Regulation - What is it Good For?

Maine Legislates a la Carte Programming

The Maine legislature passed a law that would create a la carte cable TV programming in the state. Titled “An Act to Expand Options for Consumers of Cable Television in Purchasing Individual Channels and Programs”, the act would require cable companies to offer individual channels to consumers starting September 19.

Comcast, and many of the primary programmers like A&E, C-Span, CBS, Discovery, Disney, Fox, Viacom, and New England Sports Network recently went to court to try to stop implementation of the law.

Consumers have been asking for a la carte programming for decades. People don’t like the idea of having to pay for channels they don’t watch. The cost of a cable subscription is the number one issue mentioned by the majority of the several million cord cutters that are now dropping cable every year.

It’s hard to think that the law can stand up to a legal challenge. There is a question of jurisdiction since Congress has enacted numerous laws governing cable TV that are still on the books and still enforced by the FCC. Those laws require cable companies to offer several tiers of programming for cable companies that have enough capacity to carry a lot of channels. The courts will have to decide if the Maine legislature can override federal law.

Probably more salient are the contracts between programmers and cable companies. Those contracts are extremely specific about how the cable companies must carry their content. Any cable company that tries to enforce the law will be in direct conflict with those contracts. Laws often preempt contracts, but I find it likely that the programmers would yank programming from Maine cable companies rather than see a la carte programming go into effect. If this law is allowed to stand in Maine it would likely quickly appear in other states as well.

The next problem is technical. Cable companies would find it difficult to deliver only those channels a customer wants. Cable TV networks act like a big radio system and every channel on a cable system is broadcast to every home on the network. A cable company uses filters to block channels that a customer doesn’t subscribe to. This is fairly easily done today because channels are delivered in large blocks. If a customer doesn’t want to pay for a digital programming tier the cable company blocks that whole tier. From my understanding, the blocking software used today doesn’t provide the ability to establish a custom blocking screen for each customer. This could probably be made to work with some assistance from the manufacturers of headend and from Cable Labs, but nobody has ever created the software to allow for custom blocking down to the individual channel level – it’s never been needed.

Individual channels are more easily delivered by companies that deliver cable TV on an all-digital network like fiber or DSL. This technology for delivering cable TV on these technologies is IPTV, and with this technology the cable provider only broadcasts one channel at a time for whatever customers want to watch. But even IPTV providers would need to buy modified software to give each customer a custom choice of channels.

It’s worth noting that idea has been tried in a controlled way. Last year Charter offered what they call Spectrum TV Choice where customers can pick ten channels out of a list of 65 choices and bundle them with local channels. This package is priced at $25. Charter is able to provide this product because they step outside of their normal network topology and deliver the channels over the customer broadband connection using a Roku box at the customer end. Charter has not reported on the success of this package and I’ve not seen it advertised for a while.

The final issue to consider is the price. Even if a cable company unbundles channels, they would likely charge a lot per channel. Are consumers going to be better off if they buy a dozen unbundled channels priced at $5 each for $60 or get a 150-channel bundle of channels for that same price? I believe that the cable companies would make buying single channels a costly endeavor.

It’s easy to understand why Maine legislators crafted this law. Cable programming has been increasing in price for years and is growing out of the range of affordability for many homes. Many homes don’t have sufficient broadband to cut the cord and feel trapped by the expensive cable options available to them. Surveys have also shown that the average home watched a dozen or fewer channels. My bet is that the legislation won’t survive a legal challenge, but I guess that’s why they have lawsuits.

The Industry What Customers Want

Finally a la carte TV?

Charter just sent me an advertisement that got my attention. They are offering a TV package for $21.99 per month that includes my local network affiliates plus ten other channels that I get to select. This is the first TV service I’ve seen that provides a la carte choice. The statistics from Nielsen show that the average family watches around a dozen channels and this service could give people exactly that.

The local networks included are ABC, CBS. FOX, NBC and PBS. The offer I got then allows me to pick 10 out of 65 of the most popular cable networks. This includes a wide range of options like AMC, Bravo, CNN, the Disney Channel, the Food Network, HGTV, MTV, MSNBC, TBS, and USA. I was surprised to see the offer includes the option to pick the pricier sports networks like ESPN, ESPN2 and FS1. This price includes access to the apps of your selected channels. Charter also offers around 6,000 on-demand titles, although it’s hard to know how worthwhile this might be without signing up for the package.

