Phillip “Time Warner Cable ironically debunked Lyons’ advocacy of usage-based billing” Dampier

As part of the broader push to drive support for the merger between Comcast and Time Warner Cable, academics with ties to corporate-funded think tanks and the cable industry are trotting out nearly identical guest editorials appearing in newspapers around the country that attempt to educate the masses about the wonders of cable industry consolidation.

Daniel Lyons, who has written several papers supporting and endorsing the cable industry’s business agenda, is back with his helpful advice:

Consumers have more video options than ever before. Technology has eroded the lines between hardware, content and media companies. Today, Comcast’s biggest competitive threat is not other cable and satellite providers but new entertainment sources not even imaginable a decade ago. Netflix streams video online and is responsible for one-third of all Internet traffic during peak times. Apple is transforming itself from a device manufacturer into an entertainment company that delivers music, video and games instantly through a seamless customer interface. Google has expanded beyond Internet search to video services and even broadband data networks. Verizon, a traditional telephone company, recently bought the rights to stream NFL games to smartphones. Even Walmart has entered the streaming video business.

It is a challenging transaction, one that antitrust regulators should review carefully. But they should avoid rushing to judgment merely because Comcast is consolidating its position over a stagnant cable sector. Some consolidation may be necessary for cable to avoid Blockbuster’s fate and instead compete effectively in this rich, dynamic and increasingly competitive video landscape.

It is especially hard to take Mr. Lyons seriously when he claims with a straight face the cable industry is “stagnant” and on the verge of following Blockbuster into irrelevance. The only product in the cable bundle seeing flat growth is cable television. But that has not presented a difficult financial challenge because cable operators are shifting their priorities towards broadband. Just to make sure they are covered, broadband providers have raised prices and introduced equipment fees that have more than made up the difference. Despite Lyons’ prediction of doom and gloom, industry observers still find the cable business “comically profitable.”

Lyons

In fact, the cable industry now dominates the American broadband marketplace and is well positioned to deal with any competitive threat looming on the horizon. All of the competitors Lyons mentions depend on companies like Comcast and Time Warner Cable to reach customers. Cord-cutting looks much less tenable if companies like Comcast return to a regime of usage caps on their broadband accounts. Netflix, Apple, and Google cannot sustain video streaming businesses if customers fear using these services will put them over their monthly usage allowance. Sony’s forthcoming 4K video service for its video player could consume between 40-60GB per movie. Even with Comcast’s “generous” allowance of 300GB per month in its usage-capped test markets, as few as 10 movies a month will put customers over the limit, before they do anything else with their broadband connection.

Despite the threat of Internet stagnation, Lyons is a prolific writer of pro-usage cap and usage-billing studies. In at least one of those papers, he was joined by Michigan State University Professor of Information Studies Steven Wildman, also then an adviser at the Free State Foundation. Wildman was more forthcoming about where the money comes from for these studies – the National Cable and Telecommunications Association (NCTA), the largest cable industry lobbying and trade group in the United States.

Unfortunately for the Free State Foundation and the NCTA, Time Warner Cable inadvertently proved Lyons and Wildman’s theories wrong.

“Pricing experimentation may also help narrow the digital divide,” Lyons wrote. “By recovering more fixed costs from heavier users, firms may have more freedom to extend service at a lower rate to light users who are unable or unwilling to pay the unlimited flat rate. There is evidence that these opportunities are beginning to emerge from companies engaged in usage-based pricing.”

What actually emerged from Time Warner Cable’s tests of discounted usage pricing is a repudiation of Lyons’ theories. Time Warner Cable admitted its usage-based pricing options were so unpopular with customers, only a few thousand out of 11 million broadband customers signed up — hardly a ringing endorsement. Even income-challenged customers preferred unlimited Internet over a usage cap. Time Warner Cable give customers a choice between a cap or no cap. The others, including Comcast, don’t offer an unlimited option and repeatedly claim usage cap tests have met with little resistance from customers, as if they had a choice.

