In the US there is a tangle of communications laws that were added over decades by Congress as–one-by-one–broadcast, cable, and satellite technologies transformed the TV marketplace. The primary TV laws are from 1976, 1984, and 1992, though Congress creates minor patches when the marketplace changes and commercial negotiations start to unravel.

Congress, to its great credit, largely has left alone Internet-based TV (namely, IPTV and vMVPDs) which has created a novel “problem”–too much TV. Internet-based TV, however, for years has put stress on the kludge-y legacy legal system we have, particularly the impenetrable mix of communications and copyright laws that regulates broadcast TV distribution.

Internet-based TV does two things–it undermines the current system with regulatory arbitrage but also shows how tons of diverse TV programming can be distributed to millions of households without Congress (and the FCC and the Copyright Office) injecting politics into the TV marketplace.

Locast TV is the latest Internet-based TV distributor to threaten to unravel parts the current system. In July, broadcast programmers sued Locast (its founder, David Goodfriend) and in September, Locast filed its own suit against the broadcast programmers.

Many readers will remember the 2014 Aereo decision from the Supreme Court. Much like Aereo, Locast TV captures free broadcast TV signals in the markets it operates and transmits the programming via the Internet to viewers in that market. That said, Locast isn’t Aereo.

Aereo’s position was that it could relay broadcast signals without paying broadcasters because it wasn’t a “cable company” (a critical category in copyright law). The majority of the Supreme Court disagreed; Aereo closed up shop.

Locast has a different position: it says it can relay broadcast signals without paying because it is a nonprofit.

It’s a plausible argument. Federal copyright law has a carveout allowing “nonprofit organizations” to relay broadcast signals without payment so long as the nonprofit operates “without any purpose of direct or indirect commercial advantage.”

The broadcasters are focusing on this latter provision, that any nonprofit taking advantage of the carveout mustn’t have commercial purpose. David Goodfriend, the Locast founder, is a lawyer and professor who, apparently, sought to abide by the law. However, the broadcasters argue, his past employment and commercial ties to pay-TV companies mean that the nonprofit is operating for commercial advantage.

It’s hard to say how a court will rule. Assuming a court takes up the major issues, judges will have to decide what “indirect commercial advantage” means. That’s a fact-intensive inquiry. The broadcasters will likely search for hot docs or other evidence that Locast is not a “real” nonprofit. Whatever the facts are, Locast’s arbitrage of the existing regulations is one that could be replicated.

Nobody likes the existing legacy TV regulation system: Broadcasters dislike being subject to compulsory licenses; Cable and satellite operators dislike being forced to carry some broadcast TV and to pay for a bizarre “retransmission” right. Copyright holders are largely sidelined in these artificial commercial negotiations. Wholesale reform–so that programming negotiations look more like the free-market world of Netflix and Hulu programming–would mean every party has give up something they like improve the overall system.

The Internet’s effect on traditional providers’ market share has been modest to date, but hopefully Congress will anticipate the changing marketplace before regulatory distortions become intolerable.

Additional reading: Adam Thierer & Brent Skorup, Video Marketplace Regulation: A Primer on the History of Television Regulation and Current Legislative Proposals (2014).

A decade ago, a heated debate raged over the benefits of “a la carte” (or “unbundling”) mandates for cable and satellite TV operators. Regulatory advocates said consumers wanted to buy all TV channels individually to lower costs. The FCC under former Republican Chairman Kevin Martin got close to mandating a la carte regulation.

But the math just didn’t add up. A la carte mandates, many economists noted, would actually cost consumers just as much (or even more) once they repurchased all the individual channels they desired. And it wasn’t clear people really wanted a completely atomized one-by-one content shopping experience anyway.

Throughout media history, bundles of all different sorts had been used across many different sectors (books, newspapers, music, etc.). This was because consumers often enjoyed the benefits of getting a package of diverse content delivered to them in an all-in-one package. Bundling also helped media operators create and sustain a diversity of content using creative cross-subsidization schemes. The traditional newspaper format and business is perhaps the greatest example of media bundling. The classifieds and sports sections helped cross-subsidize hard news (especially local reporting). See this 2008 essay by Jeff Eisenach and me for details for more details on the economics of a la carte.

Yet, with the rise of cable and satellite television, some critics protested the use of bundles for delivering content. Even though it was clear that the incredible diversity of 500+ channels on pay TV was directly attributable to strong channels cross-subsidizing weaker ones, many regulatory advocates said we would be better off without bundles. Moreover, they said, online video markets could show us the path forward in the form of radically atomized content options and cheaper prices.

Flash-forward to today. As this Wall Street Journal article points out, online video providers are rejecting a la carte and recreating content bundles to keep a diversity of programming flowing. This happened in unregulated markets without any FCC rules. YouTube, Hulu, PlayStation, and many other online video providers are creating new bundles and monetization schemes.

It is also worth noting that this same sort of “re-bundling” of content is happening with online news sources and other digital platforms as various sites struggle to find content monetization schemes that can sustain diverse, high-quality content in the Digital Era. Content bundling and various paywall schemes are helping them do so.

The lesson here is that the economics of content creation and delivery are quite dynamic, challenging, and extremely hard to predict. Mandating “a la carte” unbundling of content sounded smart and well-intentioned to many people a decade ago, but it proved to be problematic even in highly competitive online markets. Thankfully, we did not mandate unbundling by law. We waited and watched to see how it naturally played out in various markets. We now have a better feel for how big of a mistake mandatory a la carte would have likely been in practice.

Mobile broadband is a tough business in the US. There are four national carriers–Verizon, AT&T, T-Mobile, and Sprint–but since about 2011, mergers have been contemplated (and attempted, but blocked). Recently, the competition has gotten fiercer.  The higher data buckets and unlimited data plans have been great for consumers.

The FCC’s latest mobile competition report, citing UBS data, says that industry ARPU (basically, monthly revenue per subscriber), which had been pretty stable since 1998, declined significantly from 2013 to 2016 from about $46 to about $36. These revenue pressures seemed to fall hardest on Sprint, who in February, issued $1.5 billion of “junk bonds” to help fund its network investments. Analysts pointed out in 2016 that “Sprint has not reported full-year net profits since 2006.”  Further, mobile TV watching is becoming a bigger business. AT&T and Verizon both plan to offer a TV bundle to their wireless customers this year, and T-Mobile’s purchase of Layer3 indicates an interest in offering a mobile TV service.

It’s these trends that probably pushed T-Mobile and Sprint to announce yesterday their intention to merge. All eyes will be on the DOJ and the FCC as their competition divisions consider whether to approve the merger.

The Core Arguments

Merger opponents’ primary argument is what’s been raised several times since the 2011 AT&T-T-Mobile aborted merger: this “4 to 3” merger significantly raises the prospect of “tacit collusion.” After the merger, the story goes, the 3 remaining mobile carriers won’t work as hard to lower prices or improve services. While outright collusion on prices is illegal, they have a point that tacit collusion is more difficult for regulators to prove, to prevent, and to prosecute.

The counterargument, that T-Mobile and Sprint are already making, is that “mobile” is not a distinct market anymore–technologies and services are converging. Therefore, tacit collusion won’t be feasible because mobile broadband is increasingly competing with landline broadband providers (like Comcast and Charter), and possibly even media companies (like Netflix and Disney). Further, they claim, T-Mobile and Sprint going it alone will each struggle to deploy a capex-intensive 5G network that can compete with AT&T, Verizon, Comcast-NBCU, and the rest, but the merged company will be a formidable competitor in TV and in consumer and enterprise broadband.

Competitive Review

Any prediction about whether the deal will be approved or denied is premature. This is a horizontal merger in a highly-visible industry and it will receive an intense antitrust review. (Rachel Barkow and Peter Huber have an informative 2001 law journal article about telecom mergers at the DOJ and FCC.) The DOJ and FCC will seek years of emails and financial records from Sprint and T-Mobile executives and attempt to ascertain the “real” motivation for the merger and its likely consumer effects.

T-Mobile and Sprint will likely lean on evidence that consumers view (or soon will view) mobile broadband and TV as a substitute for landline broadband and TV. Much like phone and TV went from “local markets with one or two competitors” years ago to a “national market with several competitors,” their story seems to be, broadband is following a similar trajectory and viewing this as a 4 to 3 merger misreads industry trends.

There’s preliminary evidence that mobile broadband will put competitive pressure on conventional, landline broadband. Census surveys indicate that in 2013, 10% of Internet-using households were mobile Internet only (no landline Internet). By 2015, about 20% of households were mobile-only, and the proportion of Internet users who had landline broadband actually fell from 82% to 75%. But this is still preliminary and I haven’t seen economic evidence yet that mobile is putting pricing pressure on landline TV and broadband.

FCC Review

Antitrust review is only one step, however. The FCC transaction review process is typically longer and harder to predict. The FCC has concurrent  authority with the DOJ under the Clayton Act to review telecommunications mergers under Sections 7 and 11 of the Clayton Act but it has never used that authority. Instead, the FCC uses its spectrum transfer review authority as a hook to evaluate mergers using the Communication Act’s (vague) “public interest standard.” Unlike antitrust standards, which generally put the burden on regulators to show consumer and competitive harm, the public interest standard as currently interpreted puts the burden on merging companies to show social and competitive benefits.

Hopefully the FCC will hew to a more rigorous antitrust inquiry and reform the open-ended public interest inquiry. As Chris Koopman and I wrote for the law journal a few years ago, these FCC  “public interest” reviews are sometimes excessively long and advocates use the vague standards to force the FCC into ancillary concerns, like TV programming decisions and “net neutrality” compliance.

Part of the public interest inquiry is a complex “spectrum screen” analysis. Basically, transacting companies can’t have too much “good” spectrum in a single regional market. I doubt the spectrum screen analysis would be dispositive (much of the analysis in the past seemed pretty ad hoc), but I do wonder if it will be an issue since this was a major issue raised in the AT&T-T-Mobile attempted merger.

In any case, that’s where I see the core issues, though we’ll learn much more as the merger reviews commence.

By Brent Skorup and Melody Calkins

Recently, the FCC sought comments for its Media Modernization Initiative in its effort to “eliminate or modify [media] regulations that are outdated, unnecessary, or unduly burdensome.” The regulatory thicket for TV distribution has long encumbered broadcast and cable providers. These rules encourage large, homogeneous cable TV bundles and burden cable and satellite operators with high compliance costs. (See the complex web of TV regulations at the Media Metrics website.)

One reason “skinny bundles” from online video providers and cable operators are attracting consumers is that online video circumvents the FCC’s Rube Goldberg-like system altogether. The FCC should end its 50-year experiment with TV regulation, which, among other things, has raised the cost of TV and degraded the First Amendment rights of media outlets.

The proposal to eliminate legacy media rules garnered a considerable amount of support from a wide range of commenters. In our filed reply comments, we identify four regulatory rules ripe for removal:

• News distortion. This uncodified, under-the-radar rule allows the commission to revoke a broadcasters’ license if the FCC finds that a broadcaster deliberately engages in “news distortion, staging, or slanting.” The rule traces back to the FCC’s longstanding position that it can revoke licenses from broadcast stations if programming is not “in the public interest.”
  Though uncodified and not strictly enforced, the rule was reiterated in the FCC’s 2008 broadcast guidelines. The outline of the rule was laid out in the 1998 case Serafyn v. CBS, involving a complaint by a Ukrainian-American who alleged that the “60 Minutes” news program had unfairly edited interviews to portray Ukrainians as backwards and anti-Semitic. The FCC dismissed the complaint but DC Circuit Court reversed that dismissal and required FCC intervention. (CBS settled and the complaint was dropped before the FCC could intervene.)
  “Slanted” and distorted news can be found in (unregulated) cable news, newspapers, Twitter, and YouTube. The news distortion rule should be repealed and broadcasters should have regulatory parity (and their full First Amendment rights) restored.


• Must-carry. The rule requires cable operators to distribute the programming of local broadcast stations at broadcasters’ request. (Stations carrying relatively low-value broadcast networks seek carriage via must-carry. Stations carrying popular networks like CBS and NBC can negotiate payment from cable operators via “retransmission consent” agreements.) Must-carry was narrowly sustained by the Supreme Court in 1994 against a First Amendment challenge, on the grounds that cable operators had monopoly power in the pay-TV market. Since then, however, cable’s market share shrank from 95% to 53%. Broadcast stations have far more options for distribution, including satellite TV, telco TV, and online distribution and it’s unlikely the rules would survive a First Amendment challenge today.


• Network nonduplication and syndicated exclusivity. These rules limit how and when broadcast programming can be distributed and allow the FCC to intervene if a cable operator breaches a contract with a broadcast station. But the (exempted) distribution of hundreds of non-broadcast channels (e.g., CNN, MTV, ESPN) show that programmers and distributors are fully capable of forming private negotiations without FCC oversight. These rules simply make licensing negotiations more difficult and invite FCC intervention.

Finally, we identify retransmission consent regulations and compulsory licenses for repeal. Because “retrans” interacts with copyright matters outside of the FCC’s jurisdiction, we encourage the FCC work with the Copyright Office in advising Congress to repeal these statutes. Cable operators dislike the retrans framework and broadcasters dislike being compelled to license programming at regulated rates. These interventions simply aren’t needed (hundreds of cable and online-only TV channels operate outside of this framework) and neither the FCC nor the Copyright Office particularly likes being the referees in these fights. The FCC should break the stalemate and approach the Copyright Office about advocating for direct licensing of broadcast TV content.

The FCC appears to be dragging the TV industry, which is increasingly app- and Internet-based, into years of rulemakings, unnecessary standards development and oversight, and drawn-out lawsuits. The FCC hasn’t made a final decision but the general outline is pretty clear. T he FCC wants to use a 20 year-old piece of corporate welfare, calculated to help a now-dead electronics retailer, as authority to regulate today’s TV apps and their licensing terms. Perhaps they’ll succeed in expanding their authority over set top boxes and TV apps. But as TV is being revolutionized by the Internet the legacy providers are trying to stay ahead of the new players (Netflix, Amazon, Layer 3), regulating TV apps and boxes will likely impede the competitive process and distract the FCC from more pressing matters, like spectrum and infrastructure.

In the 1996 Telecom Act, a provision was added about set top boxes sold by cable and satellite companies. In the FCC’s words, Section 629 charges the FCC “to assure the commercial availability of devices that consumers use to access multichannel video programming.”  The law adds that such devices, boxes, and equipment must be from “manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.” In English: Congress wants to ensure that consumers can gain access to TV programming via devices sold by parties other than cable and satellite TV companies.

The FCC’s major effort to effect this this law did not end well. To create a market for “non-affiliated equipment,” the FCC created rules in 1998 that established the CableCARD technology, a module designed to the FCC’s specifications that could be inserted into “nonaffiliated” set top boxes.

