Small cable systems across the country and on overseas military bases are being granted hourly reprieves that are keeping up to 24 Viacom-owned cable channels on the air after negotiations to extend an agreement with their program buyer stalled.

Cable operators belonging to the National Cable TV Cooperative, which represents independent cable systems on cable programming matters, report Viacom is demanding an unprecedented 100 percent rate increase for its networks and a guaranteed rate hike of 10% annually on each of its channels.

Viacom’s demands would cost each subscriber at least $4 a month, noted Jack Capparell, general manager of Service Electric’s cable system in the Lehigh Valley of Pennsylvania. Service Electric is a private, family owned cable business with 250,000 subscribers in central and northeastern Pennsylvania and northwestern New Jersey.

The impasse also affects cable systems serving American military bases. Americable has notified subscribers in Yokosuka, Atsugi, Iwakuni, and Sasebo, Japan Viacom was likely to cut off 10 of its cable channels to military families sometime today. Allied Telesis, which offers service to Air Force bases in Japan is also expected to lose programming.

NCTC members complain Viacom requires cable systems to carry nearly all of its lineup, including lesser-known channels few customers have even heard of, much less want. Even if a cable system chooses not to air a Viacom channel, Viacom’s contracts require cable providers to pay for them if they want to carry Viacom’s most popular networks.

Some cable systems are breaking away from NCTC’s negotiations and opening one on one talks with Viacom. Metrocast secured an agreement for its customers earlier today by negotiating directly with Viacom.

For most affected cable operators, there is a ‘wait and see what happens’ approach. Others, including Cable ONE, have already moved to replace the Viacom networks with other channels.

“Viacom asked for a rate increase greater than 100%, despite the fact that viewing is down on 12 of their 15 networks – some by more than 30% since 2010,” said Cable ONE. “We asked Viacom to either reduce their rates or allow us to drop some of their less popular networks to reduce the total cost. They refused these reasonable requests.”

Earlier today, Cable ONE didn’t wait for Viacom to pull the plug. They pulled it themselves.

“Cable ONE has let these networks go and expects to add many top-rated networks you’ve requested and expand several other highly requested networks to our most popular level of service. Some of the new networks include BBC America, Sprout, Investigation Discovery, the Blaze, Hallmark Channel, National Geographic, TV One, Sundance, and more,” said the company, which expects to publish a full list of the new networks on Wednesday.

Viacom responded with a news release tailored for each affected provider:

We are offering Service Electric a double-digit discount off of our standard rate card. It is a better deal than HUNDREDS of other TV providers in the country have agreed to. We have been actively trying to get a deal done with Service Electric for months and they have refused to negotiate in any meaningful way. And now, on top of this, Service Electric is throwing out numbers which simply aren’t true. Our expiring deal with Service Electric is nearly five years old. In that time, we have been great partners and given Service Electric more channels, more on demand content and access to our content beyond the TV – at no additional cost. We don’t understand why Service Electric has chosen to negotiate in this manner. And now, as a result of their lack of interest in coming to a mutually beneficial agreement, you are at risk of losing 19 Viacom networks. We are serious about getting a deal done.

Virtually the entire state of Alaska is also affected.

“We’ve unified to fight for Alaskans and to work toward a fair, long-term agreement that keeps prices stable for our customers,” said Paul Landes, GCI senior vice president. “Viacom wants a rate increase that is 40 times that of the rate of inflation. Alaska pay TV providers, along with 700 small to mid-sized operators nationally, are saying ‘no’ to Viacom’s take all 26 channels or nothing demands.”

GCI is joined by Alaskan providers MTA and KPU in the dispute.

[flv]http://www.phillipdampier.com/video/Cable ONE Viacom Channels Removed New Channels Added 4-1-14.mp4[/flv]

Cable ONE released this video earlier today informing customers they were dropping Viacom networks. (1:00)

Netflix has agreed to compensate Comcast in return for assurances that the cable company’s subscribers would no longer be caught in the middle of a dispute between Comcast and one of Netflix’s content distributors.

The multi-year agreement between the two companies will bring Netflix direct access to Comcast’s broadband network with a Service Level Agreement that will guarantee streaming stability for customers who have loudly complained about Netflix’s deteriorating performance.

The controversial arrangement has probably established a precedent for other large Internet Service Providers likely to seek compensation to handle Netflix traffic. As of this evening, both AT&T and Verizon have already acknowledged they are negotiating with Netflix for similar arrangements.

