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Sinclair’s Lawyer Says Ajit Pai Froze Sinclair Out in All-But-Dead Sinclair-Tribune Merger

After the inspector general of the Federal Communications Commission opened an investigation into FCC Chairman Ajit Pai’s close relationship with executives at Sinclair Broadcasting, Pai stopped returning Sinclair’s phone calls and refused any further meetings with America’s largest local TV station owner, at least until last Tuesday when Pai called Sinclair’s general counsel to say its multi-billion dollar merger with Tribune Media was in trouble.

The revelation Pai effectively froze out Sinclair while under investigation came in an ex parte communication disclosed by FCC Commissioner Jessica Rosenworcel’s office late last week.

“I realize that you appear to have been unwilling to discuss this matter for the past several months (and for that reason our counsel and Tribune’s have been reaching out everyone at the FCC but you),” Sinclair general counsel Barry Faber wrote in an email to Ajit Pai the morning after the phone call.

Based on the email, it is clear Mr. Pai personally called Mr. Faber on Tuesday evening to report the FCC planned to refer Sinclair’s buyout of multiple Tribune Media TV stations, including WGN in Chicago, to an independent administrative law judge who would pursue a hearing — a procedure that usually signals the death of a proposed merger or acquisition. The courtesy call was one last consideration to Sinclair by Mr. Pai, giving executives an early warning that would allow them to quietly withdraw the deal as a face-saving measure before the FCC publicly pulled the rug out the next day. The call came as an apparent shock to executives at Sinclair and Tribune, who had repeatedly expressed confidence the transaction would meet approval from the Republican majority at the FCC — one led by Pai, who personally proposed several rule changes that made the Sinclair transaction possible.

Faber told Pai in response the two companies could not agree to withdraw the deal “in the brief period of time provided to us.” Instead, Faber begged Pai to give the companies more time to reassure the FCC and then offered to withdraw the controversial sweetheart sales of TV stations in Chicago, Dallas, and Houston a short time later. The buyers all had long-standing, close ties to the family that founded Sinclair and were suspected of buying the stations to become Sinclair’s silent partners. Pai refused Faber’s request and went public the next morning with the proposal to refer the matter to an administrative hearing. As of today, the deal is still headed for a hearing, but few expect it will survive long enough to begin the process. But the repercussions are likely to last far longer than that.

Faber

While talking to Faber, it is clear Pai also raised the issue of Sinclair’s possible deception in its merger application and its lack of candor about its plan to divest stations in those three cities.

“I understand that if Sinclair has not been completely truthful and forthcoming with regard to these proposed sales, abandoning them would not eliminate such unacceptable behavior. I point out, however, that as we discussed yesterday no evidence exists that Sinclair has mislead the FCC or been anything other than completely candid with respect to our relationships with the proposed buyers and the terms of the transaction,” Faber wrote. “To designate our transaction for hearing based on the possibility that there may be more to the deals than meets the eyes based on the pricing and other terms that have been disclosed, would be extraordinary and unprecedented.”

Deal critics claim Sinclair’s bold effort to barely disguise the sweetheart deals with well-known business associates of Sinclair’s chairman David Smith was extraordinary and unprecedented as well. Several Wall Street and K Street analysts have expressed concern Sinclair was being exceptionally brazen with the FCC, proposing to spin-off stations to known Sinclair associates at fire sale prices, with contract clauses allowing Sinclair to program the stations ‘for the owner’ and also have the right to buy the stations back at their original fire sale price, assuming deregulation of station ownership caps continued moving forward. Sinclair is no stranger to political controversy, generating a full-scale advertiser boycott and Wall Street blowback over mandatory political programming aired on its stations during the 2004 U.S. presidential election. Recently Sinclair’s mandatory editorials and news stories have received even more scrutiny in the media, and have generated a lot of negative press for the Baltimore-based TV station owner.

Pai

Some on Wall Street are reportedly growing tired of Sinclair management’s political agendas getting in the way of potential profits, and this latest high-profile incident is likely to further strengthen that perception. Pai’s announcement that the merger deal smacked of a “lack of candor” and “misrepresentation,” raise questions about the Sinclair’s honesty and character, something that could threaten its ability to keep or renew its stations’ licenses. Long standing FCC rules state a license can be revoked if an owner lies to the Commission or engages in unethical or criminal behavior.

The FCC rarely forgets about egregious bad conduct. In the 1960s, RKO General, a division of General Tire and Rubber Company, falsely testified to the FCC that its television stations, including KHJ Los Angeles, WNAC Boston, and WOR New York did not engage in “reciprocal trade practices” — forcing General Tire’s vendors to buy advertising time on RKO stations if they wanted their contracts with the tire company renewed. In 1969, the FCC had enough evidence to prove RKO officials had lied to the Commission and were brazenly violating FCC rules. In 1975, RKO was once again hauled before the FCC and questioned about allegations General Tire was bribing foreign officials, had a secret slush fund to finance campaign contributions, and misappropriated revenue from overseas operations to cook its books.

Five years later in 1980, the FCC stunned the broadcasting industry by canceling the license of RKO’s Boston station — WNAC, declaring RKO “lacked the requisite character” to hold a FCC license because it openly deceived the FCC by withholding evidence, covered up improper dealings, and maintained a “persistent lack of candor” about its business practices and behavior. The FCC also moved to cancel licenses for KHJ in Los Angeles and WOR in New York. RKO held on for a few more years by appealing the FCC’s decision in various courts. It eventually sold most of its TV stations by the mid-1980s. But by then, FCC administrative law judge Ed Kuhlmann documented even more corruption by RKO, calling the company’s conduct the worst case of dishonesty in FCC history. RKO systematically misled advertisers about station ratings, fraudulently billed clients, destroyed audit reports demanded by the FCC, and filed several false financial statements with the FCC. Kuhlmann wanted RKO out of the broadcasting business for good, ordering RKO to surrender licenses for the two remaining TV stations it still owned in 1987, as well as 12 radio stations.

Sinclair’s critics are likely to invoke RKO General in challenging Sinclair license renewals in the future, noting a similar lack of candor and misrepresentation.

With the Sinclair-Tribune merger deal now swirling in the bowl, shareholders may be the ultimate judge, jury, and executioner, at least at Tribune Media. Sports Fan Coalition and Public Knowledge took the opportunity to remind Tribune’s board of directors it just blew a $3.9 billion deal by allowing Sinclair to manage the transaction with apparent dishonesty and chutzpah:

The FCC has unanimously determined that Sinclair may have “engaged in misrepresentation and/or lack of candor in its applications with the Commission,” in possible violation of the Communications Act and FCC rules. Thus, because Sinclair failed to satisfy its commitments under the merger agreement, Tribune can and should invoke its termination right under the merger agreement. Such termination would not trigger the liquidated damages provisions of the merger agreement.

[…] “Either take immediate action to terminate your agreements for the sale of your company to Sinclair Broadcast Group, or resign as directors of Tribune Media.”

Historical Truths: The Telecom Act of 1996 Sowed the Seeds of a Telecom Oligopoly

How exactly did America get stuck with a broadband monopoly in many areas, a duopoly in most others? It did not happen by accident. In this occasional series, “Historical Truths,” we will take you back to important moments in telecom public and regulatory policy that would later prove to be essential for the creation of today’s anti-competitive, overpriced marketplace for broadband internet service. By understanding the trickery and legislative shell games practiced by lobbyists and their elected partners in Congress, you will learn to recognize when the telecom industry and their friends are preparing to sell you another bill of goods. 

Vice President Al Gore watches President Bill Clinton digitally sign the 1996 Telecom Act into law on February 8, 1996.

By the end of the first term of the Clinton Administration, the president faced a major backlash from Republicans two years into the Gingrich Revolution. A well-funded chorus of voices in the business community, the Democratic Leadership Council — a business-friendly group of moderate Democrats, as well as commentators and pundits had the attention of the Beltway media, complaining in unison that the Democrats shifted too far to the left during the first term of the Clinton Administration, leaving it exposed in the forthcoming presidential election to another voter backlash like the one that installed the Gingrich revolutionaries in the House of Representatives and delivered a Republican takeover of the U.S. Senate in 1994.

