Media and Content Industry Regulation Will Have to Change, as Did Regulation of VoIP

Does it make sense to regulate some suppliers of the exact same products, sold to the exact same customers, in different ways?

Over the last several decades,  new technology has erased barriers between formerly-separate industries, complicating regulatory tasks, spurring cross-industry mergers and rearranging business models.

Internet voice used to be regulated differently from common carrier voice. Internet video is regulated differently from linear video; internet messaging is treated differently than common carrier messaging. Cable TV firms, telcos and big application providers are regulated under different rules when supplying similar or identical products.

Content creators and packagers have been regulated differently from content distributors. But now content creation and delivery are not separate.

Typically, regulators are “behind the times” when these changes happen, essentially making decisions which look in the rear view mirror, instead of out the windshield. It is a common problem.

Generals often are derided for “preparing to fight the last war,” for example. So it might be worthwhile noting that the old distinctions between content production, content aggregation and content distribution have fundamentally changed.

All that matters because, in the past, there have been legal  barriers between those functions. With the blurring of former roles, distribution and content production have become parts of a single process and value chain.

Consider only content creation and distribution as practiced by Facebook and other application providers. In the clearest of ways, Facebook creates its own content and acts as its own distribution network. In fact, there is no way to separate those roles.

Facebook now has two billion monthly active users. YouTube has 1.5 billion monthly users. The point is that the leading app providers have numerous advantages over “old media” providers.

Traditional internet service providers with content operations are far smaller, and rarely global. The leading app providers are global. And though the metric for Facebook is active users, while the metrics for AT&T tend to be “subscribers,” each of those metrics is a proxy for “audience.”

AT&T has less than 150 million U.S. mobile accounts, 46.6 million video accounts and less than 16 million internet accounts in service. Facebook has more than two billion monthly users. YouTube gets 1.5 billion monthly viewers.

Netflix has more than 100 million video accounts, growing globally at about a 41-percent annual rate. Linear video, meanwhile, is declining.

For a major app providers, the incremental cost to create the next unit of content and the cost to distribute that content, are negligible. Marginal cost is quite low. That tends not be true for a traditional provider (Time Warner or AT&T, for example).

Even at scale, adding the next unit of an account, or creating the next unit of content, is expensive, in comparison to Facebook, when undertaken by AT&T or Time Warner.

source: TechCrunch

Telco video subscribers number in the tens of millions, at best. And though telco content revenues arguably are substantially higher than similar revenues earned by the likes of Facebook and Google, that clearly will change.

And growth has implications for valuation. The market values growth, which is why equity valuations of major app firms are much higher than valuations of internet service providers.

source: IDATE

source: GSMA

The point is simply that industry boundaries are being erased. Content production or aggregation now is also embedded with distribution. So old line of business rules are increasingly irrelevant.

And that is a larger problem across the communications and media industries. These days, even if there are distinct regulatory environments for cable TV and telco firms, they serve the same markets and customers.

And though regulatory environments similarly are distinct in treatment of application providers and other content producers and distributors, those rules are growing incongruous. Increasingly, firms competing in the same business are regulated distinctly.

The problem is that, eventually, the asymmetry of the rules--in conjunction with disparate business outcomes-- will have to be addressed.

Regulators always have two fundamental avenues: applying the most-stringent sets of rules on all providers, or applying the least-stringent rules on all providers. Some will argue that in rapidly-evolving markets, less stringent rules for all make more sense, at least until some semblance of stability is reached.

It goes without saying that clear commercial interests also are centrally involved. Some will see business advantage if competitors are regulated more strictly. Others might prefer less regulation for virtually all providers, to let the restructuring play out.

Either way, the old distinctions are losing relevance, when content creation and delivery are unity parts of the value chain, and not separable.

Content Creation, Aggregation, Distribution No Longer are Separate Roles

Once upon a time, there was a clear distinction between content creation; content aggregation and content distribution. Today, the roles are blurring.

In the past, there were laws prohibiting film studies from owning movie theaters, for example. Today, the rules are less stringent, but there are clear limitations on the amount of ownership allowed across the value chain.

The major broadcast networks who assemble content are limited in terms of the number of local TV outlets they can own, for example.

The “old media” thinking was that walls had to be erected between content packagers and content distributors. As a corollary, there were rules about mandatory licensing of content to distributors (“must carry” rules for cable TV, for example).

“New media” breaks all those old rules about separating content creation; content aggregation and content distribution.

