The deck is stacked against independent cable operators fighting to stay competitive in a marketplace obsessed with consolidation and volume discounts on cable programming. The excessive costs paid by small, often family owned cable operators have now become so great, they are impeding broadband upgrades and expansion, according to the American Cable Association.

The ACA represents small and medium cable operators that live in a different world than Comcast and Time Warner Cable. For years, these smaller, usually rural operators have been at a disadvantage negotiating with cable programmers for reasonable programming rates. The largest cable operators win the best volume discounts, often offset by higher rates for the smaller cable companies that are typical of ACA’s membership roster.

With the FCC now enforcing Section 706 of its mandate requiring the Commission to advance the cause of competitive and ubiquitous broadband, the ACA has gotten creative in comments urging the FCC to crack down on the kinds of unfair programming contracts that force small operators to spend an ever-increasing amount of their budgets on cable television networks instead of broadband expansion.

Video margins are dropping, which means smaller operators have less to invest in broadband. (Chart: SNL/Kagan)

“It has become evident that the increasing prices video programmers and broadcasters charge multichannel video programming distributors (MVPDs) can act as a drag on broadband deployment,” said ACA president Matt Polka. “If these prices continue their upward spiral, existing providers of both broadband and MVPD services and new entrants will be deterred from expanding their broadband networks or otherwise undertaking new builds.”

Removing barriers to investment is one of the requirements the FCC is supposed to enforce under Section 706 and it has recently shown a willingness to do that by overturning Tennessee and North Carolina laws restricting the growth of municipal broadband. The ACA now wants to learn if the FCC will give small cable operators some relief as well.

The ACA argues that broadband providers must offer consumers video along with broadband and voice services, yet they face ever-increasing video programming costs that squeeze margins.  As a result, smaller triple play providers’ ability to achieve a sufficient return on investment for deploying broadband, particularly in new areas, is quickly diminishing.

The trade group wants the FCC to reform program-access rules to guarantee fairer treatment for smaller cable operators who depend on group buying power through buying co-ops like the National Cable Television Cooperative. The ACA also wants a prohibition on programmers yanking their signals in the middle of retransmission consent contract negotiations. The ability to pull a signal off a cable system gives programmers an unfair negotiating advantage according to the ACA.

Could this be Comcast’s next target?

As Wall Street continues contemplating mom and dad at the FCC and Department of Justice calling off Comcast’s elopement with Time Warner Cable, some analysts believe Comcast will have to spend the money now burning a hole in its pocket on something.

“Given the strength of Comcast’s balance sheet and an insatiable appetite for acquisitions, we do not believe Comcast would be content with its existing portfolio (no different than after they failed in their 2004 attempt to buy Disney),” wrote Richard Greenfield from BTIG Research.

Greenfield has grown increasingly pessimistic about the Comcast-Time Warner Cable deal since realizing regulators were not going to follow the usual procedure of rubber-stamping approval with mild, short-term conditions to appease politicians. As President Barack Obama highlights telecommunications public policy in his second term, the cable industry (and broadband in particular) has come under unprecedented scrutiny and visibility in the press.

This winter, the FCC redefined broadband speed to mean a connection offering at least 25Mbps. That virtually eliminates DSL as a meaningful competitor, and would hand a combined Comcast/Time Warner Cable over 55% of broadband homes in the United States. The FCC’s approval of Net Neutrality and regulating broadband as a public utility led the audience in attendance to give a standing ovation to Chairman Thomas Wheeler and the two Democratic commissioners voting in favor of the policy change. The public sentiment is clearly against industry deregulation and unfettered deal-making, particularly when it involves Comcast, one of the most-loathed corporations in America.

Greenfield

Greenfield notes momentum is on the side of consumer groups fighting for Net Neutrality, oversight, and an end to cable industry consolidation.

Assuming Comcast’s deal with Time Warner Cable fails, what can Comcast spend its money on without running into a regulator buzzsaw?