CableCARD was developed and released to consumers, but after years of complex lawsuits and technology dead ends, cable technology had advanced and few consumers demanded CableCARD devices. The results reveal the limits of lawmaker-designed “competition.” In 2010, 14 years after passage of the law and all those years of agency resources, fewer than 1% of pay-TV customers had “unaffiliated” set top boxes.

It’s a strangely specific statute with no analogues for other technology devices. Why was this law created? Multichannel News reporting in 1998, representative of other reports at the time, has some clues.

[Rep.] Bliley, whose district includes the headquarters of electronics retailer Circuit City, sponsored the provision that requires the FCC to adopt rules to promote the retail sale of cable set-top boxes and navigation devices. 

So it it was a small addition to the Act, presumably added at the behest of Circuit City, so that electronics retailers and device companies could sell more consumer devices.

The good news is that by the law’s straightforward terms and intent, mission: accomplished. Despite CableCARD’s failure, electronics retailers today are selling devices that give consumers access to TV programming. That’s because, increasingly, TV providers are letting their apps do much of the work that set top boxes do. Today, many consumers can watch TV programming by installing a provider’s streaming TV app on their device of their choice, manufactured and sold by dozens of companies, like Samsung, Apple, and Google, and retailers. Unfortunately, Circuit City shuttered its last stores in 2009 and wasn’t around to benefit.

But the new FCC proposal says, no, mission: not accomplished. There’s some interpretative gymnastics to reach this conclusion. The FCC says “devices” and “equipment” should be interpreted broadly in order to capture apps made by pay-TV providers. Yet, while “devices and equipment” is broad enough to capture software like apps, it is not broad enough to capture actual devices and equipment, like smartphones, smart TVs, tablets, computers, and Chromecasts that consumers use to access pay-TV programming.

This strained reading of statutory language will create a regulatory mess out of the evolving pay-TV industry, that already has labyrinthine regulations.

But if you look at the history of FCC regulation, and TV regulation in particular, it’s pretty unexceptional. Advocates for FCC regulation have long seen a competitive and vibrant TV marketplace as a threat to the agency’s authority.

As former FCC chairman Newton Minow warned in his 1995 book, Abandoned in the Wasteland, the FCC would lose its ability to regulate TV if it didn’t find new justifications:

A television system with hundreds or thousands of channels—especially channels that people pay to watch—not only destroys the notion of channel scarcity upon which the public-trustee theory rests but simultaneously breathes life and logic into the libertarian model.

Minow advocated, therefore, that the FCC needed to find alternative reasons to retain some control of the TV industry, including affordability, social inclusiveness, education of youth, and elimination of violence. Special interests have manufactured a crisis in TV–“monopoly control” [sic] of set top boxes by TV distributors. As Scott Wallsten and others have suggested, bundling a set top box with a TV subscription is likely not a competitive problem and the FCC’s remedies are unlikely to work. 

The FCC’s blinkered view of the TV industry is necessary because the US TV and media marketplace is blossoming. Consumers have never had more access to programming on more devices. More than 100 standalone streaming video-on-demand products launched in 2015 alone. T he major TV providers are going where consumers are and launching their own streaming apps. The market won’t develop perfectly to the Commissioners’ liking and there will be hiccups, but competition is vigorous, output and quality are high, and consumers are benefiting.

The FCC decision to devote its highly-educated agency staff and resources (which will balloon when challenged in court or during the app specification proceedings) to an arcane consumer issue with such cynical origins is a lamentable waste of agency resources.

This an agency that for decades has done a hundred things poorly. In an increasingly competitive telecom and media marketplace, it should instead do a handful of things well. (Commissioner Pai has proposed useful infrastructure reforms and Commissioner Rosenworcel has an interesting proposal, that I’ve written about, to deploy federal spectrum into commercial markets). Let’s hope the agency leadership reassesses the necessity the this proceeding before dragging the TV industry into another wild goose chase.

Related research: This week Mercatus released a paper by MA Economics Fellow Joe Kane and me about the FCC’s reinvention as a social and cultural regulator: “The FCC and Quasi–Common Carriage A Case Study of Agency Survival.”

I came across an article last week in the AV Club that caught my eye. The title is: “The Telecommunications Act of 1996 gave us shitty cell service, expensive cable.” The Telecom Act is the largest update to the regulatory framework set up in the 1934 Communications Act. The basic thrust of the Act was to update the telephone laws because the AT&T long-distance monopoly had been broken up for a decade. The AV Club is not a policy publication but it does feature serious reporting on media. This analysis of the Telecom Act and its effects, however, omits or obfuscates important information about dynamics in media since the 1990s.

The AV Club article offers an illustrative collection of left-of-center critiques of the Telecom Act. Similar to Glass-Steagall  repeal or Citizens United, many on the left are apparently citing the Telecom Act as a kind of shorthand for deregulatory ideology run amuck. And like Glass-Steagall repeal and Citizens United, most of the critics fundamentally misstate the effects and purposes of the law. Inexplicably, the AV Club article relies heavily on a Common Cause white paper from 2005. Now, Common Cause typically does careful work but the paper is hopelessly outdated today. Eleven years ago Netflix was a small DVD-by-mail service. There was no 4G LTE (2010). No iPhone or Google Android (2007). And no Pandora, IPTV, and a dozen other technologies and services that have revolutionized communications and media. None of the competitive churn since 2005, outlined below, is even hinted at in the AV Club piece. The actual data undermine the dire diagnoses about the state of communications and media from the various critics cited in the piece. 

Competition in Telephone Service

Let’s consider the article’s provocative claim that the Act gave us “the continuing rise of cable, cellphone, and internet pricing.” Despite this empirical statement, no data are provided to support this. Instead, the article mostly quotes progressive platitudes about the evils of industry consolidation. I suppose platitudes are necessary because on most measures there’s been substantial, measurable improvements in phone and Internet service since the 1990s. In fact, the cost-per-minute of phone service has plummeted, in part, because of the competition unleashed by the Telecom Act. (Relatedly, there’s been a 50-fold increase in Internet bandwidth with no price increase.)

The Telecom Act undid much of the damage caused by decades of monopoly protection of telephone and cable companies by federal and state governments. For decades it was accepted that local telephone and cable TV service were natural monopolies. Regulators therefore prohibited competitive entry. The Telecom Act (mostly) repudiated that assumption and opened the door for cable companies and others to enter the telephone marketplace. The competitive results were transformative. According to FCC data, incumbent telephone companies, the ones given monopoly protection for decades, have lost over 100 million residential subscribers since 2000. Most of those households went wireless only but new competitors (mostly cable companies) have added over 32 million residential phone customers and may soon overtake the incumbents. The chart below breaks out connections by technology (VoIP, wireless, POTs), not incumbency, but the churn between competitors is apparent.

Further, while the Telecom Act was mostly about local landlines, not cellular networks, we can also dispense with the AV Club claim that dominant phone companies are increasing cellphone bills. Again, no data are cited. In fact, in quality-adjusted terms, the price of cell service has plummeted. In 1999, for instance, a typical cell plan was for regional coverage and offered 200 voice minutes for about $55 per month (2015 dollars). Until about 2000, there was no texting (1999 was the first year texting between carriers worked) and no data included. In comparison, for that same price today you can find a popular plan that includes, for all of North America, unlimited texting and voice minutes, plus 10 GB of 4G LTE data. Carriers spend tens of billions of dollars annually on maintaining and upgrading cellular networks and as a result, millions of US households are dropping landline connections (voice and broadband) for smartphones alone.

Competition in Television and Media

The critics of cable deregulation completely misunderstand and misstate the role of competition in the TV industry. Media quality is harder to measure, but its not a stretch to say that quality is higher than ever. Few dispute that we are in the Golden Age of Media, resulting from the proliferation of niche programming provided by Netflix, podcasts, Hulu, HBO, FX, and others. This virtual explosion in programming came about largely because there are more buyers (distributors) of programming and more cutthroat competition for eyeballs.

Again, the AV Club quotes the Common Cause report: “Roughly 98 percent of households with access to cable are served by only one cable company.”  Quite simply, this is useless stat. Why do we care how many coaxial cable companies are in a neighborhood? Consumers care about outputs–price, programming, quality, customer service–and number of competitors, regardless of the type of transmission network, which can be cellular, satellite, coaxial cable, fiber, or copper.

Look beyond the contrived “number of coaxial competitors” measure and it’s clear that m ost c able companies face substantial competition. The Telecom Act is a major source of the additional competition, particularly telco TV. Since passage of the Telecom Act, cable TV’s share of the subscription TV market fell from 95% to nearly 50%.

The Telecom Act repealed a decades-old federal policy that largely prohibited telephone companies from competing with cable TV providers. Not much changed for telco TV until the mid-2000s, when broadband technology improved and when the FCC freed phone companies from “unbundling” rules that forced telcos to lease their networks to competitors at regulated rates. In this investment-friendly environment, telephone companies began upgrading their networks for TV service and began purchasing and distributing programming. Since 2005, telcos have attracted about 13 million households and cable TV’s market share fell from about 70% to 53%. Further, much of consumer dissatisfaction with TV is caused by legacy regulations, not the Telecom Act. If cable, satellite, and phone companies were as free as Netflix and Hulu to bundle, price, and purchase content, we’d see lower prices and smaller bundles. 

The AV Club’s focus on Clear Channel [sic] and now-broken up media companies is puzzling and must be because of the article’s reliance on the 2005 Common Cause report. The bête noire of media access organizations circa 2005 was Clear Channel, ostensibly the sort of corporate media behemoth created by the Telecom Act. The hysteria proved unfounded.

Clear Channel broadcasting was rebranded in 2014 to iHeartRadio and its operations in the last decade do not resemble the picture described in the AV Club piece, that of a “radio giant” with “more than 1200 stations.” While still a major player in radio, since 2005 iHeartRadio’s parent company went private, sold all of its TV stations and hundreds of its radio station, and shed thousands of employees. The firm has serious financial challenges because of the competitive nature of the radio industry, which has seen entry from the likes of Pandora, Spotify, Google, and Apple.

The nostalgia for Cold War-era radio is also strange for an article written in the age of Pandora, Spotify, iTunes, and Google Play. The piece quotes media access scholar Robert McChesney about radio in the 1960s:

Fifty years ago when you drove from New York to California, every station would have a whole different sound to it because there would be different people talking. You’d learn a lot about the local community through the radio, and that’s all gone now. They destroyed radio. It was assassinated by the FCC and corporate lobbyists.

This oblique way of assessing competition–driving across the country–is necessary because local competition was actually relatively scarce in the 1960s. There were only about 5000 commercial radio stations in the US, which sounds like a lot except when you consider the choice and competition today. Today, largely because of digital advancements and channel splitting, there are more than 10 times as many available broadcast channels, as well as hundreds of low-power stations. Combined with streaming platforms, competition and choice is much more common today. Everyone in the US can, with an inexpensive 3G plan and a radio, access millions of niche podcasts and radio programs featuring music, hobbies, entertainment, news, and politics.

The piece quotes the 2005 report, alarmed that “ just five companies—Viacom, the parent of CBS, Disney, owner of ABC, News Corp, NBC and AOL, owner of Time Warner—now control 75 percent of all primetime viewing.” Again, I don’t understand why the article quotes decade-old articles about market share without updates. There is no mention that Viacom and CBS split up in 2005 and NewsCorp. and Fox split in 2013. The hysteria surrounding NBC, AOL, and Time Warner’s failed commercial relationships has been thoroughly explored and discredited by my colleague Adam Thierer and I’ll point you to his piece. As Adam has also documented, broadcast networks have been losing primetime audience share since at least the late 1970s, first to cable channels, then to streaming video. And nearly all networks, broadcast and cable, are seeing significant drops in audience as consumers turn to Internet streaming and gaming. Market power and profits in media is often short lived.

The article then decries the loss of local and state news reporting. It’s strange to blame the Telecom Act for newspaper woes since shrinking newsrooms is a global, not American, phenomenon with well-understood causes (loss of classifieds and increased competition with Web reporting). And, as I’ve pointed out, the greatest source of local and state reporting is local papers, but the FCC has largely prohibited papers from owning radio and TV broadcasters (which would provide papers a piece of TV’s lucrative ad and retrans revenue) for decades, even as local newspapers downsize and fail. 

The article was a fascinating read if only because it reveals how many left-of-center prognostications about media aged poorly. Those on the right have their own problems with the Act, namely its vastly different regulatory regimes (“telecommunications,” “wireless,” “television”) in a world of broadband and convergence. But useful reform means diagnosing what inhibits competition and choice in media and communications markets. Much of the competitive problems in fact arise from the enforcement of natural monopoly restrictions in the past. Media and communications has seen huge quality improvements since 1996 because the Telecom Act rejected the natural monopoly justifications for regulation. The Telecom Act has proven unwieldy but it cannot be blamed for nonexistent problems in phone and TV.

For decades Congress has gradually deregulated communications and media. This poses a significant threat to the FCC’s jurisdiction because it is the primary regulator of communications and media. The current FCC, exhibiting alarming mission creep, has started importing its legacy regulations to the online world, like Title II common carrier regulations for Internet providers. The FCC’s recent proposal to “open up” TV set top boxes is consistent with the FCC’s reinvention as the US Internet regulator, and now the White House has supported that push.

There are a lot of issues with the set top box proposal but I’ll highlight a few. I really don’t even like referring to it as “the set top box proposal” because the proposal is really aimed at the future of TV–video viewing via apps and connected devices. STBs are a sideshow and mostly just provide the FCC a statutory hook to regulate TV apps. Even that “hook” is dubious–the FCC arbitrarily classifies apps and software as “navigation devices” but concludes that actual TV devices like Chromecast, Roku, smartphones, and tablets aren’t navigation devices. And, despite what activists say, this isn’t about “cable” either but all TV distributors (“MVPDs”) like satellite and telephone companies and Google Fiber, most of whom are small TV players.

First, the entire push for the proposal is based on the baseless notion that “charging monthly STB fees reveals that cable companies are abusing their market power.” I say baseless because cable companies have lost 14 million TV subscribers since 2002 to phone and satellite companies’ TV offerings (Verizon FiOS TV, Dish, Google Fiber, etc.), which suggests cable doesn’t have market power to charge anticompetitive prices. This is bolstered by the fact that the rates cable companies charge are consistent with what their smaller phone and satellite competitors charge for STBs. In fact, the STB monthly rates cable companies charge are pretty much identical to what municipal-owned and -operated TV stations charge. Even competing STB companies like TiVo charge monthly fees.

