Tag Archives: Comcast

(Revised) Netflix to Pay Comcast; May Cause Future Problems

A couple of months ago, Netflix announced that they would be paying Comcast for faster streaming to Comcast’s customers. Comcast, who recently acquired Time Warner, is the largest internet service provider (ISP) in the country with around thirty-two million households as customers. This move may have unintentionally harmed Netflix, other internet based companies, and setback everyone in the United States who requires access to speedier internet. This post will analyze the effects on all three of these groups of actors in the internet market.

1) Netflix

While Comcast is the dominant internet provider, there are numerous other internet providers who have just gained a substantial bargaining edge with Netflix. Since the move has increased streaming speeds for Comcast’s Netflix users, CNN reported that Netflix is in talks with Verizon and other ISPs to work out a similar deal. While the financial terms of the Comcast deal haven’t been announced, I think it is a fairly safe bet that this was costly for Netflix. They may have the cash on hand to pay Comcast and Verizon for this kind of arrangement, but It would surely be too expensive to pay every ISP in the country. Additionally, if an ISP wants such an agreement, what is to stop them from slowing Netflix’s streaming speed if they don’t pay up? Despite entering these agreements to pay ISPs, Netflix is publicly condemning the fact they have to in order for their customers to stream their movies and TV shows at a reasonable pace.

2) Other Web Based Companies

Not only has this move opened Netflix up to the problems mentioned about, they have set a dangerous precedent that may force other websites into such arrangements in order to get the same speed for their users. This will particularly effect websites who have massive traffic but don’t have the massive revenues to pay ISPs.

Since the previously slow streaming speed on Netflix was the result of their massive number of users, we can assume that internet speed is a zero sum game. If one website loads faster, others must load slower. This will also pressure websites who don’t want to frustrate users with slow load speeds to enter into agreements with ISPs and pay them so that their users can enjoy the same speeds.

3) Internet Users Everywhere

Finally, internet users in general are harmed by the direction that net neutrality is headed. Websites who previously had very minimal advertising may be forced to cover their websites with banner ads to make up the revenue that will be spent paying internet service providers. While the websites that we use that do agree to pay for faster streaming will speed up, other websites who don’t have the cash to pay ISPs will relatively slow down. 

A Proposed Solution

As the FCC’s net neutrality rules no longer hold ISPs from throttling websites’ speeds, ISPs are in a position to take advantage of websites, as they are doing with Netflix. To stop this, websites like Netflix can stop entering such agreements and instead use the money to help fund or lobby for increased expansion of services like google fiber, the 1 gigabit internet that is reasonably priced relative to companies like Comcast. (Currently it is only offered in a handful of cities). If Netflix would simply refuse to pay Comcast, Verizon, and other ISPs and instead try to help google fiber reach the entire country, there would soon be no need to pay for increased speeds, and websites would have no problems loading faster than ever.

Apple + Comcast

There has been recent talk of a deal forming between Apple and Comcast. Apple will benefit from the deal because they have been looking to jump into cable for a while now. Apple can also complement Comcast because it can benefit Comcast’s huge scale. Apple has a 22 million video subscriber base, a huge portfolio of content, and owns NBC, partial stake in Hulu, and just recently signed a big deal with Netflix. Comcast can benefit from the deal because they have been losing subscribers lately (see table below). With the help of Apple’s brand name and quality, a new streaming-video service from Apple will potentially allow both companies to refine the TV business.

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In terms of the actual streaming-video service, “Apple wants traffic to the boxes to be marked as distinct from public internet traffic and travel in a separate flow of bandwidth over Comcast’s cables to homes, ensuring better quality for Apple’s TV service than Web video.” The content from the service would stream from Apple set-top boxes. However, the companies are not close to closing a deal and there is no guarantee that there may even be a deal in the future. Also, a deal as big as this is bound to face regulatory scrutiny.

Moreover, Apple proposes that its video traffic be treated as a “managed service” traveling in internet protocol format- similar to cable video-on-demand services. In January, Federal “net neutrality” rules were passed which barred broadband providers from discriminating against any public internet traffic. However, the rule makes exceptions for managed services because they don’t interfere with other web traffic.

Opponents of the deal (in favor of treating all internet service traffic equally) argue that the deal would allow Comcast to pick winners and losers and ultimately make it harder for new innovative companies to join the internet service. As we have learned throughout our Econ courses, increased competition raises entry costs and barriers for new competition. In my opinion, I believe that the two companies have good intentions- but I actually feel that the deal could have a negative effect. If Apple and Comcast paired up, I can foresee extra fees added to cable bills that will become active as consumers are provided with new, higher-bandwidth services. I actually just recently cancelled my Comcast service because I was being billed for extra irrelevant costs that they had never specified up front. If the deal is passed, I can definitely foresee the FCC re-writing the “net neutrality” regulation in order to prohibit the TV business from becoming more highly monopolized than it currently is.

