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Traditional Hollywood studios now compete with streaming content providers like Netflix and Amazon to capture viewers’ attention. Hari Sreenivasan looks at the growing impact of broadband and its effect on our viewing habits and entertainment industry with Brian Stelter of the New York Times and Lisa Donovan of Maker Studios. (8 minutes)

Some portions of the video were not cleared for online viewing. The missing section of the segment:

Traditional Hollywood studios have long produced the movies and television programs we love to watch, but in the era of high-speed broadband, companies like Netflix, Amazon, YouTube, and Hulu are some of the new power players.

All of them stream movies, TV and video. Increasingly, they’re creating their own unique content as well. For the moment, Netflix has raised the stakes most prominently. Last month, it debuted all at once 13 episodes of its original $100 million dollar series “House of Cards” all at once. It stars Kevin Spacey as a cynical U.S. House majority whip. Its success turned up the heat on its competitor, Amazon Prime, which is spending millions on new content.

Amazon in turn announced an exclusive deal with PBS to stream its hit show “Downton Abbey.” Cable providers like Xfinity and Time Warner are making more of their content available for their online customers, an audience that is growing.

According to comScore, a company that tracks digital media, every day, 75 million people in America watch videos online.

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Chattanooga, Tenn., is home to American’s fastest Internet connection — up to 200 times faster than the national average. Hari Sreenivasan talks with Sheldon Grizzle of The Company Lab and Richard Bennett from the Information Technology and Innovation Foundation about whether Chattanooga offers a model for the rest of the U.S. (9 minutes)

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Internet use is now so ubiquitous in the U.S. that not having access or online literacy can create major hurdles. As part of the NewsHour’s series on broadband technology and its effect on society, Hari Sreenivasan explores the so-called digital divide with Vicky Rideout of VJR Consulting and former FCC official Karen Kornbluh. (9 minutes)

United to grow AT&T’s revenue at the expense of rural America.

The National Farmers Union has a long tradition of protecting rural farmers and defending the rural economy, but has been completely taken in by AT&T’s proposal to abandon rural wired service.

In addition to AT&T appearing in fine print as a sponsor of the National Farmers Union’s 111th Anniversary Convention, the phone company won prominent placement at the group’s annual convention to deliver a speech about AT&T’s lobbying agenda on rural broadband courtesy of Ramona Carlow, AT&T’s vice president of public policy.

AT&T sends its lobbying forces to rural agriculture events with scare stories about impending wireless shortages and doom if the Federal Communications Commission does not hand over more spectrum. In an interview with Beth Canuteson, AT&T regional vice president of external affairs, she tells Brownfield – Ag News for America AT&T will run out of spectrum in seven years. (June 26, 2012) (6 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

The National Farmers Union joined several other rural farm groups in comments (never mentioned on the organization’s website) to the Federal Communications Commission applauding AT&T’s plan to abandon its rural “TDM” landline network:

The United States is poised for a historic transition in communications. Completing the transformation from legacy TDM-based network technology designed in the 20th century to the all-IP networks of the 21st century will allow every computer, laptop, smartphone, machine and tablet to communicate with each another and work seamlessly around the clock. These devices, connected with each other and with a host of other machines ranging from cars to thermostats via these IP-enabled networks, are changing almost every aspect of our lives in areas well beyond traditional communications. If the FCC grants AT&T’s Petition, the full build out of 21st century IP-based networks can being to spur growth, create jobs, and stimulate new opportunity across America, but especially in rural communities that are often handicapped by distance and other opportunity-limiting barriers.

AT&T has the money to upgrade its rural wireline networks.

Unfortunately for the rural farm members of the National Farmers Union, the future proposed by AT&T isn’t as rosy as the NFU would have you believe:

