[flv]http://phillipdampier.com/video/Bloomberg Are Streaming Companies a Threat to Cable 9-21-15.flv[/flv]

Jeffrey Tambor and Jill Soloway delivered Amazon.com Inc. its first major Emmy awards for the show “Transparent,” as the online retailer went toe-to-toe with Time Warner Inc.’s HBO, highlighting the growing competition between video streaming services vs. traditional cable television. Berenberg Senior Media Analyst Sarah Simon discusses with Bloomberg’s Francine Lacqua on “The Pulse.” (4:26)

With video streaming now accounting for at least 64 percent of all Internet traffic, it should have come as no surprise to Australia’s ISPs that as data caps are eased and popular online video services like Netflix arrive, traffic spikes would occur on their networks as well.

It surprised them anyway.

Telecom analyst Paul Budde told the WAToday newspaper “video streaming requires our ISPs to have robust infrastructure, and to use it in more sophisticated ways, and that largely caught Australia off guard. I think it’s fair to say everybody underestimated the effect of Netflix.”

Not everybody.

Australia’s National Broadband Network (NBN) was originally envisioned by the then Labor government as a fiber-to-the-home network capable of enormous capacity and gigabit speed. Prime Minister Kevin Rudd proposed buying out the country’s existing copper phone wire infrastructure from telecom giant Telstra to scrap it. Instead of DSL and a limited number of cable broadband providers, the national fiber to the home network would provide service to the majority of Australians, with exceptionally rural residents served by wireless and/or satellite.

Conservative critics slammed the NBN as a fiscal “white elephant” that would duplicate or overrun private investment and saddle taxpayers with the construction costs. In the run up to the federal election of 2013, critics proposed to scale back the NBN as a provider of last resort that would only offer service where others did not. Others suggested a scaled-down network would be more fiscally responsible. After the votes were counted, a Coalition government was formed, run by the conservative Liberal and National parties. Within weeks, they downsized the NBN and replaced most of its governing board.

Netflix’s launch increased traffic passing through Australia’s ISPs by 50 percent, from 30 to 50Gbps in just one week, and growing.

Plans for a national fiber to the home network similar to Verizon FiOS were dropped, replaced with fiber to the neighborhood technology somewhat comparable to AT&T U-verse or Bell Fibe. Instead of gigabit fiber, Australians would rely on a motley mix of technologies including wireless broadband, DSL, VDSL, cable, and in areas where the work had begun under the earlier government, a limited amount of fiber.

In hindsight, the penny wise-pound foolish approach to broadband upgrades has begun to haunt the conservatives, who have already broken several commitments regarding the promised performance of the downsized network and are likely to break several more, forcing more costly upgrades that would have been unnecessary if the government remained focused on an all-fiber network.

Communications Minister Malcolm Turnbull has admitted the new NBN will not be able to deliver 25Mbps service to all Australians by 2016. Only 43 percent of the country will get that speed, partly because of technical compromises engineers have been forced to make to accommodate the legacy copper network that isn’t going anywhere.

Think Broadband called the fiber to the neighborhood NBN “a farce” that has led to lowest common denominator broadband. A need to co-exist with ADSL2+ technology already offered to Australians has constrained any speed benefits available from offering faster DSL variants like VDSL2. Customers qualified for VDSL2 broadband speeds will be limited to a maximum of 12Mbps to avoid interfering with existing ADSL2+ services already deployed to other customers. Only multi-dwelling units escape this limitation because those buildings typically host their own DSLAM, which provides service to each customer inside the building. In those cases, customers are limited to a maximum of 25Mbps, not exactly broadband nirvana. The NBN is predicting it will take at least a year to take the bandwidth limits off VDSL2.

The need for further upgrades as a result of traffic growth breaks another firm commitment from the conservative government.

NBN executive chairman Ziggy Switkowski told reporters in 2013 that technology used in the NBN would not need to be upgraded for at least five years after construction.

“The NBN would not need to upgraded sooner than five years of construction of the first access technology,” Switkowski said. “It is economically more efficient to upgrade over time rather than build a future-proof technology in a field where fast-changing technology is the norm.”