With pressure over the growing lack of bipartisanship, and a presidential election ahead in the fall, the Clinton Administration was looking for ideas to prove it could work across the aisle and pass new laws that would deliver for ordinary Americans.

Revamping telecommunications policies would definitely touch every American with a phone line, computer, modem, and a television. Before 1996, America’s telecommunications regulation largely emanated from the Communications Act of 1934, which empowered the Federal Communications Commission to establish good order for the growing number of radio stations, telephone, and wire lines crisscrossing the country.

The 1934 Act’s legacy remains today, at least in part. It created the FCC, firmly established the concept of content regulation on the public airwaves, and established a single body to conduct federal oversight of the nation’s telephone monopoly controlled by AT&T.

Efforts to replace the 1934 Act began well before the Clinton Administration. In the early 1980s, Sen. Bob Packwood (R-Ore.) attempted to push for a legislative breakup of AT&T and a significant reduction in the oversight powers of the FCC. The bill met considerable opposition from AT&T, spending $2 million lobbying against the bill in 1981 and 1982. Alarm companies also heavily opposed the measure, terrified AT&T would enter their market and put them out of business. AT&T preferred a more orderly plan of divestiture being carefully negotiated in a settlement of a 1974 antitrust lawsuit by the Justice Department. A 1982 consent decree broke off AT&T’s control of local telephone lines by establishing seven Regional Bell Operating Companies independent of AT&T (NYNEX, Pacific Telesis, Ameritech, Bell Atlantic, Southwestern Bell Corporation, BellSouth, and US West). AT&T (technically an eighth Baby Bell) kept control of its nationwide long distance network.

Also in the 1980s, the cable television industry gained a much firmer foothold across the country, quickly gaining political power through well-financed lobbyists and close political ties to selected members of Congress (particularly Democrat Tim Wirth, who served in the House and later Senate representing the state of Colorado) that allowed them to push through a major amendment to the 1934 Act in 1984 deregulating the cable industry. The result was an early wave of industry consolidation as family owned cable companies were snapped up by a dozen or so growing operators. These buyouts were largely financed by dramatic rate increases passed on to consumers, resulting in cable bills tripling (or more) in some areas almost immediately. By the end of the 1980s, a major consumer backlash began, creating enormous energy for the eventual passage of the 1992 Cable Act, which re-regulated the industry and allowed the FCC to order immediate rate reductions.

The Progress and Freedom Foundation, with close ties to former House Speaker Newt Gingrich, closed its doors in 2010.

The biggest push for a near-complete revision of the 1934 Act came during the Gingrich Revolution. In 1995, the conservative Progress & Freedom Foundation — a group closely tied to then-Speaker Newt Gingrich (R-Ga.) floated a trial balloon calling for the elimination of an independent Federal Communications Commission, replaced by a stripped-down Office of Communications that would be run out of the White House and be controlled by the president. A small army of telecom industry-backed scholars also began proposing privatizing the public airwaves by selling off spectrum to companies to be owned as private property. The intense interest in the FCC by the group may have been the result of its veritable “who’s who” of telecom industry backers, including AT&T, BellSouth, Verizon, the National Cable & Telecommunications Association, cable companies like Comcast and Time Warner; cell phone companies like T-Mobile and Sprint; and broadcasters like Clear Channel Communications and Viacom.

The proposal outraged Democrats and liberal groups who called it a corporate-friendly sell-off and giveaway of the public airwaves. Then FCC Chairman Reed Hundt took the proposal very seriously, because at the time Gingrich lieutenant Tom DeLay’s (R-Tex.) secretive Project Relief group had 350 industry lobbyists, including some from BellSouth and Southwestern Bell literally drafting deregulation bills and a regulatory moratorium on behalf of the new Republican majority, coordinating campaign contributions for would-be supporters along the way. The proposal ultimately went nowhere, lost in a sea of the House Republicans’ constantly changing agendas, but did draw attention to the fact a wholesale revision of telecommunications policy would attract healthy campaign contributions from all corners of the industry — broadcasters, cable companies, phone companies, and the emerging wireless industry.

When it became known Congress was once again going to tackle telecommunications regulation, lobbyists immediately descended from their K Street perches in relentless waves, with checks in hand. There were two very important agendas in mind – deregulation, which would remove FCC rate regulation, service oversight, cross-competition prohibitions, and ownership caps, and ironically, protectionism. The cable and satellite companies had become increasingly fearful of the regional Baby Bells, which arrived in Congress in the early 1990s promoting the idea of entering the cable TV business. The cable industry feared phone companies would cross-subsidize the development of Telco TV by charging telephone ratepayers new fees to finance that entry. The cable industry had carefully developed a de facto monopoly over the prior decade of consolidation. Companies learned quickly direct head-to-head competition between two cable operators in the same market was bad for business.

The original premise of the 1996 Telecom Act was that it would eliminate regulations that discouraged competition. Promoters of the legislation asked why there should only be one phone or cable company in each city and why maintain regulations that kept cable and phone companies out of each others’ markets. Fears about market power and allowing domineering cable and phone companies to grow even larger were dismissed on the premise that a wide open marketplace, with regulations in place to protect consumers and competition would avoid creating telecom robber barons.

The checks handed out by industry lobbyists were bi-partisan. Democrats could crow the new rules would finally give consumers a new choice for cable TV or phone service, and help bring the “information superhighway” of the internet to schools, libraries, and other public institutions. Republicans proclaimed it a model example of free market deregulation, promoting competition, consumer choice, and lower prices.

At a high-brow bill signing ceremony held at the Library of Congress, both President Bill Clinton and Vice President Al Gore were on hand to “electronically sign” the bill into law. Both the president and vice-president emphasized the historical significance of the emerging internet, and its ability to connect information-have’s and have-not’s in an emerging digital divide. Missing from the discussion was an exploration of what industry lobbyists and their congressional allies were doing inserting specific language into the 1996 Telecom Act that would later haunt the bill’s legacy.

On hand to celebrate the bi-partisan bill’s signing were Speaker Gingrich, Sen. Larry Pressler (R-S.D.); Sen. Ernest F. Hollings (D-S.C.); Rep. Thomas J. Bliley Jr. (R-Va.); Rep. John Dingell (D-Mich.); and Ron Brown, the Secretary of Commerce. Pressler was among the soon-to-be-endangered moderate Republicans, Hollings was a holdout against the gradual wave of Republican takeovers in southern “red states,” and Dingell was a veteran lawmaker with close ties to the broadcasting industry.

Some of the bill’s industry backers were also there, some who would ironically see its signing as directly responsible for the eventual demise of their independent companies. John Hendricks of the Discovery Channel, Glenn Jones of Jones Intercable (acquired by Comcast in 1999), Jean Monty of Northern Telecom (later Nortel), Donald Newhouse of Advance Publications (eventual part owner of Bright House Networks and later Charter Communications), William O’Shea of Reuters Ltd. and Ray Smith of Bell Atlantic (today part of Verizon) were on hand. Also in the audience was Jack Valenti of the Motion Picture Association of America, representing Hollywood Studios.

Among the fatal flaws in the Telecom Act of 1996 were its various ‘competition tests,’ which were open to considerable interpretation and latitude at the FCC. The Republican supporters of the bill argued that the presence of an open and free marketplace would, by itself, induce competition among various entrants. They were generally unconcerned with the question of whether new competition would actually arrive. Their priority was lifting the protective levers of legacy regulation as soon as possible. Many Democrats assumed what appeared to be carefully drafted regulatory language would protect consumers by preventing the FCC from lifting protections too early in the competitive process. But lobbyists consistently outmaneuvered lawmakers, finding ways to insert loopholes and compromise language that introduced inconsistencies that could be dealt with and eliminated either by the FCC or the courts later.