That is not to imply or suggest that “more regulation” of the new leaders is needed. Business and industry models are changing, and that evolution is not finished. The point is simply that digital models are quite different than analog models, and that the roles are very hard, perhaps impossible, to separate clearly.

Consider Facebook, Google, Netflix and other firms whose business models increasingly have content components.

Ignore for the moment that modern content distributors do not need to build or own networks, as did “analog era” distributors (TV stations, radio stations, satellite video providers, cable TV distributors, movie theaters, video rental stores).

Look only that the new “identity” or “unity” of content creation and content distribution.

Facebook, Google and others are both content “creators” or “aggregators” as well as content distributors, on a global scale. That is one reason scale suddenly has become an imperative in the content aggregation and content distribution segments of the internet value chain.

source: Professor Jeffrey Funk

source: Professor Jeffrey Funk

The point is that “distribution” and “content creation and aggregation” now are parts of a single process, parts of the operations of firms. Netflix now directly funds content creation; assembles packages of content and delivers that content.

It has direct relationships with content creators, content aggregators (networks) and with end user customers who consume that content. It is studio, network and distributor, all in one. The same can be said of Amazon Prime, Facebook or Google.

The key change is the fusion of the content creation, aggregation and distribution roles.

U.S. FCC Will Vote to Remove Common Carrier Regulations on Internet Access in December 2017

The U.S. Federal Communications Commission will vote on Dec. 14, 2017 to remove common carrier regulations from internet access services.

The move is called an attack on network neutrality, but the decision is more complicated than many claim.

In many clear ways, Title II common carrier regulation is a separate issue from network neutrality, which some believe should include a prohibition on any quality of service mechanisms for consumer internet access (no “fast lanes”).

Common carrier regulation is more directly concerned with price regulation, terms and conditions of service, not “network neutrality” in a direct sense.

In a formal sense, the original classification of internet access services as a common carrier service applied a utility-style framework on internet access services that always before had been regulated as “data services.”

One practical result was that consumer welfare issues moved from the purview of the Federal Trade Commission to the FCC itself.

Though commonly referred to as a “network neutrality” remedy, many would argue the FCC still retains the authority to maintain openness, such as ensuring that consumers have access to all lawful internet applications.

Beyond that core position, observers disagree about what other stipulations are required to maintain a climate conducive both to innovation and investment. A common position has been that “network neutrality” should extend beyond “no blocking of lawful apps” to other measures such as prohibiting any quality of service mechanisms (so-called “fast lanes” where latency or bandwidth or both can be prioritized for applications that benefit from such protections at times of network congestion).

The argument always is nuanced. As many will attest, content delivery services and direct interconnections already are ways some networks and app providers ensure quality of service advantages for themselves.

Beyond that, though there has been fear about creation of new “QoS” services, not even all who support the lawful right to create such QoS-ensured services are sure they make business sense.  

Even the repeal of common carrier regulation does not, in that sense, have direct implications for network neutrality, in its “weak” form of “no blocking of lawful apps.” Nor does the change in framework necessarily change prospects for QoS-guaranteed services.

Most such services--which are lawful for business internet access services--make clearest sense for managed services where latency clearly matters. But it is by no means clear that consumer video services or voice have present performance issues that QoS makes sense for customers or app providers, beyond the measures app providers or ISPs already pay for (content delivery services or direct interconnection or peering).

And if anti-competitive practices were to arise, mechanisms already exist to deal with predatory behavior. Were common carrier regulation overturned, the Federal Trade Com

How Will CBRS Market Develop?

Will new access capacity (Citizens Broadband Radio Service; use of unlicensed and shared spectrum) allow new entities to compete with mobile operators in the access services business? Some think so.

Rethink Technology, for example, has argued that shared spectrum will trigger new “challengers” to mobile operator revenue models.

Others might point to decades-ago arguments about Wi-Fi replacing mobile networks and conclude that new shared and unlicensed spectrum likely will create new use cases and marginally affect wide area network access providers.

But the development of Wi-Fi, if a valid indicator of what could happen, suggests complementary use cases more than substitution.

source: Rethink Technology Research

Caroline Gabriel, director of research at Rethink Technology Research, believes that “enterprise small cells, particularly those operating in unlicensed spectrum, could be the undoing of mobile network operators, relegating them to ‘utility’ commoditization, and falling revenues, as both license free spectrum and shared spectrum ideas, are taken up aggressively by newcomers.”

“Small cells were conceived as a way to improve the mobile operator business model, but they may now become weapons for challengers to MNOs, particularly broadband players with established backhaul such as cable operators,” she says.

Without question, use of unlicensed or shared spectrum to create connectivity services can affect the business model of some access service providers.