Since Switkowski made that statement two years ago, other providers around the world have gravitated towards fiber optics, believing its capacity and upgradability makes it the best future-proof technology available to handle the kind of traffic growth also now being seen in Australia. At the start of 2015, 315,000 Australians were signed up for online video services. Today, more than two million subscribe, with Netflix adding more than a million customers in less than four months after it launched down under.

Many ISPs offer larger data caps or remove them altogether for “preferred partner” streaming services like Netflix. With usage caps in place, some customers would have used up an entire month’s allowance after just one night watching Netflix.

But the online viewing has created problems for several ISPs, especially during peak usage times. iiNet reports up to 25% of all its network traffic now comes from Netflix. As a result iiNet is accelerating network upgrades.

Customers still reliant on the NBN’s partial copper network are also reporting slowdowns, especially in the evening. The NBN will have to upgrade its backbone connection as well as the last mile connection it maintains with customers who often share access through a DSLAM. The more customers use their connections for Netflix, the greater the likelihood of congestion slowdowns until capacity upgrades are completed.

Hackett

Optus worries its customers have extended Internet peak time usage by almost 90 minutes each night as they watch online streaming instead of free-to-air TV. Telstra adds it also faces a strain from “well over half” of the traffic on its network now consisting of video content.

This may explain why Internet entrepreneur and NBN co-board director Simon Hackett wishes the fiber to the neighborhood technology would disappear and be replaced by true fiber to the home service.

“It sucks,” Hackett told an audience at the Rewind/Fast Forward event in Sydney in March, referring to the fiber to the neighborhood technology. His mission is to try and make the government’s priority for cheaper broadband infrastructure “as least worse as possible.”

“Fiber-to the-[neighborhood] is the least-exciting part of the current policy, no arguments,” he added. “If I could wave a wand, it’s the bit I’d erase.”

Another cost of the Coalition government’s slimmed-down Internet expansion is already clear.

According to Netflix’s own ISP speed index, which ranks providers on the quality of streaming Netflix on their networks, Australia lags well behind the top speeds of dozens of other developed nations, including Mexico and Argentina.

But even those anemic speeds come at a high cost to ISPs, charged a connectivity virtual circuit charge (CVC) by NBN costing $12.91 per 1Mbps. The fee is designed to help recoup network construction and upgrade costs. But the fee was set before the online video wave reached Australia. iiNet boss David Buckingham worries he will have to charge customers a “Netflix tax” of $19.18 a month for moderate Netflix viewing to recoup enough money to pay the CVC fees. If a viewer wants to watch a 4K video stream, Buckingham predicts ISPs will have to place a surcharge of $44.26 a month on occasional 4K viewing, if customers can even sustain such a video on NBN’s often anemic broadband connections.

Some experts fear costs will continue to rise as the government eventually recognizes its budget-priced NBN is saddled with obsolete technology that will need expensive upgrades sooner than most think.

Instead of staying focused on fiber optics, technology the former Rudd government suggested would offer Australians gigabit speeds almost immediately and would have plenty of capacity for traffic, the conservative, constrained, “more affordable” NBN is leaving many customers with no better than 12Mbps with a future promise to deliver 50Mbps some day. There is little value for money from that.

Starting Sept. 1, Chicago residents will be paying 9% more for everything from Netflix to income tax filing as city officials impose a recently reinterpreted entertainment/use tax on almost every online subscription content provider, even those peddling adult entertainment.

The Chicago Tribune reports the city’s Finance Department has vastly broadened the reach of Chicago’s amusement and personal property lease transaction taxes to apply the 9% tax to virtually any content that a customer borrows, leases, or subscribes to that is not purchased outright. Buying a CD on Amazon.com would not be subject to the tax but a Spotify subscription allowing you to listen to that same CD as long as your subscription is maintained will be taxed. Buying a digital copy of a movie will not be taxed, but watching it through a subscription service like Apple TV, Amazon, or Netflix will be.

Although some are dubbing it the “Netflix Tax,” it will also apply to cloud storage, paid television programming — including satellite, cable, telephone, and online-delivered content, financial and investment services, and almost anything else accessed online with a paid subscription. Even paying to host a website (or having someone manage it for you) will be subject to the tax.