The offer made it sound like this was an online OTT offering, but when I went to the web site I found that I can choose between delivery through a Charter settop box or delivery through a Charter broadband connection.

My first reaction to the offer is ask how Charter is able to offer this. There are specific FCC rules that define cable tiers and I’m not sure how Charter gets away with this as a traditional cable product. This doesn’t fit the FCC definition of a basic tier and certainly is not even close to an expanded basic tier. We’ve been told for years that cable companies cannot offer a la carte pricing for channels, and yet Charter is doing just that. I’m guessing that Charter does not consider this to be a true OTT offering since it’s only available to Charter broadband customers and never touches the open web.

I also wonder about the $21.99 price. I have a hard time thinking that Charter talked the local network affiliates across their huge footprint to agree to put their content onto the web, and so Charter is going to charge local franchise fees on the product with or without having the settop box. I also wonder if Charter will charge ancillary fees like a local broadcast fee or other bogus fees they charge to their normal cable customers. Anybody getting this through a settop box is clearly going to pay for the box. A customer buying this through a settop box might end up paying $35 to $40.

I also wonder if I can watch this programming when I’m traveling, which is a major consideration for me. If they can make that work then I again wonder how Charter can ship local affiliate programming over the web.

Regardless of how they are getting past all of the regulatory rules this has the potential to be a great product. Assuming it doesn’t really cost too much more than $21.99 it blows away the base prices for other OTT options like Sling TV, Playstation Vue and DirecTV Now. Those packages have an affordable basic option, but it always costs more when you add enough tiers to get the dozen channels you really want. As a traditional cable service it’s massively better than Charter’s basic offering for around the same price that doesn’t include any popular network. Any Charter basic customer ought to upgrade to this package. Interestingly Charter is charging a $20 install fee whether this is done using a cable box or over broadband, which further confirms that this is probably not considered as an OTT product.

Surveys have always shown a huge public desire for a la carte programming. People don’t like paying for the hundred channels they don’t watch. I have to think that this is going to put the pressure on the other cable companies to offer something similar.

This product seems to be aimed at cannibalizing Charter’s other TV offerings. This offer, perhaps more than anything else I’ve seen from a cable company shows that they recognize that a huge number of their customers are thinking of bailing on traditional cable TV. This offer offers a lower price option for customers to not completely cut the cord. Unless they pad this with ancillary fees it’s hard to see much margin in this package.

This package makes a lot of sense in places like the research triangle of North Carolina where Charter is competing against Google Fiber and AT&T fiber. It’s harder to understand why they are offering a low-margin cable option where they are competing only against DSL. Perhaps the reasoning is as simple as wanting to keep a few dollars margin rather than losing customers as cord cutters.

I thought about buying this, but I don’t really trust Charter and wonder what the real price tag is – it’s almost certainly not $21.99. I would also be unhappy if this only worked when I was at home on my Charter broadband connection. I am an unabashed Maryland Terrapins fan and I also wouldn’t buy this package since it doesn’t include the Big10 Network. Perhaps my own pickiness about channels shows the real challenge of offering a la carte programming. We each have our list of favorite channels and are likely to reject any OTT offer that excludes a network we insist on buying.


Regulation - What is it Good For? The Industry

Time for a New Telecom Act, Part 2

Yesterday’s blog postulated that we would see a new telecom act this year from Congress. That blog looked at what was accomplished by the last Telecommunications Act of 1996. Today I’m looking ahead at the issues that a new Act needs to address.

Last week we learned more about how the process will probably work. A new telecom act would likely be spearheaded by the Energy and Commerce Subcommittee on Communications and Technology. Last week Rep. Marsha Blackburn, head of that committee, told the press that she favored giving the new FCC a shot at fixing the things under its purview before the House would tackle a new Act. The FCC doesn’t have the authority to make many of the needed changes in telecom regulation, but it does have considerable power. Anyway, this probably means a new act is at least a year away.