For example, lawmakers insisted on unbundling telecommunications network elements, an arcane way of saying new competitors must be granted access to existing networks to be shared at wholesale rates. In practice, this meant if a phone company entered the internet service provider business, it must also make its network available for other ISPs as well. In some areas, competing local telephone companies also offered landline service over existing telephone lines, paying wholesale connection fees to the incumbent local phone company. As competition emerged, the incumbent company usually petitioned for a lifting of the regulations governing their business, claiming competition had arrived.

The first warning the 1996 Act was going awry came a year after the bill was signed into law. Phone companies started raising rates from $1.50-6 a month on average. AT&T was petitioning to hike rates $7 a month. Someone would have to pay to replace the scrapped subsidy system in a competitive market — subsidies that had been in place at the nation’s phone companies for decades. By charging higher rates for phone service in cities and for pricier long distance calls before the arrival of companies like MCI and Sprint, the phone companies used this revenue to subsidize their Universal Service obligations, keeping rural phone bills low and often below the real cost of providing service. To establish a truly competitive phone business, the subsidies had to be reformed or go, and that meant someone had to cover the difference.

“This game is called ‘shift and shaft,'” Sharon L. Nelson, the chairwoman of the Washington Utilities and Transportation Commission, said in 1997. “You shift the costs to the states and shaft the consumer.”

Sam Brownback (R-Kansas)

Gradually, consumers suddenly discovered their phone bill littered with a host of new charges, including the Subscriber Line Charge and various regulatory recovery fees and universal service cost recovery schemes. Phone companies also boosted rates on their unregulated Class phone features, like call waiting, caller ID, and three-way calling. The proceeds helped make up for the tens of billions in lost subsidies, but the end effect was that phone bills were still rising, despite promises of competitive, cheap phone service.

At a hearing of the Senate Commerce Committee later that year, several angry senators said they would never have voted in favor of the Telecommunications Act of 1996 if they had thought it would lead to higher rates. Sam Brownback, a Kansas Republican, was in the line of fire because of his rural constituents. Rates for those customers are subsidized more heavily than elsewhere because of the cost of extending service to them. Rates were threatening to skyrocket.

“We would be foolish to build up all these expectations about competition without saying to the American people, ‘We’re going to have to raise your phone bill,'” Brownback said.

But the rate hikes were just beginning. By the beginning of the George W. Bush administration, telecom lobbyists brought a thick agenda of action items to Michael Powell’s FCC. Despite promises of competition breaking out everywhere, that simply was not the case. Republicans quickly blamed the remaining regulatory protections still in place in noncompetitive markets for ‘deterring competition.’ But the companies knew the only thing better than deregulation was deregulation without competition.

Consolidation wave

The Republican-dominated FCC quickly began removing many of those protective regulations, claiming they were outdated and unnecessary. The very definition of competition was broadened, allowing the presence of virtually any company offering almost any service good enough to trip the deregulation levers. Later, even open access to networks by competitors was often limited to pre-existing networks, not the future next generation networks. Republicans argued those networks should be managed by their owners and not subject to “unbundling” requirements.

The weakened rules also sparked one of the country’s largest consolidation waves in history. Cable companies bought other cable companies and the Baby Bells gradually started putting themselves back together into what would eventually be AT&T, Verizon, and Qwest/CenturyLink. For good measure, phone companies even snapped up a handful of independent phone companies, most notably General Telephone and Electronics, better known as GTE by Verizon and Southern New England Telephone (SNET) by AT&T.

Prices rising as costs dropping.

The cable industry, under the premise it needed territories of scale to maximize potential ad insertion revenue from selling commercials on cable networks, gradually shrunk from at least a dozen well-known companies to two very large ones – Comcast and Charter, along with a few middle-sized powerhouses like Cox and Altice. Merger and acquisition deals faced little scrutiny during the Bush years of 2002-2009, usually approved with few conditions.

The result has been a rate-raising oligopoly for telecom services. In broadcasting, the consolidation wave started in radio, with entities like Clear Channel buying up hundreds of radio stations (and eventually putting the resulting giant iHeartMedia into bankruptcy) and Sinclair and similar companies acquiring masses of local television outlets. On many, local news and original programming was sacrificed, along with a significant number of employees at each station, in favor of inexpensive music, network or syndicated programming. Some stations that aired local news for 50 years ended that tradition or turned newsgathering over to a co-owned station in the same city.

Although telephone service eventually dropped in price with the advent of Voice over IP service, consumers’ cable TV and internet bills are skyrocketing at levels well in excess of inflation. Last year, the Washington Center for Equitable Growth demonstrated that the current consolidated, anti-competitive telecom marketplace results in rising prices for buyers and falling costs for providers.

Your oligopoly tax.

“In truly competitive markets, a significant part of cost reductions would be passed through to consumers,” the group wrote. “Based on a detailed analysis of profits—primarily EBITDA—we estimate that the resulting overcharges amount to more than $45 per month, or $540 per year, an aggregate of almost $60 billion, or about 25 percent of the total average consumer’s monthly bill.”

That is one expensive bill, paid by subscribers year after year with no relief in sight. Several Republicans are proposing to double down on deregulation even more after eliminating net neutrality, which could cause your internet bill to rise further. Several Republicans want to rewrite the 1996 Telecom Act once again, and lobbyists are already sharing their ideas to further curtail consumer protections, lift ownership caps, and promote additional consolidation.

Trudeau Ends Endless Debate on Taxing Internet Content Providers: Canadians Pay Enough Already

Heritage Minister Mélanie Joly blunders through the dicey issue of Canadian content on Netflix in a press tour called “disastrous” by critics.

The arrival of Netflix Canada and its tens of thousands of alternative on-demand viewing choices has had defenders of Canadian culture up in arms ever since the American interloper showed up.

A little background:

For Canada, the dominance of their neighbor to the south has always presented a challenge to a country that fears having its cultural independence steamrolled and its official two-language experience watered down by an avalanche of English-language content. Canadian broadcasters and cable networks are governed by regulations that require they reserve at least 50% of their program schedule for Canadian content (the percentage varies slightly for the Canadian Broadcasting Corporation/Société Radio-Canada — Canada’s public broadcaster, and Canadian cable networks).

Because Canada is a much smaller media market than the United States, finding the money to produce enough high quality Canadian TV shows and movies has always been a challenge. Most recently, Canada’s telecom regulator, the Canadian Radio-television and Telecommunications Commission (CRTC) mandated that broadcasters spend 30% of their revenues on original Canadian content. As a result, many commercial networks and stations spend that money on cheap reality shows or news content to satisfy Canadian content requirements. While that fulfills the government mandate, it doesn’t always fulfill the demands of many Canadian viewers that prefer to watch something else.

Netflix’s streaming service in Canada competes directly with those broadcasters, as well as Canadian cable and phone company on-demand services, but is not subject to the same content laws because the 25-year old law governing broadcasting was written before there was the prospect of online streaming alternatives. In less than a decade Netflix has grown its original business renting DVD’s through the mail into a multi-billion dollar international streaming business that has deeper content acquisition pockets than any Canadian media entity.

The Liberal Party of Canada is trying to manage Canadian content rules now 25 years old, before the era of streaming video.

There is also a technology shift in play here. What exactly constitutes “media” is open to debate. Traditional broadcast media now competes with newly emerging, and largely unregulated digital social media (a-la Facebook, Twitter, etc.) and online over-the-top services (Netflix, Hulu, YouTube, etc.) Broadcasters are regulated in the public interest and have lived under that framework for decades. Upstart new media relies on an internet platform that has never been significantly regulated at all.

Efforts by the government and Canada’s creative community to get Netflix Canada to follow the Canadian content model has largely failed, and it seems unlikely Netflix will ever see itself tied down by content or language quotas. It flies in the face of Netflix’s marketing — giving customers unlimited access to the content they want to see, not what a bureaucrat in Montreal or Ottawa wants customers to see.