Comcast could easily continue a mergers and acquisitions strategy if it avoids attempting to dramatically increase its cable footprint. For instance, Comcast could still choose to sell some of its less important cable systems to Charter Communications — already part of the proposed Time Warner Cable transaction — and make up that subscriber loss by acquiring Cablevision, which provides service in the important suburban New York City market. Of course, the Dolan family is notorious for not selling to anyone, and a considerable number of extended family members are employed as executives in the company.

Cable operators have returned to a strategy of hedging their content costs by spending billions to acquire content producers and sports teams in hopes of moderating their price demands. In the 1980s and early 1990s, large cable operators insisted on owning a piece of nearly every cable network shown on their systems. Today, having an ownership stake in the cable networks one negotiates with at contract renewal time is a helpful advantage.

Comcast has several attractive acquisition targets Greenfield believes it can consider:

• Time Warner (Entertainment): Not affiliated with Time Warner Cable, owning Time Warner (Entertainment) would gain Comcast important cable networks like TNT, HBO, and the Warner Bros. studio.
• Netflix: Acquiring one of the best assets cord cutters have might prove difficult with regulators in Washington, but buying the ultimate TV Everywhere experience could deliver a digital platform that puts Comcast’s own online content portal to shame. The deal would also come with the talent that made Netflix an international success. If Comcast were to acquire Netflix, it would combine a superior streaming platform with an enormous content library.
• Acquire online video content sites and producers: Linear live television continues to be challenged by an array of on-demand content and video clips from various websites like Vice — videos that could be further monetized by matching Comcast’s advertising sales team with online media.
• Next generation online video set-top box manufacturers: The traditional cable box is dead to a lot of subscribers who prefer the simplicity (and price) of Roku and other similar alternatives. Current cable boxes are huge, expensive, and simply lack the creative imagination of the competition. If Comcast can’t beat Roku, it could buy it.
• Buy Sprint or T-Mobile: Greenfield believes Comcast lacks a wireless component in its product lineup as consumers increasingly move towards portable devices. Comcast would be financially foolish to build a network from the ground up, so acquiring an existing one makes more sense. AT&T and Verizon Wireless are likely out of reach, but Sprint and T-Mobile are not. Both carriers’ parent companies seem ready to sell, if the price is right. Of the two, Sprint might be willing to sell first. Sprint’s owner — Japan’s Softbank — has discovered the United States is a huge country that can swallow up endless amounts of investment and still leave it saddled with a second-rate network.

Greenfield is only speculating and there are no indications Comcast is seriously considering a next move should the Time Warner Cable deal be killed in Washington. But it does signal Wall Street does expect Comcast to do something.

Wheeler

The chairman of the Federal Communications Commission has foreshadowed his revised plan for Net Neutrality will include reclassification of broadband as a utility, allowing the agency to better withstand future legal challenges as it increases its oversight of the Internet.

Tom Wheeler’s latest comments came during this week’s consumer electronics show in Las Vegas. Wheeler stressed he supports reclassification of broadband, away from its current definition as an “information service” subject to Section 706 of the Telecom Act of 1996 (all two broadly written paragraphs of it) towards a traditional “telecommunications service.” Under the Communications Act of 1934, that would place broadband under Title II of the FCC’s mandate. Although at least 100 pages long, Title II has stood the test of time and has withstood corporate lawsuits and challenges for decades.

Section 706 relies almost entirely on competition to resolve disputes by allowing the marketplace to solve problems. The 1996 Telecom Act, signed into law by President Bill Clinton, sought to promote competition and end “barriers to infrastructure investment.” Broadly written with few specifics, large telecom companies have successfully argued in court that nothing in Section 706 gives the FCC the right to interfere with the marketing and development of their Internet services, including the hotly disputed issues of usage caps, speed throttling, and the fight against paid fast lanes and Internet traffic toll booths. In fact, the industry has argued increased involvement by the FCC runs contrary to the goals of Section 706 by deterring private investment.