The expanded tax is part of Mayor Rahm Emanuel’s strategy to deal with Chicago’s huge budget shortfall with fees, fines, and broadening taxes. The city predicts the expanded tax will capture up to $12 million a year from Chicago residents and businesses.

“In an environment in which technologies and emerging industries evolve quickly, the City periodically issues rulings that clarify the application of existing laws to these technologies and industries,” mayoral spokeswoman Elizabeth Langsdorf said in a statement issued Wednesday. “These two rulings are consistent with the City’s current tax laws and are not an expansion of the laws. These ensure that city taxation is uniformly and fairly applied and that businesses are given clear guidance on the applicability of the City’s tax laws to their operations, and they clarify that the amusement tax and personal property lease tax apply to digital services.”

Chicago residents have paid the amusement tax on movie tickets, local concerts and sports events since at least 1998. The city collects 5% on live theatrical, musical, and other live cultural performances held in an auditorium, theater, or other space whose maximum capacity (including balconies) is more than 750 persons. A 9% tax applies on all other events, but no tax is collected on religious, charitable, and not-for-profit organizations holding events for fund-raising purposes as long as they limit them to two events per year.

A Netflix spokeswoman confirmed that the company will pass the additional cost to subscribers but said no other details were available.

Critics of the tax contend it will be very easy to avoid through the use of payment services like PayPal, which allow customers to specify an out-of-state address — any out-of-state address, valid or not — in the payment details box, allowing residents to avoid the tax. Others are adding the addresses of out-of-state relatives to their credit cards and will use those addresses when placing orders for online content.

“Since they are not mailing you anything, it doesn’t really matter what address you use, as long as it is outside of the city of Chicago,” one anonymous commenter noted.

Wynne

That is exactly what Michael Wynne, a partner and attorney in the Chicago office of the law firm Reed Smith, predicted would happen, noting Chicago is already replete with high taxes and fees and adding more of them would encourage tax dodging. He assumed businesses will also actively avoid the tax, either by moving their offices out of the Chicago city limits or more likely renting a post office box in the suburbs and using it as a billing address.

“Let’s say I sign up for streaming business data in the city but I have offices throughout the country,” Wynne told the newspaper. “I will definitely make sure my billing goes through a different office.”

Wynne believes many Chicago residents may not understand the 9% tax will apply to a lot more than just Netflix. He called the expansion staggering in its breadth in his analysis, excerpted below.

The Unamusing Amusement Tax: It Could Apply to Almost Anything

The Amusement Tax ruling will extend the tax to streaming services for music, movies, games, and the like, as well as satellite TV delivered to a customer located in Chicago. However, the ruling does not impose the Amusement Tax on the same content when it is permanently downloaded by a consumer. The Lease Transaction Tax ruling extends the tax to the online procurement of real estate listings, car prices, stock prices, economic statistics, and “similar information or data that has been compiled, entered and stored on the provider’s computer.” In addition, under the ruling, the Lease Transaction Tax will apply to the online procurement of “word processing, calculations, data processing, tax preparation” and “other applications available to a customer through access to a provider’s computer and its software.” In the ruling, the Department expressly notes that these “examples are sometimes referred to as cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.”

The Amusement Tax is imposed on patrons of every amusement within the city. “Amusement” is broadly defined, and it includes “any entertainment or recreational activity offered for public participation or on a membership or other basis,” and “any paid television programming, whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite or similar means.”

The Amusement Tax ruling specifically taxes charges paid for the privilege of the following amusements delivered to a patron in the city: (1) “watching electronically delivered television shows, movies, or videos”; (2) “listening to electronically delivered music”; and (3) “participating in games, on-line or otherwise.” As a consequence, streaming a movie, listening to streaming music, or playing a game on a smartphone or tablet will now trigger a 9% tax on the subscription charge for those services if those activities are done at a location in Chicago. Furthermore, the ruling addresses “bundled” transactions, by providing that “unless it is clearly proven that at least 50% of the price” is not for the amusement, the entire charge, except for any separately stated non-amusement charges, is subject to the Amusement Tax. That suggests great care must be paid to invoicing services when including any item that might be construed to be an amusement. The ruling does not differentiate between news, current events, sports, movies, music or other types of television programming. As a consequence, an establishment that charges patrons for access to television programming of any sort, plus other goods and services (e.g., a bar that imposes an admission charge for a pay-per-view event that includes food and beverages) may have to navigate the bundling rules.