Short Title: Total Deregulation

Other members of Free State Foundation’s Board of Academic Advisors, including Richard A. Epstein, Justin (Gus) Hurwitz, Daniel Lyons, James B. Speta, and Christopher S. Yoo advance the cable industry agenda in other ways too.

Speta submitted an Amicus Brief: ‘In the Matter of Comcast Corporation v. FCC,’ that basically argued the Federal Communications Commission “does not have jurisdiction to address most Internet regulatory issues, because whatever expansive readings such ancillary jurisdiction has received in the past are no longer tenable.”

In fact, the Free State Foundation unabashedly supports near-total deregulation of the telecommunications industry and an elimination of most FCC powers to oversee it. In comments before the House Energy & Commerce Committee, the foundation’s Board of Academic Advisers recommended:

• Updating the Communications Act by wiping it out — a clean slate approach is needed to adopt a “replacement” regime – a new Digital Age Communications Act, which is another way of saying near-complete elimination of all current oversight and enforcement powers exercised by the FCC;
• Lyons, among others, supports eliminating regulation designed around the concept of “in the public interest” with a near-complete deregulation of telecommunications oversight, letting marketplace competition check any bad behavior. The only regulatory activities permitted would require the FCC to show the resulting harm from lack of sufficient competition;
• The group supports disallowing the FCC from issuing rules to prevent anti-competitive or abusive behavior until such behavior has been proven to have taken place. Any rules that result would automatically expire after a fixed number of years;
• States would be prohibited from regulating telecommunications services in instances where states feel federal regulation is inadequate.

Ironically, some of the biggest supporters of the group’s ideas to restrict states from writing telecommunications laws seem to have no problem letting states write laws that ban community broadband networks.

And finally, how could we forget to mention Mr. Yoo, who testified in recent hearings in the Senate Judiciary Committee enthusiastically supporting the merger deal, while not bothering to mention his employer, the University of Pennsylvania law school, has close ties to Comcast. In fact David Cohen, the Comcast executive who is the company’s leading voice in Washington and was the first witness at the hearing, is chairman of the trustees of the University of Pennsylvania.

Cruz Control

A group of Republican senators are warning the chairman of the Federal Communications Commission he’d better not touch statewide bans on community broadband networks.

In a letter sent to FCC Chairman Tom Wheeler, Republican Sens. Deb Fisher, Ron Johnson, Ted Cruz, Mike Enzi, John Barrasso, Pat Roberts, Lamar Alexander, John Cornyn, Tom Coburn, Tim Scott and Marco Rubio slammed Wheeler for his willingness to override or ignore state laws co-written by cable and telephone companies that banish municipal broadband from providing any competition.

“The insinuation that the Federal Communications Commission will force taxpayer-funded competition against private broadband providers — against the wishes of the states — is deeply troubling,” said the senators. “Inserting the commission into states’ economic and fiscal affairs in such a cavalier fashion shows a lack of respect for states’ rights,” they said.

Comcast, AT&T, Verizon, Time Warner Cable, and other operators are among the campaign contributors of the nine senators.

Echoing the sentiment of the cable and phone companies, the Republicans called community owned broadband “an unnecessary and risky government liability” and warned Wheeler there would be consequences if he was serious about ignoring the state laws, many enacted with the assistance of the American Legislative Exchange Council (ALEC).

“State political leaders are accountable to the voters who elect them, and the Commission would be well-advised to respect state sovereignty,” said the senators. “We look forward to your timely response, and we hope you will think critically about the Commission’s role and how it can more appropriately interact with our state authorities.”

Community broadband has largely been the only wired competitor facing off against cable and phone companies. Consumers have a much bigger chance of seeing a municipal provider in their community than Google Fiber or another overbuilder.

