Moffett

A consolidated cable industry envisioned by Dr. John Malone, currently bidding for a merger between Charter Communications and Time Warner Cable, would feature widespread usage caps and usage billing and could obliterate competition from over-the-top online video providers, predicts a cable industry analyst.

Craig Moffett, now out on his own as co-head of independent Wall Street research firm MoffettNathanson, says broadband usage pricing is the sleeper issue of the last five years.

“I’ve written for years that [usage based pricing] is the single most important issue in all [the telecom sector],” Moffett said in an interview last week. “I’ve always been amazed by how little attention people have always paid to the issue.”

The Street reports that a unified cable cartel limiting consumer access to the Internet or more importantly monetizing that access would immediately devastate streaming video competitors including Netflix, Amazon, YouTube and Hulu.

If usage based pricing were implemented across the cable industry tomorrow, Moffett believes Netflix’s subscriber base would immediately fall from 30 million to 10 million. Nascent video players like Intel and Apple would likely find their business plans untenable, and some analysts believe the sweeping price changes would probably end the shift towards integrating streaming technology into large flat panel television sets.

Consumer backlash

Moffett says the impact would be broadly felt. Other analysts predict it could cause a national consumer uprising, especially at a time when other countries are swiftly moving to get rid of usage limits and consumption-based billing that have never been popular with customers.

“I think it will become clear that over the summer the window may have already closed for the cable operators to move to a usage based pricing theme,” Moffett said.

The Federal Communications Commission has done almost nothing about the issue of usage caps and usage pricing. Former FCC chairman Julius Genachowski even applauded the unpopular price scheme, calling it an important innovation.

Customers call it something else, and an uproar from consumers and competitors alike could overshadow the broadband successes of the Obama Administration. It would represent “a laughable setback for the nation’s communications infrastructure,” predict increasingly pessimistic Wall Street analysts concerned about the inevitable backlash.

The Street:

In a new broadband pricing regime, regulators would have to condone what consumers and competitors would immediately recognize as anti-competitive. Meanwhile, immensely popular content providers such as Netflix, Amazon Prime, Hulu, YouTube and the like would have to lose a Washington lobbying battle to the interests of cable monopolies, their arcane billing and off shored customer service.

Hollywood and broadcast networks would lose marginal new content buyers such as Netflix. Tablet makers such as Apple, Google, Samsung and Amazon would see the value of their fastest growing products put at risk.

Most importantly, it would be an affront to one of the few clear consumer victories for the Department of Justice in the Obama administration.

The company best known for the 10 daily newspapers it publishes, including the Chicago Tribune, the Orlando Sentinel, the Baltimore Sun, and the Los Angeles Times, can’t wait to get out of the newspaper business.

Last December, the Tribune Company, the second largest newspaper publisher in the country, emerged from bankruptcy without its $13 billion debt and old owners. Now in charge: the same Wall Street banks that lent the company billions to go private. Two months after assuming control, Tribune’s new owners hired Evercore Partners and J.P. Morgan to oversee the dumping of Tribune’s newspaper portfolio.

Founded in 1847 with the launch of the Chicago Tribune, 166 years later the Tribune Company was finished with print news, probably for good.

Investment bank and now owner

Today’s Tribune, controlled by Oaktree Capital Management, best known for investing in “distressed” companies, JPMorgan Chase, a Wall Street investment firm, and Angelo, Gordon & Co., a hedge fund sponsor best known for helping the U.S. government deal with the toxic assets accumulated by banks that helped trigger The Great Recession, want into the television business instead.

Tribune, which already owned 23 local television stations including flagship WGN in Chicago, bought another 19 Monday in a deal estimated to be worth at least $2.7 billion.

The stations were acquired from Local TV Holdings, itself owned and controlled by Wall Street investment firm Oak Hill Capital Partners, founded by Texas oil billionaire Robert Bass. Oak Hill acquired the television outlets from The New York Times and News Corp., in two prior deals. Tribune won’t pay for the stations outright. It is financing the deal with a $4.1 billion credit line granted by banks including JPMorgan Chase and Citigroup.

The stations involved:

Assuming the deal meets the approval of the Federal Communications Commission, Tribune will control 42 stations in 16 markets, including New York, Los Angeles, and Miami.

It expects to pay off the loans and generate returns from the “significant free cash flow” generated by the stations.

Where will that cash flow originate? From pay television subscribers asked to pay a growing amount each year for the formerly “free TV” stations.

“Smaller players feel like they’re losing their way with pay-TV providers and broadcast networks,” Craig Huber, analyst at Huber Research Partners, told USA Today. “They feel like they’re at a disadvantage here unless they size up.”

