DirecTV Now Will Connect Cord-Cutters to Live Programming

On November 28, 2016, The Wall Street Journal featured an article about AT&T's new DirecTV Now [Subscription Required], an over-the-top (OTT) video service with more than 100 live streaming television channels for $35 a month. Featuring content from some of the biggest companies in the world, including 21^st Century Fox, Walt Disney Company, and Time Warner, DirecTV Now will be an OTT competitor to traditional pay-TV providers. DirecTV Now will allow cord-cutters to access live programing and likely will incentivize other pay-TV competitors to develop similar services to account for an increasing number of cord-cutters. 

Pasadena, California Imposes Heavy Tax on Video Streaming Services

In September, the city of Pasadena, CA imposed a 9.4% tax on video streaming services, such as Netflix, HBO Go, and Hulu. The tax will go into effect on January 1, 2017. As more and more consumers “cut the cord,” cites throughout the country are turning to video streaming services to make up for the loss in tax revenue that previously was generated from pay-TV services. State and local governments instead should work to reduce taxes on all video services, allowing consumers to access as much content as possible.

It's Time for the FCC to Recognize OVDs and MVPDs Are Substitutable

Stock prices have fallen recently for some of the largest video content companies, including Disney, Viacom, CBS, and 21^st Century Fox – primarily a response to multichannel video programming distributors (MVPDs) losing 566,000 subscribers in the second quarter of 2015. This is a sign that MVPDs most likely will need to transform their programming packages in order to compete with the emerging success of online video distributors (OVDs).

For many young Americans, OVDs (such as Netflix, Hulu, or Amazon Prime) have become substitutes for the services of MVPDs. In fact, roughly 1.4 million Americans “cut the cord” in 2014 and now view content strictly through OVDs. (That number is likely to increase in 2015.) While the availability of live sports programming has been a reason for some consumers to keep an MVPD subscription, even ESPN has lost 3.2 million subscribers in just over 12 months. Despite the obvious signs of this inevitable technology transition, the Commission says it does “not have evidence” that OVDs and MVPDs are substitutes, according to the July 2015 AT&T-DIRECTV order. 

The Commission seems puzzled about the relationship between OVDs and MVPDs. It stated the following in the AT&T-DIRECTV order:

“[F]or most consumers today, OVD services are not substitutes for MVPD services. Rather, as we note in our description of current industry conditions discussed above, OVDs typically offer consumers choices that may either complement their MVPD services or compete with some portion of the services MVPDs offer, such as VOD. Indeed, despite the increased number of OVDs and increased use by consumers of OVD services, we do not have evidence on the record that any OVD would be, in the near term, a disciplining force if the combined entity were to increase price or decrease quality. However, given the development of additional and new OVD services and the proliferation of new technologies and devices that allow consumers to view video programming sold by OVDs on their computers, phones, and televisions, we acknowledge that OVDs have the potential to become substitutes for MVPD services with a market presence that is sufficient to counter effectively an increase in price or decrease in quality by the combined entity.”

It is important for the Commission to recognize OVDs and MVPDs as substitutable during its “Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming.” If the Commission continues to see the two as complements, rather than substitutes, its analysis regarding market concentration and video competition will not be accurate when considering policy implications or assessing future merger proposals.

The Gift That Keeps on Taking: Municipal Broadband System in Lafayette, LA Showing Weakness

Last month, city auditors issued yet another warning to the municipal broadband system in Lafayette Louisiana, LUS Fiber. Rstreet.com reported the details of the recent advisory, published an in-depth case study on the Lafayette system, and noted that Lafayette auditors have voiced concerns about the network in each of their reports over the past two years. LUS Fiber is the just the next in a long line of government-owned broadband networks that have fallen far short of expectations.