1. AT&T has neglected its rural landline network for years. Whether the technology is wired or wireless, the bean counters at AT&T are clear: there is no Return on Investment formula that works for the company at the current low prices charged for traditional rural landline and DSL service. AT&T has poured billions into a half-measure upgrade, a fiber-copper wire compromise called U-verse, but only in urban areas where it can justify that  investment to hungry shareholders. AT&T has no plans to deploy U-verse in rural areas. Instead, Wall Street’s economic expectation is that fixed wireless is the best solution for rural areas, because it delivers dramatically higher prices that accelerate return on investment and future enhanced earnings;
2. AT&T continues to be America’s lowest-rated wireless carrier — worst for dropped calls and worst for customer service. If you live in a rural area, you already know what AT&T wireless cell service is like. Do you want to depend on that network for all of your telecommunications needs, including emergency calls to 911?
3. AT&T’s DSL service starts at $15 a month on commonly available pricing promotions and has a barely enforced usage cap of 150GB a month. AT&T’s wireless smartphone plans start at $20 a month with a usage cap of 200MB a month. A 5GB plan costs $50 a month. On AT&T’s heavily marketed Family Share plan, 1GB of usage costs $40 a month. A typical broadband customer using between 15-20GB a month, now considered the national average, would pay $15 a month for AT&T’s DSL or $200 a month on AT&T’s wireless network, based on a plan designed to avoid overlimit fees;¹
4. AT&T’s plan also includes fringe benefits for itself: a transition to technology not subject to consumer protection and oversight laws, rate regulation, quality of service guarantees, and “carrier of last resort” obligations. In short, it means AT&T is not responsible if your wireless reception is unsuitable for voice or data use.

AT&T’s cash on hand. Q.: Where will they spend it, on their networks or on their shareholders? A.: “AT&T generated best-ever cash from operations and free cash flow in 2012, which let us return a record $23 billion in cash to shareholders, including dividends and share buybacks.” — AT&T 2012 Annual Report.

The National Farmers Union needs to consider whether AT&T’s proposal meets the terms the organization lays out in its own policy statement on rural telecommunications:

We support:

a) Efforts to ensure competitively priced, high-speed broadband access to the Internet for rural America, which should remain free of censorship and not interfere with other frequencies;

b) Collaborative efforts and public/private initiatives that leverage internet-based technology and use the internet to improve communications, reduce costs, increase access and grow farm business for producers and their cooperatives; and

c) Legislative action and efforts by the administration to encourage robust broadband and wireless deployment in rural America to drive economic development, better serve farmers and ranchers and to prevent a digital divide between rural and urban citizens.

Strong earnings growth.

Let’s consider how AT&T will manage with these tests:

• Wireless competition in rural America exists even less than in urban America. For most, there are one or two choices, typically AT&T and Verizon Wireless, which charge nearly identical, expensive prices;
• AT&T and its various front groups like the American Legislative Exchange Council (ALEC) lobby state lawmakers to prohibit public initiatives that would enhance rural broadband, particularly community-owned broadband networks. Advocating for AT&T’s imposed rural solution is a far cry from the NFU’s past. In 1934, President Franklin D. Roosevelt requested the group lead the charge for rural utilities cooperatives, owned and operated by the communities they served. In 2013, the group seems satisfied with whatever scraps AT&T is willing to throw the way of rural America;
• A digital divide can exist in many ways. The NFU proposes to cut the digital divide by introducing a pricing divide. Can most rural Americans afford $200 a month for AT&T’s wireless service, assuming they can get a good signal? AT&T returned $23 billion in excess cash to shareholders in 2o12². Imagine what half of that would offer rural America if the company chose to upgrade its existing landline network for the same 21st century service it proposes to offer urban customers.

¹-AT&T’s Mobile Share with Unlimited Talk & Text 20GB package, not including a $30 additional device fee for each smartphone on the account.

²- AT&T Annual Report 2012.

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Susan Crawford appears this weekend on Moyers & Company (check to see if it airs on a local public television station) to explain the real reason America has a digital divide with broadband have’s and have-not’s. The heart of the problem is America’s largest telecom companies, who are only interested in picking off the low hanging fruit — urban customers they can wire cheaply for service and demand monopoly or duopoly-style high prices. Rural America is being left behind, putting profit ahead of the public interest.

America has seen this before during the era of electrification, when power was denied to small towns and family farms. Then the country decided electric service was a utility and must be provided to all Americans. So it should be with broadband. Only the same ideology that argued rural Americans should pick up and move if they want electric service is back in force with broadband, where some argue companies should not have to spend money to provide universal service when they can sit back and reap enormous profits from the areas they choose to serve.

Check out this preview. (2 minutes)

Follow the money to the real root of this argument.

After conclusive evidence that cable broadband upgrades have eliminated any congestion problems, the cable industry has finally admitted usage caps are not about “congestion relief,” but are, in their view, “about fairness.”

