At this week’s excellent State of the Net 2011 event, I participated in a panel discussion about the future of the online video marketplace.  Unsurprisingly, a great deal of time was spent discussing the Federal Communications Commission’s (FCC) recent approval of the proposed merger of Comcast and NBC Universal (NBCU). On Tuesday, the agency voted 4-1 to approve the deal with myriad conditions and “voluntary” concessions being attached.  The FCC voted on the matter and issued a short press release and late today issued its final 279-page order.

The Commission’s Comcast-NBCU order represents an unprecedented regulatory shakedown of a company that obviously would have done just about anything to gain approval of the deal.  I believe the conditions the FCC has imposed on the deal, which are to run for seven years, are tantamount to a death by a thousand cuts for the deal and, ultimately, could lead to its failure.  That’s because the requirements placed on the new entity make it practically impossible for Comcast to leverage the content it is acquiring from NBCU and profit from it such that they can recoup the significant costs associated with the deal.

In essence, Comcast-NBCU was forced to preemptively surrender much of its intellectual property rights by agreeing to share most of their content properties with others on terms someone else will determine.  That’s a recipe for disaster.  If Comcast-NBCU doesn’t have the right and ability to cut deals on terms that they find advantageous to the company and its shareholders, then why go through with this deal at all? Isn’t the whole point of such a deal with get some additional in-house content properties — something Comcast almost completely lacked previously — such that it would have some content gems to highlight and leverage in an attempt to attract new customers (or just keep old ones)? If someone else is constantly setting the terms of their deals, it will limit the inherent value of the IP owned by Comcast-NBCU and sap most of the value from the deal.

Particularly concerning in this regard is the language of the FCC’s order dealing with online video marketplace. As a condition of approval, the FCC’s plan requires that Comcast-NBCU:

• Provides to all MVPDs, at fair market value and non-discriminatory prices, terms, and conditions, any affiliated content that Comcast makes available online to its own subscribers or to other MVPD subscribers.
• Offers its video programming to legitimate OVDs [online video distributors] on the same terms and conditions that would be available to an MVPD.
• Makes comparable programming available on economically comparable prices, terms, and conditions to an OVD that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.
• Offers standalone broadband Internet access services at reasonable prices and of sufficient bandwidth so that customers can access online video services without the need to purchase a cable television subscription from Comcast.
• Does not enter into agreements to unreasonably restrict online distribution of its own video programming or programming of other providers.
• Does not disadvantage rival online video distribution through its broadband Internet access services and/or set-top boxes.
• Does not exercise corporate control over or unreasonably withhold programming from Hulu.

The first thing to note about this language is that, through a merger proceeding, the FCC has just inserted itself into the online video marketplace in a major way and began regulating it.  Not so long ago, the idea of the FCC regulating the Net and online video would have been scoffed at and rejected as outlandish.  But here we are now with the FCC knee-deep into the daily workings of the online marketplace without Congress ever having passed a law authorizing such a thing.

The second thing to note about those online video provisions is that they potentially foreshadow the rise of a compulsory license for online video distribution.  In essence, to use antitrust parlance, Comcast-NBCU has a “duty to deal” its content to others on terms that regulators will police.  Of course, we already have many compulsory licenses in place in America, including one for traditional cable television, so it will be tempting for some to say, ‘why not one for online video, too?’  But it seems like this would have been a good time to give good ol’ fashion market competition and contractual negotiations a chance instead.  After all, where is the harm here?  If NBC’s content is supposedly so valuable that Comcast will exploit it in future online video negotiations, why hasn’t NBC been exploiting that content for years already?

Of course, this exposes the real irony of all this hand-wringing about the Comcast-NBCU deal: It’s a fight about supposedly “Must See TV” that not everyone feels they must see anymore!  Don’t get me wrong, NBCU does have some wonderful content in its stable of properties, and Comcast is no doubt happy to have something better than the Golf Channel under it’s corporate umbrella now.  But, seriously, would the Earth spin of its axis tomorrow if Comcast suddenly decided to try to lock up all its new NBC content and refuse to deal with anyone else on equal terms?  That would be highly unlikely, of course, since it would be economic suicide to restrict access to a single platform. But if they did, would anyone really care?   In the modern world of content abundance and distribution platform diversity, it’s hard to image most consumers would.  Comcast has bet the farm on the opposite theory — that NBCU content is still hotly demanded and will add real value to the company — and yet, even without the onerous conditions it has been forced to agree to here, the firm must know just how risky this move is for them and their shareholders.  Those who lost their shirts on the failed AOL-TimeWarner and NewsCorp-DirecTV deals can attest to how illusive those so-called “synergies” can be when two very different media operations and cultures are merged. [Read my old paper on “A Brief History of Media Merger Hysteria” for all the grim details on those deals and how they went south so quickly.]