The Computer Lease Tax Ruling = 9% on Everything You Borrow, Subscribe, Rent, Lease, or Pay-Per-View Online

Rep. Bob Goodlatte (R-Va.) introduced H.R. 235: the Permanent Internet Tax Freedom Act, which passed in the House of Representatives on June 9th and is heading to the Senate.

The ruling provides examples of when the tax applies, such as when performing legal research or similar on-line database searches, to obtain consumer credit reports, or “real estate listings and prices, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data, and similar information or data that has been compiled, entered and stored on the provider’s computer.” In the ruling, the Department specifically identifies taxable leases of personal property to include “cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.” This is quite an expansion for a concept evolved from taxing agreements for time-sharing on mainframe computers, and that has only been judicially tested once, involving legal research in the city on terminals provided by the legal search provider, in days that preceded the creation of the World Wide Web, and the expansion of fiber-optic networks that made possible the Internet networks relied on to deliver many of the services the ruling now targets. See, Meites v. City of Chicago, 184 Ill. App. 3d 887 (1989). The rulings represent a further evolution of the city’s approach under the Lease Transaction Tax to disregard contract terms and recharacterize transactions to fit its tax code definitions; it is doubtful that any consumer or provider of subscription Internet streaming services thinks they are contracting to lease tangible personal property.

Wynne says Chicago officials have expanded the scope of its tax ordinances to their absolute limit, if not further. He also fears Chicago could give other cities and states ideas for new taxes.

“If any state or local governments were wondering how to tax transactions occurring in the Cloud when legislative authority for such taxation is absent, the Department has just sketched a roadmap,” he wrote.

Wynne believes the time to stop these kinds of taxes is now, before they have a chance to spread, or worse, start being collected.

He writes there are strong arguments that Chicago’s creative reinterpretation of its 9% tax is illegal, running afoul of the Federal Telecommunications Act, the Internet Tax Freedom Act, and federal and Illinois constitutional limits on taxation. But while the rulings are likely to be challenged in court, Chicago officials still expect providers to start handing over the 9% tax proceeds beginning this fall. Those that don’t will run into Chicago’s tax penalty buzzsaw – 12% interest on delinquent taxes, a 25% penalty, and a lengthy bureaucratic process (bring your attorney) dealing with the city’s administrative hearings office.

Cablevision’s broadcast TV surcharge increased in January to $5.98 a month, which amounts to $71.76 a year, on top of your usual cable TV bill.

No it isn’t your imagination. While a growing number of cable television subscribers now face a “broadcast programming surcharge” on their cable bill to compensate television stations and networks for cable carriage, those same channels are larding up their programming with ever-increasing advertising. One quarter of every hour of network television is now littered with commercials — an all-time high for broadcast networks seeking to maximize advertising revenue.

Show openings have been cut to seconds, credits roll by at fast-forward speed – usually compressed into illegibility, and some cable networks have returned to the practice of chopping bits of shows and compressing playback of others to accommodate more commercials. That does not include product placement or “in-program” compensated advertising, which appears when a character picks up a can of Pepsi, walks by a Subway outlet, or reaches for a Pop-Tart for breakfast.

As early as 2009, TNS Media Intelligence found at least 36% of today’s network primetime shows were advertising-oriented. That included 7:59 of in-show brand appearances and 13:52 of commercial advertisements, for a combined total of 21:51 of marketing content.

Reality shows, as well as being cheap to produce, are product placement gold. America’s Toughest Jobs contained 44:50 per hour of advertising messages and product placement, The Biggest Loser ran up 40:37. Before the reality show craze, game shows were program-length commercials in disguise. Game show producers received an endless supply of prizes to give away in return for viewers enduring relentless 10-15 second pitches for Rice-a-Roni, crock pots, living room furniture sets, and current model cars and trucks. Viewers did not escape traditional advertisements along the way either.