“Those are nine senators that moonlight for Comcast and AT&T I won’t be voting for,” says Stop the Cap! reader Tom Resden who shared the story. “Municipal broadband balances a playing field that has favored big cable and phone companies for years. These are the same type of senators that 100 years ago would have opposed municipal power and co-ops, willing to leave people in the dark rather than allow a player that answers only to customers get traction. It’s not a state rights issue when the corporations wrote the legislation their well-funded lackeys in statehouses around the country helped hurry into law. What we are really talking about is the corporate right to suppress competition.”

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CNN explores who is responsible for Netflix’s streaming problems on Verizon FiOS and AT&T U-verse. While one industry analyst seems keen to blame Netflix, his other articles on the subject show an increasing bias towards big ISPs like Verizon and AT&T. (2:54)

Netflix’s May speed rankings confirm Verizon FiOS customers are likely to find a degraded video streaming experience while using the otherwise speedy fiber to the home service. Netflix performance on Verizon FiOS dropped considerably last month — so much so that Frontier and Windstream DSL customers now get better Netflix performance than any Verizon customer receives. AT&T U-verse customers fared even worse with streaming performance below that offered by Mediacom — America’s bottom-rated cable company and CenturyLink DSL. In fact AT&T U-verse customers receive only marginally better service than Hughes satellite and Clearwire wireless customers. Verizon’s DSL came in dead last.

Coincidentally, both Verizon and AT&T, following Comcast’s lead, have been in negotiations with Netflix to receive payment from the streaming video provider to better handle its traffic. Verizon CEO Lowell McAdam said he’s confident about getting payments from Netflix, and he turned out to be correct — Verizon and Netflix reached an agreement in late April that is still being implemented. AT&T also says it is negotiating with Netflix. Verizon’s streaming video partnership with Redbox has not been affected by the sudden deterioration in online video streaming on Verizon’s network.

The problems with Netflix on some ISP’s have gone all the way to the top.

“My wife and I like to lay in bed and watch Netflix,” Tom Wheeler, chairman of the US Federal Communications Commission, said in January. The two companies serving Wheeler’s neighborhood are Comcast and Verizon. When enough customers launch streams on Netflix, saturating the inbound connection to either ISP, the video stops. When it does, Wheeler’s wife joins the parade of irritated customers.

“You’re chairman of the FCC,” she says to him. “Why is this happening?”

Last week, Netflix decided to answer that question with a more informative error message appearing when available bandwidth is insufficient to support a high quality stream.

“The Verizon network is crowded right now,” the message says. Netflix then attempts to restore the stream by serving up a degraded, lower quality/bit rate version to the paying customer.

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Bloomberg interviews Todd O’Boyle from Common Cause. He places the blame for this debacle solely on the shoulders of Verizon and other ISPs. (5:39)

The inability to successfully maintain a stable stream of Netflix content that ranges from 256kbps to 5.8Mbps seems odd on ISPs that offer customers connections far faster than that. The average Netflix stream is 2Mbps, slow enough to be comfortably supported on even a 3Mbps DSL connection. Netflix’s problems with Comcast evaporated after agreeing to pay the cable company to maintain a better connection between its customers and Netflix’s content delivery network. The same cannot be said for perfomance on AT&T’s U-verse platform. Although Verizon signed an agreement with Netflix, it has clearly not been implemented as of yet.

“We started a small-scale test in early May that lets consumers know, while they’re watching Netflix, that their experience is degraded due to a lack of capacity into their broadband provider’s network,” said Netflix’s Joris Evers. “We are testing this across the U.S. wherever there is significant and persistent network congestion.”

The companies with the biggest drops in Netflix performance are the same ones strongly advocating special paid “fast lanes” on the Internet for preferred traffic to resolve exactly these kinds of performance problems.

“Some large US ISPs are erecting toll booths, providing sufficient capacity for services requested by their subscribers to flow through only when those services pay the toll,” said Evers. “In this way, ISPs are double-dipping by getting both their subscribers and Internet content providers to pay for access to each other. We believe these ISP tolls are wrong because they raise costs, stifle innovation and harm consumers. ISPs should provide sufficient capacity into their network to provide consumers the broadband experience for which they pay.”