Caught in the middle of the dispute are Comcast customers paying for a reliable Internet connection and getting slowing connections and re-buffering problems while attempting to watch Netflix content during peak usage times.

One side accuses Comcast of violating Net Neutrality while the other blames Netflix for dumping enormous Internet traffic on Internet Service Providers without compensation for network upgrades. Also in the crossfire is Cogent, a third-party company delivering Netflix content to Comcast’s front door.

How Netflix Distributes Its Streaming Movies and TV Shows

Netflix has traditionally avoided owning the “pipes” that distribute movies and TV shows to paying customers. Instead, it usually contracts with “transit providers” to send content from Netflix headquarters on to “content distribution networks (CDN)” that manage video streaming. A Netflix video may pass through a number of connections on a variety of independently owned networks before it arrives at the front door of your Internet Service Provider. Companies like Comcast handle “the last mile” of the journey that began at Netflix and ends at your computer or television set.

Netflix does not rely on just one transit provider to handle its traffic. Level 3, Cogent, and XO Communications all reportedly serve in that capacity, depending on where traffic is headed. The same is true for the CDN’s Netflix contracts with to regionally stream content to each subscriber.

Netflix determines how to handle your streaming movie request behind the scenes, selecting a CDN that is close to you and capable of delivering the most stable streaming experience at that moment. If you are a Comcast or Verizon customer, Netflix often selects Cogent to handle its content. Cogent is also well known for its relatively low cost.

If you are served by Cablevision, Frontier, or certain other providers like Google Fiber, Netflix will instead direct your streaming request to a CDN located within your provider’s own network. These “Open Connect” boxes store Netflix content in a type of cache and can stream it to customers directly without sending video packets across multiple third-party networks. Theoretically, Open Connect offers an efficient and stable way of distributing Netflix content to customers. It also saves Netflix money and in return, it costs the ISP nothing — Netflix pays for the equipment and service.

Cogent vs. Big Telecom

Netflix and YouTube together are now estimated to cover 50 percent of all video traffic on the Internet, and that traffic is growing. Cogent dutifully passes that video content along to Internet Service Providers like Verizon and Comcast that have customers waiting to watch. But it is a two-way street. Any outbound traffic from customers could also be forwarded to Cogent to send on. Traditionally, both sides have managed the traffic by gradually increasing the bandwidth and speed of their connections to one-another. But as Netflix traffic grows and grows, companies like Comcast and Verizon believe they are being saddled with the costs to upgrade their networks in ways that are out of proportion to the traffic they send in the other direction. ISPs often grumble about the cost but keep on upgrading to keep paying customers happy. Verizon and Comcast are suspected of dragging their feet on those upgrades in an effort to win compensation.

Verizon and Comcast argue they should be paid by content producers responsible for generating tons of Internet traffic to help cover the cost of upgrades. Instead, Netflix offered its Open Connect boxes, which keep Netflix traffic within an ISPs own network, reducing the necessity of constantly upgrading connections with other transit providers. Verizon and Comcast don’t want Netflix’s solution — they want cold hard cash.

Conflict of Interest

Some network engineers cannot understand all the controversy about Comcast’s arrangement with Netflix. Some believe Netflix is simply shifting traffic away from third-party Cogent to Comcast directly, presumably at a cost savings. They suggest customers will be happy that streaming quality is restored and Netflix also wins a guaranteed level of performance they never had with Cogent.

But that argument does not explain why Netflix was compelled to make a financial arrangement with Comcast. The two companies have been in negotiations on the subject of traffic compensation for months. Many industry observers believe those talks went nowhere until Netflix customers began complaining about the increasing network slowdowns. Some even dropped their Netflix subscriptions over the issue.

Netflix CEO Reed Hastings admitted he made a deal with Comcast to restore customer confidence in Netflix and end subscriber frustration. It was also increasingly clear Comcast was in no hurry to improve things on its own, despite the fact its own customers were the ones most directly affected.

So why wouldn’t Comcast (or Verizon or Time Warner Cable) take Netflix up on its offer of free Open Connect boxes that would reasonably solve streaming problems without forcing anyone to spend a fortune on upgrades? Simply put, all three companies are direct competitors of Netflix. Helping Netflix offer a top quality streaming experience is not in the best interests of Comcast (or others) that are facing potential cord-cutting customer losses in their subscription video businesses. Verizon has partnered with Redbox to deliver streamed video, Comcast operates Streampix, its own online streaming service, and Time Warner Cable offers a variety of on-demand and streamed video content for its cable TV subscribers. None of these services have suffered from traffic congestion issues.