As cable programming rates continue to increase and subscribers threaten to cut the cord, pay television providers have been more willing to play hardball and kick stations off the cable or satellite dial when they cannot reach a retransmission consent agreement.

With up to 90 percent of a station’s viewership coming from pay television platforms, a lengthy standoff can destroy a station’s primary source of income: advertising revenue.

To protect themselves, television station owners are retaliating by threatening providers with the loss of all of their stations across the country, not just one or two. The resulting subscriber uproar could prove politically difficult and threaten customer relationships with providers. The more stations a company controls, the bigger the threat it can pose to Comcast, DirecTV, AT&T and other national providers.

Tribune is not alone bulking up the number of stations they own and control. Last month Gannett nearly doubled its portfolio from 23 to 43 stations with the acquisition of Belo’s TV stations for $1.5 billion in cash and agreeing to cover $715 million in accumulated debt.

Sinclair Broadcast Group, already the largest local TV station owner in the country, has gotten even larger with the purchase of four TV stations owned by Titan TV Broadcast Group. If the deal is approved, Sinclair will own 140 stations in 72 markets. In some cities, Sinclair will nominally own or control up to five local stations.

Sinclair management is well-known for injecting conservative political viewpoints into local newscasts and programming decisions. In 2004, two weeks before the presidential election, Sinclair ordered all of its television stations to air propaganda critical of Democratic candidate John Kerry. Later that year, Sinclair ordered its ABC affiliated stations not to broadcast a “Nightline” episode about soldiers killed in the Iraq war, fearing it would turn the public against the war.

But for most owners, politics has nothing to do with the desire to supersize. It’s a matter of money.

Even smaller station groups are now consolidating. Media General and New Young Broadcasting Holding, are merging their combined 30 stations.

(Image: The Wall Street Journal)

Critics worry the changing landscape of local television will threaten the concept of “local service” stations are required to provide as a condition of their broadcast license. A station owner that lives and works in the community served is becoming an increasing rarity, and the Federal Communications Commission has allowed stations that used to fiercely compete for local news viewers to now “share resources.” Many stations, especially those owned by out of area investment banks, have discontinued local news altogether in cost-savings maneuvers.

“This deal adds to a blizzard of broadcast industry consolidation that is poised to leave America’s media system less local, less diverse and less accountable to the people in these communities,” said Free Press’ Craig Aaron in a statement on the deal. “By the time all these deals are done, a handful of companies could control almost all of the network affiliates in major markets and swing states. Local broadcasts are becoming simulcasts, with the same cookie-cutter content piped in from distant corporate headquarters, once-competitive stations combined into single newsrooms and fewer journalists forced to fill more hours of airtime.”

“The FCC needs to wake up to what’s happening on local TV,” said Aaron. “Wall Street may be overjoyed at this merger mania, but the rest of us should be very worried about having fewer viewpoints on the air and fewer reporters on the beat.”

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Former FCC commissioner Michael Copps shares his concerns about media consolidation 2013.mp4[/flv]

Former FCC commissioner Michael Copps shares his concerns about increasing media consolidation and its impact on an informed electorate. (Aired on Carolina Journal Radio May 23, 2013) (1 minute)

“We just don’t see the need of delivering [gigabit broadband] to consumers.” — Irene Esteves, former chief financial officer, Time Warner Cable, February 2013

“For some, the discussion about the broadband Internet seems to begin and end on the issue of ‘gigabit’ access. The issue with such speed is really more about demand than supply. Most websites can’t deliver content as fast as current networks move, and most U.S. homes have routers that can’t support the speed already available.” — David Cohen, chief lobbyist, Comcast Corp., May 2013

“We don’t focus on megabits, we don’t focus on gigabits, we focus on activities. We go to the activity set to get a sense of what customers are actually doing and the majority of our customers fit into that 6Mbps or less category.” — Maggie Wilderotter, CEO, Frontier Communications, May 2013

“It would cost multiple billions” to upgrade Cox’s network to offer gigabit speeds to all its customers. — Pat Esser, CEO, Cox Communications, Pat Esser, chief executive of Cox Communications Inc., January 2013

“The problem with [matching Google Fiber speeds] is even if you build the last mile access plant to [offer gigabit speeds], there is neither the applications that require that nor a broader Internet backbone and servers delivering at that speed. It ends up being more about publicity and bragging. There has been a whole series of articles in the paper about ‘I’m a little startup business and boy it is really great I can get this’ and my reaction is we already have plant there that can deliver whatever it is they are talking about in those articles, which is usually not stuff that requires that high-speed.” — Glenn Britt, CEO, Time Warner Cable, December 2012