Netflix has hired some high-priced lobbyists to make sure their interests are represented before federal and provincial officials, and it has been a constant battle over the last two years as the service confronts content regulators, those upset about the service’s lack of French Canadian titles, and the desire by some of Canada’s political parties and provinces, Quebec notably, to subject Netflix to federal and provincial sales and value-added taxes (GST/HST).

The federal government, led by Prime Minister Justin Trudeau, has refused to impose these kinds of taxes on Netflix or other foreign-headquartered internet services, despite the fact many fellow members of the Liberal Party think it should. The Standing Committee on Canadian Heritage called for an internet tax last June, and content creator groups have lobbied the government hard to demand Netflix be required to substantially invest in homegrown Canadian productions envisioned, filmed, and produced by Canadians.

It has also the components you need to create a melodrama:

  • a deep-pocketed and arrogant American corporation that made an inelegant entry into Canada and alienated the CRTC by refusing to disclose information to the regulator;
  • a sense of an unfair playing field where Canadian companies face sales/use taxes while American companies like Netflix don’t;
  • the ongoing fear among Canada’s Francophone community that their political and language sovereignty is under threat;
  • the ongoing fear of Canadians that their cultural sovereignty will be washed away by an American cultural tsunami.

The Liberals’ Sacrificial Lamb: Canadian Heritage Minister Mélanie Joly’s Disaster Tour

Some Francophone tabloids in Quebec specialize is assaulting all-things-Liberal, especially Mélanie Joly.

Trudeau’s point person on the Netflix controversy in 2017 was Canadian Heritage Minister Mélanie Joly, who was swept into the political maelstrom during a cross-country tour to promote the government’s new Creative Canada cultural policy. By all accounts, it was an unmitigated disaster for the government.

Joly’s performance in Quebec — her home province where she serves as MP for the Ahuntsic-Cartierville riding in Montreal, managed what few thought possible — uniting critics from the province’s governing Liberals with the sovereigntist Parti Québécois and the left-wing party Québec Solidaire.

Mathieu Bock-Côté, writing in the Journal de Montréal, claimed Joly was guilty of “dereliction of duty.”

After Joly bizarrely asserted on Radio-Canada’s popular talk show Tout le monde en parle (“Everyone’s Talking About It”) that Vidéotron, Quebec’s largest cable operator with over 1.6 million subscribers was not a cable company, center-right tabloids Le Journal de Montréal and Le Journal de Québec, both specializing in attacking all-things-Trudeau, had a field day. One columnist labeled Joly “Mélangée Joly” ( All-mixed-up Joly). Her propensity to stick close to her index card talking points and repeat them over and over, regardless of the question asked, bemused columnist Richard Martineau, who wrote Joly sounded “like a living answering machine having a nervous breakdown.”

In Quebec, the debate over tax fairness shared the stage with concerns about how much attention Netflix will pay producing French Canadian content.

In hopes of assuaging concerns, Joly announced Ottawa would increase investment in the $349 million Canada Media Fund to make up for shortfalls from declining contributions based on decreasing revenue from Canadian cable operators. She also promised $125 million to promote Canadian productions abroad. Heads that first nodded in agreement over the announcement quickly froze after Joly also announced Netflix would be exempt from federal sales tax in return for a five-year commitment to invest $100 million annually in Canadian content and $25 million specifically for “market development” of French-language content, whatever that means.

The lack of any specific commitment on French language programming went over like a lead balloon and ignited a firestorm of criticism over the perception Joly was going to rely entirely on Netflix Canada to protect and manage francophone programming on its own terms.

“We are alarmed as Francophones because there is no guarantee that a part of this [$100 million annually] is going to francophone content,” said Gabriel Pelletier, head of the province’s producers’ union, the Association des réalisateurs et réalisatrices du Québec. “Cultural questions are definitely more sensitive and obvious in Quebec, but my colleagues in the rest of Canada have similar priorities. We need to be able to see ourselves and our own stories in cultural content. Our own distributors play by very strict rules, but here we are giving Netflix a red carpet and an open market. It could lead to the disintegration of our entire regulatory system, because Rogers and Bell might say ‘Why do we have to pay when Netflix doesn’t have to?”

Joly also made little headway defending the Liberal government’s sales tax policy exempting Netflix. Appearing on Cogeco-owned CHMP-FM in Montreal, Joly was questioned by center-right talk show host Paul Arcand over her claim the decision not to tax Netflix was based on the Liberals’ promise not to raise taxes.

“Tou.tv (Radio-Canada’s streaming film service] is taxed. Vidéotron’s Illico is taxed; we are not talking about adding a new tax, we’re talking about taxing a product thacrticismt already exists,” Arcand said. “Are you ready to remove the taxes for those two comparable [Canadian] companies?”

Joly did not specifically answer.

Cartoonists have been particularly vicious over the Netflix affair, portraying Joly as vapid or a camera-friendly tall, blond, 38-year old politician more style than substance. Some of her critics on the right — usually older middle-aged men, according to her defenders — ‘cross the line’ into sexism by repeatedly calling Joly “the majorette” — a reference to a baton twirling performer usually seen in marching bands during parades.

Despite the criticism, Joly rarely sat back and allowed those perceptions to go unchallenged.

A tradition among guests on Tout le monde en parle is to end their segment by reading aloud a card handed to them by a producer that succinctly summarizes their position. Viewers understand the words are written by the producer and not the guest, but Joly unilaterally decided to change her card. The original said, “It’s amazing that with all the digital media available, our politicians have stayed faithful to the cassette.” Joly replaced the word “cassette” with the word “innovation.”

Dany Turcotte, the show’s co-producer tasked with creating the cards, was not happy with Joly’s change.

“When someone changes the meaning of my cards, ça me met en t****,” using an expression that roughly translates to “that makes me f***ing angry.”

The NDP vs. the Liberals

After the embarrassing press tour ended, the issue went back on simmer mode until Feb. 5, when an opposition members of the NDP brought the issue forward once again during the House of Commons Question Time, where members can directly question the Prime Minister Justin Trudeau.

Julian

“The government seems more than happy to let web giants continue to make huge profits without contributing to the Canadian economy,” said MP Peter Julian (NDP-New Westminster/Burnaby, B.C.). “While the rest of the world is trying to make these companies pay, the Liberals are doing the opposite. They are making deals with Netflix and other companies, and offering massive tax breaks. Canadians pay their taxes and expect companies to do the same. When will the Liberals start making web giants pay their fair share?”

“Mr. Speaker, the NDP is proposing to raise taxes on the middle class, which is something we promised we would not do and have not done,” responded Prime Minister Trudeau. “We explicitly promised in the 2015 election campaign that we would not be raising taxes on Netflix. People may remember Stephen Harper’s attack ads on that. They were false. We actually moved forward in demonstrating that we were not going to raise taxes on consumers, who pay enough for their internet at home.”

“Mr. Speaker, is it fair that Netflix, Facebook, and other web giants have to pay neither sales nor income tax whereas Canadian companies in the same sector do?” followed up MP Guy Caron (NDP-Rimouski-Neigette/Témiscouata/Les Basques, Que.) “Around the world, other countries are trying to make sure that these web giants pay their fair share. Australia and the European Union are excellent examples. After all, it is those giants that are going to monopolize the advertising market and suck the lifeblood out of our print media. They are also responsible for the challenges facing print media. Instead of reining in the web giants and ensuring a level playing field for everyone, the Liberals want to make this preferential treatment official. When will the Liberals show some backbone and level the playing field?”

Trudeau

“Mr. Speaker, we are not going to raise taxes on Canadians. That is what the NDP is asking us to do,” responded Trudeau. “We recognize that the media environment and television viewing and production are changing rapidly. That is why we reached out and got Netflix to make historic investments in our content creators here in Quebec and Canada, to help them succeed in this changing universe. We have a great deal of confidence in our creators; the approach we have chose is a testament to that.”