Service providers with a huge network footprint (cable TV operators being the best example), can use Wi-Fi access to reduce the amount of capacity they buy from their wholesale providers, when operating as mobile service providers. So, without question, unlicensed and shared spectrum will have business consequences for some competitors.

Independent wireless ISPs might also be able to leverage new shared and unlicensed spectrum.

In that sense, yes, new shared spectrum and unlicensed spectrum can--and will--be used by telco competitors, as well as by telcos themselves.

A related question is whether use of unlicensed or shared spectrum by large enterprises actually displaces access that otherwise would have been purchased from a mobile service provider.

That could be relevant in terms of internet of things deployments, where an enterprise might build its own local network to collect data from sensors, rather than using services from a mobile service provider, instead.

Rethink estimates that, by 2022, enterprises will account for almost half of all small cell deployments, up from seven percent in 2014. The installed base will reach 14.8 million in 2022, up from 185,000 in 2014.

The issue is why enterprises will be deploying, what the use cases are, and how such deployments could affect service provider revenue.

Here one must look to history.

Substitution of this type (private networks for public networks) has been talked about for decades. Wi-Fi provides the example. Back in the late 1990s and early 2000s, one could hear some talk of the theory that Wi-Fi eventually would emerge as a full access substitute for mobile network access.

That mostly happened in the early 3G era.

Conversely, perhaps some might argue that new mobile networks will obviate the need for Wi-Fi. That almost assuredly goes too far, but even Cisco’s forecasts waffle on this matter.

A 2015 forecast by Cisco suggested use of Wi-Fi would not decrease, as a percentage of total access. Later forecasts suggest 5G will increase the amount of access on the mobile network, reversing a trend in place since 2G.

source: Cisco

One potentially useful analogy is the traditional use cases for private, indoor networks (local area networks and Wi-Fi) and outdoor mobile and fixed networks. One can argue that the traditional bifurcation between public “access” networks and private enterprise networks still provides a likely model.

Wi-Fi essentially is the platform that replaced cabled private premises networks. Public carriers earned their revenue bringing connectivity to the premises, but enterprises and organizations and built their own internal distribution networks.

Rethink believes CBRS will therefore enable replacement of mobile services by enterprise owners building private networks. That could happen, in the sense of enterprises substituting private network access for public network sensor access.

But that would limit new public network IoT connections, not displace existing mobile connections. There would be a revenue impact, but of an indirect sort: eliminating one potential source of new mobile network connectivity revenues.

The analogy is not perfect, but the bifurcation between private local area networks and wide area public networks is germane. That is not to deny the emergence of “neutral host” providers selling wholesale premises access to all mobile service providers.

But, in such cases, the neutral host providers essentially are mobile infrastructure providers working in partnership with their mobile clients, as do tower companies.

We will wait to see how the business models develop, but LANs and tower company precedents, as well as services such as Boingo, provide some prior examples of how the new CBRS and related markets could develop.

U.S. Internet Access: What Would it Take for AT&T, Verizon to Take 10 Market Share Points?

The largest U.S. cable TV companies have 64 percent share of internet access accounts in the United States, according to the latest data from Leichtman Research Group. But there also is an 80/20 rule at work: the firms that drive most of the activity are Comcast and Charter; AT&T and Verizon.

Charter and Comcast have 81 percent of the cable internet customers. AT&T and Verizon have 67 percent of the telco internet access customers.

Between them, Charter and Comcast got 93 percent of the net account additions in the cable TV internet access provider segment. And while AT&T gained marginally, while Verizon lost marginally, nearly all the telco ISP losses came from CenturyLink and Frontier Communications.

In other words, though cable ISPs continue to get virtually all the net gains in accounts, AT&T and Verizon are roughly flat, in terms of subscriber installed base, while it is the rural operations that are losing share to cable rivals.

There might be some larger implications. Assume Verizon and AT&T get about 40 percent share in their markets, with cable getting 60 percent. No matter what they do, how easy will it be for AT&T and Verizon to nudge up to about 50 percent share? And how could they do so?

Basically, AT&T and Verizon likely would have to be able to match cable speeds and product features, as well as offer lower prices cable refuses to match, or otherwise change the value-price bundle in some other way relevant for consumers.

Ratcheting up speeds to match cable likely is the less difficult precondition, as costly as network upgrades might be.

Gaining a sustainable pricing advantage over cable is more difficult, as AT&T and Verizon cannot control the cable reaction. And it is by no means clear that  cable competitors would accept lower market share to protect their profit margins.