Second, as I’ve written, the FCC’s plans simply won’t work. The FCC tried “opening up” cable boxes for years with CableCard. That debacle resulted in ten years of regulations and FCC-directed standards and had only a marginal effect on the STB market. At conclusion, under 5% of the STB market went to “competitive” STB makers like TiVo. This latest plan has an even smaller chance of success because the FCC is not simply regulating cable boxes, but also boxes from satellite TV and IPTV distributors and their apps. The FCC is telling these hundreds of companies using dozens of technologies, codecs, and standards to develop interoperable standards so that other companies can retransmit the TV programming the MVPDs have bundled. It’s impractical and likely to fail, as Larry Downes noted in Recode, which is why the FCC provides few details about how this will work.

Third, what little progress the FCC does make in forcing MVPDs to make their TV programming accessible to competitors’ video apps and devices will tend to make broadband and TV less competitive. What the FCC is trying to do is force, say, Comcast’s TV programming to be available to certain application makers who want to retransmit that programming. So whatever streams to the Comcast Xfinity app will need to also work on competing apps if a competitor wants to re-bundle that programming.

The problem is that TV packages are how these companies compete and FCC rules will hinder that competitive process. TV distributors, including Netflix, purchase rights for sports and other programming to steal subscribers away from competitors. For instance, DirecTV attracts many customers solely because they have NFL Sunday Ticket and Amazon and Netflix original programming is a huge draw to their video services. TV programming and bundling that programming drives the competitive process. The Google Fiber folks likewise found out the importance of TV programming to compete. They planned originally to offer only broadband but came to find out there was little market for a broadband-only provider. Most people want TV packaged with broadband and Google was compelled by market forces to go out and purchase TV programming to attract customers. (On the other hand, some cable companies like Cable One are getting out of the TV game because programmers have significant leverage.)

Even non-MVPDs like mobile carriers and tech companies, including Twitter, Yahoo, and Facebook, are using TV programming to compete and they are investing big into video programming. Verizon Wireless has exclusive NFL programming, T-Mobile recently gave its subscribers a year of streaming access to most baseball games via a MLB.TV deal, and AT&T is giving mobile subscribers access to DirecTV programming. The point is, companies compete by experimenting with different service and program bundles. By forcing programming onto competing applications, devices, and platforms, the FCC short-circuits these competitive dynamics.

Fourth, speaking of purchasing rights, there is misinformation spreading about what TV access consumers are entitled to. For instance, there’s a recent Public Knowledge post that simply distorts the economics and law of TV licensing. Notably, the post says the FCC’s proposal “makes it easier for subscribers to control their own experience when accessing the programming that they…have paid for and to which they have lawful access.” This is simply false. Just because Walking Dead has been licensed for viewing on your television does not mean it’s lawful (or beneficial) for a TV competitor to take that same programming and send it to you via their own app.

Copyright holders re-sell the same programming to different distributors, sometimes several times over. Programmers have exclusive licensing deals with various distributors and device makers, so just because your cable contract allows you to watch it on your TV does not mean you have lawful access anywhere. For instance, the NFL has licensed Thursday Night NFL games to CBS and NBC for broadcast TV viewing, to the NFL Network for cable TV viewing, to Verizon Wireless for smartphone viewing, and to Twitter for computer viewing. Same programming, four different distribution technologies and five different companies. When programming can be easily repurposed, as the FCC would like, that upends entire business models of hundreds of media companies and distributors.

Further, it injects the FCC into copyright licensing issues. Put aside for the moment the debates, that the Public Knowledge post touches on, whether copyright holders are too restrictive. Whatever your views, reforming program licensing should come from Congress and the courts–not the FCC through this convoluted proposal. In fact, change via the courts is what Public Knowledge implicitly endorses. It was the courts–not the FCC–that made VCRs, DVRs, and DVR cloud storage legal in the face of copyright holder opposition. When the FCC last got involved in intervening in TV rights assignments in the 1960s and 1970s, the agency created broadcast retransmission rights, which have plagued communications and copyright law with complexity and lawsuits to this day.

Quite simply, the FCC is coercing companies to make their contracted-for TV content available to others who didn’t contract for it. This proposal will create a mess in television when implemented. It’s an unnecessary intervention into a marketplace–video programming–that is working. We are in what many media critics regard as the Golden Age of Television. That’s because there are so many TV distributors competing for programming. It’s a sellers’ market. The supposed problems here–high STB prices and copyright restrictiveness–are problems for competition agencies and the courts, respectively, not the FCC. The FCC wants to fix what’s not broken and start regulating apps and online video. It does nothing to improve the television market and simply makes more tech and media companies dependent on the FCC’s good graces for competitive survival.

With great fanfare, FCC Chairman Thomas Wheeler is calling for sweeping changes to the way cable TV set-top boxes work.

In an essay published Jan. 27 by Re/Code, Wheeler began by citing the high prices consumers pay for set-top box rentals, and bemoans the fact that alternatives are not easily available. Yet for all the talk and tweets about pricing and consumer lock-in, Wheeler did not propose an inquiry into set-top box profit margins, nor whether the supply chain is unduly controlled by the cable companies. Neither did Wheeler propose an investigation into the complaints consumers have made about cable companies’ hassles around CableCards, which under FCC mandate cable companies must provide to customers who buy their own set-top boxes.

In fact, he dropped the pricing issue halfway through and began discussing access to streaming content:

To receive streaming Internet video, it is necessary to have a smart TV, or to watch it on a tablet or laptop computer that, similarly, do not have access to the channels and content that pay-TV subscribers pay for. The result is multiple devices and controllers, constrained program choice and higher costs.

This statement seems intentionally misleading. Roku, Apple TV and Amazon Fire sell boxes that connect to TVs and allow a huge amount of streaming content to play. True, the devices are still independent of the set-top cable box but there is no evidence that this lack of integration is a competitive barrier.

A new generation of devices, called media home gateways (MHGs), is poised to provide this integration, as well as manage other media-based cloud services on behalf of consumers. This is where Wheeler’s proposal should be worrisome. He writes:

The new rules would create a framework for providing device manufacturers, software developers and others the information they need to introduce innovative new technologies, while at the same time maintaining strong security, copyright and consumer protections.

This sounds much more like a plan to dictate operating systems, user interfaces and other hardware and software standards for equipment that until now has been unregulated. Wheeler gives no explanation as to how his proposal will lead to lower prices or development of a direct-to-consumer sales channel.

[M]y proposal will pave the way for a competitive marketplace for alternate navigation devices, and could even end the need for multiple remote controls, allowing you to use one for all of the video sources you use.

What Wheeler really wants is FCC management of the transition from today’s set-top boxes to the media home gateways (MHGs) just beginning to appear on the market—a foray into customer premises equipment regulation unseen since the 1960s.

For good reason, the words “media home gateway” never appear in Wheeler’s Re/Code article. By avoiding mention of MHGs, he can play his “lack of competition” card, as he did in Thursday’s press briefing on his proposal.

There’s more than a whiff of misdirection here. Set-top boxes are a maturing market. An October 2015 TechNavio report forecasts the shipment volume of the global set-top box market to decline at a compound annual rate of 1.34 % over the period 2014-2019. By revenue, the market is expected to decline at a compound annual rate 1.36% during the forecast period. When consumers “cut the cable cord,” as some 21 million have, it’s set-top boxes that get unplugged.

At the same time, TechNavio forecasts the global MHG market to grow at a compound annual rate of 7.82% over the same period. Elsewhere, SNL Kagan’s Multimedia Research Group forecasts MHG shipments will exceed 24 million in 2017, up from 7.7 million in 2012. The long list of MHG manufacturers includes ActionTec, Arris, Ceva, Huawei, Humax, Samsung and Technicolor.

MHGs are the “alternative navigation devices” Wheeler coyly refers to in his Re/Code essay. These devices will replace the set-top boxes in use today, but because of their ability to handle Internet streaming, they are likely to be available through more than one channel. That’s why they only way to view Wheeler’s call to “unlock the set-top box” is as a pre-emptive move to extend the FCC’s regulation into the delivery of streaming media.

To be sure, if the FCC mandates integration of streaming options into cable-provided MHGs, streaming companies would gain stronger foothold into consumers’ homes, which would then allow them to share their apps, gather data on users, and, perhaps most lucratively of all, control the interface on which channels are displayed, as noted by The Verge’s Ashley Carman.

Yet the streaming companies that would appear to benefit most from this proposal have thus far been quiet. Perhaps because Wheeler has made no secret that he believes Apple TV, Amazon Fire and Roku are multichannel video programming distributors (MVPDs), FCC-speak for “local cable companies.” Is his “unlock the box” plan precisely the opposite? Is it an effort to fold streaming aggregators into the existing cable TV regulatory platform, with all its myriad rules, regulations, legal obligations and—dare we say it—fees and surcharges? You might roll your eyes, but this is the only analysis in which the proposal, which focuses on “device manufacturers, software developers and others,” makes sense.

But does the FCC have the right to require cable companies to share customer data acquired through the infrastructure and software they built and own? It’s yet another iteration of the old unbundled network elements model that is consistently shot down by the courts yet one that the FCC can’t seem to get past.

Arcane details aside, the FCC should not be involved in directing evolution paths, operating software or other product features. It creates too much opportunity for lobbying and rent-seeking. History shows that when the government gets granularly involved in promoting technology direction, costs go up and innovation suffers as capital is diverted into politically-favored choices where it ends up wasted. The debacles with the Chevy Volt and Solera are just two recent examples of the dangers inherent when bureaucrats try to pick winners, or give a subset of companies in one industry an assist and the expense of others.

This post originally appeared Feb. 1, 2016 on the R Street Institute official blog.

People are excited about online TV getting big in 2016. Alon Maor of Qwilt predicts in Multichannel News that this will be “the year of the skinny bundle.” Wired echoes that sentiment. The Wall Street Journal’s Geoffrey A. Fowler said, “it’s no longer the technology that holds back cable cutting–it’s the lawyers.”

Well, I’m here to say, lawyers can’t take all the blame. In my experience, it’s the technology, too. Some of the problem is that most discussion about the future of online TV and cable cutting fails to distinguish streaming video-on-demand (SVOD) and streaming linear TV (“linear” means continuous pre-programmed and live “channels”, often with commercials, much like traditional cable).

SVOD includes Netflix, HBO Go, and Hulu. Yes, SVOD technology is very good. The major SVOD players spend millions on networks and caching so that their (static) content is as close to consumers as possible.

But streaming linear TV–like Sling and live sports–cannot be cached like static content and appears to have kinks to iron out before mass-market adoption. Read online video analysts and you realize that streaming linear and live TV online is an entirely different animal from SVOD. In August, Ben Popper at the Verge had a fascinating longform piece about the MLB’s streaming TV operation, Major League Baseball Advanced Media (BAM), which is the industry leader doing live streaming video. (HBO hired BAM for streaming the latest Game of Thrones season after HBO Go’s in-house streaming offering suffered from outages.)

Linear online TV is hard! As one BAM executive explains vividly,

What people forget is that the internet, as a technology was never designed to do something like this–deliver flawless video simultaneously to millions of people. I liken it to trying to live on Mercury. The planet is completely inhospitable. Every day all you’re doing is [fighting] a battle for survival in a place that really does not want you.

So I say this understanding the significant technical difficulties they face: in my experience, streaming linear TV is not ready for prime-time yet. (If I could find information about how firms do it, I would also distinguish pre-recorded linear TV–like Sling’s HGTV channel–from live online TV, because firms likely use different network topologies. Another time, perhaps.) Perhaps I’m an outlier, but media reports about Sling outages suggest that I’m not. I used Sling TV for the past few months and had high hopes but I just dropped my subscription. My test for acceptable streaming quality is: “Would I invite friends over to watch something using this streaming service?” Most SVOD services pass that test. Through caching and streaming protocols, SVOD operators can assure pretty consistent streaming even during times of moderate congestion.

Since linear TV typically has programming that is transmitted (nearly) live, operators can’t really do the distributed caching of content that makes SVOD function well. As a result, streaming linear TV like Sling TV and WatchESPN (a Sling subscription gives you access to ESPN’s online sports portal) currently do not pass my test. Frankly, the streaming quality varied from excellent to unwatchable. Punching into the app and casting it to my TV, I was never sure which Sling would show up that day: Good Sling or Bad Sling. On good days, the Monday Night Football game looked better than cable TV. Other days, the stream would, for instance, work well and then fail at every commercial break (perhaps the commercials were stored on another, overwhelmed server?).

Now, it’s impossible to know for sure where the network bottleneck is and why a video stream is stuttering. To be more certain that the problem was with Sling TV or WatchESPN and not, say, my Chromecast, my Wifi, or my ISP, every time Sling or WatchESPN had several severe streaming problems in a period of short time, I did an unscientific test. I would close down the Sling app, open up Netflix, and start streaming Netflix via my Chromecast. Without exception for the past three months, Netflix loaded quickly and streamed well. Keeping everything the same except the source of content suggests (but doesn’t prove) that the problem was not a local network or device problem.

There are ways of using network architecture and protocols to improve linear TV on broadband, typically with dedicated servers and last-mile bandwidth reservation. Comcast Stream TV is an example and LTE Broadcast might someday soon provide linear and live TV for mobile customers. But given so-called net neutrality rules, these services are controversial and regulated. ISPs can have their own proprietary TV service like Stream TV but, given net neutrality hysteria, probably won’t offer dedicated bandwidth to distributors like Sling. In this narrow area, the FCC’s rules are a pretty good deal for larger, vertically integrated firms that can put programming bundles together. It’s not so great for the small ISPs and WISPs who want to respond to cable cutter demands and offer a quality TV product from another company via broadband.

So I expect linear online TV to remain niche until the quality improves. A big draw of Sling is the cancel-at-any-time policy which lowers the risk if you’re dissatisfied with programming and allows single-season sports fans like me to subscribe for a season or two. I subscribed in the fall and winter to watch NCAA and NFL football. Sling recognizes that a lot of its subscribers are like me. But if Sling and other linear TV programmers want to expand beyond niche, they’ll need higher-quality streams. (And Sling might wish to remain niche so they don’t upset their programmers by cannibalizing traditional subscription TV.) Would I sign up for Sling again? Sure. Maybe the prognosticators are right, and the technology will develop rapidly in 2016. I have my doubts.

For tech policy progressives, 2015 was a great year. After a decade of campaigning, network neutrality advocates finally got the Federal Communications Commission to codify regulations that require Internet service providers to treat all traffic the same as it crosses the network and is delivered to customers.

Yet the rapid way broadband business models, always tenuous to begin with, are being overhauled, may throw some damp linens on their party. More powerful smart phones, the huge uptick in Internet streaming and improved WiFi technology are just three factors driving this shift.

As regulatory mechanisms lag market trends in general, they can’t help but be upended along with the industry they aim to govern. Looking ahead to the coming year, the consequences of 2015’s regulatory activism will create some difficult situations for the FCC.

