Cutting the Video Cord

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. The 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. Continue reading →

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.  Continue reading →

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. Continue reading →

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.

Continue reading →

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). Continue reading →

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.

Continue reading →

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. Continue reading →

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.

Pay TV Market Share

Continue reading →