The Quest for Faster Internet

If you are anything like me, you spend a lot of time on the Internet.  Probably too much.  Consumers do a range range of things on the internet, like shopping, researching, reading, and playing games.  Everyone has a favorite browser (please don’t say Internet Explorer), and a way they format tabs (I prefer somewhere between one and five, anything more is a little cluttered for me).  Despite all of these numerous uses and styles, one thing that everyone likes is speed.  The faster your Internet connection, the better.  The future is a gigabit (1,000 Mbps) connection.

Sitting at home, my browser gets about 25 Mbps downloading content, and 10 Mbps uploading content.  The servers at the University of Michigan are significantly faster; I can recall hitting 100+ Mbps in downloading speed tests.  The average connection speed in the United States is slightly under 10 Mbps, not great by global standards.  Not surprising, tech powerhouses South Korea, Japan, and Hong King lead the way.  South Korea has average internet speeds 50% faster than the United States.

Obviously, the United States faces infrastructure challenges much greater than these Southeast Asian countries.  The U.S. population is spread more thinly across the country rather than the urban-centric countries with the top internet speeds.  This means that the resources required to upgrade networks in the U.S. are exponentially greater than in more urbanized countries. The larger hurdle consumers face in getting faster internet is the providers themselves.

Gigabit connections are possible.  Google, not a traditional ISP, has installed gigabit connections via Google Fiber in several cities like Kansas City and Austin, charging about $70 for internet service approximately 100 times faster than a standard broadband line.  In comparison, Verizon offers a 500 Mbps connection, half the speed of a gigabit connection, for a measly $300 dollars, over four times the cost.  The obvious question is: why would anyone choose an inferior Verizon service at a higher cost?  The answer is that they have no choice.

Cable Company Mergers

Most homes in the United States have access to limited options when it comes to internet providers.  Thirty percent of homes have access to zero or one internet provider with 6 Mbps or more.  An additional 37% have access to two such networks.  The lack of gigabit connection makes more sense with these facts in mind; it makes little sense for a business with little to no competition to charge a competitive rate for services.  A cable company Comcast has little incentive to upgrade their lines to gigabit levels when they can charge a similar price for a service that is cheaper for them to provide.  Unfortunately for consumers, this problem will only be exacerbated by the acquisition of Time Warner by Comcast (pending government approval).  With the two largest cable companies in the U.S. combining, consumers will have even less choice in the the cable marketplace.  Since cable service is a market with an incredibly high entry costs, firms cannot enter because the risk is extremely high.  (One wonders at what point will the government perhaps take over or strictly regulate this service like they do electricity.) New streaming services try to avoid these entry costs by providing television over the internet, but they are still restricted by the cable companies bandwidth limitations.  For example, Netflix has recently agreed to pay Comcast for direct access to their services, because Comcast had slowed down their connection due to the large amount of bandwidth their customers were using.

With the cable companies having little incentive to upgrade their capital, Google has tried to step in to offer access to high-speed lines.  Again, unfortunately for consumers, this is no easy task.  Achieving gigabit speeds requires hardware in the ground.  This means tearing up yards, roads and the like just to eat faster internet connection.  Google asks for significant concessions from cities in order to expedite the process, but often times they are too much to make a deal possible.  Thus, between local governments being reluctant to give so much to Google (a company worth far more than basically any city), and the cable companies providing obstacles at every turn (AT&T has denied access to utility poles in Austin), Google Fiber’s growth has been slow.

Thus, as much as consumer might hope for lightning fast connection speeds to match their Asian neighbors, it is unlikely.  Only with significant government action will gigabit connection become readily accessible any time soon.

Net Neutrality Struck Down? (Revised)

Earlier in the month, I wrote about the conclusion of a lawsuit between Verizon and the FCC. Verizon won the lawsuit; “three judges on a US Appeals court panel struck down net neutrality rules saying that because the FCC decided to characterize ISP’s not as telecom companies but in a category of their own, the FCC could not regulate them as such.” (Econ 411 Blog).