Zero rating will clash with net neutrality

 The FCC biggest question will be whether “zero rating,” also known as “toll-free data,” is permissible under its new Open Internet rules. Network neutrality prohibits an ISP from favoring one provider’s content over another’s. Yet by definition, that’s what zero rating does: an ISP agrees not to count data generated by a specific content provider against a customer’s overall bandwidth cap. Looking at from another angle, instead of charging more for enhanced quality—the Internet “toll road” network neutrality is designed to prevent, zero rating offers a discount for downgraded transmission. As ISPs, particularly bandwidth-constrained wireless companies, replace “all-you-can-eat” data with tiered pricing plans that place a monthly limit on total data used—and assess additional charges on consumers who go beyond the cap—zero rating agreements become critical in allowing companies like Alphabet (formerly Google), Facebook and Netflix, companies that were among the most vocal supports of network neutrality, to keep users regularly engaged.

T-Mobile has been aggressive with zero rating, having reached agreements with Netflix, Hulu, HBO Now, and SlingTV for its Binge On feature. Facebook, another network neutrality advocate, has begun lobbying for zero rating exceptions outside the U.S. Facebook founder and CEO Mark Zuckerberg told a tech audience in India, where net neutrality has been a long-standing rule, that zero rating is not a violation, a contention that some tech bloggers immediately challenged.

When it came to net neutrality rulings, the FCC may have hoped it would only have to deal with disputes dealing with the technical sausage-making covered by the “reasonable network management” clause in the Title II order (to be fair, zero rating involves some data optimization). But any ruling that permits zero rating would collapse its entire case for network neutrality. The Electronic Frontier Foundation, another vocal net neutrality supporter, understands this explicitly, and wants the FCC to nip zero rating in the bud.

The problem is that zero-rating is not anti-consumer, but a healthy, market-based response to bandwidth limitations. Even though ISPs are treating data differently, customers get access to more entertainment and content without higher costs. Bottom line: consumers get more for their money. For providers like Alphabet and Facebook, which rely on advertising, there stands to be substantial return on investment. Unlike blanket regulation, it’s voluntary, sensitive to market shifts and not coercive.

How long before these companies who lobbied for network neutrality begin their semantic gymnastics to demand exemptions for zero rating? The Court of Appeals may make it moot by overturning Title II reclassification outright. But failing that, expect some of the big Silicon Valley tech companies to start their rhetorical games soon.

  Internet streaming will confound the FCC

The zero rating controversy is just one more outgrowth of the rise in Internet streaming.

For the past seven years, the FCC’s regulatory policy has been based on the questionable assertion that cable and phone companies are monopoly bottlenecks.

Title II reclassification is aimed at preventing ISPs from using these perceived bottlenecks to extract higher costs from content providers. Yet at the same time, the FCC, in keeping with its cable/telco/ISPs-are-monopolies mindset, depends on them to fund its universal service and e-rate funds and fulfill its public interest mandate by carrying broadcast feeds from local television stations.

The simple fact is that the local telephone, cable and ISP bundlers are not monopolies. The 463,000 subscribers the top 8 cable companies lost in the second quarter of 2015 are getting their TV entertainment from somewhere. Those who are not cutting the cord completely are reducing their service: Another study estimated that 45 percent of U.S. households reduced the level of cable or satellite service in 2014.

Consumers are replacing their cable bundle with streaming options such as Roku, Amazon Fire, Apple TV and Google Play. These companies aggregate and optimize the Internet video for big screen TVs and home entertainment centers. Broadcast and basic cable programs are usually free (but carry ads); other programming can be purchased by subscription (Netflix, HBO Now) or on demand (iTunes, Amazon). While in many cases consumers retain their broadband connection, that remains their only purchase from the cable or telephone company. But even that might be optional, too. Millennial consumers are comfortable using free WiFi services or zero-rated wireless plans like T-Mobile’s Binge On.

But as consumers cut the cord, cable revenues go down. When cable revenues drop, so does the funding for all those FCC pet causes. The question is how hard will the FCC push to require streaming services to pay universal service fees, or include local TV feeds among their channel offerings? Under the current law, the FCC has no regulatory jurisdiction over streaming applications, unless, as with Title II, it tries to play fast and loose with legal definitions. The FCC has never been shy about overreaching, and as early as October 2014 Chairman Tom Wheeler suggested that IP video aggregators could be considered multichannel video programming distributors, a term that to date has been applied only to cable television companies.

Ironically, streaming stands to meet two long-held progressive policy goals—a la carte programming selection and structural separation of the companies that build and manage physical broadband networks and the companies that provide the applications that ride it. Cable and Internet bundles are so 2012! Yet 2016 finds the FCC is woefully unprepared for this shift. In fact, last we looked was encouraging small towns to borrow millions of dollars to get onto the cable TV business.

Over the past seven years, the FCC has pursued Internet regulations from an ideological perspective—treating it as a necessary component of the overall business ecosystem. In truth, regulation is supposed to serve consumer interests, and should be applied to address extant problems, not as precautionary measures. Unfortunately, the FCC has chosen to ignore market realities and apply rules that fit its own deliberate misperceptions. The Commission’s looming inability to find consistency in enforcing its own edicts is a problem solely of its own making.

At the same time FilmOn, an Aereo look-alike, is seeking a compulsory license to broadcast TV content, free market advocates in Congress and officials at the Copyright Office are trying to remove this compulsory license. A compulsory license to copyrighted content gives parties like FilmOn the use of copyrighted material at a regulated rate without the consent of the copyright holder. There may be sensible objections to repealing the TV compulsory license, but transaction costs–the ostensible inability to acquire the numerous permissions to retransmit TV content–should not be one of them.

Economists can devise situations where transaction costs are immense and compulsory licenses are needed for a well-functioning market. Today, as when the compulsory license was created, the conventional wisdom is that TV compulsory licenses are still needed to prevent market failure.

In the 1970s, cable companies were capturing broadcast channels and retransmitting it to their subscribers for free because, per the Supreme Court, cable was a passive transmitter and didn’t need copyright permission. In 1976, to correct this perceived unfairness, Congress amended the Copyright Act and said this cable retransmission did necessitate copyright authorization. To make it easier on cable systems (most of which were small, local operations), the law created a compulsory license to broadcast TV content like NBC, ABC, and CBS programming.

The compulsory license primarily does two things: it provides cable operators local TV content royalty-free and provides non-local (“distant”) content (imagine a DC cable company importing a WGN broadcast from Chicago) at regulated rates.

As the House report says:

The Committee recognizes…that it would be impractical and unduly burdensome to require every cable system to negotiate with every copyright owner whose work was retransmitted by a cable system.

The Copyright Office, early on, opposed the compulsory license and has called for the repeal of the compulsory license to broadcast TV content since 1981. As the Register of Copyrights said at a 2000 congressional hearing,

A compulsory license is not only a derogation of a copyright owner’s exclusive rights, but it also prevents the marketplace from deciding the fair value of copyrighted works through government-set price controls.

But when the issue of repeal comes up, many parties cite “significant transaction costs” as a problem with conventional, direct licensing. GAO echoed these objections in an April 2015 report,

we have previously found that obtaining the copyright holders’ permission for all this content would be challenging. Each television program may have multiple copyright holders, and rebroadcasting an entire day of content may require obtaining permission from hundreds of copyright holders. The transaction costs of doing so make this impractical for cable operators.

That sounds sensible but we have powerful contradictory evidence: for decades, hundreds of TV channels requiring the bundling of thousands of copyright licenses are distributed seamlessly and completely outside of the compulsory license regime.

So it’s a mystery to me why analysts still talk about the difficulty in acquiring copyright permission from hundreds or thousands of rights holders. TV distributors outside of the compulsory license scheme do these complex content acquisition deals routinely. Hundreds of non-broadcast channels–like ESPN, CNN, Bravo, HGTV, MTV, and Fox News–are distributed to tens of millions of households via private contractual agreements and without regulated compulsory licenses. TBS, uniquely, in the late 1990s went from a broadcast channel, subject to a compulsory license, to a cable channel distributed via direct licensing with no apparent ill effects. Analysts raising the transactions costs for keeping compulsory licenses, to my knowledge, never explain why the market failure they predict is absent for these hundreds of cable and satellite channels.

Further, while cable and satellite companies don’t need to negotiate broadcast TV copyrights because of the compulsory license, the FCC’s retransmission consent process, part of the 1992 Cable Act, requires these companies to negotiate payment to retransmit broadcast signals–signals that contain the underlying copyrighted content. This process, though bizarre and artificial, is essentially the same negotiation cable and satellite companies would need to enter into in a world without compulsory license.

Finally, online programming from distributors like Hulu, Netflix, and (potentially) Apple TV operate entirely outside of the retrans-compulsory copyright system and undermine the transaction costs objection. Netflix, for instance, doesn’t negotiate with every individual right holder like GAO and Congress imply is necessary in a non-compulsory license regime. Content aggregators and intermediaries, not regulation, streamline the rights acquisition process without the need for a compulsory license. The ostensibly burdensome transaction costs don’t stop Netflix from licensing over 10,000 titles worth around $9 billion.

Certainly, converting from compulsory licensing to direct licensing has issues. Changing legal regimes can be costly and there is a need to prevent anticompetitive withholding of content. Understandably, many cable and satellite distributors oppose repeal of compulsory licenses if the complex FCC system of retransmission consent and must carry are maintained. I tend to agree. Nevertheless, it’s time to strike the transaction cost argument from the policy discussion. The predicted market failure is overcome by market forces.

For more background on TV regulation, see Adam Thierer and Brent Skorup, Video Marketplace Regulation: A Primer on the History of Television Regulation and Current Legislative Proposals (Mercatus working paper).

Congress is considering reforming television laws and solicited comment from the public last month. On Friday, I submitted a letter encouraging the reform effort. I attached the paper Adam and I wrote last year about the current state of video regulations and the need for eliminating the complex rules for television providers.

As I say in the letter, excerpted below, pay TV (cable, satellite, and telco-provided) is quite competitive, as this chart of pay TV market share illustrates. In addition to pay TV there is broadcast, Netflix, Sling, and other providers. Consumers have many choices and the old industrial policy for mass media encourages rent-seeking and prevents markets from evolving.

Dear Chairman Upton and Chairman Walden:

Thank you for the opportunity to respond to the Committee’s December 2014 questions on video regulation.

…The labyrinthine communications and copyright laws governing video distribution are now distorting the market and therefore should be made rational. Congress should avoid favoring some distributors at the expense of free competition. Instead, policy should encourage new entrants and consumer choice.

The focus of the committee’s white paper on how to “foster” various television distributors, while understandable, was nonetheless misguided. Such an inquiry will likely lead to harmful rules that favor some companies and programmers over others, based on political whims. Congress and the FCC should get out of “fostering” the video distribution markets completely. A light-touch regulatory approach will prevent the damaging effects of lobbying for privilege and will ensure the primacy of consumer choice.

Some of the white paper’s questions may actually lead policy astray. Question 4, for instance, asks how we should “balance consumer welfare and the rights of content creators” in video markets. Congress should not pursue this line of inquiry too far. Just consider an analogous question: how do we balance consumer welfare and the interests of content creators in literature and written content? The answer is plain: we don’t. It’s bizarre to even contemplate.

Congress does not currently regulate the distribution markets of literature and written news and entertainment. Congress simply gives content producers copyright protection, which is generally applicable. The content gets aggregated and distributed on various platforms through private ordering via contract. Congress does not, as in video, attempt to keep competitive parity between competing distributors of written material: the Internet, paperback publishers, magazine publishers, books on tape, newsstands, and the like. Likewise, Congress should forego any attempt at “balancing” in video content markets. Instead, eliminate top-down communications laws in favor of generally applicable copyright laws, antitrust laws, and consumer protection laws.

As our paper shows, the video distribution marketplace has changed drastically. From the 1950s to the 1990s, cable was essentially consumers’ only option for pay TV. Those days are long gone, and consumers now have several television distributors and substitutes to choose from. From close to 100 percent market share of the pay TV market in the early 1990s, cable now has about 50 percent of the market. Consumers can choose popular alternatives like satellite- and telco-provided television as well as smaller players like wireless carriers, online video distributors (such as Netflix and Sling), wireless Internet service providers (WISPs), and multichannel video and data distribution service (MVDDS or “wireless cable”). As many consumers find Internet over-the-top television adequate, and pay TV an unnecessary expense, “free” broadcast television is also finding new life as a distributor.

The New York Times reported this month that “[t]elevision executives said they could not remember a time when the competition for breakthrough concepts and creative talent was fiercer” (“Aiming to Break Out in a Crowded TV Landscape,” January 11, 2015). As media critics will attest, we are living in the golden age of television. Content is abundant and Congress should quietly exit the “fostering competition” game. Whether this competition in television markets came about because of FCC policy or in spite of it (likely both), the future of television looks bright, and the old classifications no longer apply. In fact, the old “silo” classifications stand in the way of new business models and consumer choice.

Therefore, Congress should (1) merge the FCC’s responsibilities with the Federal Trade Commission or (2) abolish the FCC’s authority over video markets entirely and rely on antitrust agencies and consumer protection laws in television markets. New Zealand, the Netherlands, Denmark, and other countries have merged competition and telecommunications regulators. Agency merger streamlines competition analyses and prevents duplicative oversight.

Finally, instead of fostering favored distribution channels, Congress’ efforts are better spent on reforms that make it easier for new entrants to build distribution infrastructure. Such reforms increase jobs, increase competition, expand consumer choice, and lower consumer prices.

Thank you for initiating the discussion about updating the Communications Act. Reform can give America’s innovative telecommunications and mass-media sectors a predictable and technology neutral legal framework. When Congress replaces industrial planning in video with market forces, consumers will be the primary beneficiaries.

Sincerely,

Brent Skorup Research Fellow, Technology Policy Program Mercatus Center at George Mason University

The outrage over the FCC’s attempt to write new open Internet rules has caught many by surprise, and probably Chairman Wheeler as well. The rumored possibility of the FCC authorizing broadband “fast lanes” draws most complaints and animus. Gus Hurwitz points out that the FCC’s actions this week have nothing to do with fast lanes and Larry Downes reminds us that this week’s rules don’t authorize anything. There’s a tremendous amount of misinformation because few understand how administrative law works. Yet many net neutrality proponents fear the worst from the proposed rules because Wheeler takes the consensus position that broadband provision is a two-sided market and prioritized traffic could be pro-consumer.

Fast lanes have been permitted by the FCC for years and they can benefit consumers. Some broadband services–like video and voice over Internet protocol (VoIP)–need to be transmitted faster or with better quality than static webpages, email, and file syncs. Don’t take my word for it. The 2010 Open Internet NPRM, which led to the recently struck-down rules, stated,

As rapid innovation in Internet-related services continues, we recognize that there are and will continue to be Internet-Protocol-based offerings (including voice and subscription video services, and certain business services provided to enterprise customers), often provided over the same networks used for broadband Internet access service, that have not been classified by the Commission. We use the term “managed” or “specialized” services to describe these types of offerings. The existence of these services may provide consumer benefits, including greater competition among voice and subscription video providers, and may lead to increased deployment of broadband networks.