ISP Payday

What About Net Neutrality? What About Paying Customers?

With Net Neutrality tossed out by the courts, there is little any regulator can do to resolve disputes until Net Neutrality can be properly enforced under a stronger regulatory framework. Some argue the congestion issues creating the problems with Netflix are not a true violation of Net Neutrality in any event because providers are not artificially prioritizing traffic.

They are simply not keeping up with upgrades that just so happen to directly impact a competitor while leaving their own services unscathed.

Providers also seem characteristically unconcerned about complaining customers, passing blame for the problem on to Netflix. Besides, they remind you, paying for an Internet connection alone does not entitle you to any guarantee of performance.

The Dam Breaks

With this week’s agreement between Comcast and Netflix, both AT&T and Verizon wasted no time admitting they are both seeking compensation from Netflix as well. Other providers are likely to follow.

Netflix warned investors that paid agreements with ISPs could adversely affect its earnings due to increased costs. Although stopping short of suggesting price increases for Netflix customers could come as a result, Wall Street wasted no time worrying about the financial impact of deals like the one between Netflix and Comcast.

The Wall Street Journal reported the momentum appears to be shifting in favor of large Internet providers like Comcast and AT&T and away from content producers.

Janney Capital analyst Tony Wible suggested Comcast’s toll booth could create a barrier for other content producers if the cable company asks for significant compensation.

“Although there is no prioritization benefit [from the deal], we suspect that the exchange of money for resolution/performance could (if large) effectively limit competition,” said Wible. “In essence, Netflix could be trading [profit] margins for subscribers. Few others can match Netflix’s [spending budget to acquire content] without incurring massive losses. The competition may now have to cope with additional fees that sway their willingness to compete if they do not already have a large subscriber base.”

In other words, a new Internet startup could face hard questions from investors about how it intends to cover ISP demands for compensation in return for a suitable connection to reach customers. A large venture like Netflix has enough resources to handle those costs and negotiate for a better deal while a smaller startup may not.

[flv]http://www.phillipdampier.com/video/WSJ Netflix Comcast Agreement 2-24-14.flv[/flv]

Netflix has signed a deal with Comcast to ensure smooth streaming, in what is being called a landmark agreement. Wall Street Journal reporter Shalini Ramachandran explains the agreement. (3:39)

Behind the 8 ball.

Intel’s plan to launch a competing virtual cable television operation delivering programming over existing broadband connections is dead and the cable industry has tentative plans to bury the technology overseas.

OnCue was to feature dozens of popular cable networks and a large library of on-demand content using hardware that combined live, on-demand, and streaming video. The service was supposed to be up and running this year, but despite months of talks, Intel was unable to announce any significant carriage agreements with major cable networks. Cable programmers were reportedly fearful of alienating their biggest customers — large incumbent cable, telco and satellite companies — potentially leaving networks exposed to retaliation during contract renewal talks.

The cable industry has repeatedly warned that reselling programming to streaming providers dilutes the value of those networks. The clear implication: sell to our competitors and we will demand significantly discounted rates when our contracts come up for renewal.

Intel has reportedly been shopping the remnants of the service to new buyers. A late October rumor that Verizon Communications was a likely buyer has gone unconfirmed. Today, Bloomberg News reports Dr. John Malone’s Liberty Media has shown an interest (since denied by Liberty) in acquiring the service. Other media accounts suggest Verizon and Liberty could jointly buy the service, but Malone is loyal to the cable industry and is reportedly uncomfortable doing business with a telephone company.

Should Liberty Media acquire the technology, cable companies in the United States can stop worrying about OnCue as an online competitor. Liberty Media would only deploy the technology as an advanced set-top box offered through its owned and operated European cable systems.

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Bloomberg senior West Coast correspondent Jon Erlichman reports that Intel may be turning over its web-TV project to Verizon and looks at possible reasons why the company may be abandoning the project and what it could mean for Verizon. He speaks on Bloomberg Television’s “Bloomberg West.” (2:28)

Coming soon nationwide? Comcast, Time Warner, AT&T and CenturyLink sure hope not.

Verizon is talking to major cable programmers about launching a nationwide version of FiOS TV as an over-the-top video service that works with your existing broadband provider.