Here are some of the things that I think the FCC and Congress need to address to modernize telecom:

Need for More Spectrum. It’s becoming clear that a lot of big ISPs are thinking of deploying 5Gn and various other millimeter wave technologies. The FCC needs to continue to open up more spectrum for broadband. There is still a lot of spectrum has been reserved for government use and there needs to be more attempts to share frequency when possible. There also needs to be a fresh look taken at how frequency is used. Historically many bands of frequency had narrow channels aimed at accommodating voice traffic or a single channel of television. From an engineering perspective we can get a lot more out of spectrum if we can make wider channels in the spectrum bands that are already in use.

Tackling Cybersecurity. 2016 was a year when security breaches led the industry news weekly. There is no easy fix for security issues, but there are big steps that can be taken. For example, we are flooding the world with IoT devices that are easily hacked and which can now be used to launch coordinated denial of service attacks. With Congressional backing the FCC could create standards to make IoT devices more secure. The government will never make us free from hacking, but there are a lot of sensible standards and fixes needed for IoT devices.

Expanding Access to Fast Broadband. As somebody who works regularly in rural America I know that lack of broadband there is now one of the biggest problems identified by rural households. We need to find ways to get good broadband to more places, and we have to do this smartly by building infrastructure that will last for decades. We’ve already seen how not to do this with the CAF II program that is being used to expand DSL and LTE wireless – two technologies that are already inadequate today.

Unless we see that fiber is built everywhere this is going to be an ongoing major issue. For example, if we fix broadband for those that have none but ignore the bigger swathe of the country that has only marginally acceptable broadband today, we will be back in a decade looking at how to fix broadband in those places.

We also need rules that unleashes anybody willing to spend money on fiber. I see numerous rural counties and towns that are ready to spring for bond issues to get fiber. We need rules that allow anybody willing to invest in fiber be able to do so – be that local governments, electric cooperatives, rural telcos or anybody else.

Infrastructure Issues. There are still a lot of infrastructure roadblocks to deploying fiber. We have never done a good job of fulfilling the mandate from the 1996 Act to provide access to poles and conduit. And we are now looking at deploying a fiber-fed wireless network that is going to mean bringing both fiber and power to buildings, rooftops, poles and other infrastructure. We need to find a way to get this done without also trampling over the legitimate concerns of local jurisdictions. For example, the FCC can’t just demand that cities allow free and quick fiber construction if that means digging up newly paved streets or overburdening poles – we need to find rules that work. And we need to do a much better job of this than we have done so far.

Programming. It’s now clear that online video content is competitive alternative to traditional cable TV. We need rules that unleash cable companies and anybody else to sell programming that people really want to buy. That means stepping away from the current rigid cable rules that mandate the giant channel lineups. Companies need to be free to create programming bundles that people want to buy. This might mean allowing a la carte programming. And there must be rules that require content providers to sell to everybody in an unbiased manner.

I don’t know how many of these big issues the current FCC is going to be willing to tackle. It seems like a lot of their agenda for the first six months will be to undo things ordered by the previous FCC. While I understand the desire to mold the FCC to the political persuasion of whatever party is in power, most of the issues on my list above are not partisan. They are just things that we all need to solve if we are to have a telecom infrastructure that serves us all well.

Regulation - What is it Good For?

A New Telecom Act?

There has been a lot of talk during the last year about putting together a new Telecom Act. It’s been twenty years since the Telecom Act of 1996 which created CLECs. But a lot has changed in twenty years and that Act is largely obsolete. Unfortunately it’s unlikely with political gridlock that we’ll get a new Act that fixes our real problems. But I asked myself what I would include in a new Telecom Act if I was allowed to write it. Here are some of the top changes I would make:

Fund Fiber Everywhere. There was recently a bill introduced in Congress to add $50M to the RUS for rural broadband grants. That makes such a tiny dent in the problem as to be embarrassing. If we believe as a country that broadband is essential for our economic future, then let’s do what other countries have done and start a federal program to build fiber everywhere, from rural America to inner cities. I could write a week’s worth of blogs about how this could be done, but it needs to be done.