I have no special knowledge about what ISPs will or won’t do. I wouldn’t predict in the short term the widespread development of prioritized traffic under even minimal regulation. I think the carriers haven’t looked too closely at additional services because net neutrality regulations have precariously hung over them for a decade. But some of net neutrality proponents’ talking points (like insinuating or predicting ISPs will block political speech they disagree with) are not based in reality.

We run a serious risk of derailing research and development into broadband services if the FCC is cowed by uninformed and extreme net neutrality views. As Adam eloquently said, “Living in constant fear of hypothetical worst-case scenarios — and premising public policy upon them — means that best-case scenarios will never come about.” Many net neutrality proponents would like to smear all priority traffic as unjust and exploitative. This is unfortunate and a bit ironic because one of the most transformative communications developments, cable VoIP, is a prioritized IP service.

There are other IP services that are only economically feasible if jitter, latency, and slow speed are minimized. Prioritized traffic takes several forms, but it could enhance these services:

VoIP. This prioritized service has actually been around for several years and has completely revolutionized the phone industry. Something unthinkable for decades–facilities-based local telephone service–became commonplace in the last few years and undermined much of the careful industrial planning in the 1996 Telecom Act. If you subscribe to voice service from your cable provider, you are benefiting from fast lane treatment. Your “phone” service is carried over your broadband cable, segregated from your television and Internet streams. Smaller ISPs could conceivably make their phone service more attractive by pairing up with a Skype- or Vonage-type voice provider, and there are other possibilities that make local phone service more competitive.

Cloud-hosted virtual desktops. This is not a new idea, but it’s possible to have most or all of your computing done in a secure cloud, not on your PC, via a prioritized data stream. With a virtual desktop, your laptop or desktop PC functions mainly as a dumb portal. No more annoying software updates. Fewer security risks. IT and security departments everywhere would rejoice. Google Chromebooks are a stripped-down version of this but truly functional virtual desktops would be valued by corporations, reporters, or government agencies that don’t want sensitive data saved on a bunch of laptops in their organization that they can’t constantly monitor. Virtual desktops could also transform the device market, putting the focus on a great cloud and (priority) broadband service and less on the power and speed of the device. Unfortunately, at present, virtual desktops are not in widespread use because even small lag frustrates users.

TV. The future of TV is IP-based and the distinction between “TV” and “the Internet” is increasingly blurring, with Netflix leading the way. In a fast lane future, you could imagine ISPs launching pared-down TV bundles–say, Netflix, HBO Go, and some sports channels–over a broadband connection. Most ISPs wouldn’t do it, but an over-the-top package might interest smaller ISPs who find acquiring TV content and bundling their own cable packages time-consuming and expensive.

Gaming. Computer gamers hate jitter and latency. (My experience with a roommate who had unprintable outbursts when Diablo III or World of Warcraft lagged is not uncommon.) Game lag means you die quite frequently because of your data connection and this depresses your interest in a game. There might be gaming companies out there who would like to partner with ISPs and other network operators to ensure smooth gameplay. Priority gaming services could also lead the way to more realistic, beautiful, and graphics-intensive games.

Teleconferencing, telemedicine, teleteaching, etc. Any real-time, video-based service could reach critical mass of subscribers and become economical with priority treatment. Any lag absolutely kills consumer interest in these video-based applications. By favoring applications like telemedicine, providing remote services could become attractive to enough people for ISPS to offer stand-alone broadband products.

This is just a sampling of the possible consumer benefits of pay-for-priority IP services we possibly sacrifice in the name of strict neutrality enforcement. There are other services we can’t even conceive of yet that will never develop. Generally, net neutrality proponents don’t admit these possible benefits and are trying to poison the well against all priority deals, including many of these services.

Most troubling, net neutrality turns the regulatory process on its head. Rather than identify a market failure and then take steps to correct the failure, the FCC may prevent commercial agreements that would be unobjectionable in nearly any other industry. The FCC has many experts who are familiar with the possible benefits of broadband fast lanes, which is why the FCC has consistently blessed priority treatment in some circumstances.

Unfortunately, the orchestrated reaction in recent weeks might leave us with onerous rules, delaying or making impossible new broadband services. Hopefully, in the ensuing months, reason wins out and FCC staff are persuaded by competitive analysis and possible innovations, not t-shirt slogans.

Aereo’s antenna system is frequently characterized perjoratively as a Rube Goldberg contraption, including in the Supreme Court oral arguments. Funny enough, Preston Padden, a veteran television executive, has characterized the legal system producing over-the-air broadcast television–Aereo’s chief legal opponents–precisely the same way. It’s also ironic that Aereo is in a fight for its life over alleged copyright violations since communications law diminishes the import of copyright law and makes copyright almost incomprehensible. Larry Downes calls the legal arguments for and against Aereo a “tangled mess.” David Post at the Volokh Conspiracy likewise concluded the situation is “pretty bizarre, when you think about it” after briefly exploring how copyright law interacts with communications law.

I agree, but Post actually understates how distorted the copyright law becomes when TV programs pass through a broadcaster’s towers, as opposed to a cable company’s headend. In particular, a broadcaster, which is mostly a passive transmitter of TV programs, gains more control over the programs than the copyright owners. It’s nearly impossible to separate the communications law distortions from the copyright issues, but the Aereo issue could be solved relatively painlessly by the FCC. It’s unfortunate copyright and television law intertwine like this because a ruling adverse to Aereo could potentially–and unnecessarily–upend copyright law.

This week I’ve seen many commentators, even Supreme Court justices, mischaracterize the state of television law when discussing the Aereo case. This is a very complex area and below is my attempt to lay out some of the deeper legal issues driving trends in the television industry that gave rise to the Aereo dispute. Crucially, the law is even more complex than most people realize, which benefits industry insiders and prevents sensible reforms.

The FCC, and Congress to a lesser extent, has gone to great lengths to protect broadcasters from competition from other television distributors, as the Copyright Office has said. There is nothing magical about free broadcast television. It’s simply another distribution platform that competes with several other TV platforms, including cable, satellite, IPTV (like AT&T U-Verse), and, increasingly, over-the-top streaming (like Netflix and Amazon Prime Instant Video).

Hundreds of channels and thousands of copyrighted programs are distributed by these non-broadcast distributors (mostly) through marketplace negotiations.

Strange things happen to copyrights when programs are delivered via the circuitous route 1) through a broadcast tower and 2) to a cable/satellite operator. Namely, copyright owners, by law, lose direct control over their intellectual property when local broadcasters transmit it. At that point, regulators, not copyright holders, determine the nature of bargaining and the prices paid.

Distribution of non-local broadcast programming

Right away, an oddity arises. Copyright treatment of local broadcasts differs from distant (non-local) broadcasts. Cable and satellite companies have never paid copyright royalties for signals from a local broadcast. (This is one reason the broadcast lawyer denied that Aereo is a cable company during Supreme Court oral arguments–Aereo merely transmits local broadcast signals.) But if a cable or satellite company retransmits signals from a non-local (“distant”) broadcaster, the company pays the Copyright Office for a copyright license. However, this license is not bargained for with the copyright holder; it is a compulsory license. Programmers are compelled to license their program and in return receive the price set by the panel of Copyright Office officials.

The Copyright Office has asked Congress for over 30 years to eliminate the compulsory license system for distant broadcasts. There are few major distant broadcasters carried by cable companies but the most popular is WGN, a Chicago broadcaster that is carried on many cable systems across the country. The programmers complain they’re underpaid and the Copyright Office has the impossible task of deciding a fair price for a compulsory copyright license. Alleged underpayment is partly why TBS, in 1998, converted from a distant broadcast network to a pure cable network, where TBS could bargain with cable and satellite companies directly.

Distribution of local broadcast programming

Yet things get even stranger when you examine how local broadcasts are treated. Copyright is, as best as I can tell, a nullity when a program is broadcast by a local broadcaster and then retransmitted by a cable company. Until 1992, no payments passed from cable companies to either the broadcaster or copyright holder of broadcast programs. Congress made the retransmission of locally-broadcasted programs royalty-free. Cable companies captured the free over-the-air signals and sold those channels along with cable channels to subscribers.

Why would broadcasters and programmers stand for this? They tolerated this for decades because the FCC requires broadcasts to be “free”–that is, funded by ads. Local broadcasters and programmers benefited from cable distribution because cable TV reaches more viewers that broadcasters can’t reach.

Then in 1992, as cable TV grew, Congress decided to rebalance the competitive scales. Congress created a new property right that ensured local broadcasters got paid by cable companies–the retransmission right. Congress did not require a copyright royalty payment. So cable (and later satellite) still didn’t pay copyright royalties for local broadcasts. The “retransmission right” is held by, not the copyright owner, but the owner of the broadcast tower. This is a bizarre situation where, as the Copyright Office says, Congress accords a “licensee of copyrighted works (broadcasters) greater proprietary rights than the owner of copyright.”

Welcome to the bizarro world of broadcast television that Aereo finds itself. On the bright side, perhaps the very public outcry over Aereo means the laws that permitted Aereo’s regulatory arbitrage will be scrutinized and rationalized. In the short term, I’m hoping the Supreme Court, as Downes mentions, punts the case to a lower court for more fact-finding. Aereo is a communications law case disguised as a copyright case. These issues really need to be before the FCC for a determination about what is a “cable operator” and an “MVPD.” A finding that Aereo is either one would end this copyright dispute.

Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Second, Comcast and Apple discussed a possible partnership whereby Comcast customers would receive prioritized access to Apple’s new video service. Apple’s TV offering would be a “managed service” exempt from net neutrality obligations.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help.

1. Interconnection becomes less about traffic burden and more about leverage.

The ostensible reason that content companies like Netflix (or third parties like Cogent) pay ISPs for interconnection is because video content unloads a substantial amount of traffic onto ISPs’ last-mile networks.

Someone has to pay for network upgrades to handle the traffic. Typically, the parties seem to abide by the equity principle that whoever is sending the traffic–in this case, Netflix–should bear the costs via paid peering. That way, the increased expense is incurred by Netflix who can spread costs across its subscribers. If ISPs incurred the expense of upgrades, they’d have to spread costs over its subscriber base, but many of their subscribers are not Netflix users.

That principle doesn’t seem to hold for WatchESPN, which is owned by Disney. WatchESPN is an online service that provides live streams of ESPN television programming, like ESPN2 and ESPNU, to personal computers and also includes ESPN3, an online-only livestream of non-marquee sports. If a company has leverage in other markets, like Disney does in TV programming markets, I suspect ISPs can’t or won’t charge for interconnection. These interconnection deals are non-public but Disney probably doesn’t pay ISPs for transmitting WatchESPN traffic onto ISPs’ last-mile networks. The existence of a list of ESPN’s “Participating Providers” indicates that ISPs actually have to pay ESPN for the privilege of carrying WatchESPN content.

Netflix is different from WatchESPN in significant ways (it has substantially more traffic, for one). However, it is a popular service and seems to be flexing its leverage muscle with its Open Connect program, which provided higher-quality videos to participating ISPs. It’s plausible that someday video sources like Netflix will gain leverage, especially as broadband competition increases, and ISPs will have to pay content companies for traffic, rather than the reverse. When competitive leverage is the issue, antitrust agencies, not the FCC, have the appropriate tools to police business practices.

2. The rise of managed services in video.

Managed services include services ISPs provide to customers like VoIP and video-on-demand (VOD). They are on data streams that receive priority for guaranteed quality assurance since customers won’t tolerate a jittery phone call or movie stream. Crucially, managed services are carried on the same physical broadband network but are on separate data streams that don’t interfere with a customer’s Internet service.

The Apple-Comcast deal, if it comes to fruition, would be the first major video offering provided as a managed service. (Comcast has experimented with managed services affiliated with Xbox and TiVo.) Verizon is also a potential influential player since it just bought an Intel streaming TV service. Future plans are uncertain but Verizon might launch a TV product that it could sell outside of the FiOS footprint with a bundle of cable channels, live television, and live sports.

Net neutrality proponents decry managed services as exploiting a loophole in the net neutrality rules but it’s hardly a loophole. The FCC views managed services as a social good that ISPs should invest in. The FCC’s net neutrality advisory committee last August released a report and concluded that managed services provide “considerable” benefits to consumers. The report went on to articulate principles that resemble a safe harbor for ISPs contemplating managed services. Given this consensus view, I see no reason why the FCC would threaten managed services with new rules.

3. Uncertainty about what is “the Internet” and what is “television.”

Managed services and other developments are blurring the line between the Internet and television, which makes “neutrality” on the Internet harder to define and implement. We see similar tensions in phone service. Residential voice service is already largely carried via IP. According to FCC data, 2014 will likely be the year that more people subscribe to VoIP service than plain-old-telephone service. The IP Transition reveals the legal and practical tensions when technology advances make the FCC’s regulatory silos–“phone” and “Internet”–anachronistic.

Those same technology changes and legal ambiguity are carrying over into television. TV is also increasingly carried via IP and it’s unclear where “TV” ends and “Internet video” begins. This distinction matters because television is regulated heavily while Internet video is barely regulated at all. On one end of the spectrum you have video-on-demand from a cable operator. VOD is carried over a cable operator’s broadband lines but fits under the FCC’s cable service rules. On the other end of the spectrum you have Netflix and YouTube. Netflix and YouTube are online-only video services delivered via broadband but are definitely outside of cable rules.

In the gray zone between “TV” and “Internet video” lies several services and physical networks that are not entirely in either category. These services include WatchESPN and ESPN3, which are owned by a cable network and are included in traditional television negotiations but delivered via a broadband connection.

IPTV, also, is not entirely TV nor Internet video. AT&T’s UVerse, Verizon’s FiOS, and Google Fiber’s television product are pure or hybrid IPTV networks that “look” like cable or satellite TV to consumers but are not. AT&T, Verizon, and Google voluntarily assent to many, but not all, cable regulations even though their service occupies a legally ambiguous area.

Finally, on the horizon, are managed video and gaming services and “virtual MSOs” like Apple’s or Verizon’s video products. These are probably outside of traditional cable rules–like program access rules and broadcast carriage mandates–but there is still regulatory uncertainty.

Broadband and video markets are in a unique state of flux. New business models are slowly emerging and firms are attempting to figure out each other’s leverage. However, as phone and video move out of their traditional regulatory categories and converge with broadband services, companies face substantial regulatory compliance risks. In such an environment, more than ever, the FCC should proceed cautiously and give certainty to firms. In any case, I’m optimistic that experts’ predictions will be borne out: ex ante net neutrality rules are looking increasingly rigid and inappropriate for this ever-changing market environment.