In a later exchange, the issue of Netflix and taxation was debated by MP Pierre-Luc Dusseault (NDP-Sherbrooke, Que.) and Sean Casey, the Parliamentary Secretary to the Minister of Canadian Heritage:

Dusseault: My question primarily has to do with the Netflix agreement. Everyone is starting to understand how this agreement gives Netflix a tax advantage over its competitors. I want to follow up on this issue and on the government’s completely twisted logic. Last week, the government kept spouting the same empty rhetoric to explain why it decided to give Netflix a tax holiday. This tax holiday was granted in exchange for an investment, but there is no guarantee of this investment. Netflix is getting a tax holiday in exchange for the infamous agreement presented by the Minister of Canadian Heritage. This is what I would like to talk about today.

The government gave a foreign company a tax break for doing business in Canada without having to abide by same tax rules as its competitors. This company is doing business with Canadian consumers. When it sells a product to consumers in Canada, it does not have to charge GST or federal sales tax because the government is allowing this situation to continue. The government is allowing a company to sell a product, in this case a subscription to Netflix, without charging consumers any GST.

According to the government and its twisted logic, this is not a problem because that is just how things work. That is the government’s reason for not forcing Netflix to charge GST. It is possible to make Netflix charge sales tax because several other countries have already done so. Although Netflix is an American company that operates all over the world, it pays sales tax in some countries. Most countries actually have taxes associated with the sale of goods and services.

Dusseault

Canada can make Netflix charge sales tax. It is possible. The argument that the government cannot do this does not hold water. In fact, the government is not even using that argument. In the beginning, the Minister of Canadian Heritage said that it was too complicated and that it would require an international agreement to make Netflix charge sales tax. That is completely untrue.

Now the government’s argument is that it does not want to impose a new tax on consumers. Based on the government’s twisted logic, the GST is a new tax. This is like telling huge multinationals like Target or Walmart that when they come to Canada to sell their goods and services, they will not have to charge their customers GST at the checkout because that would be a new tax. This is like telling a new company that sets up shop in Canada that we cannot ask it to charge GST because that would be a new tax, and Canadians cannot afford any new taxes. That is the logic the Liberals are using today. In other words, they are saying that a foreign company or multinational that has a physical presence in Canada does not have to charge GST, although the store next door does.

Can my colleague explain how the government came up with this logic? How is the GST a new tax for businesses?

Casey: Mr. Speaker, I would like to thank my honorable colleague from Sherbrooke for giving us a chance to talk about the many benefits of the agreement with Netflix.This government strongly believes that the establishment of a new Canadian business in the film and television production sector by Netflix is wonderful news for Canadian creators and producers, and ultimately for our cultural industries as a whole.

The approval of this significant investment in Canada under the Investment Canada Act is yet another indication of our government’s strong commitment to growing Canada’s creative industries, with new investments that create more opportunities for creators and producers across the country. In fact, this major investment of a minimum of $500 million over the next five years on original productions in Canada will provide them with even greater access to financing, business partners, and ultimately new ways to connect with audiences across the globe.

Casey

Such an unprecedented investment by a digital platform in Canada, a first of its kind for Netflix outside of the United States, is yet another confirmation to the world that Canada is a great place to invest, attesting to the creative talent of this country and the strong track record of our cultural industries in creating films and television productions that really stand out.

It is important to make a distinction between the cultural activities of Netflix Canada, which has committed to investing a minimum of $500 million Canadian in the production of Canadian-made films and television series, with the activities of its U.S.-based video streaming service. These are in fact two separate kinds of cultural activities.

It is also important to reiterate that all businesses, including those involved in television and film production that set up and operate in Canada, must abide by the Canadian tax system, which includes GST. Given that Netflix Canada plans to operate a production company in Canada, it will have to comply with all GST-related rules, which could apply to its production activities in Canada.

Lastly I would like to point out that Netflix announced last week that it has acquired the award-winning Canadian film, Les Affamés, written and directed by Robin Aubert, one of the most unique voices in Quebec’s cinema, to be made available on the international market as early as this coming March. This represents the first of many Canadian films and television series to be acquired or produced by Netflix Canada as a result of its significant investment announced last fall.

Dusseault: Mr. Speaker, I know the parliamentary secretary is trying to draw a distinction between Netflix Canada and Netflix USA. I know the two are different. However, he avoided answering my question about Netflix USA subscriptions that are not subject to GST. That was probably intentional, so I would like him to comment on this specific issue. Netflix USA sells a product to Canadian consumers and, unlike its competitors, does not have to collect GST.

Can my colleague, the parliamentary secretary, explain to me why a foreign company is exempt from the tax rules that apply to Canadian businesses? Why are Canadian consumers not paying tax on Netflix subscriptions?

Casey: Mr. Speaker, Netflix Canada created a new film and television production company. This is great news for Canadian creators and producers. Once again, over the next five years, Netflix will invest a minimum of $500 million Canadian in original productions produced in Canada in English and in French for distribution on Netflix’s global platform.

Caron

Let us not forget that Netflix already has a strong track record of investing in Canadian producers and content, with recent examples including Anne and Alias Grace with the CBC, Travelers with Showcase, and Frontier with Discovery.

We believe that this significant investment in Canada demonstrates that Netflix is committed to continuing to be a meaningful partner in supporting Canadian creators, producers, and the Canadian creative expression.

A day later, Caron was ready to follow up with the Prime Minister.

“Mr. Speaker, when we ask him why web giants like Netflix and Facebook do not have to charge sales tax even though their Canadian competitors do, the Prime Minister says that he promised not to raise taxes for the middle class. We are talking about a tax that already exists, sales tax. We want fairness in the industry. It is unacceptable that the Prime Minister does not have the courage to ask web giants to pay their fair share. When will the Prime Minister understand that and insist on fair treatment for the entire industry?”

“Mr. Speaker, once again, as the NDP has said, web giants must pay their fair share,” responded Trudeau. “It is not web giants that the NDP wants to charge, it is taxpayers. The New Democrats want to make taxpayers pay more taxes. They want Canadians, Quebec and Canadian taxpayers, to pay more taxes for their online services. We, on this side of the House, promised not to raise taxes for taxpayers, and we are going to stand by that promise. If the New Democrats want to raise taxes for Canadians, they should say so instead of hiding behind talk of big corporations.”

“Mr. Speaker, he does not get it,” retorted Caron. “We are not talking about a new tax; we are talking about a tax that already exists and must be collected by Canadian competitors. He needs to follow the example of France, Australia, and many American states that have decided to make these web giants pay. Even here at home, the whole province of Quebec wants to do the same. Imposing on Bombardier a sales tax that is not required of Boeing would be unthinkable, so why do it in the online sector? Not only is the Prime Minister trying to justify these tax breaks, but he is going even further by making deals with those companies. When will the Liberals stop getting into bed with these web giants?”

“Mr. Speaker, once again, the New Democrats are misleading Canadians,” replied Trudeau. “They are talking about making web giants pay their fair share. It is not the web giants they want to pay more in taxes; it is taxpayers. We made a commitment to taxpayers that they would not have to pay more for their online services. We on this side of the House plan to keep that promise.”

Trudeau Settles the Matter… for Some

The issue of Netflix, taxation, and to some extent Canadian content has apparently resonated with the NDP, as their members return to press the issue with the Liberals again and again. But Trudeau’s steadfast response has made it clear his government intends to bury the issue once and for all.

In a sense, both sides are right. Canadian content regulations and protections for Canadian culture and the francophone community in Canada are at risk of being diluted by an onslaught of cord-cutting and new online streaming services that do not always recognize the sensitivity of these issues for many Canadians. As viewers gain new choices, especially those not subject to regulatory oversight, the dominance of American streaming services will be even more apparent than the dominance of Hollywood and American network television. Netflix is not in the business to cater to Canadian content quotas and likely never will unless the government mandates it.