“Residential customers, at this time, do not need the bandwidth offered with dedicated fiber – however, Bright House has led the industry in comprehensively deploying next-generation bandwidth services (DOCSIS 3.0) to its entire footprint in Florida – current speeds offered are 50Mbps with the ability to offer much higher. We provision our network according to our customers’ needs.” – Don Forbes, Bright House Networks, February 2011

‘Charter [Cable] is not seeing enough demand to warrant extending fiber to small and medium-sized businesses — and certainly not to every household.’ — “Speedier Internet Rivals Push Past Cable“, New York Times, Jan. 2, 2013

Unless you live in Kansas City, Austin, in a community where public broadband exists, or where Verizon FiOS provides its fiber optic service, chances are your broadband speeds are not growing much, but are getting more expensive. The only thing innovative coming from the local phone or cable company is a constant effort to convince customers they don’t need faster Internet access anyway.

At least until a competitor threatens to shake up the comfortable status quo.

Time Warner Cable claims they are perfectly comfortable offering residential customers no better than 50/5Mbps, except in markets like Kansas City (and soon in Texas) where 100Mbps is more satisfying. Why is a glass Time Warner claims is full to the brim everywhere else in the country only half-full in Kansas City? Google Fiber might be the answer. It offers 1,000/1,000Mbps service for less money than Time Warner used to charge for 50Mbps service, and Google is also headed to Austin.

AT&T scoffed at following Verizon into the world of fiber optic broadband, where broadband speeds are limited only by the possibilities. Instead, they built their half-fiber, half-Alexander Graham Bell-era copper wire hybrid network on the cheap and ended up with broadband speeds topping out around 24Mbps, at least in a perfect AT&T world, assuming everything was ideal between your home and their central office.

At the time U-verse was first breaking ground, cable broadband’s “good enough for you” top Internet speed was typically 10-20Mbps. Now that incrementally faster cable Internet speeds are available from recent DOCSIS 3.0 cable upgrades, AT&T is coming back with an incremental upgrade of its own, to deliver around 75Mbps.

It is still slower than cable, but AT&T thinks it is fast enough for their customers, except in Austin, where Google Fiber provoked the company to claim it would build its own 1,000Mbps fiber network to compete (if it got everything on its Christmas Wish List from federal, state, and local governments).

Are you starting to see a trend here? Competition can turn providers’ investment frowns upside down and get customers faster Internet access.

Wilderotter: Most of our customers are satisfied with 6Mbps broadband.

In rural markets were Frontier Communications faces far less competition from well-heeled cable companies, the company can claim it doesn’t believe most of its customers need north of 6Mbps to do important things on the Internet. If they did, where would they go to do them?

Where Comcast and AT&T directly compete, major Internet speed increases are a matter of “why bother – who needs them.” Comcast is more generous where it faces down Verizon FiOS. AT&T also knows the clock is ticking where Google Fiber is coming to town.

Verizon FiOS, Google Fiber, and a number of community-owned fiber to the home broadband networks like EPB in Chattanooga and Greenlight in Wilson, N.C. seem more interested in boosting speeds to build market share, increase revenue to cover their expenses, and make a marketing point their networks are superior. They respond to requests for speed upgrades differently — “why not?”

Verizon figured out offering 50/25Mbps service was simple to offer and easy to embrace. Two clicks on a FiOS remote control and $10 more a month gets a major speed upgrade for basic Internet customers that used to get 15/5Mbps service. Verizon management reports they are pleased with the number of customers signing up.

In Chattanooga, Tenn. EPB Fiber offered gigabit Internet service because, in the words of its managing director, “it could.” The community-owned utility did not even know how to price residential gigabit service when it first went on offer, but the costs to EPB to offer those speeds are considerably lower over fiber to the home broadband infrastructure.

Broadband customers in Chattanooga, Kansas City and Austin are not too different from customers in Knoxville, Des Moines, and Houston. But the available broadband speeds in those cities sure are.

LUS Fiber in Lafayette, La. changed the song Cox was singing about their ‘adequate’ broadband speeds. Earlier this year, Cox unveiled up to 150/25Mbps service to cut the number of departing customers headed to the community owned utility, already offering those speeds.

Convincing Wall Street that spending money to upgrade networks to next generation technology will earn more money in the long run has failed miserably as a strategy.

“Competitors have been overbuilding, investors are wondering where the returns are,” said Mark Ansboury, president and co-founder of GigaBit Squared. “What you’re seeing is an entrenchment, companies leveraging what they already have in play.”