Finally, perhaps the most interesting provision in the FCC’s order is the requirement that Comcast-NBCU “makes comparable programming available on economically comparable prices, terms, and conditions to an [online video distributors] that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.” As I read it, what this means is that when competing content companies — such as Disney, News Corp., Viacom, etc. — cut deals with an online video distributors, it establishes a precedent for what is expected of Comcast-NBCU when they go to strike terms and prices with OVDs.  How long will it be before this provision leads to accusations of collusion among major content companies?!  Moreover, this provision is somewhat insulting since it basically assumes all content is created equal when that is most definitely not the case.  When Disney is negotiating with an OVD to carry ESPN, should that deal really have any bearing on Comcast cutting a deal with someone for the Golf Channel or Versus?

There are many other provisions and conditions that I haven’t bothered detailing here, including program “localism” mandates, broadband deployment and pricing requirements, program “diversity” requirements, children’s television mandates, more “PEG” programming requirements, and more.  But wait, you ask: won’t all these provisions and the others discussed above benefit consumers?  It’d be nice to imagine that the FCC could work such magic by waving its regulatory wand and trying to mandate consumer benefits into existence by decree. And perhaps some of these requirements will help some consumers in a marginal way.  In reality, however, healthy companies are the better way to serve customers with new and better services.  Hamstringing merging entities with layers of red tape like this is particularly misguided in light of how much money is being spent to make the deal happen.  Finally, regulators should just be happy that someone out there wanted to take over NBC and help the struggling media operator rebound!  If regulators are really concerned about the future of  “localism” or the health of traditional media operators like NBC more generally, asking for a pound of flesh through a set of “voluntary” concessions like these isn’t a good way to achieve that goal.

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.

In her latest column, Media Post media market guru Diane Mermigas wonders how long it will be before we see a traditional over-the-air (OTA) broadcast TV network (like ABC, NBC, CBS, or Fox) dump their old broadcast business altogether and just move all their properties to cable and satellite TV. And, in response to Mermigas, Cory Bergman of Lost Remote argues, as I did last week, “the real future of TV is not linear cable, but non-linear video delivered seamlessly via IP to multiple devices, including your TV set. But mass adoption of this approach is still several years away.”

Bergman is right. It would be foolish to think any traditional network is going to rely exclusively on IP-based distribution any time soon; they see it as more of a compliment (or another product window). But Mermigas may be on to something in predicting that broadcast networks may soon be looking to get out of the OTA television business altogether and essentially become “a glorified general entertainment cable network.”

The strain on their dysfunctional paradigm is emanating from a devastating recession and the ongoing digital revolution. Both are permanently altering the rules of play for the networks. A case can be made for at least one of the Big 4 broadcast networks emerging as a glorified general entertainment cable network within the next several years. The economic advantages: more steady ad revenues and consistent subscriber fees as content is distributed cross-platform. It would be a bold move that a free-spirited company such as News Corp. might already be contemplating for its Fox Broadcast TV Network, or NBC Universal for its peacock network. Industry analysts increasingly wonder how an independent CBS can prattle on under the crumbling old rules. In a world of exploding access and choices, the prime-time ratings (even with Live plus 3 configurations) spell diminishing returns. For Disney, ABC’s general entertainment status is on par with ESPN in sports; the new multi-platform model is in place except for formally moving the ABC TV Network to the cable side of the ledger.

Such a suggestion would have been considered outlandish even just a few years ago, but now it seems like it’s only a matter of time before one of the majors makes the jump to being a cable-exclusive “super-station.” It’s another sign of the radical metamorphosis underway in our modern media marketplace. Mermigas notes that “The most compelling argument for the Big 4 surviving as cable networks is economic”:

Digital distribution is a long way from yielding the financial returns needed to offset the dilution of old-line mainstream revenues. The vulnerability of the broadcast networks’ $9 billion in upfront ad revenues will be starkly evident next spring amid the protracted recession. Major ad categories–such as autos, financials, real estate and retail–will be markedly altered in their spending as well as structure. The Big 3 U.S. automakers account for 6% of the Big 3 broadcast networks’ ad revenues (9% for Fox) and 2.5% of cable networks’ overall advertising (7% for ESPN). On the cost side, less than 30% of core expenses can be eliminated from program production budgets and legacy operations, which means that the entire broadcast network dynamic must be reengineered. Despite all the complications, the easiest, most efficient business model conversion would be to reset broadcast networks as general entertainment cable networks. […]

While the most competitive cable networks have closed the ratings gaps with broadcast networks, they still fail to command similar ad unit prices. Prices have failed to reflect changed value propositions; that dilemma will be resolved in a digital marketplace. Bottom line: the alignment of broadcast and cable networks is already in place. Cable’s niche appeal, parallel to the Internet’s special interest “long tail,” will continue to nudge advertisers, consumers and content providers toward a more fully monetized online business model.