French language content on Netflix will largely come from European producers and networks in France and to a lesser degree Belgium and Switzerland.

But Netflix’s enormous budget for content development does open the door to opportunities for Canadian productions with budgets Canadian networks like CBC, CTV, Global, TVA, and Radio-Canada can only dream about. Quality should trump quotas, and may the best productions win.

Canadian telecom companies have a pervasive presence in all forms of Canadian entertainment. Bell (Canada) owns Bell Media, which in turn owns CTV – Canada’s largest privately owned commercial network. City, which has network affiliates in Canada’s largest cities, is owned by Rogers, Canada’s largest cable operator (Rogers also owns Omni Television, a multicultural network). Global is owned by Corus Entertainment, which in turn is controlled substantially by Shaw Communications, western Canada’s largest cable operator. Canadian cable and telco-TV providers run their own streaming services which are subject to sales taxes, while foreign streaming companies like Netflix are not. There is a case to be made for a lack of a level-playing field.

But Prime Minister Trudeau is also correct stating that any new taxes imposed on Netflix Canada or other new entrants would immediately be passed on to subscribers and raise the price of internet services. The Liberals’ platform during the last election insisted that the party wanted universal access to affordable broadband service for all Canadians and no taxes on Netflix. For many consumers, the price of content and the price of access are essentially the same thing.

Netflix has thrown a “token” $500 million at the problem in hopes of placating its Canadian critics. It may be enough to satisfy Vancouver and Toronto, where many series and movies are filmed, and it certainly has “resolved” the matter for the Liberal government of Mr. Trudeau, but it seems unlikely to soothe the concerns of Quebec and its vocal and proud francophone community. Quebec could move forward and impose a provincial sales tax on Netflix at any time, and will likely continue to pose a challenge to Netflix Canada until the company seems more sensitive to the concerns raised in many quarters in Montreal, Quebec City, and beyond. The creative community of French Canada can deliver some excellent productions, so long as Anglophiles are willing to read subtitles. Netflix may have to spend more money to make certain those types of shows turn up on the service in the not too distant future.

Internet’s Biggest Frauds: Traffic Tsunamis and Usage-Based Pricing

Providers’ tall tales.

Year after year, equipment manufacturers and internet service providers trot out predictions of a storm surge of internet traffic threatening to overwhelm the internet as we know it. But growing evidence suggests such scare stories are more about lining the pockets of those predicting traffic tsunamis and the providers that use them to justify raising your internet bill.

This month, Cisco — one of the country’s largest internet equipment suppliers, released its latest predictions of astounding internet traffic growth. The company is so confident its annual predictions of traffic deluges are real it branded a term it likes to use to describe it: The Zettabyte Era. (A zettabyte, for those who don’t know, is one sextillion bytes, or perhaps more comfortably expressed as one trillion gigabytes.)

Cisco’s business thrives on scaring network engineers with predictions that customers will overwhelm their broadband networks unless they upgrade their equipment now, as in ‘right now!‘ In turn, the broadband industry’s bean counters find predictions of traffic explosions useful to justify revenue enhancers like usage caps, usage-based billing, and constant rate increases.

“As we make these and other investments, we periodically need to adjust prices due to increases [in] business costs,” wrote Comcast executive Sharon Powell in a letter defending a broad rate increase imposed on customers in Philadelphia late last year.

In 2015, as that cable company was expanding its usage caps to more markets, spokesman Charlie Douglas tried to justify the usage caps claiming, “When you have 10 percent of the customers consuming 50 percent of the network bandwidth, it’s only fair that those consumers should pay more.”

When Cisco released its 2017 predictions of internet traffic growth, once again it suggests a lot more data will need to be accommodated across America’s broadband and wireless networks. But broadband expert Dave Burstein has a good memory based on his long involvement in the industry and the data he saw from Cisco actually deflates internet traffic panic, and more importantly provider arguments for higher cost, usage-capped internet access.

“Peak Internet growth may have been a couple of years ago,” wrote Burstein. “For more than a decade, internet traffic went up ~40% every year. Cisco’s VNI, the most accurate numbers available, sees growth this year down to 27% on landlines and falling to 15-20% many places over the next few years. Mobile growth is staying higher — 40-50% worldwide. Fortunately, mobile technology is moving even faster. With today’s level of [provider investments], LTE networks can increase capacity 10x to 15x.”

According to Burstein, Cisco’s estimates for mobile traffic in the U.S. and Canada in 2020 is 4,525 petabytes and in 2021 is 5,883 petabytes. That’s a 30% growth rate. Total consumer traffic in the U.S. and Canada Cisco sees as 48,224 petabytes and 56,470 petabytes in 2021. That’s a 17% growth rate, which is much lower on wired networks.

Burstein’s findings are in agreement with those of Professor Andrew Odlyzko, who has debunked “exaflood/data tsunami” scare stories for over a decade.

“[The] growth rate has been decreasing for almost two decades,” Odlyzko wrote in a 2016 paper published in IPSI BgD Transactions. “Even the growth rate in wireless data, which was extremely high in the last few years, shows clear signs of a decline. There is still rapid growth, but it is simply not at the rates observed earlier, or hoped for by many promoters of new technologies and business methods.”

Burstein

The growth slowdown, according to Odlyzko, actually began all the way back in 1997, providing the first warning the dot.com bubble of the time was preparing to burst. He argued the data models used by equipment manufacturers and the broadband industry to measure growth have been flawed for a long time.

When new internet trends became popular, assumptions were made about what impact they would have, but few models accurately predicted whether those trends would remain a major factor for internet traffic over the long-term.

Peer-to-peer file sharing, one of the first technologies Comcast attempted to use as a justification for its original 250GB usage cap, is now considered almost a footnote among the applications having a current profound impact on internet traffic. Video game play, also occasionally mentioned as a justification for usage caps or network management like speed throttling, was hardly ever a major factor for traffic slowdowns, and most games today exchange player actions using the smallest amount of traffic possible to ensure games are fast and responsive. In fact, the most impact video games have on the internet is the size of downloads required to acquire and update them.

Odlyzko also debunked alarmist predictions of traffic overloads coming from the two newest and largest traffic contributors of the period 2001-2010 — cloud backups and online video.

Odlyzko

“Actual traffic trends falsified this conjecture, as the first decade of the 21st century witnessed a substantial [traffic growth rate] slowdown,” said Odlyzko. “The frequent predictions about ‘exafloods’ overwhelming the networks that were frequent a decade ago have simply not come to pass. At the 20 to 30% per year growth rates that are observed today in industrialized countries, technology is advancing faster than demand, so there is no need for increasing the volume of investments, or for the fine-grained traffic control schemes that are beloved by industry managers as well as researchers.”

That’s a hard pill to swallow for companies that manufacture equipment designed to “manage,” throttle, cap, and charge customers based on their overusage of the internet. It also gives fits to industry executives, lobbyists, and the well paid public policy researchers that produce on spec studies and reports attempting to justify such schemes. But the numbers don’t lie, even if the industry does.

Although a lot of growth measured these days comes from wireless networks, they are not immune to growth slowdowns either. The arrival of the smartphone was hailed by wireless companies and Wall Street as a rocket engine to propel wireless revenue sky high. Company presidents even based part of their business plans on revenue earned from monetizing data usage allegedly to pay for spectrum acquisitions and upgrades.

McAdam

Verizon’s CEO Lowell McAdam told investors as late as a year ago “unlimited data” could never work on Verizon Wireless again.

“With unlimited, it’s the physics that breaks it,” he said. “If you allow unlimited usage, you just run out of gas.”

The laws of physics must have changed this year when Verizon reintroduced unlimited data for its wireless customers.

John Wells, then vice president of public affairs for CTIA, the wireless industry’s top lobbying group, argued back in 2010 AT&T’s decision to establish pricing tiers was a legitimate way for carriers to manage the ‘explosive growth in data usage.’ Wells complained the FCC was taking too long to free up critically needed wireless spectrum, so they needed “other tools” to manage their networks.