Related Posts

1. Yes, Net Neutrality is a Dead Man Walking. We Already Have a Fast Lane.
2. Who Won the Net Neutrality Case?
3. If You’re Reliant on the Internet, You Loathe Net Neutrality.

There are few things more likely to get constituents to call their representative than TV programming blackouts, and the increase in broadcasting disruptions arising from licensing disputes in recent years means Congress may be forced to once again fix television and copyright laws. As Jerry Brito explains at Reason, the current standoff between CBS and Time Warner Cable is the result of bad regulations, which contribute to more frequent broadcaster blackouts. While each type of TV distributor (cable, satellite, broadcasters, telcos) is both disadvantaged and advantaged through regulation, broadcasters are particularly favored. As the US Copyright Office has said, the rule at issue in CBS-TWC is “part of a thicket of communications law requirements aimed at protecting and supporting the broadcast industry.”

But as we approach a damaging tipping point of rising programming costs and blackouts, Congress’ potential rescuer–Aereo–appears on the horizon, possibly buying more time before a major regulatory rewrite. Aereo, for the uninitiated, is a small online company that sets up tiny antennas in certain cities to capture broadcast television station signals–like CBS, NBC, ABC, Fox, the CW, and Univision–and streams those signals online to paying customers, who can watch live or record the local signals captured by their own “rented” Aereo antenna. Broadcasters hate this because the service deprives them of lucrative retransmission fees and unsuccessfully sued to get Aereo to cease operations.

Let’s back up. Broadcast television is–as my colleague Tom Hazlett says–the “killer app of 1952.” It’s an old technology featuring a few dozen channels that hasn’t fared well with the rise of subscription television offering hundreds of channels–Comcast, Dish, U-Verse, and others. Only about 10% to 15% of households rely on rabbit ears antennas to receive free broadcast TV, while the rest have a subscription.

I’m doubtful Congress will step in and make online distributors like Aereo pay for retransmission. While the laws tilt in broadcasters’ favor, Aereo gives cable and satellite companies additional leverage since–if they have a protracted fight with a broadcaster–they can direct their customers to Aereo. TWC is, in fact, doing this in its current dispute with CBS. Since customers have an online option, no one needs to miss NFL preseason football or the latest How I Met Your Mother. Aereo is not an ideal solution, but it gives a cable or satellite provider another bargaining weapon.

For several reasons, I think Congress may allow Aereo to proceed. First, with the variety of print, online, and television options consumers face today, broadcast programming is no longer a sacred cow. Congress, the FCC, and the tech and telecom industries are anxious to get more broadcasters off the air to make room for spectrum-hungry mobile technologies. That is the precise purpose of the pending incentive auctions. Broadcasters are a powerful group with compelling arguments for the status quo–they provide high-demand local news, sports, and weather, for instance–but many people are beginning to realistically imagine life without them.

Second, the primary political justification for protecting local broadcasters–local ownership and diversity–has “virtually vanished” because of industry consolidation in the 1990s and 2000s, as Harold Feld from Public Knowledge notes. It was easier in the past to defend these regulatory carve-outs for broadcasters when locally-owned operations were the beneficiaries, but today many broadcasters are owned by large media companies.

Finally, in the dynamic video marketplace, Congress may be hesitant to impose more regulations on new video technologies. Protecting a 1950s technology by enforcing 1990s laws on today’s Internet services makes little sense. Already, television laws passed in the 1990s look terribly dated and give Congress and the FCC headaches. Rewriting television and copyright laws is a huge task involving many powerful industries seeking protection from disruptive law changes. With the House and Senate controlled by different parties, this makes a grand compromise even less likely.

So Aereo and other antenna rental services represent some relief for regulators since it gives cable and satellite providers a little more leverage. The service is only in a few cities but is quickly expanding. If consumers adopt the service during future disputes, a semblance of equilibrium may return when subscription services bargain with broadcasters. For that reason, Congress may want to sit back and see how it plays out.

A cable TV monopoly is imminent and high prices loom, at least as far as the Associated Press is concerned.

That was the angle of a widely syndicated AP story last week reporting that in the second quarter of this year, landline phone companies lost broadband subscribers while cable companies gained market share.

Beneath the lead, Peter Svensson, AP technology reporter, wrote:

The flow of subscribers from phone companies to cable providers could lead to a de facto monopoly on broadband in many areas of the U.S., say industry watchers. That could mean a lack of choice and higher prices.

In the news business, the second graph is usually referred to as the “nut” graph. It encapsulates the significance of the story, that is, why it’s news.

It’s interesting that Svensson, with either support or input from his editors, jumped on the “de facto” monopoly angle. There could be any number of reasons why cable broadband is outpacing telco DSL, beginning with superior speed (to be fair, an aspect noted in the lead).

However, AP defaulted to the clichéd narrative that the telecom, Internet and media technology markets inevitably bend toward monopoly (see here, here, here and here for just as a sample). Moreover, that the money quote came from Susan Crawford, President Obama’s former special assistant for science, technology and innovation policy, and a vocal advocate of broad industry regulation, was all the more reason it should have been countered with some acknowledgement of the growing data on how consumer behavior is changing when it comes to TV viewing. Arguably, at least, the cable companies, far from heading toward monopoly, are sailing into competitive headwinds stirred up by video on demand services such as Netflix, Hulu and iTunes.

What numbers does AP base its monopoly supposition on? Their own tally from separate phone company reports finds that the eight largest phone companies in the U.S. collectively lost 70,000 broadband subscribers between April and June. Meanwhile, the top four public cable companies reported a gain of 290,000 subscribers. Assuming most of the 70,000 the telcos lost was DSL-to-cable churn, that still leaves cable with a net gain of 220,000 broadband subscribers (although some likely switched from satellite). So another way to read these numbers is that U.S. broadband subscriptions increased by nearly a quarter-million households in the second quarter. Too much of a smiley face? OK.

Then consider this:

Balancing the AP’s reporting of cable dominance is the Convergence Consulting Group’s finding that between 2008 and 2011 2.65 million people have dropped cable entirely in favor of alternative methods. Separate research from Nielsen tracked with this, finding that the number of households paying a multichannel provider last year declined by 1.5 million, which suggests the rate of cord-cutting is increasing.

In an excellent analysis of these trends, Engadget’s Brad Hill, no fan of cable, looks at how the cable companies are slowly getting boxed in between the on-demand alternatives and their traditional tiered pricing model, which day-by-day appears less and less price-competitive.

My purpose here has not been to pile on AP’s or the mainstream media’s technology reporting. But the danger in defaulting to the monopoly angle reinforces erroneous perceptions that persist in policy circles. I can’t predict how it’s going to turn out, but if consumers are to be served, broadband providers, as well as companies in any other segment of the digital economy, need the freedom to respond to market conditions. Regulations that restrain now-competitive companies as if they were once-and-future monopolies is not going to promote innovation. If progress is to be made on broadband policy that truly benefits consumers, lawmakers and regulators have approach the industry as it exists today—not as it was one, three, five or ten years ago. I’ll be the first to say legacy perceptions are hard to dismiss. But responsible reporting and analysis contributes to greater clarity and does not reinforce outdated notions.

I suppose there’s something to be said for the fact that two days into DirecTV’s shutdown of 17 Viacom programming channels (26 if you count the HD feeds) no congressman, senator or FCC chairman has come forth demanding that DirecTV reinstate them to protect consumers’ “right” to watch SpongeBob SquarePants.

Yes, it’s another one of those dust-ups between studios and cable/satellite companies over the cost of carrying programming. Two weeks ago, DirecTV competitor Dish Network dropped AMC, IFC and WE TV. As with AMC and Dish, Viacom wants a bigger payment—in this case 30 percent more—from DirecTV to carry its channel line-up, which includes Comedy Central, MTV and Nickelodeon. DirecTV, balked, wanting to keep its own prices down. Hence, as of yesterday, those channels are not available pending a resolution.

As I have said in the past, Washington should let both these disputes play out. For starters, despite some consumer complaints, demographics might be in DirecTV’s favor. True, Viacom has some popular channels with popular shows. But they all skew to younger age groups that are turning to their tablets and smartphones for viewing entertainment. At the same time, satellite TV service likely skews toward homeowners, a slightly older demographic. It could be that DirecTV’s research and the math shows dropping Viacom will not cost them too many subscribers.

This is the new reality of TV viewing. If you are willing to wait a few days, you can download most of Comedy Central’s latest episodes for free (although John Bergmayer at Public Knowledge reports that, in a move related to the DirecTV dispute, Comedy Central has pulled The Daily Show episodes from its site, although they are still available at Hulu).

What’s more, in a decision that should raise eyebrows all around, AMC said it will allow Dish subscribers to watch the season premiere of its hit series Breaking Bad online this Sunday, simultaneous with the broadcast/cablecast. This decision should be the final coffin nail for the regulatory claim of “cable programming bottleneck.” Obviously, studios have other means of reaching their audience, and are willing to use them when they have to.

Meanwhile, a Michigan user, commenting on the DirecTV-Viacom fight, told the MLive web site that “I love [DirecTV] compared to everyone else. I get local channels, I get sports channels. I wouldn’t have chosen if it was a problem.”

Now if Congress or the FCC steps up and requires that satellite and cable companies carry programming on behalf of Hollywood, the irony would be rich. Recall that just a few years ago, Congress and the FCC were pushing for a la carte regulation that would require cable companies to  reduce total channel packaging and let consumers essentially pick  the ones they want. Even the Parents Television Council is glomming onto this, as reported in the Washington Post, although not precisely from a libertarian perspective.

“The contract negotiation between DirecTV and Viacom is the latest startling example of failure in the marketplace through forced product bundling,” said PTC President Tim Winter in a statement calling on Congress and the FCC to examine the issue. “The easy answer is to allow consumers to pick and pay for the cable channels they want,” he said.

Winter’s mistake is that he views DirecTV’s challenge to Viacom as marketplace failure. Quite the contrary, it is a sure sign of a functional marketplace when one party feels it has the leverage to say no to a supplier’s aggressive price increase. And while I would be against a ruling forcing cable and satellite companies to construct a la carte alternatives, market evolution may soon be taking us there, but perhaps not the way activists imagined.

I’ll hazard a guess to say that today’s viewer paradigm isn’t so much “I never watch such-and-such a channel” than “I only watch one show on such-and-such a channel.” When Dish cuts off AMC and DirecTV cuts off Comedy Channel et al, they are banking that their customers won’t miss the station, just a handful of shows that they will be motivated enough to find elsewhere, if they haven’t done so already.

It might take a pencil and paper, but there is enough price transparency for a budget-minded video consumer to calculate the best balance between multichannel TV program platforms like satellite and cable, pay-per-view video, free and paid digital downloads and DVD rentals. The cable cord (or satellite link) may be difficult to cut completely, but the $200-a-month bill packed with multiple premium channel packages is endangered. The video consumer of the near-future might still keep cable or satellite for ESPN for Monday Night Football, but turn to Netflix for Game of Thrones, iTunes for Breaking Bad, and the bargain DVD bin for a season box set of Dora the Explorer videos. DirecTV and Dish Network are confronting these economics by confronting studios on their distribution strategy. The studios, for their part, may find they can’t aggressively exploit other digital channels and keep raising rates for multichannel operators.

While disputes like this are messy for consumers in the short term, the resolution will be a consumer win because it will force multichannel operators and the studios to adapt to actual changes in consumer behavior, not a policymaker’s construct of competitive supply chain. Washington would be wise to stay out.

OK, now that the television industry has admitted it, I guess I finally can, too: Hulu, far from being the key to “cable freedom” is just another evil plot by an evil industry to control us all—with the help of mind-bending advertising, of course!

http://www.youtube.com/v/48CZDXbczMI&hl=en_US&fs=1&

By Adam Thierer & Berin Szoka

The Wall Street Journal reports (see Financial Times, too) that “CBS Corp. and Walt Disney Co. are considering participating in Apple Inc.’s plan to offer television subscriptions over the Internet, according to people familiar with the matter, as Apple prepares a potential new competitor to cable and satellite TV.”

If Apple signs up enough networks to launch a viable service—still a very big if—it could ultimately alter the economics of the television business. The service could undermine the big bundles of channels that cable, satellite and telecommunications companies, including Comcast Corp. and DirecTV Inc., have traditionally sold in packages to subscribers.

And Brian Stelter of The New York Times says of the plan:

Broadband Internet subscriptions to TV networks could potentially destabilize the bedrock of the television business, which relies on subscribers paying for dozens of bundled channels.

As we have noted have noted here in our ongoing “Cutting the Video Cord” series, it’s just another sign that the video marketplace is vibrantly competitive and experiencing unprecedented innovation. So, why is Washington regulating this marketplace like we still live in the disco era?

The New York Times itself seems to be of two minds on this: Brian seems to recognize that the rise of Internet television means that cable providers no longer have any sort of special “gatekeeper” or “bottleneck” control over the programming available to consumers, just as his colleague Nick Bilton at the Times‘ BITS blog recently declared that “Cable Freedom Is a Click Away.” And yet, as Berin recently noted, when the DC Circuit struck down the FCC’s outdated 30% cap on the number of homes a single cable provider could serve (based on “gatekeeper” concerns) back in September, the  Times editorial page bemoaned the decision and demanded further regulation of the cable industry—even as Internet TV is fundamentally changing the marketplace for video programming and rendering moot “gatekeeper” concerns far more effectively than any law could ever do.

“Right hand, meet Left hand. Howyadoinnicetameetcha!”

Three months ago, when the DC Circuit struck down the FCC’s “Cable Cap”—which prevented any one cable company from serving more than 30% of US households out of fear that he larger cable companies would use their “gatekeeper” power to restrict programming—the New York Times bemoaned the decision:

The problem with the cap is not that it is too onerous, but that it is not demanding enough. Even with the cap — and satellite television — there is a disturbing lack of price competition. The cable companies have resisted letting customers choose, a la carte, the channels they actually watch…. [The FCC] needs to ensure that customers have an array of choices among cable providers, and that there is real competition on price and program offerings.

Perhaps the Times‘ editors should have consulted with the Lead Technology Writer of their excellent BITS blog.  Nick Bilton might have told him the truth: “Cable Freedom Is a Click Away.”  That’s the title of his excellent survey of devices and services (Hulu, Boxee, iTunes, Joost, YouTube, etc.) that allow users to get cable television programming without a cable subscription.

