?