“This is one of the measures that carriers are considering to make sure everyone has a fair and equal experience,” Walls said, forgetting to mention the wireless industry was cashing in on wireless data revenue, which increased from $8.5 billion annually in 2005 to $41.5 billion in 2009, and Wall Street was demanding more.

“There were again many cries about unsustainable trends, and demands for more spectrum (even though the most ambitious conceivable re-allocation of spectrum would have at most doubled the cellular bands, which would have accommodated only a year of the projected 100+% annual growth),” Odlyzko noted.

What the industry and Wall Street did not fully account for is that their economic models and pricing had the effect of modifying consumer behavior and changed internet traffic growth rates. Odlyzko cites the end of unlimited data plans and the introduction of “tight data caps” as an obvious factor in slowing down wireless traffic growth.

“But there were probably other significant ones,” Odlyzko wrote. “For example, mobile devices have to cope not just with limited transmission capacity, but also with small screens, battery
limits, and the like. This may have led to changes of behavior not just of users, but also of app developers. They likely have been working on services that can function well with modest
bandwidth.”

“U.S. wireless data traffic, which more than doubled from 2012 to 2013, increased just 26% from 2013 to 2014,” Odylzko reported. “This was a surprise to many observers, especially since there is still more than 10 times as much wireline Internet traffic than wireless Internet traffic.”

Many believe that was around the same time smartphones achieved peak penetration in the marketplace. Virtually everyone who wanted a smartphone had one by 2014, and as a result of fewer first-time users on their networks, data traffic growth slowed. At the same time, some Wall Street analysts also began to worry the companies were reaching peak revenue per user, meaning there was nothing significant to sell wireless customers that they didn’t already have. At that point, future revenue growth would come primarily from rate increases and poaching customers from competitors. Or, as some providers hoped, further monetizing data usage.

The Net Neutrality debate has kept most companies from “innovating” with internet traffic “fast lanes” and other monetization schemes out of fear of stoking political blowback. Wireless companies could make significant revenue trying to sell customers performance boosters like higher priority access on a cell tower or avoiding a speed throttle that compromised video quality. But until providers have a better idea whether the current administration’s efforts to neuter Net Neutrality are going to be successful, some have satisfied themselves with zero rating schemes and bundling that offer customers content without a data caps or usage billing or access to discounted packages of TV services like DirecTV Now.

Verizon is also betting its millions that “content is king” and the next generation of revenue enhancers will come from owning and distributing exclusive video content it can offer its customers.

Odlyzko believes providers are continuing the mistake of stubbornly insisting on acquiring or at least charging content providers for streaming content across their networks. That debate began more than a decade ago when then SBC/AT&T CEO Edward Whitacre Jr. insisted content companies like Netflix were not going to use AT&T’s “pipes for free.”

“Much of the current preoccupation of telecom service providers with content can be explained away as following historical precedents, succumbing to the glamour of ‘content,'” Odlyzko wrote. “But there is likely another pressing reason that applies today. With connection speeds growing, and the ability to charge according to the value of traffic being constrained either directly by laws and regulations, or the fear of such, the industry is in a desperate search for ways not to be a ‘dumb pipe.'”

AT&T and Verizon: The Doublemint Twins of Wireless

A number of Wall Street analysts also fear common carrier telecom companies are a revenue growth ‘dead-end,’ offering up a commodity service about as exciting as electricity. Customers given a choice between AT&T, Verizon, Sprint, or T-Mobile need something to differentiate one network from the other. Verizon Wireless claims it has a best in class LTE network with solid rural coverage. AT&T offers bundling opportunities with its home broadband and DirecTV satellite service. Sprint is opting to be the low price leader, and T-Mobile keeps its customers with a network that outperforms expectations and pitches constant promotions and giveaways to customers that crave constant gratification and change.

The theory goes that acquiring video content will drive data usage revenue, further differentiate providers, and keep customers from switching to a competitor. But Odylzko predicts these acquisitions and offerings will ultimately fail to make much difference.

“Dumb pipes’ [are] precisely what society needs,” Odylzko claims and in his view it is the telecom industry alone that has the “non-trivial skills” required to provide ubiquitous reliable broadband. The industry also ignores the utility-like built-in advantage it has owning pre-existing wireline and wireless networks. The amortized costs of network infrastructure often built decades ago offers natural protection from marketplace disruptors that likely lack the fortitude to spend billions of dollars required to invade markets with newly constructed networks of their own.

Odylzko is also critical of the industry’s ongoing failure of imagination.

Stop the Cap! calls that the industry’s “broadband scarcity” business model. It is predicated on the idea that broadband is a limited resource that must be carefully managed and, in some cases, metered. Companies like Cox and Comcast now usage-cap their customers and deter them from exceeding their allowance with overlimit penalties. AT&T subjectively usage caps their customers as well, but strictly enforces caps only for its legacy DSL customers. Charter Communications sells Spectrum customers on the idea of a one-size fits all, faster broadband option, but then strongly repels those looking to upgrade to even faster speeds with an indefensible $200 upgrade fee.

Rationing Your Internet Experience?

“The fixation with video means the telecom industry is concentrating too much on limiting user traffic,” Odlyzko writes. “In many ways, the danger for the industry, especially in the wireline arena, is from too little traffic, not too much. The many debates as to whether users really need 100Mbps connections, much less 1Gbps ones, reveal lack of appreciation that burst capability is the main function of modern telecom, serving human impatience. Although pre-recorded video dominates in the volume of traffic, the future of the Net is likely to be bursts of traffic coming from cascades of interactions between computers reacting to human demands.”

Burstein agrees.

“The problem for most large carriers is that they can’t sell the capacity they have, not that they can’t keep up,” he writes. “The current surge in 5G millimeter wave [talk] is not because the technology will be required to meet demand. Rather, it is inspired by costs coming down so fast the 5G networks will be a cheaper way to deliver the bits. In addition, Verizon sees a large opportunity to replace cable and other landlines.”

On the subject of cost and broadband economics, Burstein sees almost nothing to justify broadband rate hikes or traffic management measures like usage caps or speed throttling.

“Bandwidth cost per month per subscriber will continue flat to down,” Burstein notes. “For large carriers, that’s been about $1/month [per customer] since ~2003. Moore’s Law has been reducing equipment costs at a similar rate.”

“Cisco notes people are watching more TV over the net in evening prime time, so demand in those hours is going up somewhat faster than the daily average,” he adds. “This could be costly – networks have to be sized for highest demand – but is somewhat offset by the growth of content delivery networks (CDN), like Akamai and Netflix. (Google, YouTube, and increasingly Microsoft and Facebook have built their own.) CDNs eliminate the carrier cost of transit and backhaul. They deliver the bits to the appropriate segment of the carrier network, reducing network costs.”

Both experts agree there is no evidence of any internet traffic jams and routine upgrades as a normal course of doing business remain appropriate, and do not justify some of the price and policy changes wired and wireless providers are seeking.

But Wall Street doesn’t agree and analysts like New Street Research’s Jonathan Chaplin believe broadband prices should rise because with a lack of competition, nothing stops cable companies from collecting more money from subscribers. He isn’t concerned with network traffic growth, just revenue growth.

“As the primary source of value to households shifts increasingly from pay-TV to broadband, we would expect the cable companies to reflect more of the annual rate increases they push through on their bundles to be reflected in broadband than in the past,” Chaplin wrote investors. Comcast apparently was listening, because Chaplin noticed it priced standalone broadband at a premium $85 for its flagship product, which is $20 more than Comcast’s non-promotional rate for customers choosing a TV-internet bundle.