Make Broadband Affordable to All. The Lifeline program that subsidizes $9.25 per month for broadband for low-income households has the right intentions. But the amount of subsidy is ridiculously low. If we believe that schoolkids ought to have broadband to succeed then let’s do this right and pony up and find a way to pay for it.

Tax Broadband. The continuing ban against taxing the Internet is stupid. It was put in place years ago to protect a fledgling new Internet industry. Let’s put a tax on landline and cellular broadband to pay for getting fiber everywhere and broadband to everybody.

Stop Subsidizing Non-Broadband. It should be impossible for the FCC to provide any funding or subsidies to broadband connections that don’t meet their own definition of what constitutes broadband speeds.

Fix Pole Issues. Pole issues have been a bane to competitors since the last Telecom Act required pole owners to allow access. Let’s create common-sense rules that don’t allow pole owners to hold new competitors hostage.

Break the Power of the Programmers. Most of what has been broken in the cable TV industry has been due to the immense power and greed of the programmers to set the price and conditions for their content. It’s time to put a halt to contracts for content that force cable providers to buy programming they don’t want. And it’s also time to consider requiring programmers to offer each network a la carte and not in big bundles.

Unleash Skinny Bundles. Existing cable rules put handcuffs on cable providers. Rules that require specific kinds of bundles such as basic and expanded basic means that a cable provider has a nearly impossible task of putting together offerings that customers really want to buy. Let’s scrap those rules and start fresh with customer choice as the driver behind the new rules.

Make Cable Rules Apply to Everybody. Any new cable rules need to apply to everybody that provides content – over wirelines or over the Internet. Anything less than this gives massive advantages to one side or the other. I would be fine if the best way to do this is to have almost no rules!

Reinstitute Limitations on Ownership of Media. Allowing a handful of companies to own all of the television and radio stations has put a huge dent in our free press and in local control of news stations and reporting. Let’s break up these conglomerates and start over.

I could easily add forty more items to this list, but these were the ones that first came to mind as I was writing. What would you add to a new Telecom Act?

The Industry

Some Interesting Cable Statistics

Digitalsmiths recently released their Q3 2015 Video Trend Report and there are some really interesting statistics to be gleaned from the report. This is a large survey given to 3,153 consumers in the US and Canada. I’d love to hear from any small service providers who thinks that the statistics for your own customers are much different than these.

Satisfaction with Current Provider: Only 53% of customers said they were happy with their current cable provider. 4.8% said they were going to cut cable service within the next six months, 7.2% said they were going to change providers, and 32% said they might change providers. We know from past surveys that many of the people who say they are going to drop cable don’t end up doing so, but these statistics show the general lack of satisfaction with whoever provides cable.

Size of Monthly Bill: This asked how much people spend on TV, Internet, and phone. 61% are spending more than $100 per month. 41% are spending more than $125 per month and 24% are spending more than $150. In 2013 56% of people spend more than $100.

Premium Programming: 24% of respondents buy HBO, 15% Showtime, 14% The Movie Channel, 10% Cinemax, and 10% Starz!. 12% of households buy a premium sports package.

Growing Awareness of Skinny Bundles: The survey defined skinny bundles as Hulu, HBO Now, Sling TV, CBS all Access, and the online Showtime. 63% are aware of these services, up from 56% in the first quarter of 2015.

Most Wanted for a la Carte: People were asked what channels they would most want to buy on an a la carte basis. Over 50% of the people would buy ABC, the Discovery Channel, CBS, NBC, the History Channel, and A&E. Over 40% would buy Fox, HBO, National Geographic, PBS, Comedy Central, and AMC. When asked how much people would be willing to spend in total for a la carte programming, the average was $40.50 with 22% not willing to pay more than $20 and only 4% willing to pay more than $81.

Feelings about Large Cable Packages: 34% of people are overwhelmed by the number of channels available to them. 83% of respondents watch 10 or fewer channels over and over again. That is down from 86% in 2013. Only 58% say that it’s easy to find something they ‘want’ to watch.

Pay-per-View Events: Only 10% of households have watched at least one PPV event, things like boxing or UFC fights (not movies), during the last year.