An executive summary of a report published on the industry-funded Internet Innovation Alliance website wastes no time making that connection, stating it in the first paragraph:

Net neutrality has the potential to distort the parameters built into operator business cases in such a way as to increase the expected risk. And because it distorts the operator investment business decision, net neutrality has the potential to significantly discourage infrastructure investment. This is due to the fact that investments in infrastructure are highly sensitive to expected subscriber revenue. Anything that reduces the expectation of such revenue streams can either delay or curtail such investments.

Unfortunately for consumers, even the chairman of the FCC concedes the broadband marketplace isn’t exactly teeming with the kind of competition Section 706 envisioned to keep the marketplace in check. In fact, Wheeler suggested most Americans live with a broadband duopoly, and often a monopoly when buying Internet access at speeds of 25Mbps or greater. Further industry consolidation is already underway, which further deters new competitors from entering the market.

Net Neutrality critics, the broadband industry, and their allies on Capitol Hill have argued that adopting Title II rules for broadband will saddle ISPs with at least one hundred pages of rules originally written to manage the landline telephone monopoly of the 1930s. Title II allows the FCC to force providers to charge “just and reasonable rates” which they believe opens the door to rate regulation. It also broadly requires providers to act “in the public interest” and unambiguously prohibits companies from making “any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.”

Both Comcast and Verizon have challenged the FCC’s authority to regulate Internet services using Section 706, and twice the courts have ruled largely in favor of the cable and phone company. Judges have no problem permitting the FCC to enforce policies that encourage competition, which has allowed the FCC some room to insist that whatever providers choose to charge customers or what they do to manage Internet traffic must be fully disclosed. The court in the Verizon case also suggested the FCC has the authority to oversee the relationship between ISPs and content providers also within a framework of promoting competition.

DC Circuit Court

But when the FCC sought to enforce specific policies governing Internet traffic using Section 706, they lost their case in court.

Although Net Neutrality critics contend the FCC has plenty of authority to enforce Net Neutrality under Section 706, in reality the FCC’s hands are tied as soon as they attempt to implement anti-blocking and anti-traffic discrimination rules.

The court found that the FCC cannot impose new rules under Section 706 that are covered by other provisions of the Communications Act.

So what does that mean, exactly?

Michael Powell, former FCC chairman, is now the chief lobbyist for the National Cable & Telecommunications Association. (Photo courtesy: NCTA)

In 2002, former FCC chairman Michael Powell (who serves today as the cable industry’s chief lobbyist) presided over the agency’s decision to classify broadband not as a telecommunications service but an “information service provider” subject to Title I oversight. Whether he realized it or not, that decision meant broadband providers would be exempt from common carrier obligations as long as they remained subject to Title I rules.

When the FCC sought to write rules requiring ISPs not block, slow or discriminate against certain Internet traffic, the court ruled they overstepped into “common carrier”-style regulations like those that originally prohibited phone companies from blocking phone calls or preventing another phone company from connecting calls to and from AT&T’s network.

If the FCC wanted to enforce rules that mimic “common carrier” regulations, the court ruled the FCC needed to demonstrate it had the regulatory authority or risk further embarrassing defeats in the courtroom. The FCC’s transparency rules requiring ISPs to disclose their rates and network management policies survived Verizon’s court challenge because the court found that policy promoted competition and did not trespass on regulations written under Title II.

The writing on the wall could not be clearer: If you want Net Neutrality to survive inevitable court challenges, you need to reclassify broadband as a telecommunications service under Title II of the Communications Act.

Major ISPs won’t hear of it however and have launched an expensive media blitz claiming that reclassification would subject them to 100 pages of regulations written for the rotary dial era. Broadband, they say, would be regulated like a 1934 landline. Some have suggested the costs of complying with the new regulations would lead to significant rate increases as well. Many Republicans in Congress want the FCC to wait until they can introduce and pass a Net Neutrality policy of their own, one that will likely heavily tilt in favor of providers. Such a bill would likely face a presidential veto.