Reports of the Internet data exaflood, tsunami, brownouts, or even blackouts are highly exaggerated and always have been. But we knew that from the first day Stop the Cap! got started.

In the summer of 2008, Frontier Communications attempted to define a top limit on their residential DSL accounts at a staggeringly small 5GB per month. Time Warner Cable initially thought 40-60GB a month was more than fair when it tried to ram its own Internet Overcharging scheme down the throats of customers in New York, North Carolina, and Texas in April 2009. Comcast said using more than 250GB a month could create congestion problems on their network and be unfair to other customers. To this day, AT&T, one of the nation’s largest telecommunications companies, claims that anything more than 150GB on their DSL service or 250GB on U-verse could bring their entire network to its knees.

The Holy Grail of Wall Street economics for broadband is to monetize its usage, creating an endless money party for what is today a utility service. Millions have been spent lobbying anyone who will listen that usage caps and consumption billing were essential to promote investment, upgrades, and to expand broadband service into rural America. Since those arguments have been made, broadband rates have increased, investment has decreased on a per customer and often real basis, and the government is now trying to chip in public taxpayer dollars to get providers to wire areas that will never pass demanding return on investment formulas.

The second prong of selling this meme is the creation of an Internet boogeyman — the “data hog,” a largely fictional creature that supposedly cares only about consuming every possible bit of bandwidth and slowing your web browsing to a crawl. Shouldn’t he pay more, you are asked, at the same time these same companies continue to raise your rates and now attempt to limit your use of a service that should cost less.

This week, Michael Powell, former FCC chairman turned head of the nation’s largest cable lobby — the National Cable & Telecommunications Association, capitulated on the “congestion” myth to an audience at the Minority Media and Telecommunications Association.

Asked by MMTC president David Honig to weigh in on data caps, Powell said that while a lot of people had tried to label the cable industry’s interest in the issue as about congestion management. “That’s wrong,” he said. “Our principal purpose is how to fairly monetize a high fixed cost.”

He said bandwidth management was part of it, though a more serious issue with wireless.

But he pointed out that the cable industry had to spend a bunch of money on its network before the first customer was signed. So, for a business that requires “enormously high” fixed costs — digging up the streets, put the wires in — and operational expense, “it is a completely rational and acceptable process to figure out how to fairly allocate those costs among your consumers who are choosing the service and will pay you to recover those costs.”

When will Washington regulators and lawmakers stop drinking the Kool-Aid handed them by high-paid lobbyists?

But our readers know Powell’s arguments are based on nothing more than the same empty rhetoric that declared the Internet exaflood was at hand.

Cable broadband was introduced as an ancillary service in the late 1990s utilizing cable television infrastructure that was constructed and paid off years earlier. Introducing broadband required only incremental investment and that remains true to this day. Cable operators more than cover their costs with sky high prices for service delivering some operators as high as 95% gross margin on broadband. Capital investments have broadly declined for years as have the costs to deliver the service on a per customer basis.

Suddenlink president and CEO Jerry Kent admitted the days of expensive system upgrades were over and it was now time to rake in profits.

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

Powell’s arguments ironically may apply partly to Verizon’s FiOS fiber network, which requires the retirement of copper wire infrastructure around since Alexander Graham Bell, but even Verizon covered much of its costs winning permission to raise rates years earlier to cover fiber upgrades. Much of that money was diverted to their wireless business instead. Today, Verizon FiOS manages just fine with no usage limits at all.

In fact, the only argument about fairness that should be open for debate regards the current cost of broadband service in the United States when compared against operators’ enormous profit margins. The lack of competition has allowed providers to increase prices and introduce “creative pricing” that always guarantees protection for the incredibly high average revenue per customer already earned.

Too often, Washington regulators and lawmakers drink the Kool-Aid handed them by an industry with an incentive to distort the truth. That incentive is the billions at stake in this fight.

Powell has even shelved the notion of the Cheetos-eating data hog burning up the Internet in his parent’s basement and has elected to try class warfare instead, claiming the most capacity is used “by a high end elite subsidized by the rest.” The real high-end elite are the telecom company executives cleaning up overcharging customers for a service that has become a necessity. Arguing for usage caps as a way to offer “lower prices” for those who cannot afford the ridiculously high prices the industry charges today only creates a new digital divide – the have’s and the have only so much.