Nick explains that consumers can “cut the video cord” and still find much, if not all, their favorite cable programming—as well as the vast offerings of online video—without a hefty monthly subscription.  (Adam recently described how Clicker.com is essentially TV guide for the increasing cornucopia of Internet video.)  This makes the 1992 Cable Act’s requirement that the FCC impose a cable cap nothing more than the vestige of a bygone era of platform scarcity, predating not just the Internet, but also competing subscription services offered by satellite and telcos over fiber.  That’s precisely what we argued in PFF’s amicus brief to the DC Circuit a year ago, and largely why the court ultimately struck down the cap.

Bilton notes that “this isn’t as easy as just plugging a computer into a monitor, sitting back and watching a movie. There’s definitely a slight learning curve.”  But, as he describes, cutting the cord isn’t rocket science.  If getting used to using a wireless mouse is the thing that most keeps consumers “enslaved” to the cable “gatekeepers” the FCC frets so much about, what’s the big deal?  Does government really need to set aside the property and free speech rights of cable operators to run their own networks just because some people may not be as quick to dump cable as Bilton?  Is the lag time between early adopters and mainstream really such a problem that we would risk maintaining outdated systems of architectural censorship (Chris Yoo’s brilliant term) that give government control over speech in countless subtle and indirect ways?

If we were talking about just another subscription video service like satellite and telco fiber, the demise of cable as a unique “bottleneck” for programming might not be so obvious to the layperson (although MVPD competition is quite stunning, and means that “subscription service freedom is just a phone call or click away”).  But in the case of Internet video, the programming is à la carte by show and often free  (i.e., ad-supported), so consumers have a huge incentive to switch or can simply “put their toe in the water” before finally taking the plunge altogether.  As Bilton notes, he’s saving a fortune ($1,600/year):

Although the initial investment was costly, totaling $550, it took only a few months to recoup the money. Back in the olden days of cable we were forced to shell out a relatively standard $140 a month, for television service alone. This cost gave us access to a digital video recorder and hundreds of unwatched TV channels. Contrast this with today, where our only expense is $9 a month to stream Netflix videos from the Web and the $30 a month that we always spent on an Internet connection. O.K., maybe that’s not completely accurate. When the wireless keyboard died a few weeks ago I was forced to spend another $4 for two new AA batteries. We’ve not yet recovered from that financial loss… Tunes can get expensive. If you watch premium-cable television shows, you can pay more than $40 for the season of a single show. But even that is less than one month of cable. Since there are so many other entertainment options online, we just skip “Dexter” and “Weeds.” Trust me, there is a lot of great free or ad-supported content out there.

The experience isn’t that different, but it is richer:

We still come home from work and watch any number of shows, just like the people who continue to pay for cable. We just do it a little differently, starting the computer and then using services like Hulu, Boxee, iTunes and Joost. Another interesting twist to this experience is that we’re no longer limited to consuming traditional programming. With these applications we can spend an entire evening flicking through videos from YouTube, CollegeHumor or Web-only programs.

Mark my words: stories like this one will become increasingly representative of the mainstream, just as huge numbers of consumers have “cut the landline cord” in favor of cell phones.  By the time the FCC gets around to coming up with a new cable cap—using some inventively”fresh approach,” as the Times suggests, no doubt—stories like this one will be passé, and today’s world of cable TV subscriptions will have gone the way of the landline, rabbit ears, the fax machine, the mimeograph and the stereoscope.  The FCC, the Times’ editorialists, and all the other media reformista groups that keep screaming for regulation to slay phantoms of a bygone era will look mighty foolish, indeed.

On a final note, savvy observers will notice the similarity between Bilton’s slogan (“Cable Freedom Is a Click Away”) and Google’s mantra about its various services (“Competition is just one click away“).  Both run contrary to the prevailing assumption behind so much communications/Internet policymaking that users are too lazy, ignorant, stupid and/or helpless to find, explore, try, or even understand new tools, products, services or models.  One could raise legitimate questions about how competition plays out on the other side of these two-sided markets (advertising in the case of search and programming in the case of cable television), but to deny that consumers are capable of “clicking away” is to assume that they are mindless sheep.

The New York Times, to their credit and despite their editorial position on cable regulation, certainly seems to have a higher opinion of our intelligence—or they wouldn’t have bothered with Bilton’s excellent do-it-yourself guide.  In the case of television programming, the “sheep”  have begun overrunning  whatever “gates” once contained them and flooding into the verdant pastures of Internet video programming abundance.  More will soon follow in droves, and cable operators will do everything they can to keep their “grass” (programming choices) as “green” (abundant and diverse) as possible, just to compete.  The FCC’s continued meddling is simply unnecessary, counterproductive and dangerous as a precedent for outdated regulatory controls.

Around this time last year, a relative 20 years my senior was asking me what I was writing about and I mentioned how I’d been collecting anecdotes and stats for what was becoming our “Cutting the Video Cord” series here.  That series has documented how the Internet and new digital media options are displacing traditional video distribution channels.  We’ve been exploring what that means for consumers, regulators and the media itself.

I asked this relative of mine if they spent any time watching their favorite shows, or even movies, online or through alternative means than just their cable or satellite subscription.  He said he didn’t because of the lack of an easy way to find all their favorite shows quickly.  Specifically, he lamented the lack of a good “TV Guide” for online video. I explained to him that, for most of us 40 and under, our “TV Guide” was called “a search engine”!  It’s pretty easy to just pop in any show name or topic into your preferred search engine and then click on “Video” to see what you get back.  Nonetheless, I had to concede that random searching for video wouldn’t necessarily be the way everyone would want to go about it.  And it wouldn’t necessarily organize the results in way viewers would find useful–grouping things thematically by genre or offering the sort of related programming you might be interested in seeing.

Well, good news, such a service now exists. Katherine Boehret of the Wall Street Journal brought “Clicker.com” to my attention in her column last night, a terrific new (and free) video search service:

… Clicker [is] a free Web site that aims to be the TV Guide for all full episodes available to watch on the Web. It searches over 1,200 sources, so it can index some 400,000 episodes from 7,000 shows. Results include television programs as well as “Web originals,” or shows that are native to the Internet and are of broadcast quality. Clicker either plays the video on its site or links you to where this content is shown on another hosting site—like NBC or Hulu. If a show isn’t available online, Clicker tells you so you don’t have to keep hunting all over for it.

I played around with Clicker quite a bit last night and this morning and can safely say that I will be spending a lot of my free time there in coming months and years, as will a lot of other folks I suspect. It’s a great way to search a broad array of websites for the very best video content on the Net.  I’m a car nut and used Clicker to quickly pull up some of my favorite programs as well as several I had never heard of before.  The player will allow you to fire up many of those videos right away, or at least direct you to the site where the content is housed to watch it there immediately.  The playlist feature allows you to create a customized “TV Guide” for you and your own family.  Very cool.

Anyway, when we add Clicker to all the other great online video services out there today, it’s even harder for me to understand the amount of time Washington regulators and lawmakers spend obsessing about crusty old TV regulatory issues.  It just doesn’t make any sense.

My PFF colleagues Berin Szoka and Adam Thierer have written many times about the quid pro quo by which advertising supports free online content and services: somebody must pay for all the supposedly “free” content on the Internet. There is no free lunch !

Here are two two recent examples I came across of the quid pro quo being made very apparent to users.

Hulu. Traditionally, broadcast media has been a “two-sided” market: Broadcasters give away content to attract audiences, and broadcasters “sell” that audience to advertisers. The same is true for Internet video. But watching Hulu over the weekend, I noticed something interesting: Adblock Plus blocked the occasional Hulu ad but every time it did so, I was treated to 30 seconds of a black screen (instead of the normal 15 second ad) showing a message from Hulu reminding me that “Hulu’s advertising partners allow [them] to provide a free viewing experience” and suggesting that I “Confirm all ad-blocking software has been fully disabled.”

Although I use AdBlock on many newspaper websites (because I just can’t focus on the articles with flashing ads next to the text), I would much rather watch a 15-second ad than wait 30 seconds for my show to resume. I think most users would feel the same way. We get annoyed by TV ads because they take up so much of our time. If Wikipedia is to be believed, there’s now an average of 9 minutes of advertisements per half-hour of television. That’s double the amount of advertising that was shown in the 1960s.

But online services such as Hulu show an average of just 37 seconds of advertising per episode. Amazingly, some shows garner ad rates 2-3 times higher than on prime-time television. Why might ad rates for online shows be higher? Because:

1. When a show has only 15 seconds of ads, you’re less likely to turn away from the screen to do something else;
2. Advertisers are more certain that viewers are watching their ads (as opposed to changing the channel or skipping over it with a DVR); and
3. Online viewers are twice as likely to remember a commercial they’ve seen on Hulu as one they’ve seen on television-at least in part because of factors 1 and 2, and perhaps because Internet video ads might be more effective in other ways.

As for me, I’ve reconfigured Adblock Plus to not block ads on Hulu. But even if users like me don’t block video ads on sites like Hulu, they may not be able to generate enough revenue to survive. Traditional media providers might be willing to cross-subsidize experiments in online video distribution for a while from offline revenue streams, but at some point, either online video will have to produce comparable revenue or the quality of content will deteriorate notably in the gradual shift to online distribution.

The problem is that, even if online video services can sell ad time for 3 times as much as broadcasters, because there is almost 15 times as much ad time on broadcast television than online services, the online service will still earn only 1/5 as much revenue as a traditional broadcaster. This is why online video is expected to drive adoption of personalized (or “behaviorally targeted”) advertising: If online video programmers can target advertising to the individual user’s likely interest, rather than to a crude profile of their likely audience, they can generate much higher revenue per ad because advertisers won’t be wasting their ad budgets showing users ads for things they aren’t interested in! The increased revenue for online content providers made possible by targeted advertising is the “mother’s milk” that many websites need to survive.

Google Maps. On 8/25, Google announced that it had updated Google Maps for mobile to periodically report the user’s location (based on the GPS chip in their device) back to Google. But before you reach for your tinfoil hats and start shouting about conspiracy theories, let me explain why this “tracking” is actually fantastic news for users:

1. Google uses the reported location (and speed) information to assess traffic conditions in real-time. This traffic information is then shared with other Google Maps users in near-real-time-everyone benefits! If only a few people participated, the data would not be very helpful. But when lots of people participate, the data is more accurate and available for more roads than would otherwise be possible.
2. It’s completely optional and users are fully informed of what the software is doing.
3. People who do not want their location tracked can opt-out at no cost-and they get to keep using Google Maps for free.

Conclusion

In the Hulu example, the basic quid pro quo for getting all that free video programming is watching a few ads. It’s possible for people to block the ads, but then they’ll waste even more time looking at a black screen. That basic quid pro quo might prove insufficient to support the quality and quantity of video programming users want online, but without at least the basic quid pro quo of not blocking ads, video programming won’t get past stage one.

In the Google Maps example, the quid pro quo for getting traffic data is sharing your location with Google. Users can still get the traffic data without sharing their location, but if everyone did that, there would be no traffic data. This highlights the problem of free-riding created by the no-cost opt-out: It’s still possible to be a freeloader with both services, but if everyone did that, these services simply wouldn’t survive.

The Tennis Channel and ESPN have teamed up to offer live coverage of the US Open online. Not only is this a wonderful thing for consumers, but it also demonstrates just how easily content creators (including traditional television programming networks) can completely bypass cable companies, who once supposedly used their “bottleneck” power to act as “gatekeepers” over the content Americans could receive. If this was ever true, it certainly isn’t true in the era of Internet video!

The venture will, of course, be ad-supported. But just how much content such a  model can support will depend  heavily on whether Internet video programming distributors like this venture (or Hulu.com) will be able to personalize the ads shown on their videos based on the likely interests of users.  Ad industry observer David Hallerman has predicted that spending on behavioral advertising:

is projected to reach $1.1 billion in 2009 and $4.4 billion in 2012 [a quarter of U.S. display advertising].The prime mover behind this rapid increase will be the mainstream adoption of online video advertising, which will increasingly require targeting to make it cost-effective.

The problem isn’t just the expense involved in streaming online video, it’s that contextually targeting advertising (based on keywords) is easy when the content is text but far more difficult when the content is video.

So if you’re hoping to cut the cord to cable and save the expense of a monthly cable subscription, you’d better hope the privacy zealots don’t wipe out advertising model necessary to make Internet video a true substitute for traditional subscription video sources!

The D.C. Circuit has struck down as arbitrary and capricious the FCC’s “cable cap.”  The cap prevented a single cable operator from serving more than 30% of U.S. homes—precisely the same percentage limit struck down by the court in 2001.  The court ruled that the FCC had failed to demonstrate that “allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming.”

The court’s decision rested on the two critical charts (both generated by my PFF colleague Adam Thierer in his excellent Media Metrics special report) at the heart of the PFF amicus brief I wrote with our president, Ken Ferree:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992.

Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

Our chart shows the explosion in the number of programmers (though not the total amount of programming), as well as the falling rate of affiliation between cable operators and programmers, which was among the prime factors motivating Congress when it authorized a cable cap in the 1992 Cable Act:

These two charts show how much less defensible the FCC’s 30% cap is now than it was back in 2001. If the Court had needed still more evidence, it could have cited the broader trend towards “Cutting the Video Cord.” As we explained in our amicus brief, viewers are shifting away from cable, satellite and fiber (“Multichannel Video Programming Distributors,” in FCC-speak) towards sites like Hulu and Netflix (which we dubbed “Internet Video Programming Distributors” in the hopes that a familiar-sounding acronym might resonate inside a regulatory agency that can’t even figure out how to stream its own meetings properly). Nothing better demonstrates how the Internet is revolutionizing video distribution than the fact that Hulu.com has actually overtaken TimeWarner cable in viewership:

As part of our ongoing series that tracks the gradual transition of video content to the boob tube to online outlets, I want to draw everyone’s attention to two excellent articles in today’s Washington Post about this trend.  One is by Paul Fahri (“Click, Change: The Traditional Tube Is Getting Squeezed Out of the Picture“) and the other by Monica Hesse (“Web Series Are Coming Into A Prime Time of Their Own“).  I love the way Paul opens his piece with a look forward at how many of us will be explaining the “old days” of TV viewing to our grand kids:

S it down, kids, and let Grandpa tell you about something we used to call “watching television.” Why, back when, we had to tune to something called a “channel” to see our favorite programs. And we couldn’t take the television set with us ; we had to go see it! Ah, those were simpler times. Oh, sure, we had some technology we thought was pretty fancy then, too, like your TiVo and your cable and your satellite, which gave us a few hundred “channels” of TV at a time. Imagine that — just a few hundred! And we had to pay for it every month! Isn’t the past quaint, children? Well, it all started to change around aught-eight, or maybe ’09, for sure. That’s when you no longer needed a television to watch all the television you could ever want. Yes, I still remember it like it was yesterday . . .

Too true.  Anyway, Paul goes on to document how some folks have already completely made the jump to an online-online TV existence and are doing just fine, although the idea of us all gathering around the tube to share common experiences may be a causality of the migration to smaller screens, he notes.