It is my belief that this migration would have already been occurring had broadcast spectrum holders been granted flexible use and resale rights for their spectrum long ago. Unfortunately, the same old command-and-control system of spectrum regulation that the FCC put in place seven decades is still haunts us today. That system literally makes it a crime for television broadcasters to sell their existing spectrum for anything other than broadcast television. They can’t repurpose their spectrum for an alternative purpose. Nor can they sell it to someone else who might put it to different use (say, high-speed wireless broadband). Just think, if they would have had unambiguous property rights in their allocation, they might have had the incentive to already have thrown the switch on the plan to migrate their content from OTA to cable and satellite entirely.

Of course, that now may happen anyway for the reasons Mermigas suggests. And the migration of more and more content to the Internet will only speed that process along. It’s just a shame that regulation prevents markets from reallocating spectrum efficiently.

Finally, if the networks begin to make this jump, it raises another interesting question: What about the local broadcast television operators who are not owned by a major network? What’s going to happen to them?

Interesting days ahead.

In an essay I posted here back in October called “Cutting the (Video) Cord: The Shift to Online Video Continues” (part of an ongoing series), I reflected on an interesting piece by the Wall Street Journal’s Nick Wingfield’s entitled “Turn On, Tune Out, Click Here.” Wingfield’s article illustrated how rapidly the online video marketplace is growing and noted that so many shows are now available online that many people are cutting the cord entirely by canceling their cable or satellite subscriptions and just downloading everything they want to watch via sites like Hulu and supplmenting that with services like Netflix. In today’s Washington Post, Mike Musgrove writes about these same trends and developments in a column entitled, “TV Breaks Out of the Box.” Musgrove notes:

This has been a big year for both Netflix and online video services like Hulu.com, where people can watch episodes of popular shows such as “The Office” for free, though users do have to sit through a few commercials. When Tina Fey debuted her impression of Sarah Palin on “Saturday Night Live” last month, more people watched the comedy sketch online at NBC.com or Hulu.com than during the show’s broadcast. Last week, YouTube announced that it would start carrying old TV shows and movies from the film studio MGM. As for Netflix, it seems that somebody there has been busy this year. While most customers still use the online video rental site mainly for movie deliveries by mail, the company now has a library of online content available for viewing on your TV through a variety of devices. A $99 appliance from Roku that plugs into your TV set and connects to the Web has been popular among some folks dropping their cable subscriptions. A couple of new, Web-connected Blu-ray players from Samsung and LG Electronics also allow Netflix subscribers to instantly watch titles from the company’s online collection.

Musgrove continues and notes that it’s about more than just Hulu and Netflix:

During a visit to The Washington Post this past summer, Microsoft chief executive Steve Ballmer mentioned that his favorite TV show is “Lost” and that he watches the show online, not on cable and not through a purchase on Apple‘s iTunes service. “I have to admit I’m annoyed by the [ads], but not enough to pay a buck,” he said. Ever have a billionaire make you feel dumb for leading an overly extravagant lifestyle? Ballmer didn’t mention the show’s availability on Microsoft’s Xbox Live service. That’s where I’d been buying and downloading episodes of the show, on an a la carte basis. But starting this week, a major revamp of the Xbox interface makes it possible for owners like me to access the Netflix library without shelling out on a per-title basis. The day after CSI airs, for example, I’ll be able to watch it with a few clicks on the device’s controller. This is available only for people paying for a Netflix subscription, but I’ve already heard some gadget fans, the ones who don’t care about video games very much, wondering if the new feature might make the console a worthwhile purchase. For those interested in checking out some TV on the Web, some networks, like NBC, put almost all of their programming online; others, like HBO, have little content online. One Web site, Cancelcable.com, has a page that tracks where Web surfers can find their favorite shows online.

I was not aware of that CancelCable.com site until I read Musgrove’s article, but it really does show how this migration to alternative video distribution / consumption is picking up steam.

Unfortunately, as I noted in my previous essay, someone forgot to tell the folks in Washington about all this. They’re still busy obsessively regulating broadcast TV and radio as if the 1950s never ended. And they’ve increasingly expanded their regulatory coverage to include cable and satellite even though they are now struggling to keep people from moving to the completely unbundled, a la carte world of online video.

It’s an old story, really: Technology advances; regulation stands still.

