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.