Regulating Over-the-Top Video

I know several cable head-end owners that are developing over-the-top video products to deliver over traditional cable networks. I define that to be a video product that is streamed to customers over a broadband connection and not delivered to customers through a settop box or equivalent. The industry now has plenty of examples of OTT services such as Netflix, Amazon Prime, Sling TV, Hulu and a hundred others.

While the FCC has walked almost totally away from broadband regulation there are still a lot of regulations affecting cable TV, so today I am looking at the ramifications of streaming programming to customers instead of delivering the signal in a more traditional way. Why would a company choose to stream content? The most obvious benefit is the elimination of settop boxes. OTT services only require an app on the receiving device, which can be a smart TV, desktop, laptop, tablet or cellphone. Customers largely dislike settop boxes and seem to love the ability to receive content on any device in their home. A provider that pairs OTT video delivery with a cloud DVR has replaced all of the functions of the settop box.

There are a few cable companies that have been doing this. Comcast today offers a streaming service they label as Xfinity Instant TV. This package starts with a package of ten channels including local broadcast networks. They then offer 3 add-on options: a kids and family package for $10, an entertainment package for $15 and a sports and news package for $35. Comcast also touts that a customer can choose to stream the content to any of the millions of Comcast WiFi hotspots, not only at their homes.

It’s an interesting tactic for Comcast to undertake, because they have invested huge R&D dollars into developing their own X1 settop box that is the best in the industry. The company is clearly using this product to satisfy a specific market segment which is likely those considering cutting the cord or those that want to be able to easily download to any device.

A second big benefit to Comcast is that they save a lot of money on programming by offering smaller channel line-ups. Traditional cable packages generally include a lot of channels that customers don’t watch but which still must be paid for. Comcast would much prefer to sell a customer a smaller channel line-up than to have them walk away from all Comcast programming.

The third reason why a cable provider might want to stream content is that it lets them argue that they can selectively walk away from cable regulations. The only real difference between Comcast’s OTT and their traditional cable products is the technology used to get a channel to a customer. From a regulatory perspective this looks a lot like the regulatory discussions we had for years about VoIP – does changing the technology somehow create a different product and different regulations. Before VoIP there were numerous technology changes in the way calls were delivered – open wire, party-lines, digitized voice on T-carrier, etc. – but none of the technology upgrades every changed the way that voice was regulated.

I can’t see any reason why Comcast is allowed, from a regulatory perspective, to stream their ITT content over their cable network. The company is clearly violating the rules that require the creation of specific tiers such as basic, expanded basic and premium. What seems to be happening is that regulators are deciding not to regulate. You might recall that three or four years ago the FCC opened investigation this and other video issue – for example, they wanted to explore if video delivered on the web needs to be regulated. That docket also asked about IP video being delivered over a cable system. The FCC never acted on that docket, and I chalk that up to the explosion of online video content. The public voted with their pocketbooks to support streaming video and the FCC let the topic die.  There are arguments that can be made for regulating streaming video, particularly when it’s delivered over the same physical network as traditional cable TV, like in the case with Comcast.

Clearly the FCC is not going to address the issue, and so the technology an lack of regulation ought to be made available to many other cable providers. But that doesn’t mean that the controversy will be over. I predict that the next battleground will be the taxation of streaming video. Comcast would gain a competitive advantage over competitors if they don’t have to pay franchise fees for streaming content. In fact, a cable company can argue they don’t need a franchise if they choose to stream all of their content.

It’s somewhat ironic that we are likely to have these regulatory fights with the cable product – a product that is clearly dying. Customers are demanding alternatives to traditional cable TV, yet the FCC is still saddled with the cable regulations handed to them by Congress. One nightmare scenario for Comcast and the industry would be if some competitor sues a cable company to stop the streaming product – because that would require the regulators, and ultimately the courts to address the issue. It’s not inconceivable that a court could decide that the Comcast streaming service is in violation of the FCC rules that define channel line-ups. Congress could fix this issue easily, but unless they do away with the current laws there will always be a background regulatory threat hanging over anybody that elect to use the product.

A Little Bit Closer to OTT

TabletWe keep inching closer and closer to the day when customers will have a viable access to real time over-the-top programming. The first company to make any progress in this area was Aereo who is sending the network channels to people’s cellphones and tablets in major markets. But Aereo has an upcoming day in court and the US Supreme Court could put them out of business.

It’s not like there isn’t any programming available on the web, because there are mountains of old TV shows and movies available on NetFlix and AmazonPrime and the many other companies that have deals to put content on the web. And many customers of the major cable providers have TV anywhere where the cable company lets them watch some of the channels they subscribe to on remote devices.

But what is still missing, and what will finally give a lot of people the impetus to cut the cord is when they can get the programming they most want in real-time on devices other than televisions. I have largely cut the cord and watch the programming available on NetFlix and AmazonPrime. But I would be very happy if I could buy ESPN and the Big10 Network a la carte. And maybe some news network like CNN.

There were two announcements this past week that inch us closer to an OTT alternative. The CEO of Verizon Wireless, Lowell McAdam announced that he has had discussions with content providers about launching an OTT service for customers using the Verizon LTE network and also possibly for those using other broadband providers.

The second announcement came from Dish Networks who announced a major deal with Disney that would allow them to distribute Disney and ESPN wirelessly. The agreement was complex and also resolved a number of issued between Disney and Dish for satellite carriage. Last week I reported on the spectrum that Dish has been buying, and this announcement demonstrates that they have plans to use some of that spectrum to offer an OTT product.

When the Verizon CEO was asked about the Dish Networks announcement his response was that he thought Verizon has a huge head start and that it would take Dish at least a year to construct a wireless network. So I think we can expect Verizon to roll something out soon to take advantage of the existing network.

Both announcements make it sound like customers will be able to buy the OTT programming without having to subscribe elsewhere to a landline version of the same channels. This would be the first time that such live content like sports has been made available this way. I wrote last year that there are only a handful of channels with enough market power to pull off OTT programming, and that very short list includes ESPN. I know that I would gladly pay $20 for ESPN a la carte rather than have to buy a $60 package to get it. And I don’t think I am that unusual. Just in the last week I have had conversations with several other sports fans who say the same thing.

I had cable service several years ago with all of the channels and all of the movies. And I found that I would go weeks, and sometimes even months without turning on the TV (especially outside of football season). I am really hoping that these announcements are the first little crack in the programming monopoly and that the first pieces of OTT are here. But I won’t believe it until I can buy it. It’s possible that Dish and Verizon Wireless will be forced to also sell bundles of programming including a lot of things I won’t want. But I can’t see them getting into the OTT business if they aren’t going to let customers buy the smaller packages they really want. I will be watching.