Suggestions the FCC would voluntarily not impose outdated or irrelevant sections of Title II on the broadband industry didn’t soothe providers or their supporters. Republican FCC commissioners are also cold to the concept of reclassification.

O’Rielly

“Title II includes a host of arcane provisions,” said FCC commissioner Michael O’Rielly in a meeting in May 2014. “The idea that the commission can magically impose or sprinkle just the right amount of Title II on broadband providers is giving the commission more credit than it ever deserves.”

Providers were cautiously optimistic in 2014 they could navigate around strong Net Neutrality enforcement with the help of their lobbyists and suggestions that an industry-regulator compromise was possible. Early indications that a watered-down version of Net Neutrality was on the way came after a trial balloon was floated by Wheeler last year. Under his original concept, paid fast lanes and other network management and traffic manipulation would be allowed if it did not create undue burdens on other Internet traffic.

Net activists loudly protested Wheeler’s vision of Net Neutrality was a sellout. Wheeler’s vision was permanently laid to rest after last November when President Barack Obama suddenly announced his support for strong and unambiguous Net Neutrality protections (and reclassifying broadband as a Title II telecommunications service), No FCC chairman would likely challenge policies directly advocated by the president that nominated him.

Obama spoke, Thomas Wheeler listened. Wheeler’s revised Net Neutrality plan is likely to arrive on the desks of his fellow commissioners no later than Feb. 5, scheduled for a vote on Feb. 26. It’s a safe bet the two Republicans will oppose the proposal and the three Democrats will support it. But chairman Wheeler also listens to Congress and made it clear he doesn’t have a problem deferring to them if they feel it necessary.

“Clearly, we’re going to come out with what I hope will be the gold standard,” Wheeler told the audience in Las Vegas. “If Congress wants to come in and then say, we want to make sure that this approach doesn’t get screwed up by some crazy chairman that comes in, [those are] legitimate issues.”

If that doesn’t work, the industry plans to take care of the Net Neutrality regulation problem itself. Hours after any Net Neutrality policy successfully gets approved, AT&T has promised to challenge it in court.

[flv]http://www.phillipdampier.com/video/Fox Business News Net Neutrality Wheeler 1-8-15.flv[/flv]

Free Press CEO Craig Aaron appeared on Fox Business News to discuss Tom Wheeler’s evolving position on Net Neutrality. (3:54)

Phillip Dampier

Welcome to 2015!

This is the seventh year Stop the Cap! has fought for better broadband across North America and beyond. Whether your provider is Comcast, Time Warner Cable, Rogers, Bell, AT&T, Verizon or a (dwindling) number of other cable and telephone companies, there is plenty of room for improvement.

When we began in the summer of 2008, Frontier Communications was contemplating a usage cap of just 5GB a month on their broadband service. A year later Time Warner Cable market tested caps as high as 40GB a month. For almost as long as we’ve existed, Comcast has believed 250GB a month was all most customers ever needed. Rogers’ most popular Internet package today offers 60GB a month, despite the fact Canadians on average watch more online video than anyone else. AT&T thinks 150GB a month is fine for DSL and 250GB is all you’d need as a U-verse customer. Verizon doesn’t see a need for limits on either its DSL or fiber optic networks. Neither does Cablevision.

Usage caps and so-called “usage-based billing” continue to be one of the most under-reported stories in the tech press. Touted as “fair pricing,” these plans are in fact little more than profit-padding for a service that already earns companies as much as 90% gross margin. There is nothing fair about usage-based billing in North America. Customers face the same prices they have always paid for unlimited service, but now endure an arbitrary usage allowance that usually includes a stiff overlimit fee. Those providers charging usage pricing do not offer the fastest service, have not made significant improvements above and beyond other providers that still charge flat rate prices, and frequently also charge excessive modem rental fees.