The error message fingering Verizon as the culprit for a poorer Netflix experience brought an angry response from Verizon on its blog:

Reports from this morning have suggested that Netflix is engaging in a PR stunt in an attempt to shift blame to ISPs for the buffering that some of its customers may be experiencing. According to one journalist’s tweet from last night, Netflix is displaying a message on the screen for users who experience buffering which says: “The Verizon network is crowded right now.”

This claim is not only inaccurate, it is deliberately misleading.

The source of the problem is almost certainly NOT congestion in Verizon’s network. Instead, the problem is most likely congestion on the connection that Netflix has chosen to use to reach Verizon’s network. Of course, Netflix is solely responsible for choosing how their traffic is routed into any ISP’s network.

[…] It is sad that Netflix is willing to deliberately mislead its customers so they can be used as pawns in business negotiations and regulatory proceedings.

It would be more accurate for Netflix’s message screen to say: “The path that we have chosen to reach Verizon’s network is crowded right now.”

However, that would highlight their responsibility for the problem.

Milch

That was quickly followed by a cease and desist letter from Verizon demanding Netflix remove error messages that blame Verizon for the problem. It also demanded a list of Verizon customers that received the Netflix notification.

“Failure to provide this information may lead us to pursue legal remedies,” wrote Verizon general counsel Randal Milch in a letter to Netflix general counsel David Hyman.

“This is about consumers not getting what they paid for from their broadband provider,” Netflix spokesman Jonathan Friedland said. “We are trying to provide more transparency, just like we do with the ISP Speed Index, and Verizon is trying to shut down that discussion.”

“Verizon’s unwillingness to augment its access ports to major Internet backbone providers is squarely Verizon’s fault,” Netflix general counsel David Hyman wrote.

“Netflix does not purposely select congested routes,” added Evers. “We pay some of the world’s largest transit networks to deliver Netflix video right to the front door of an ISP. Where the problem occurs is at that door — the interconnection point — when the broadband provider hasn’t provided enough capacity to accommodate the traffic their customer requested.”

Despite all that, Netflix also admitted it plans to drop the error messages after the “small-scale test” ends on June 16.

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CNBC explains how Netflix content gets to end viewers over a complicated series of Internet connections between Netflix and your ISP. (1:31)

Official merger announcement due next month.

Several media reports breaking this evening report Softbank/Sprint is close to a deal to acquire majority interest in Deutsche Telekom’s T-Mobile USA in a deal that will combine the two carriers under the Sprint brand.

Bloomberg News reports Sprint has offered $40 a share for Deutsche Telekom’s T-Mobile USA — 50% in cash and 50% in stock. The deal will leave the German wireless carrier with a 15% minority ownership stake in the combined company. Sprint would still dwarf both Verizon Wireless and AT&T and would continue to be hampered by significant coverage caps in suburban and rural areas that neither Sprint or T-Mobile’s home networks cover.

The deal includes a breakup fee payable by Sprint if the merger is blocked by regulators or fails to be executed. Sprint reportedly offered $1 billion in cash and assets if the deal falls through, but Deutsche Telekom is reportedly seeking as much as $3 billion.

Masayoshi Son

Bloomberg News previously reported a deal would probably be announced in June or July. It’s possible a deal announcement could slip into August, a source told Bloomberg. If no deal is reached by then, the sides are likely to stop negotiations for several years and wait for a new U.S. presidential administration more amenable to consolidation.

Billionaire Masayoshi Son, the founder of Japan-based SoftBank, which owns 80 percent of Sprint, faces skeptical regulators who are wary about eliminating one of four national wireless competitors. But in the last few days, executives at Sprint and Deutsche Telekom believe they can get the deal passed regulators preoccupied with a flurry of merger announcements, including Time Warner Cable and Comcast and AT&T and DirecTV. With a tidal wave of consolidation sweeping across the American telecommunications market, some industry insiders believe groups opposed to such deals will be overwhelmed trying to stop all of them.

