This piece was originally published in the 2015 Super Mobility Week Official Show Daily.
Video is the transformative application on networks. As video moved to the Internet, a task that used to be comparatively trivial in the days of broadcast television suddenly became a challenge: Nothing else puts as much stress on networks as video, with its constant heavy traffic that’s sensitive to latency and dropped packets. However, consumers do not care about the technical difficulties; they just want their high-definition video, regardless of the underlying technical medium.
The effective unbundling of video content (whether on channels like HBO, sports like Major League Baseball, traditional broadcast networks like CBS, or just a collection of movies and programs like Netflix) from the transport layer – cable connection, satellite or broadcast signal – is unravelling the entire regulatory regime around it. The problem is further exacerbated by the move away from linear television to on-demand consumption, either via DVR or substitution via Netflix, Amazon Prime Video or Hulu. The end point is clear: Unless it is a time critical program – sports event, political election, natural disaster or The Bachelor – consumers will watch the content they want to watch when they want to watch it. But even The Bachelor’s content is time-shifted and out of sync on the West Coast. The death of linear television is staring us in the face. We know it will die; the only question is when.
The numbers are undeniable. Pay-streaming video is on a roll, pay TV is languishing. While cable is on a clear decline, satellite providers’ results are mixed, while fiber-based pay TV is continuing to grow. Right now there are more streaming accounts with Netflix, Amazon Prime and Hulu than there are pay TV accounts.
At the current run rate, by summer 2016 – less than a year from now – there will be more streaming households than pay TV households in the United States as consumers are voting with their wallets and eye balls. The massive shift towards streaming video and TV is not a trend that will happen in the future. It has already happened, and is the preferred way Americans consume movies and TV shows. FBR
Capital Management estimates that when Netflix becomes Nielsen rated it will have a higher 24-hour ratings share than all broadcasters combined. As this trend continues, regulators are holding on to old regulations or are trying to expand them to companies that don’t want them under the guise of “we are only trying to help.”
Gregory Barnes, general counsel of the Digital Media Association, who lobbies on behalf of tech firms, said: “This is a classic example of a solution in search of a problem. Our concern is that the entire space is in the nascent stage, and we’re still tinkering with existing business models to respond to consumer demands.” The funny – or sad – thing about this statement is that it is valid for everyone in the space, newcomers or established players alike, along the entire value chain.
As content providers disaggregate the value chain by offering their services online (HBO Now, CBS All Access, MLB.tv, plus others like Showtime and Starz right behind) the logic for pay TV providers to disaggregate becomes equally compelling. Why incur the regulatory restrictions and costs that apply to the bundled, linear model when you can simply avoid the costs by disaggregation? What is the difference between CBS and CBS Now? One has transport and is regulated – and the other does not. What is the difference between Verizon FiOS’ skinny TV bundles and Sling TV? One offering involves transport and is therefore regulated – and the other does not and therefore is not. To top it all off, pay TV providers could take the next step and eliminate the cable box (and expense) and move it to a third party streaming TV player like Roku, Apple TV or the like.
The role of the regulator in determining the success or failure of emerging service models is nowhere more omnipresent than with respect to how the agency is trying to regulate the provision of content across broadband. It seems like the FCC’s Open Internet Order is designed to prevent only those companies that offer transport among their suite of services from directly competing with providers of content on a direct and equal footing. The trepidation among video edge providers regarding the FCC regulatory roadmap is palpable. They went into the whole Title II situation with the expectation that the pay TV providers and the network transport providers would be boxed into Title II and they, the “pure play” content providers, would emerge unscathed and as big winners with a distinct competitive advantage. But, as Orson Welles said, “If you want a happy ending, that depends on where you stop the story.” Netflix, a company whose particular business model has been favored in FCC decisions, has just decommissioned its last data center and has completely outsourced its network components. Why? They want to avoid giving the FCC an obvious reason to impose Title II regulation on them. Will they be successful in that endeavor? Unclear. If we read the writing on the wall, then the FCC embrace will likely ensnare video edge providers whether or not they own data centers.
This is a particularly important regulatory trend for mobile providers with OTT applications to pay attention to, such as AT&T with its NFL Sunday Ticket or Verizon with its upcoming Go90. No matter how unlike a network – mobile or fixed – these services look, the FCC does not appear ready to let the services out of its regulating grip. The FCC has a choice to make here – be bold and truly rethink its regulatory paradigm for the world of consumer broadband or default to what it knows and treat it all like phone service.
Some of the world’s most impactful innovations have been incubated inside enormous companies with significant research arms. If the regulator continues to pursue an interventionist path based on the philosophy that “big is bad” rather than “let’s enable innovation and attract investment across the entire value chain”, the sector is likely doomed to falter, with value creation diminishing and consumer benefits shrinking.
Filed Under: Industry regulations