With North American broadband prices rising, and some cable companies earning 90-95% margins selling broadband, one might think there is plenty of money available to spend on broadband upgrades. Instead, investors are receiving increased dividend payouts, executive compensation packages are swelling as a reward for maximizing shareholder value, and many companies are buying back their stock, refinancing or paying off debt instead of pouring money into major network upgrades.

That is not true in Europe, where providers are making headlines with major network improvements and speed increases, all while charging much less than what North Americans pay for broadband service.

UPC Netherlands is Holland’s second biggest cable company and is in the middle of a broadband speed war with fiber to the home providers.

In the Netherlands, the very concept of Google Fiber’s affordable gigabit speeds terrify cable operators like UPC Netherlands, especially when existing fiber to the home providers in the country are taking Google’s cue and advertising gigabit service themselves. UPC rushed to dedicate up to 16 bonded cable channels to boost cable broadband speeds to 500Mbps in recent field trials, without giving any serious thought to the cable operators in the United States that argue customers don’t need or want the faster Internet speeds fiber offers.

“We had to address it head on very recently because of the fiber (competition)” said vice president of technology Bill Warga. “The company is called Reggefiber in the Netherlands. What they’re touting is a 1Gbps service, [the same speed] upstream and downstream. We came out with 500Mbps service. We had to build a special modem because (DOCSIS) 3.1 chips aren’t out yet. We had to double up on the chips in the modem and put it out there because we had to have a competing product, if anything just in the press. That was a reaction but that tells you how quickly in a marketplace that something can move.”

Despite that, groupthink among cable industry attendees back home at the SCTE Rocky Mountain Chapter Symposium agreed that Google Fiber was a political and marketing stunt, “since the majority of users don’t need those types of speed.”

Who does need and want 500Mbps? Executives at UPC, who have it installed in their homes, admits Warga. But cost can also impact consumer demand. Currently, the most popular legacy UPC broadband package offers 25Mbps for €25 ($32.50). The company now sells 60/6Mbps for €52,50 ($48.75), 100/10Mbps for €42,50 ($55.25) or 150-200/10Mbps for €52,50 ($68.25).

Warga also admits the competition has put UPC in a speed race, and boosted speeds are coming fast and furious.

“They’ll come in and say they’re 100, or 101Mbps we’ll come back and say we’re 110 or 120, or 130Mbps,” Warga said. “It’s a bit of a cat and mouse game, but we always feel like we can be ahead. For us DOCSIS 3.1 can’t come soon enough.”

[flv width=”640″ height=”367”]http://www.phillipdampier.com/video/WSJ Cable Broadband Speeds 1-13.flv[/flv]

The Wall Street Journal investigates why cable companies are getting stingy with broadband speed upgrades while gigabit fiber networks are springing up around the country. (4 minutes)

Again with the domination and control thing.

Dr. John Malone is wasting no time reacquainting the cable industry with the kinds of classic power plays he used while running Tele-Communications, Inc. (TCI), then America’s largest and most powerful cable operator. Malone’s latest salvo: proposing new broadband pricing schemes that run afoul of Net Neutrality by charging consumers higher broadband prices if they watch online video services like Netflix.

Malone, increasing his influence over Charter Communications before launching the next wave of cable company consolidation, implied the industry is hurting from the lack of power and dominance it used to enjoy when it had an unfettered, territorial monopoly back in the 1980s. Malone told an audience at the annual shareholder meeting of Liberty Global he advocates getting the industry’s mojo back by returning to “value creation” pricing models — code language for new ways to charge customers higher prices or add-on fees.

Malone sees raising prices for Internet service key to bringing the industry back to the golden profits it used to enjoy selling television subscriptions, even as customers faced massive rate increases that doubled, tripled, or even quintupled rates for certain services.

Malone’s assessment of the eight current largest cable operators wiring the country: Snow White (Comcast) and the Seven Dwarfs (Everyone Else). The disorganized agendas of various cable operators are troublesome to Malone, who wants the industry to act in lock step with a unified, cooperating voice. Consumer groups call this kind of friendly cooperation “collusion.”

Malone also thinks it is time to discard reliance on cable television to bring home the revenue and profits Wall Street expects. The industry should instead turn its earning attention to broadband, a product few Americans can live without. Malone believes the cable industry is not only positioned to control content distributed on its TV Everywhere online video platform for authenticated cable subscribers, but also have a say in competing content from Netflix, among others, which are totally reliant on the broadband pipes provided by ISPs.

With Netflix consuming a growing percentage of cable broadband resources, and possibly contributing to cable TV cord cutting, Malone does not advocate crushing its competition. Instead, he wants a piece of the action. How? By demanding online video providers pay for using cable broadband infrastructure. Consumers also face surcharges on their broadband accounts if they watch online video services like Netflix, Amazon, YouTube and other over-the-top-video. Malone also advocates the implementation of Internet Overcharging schemes like consumption billing and usage caps.