Either way, providers laugh all the way to the bank.

Google Fiber is more than the experimental publicity/political “stunt” many large cable companies and Wall Street investors have suspected since the search giant first announced it would build a 1,000/1,000Mbps fiber to the home network.

BTIG Research, which follows the telecom sector for large institutional investors and investment managers, says there is a lot more to Google Fiber than many initially thought.

If Google’s fiber project expands outside of Kansas City, it could ultimately transform the business model of broadband in the United States. It already has generated unease for Time Warner Cable, which has resorted to knocking on doors to preserve its customer relationships.

It is one thing to consider Google Fiber from a New York City office and another to see it working on the ground. BTIG’s Rich Greenfield and Walt Piecyk decided to travel to Kansas City to investigate the new fiber service first-hand.

“We believe Google Fiber will accelerate rapidly, changing consumer habits in its territory,” they concluded. “While it is very early in Google Fiber’s life, we fully expect Google to build out more markets after they perfect the broadband and TV offerings in Kansas City.”

There is ready-made demand, judging from the 1,100 cities that asked Google Fiber to set up shop locally. Local governments recognize their telecommunications future has been largely monopolized by one cable and one phone company, and it is important for that to change. Some have taken steps to build their own networks, others will throw a parade if Google does it for them. Reasoning with the likes of Comcast, Time Warner Cable, AT&T, and Verizon — among several others — has not gotten world class broadband at a reasonable price. Instead, many incumbent players have used their market power to raise prices, restrict usage with unnecessary usage caps, and retard innovation.

Google may prove to be the only force large and aggressive enough to throw a monkey wrench into the comfortable business plans and conventional wisdom about how broadband should be packaged and sold in this country. Community owned providers have shown they can deliver superior service and pricing, but face deep-pocketed incumbents that can use predatory pricing to save customers in one market while raising prices on captive customers in others. Incumbent providers also have successfully advocated for protectionist bans on publicly-owned broadband in a number of states. Washington regulators have thus far been largely supine and disengaged when asked to address the challenges consumers face from rising bills for more restricted service.

BTIG’s own research is a marked departure from the usual dismissive attitude incumbents and Wall Street have paid to the Google project. Greenfield himself acknowledges that the investment and business media communities typically respond with three reactions when one mentions Google Fiber:

• “Is it a sustainable business with those economics?”
• “How much cash are they blowing?”
• “Who cares about what they are doing in a couple of relatively small cities such as the Kansas Cities?”

But such thinking underestimates Google’s potential much the same way Yahoo! and AltaVista did with their dominant search engines a decade ago. The biggest mistake one could make is to assume Google just wants to be another competing cable or phone company. It goes far beyond that.

Greenfield believes Google is seeking to become an integral part of the communities it serves, equal in stature to the cable and phone companies, but without their reviled reputation.

But the most significant change Google brings is a challenge to the current business model of consumer broadband.

Phone and cable companies first monetized broadband speeds. The faster the speed chosen, the higher the price. The earnings power of broadband gradually increased as more Americans signed up for service and the costs to provide it declined. But as cable TV margins continue to erode, the money to cover the difference has come from broadband, which has seen regular, unjustified rate increases since 2010. Not content with monetizing broadband speed alone, many providers are also attempting to monetize broadband usage with usage limits and/or consumption-based billing schemes. A recent Wall Street Journal article estimated 90 percent of the price consumers pay for Internet access is profit.

With that kind of profit margin, the economics of Google’s ambitious fiber project do not look as unfavorable as some on Wall Street suggest.

Greenfield calls Google’s 1 gigabit speeds insanely low-priced at $70 a month. He’s right when one considers current pricing models of incumbents. At Time Warner Cable’s current pricing (50/5Mbps service for $99 a month), the cable company would charge consumers $1,980 a month for 1,000/1,000Mbps service, assuming they could actually deliver it. Upstream speeds above 5Mbps might cost even more. Cable television, which used to be the core service offered by cable companies, is almost an afterthought for Google. It can be added for $50 more per month, which is actually cheaper than many competing providers charge for a similar package.

Greenfield feels Google has an aspirational goal for its Kansas City network.