Back in the mid- and even late 1990s, I was engaged in a lot of dreadfully boring telecom policy debates in which the proponents of regulation flatly refused to accept the argument that the hegemony of wireline communications systems would ever be seriously challenged by wireless networks. Well, we all know how that story is playing out today. People are increasingly “cutting the cord” and opting to live a wireless-only existence. For example, this recent Nielsen Mobile study on wireless substitution reports that, although only 4.2% of homes were wireless-only at the end of 2003…

At the end of 2007, 16.4 percent of U.S. households had abandoned their landline phone for their wireless phone, but by the end of June 2008, just 6 months later, that number had increased to 17.1 percent. Overall, this percentage has grown by 3-4 percentage points per year, and the trend doesn’t seem to be slowing. In fact, a Q4 2007 study by Nielsen Mobile showed that an additional 5 percent of households indicated that they were “likely” to disconnect their landline service in the next 12 months, potentially increasing the overall percentage of wireless-only households to nearly 1 in 5 by year’s end.

And one wonders about how many homes are like mine — we just keep the landline for emergency purposes or to redirect phone spam to that number instead of giving out our mobile numbers.  Beyond that, my wife and I are pretty much wireless-only people and I’m sure there’s a lot of others like us out there.

Anyway, I’ve been having a strange feeling of deva vu lately as I’ve been engaging in policy debates about the future of the video marketplace.  Like those old telecom debates of the last decade, we are now witnessing a similar debate — and set of denials — playing out in the video arena.  Many lawmakers and regulatory advocates (and even some industry folks) are acting as if the old ways of doing business are the only ways that still count.  In reality, things are changing rapidly as video content continues to migrate online.

I was reminded of that again this weekend when I was reading Nick Wingfield’s brilliant piece in the Wall Street Journal entitled “Turn On, Tune Out, Click Here.”  It is must-reading for anyone following development in this field.  As Wingfield notes:

In the past two years, nearly every major network show and many of the biggest cable programs have become available on the Internet. The virtual library of content includes everything from “Desperate Housewives” and “CSI” to “The Colbert Report” and “Mad Men.” Some of the biggest hits online are memorable TV moments. More than half of the people who saw recent “Saturday Night Live” skits featuring comedian Tina Fey as vice presidential candidate Sarah Palin watched the skits over the Internet, according to a survey of 500 viewers on Monday by Solutions Research Group. Nearly a quarter saw them on YouTube and 21% saw them on NBC.com or Hulu.com. Many shows can be viewed for free and are accompanied by a dollop of ads that’s small when compared with the number of commercial breaks on television. As a result, some cost-conscious consumers are ditching their cable subscriptions altogether.

And the migration of video online is really picking up speed as a result.  According to Wingfield, “Complete episodes of about 90% of prime-time network television shows and roughly 20% of cable shows are now available online, according to Forrester Research analyst James McQuivey.”  However, Wingfield points out that “the number of people watching all of their programs online is still small; some estimates put the number at just 1% of the total television audience. In part, that’s because watching online isn’t as easy as channel surfing on the couch, TV remote in hand. Viewers must either watch shows on their personal computers, or use a device like Apple TV, which allows them to download shows from the Internet onto their television sets.”  That being said, he goes on to note that:

Within the next several years, however, media and technology executives say that a host of new technologies will make television access to online video a mainstream phenomenon. Vudu Inc. already sells a $299 set-top box with a remote control that allows users to download television shows for $1.99 per episode. Microsoft and Sony both sell television shows that users of their Xbox 360 and PlayStation 3 videogame consoles can download over the Internet for viewing on television sets. Netflix subscribers can buy a $99 set-top box from Roku Inc. that streams videos on their television sets. The service is included at no extra charge in the monthly Netflix fee for renting DVDs.

And that’s just what’s happening today.  There will be a lot more options coming online soon.  Remember, most of these changes have all taken place in just the past couple of years.  If you look at the FCC’s last “Annual Video Competition Report” from two years ago, you won’t find much discussion of these new developments. But, if the FCC ever gets around to releasing another annual report, the regulators won’t be able to ignore these trends and developments any longer.

OK, so the point is clear: 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.

At what point does this charade end?  When do we realize that substitution is occuring and giving people alternative places to camp their eyeballs?  Or doesn’t that make any difference?  Should we just continue to regulate the old platforms and players the same was as always?  Or, worse yet, should we “level the playing field” by regulating the Internet and online video providers the same way?  I hope most people would understand what a disaster that would be in practice.  The Internet and digital video delivery is offerning society an unprecedented abundance of media riches.  They last thing we need to do is screw it up by laying on reams of regulation.