Monica’s piece documents the rise of independent online television shows and notes:

The shows don’t look exactly like the traditional television series we’re used to, but if you’re willing to adapt to the medium you might discover something surprising: You can become a very satisfied television addict without ever straying from your laptop. When done right, the experience can be more intimate, more creative and more personal than you ever expected.

She then discusses the growth of online series such as “The Guild,” “Gemini Division,” and “Sorority Forever,” which features the Jessica Rose (aka “Lonely Girl15“), who was instrumental in getting the online video TV series trend off the ground.  Of course, the viewing numbers for online shows still pale in comparison to major network or cable shows, but that could change in the future.

Again, to reiterate a point we have made here many times before, what makes all this so interesting from a policy perspective is the way media law remain stuck in a time warp, or what I have referred to as a jurisprudential Twilight Zone:  Identical words and images are being regulated in completely different ways depending on the medium of transmission.  As I noted in an earlier essay in this series:

The video marketplace is changing rapidly. Meanwhile, however, back in the surreal regulatory la-la land of Washington, DC, it remains business as usual.  As Brian Anderson and I point out in our new book, A Manifesto for Media Freedom, policymakers are still trying applying a host of unique regulations to “old media” providers, including: various censorship rules, educational programming mandates, special campaign finance advertising laws, must carry regs, media ownership caps, broadcast “localism” requirements and various other “public interest” obligations, and much more.

And yet, online video remains (thankfully) completely unregulated.  Will that last?  Or will the worst regulation of old television era gradually creep over into new video realms?  That’s something I am increasingly concerned about; the dawn of what I call “convergence-era content regulation.”

Get ready.  A regulatory war awaits.

This ongoing series has focused on the growing substitutability of Internet-delivered video for traditional video distribution channels like cable and satellite.  YouTube has recently begun exploring adding traditional television programming to its staggering catalogue of mostly amateur-generated content.  

But now YouTube is going one step farther by exploring  the possibility of signing Hollywood professionals to produce “straight-to-YouTube” content:

The deal would underscore the ways that distribution models are evolving on the Internet. Already, some actors and other celebrities are creating their own content for the Web, bypassing the often arduous process of developing a program for a television network. The YouTube deal would give William Morris clients an ownership stake in the videos they create for the Web site.

This kind of deal would make Internet video even more of a substitute for traditional subscription channels—thus further eroding the existing rationale for regulating those channels.  

But what’s even most interesting about this development is that YouTube’s interest seems to be driven primarily by the possibility of reaping greater advertising revenues on such professional content than on its currently reaps from its vast, but relatively unprofitable, catalogue of user-generated content:  

YouTube’s audience is enormous; the measurement firm comScore reported that 100 million viewers in the United States visited the site in October. But, in part because of copyright concerns, the site does not place ads on or next to user-uploaded videos. As a result, it makes money from only a fraction of the videos on the site — the ones that are posted by its partners, including media companies like CBS and Universal Music. The company has shown interest in becoming a home for premium video in recent months by upgrading its video player and adding full-length episodes of television shows. But some major television networks and other media companies are still hesitant about showing their content on the site. The Warner Music Group’s videos were removed from the site last month in a dispute over pay for its content.

Digital video recorders (DVRs) may turn out to be the “last gasp” of cable, satellite and other traditional multichannel subscription video providers.  If users can get the same basic functionality (on demand viewing of the shows they want) over the Internet for free or paying for each show rather than a hefty monthly subscription, Who Needs a DVR?, as Nick Wingfield at the WSJ asks:

Among a more narrow band of viewers -– 18- to 34-year-olds -– SRG found that 70% have watched TV online in the past. In contrast, only 36% of that group had watched a show on a TiVo or some other DVR at any time in the past. That last figure is a fairly remarkable statistic. Remember that DVRs have the advantage of playing video back on a device where the vast majority of television consumption has traditionally occurred –- that is, the TV set. Although it’s also possible to watch shows over the Internet on a TV set through a device like Apple TV and Microsoft’s Xbox 360, most people watch online TV shows through their computers — which have inherent disadvantages, like smaller screens and, in most cases, no remote controls.

Indeed, if users are going to buy a piece of hardware, why buy a DVR when they can buy a Roku box or a game console like the XBox 360 that will put Internet-delivered TV on their programming on their “television” (a term that increasingly simply means the biggest LCD in the house, or the one that faces a couch instead of an office chair)— and save money?

This is precisely the point Adam Thierer and I have been hammering away at in this ongoing series.  The availability of TV through the Internet and the ease with which consumers can display that content on a device, and at a time, of their choosing are quickly breaking down the old “gatekeeper” or “bottleneck” power of cable.  Let’s see how long it takes Congress and the FCC to realize that the system of cable regulation created in the analog 1990s no longer makes sense in this truly digital age.

This ongoing series has explored the increasing ability of consumers to “cut the cord” to traditional video distributors (cable, satellite, etc.) and instead receive a mix of “television” programming and other forms of video programming over the Internet.  As I’ve argued, this change not only means lower monthly bills for those “early adopter” consumers who actually do “cut the cord”, but, in the coming years, a total revolution in the traditional system of content creation and distribution on which the FCC’s existing media regulatory regime is premised.   

This revolution has two key parts:

1. Conduits: The growing inventory—and  popularity—of sites such as Hulu, Amazon Unboxed and the XBox 360 Marketplace (or software such as Apple’s iTunes store), that allow users to view or download video content.  Drawing an analogy to the FCC’s term “Multichannel Video Programming Distibutor” or MVPD (cable, direct broadcast satellite, telco fiber, etc.), I’ve dubbed these sites “Internet Video Programming Distributors” or IVPDs.
2. Interface:  The hardware and software that allows users to display that content easily on a device of their choice, especially their home televisions.

While much of the conversation about “interface” has focused on special hardware that brings IVPD content to televisions through set-top boxes such as the Roku box or game consoles like the XBox 360, at least one company is making waves with a software solution.  From the NYT:

Boxee bills its software as a simple way to access multiple Internet video and music sites, and to bring them to a large monitor or television that one might be watching from a sofa across the room. Some of Boxee’s fans also think it is much more: a way to euthanize that costly $100-a-month cable or satellite connection. “Boxee has allowed me to replace cable with no remorse,” said Jef Holbrook, a 27-year-old actor in Columbus, Ga., who recently downloaded the Boxee software to the $600 Mac Mini he has connected to his television. “Most people my age would like to just pay for the channels they want, but cable refuses to give us that option. Services like Boxee, that allow users choice, are the future of television.” …. Boxee gives users a single interface to access all the photos, video and music on their hard drives, along with a wide range of television shows, movies and songs from sites like Hulu,Netflix, YouTube, CNN.com and CBS.com.

With 200,000 users thus far, Boxee is quickly taking off and made a big splash at CES this year.  Boxee may be a scrappy start-up but is founder realizes the revolutionary implications of his product:

Mr. Ronen also shared what he called his “politically incorrect” vision of how the Internet would upset the television business by giving people on-demand access to the array of Web content. “The challenge for the cable industry is how they grapple with the fact that this is in some way a substitution for some of the things they do,” he said.

The NYT rightly observes that, whether Boxee really takes off as the Next Big Thing, its success thus far is at least driving other “consumer electronics companies to move faster to bring the Internet to their devices.”  I suspect that what we’re seeing now is a “tipping point” on both sides of the business:  As IVPDs gain popularity and larger inventories, “interface” developers like Boxee (or others on the hardware side) will proliferate rapidly.

Continuing the “Cutting the (Video) Cord” series started by my PFF colleague Adam Thierer:  The WSJ had two great pieces yesterday about the increasing competitive relevance of television distributed by Internet—a trend that was at the heart of an amicus brief PFF recently filed in support of C omcast’s challenge of the FCC’s 30% cap on cable ownership.  The first WSJ piece declares that:

After more than a decade of disappointment, the goal of marrying television and the Internet seems finally to be picking up steam. A key factor in the push are new TV sets that have networking connections built directly into them, requiring no additional set-top boxes for getting online. Meanwhile, many consumers are finding more attractive entertainment and information choices on the Internet — and have already set up data networks for their PCs and laptops that can also help move that content to their TV sets.

The easier it is for consumers to receive traditional television programming (in addition to other kinds of video content) distributed over the Internet on their television, the less “gatekeeper” or “bottleneck” power cable distributors have over programming.  So the Netflix-capable and Yahoo-widget-capable televisions described by the WSJ piece go a long way to increasing the substitutability of what we call Internet Video Programming Distributors (IVPDs) for Multichannel Video Programming Distributors (MVPDs), such as cable, satellite television and fiber services offered by telcos such as Verizon’s FiOS.  

While such televisions are only expected to reach 14% of all TV sales by 2012, one must remember that a growing number of set-top boxes ( e.g., the Roku Digitial Video Player, game consoles like the Microsoft XBox 360 and Sony PlayStation 3, and TiVo DVRs) allow users to users to receive IVPD programming on their existing televisions.  

As we argued in our amicus brief, the immense competitive importance of IVPDs lies not in the potential for some users to “cut the cord” to cable and other MVPDs (though that will surely happen), but in the immediate impact IVPDs have as an alternative distribution channel for programmers.  In the pending D.C. Circuit case, we argue that both the FCC’s 30% cap, issued in December 2007, and the underlying portions of the 1992 Cable Act authorizing such a cap should be struck down as unconstitutional because the ready availability of IVPDs as an alternative distribution channel means that cable no longer has the “special characteristic” of gatekeeper/bottleneck power that would justify imposing such a unique burden on the audience size of cable operators.  (Of course, Direct Broadcast Satellite and Telco Fiber are also eating away at cable’s share of the MVPD marketplace.)

The second WSJ piece, an op/ed, illustrates beautifully how cable operators are already losing “market power” (or at least negotiating leverage) in a very tangible way:  they’re having to pay more for programming.  Specifically, the Journal describes how Viacom plaid chicken with Time Warner—and won.  

 The Viacom network had threatened to pull its 19 channels, including Nickelodeon with its “Dora the Explorer” and “SpongeBob SquarePants” cartoons, from the 13 million subscribers to the Time Warner Cable system…. The game of chicken included Viacom advertisements that unless Time Warner Cable agreed to pay more, it would pull the channels, encouraging viewers to call to say they wanted their MTV and other Viacom channels. One ad asked, “Why is Dora crying?” Time Warner countered that consumers would pay more if its costs rose. Bernstein Research analyst Michael Nathanson noted that neither party could afford “mutually assured destruction.” Viacom needs to find more subscription revenue as advertising revenues soften, while Time Warner Cable has to worry about satellite and telecom competitors. New media was the new factor. Many popular Viacom shows are widely available on the Web, including on its own sites. When it looked as if Comedy Central would be pulled, Wired magazine helpfully posted a guide for accessing the shows on the Web, pointing out that Jon Stewart’s “The Daily Show” can be accessed on Hulu and that “South Park” episodes are on Fancast. The best parts of “The Colbert Report” are often viewed as email attachments or as snippets on mobile phones.

So, in a nutshell, the fact that consumers could get Viacom programming available through IVPDs gave Viacom more leverage against MVPD Time Warner because it increased the credibility of Viacom’s threat to simply shut off programming to Time Warner if the cable giant didn’t cough up more cash.  While this fact seems to have carried the day for Viacom, the availability of Viacom’s content through IVPDs did have some secondary effects that also are worth noting:

During the negotiations, Time Warner Cable threatened to make it easier for its subscribers to connect laptop computers to their televisions so that Viacom shows could stream directly onto subscribers’ televisions.

This is essentially a reversal of the tactic often employed by local broadcasters in their battles with cable operators:  give your customers a set of rabbit ears so they can still get your signal if you actually take your programming off the local cable network.  While this tactic doesn’t seem to have helped Time Warner here, it does point to a long-term trend that could fundamentally change the programming marketplace:

The cable company also argued that it shouldn’t have to pay more to distribute shows that Viacom made available free in other media.

I suspect that, as IVPDs further erode the viewership of cable and other MVPDs, the MVPDs will become more desperate for content—and therefore willing to pay more for it.  But it seems likely that both of the key revenue sources for MVPDs—subscriptions and advertising—will, at some point, begin to decline as Americans spend more time watching IVPD content and become less willing to pay for expensive MVPD plans.  As this happens, cable may have less revenue to share with programmers per subscriber, even as their need for that programming grows.

So how will this all end?  I doubt anyone really knows.  But I feel reasonably comfortable making two predictions.  

First, the overall health of the video programming content market will become increasingly dependent on the profitability of advertising—for MVPDs, IVPDs as well as programmers.  This will require technological innovation to produce smarter advertising.  The better advertising is targeted to a specific consumer’s interests, the more revenue it will produce for all concerned.  But if the government short-circuits this process by hindering the evolution of targeted advertising in the name of protecting consumers’ privacy (or simply to protect them from the supposed inherent unfairness of advertising—an old Marxist shibboleth), the total amount of funding available for content could plummet.  The dynamics described so well by Chris Anderson in “Free! Why $0.00 Is the Future of Business” could drive video programmers to make their content available online for “free” (i.e., at no charge to the user) even if that content ends up producing (via advertising, etc.) significantly less revenue than it currently does on MVPDs (primarily from subscription revenue).  Plenty of smart people have explored this question and have far more intelligent things to say about it than I do.  But since the long-term trend seems to be that consumers are increasingly unwilling to pay even small sums for content, I just don’t see any alternative to increasing advertising revenues—other than public financing, which will necessarily bring with it government control and censorship.

Second, the other part of the solution to this problem will be business model innovation:  If individual consumers won’t pay for online video content, and if future ad revenues for online video content  don’t replace existing revenue streams, programmers are going to look for other sources of funding.  This dynamic seems to be on a collision course with net neutrality mandates.  The WSJ reported:

At one point, it looked as if Viacom might have escalated by trying to block Time Warner Cable broadband subscribers from accessing its Web sites to see its shows.

Whatever actually happened here, one can easily imagine a programmer like Viacom at some point in the future trying to get ISPs to start paying money per broadband subscriber for video content just as MVPDs currently pay per subscriber.  This is really the inverse of the fear generally expressed by net neutrality advocates that ISPs would try to charge programmers for the bandwidth used to transmit their content to an ISP’s subscribers.  If it’s true that programmers (the Viacoms of the world) and not distributors (Time Warner Cable the MVPD or Time Warner Cable the ISP) really have the market power, as this story suggests, then such arrangements might well be the economic salvation of content creators.  As with regulation of advertising, I only hope that government mandates against such innovation in the name of abstract “neutrality” principles don’t end up dooming us to a future where, with free market solutions (better advertising, revenue sharing with ISPs) rendered ineffective by government, government itself seems to be the only option left.