More importantly, the issue of wireless spectrum was a key motivator to push the two companies towards a quick deal.

The Wall Street Journal reports the FCC originally considered barring AT&T and Verizon Wireless from bidding on airwaves that would have been set aside for smaller carriers. But a fierce lobbying effort by AT&T successfully nixed that plan and slashed the amount of spectrum available exclusively to smaller carriers. Sprint and T-Mobile believe the FCC’s decision gives them an opening to argue the government needs to allow a merger because it isn’t doing enough to help them compete.

Rosenworcel

Another welcome sign for Sprint and T-Mobile is Democratic FCC commissioner Jessica Rosenworcel, who saw nothing wrong with holding private meetings with Wall Street insiders, telling them she would keep “an open mind” when considering the merger. With both Republican commissioners almost certain to approve a merger and Thomas Wheeler and Mignon Clyburn — both Democrats — likely opposed, Rosenworcel may have signaled she holds the deciding vote.

Prior to 2011, wireless consolidation was rampant, with an FCC predisposed to almost rubber stamping approval of buyouts and mergers. That changed in 2011 when AT&T tried to buy T-Mobile. It was the U.S. Justice Department, not the FCC, that led the charge against the deal, calling it anti-competitive. The Justice Department was vindicated when T-Mobile promptly launched new competitive service plans and pricing that forced price reductions and plan improvements from its competitors. T-Mobile has seen dramatic growth since launching its aggressively competitive service plans.

Sprint will likely claim T-Mobile’s competitive gains are illusory and will never offer a real competitive challenge to AT&T and Verizon’s market dominance. Despite the fact the combined company would still be far smaller than either AT&T or Verizon Wireless, Sprint is expected to argue it will be better positioned to fiercely compete for customers.

That argument is tempered by the fact that competition in the prepaid wireless market — already diminished by AT&T’s acquisition of Leap Wireless’ Cricket — will suffer even more if Sprint and T-Mobile, both major competitors in the prepaid market, are combined.

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Sprint is nearing an agreement on the price, capital structure and termination fee of an acquisition for T-Mobile US that could value the wireless carrier at almost $40 a share, people with knowledge of the matter said. Alex Sherman has more on Bloomberg Television’s “Taking Stock.” (2:34)

Supporting Comcast’s merger agenda

A conservative think tank with ties to corporate money and the American Legislative Exchange Council says the FCC should not reject the Comcast and Time Warner Cable merger for emotional, “big is bad” sloganeering.

Seth Cooper, a former director of the ALEC Telecommunications and Information Technology Task Force and current Amicus Counsel for the corporate group made his comments about the merger under the moniker of the Free State Foundation.

The FCC’s due diligence in that examination of the deal, Cooper says, must “disregard pleas for it to reject Comcast/TWC out of hand, based on appeals to emotional incredulity or ‘big is bad’ sloganeering; Stand firm against calls that, under the guise of protecting consumers, the agency impose conditions in order to protect market rivals…; reject dragging out its review process…; and avoid the imposition of any conditions on the merger unrelated to demonstrable concerns over market power and anticompetitive conduct.”

Cooper parrots Comcast’s press releases promoting the multi-billion dollar merger, claiming it will lead to a faster transition to digital cable, faster Internet speeds via DOCSIS 3.1, and expanded wireless backhaul services.

Unfortunately for Cooper, the facts are not on his side.

As part of Time Warner Cable’s Maxx initiative, the march to digital cable in unmistakable at Time Warner. TWC Maxx-upgraded cities now get faster speeds at a lower cost than what Comcast offers, and no data caps. Both cable companies are already in the wireless backhaul market, installing fiber to cell towers to support 4G LTE broadband. But LTE-enabled towers are highly likely to already have fiber connections, limiting future growth. A merger between the two cable companies won’t dramatically change that market reality.