According to the city’s financial reports, LUS Fiber reported $23 million in operating revenues, compared to $36.7 million that was forecast in its feasibility study for the fiscal year ended October 31, 2013. According to LUS Fiber’s original plan, the operation was projected to produce a profit of $902,000, but instead the system incurred a $2.5 million operating loss for the year. But the most telling number is LUS Fiber’s deficit of $47 million at the end of FY 2013, up from $37.1 million the year before.

LUS Fiber has tried to downplay these results by publicizing that the network is “cash-flow positive.” But that just means that LUS Fiber is taking in more than it’s spending on a day-to-day basis, but it does not properly acknowledge the network’s substantial long-term debt liability. The failure to produce promised-profitability puts taxpayers on the hook for LUS Fiber’s debt, which increased a staggering 27 percent from 2012 to 2013 according to Coalition for the New Economy.

And unfortunately for local taxpayers, data shows that municipal broadband systems like LUS Fiber are unlikely to find relief for their ever-increasing debt. LUS Fiber and other municipal broadband networks that offer landline broadband services and rely on the triple-play package – phone, cable, and Internet - to produce revenue are betting on a dying model. Based on a report from ISI Group, an equity research firm, BusinessInsider.com reported that nearly 5 million cable TV subscribers cut the cord in the last five years. The number of cable TV-only subscribers remaining could fall below 40 million next year, as the graph from ISI Group shows.

The weaknesses of LUS Fiber are regrettably common among municipal broadband networks. Free State Foundation scholars have tracked the failure of many government-owned networks, including Burlington Telecom’s February $10 million settlement with Citibank over loans to its ailing system. Other examples of municipal “broadband busts” include Mooresville and Davidson, North Carolina, Utah’s UTOPIA network, Chattanooga, Tennessee’s Electric Power Board (EPB) network Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency. 

Municipalities should view the consistent failure of government-owned networks as confirmation that the private sector is best suited to develop and manage broadband networks. Absent compelling evidence that private sector broadband providers will not make adequate service available in the locality, local governments should refrain from building out their own networks in order to protect their taxpayers from the high costs and high risks of broadband network deployment.

If local governments want to increase competition in their broadband markets, the best way to do so is to remove existing, costly, unnecessary regulations. This will incentivize private investment, remove barriers to broadband deployment, and promote the continued growth of today’s competitive communications environment. 

In Wireless Report, FCC Sees Competition But Blinks

On June 27, the FCC released its annual Wireless Competition Report for 2011. The Report contains plenty of positive data points concerning wireless innovation, competition, and choice of service and price options. Numbers in the Report show that the wireless market is dynamic and highly competitive.

But the Commission passed up an opportunity to look more closely at the impact of intermodal competition and wireless substitution in the advanced telecommunications marketplace. And the Commission disregarded Congress's directive in Section 332(c)(1)(C) of the Communications Act that its Report "shall include…an analysis of whether or not there is effective competition" in the market."

This means another lost opportunity for the Commission to lay the groundwork for removing outdated, monopoly-era legacy wireline regulations. And the agency's agnosticism when it comes to effective competition gives it cover for a slate of proposals for imposing new wireless regulations that have been circulated in Congress and by the Commission itself.

Positive numbers from the Report include expanded coverage of the population by competing wireless voice providers. 99.2% of the population is served by two or more wireless voice providers, 97.2% is served by three or more providers, and 94.3% are served by four or more providers. Numbers for wireless broadband coverage and competition also stack up well. 91.9% of the population is served by two or more wireless broadband service providers, 81.7% is served by three or more providers, and 67.8% is served by four or more providers.

In addition, the Report indicates downward trends in prices. Average revenue per voice minute has continued to decline, lowering to $0.049 per minute in 2009, from $0.054 per minute in 2008 and $0.112 per minute in 2002. "[T]he unit price for text messages continued to fall in 2009" as "price per text yields dropped for the fifth consecutive year in 2009 to $0.009, a 25 percent decline from the previous year."