“In Kansas City, Google has a customer facing service with employees who are part of your community, trucks that come to your house and customer service reps that answer your questions when you need help,” Greenfield notes.

On that basis, Google can reboot itself into an entirely new entity in Kansas City, offering much more than a broadband service and a search engine.

Google’s sleek network box.

Greenfield notes Google Fiber has been carefully developed to break away from the familiar experience one has with the phone and cable company:

• The home terminals and DVR equipment more closely resemble a sleek Apple product, not a Motorola/Cisco set top box that has looked largely the same since the 1990s;
• The installation experience has been streamlined — the external network interface on the side of the customer’s home does not require anyone to be home during the installation, reducing the time needed for a customer to sit around while service is installed inside;
• In-home equipment envisions a more integrated IP-based network future with Ethernet and Wi-Fi connectivity, a centralized storage device which acts as an enhanced whole house DVR, and a minimalist TV box that can be hidden — no more unsightly hulking set top boxes. It represents a home entertainment network that goes far beyond what the competition is offering.

These factors deliver a positive customer experience, if only because Google paid attention to complaints from cable and telephone subscribers and decided to do things differently.

Other traditional business model busters noted by Greenfield:

• Google will deliver 6/1Mbps budget priced Internet for a $300 one time fee (payable in $20 installments) which includes an in-home router, breaking through the digital divide and getting Google’s infrastructure into homes that simply cannot afford traditional cable or phone company broadband. It blows away the current “lite” offering sold by cable and phone companies with much better speeds at a far lower price;
• Google is working with charitable organizations to help the poorest get broadband for even less, through donations and other fundraising;
• Google leverages the community as a crowd-sourced marketing engine. Word of mouth advertising and competition among different neighborhoods helps drive the expansion of the network. Even if a consumer has no interest in the service, many fight to see it in their neighborhoods for the benefit of local community institutions who will receive free hookups;
• Every new customer signed up for two years’ service receives a free Nexus tablet. The tablet is sold as the service’s “remote control,” but it is capable of much more;
• No data caps, no speed throttling. With just two speed tiers, Google has completely discarded the speed-based and usage-based business models for broadband.

A Nexus 7 tablet comes free with the service (and a two year commitment)

So what exactly does BTIG think is Google’s master plan? Greenfield suspects Google is not recouping its initial investment or costs with their current pricing model, but that may not matter. Google may earn profit in other ways.

A 33% increase in the number of homes with broadband could be a substantial boost for Google search and YouTube, earning Google additional revenue. Improved broadband available to an entire household guarantees people will spend more time online, especially with no data caps or slow speeds. Enormously faster upload speed promotes more content sharing, which in turn means more time online with services like YouTube. A home tablet enables even more broadband usage, according to Greenfield.

As broadband speeds improve, advertisers can expose web visitors to more attractive, multimedia rich advertising not easily possible on slower speed connections. That could let Google tap into a greater share of the $60 billion TV ad market, especially for YouTube videos.

Finally, Greenfield suspects the more Google develops brand loyalty, the more successful it will be pitching consumers and businesses on services of the future.

Greenfield notes there are still bugs and features to be worked on, particularly with Google’s TV offering, but the company will have plenty of opportunities to manage those before it introduces Google Fiber elsewhere.

The implications of an expanding fiber to the home universe in the United States under Google’s price model could deliver a potent punch to incumbents like Time Warner Cable. So far, the cable company has only faced satellite dish competition for television, a technologically inferior AT&T U-verse, which will never have the capacity Time Warner has so long as the phone company still relies on any significant amount of copper wiring, and Verizon FiOS, which has disengaged from a price war with the cable company and is raising prices.

The writing is already on the wall, at least in Kansas City. Greenfield relays that Time Warner has been going all-out to improve its own customer service. One customer noted Time Warner Cable came to his house twice in recent weeks, without a scheduled service call, to check on the quality of his Internet speeds and to make sure the customer was happy.

In some neighborhoods, Time Warner is going door to door to interact with customers, something not done since cable operators first knocked on doors 30 years ago to introduce you to their service.

Google Fiber could ultimately force the end of one more legacy the cable industry has earned itself over the past few decades: customers loathing its service and prices.

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BTIG’s Rich Greenfield and Walt Piecyk experience Google Fiber in Kansas City.  (3 minutes)