“Our analysis suggests that broadband as a product is underpriced,” Chaplin wrote. “Our work suggests that cable companies have room to take up broadband pricing significantly and we believe regulators should not oppose the re-pricing. The companies will undoubtedly have to take pay-TV pricing down to help ‘fund’ the price increase for broadband, but this is a good thing for the business. Post re-pricing, [online video] competition would cease to be a threat and the companies would grow revenue and free cash flow at a far faster rate than they would otherwise.”

VCRs Officially Dead; Last Manufacturer of VHS Recorders Calls It Quits

Phillip Dampier July 21, 2016 Consumer News, History 2 Comments
How many of these do you still have in your basement or attic?

How many of these do you still have in your basement or attic? And more importantly, Be Kind, Rewind! (Image: Wikipedia)

The days of the Video Cassette Recorder (VCR) are coming to a quiet end as the last known manufacturer of the once-ubiquitous device announced it will stop making new machines at the end of July.

The VCR had its place in about 90 percent of U.S. homes just ten years ago. Although introduced to the consumer market in the late 1960s, the VCR remained a toy of the wealthy through much of the 1970s. It would take 10 years after that — the 1980s — for VCRs to become easily affordable and in enough homes to inspire a multi-billion dollar video rental industry with household names like Blockbuster. CNN even considered the VCR one of the most important cultural icons in its series The Eighties.

Like most new technology, the arrival of the VCR threatened everything, according to enterainment industry executives. Years of litigation dragged out issues like the right for consumers to make recordings of over-the-air stations to capture their favorite shows. Ad-skipping, courtesy of the fast-forward button, would “ruin” free television. Viewers might even build video libraries of shows and share them with friends and neighbors! At one time, some major companies in Hollywood even favored the imposition of a tax on blank videocassettes that would cover their losses from home recording. Copyright questions were finally settled in 1984, when the Supreme Court ruled home taping on a not-for-profit basis was perfectly legal. Hollywood survived despite this.

vcr_toshibaConsumers had a choice between two incompatible standards – the Sony Betamax, which promised superior video quality or JVC’s VHS format, a standard that allowed for longer recordings and was supported by just about every electronics manufacturer other than Sony. Some consumers owned both, but most settled for one or the other, and the VHS tape had a decisive advantage – extended recording time and near universal accessibility. It would eventually dominate in sales. More than 30 years later, recordings made on Betamax and VHS machines are still viewable, and turn up on video websites, often showcasing television as it used to look like in the 1970s and 1980s.

The VCR became so popular, it was a significant part of our lives. Pornography on videotape became a major issue during the Reagan Administration. But an even more pervasive problem was the flashing 12:00 time on your grandparent’s unconfigured VCR and the piece of black electrical tape used to conceal it. Videocassette clubs became as common as the record clubs that were around decades earlier. Parents used the VCR as an electronic babysitter to entertain children. Movie rental night was also the best way to watch your second, third, or fourth choice movie, as popular titles were cleared off shelves early in the evening. Rental fees, late fees, and “be kind, rewind” fees were also issues. But the worst nightmare of all was the horror of discovering a hopelessly unwound and tangled videocassette inside the machine, or worse, your child’s lunch.

What the VCR was invented for.

What the VCR was invented for: time-shifting

First generation VCRs were replaced with Hi-Fi and even SuperVHS models, which improved recording quality. Consumers bought second and third units for their bedrooms. Blank videocassettes were everywhere, often available hanging on a rack next to the checkout line.

The VCR was technology America took for granted… until the arrival of DVDs in 1995, just a decade after the VCR really got popular. There was simply no comparison. The DVD blew away videocassette video quality and offered easy accessibility, compact storage, and a longer lifespan. Just five years after the DVD showed up, it outsold all videotape formats combined. The pay television industry completed the hatchet job on the VCR with the introduction of the Digital Video Recorder (DVR) (Personal Video Recorder, or PVR, in Canada). The DVR was designed around the fact most consumers used VCRs to time-shift television programming, not build a personal library of recordings. With a DVR, a customer could quickly record their favorite shows and store them digitally, erasing unwanted shows with the push of a button.

The DVR still shows years of life, but the DVD’s days are likely numbered as cloud storage and on-demand video streaming make the need to collect and organize a library of shows and movies obsolete. Why buy it if you can stream it?

Manufacturers and retailers have noticed the shifting trends and the VCRs that were originally for sale in the 1980s were largely replaced by DVD players in the 1990s. Today, even DVD players are slowly being replaced in favor of devices like Roku or portable tablets.

Until this month, at least one manufacturer – Funai of Japan – still had a small niche market keeping VCRs in homes where owners spent decades amassing vast video libraries of movies and TV shows. Unfortunately, Chinese manufacturers of the parts needed to build a VCR have increasingly lost interest. So has Funai.

“We are the last manufacturer” of VCRs “in all of the world” — 750,000 units were sold worldwide in 2015, down from millions decades earlier, said Funai, which sold them under brand names like Sanyo, among others. This last holdout made VHS machines. Sony threw in the towel on making Betamax VCRs back in 2002. It stopped manufacturing blank tapes this year.

The infamous 8-track tape, just one of many orphaned recording media formats.

The infamous 8-track tape, just one of many orphaned recording media formats.

At some point in the next 10-20 years, the videocassette could represent one of the largest orphaned recording formats around. As little as 20 years from now, as your kids and grandchildren unearth strange plastic boxes from the attic or basement, they will wonder what they are and how to play them. Preservationists are concerned about the inevitable – discovering playable videocassettes have outlived the players required to watch them.

It isn’t the first time. Wire recordings still turn up in some attics. To the uninformed, they are nothing more than a spool of ordinary wire, except someone recorded sound on them sometime in the first half of the 20th Century. Even more common, open reel or reel-to-reel tapes wound on large plastic spools. This was the audiophile’s choice during much of the vinyl era, where the alternative was the obnoxiously awful 8-track tape or the hissy audio cassette.

If a radio broadcaster lived in your home, you might still find a few Fidelipac cartridges that slightly resemble 8-track tapes. These were commonly used to store continuous loop/always ready to go commercials and jingles. RCA developed its own version of the “Stereo Tape” in 1958 that came and went faster than the DuMont television network. In 1962, Muntz tried a Stereo Pak 4-track tape that went over like a yellow jacket swarm at a summer picnic. In 1966, the two track PlayTape format showed up and the only place you were likely to ever encounter it was inside certain Volkswagen automobiles. In 1977, someone had the brilliant idea of taking reel-to-reel size tape and loading it into a giant cassette-like shell. The Elcaset was born with a gigantic price tag. Unfortunately for the inventors, most consumers thought regular cassettes sounded good enough.

From the 1970s on, videotape was where it was at, and early formats were likely wound on spools or inserted into cartridges with strange-sounding names like U-matic. TV station personnel knew about these formats, but most consumers didn’t.

Making audio sound better in the 1980s brought three more attempts to recreate the portable cassette-like experience in a digital format. In 1988, Digital Audio Tape (DAT and R-DAT) arrived. It promised CD audio quality recordings. The record industry promised to destroy it at all costs because it could make perfect digital copies, great for bootlegging and pirating. It never emerged from niche status. The same was true for Sony’s bizarre MiniDisk, introduced in 1991. A sort of recordable CD-like disk placed inside a computer disk-style cartridge, it won some market share in Japan, but was never more than a curiosity in North America. If record companies didn’t release albums on these formats, they tended to tie quickly. Helping it along to the grave was copy protection technology, which irritated some users. In the end, the MiniDisk was deemed irrelevant after MP3 players arrived.

Philips of the Netherlands and Sony of Japan made one last effort before the MP3 rage with their 1992 introduction of the Digital Compact Cassette. Its main selling point was that players were backwards compatible and could also play ordinary cassettes (the things most consumers were starting to shove into drawers and shoe boxes the moment digital audio formats like MP3 took off). Too little, too late, and although Philips had a small loyal following for their players in Holland, you now have a better chance of finding blank digital cassettes stuffed into the back of drawers than you will ever have encountering a player to play them on.

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