Leaving those issues aside for the moment, assume that AT&T and Verizon were able, somehow, to grab 10 points of market share, in part by upgrading to gigabit speeds, with a path to 10 Gbps.

The upside from such an upgrade is about 10 points of market share in internet access. What is a point of share in the consumer market worth?

Assume an internet access account taken from a cable supplier represents about $50 a month in revenue, or an annual $600 worth of gross revenue. If so, one percent of share gain is about 945,322 accounts in the overall market.

The issue is that none of those firms operates fully nationwide, and do not compete solely with the other two firms (Comcast and Charter on one hand, AT&T and Verizon on the other).

But as a simplifying assumption, assume AT&T, Verizon, Charter and Comcast collectively represent about 72 million accounts, and that the share changes would happen only across that 72 million installed base.

In that case, one percent of share change represents 720,000 accounts. Also, since the market is a zero-sum gain, five percent of gain by telcos means five percent loss for cable, for a total net swing of 10 percent, and a new share structure with cable at 55 percent and telcos at 45 percent.

That suggests, broadly, the the upside for AT&T and Verizon, to gain five percent share of the installed base, is really about 3.6 million accounts. At $600 for each account, annually, that implies something on the order of $2.16 billion in incremental revenue for AT&T and Verizon, with AT&T gaining about 69 percent of that.

The implications of a full 10-point change in market share, resulting in a 50-50 split of the market, is $4.3 billion in annual revenue and net swing of 7.2 million accounts,  again assuming that AT&T/Verizon only face Comcast/Charter in their markets.

As a practical matter, the potential for installed base share change between those four firms likely is less than that, since none of the four firms actually faces a zero-sum situation across the cable-telco industry segment divide.

The point is that the revenue upside for internet access gains arguably is less than $3 billion in annual revenue for AT&T, some $1.3 billion for Verizon, if AT&T and Verizon were able to take half the internet access share in their fixed network markets.

Compare that to the cost of upgrading 18 million passings to get those 7.2 million new accounts. Recall that both AT&T and Verizon presently have customers on about 40 percent of passings. So it is necessary to upgrade all passings to capture half the new customers.

At $700 per passing, that implies a network investment of about $12.6 billion, plus activated account investment of perhaps another $2.1 billion, or about $14.7 billion total. Marketing or customer acquisition costs would be incurred as well.

Such customer acquisition costs can run about $2000 per new account, including direct marketing costs and the cost of promotional pricing and incentives. That could add another $14.4 billion in operating costs, for a total of $29 billion.

You might consider that a reasonable bet (spending $29 billion to harvest $4.3 billion in additional revenue). But you also can see why AT&T and Verizon are hopeful about 5G-based fixed wireless access, which might offer capital investment about half what fiber to the home costs.

ISPs	Subscribers, 3Q 2017	Net Adds, 3Q 2017
Cable Companies
Comcast	25,519,000	213,000
Charter	23,603,000	285,000
Altice	4,020,900	16,500
Mediacom	1,194,000	9,000
WOW (WideOpenWest)	730,000	2,400
Cable ONE*	519,062	(2,662)
Other Major Private Company**	4,860,000	15,000
Total Top Cable	60,445,962	538,238
AT&T	15,715,000	29,000
Verizon	6,978,000	(10,000)
CenturyLink	5,767,000	(101,000)
Frontier	4,000,000	(63,000)
Windstream	1,017,400	(8,400)
Cincinnati Bell	307,900	800
FairPoint^	301,000	(3,193)
Total Top Telco	34,086,300	(155,793)
Total Top Broadband	94,532,262	382,445

source: Leichtman Research

Video Entertainment: Slim to Zero Profits

For most tier-one service providers, video entertainment has lower profit margins than internet access or voice. The issue is how much lower. Gross margins for internet access might be in the range of 20 percent for video, 40 percent for internet access. Net margins for video might be in single digits.

For smaller service providers, video entertainment is a money-loser.


source: Geobrava

For Metronet, an overbuilder operating in Indiana and Illinois, it is literally the case that video entertainment is a “zero margin” service; a feature of a triple-play service, not a direct revenue driver.

Using what it calls a pass-thru pricing regime, Metronet says it makes video entertainment available at exactly what Metronet pays its content providers.

Under that “pass thru pricing” program, consumers are billed exactly what we pay for the television networks in your package,” Metronet says.

That means no mark-up from the actual cost of goods. “We promise that you'll pay exactly what we pay for the networks in your television lineup,” Metronet says.

In other words, video entertainment literally is a feature of the triple-play package, not a revenue generator.