OTT Usage: 56% of households buy at least one OTT service like Netflix. 33% of households that buy OTT watch it more than 2 hours per day. 36% of households have used OTT per-rental services like Redbox or movies on Amazon Prime. 70% of those who use rental services watch content on a weekly basis. 80% of people using OTT report that it’s easy to find things they ‘want’ to watch.

TV Everywhere: Only 43% of respondents were aware that their cable provider offers TV Everywhere programming. Only 23% of respondents use TV Everywhere.

Social Media: 22% of respondents have posted on social media while watching TV. 34% have watched new programming based upon a recommendation from somebody they know on social media.

Regulation - What is it Good For?

A Real Chance for OTT?

On Friday the FCC released an NPRM in Docket FCC 14-210 that asks a host of questions about allowing Internet content providers to be treated as cable companies. The NPRM contains a very thorough discussion of all of the rights and obligations of being a cable company, and anybody who doesn’t understand the regulation of cable companies can get a quick education just by reading the NPRM.

It’s obvious that by raising the issue that the FCC is in favor of promoting more competition for cable TV. This is something that the public obviously wants. But the FCC has to walk a fine balance with this issue. If they make it too easy for online content providers then they might accelerate the collapse of the traditional cable TV business. I know many would applaud that, but there are a lot of homes that can’t get cable over the Internet and who are not situated to get it from a satellite. On the other hand, if they make it too hard to qualify to deliver content online then not many companies will try and they will have accomplished little.

One might think that it’s an easy question to answer until you read the NPRM. There are some very tricky issues for the FCC to wrangle with:

  • For example, should somebody who only wants to deliver a package of a few channels be able to buy them? (Cable companies can’t do that).
  • Should they require an Internet provider to carry the major network channels like cable companies must do, and if so, would they be required to carry the channels in every market and have to swing deals with hundreds or even thousands of stations?
  • Can an Internet provider that only wants to deliver content on a delayed basis, like Netflix, be able to buy any programming they want?
  • Can a content provider like Disney offer a package of programming online that only includes content they own?
  • Do online providers have to provide services like closed captioning (for the deaf) and video description (for the blind)?
  • Would ad-based online companies have to comply with the rules about the loudness of commercials?
  • Does an online provider have to notify customers of things like weather alerts or other emergency announcements?
  • Can the FCC require content providers to negotiate with possibly thousands of new online market entrants? Even today many content providers send smaller providers to somebody like the National Cable Television Cooperative to get content. Would this mean that NCTC would have to accept online providers into the Coop?
  • Would online providers have the same restrictions against making exclusive deals with MDU owners?
  • What do they do about the more arcane rules such as cable cards, inside wiring and signal leakage?
  • Can a company with no business presence in the US become a US cable company since they have access to customers through the Internet?

I think it’s pretty obvious that the FCC is going to do something to allow online competition. But they are starting with a regulatory framework that was written specifically with coaxial networks in mind and that has many rules that don’t make sense for an Internet provider.

I think there are a lot of people who would become cord cutters if they could buy smaller packages of the programming they want online. I know I would personally be very happy with a package of Netflix, Amazon Prime, ESPN and the Big 10 Network. But I think a lot of people are going to be disappointed when the find out that online cable competition is not going to be the same thing as a la carte programming where subscribers can choose only the channels they want to buy. It might be that on-line packages cost as much as the ones from the cable companies.

Once a company qualifies as an online cable company they are going to be saddled with many of the same rules that apply to cable companies. And they are going to be in an industry where the balance of the power has swung very much to the content providers. For example, it’s common today that if a cable company wants to buy one channel from one of the big eight content providers that they have to take virtually every channel that the provider owns.

There is also an issue that is faced by many customers that is not addressed in the NPRM. It’s a very common trend these days for cable companies to require at least some bundling in order to buy Internet access. For example, in my town I can only buy Comcast’s slowest Internet speed without having to subscribe to at least some cable channels. But it’s doubtful that without considering Internet as a Title II service that the FCC can order cable companies to sell all speeds of broadband as a standalone product. This is one of the issue that is stopping potential cord cutters. So here is yet another issue that is tangled up in in the Title II regulatory debate along with net neutrality.