Malone’s “world of the future,” is, in reality, not much different from AT&T’s 2005 proclamation that use of AT&T’s broadband pipes should come at a cost to content producers.

Then-CEO Ed Whitacre’s public statements fueled support for Net Neutrality, which forbids broadband providers from traffic discrimination techniques like charging extra for certain content or artificially degrading service for producers who refuse to pay.

Malone’s incendiary ideas may be letting too much of the cat out of the bag, say some observers worried Malone’s rhetoric will remind people he was once labeled “the Darth Vader of Cable.” His statements could attract unnecessary attention that could be used to organize opposition.

Last week, the Wall Street Journal reported that broadband providers and content producers were already secretly cutting deals to exchange bandwidth for money without the public scrutiny Malone’s comments will generate.

The newspaper reports some of the biggest Net Neutrality proponents around, particularly Google, are quietly paying millions to large cable companies to guarantee their content reaches customers as quickly and smoothly as possible.

Among the top recipients: Comcast, which collects $25-30 million a year and Time Warner Cable, which nets “tens of millions of dollars” from Google, Microsoft, and Facebook.

The payments are buried in the murky world of “interconnection agreements” governing the backbone pipes carrying huge amounts of web traffic from popular websites and those owned by large telecom providers. Originally, content and broadband providers agreed to peering arrangements that would trade traffic without payment to each other. But as bandwidth-heavy online video began to turn those shared connections into lopsided floods of movies and TV shows headed into subscriber homes against a trickle of content coming back from broadband customers, the cable and phone companies began crying foul.

Netflix has so far navigated around paying Internet Service Providers directly to support their video content. Instead, it is building its own specialized content distribution network intended for ISPs to more effectively and efficiently deliver high bandwidth video. Connections to the Netflix network are free of charge to participating providers, but many ISPs are demanding to be paid.

Some content providers are fearful if they don’t pay, the free “peering” links will become hopelessly overcongested and slow web pages and services to a crawl.

For Verizon customers, that may have already happened as Netflix streams began stuttering and buffering earlier this month.

Cogent, which supplies Verizon with a considerable amount of Netflix traffic, immediately pointed the finger at the phone company for artificially degrading the Netflix viewing experience. Verizon promptly shot back:

Cogent is not compliant with one of the basic and long-standing requirements for most settlement-free peering arrangements: that traffic between the providers be roughly in balance. When the traffic loads are not symmetric, the provider with the heavier load typically pays the other for transit. This isn’t a story about Netflix, or about Verizon “letting” anybody’s traffic deteriorate. This is a fairly boring story about a bandwidth provider that is unhappy that they are out of balance and will have to make alternative arrangements for capacity enhancements, just like any other interconnecting ISP.

Cable giants like Malone see the battle as one the cable industry will have a hard time losing, because it is the only technology present in most communities that can handle the traffic and the growing demand for faster speeds.

Cable operators think content companies have a license to print money, especially since their success is built partly on broadband networks they don’t own or pay for delivering content to customers. At the same time, content companies fear they could be forced out of business if the cable industry decides to give itself preferential treatment.

[flv width=”504″ height=”300″]http://www.phillipdampier.com/video/WSJ Paying ISPs to Move Content 6-20-13.flv[/flv]

Reporters from The Wall Street Journal discuss the secret payment arrangements between content producers and some of America’s largest ISPs. (4 minutes)

We saved the only good part.

The best part of Cablevision’s latest ridiculous advertising campaign is the 12-month introductory price new subscribers will pay for phone, broadband, and television service: $84.95 a month. Not bad. The same cannot be said to the advertising agency that created this mess and the executives who approved it.

Richard Greenfield from BTIG Research, which covers Cablevision for Wall Street, isn’t impressed with Cablevision’s ads either:

We believe it is time for Cablevision to find a new ad agency, bring in some new marketing executives internally and seriously rethink what their consumer proposition is – going back to pitching the triple-play at an ever lower (now $84.95 price point) is not particularly compelling. Cablevision already has very high level of bundling of video, data and voice services across its customer base.  Given that, Cablevision should be devising a marketing approach to upsell existing customers, especially higher speed, higher ARPU broadband services (given their high margin).

Consumers concerned about the high cost of cable may not agree with Greenfield’s assessment. Paying $85 a month for a triple play package is a great deal, at least until it expires.

But we suspect a lot of consumers will never get that far through the ad, particularly when most viewers don’t pay that much attention to advertising in the first place.