Through much of the 1970s and early 1980s, an average hour of network television was between 48-52 minutes of programming, 8-12 minutes of network and local commercials. Short news breaks and public service announcements were often included during those breaks. Shows targeting children usually contained less advertising.

In 1984, the Reagan Administration deregulated broadcasters, claiming the free market was best equipped to contain any abusive practices as consumers theoretically could tune out stations and networks that allowed things to get out-of-hand.

In reality, what one network decided, the others usually followed. Outside of watching commercial-free PBS (although those sponsorship messages increasingly began to resemble traditional advertising over the years), viewers didn’t have much choice. For the last 31 years since deregulation, advertising has increased while show length has decreased. In the 1970s and 80s, pieces of rerun television shows created when ad loads were shorter were often cut from shows to make room for an extra ad or two. What was left after a trip to the cutting room was often played slightly sped-up, which made room for even more advertising. By the 1990s, producers created their shows with increasing advertising loads in mind. Short sacrificial 60-90 second end scenes, deemed non-essential to the show’s integrity, were often chopped when a show entered syndication.

In the 2000s, network executives started demanding producers drastically cut the length of show opening and closing themes. If producers didn’t, studios did it for them when a show was resold to a cable network. A rerun of Law & Order now features a 24-second opening, a big difference from the original 1:45 second opening the show had when it originally aired on NBC. End credits were usually squished on-screen to allow a 15-second network promotion to run at the top. Some networks even began their next show in one window while showing end credits of the last program in another.

But nothing affected commercial loads more than the 2008 Great Recession. Advertising revenue tumbled, along with the economy, and advertisers balked at paying traditional ad rates when online advertising was available for much less. The answer? Sell more ads… at a lower price. Once again, program lengths had to be cut to make room for the increasing number of commercials. By 2009, average network ad loads were up to 13:25 per hour. Just four years later in 2013, that number spiked to 14:15. It’s now 15 minutes and up at some networks, depending on the type of program.

As commercials neared comprising 25% of every hour of television, sponsors finally began to rebel. They were reacting to the pervasive growth of the DVR, which allowed consumers to record their favorite shows, if only to fast forward past the dense thicket of commercials. They sought a ceiling on ad loads and more creative ways to reach ad-skipping audiences numbed by relentless advertising. That meant even more product placement.

Although sponsors of expensive NBC, CBS, ABC, and FOX shows may have rebelled at the 15-minute mark, the same isn’t true with cable networks where ad loads are as high as 24 minutes per hour. In 2009, the average cable network aired 14:27 of advertisements an hour. This year, it’s up to 15:18 and still rising. Among the worst offenders:

To keep the money flowing from every direction, both over-the-air and cable networks, including those noted above, continue to seek additional compensation from your provider in the form of retransmission consent and carriage agreements. Whether you watch a channel or not, you are paying for it. Some of these compensation agreements are experiencing rate increases approaching 10% annually.

To the surprise of many industry analysts, some of the worst offenders are networks with declining ratings who risk further alienating viewers with even more advertising just to keep revenue numbers up. While traditional ads actually declined by 2% on most over the air networks this year, FOX more than made up for that with a 15% increase in advertising time. The cable networks with the highest ad increases this year were Viacom-owned channels (Comedy Central, Spike, MTV, Nickelodeon) jumping 13%, A+E Networks (A&E, Crime & Investigation, Lifetime, History) increasing 10%, and 9% at Discovery Networks. Which networks increased ads the least? Those owned by Disney, independent cable networks, and Time Warner (Entertainment).

“Generally speaking, the ratings winners (Disney, 21st Century Fox, Scripps Networks) are increasing investment in original content (and not abusively increasing ad loads), whereas the losers (A+E Networks, Viacom, NBCUniversal) and the neutrals (Discovery, AMC Networks) are decelerating investment in original content and stuffing more ad spots into their shows,” said analyst Todd Juenger of Sanford C. Bernstein.