The Report also cites a survey indicating that a growing number of households – approximately 26.6% – are now wireless-only. And it also points out that "[a] Nielsen Company survey shows a similar rising trend in households who have 'cut the cord.'"

Given the Commission's goals for universal broadband access, shouldn't it be an agency imperative to gain better insight into the substitutability and competitive effects of wireless in delivering broadband services? Unfortunately, the Report's subsection on intermodal competition in voice services provides no analysis, no conclusions, nor any substantive insights regarding competitive pressures in the voice services market resulting from wireless and cross-platform competition.

Wireline telecommunications providers are in many instances still subject to legacy regulatory burdens premised on monopoly-era assumptions about competition in the market. On their face, those assumptions now appear unwarranted in light of competition from wireless and other competitors. But the lack of any such assessment in the Report suggests the Commission isn't much interested in better understanding what kind of competitive pressures wireless creates in the voice services market. The result is another missed opportunity for the Commission to reconsider the competitive underpinnings of its monopoly-era legacy regulation for wireline.

Repeating its approach to the 2010 Report, the Commission backs away from its statutory obligation to make an "effective competition" determination. In this year's Report the Commission again adopts an "effective competition" agnosticism regarding the wireless market, meaning no amount of positive data could satisfy the Commission that an effective competition finding is warranted. According to the Report,"[i]t would be overly simplistic to apply a binary conclusion or blanket label to this complex and multi-dimensional industry." But as Commissioner Robert McDowell responded in his concurring statement: "Nonetheless, this is what Congress asked us to do." The FCC effectively disregarded its statutory duty under Section 332(c)(1)(C).

For the FCC, the upshot to avoiding a finding of "effective competition" in the wireless market is that it renders new regulations more tenable. Over the last year, Congress and the Commission have proposals for wireless mandates includes: next generation wireless disclosure regulation, early-termination fee regulation, handset exclusivity regulation, bill shock regulation, text messaging and common short code regulation, smartphone app regulation and smartphone design regulation (such as FM chipset mandates). Not to mention the FCC's net neutrality regulation of wireless, adopted last year.

The Commission's agnosticism toward the existence of an "effectively competitive" wireless market gives such proposals for new wireless regulation a better chance of favorable reception in policymaking circles. And in the absence of any recognition of robust market competition, courts are more likely to subject regulation to less exacting scrutiny and to give greater deference to agency regulatory intervention.

Nonetheless, hard data in this year's Wireless Competition Report suggests a dynamic market that continues to be characterized by investment, innovation and competition. The numbers suggest that consumers of wireless voice and broadband services are benefitting from a wireless market that is effectively competitive. So while the Report's official glosses on that data might be pro-regulation, the data itself is strongly pro-consumer.

FCC's Wireless Competition Report Should Take Wireless Substitution Seriously

A year ago this month the FCC issued its annual Wireless Competition Report. So a new report from the Commission should be just around the corner. One of the biggest questions surrounding its forthcoming report is whether the Commission will finally take stock of wireless substitution for wireline services.

In its next Wireless Competition Report, the FCC should take the opportunity to more closely examine the growing phenomenon of wireless customers "cutting the cord" and going without wireline voice service altogether. The Commission should also forthrightly examine in its report the impact of wireless on the wireline market. Particularly when it comes to voice service, a strong case can be made that competition from wireless service is rendering legacy wireline regulation unnecessary and costly.

From time to time, the FCC has acknowledged the increasing numbers of wireless subscribers. The Commission's recent Local Telephone Competition Report, for instance, states that as of the end of June 2010, the number of wireless voice subscribers nationwide had increased to almost 279 million – up almost 14 million from a year before and up more than 61 million from four years prior.