Current News

ESPN and a la Carte Programming

Earlier this month ESPN announced that it would be providing some professional basketball and other programming available by a subscription basis on the web. This got the sports world buzzing. I follow several sports bulletin boards and sports fans have been looking for a glimmer of hope that sports programming will be sold a la carte. A large percentage of football fans (at least the vocal ones on line) say that they hate paying for the big programming packages to just get sports. They all say they would gladly pay for ESPN and a few other networks (depending upon the part of the country they live in).

Unless these guys all live in bachelor pads that only watch football and basketball channels they probably are ignoring the fact that their families probably prefer to watch something other than sports. But let’s just suppose that a genie came along and gave these guys their wish. What might an a la carte sports programming world look like?

ESPN is clearly the king of the sports programmers. In 2013 they had revenues of $11 billion, about $7 billion of which came from programming fees mostly from ESPN, but also from the other sports channels they operate. The remaining revenues came from advertising. It was reported in 2013 that ESPN was in almost 100 million homes and that their average fee to cable companies was about $5.50 per month per subscriber. And that number is growing rapidly and I have already seen fees of $6.00 in 2014.

What would it take for ESPN to go a la carte and sell at a premium price only to sports fans? It’s really simple math. If ESPN was to charge $15 per month they would need 40 million customers. At $20 per month it’s 30 million, and at $25 per month it’s 24 million? Might ESPN be able to do that? It’s at least conceivable that they could get those kinds of subscriber numbers, but it looks like a tall order. It’s hard imagining a third of US households signing up for an ESPN subscription at $20 per month. I am sure the folks at ESPN are quite happy with the current regime and will only contemplate a la carte if the wheels come off the industry.

ESPN is probably the only sports network that can contemplate such a scenario. Making a change this drastic would certainly upset their comfortable business model, but if they were able to get 20 million customers they could establish a new baseline and grow again from there.

My alma mater Maryland just joined the Big 10, partly due to a promise of higher revenues from TV. The Big 10 Network, along with the SEC network are the next two highest earning sports networks after ESPN, both expecting revenues of around $350 million in 2014. Let’s look what it would take for the Big 10 network to change to a la carte. Today they charge about $1.10 per subscriber in areas where they have schools and it’s reported that outside those areas the fees are closer to $0.25 per customer. If they were to charge $10 per month they would need 2.9 million customers. At $15 they would need 1.9 million paying customers, and at $20 they would need 1.4 million.

These are certainly lower numbers than ESPN needs, but they also have a much smaller potential universe of customers. One way to see how reasonable a la carte might be is to look at recent TV ratings for Big 10 football games. Let’s look at weeks 7 and 8 of this college football season. In week 7 the Big 10 had three football games that got more than 75,000 viewers. That was Michigan State vs. Purdue, Penn State vs. Michigan and Indiana vs. Iowa. In total the Big 10 games were watched by 5.0 million people that week. Week 8 was similar and the three games with more than 75,000 viewers were Rutgers vs. Ohio State, Michigan State vs. Indiana and Maryland vs. Iowa. In total that was 4.9 million viewers for the week.

And one has to suppose that a lot of Big 10 football fans watch more than one game, so I’m thinking one might discount those numbers by 40%. That means that the Big 10 has perhaps 3 million individual viewers per week. Is it reasonable that they could talk 2/3 of those fans into paying $15 per month for the network, or half of those fans into paying $10. That seems unlikely to me.

But you might ask, “What about basketball?”. There are a lot of basketball fans, but football is king. The weekly total viewers of a league for basketball is significantly smaller than football for most schools (except those that identify as primarily basketball schools like Georgetown).

Plus, one has to ask how schools stay relevant over the long haul when only homes willing to pay a la carte pricing will watch them. That means millions of homes (and potential future fans) are not going to grow up watching their product and identifying with a given university brand. I would love the idea of a la carte being available as I have described it. I would subscribe to both ESPN and the Big 10 network at those prices. But are there enough others out there like me there to support sports a la carte? I have serious doubts.

Tomorrow: The Total Sports Programming Bill

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