Michael Nathanson of MoffetNathanson Research worries television is repeating the mistakes commercial radio made post-deregulation, when massive increases in advertising accompanied by decelerating investment in programming repelled many listeners, perhaps for good. Some have permanently abandoned commercial over the air radio in favor of commercial free music services, satellite radio, and streaming services.

“Networks can offset ratings challenges and pricing weakness with more inventory, however, we worry that it is a dangerous long-term game that ultimately devalues the consumer experience and reduces ad efficacy,” Nathanson said. “As we saw with radio, once the increased commercial load genie is out of the bottle, it is nearly impossible to put it back in.”

When Stephen Cox was watching The Wizard of Oz on TBS last November, something didn’t sound quite right to him about the Munchkins, who are near and dear to his heart. He wasn’t imagining things. Time Warner-owned TBS used compression technology to speed up the movie. The purpose: stuffing in more TV commercials.

“Their voices were raised a notch,” Cox, the author of several pop-culture books including one about the classic 1939 film, told the Wall Street Journal. “It was astounding to me.”

Staff attorneys that have reviewed details of the Time Warner Cable/Comcast merger proposal are prepared to make a recommendation as early as next week that the Department of Justice should block the deal because it is anti-competitive and anti-consumer.

The staff in the Justice Department’s antitrust division have spent more than a year reviewing documents submitted by both cable companies to determine what impact the merger would have on the cable television and broadband landscape.

Bloomberg News today reported the attorneys did not like what they saw and believe the merger would harm consumers. For the first time, a cable company merger deal was reviewed not so much for its impact on cable television programming, but on broadband.

When the Federal Communications Commission redefined broadband as an Internet connection of at least 25Mbps, Comcast suddenly found itself the largest broadband provider in the country. If the merger with Time Warner Cable is approved, Comcast will have a 56.8 percent market share of U.S. broadband customers, far exceeding any other provider.

In upstate New York, Comcast would have more than a 75% market share — nearly 9o% if you just consider non-Verizon FiOS areas. In California, Comcast would control more than 80% of the market, not only picking up Time Warner Cable customers, but Charter customers in Southern California as well. 

Comcast and Time Warner Cable have argued competition is not affected because the two companies never compete with each other. But a de facto broadband monopoly could allow Comcast to raise rates at will and bring a return to usage-related billing. It would also discourage new competitors from entering the market – particularly those relying on broadband to deliver video services, and hand Comcast more leverage to force compensation from online content companies like Netflix.

Under consideration by the Justice Department:

• Whether the combined entity would have too much control over nationwide broadband Internet delivery;
• whether Comcast could use its financial influence to strike exclusive cable deals that could keep programming off other platforms;
• whether Comcast could limit how programming is delivered through video streaming services (usage caps, etc.);
• if Comcast complied with terms under a previous merger deal with NBCUniversal.

Renata Hesse, a deputy assistant attorney general for antitrust, will take the analysis and ultimately decide, along with the division’s top officials, whether to file a federal lawsuit to block the deal. Bloomberg reports lawyers at the Justice Department have contacted outside parties to collect evidence to strengthen their potential case against the merger.

Another clear sign the merger is not being received well inside the Justice Department and the Federal Communications Commission is a complete lack of negotiations with Comcast over possible concessions to make the deal less anti-competitive. That also happened with the AT&T/T-Mobile merger where negotiations to ease anticompetitive concerns never seriously got off the ground before the Justice Department sued to block the deal. The FCC quickly announced its own opposition later that same day.

A lawsuit does not necessarily kill the merger deal. Comcast could take its case to federal court to win approval over the objections of the Justice Department. The company might also counter-propose new concessions to address concerns raised by the lawsuit. 

After learning of today’s Bloomberg News story, spokespeople at both Comcast and Time Warner Cable are either confident or in denial:

“There is no basis for a lawsuit to block the transaction,” said Sena Fitzmaurice, a Comcast spokeswoman. The merger “will result in significant consumer benefits — faster broadband speeds, access to a superior video experience, and more competition in business services resulting in billions of dollars of cost savings.”

Time Warner Cable spokesman Bobby Amirshahi said “we have been working productively with both DOJ and FCC and believe that there is no basis for DOJ to block the deal.”