The NY Post reports Verizon is looking at launching an online pay television service for customers without installing additional fiber optic lines to deliver it.

The service would likely be an extension of the “TV Everywhere” online video platforms that many national cable and telco-TV providers already offer existing cable TV subscribers. What would make Verizon’s offer radically different is selling the virtual cable TV service in areas where it does not offer FiOS service.

Verizon must carefully negotiate with programmers to distribute networks over an online video service that would likely compete directly with those programmers’ best customers: cable operators and telco IPTV services like U-verse and Prism TV.

The concept was rejected out of hand Wednesday by Time Warner Cable chief operating officer Rob Marcus, who agreed with Comcast executive vice president Steve Burke’s contention that “over the top” video services that offer virtual cable television outside of their respective service areas lacked a compelling business model and would be difficult to monetize.

“At this point we don’t really aspire to delivering an over-the-top service,” Marcus said. “Our value proposition is delivering video via our facilities as opposed to being a retailer of somebody else’s video, which is a somewhat commoditized product.”

Neither cable executive mentioned the fact cable operators have also maintained an informal “wink and nod” agreement to steer clear of head-on competition with each other for decades.

Verizon: The next big supporter of Net Neutrality?

Verizon apparently wants to shake things up and sell online video without incurring the cost of expanding its fiber optic network FiOS to deliver it.

“They’ve had exploratory talks about how to become a virtual [multiple-system operator],” one person close to the conversations told the Post. “It’s a question of how to get there.”

Interestingly, Verizon CEO Lowell McAdam is worried about developing the service without Net Neutrality protection or some other form of government oversight of broadband. Verizon could spend millions to negotiate programming contracts only to find competitors with their own TV packages to protect outmaneuvering the venture. Without Net Neutrality, Verizon could find its service blocked by competitors or made untenable with the implementation of broadband usage caps or consumption billing that would make a subscription too costly to consider.

The company is now trying to figure out exactly which branch of government (or agency) controls broadband policy in the nation.

The FCC’s current Net Neutrality policy depends on a shaky regulatory framework now being challenged in federal court.

Verizon declined to comment.

Steve Burke is CEO of NBCUniversal and an executive vice president at Comcast.

Comcast is in the enviable position of negotiating with itself for permission to carry Comcast-owned NBC stations over Comcast Cable, earning the company hundreds of millions in retransmission consent fees paid by cable subscribers.

Comcast executive vice president Steve Burke, who also oversees the Comcast-owned NBCUniversal, said retransmission fees are changing the broadcast business, and makes Comcast a ton of money along the way.

“NBC made virtually nothing on retransmission consent two years ago,” Burke told investors at the Bank of America Merrill Lynch 2013 Media, Communications & Entertainment Conference. “This year we’ll make about $200 million.”

Since acquiring NBCUniversal, cable subscribers cannot help but find themselves watching at least one channel owned by the entertainment and cable conglomerate. Burke said in addition to owning NBC local stations in the largest U.S. cities, Comcast also owns or controls an impressive number of popular cable channels including USA, Syfy, Bravo, E!, MSNBC, CNBC, The Weather Channel, and a variety of sports networks. Seven Comcast-owned cable networks earn the company more than $200 million annually, providing almost two-thirds of the programming division’s operating cash flow.

But Burke isn’t satisfied with those earnings, claiming cable companies undervalue the networks’ true worth by 20-25 percent.

“There is a monetization gap between how those channels are doing and how they should be doing measured by how peer cable channels are doing,” Burke explained. “In other words we are not paid as much as we think we should be given our ratings and our positioning by cable and satellite companies.”

Burke told investors the company is positioning to capitalize on the growth of retransmission consent fees that will deliver more revenue to the broadcast and cable programming divisions of Comcast that will be eventually reflected on subscribers’ bills.

“The key to retransmission consent is to have contracts expire with the big distributors that allow you to reopen the existing retransmission consent contracts,” Burke said. “One thing that we really hadn’t figured on when we did the deal was how rapidly retransmission consent was going to establish itself. We underestimated that frankly. That’s a very good thing for NBCUniversal, but not so good I think for Comcast Cable.”

Although Comcast has been very vocal about unreasonable price increases for broadcast and cable television programming owned by other companies, it expects comparable compensation for its own stations and networks.

“As our contracts come up, we will get those revenues the same way CBS, ABC and FOX have,” Burke argues. “I see no reason why we won’t […] get paid in a similar fashion to the way that they get paid in the future.”