It's difficult to imagine how such a momentous spike in wireless subscribership could possibly leave wireline unaffected. And, in fact, the Commission has acknowledged the decreasing numbers of switched access lines. Its Local Telephone Competition Report indicates that the number of switched access lines for both ILECs and non-ILEC telecommunications providers total some 122 million. (ILECs and non-ILECs also serve a combined total of approximately 29 million VoIP subscribers). This number for switched access lines is down from approximately 133 million the year before and down from over 172 million from June 2006. In addition, the number of ILEC access lines and VoIP subscribership has declined relative to increases for non-ILECs. On June 30, 2010, ILEC total end-user switched access lines and VoIP subscriptions equaled just over 102 million, down over 10 million from a year prior and down nearly 40 million from four years earlier. Non-ILEC total end-user switched access lines and VoIP subscriptions equaled nearly 49 million as of June 30, 2010, up over 4 million from a year prior and up almost 20 million from four years before.

The FCC has also acknowledged the increasing numbers of consumers who have "cut the cord" and now rely exclusively on wireless. For instance, one 2010 survey cited by the Commissionshows that a fast-growing number of households — now approximately one-quarter of all households — have "cut the cord" and rely exclusively on wireless: "For the last 3 years, the proportion of households subscribing to both landline and mobile wireless service has fluctuated around 59%, while the proportion of households that subscribe only to mobile wireless increased from 13.6% to 24.5%." The latest iteration of that survey suggests those same trends are continuing. Age demographics alone should suggest these cord-cutting trends will continue, as the number of wireless-only subscribers increases among users in younger age brackets. The chart below conveys a general sense of the upward trajectory of wireless-only subscribership as a percentage of all wireless subscribers.

Furthermore, when it comes to assessing wireless in competition with wireline, one should also take into account the degree of wireless choices available to consumers. Consider the Commission's findings in its 2010 Wireless Competition Report that "[t]he percentage of the population served by at least two mobile broadband providers increased from 73 percent in May 2008 to nearly 90 percent in November 2009," "the percentage of the population served by three or more providers increased from 51 percent in May 2008 to 76 percent in November 2009," and "approximately 58 percent of the population is served by at least four mobile broadband providers." A forthcoming Wireless Competition Report should provide an updated set of numbers. But the continuing presence of wireless alternatives to wireline services in the voice market is a certainty.

Unfortunately, the FCC's Qwest Phoenix MSA Order from last year followed a string of prior orders in which the Commission has declined to incorporate these insights regarding wireline and wireless subscribership into its overall regulatory approach to wireline services. This despite the Commission's concession that "most subscribers to wireline and wireless engage in some usage substitution," and that "[t]he increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless services may materially constrain the price of residential wireline service."

The Commission excluded wireless as a substitute for wireline in its market analysis in the Qwest Phoenix MSA Order by suggesting mere usage substitution is not the same as access substitution, and that conclusive proof of the latter would be required to show price-constraining effects. The Commission insisted that "[k]nowing the percentage of households that rely exclusively upon mobile wireless is insufficient to determine whether mobile wireless services have a price-constraining effect on wireline access services." But the Commission suggested that what it calls conclusive proof of price-constraining effects might not itself be enough to treat wireless as a substitution for wireline, claiming that cord-cutting "could be driven more by differences in consumers' age, household structure, and underlying preferences than by relative price differentials."

The Commission's refusal to consider wireless substitution in the Qwest Phoenix MSA Order runs contrary to a commonsense look at the data regarding increasing wireless subscribership, decreasing ILEC access switches, and increasing wireless-only subscribership that is bound to continue rising in light of associated age demographics. But it should also be remembered that the wireless substitution issue was subsumed by the FCC's rollout of a new and controversial market power analysis in the Section 10 regulatory forbearance context and its application to one particular metropolitan statistical area.

The next Wireless Competition Report now offers the FCC a better place to take a fresh look at the big picture of wireless competition and cord-cutting. The Commission should take that opportunity to face up to the substitutability of wireless for wireline. Once that long overdue step is taken, the Commission can then begin to recognize that aspect of market competition into its future rulemakings, regulatory reviews, and forbearance proceedings.