The duopoly most Americans have for broadband service has become quite fat and happy collecting ever-increasing amounts of money for service that only seems to improve after an upstart competitor like Google arrives ready to offer better service at a lower price. Customers in Kansas City, Austin, and a handful of other communities are getting the best upgrades and are empowered to negotiate a lower price for service. The rest of the country is not so lucky. A handful of often-under capitalized fiber competitors have arrived in some areas, but their market share generally remains a fraction of what the cable and phone companies have locked up.

We have always believed broadband was destined to become the next must-have utility service, following clean water, electricity, gas and some form of telephone service. Unfortunately, Washington policymakers continue to treat Internet access as an optional extra, allowing one or two companies to dominate access in most communities. Policymakers and regulators have done very little to protect consumers from the effects of marketplace concentration, allowing cable and phone companies to merge and raise prices, remain uncommitted to protecting the Open Internet with strong Net Neutrality protections, and not taking the effects of usage caps seriously.

One of the most effective ways a community can combat bad service and high prices is to support launching its own public broadband network. Throughout the United States, local town and counties enduring “good enough for you” broadband (or no service at all) are constructing their own fiber optic networks to better meet the realities of the 21st century digital economy. They face industry-funded opposition in at least 20 states where lawmakers have banned or severely curtailed these networks to protect private telecom giants from the effects of serious competition.

In 2015, Stop the Cap! will continue to fight for consumers looking for a better deal:

• We continue to oppose industry consolidation. Mergers and buyouts benefit executives and shareholders. They almost never benefit customers who soon find rate increases, fewer choices, and often worse service as a result. Connecticut residents know that first hand enduring Frontier Communications’ recent bungled transition from AT&T service. Customers that dislike Time Warner Cable will likely loathe Comcast if that merger wins regulator approval. AT&T’s buyout of DirecTV leaves one less competitive choice for customers living in AT&T’s service areas looking for an alternative to U-verse television. Imagine if the government had approved AT&T’s attempted buyout of T-Mobile, the one wireless carrier now willing to throw a monkey-wrench into the current dominance of almost-identical expensive wireless service plans from AT&T and Verizon.
• Usage caps and consumption billing remain unjustified, particularly for wired broadband. Despite industry claims that usage caps and usage billing stimulate investment, in most cases the costs of delivering broadband service and the amounts companies invest in network upgrades continue their relentless decline on a per customer basis. Usage billing is no prescription for congestion problems either. Most congestion problems occur during peak usage levels — when light and heavy users alike are most likely to be online. A truly fair usage pricing scheme would charge a fair price for actual usage and nothing else. But such a pricing scheme would likely cut broadband bills and profits. So providers offer pre-determined compulsory usage allowances at current prices instead, and do not offer a flat rate option or rollover unused usage to a future month. As a result, customers often pay more for less service and constantly have to check their usage to make sure they do not get an unexpected surprise on their bill.
• Strong Net Neutrality protection is the best guarantee of preserving the Internet as it exists today – where success or failure of an online venture is based on what it offers customers, not on the size of its bank account. A nationwide end to laws restricting the development and expansion of community broadband is also essential to give communities self-determination of their broadband future.
• We will continue to educate consumers on how to negotiate a better deal with your provider and avoid expensive surcharges like modem rental fees. We will also continue to enlighten you about the pervasive influence of Big Telecom money on non-profits, state and federal governments, and researchers that support the various agendas of some of the largest telecom corporations in the country.

Broadband is improving at an incredible pace around the world, but back home prices continue to rise while Internet speed improvements are often met by usage cap road bumps. Internet affordability remains as much of a problem as rural broadband access. The more you know, the more effective you can argue for a change in telecom policies, where the public interest is better-balanced against corporate profits and duopoly prices.

Thank you for being a part of our efforts to make things better.