This essentially left the door open for the FCC to start pushing through new laws in an attempt to regulate this “new market” that they had characterized these ISP’s as. Since I wrote this article, there have been a few very interesting developments that I think stoke a fire under the net neutrality debate as well as the FCC as they are now under even more pressure to take action in markets that are seemingly becoming more and more concentrated. The most prominent of these events are the Comcast/TWC merger as well as the deal between Netflix and Comcast that effectively makes Netflix pay for efficient streaming of their content.

With this in mind, I would like to take a look back over my explanation of the Comcast/Time Warner merger:

“Let’s start with just the bare bones of each company — according to the NYPost, TWC had some 11 million video subscribers combined now with Comcast’s 22 million gives you a rough estimate of 33 million subscribers out of a total of 100 million people who have some sort of cable video connection through a provider in the USA. The question then, is what constitutes a monopoly? In terms of Antitrust regulation (and in Econ 432 class), one of the main indicators of monopoly or at least one of the main influencers of regulation from the government is the Herfindahl-Hirschman Index or more simply known as the (HHI). This measurement is used to determine the “concentration” of an industry or given market in an attempt to determine how close to monopoly conditions a given merger would create. According to the article, the formula is computed on a scale of 0-10000 with 0 being perfect competition and 10000 being one single company owning the market. According to the government, a score from 0-1499 is low concentration, 1500-2500 is moderately concentrated and above that is considered to be highly concentrated. Moreover, in a “somewhat concentrated industry” a merger resulting in a 200 point increase gets the government worried and an increase of 100 points in a highly concentrated market does the same. The NY Post did rough calculations and found that the HHI increase due to the Comcast/TWC merger was in the range of 639 points (500 if you want to be conservative they say). This most definitely would make the government look twice.” (Econ 411 Blog)

As of this moment in time, the FCC has not made any major comments about this case, but the word is that they are looking into things. It would seem just from the piece above, that there should at least be some due diligence completed by the FCC on a deal like this. The WSJ and myself made the comment about the Verizon/FCC case that maybe Verizon’s victory in that case had set the stage for the FCC to take a strong stance in the future to regulate the ISP industry.

This however, was before the Comcast/TWC took place and the deal between Comcast and Netflix succeeding even that — things have gotten even scarier for those wanting to make sure the internet stands to stay the internet we know and love.

So while those of us waiting waiting eagerly to see the FCC action from the Comcast merger had our eyes locked on just that, Comcast had different plans. Sunday morning it was announced by the WSJ that Netflix would be paying Comcast an undisclosed amount for direct access to their servers. Yes, I know you are wondering what the heck that means, so here is a little background on this issue. Recently (around Holiday ’13 and since then) there have been numerous anecdotal reports of Netflix streams deteriorating on different ISP’s networks. The WSJ article I just mentioned dives into this with a little more detail, “the average speeds of the company’s prime-time streams to Comcast subscribers dropped 27% from October to January. Netflix’s streams to Verizon subscribers also have slowed in recent months.” The battle has since ensued as to who should pay to prop up the ISP’s networks in order to keep things running smoothly. Netflix acknowledged these issues in their 4th quarter conference call recently saying that if they were forced to incur additional expenses due to paying to keep networks running in such a state that they can efficiently transfer their content, that their own bottom line would be adversely affected. It is hard to speak to this point at the current time due to the fact that we do not know exactly how much Netflix agreed to pay Comcast– what effectively happened was that Netflix paid to cut out the middle man between them and Comcast.

The issue here is not that Netflix paid Comcast to cut out the middle man; the money was going to someone regardless and that, in my eyes, is just an expense that is built into their business model to begin with. The real issue is the fact that Comcast has a makings of a monopoly in the US market and is in a position to make a company pay based on the type of use of Comcast’s network. In other words, Comcast is the ISP to enough Netflix customers, that Netflix had no choice but to cave and pay in order to maintain the integrity of their own business. It is extremely disturbing to me that a company like Netflix, that has fundamentally changed the way that average American citizens consume media, is now at the mercy of an ISP like Comcast.

The time to act is now, and if there was not a clear enough image of the types of perils caused by allowing these ISP’s to run amok without proper legislation, I believe there is now. The problem with not treating all traffic the same is not the fact that Netflix’s bottom line gets squeezed at Comcast’s glee, but rather that smaller companies (the next Netflix etc) that require full use of the internet as a part of their business model, can now be choked out like a weed in concrete. I hope that the FCC sees this and does prove both myself and the WSJ right by issuing legislation with a heavy hand, as the future at this moment seems quite fragile.

 

Antitrust Implications of TWC/Comcast Merger

Over the past few months, Time Warner Cable, a staple cable company that serves a vast portion of the US with service in 29 different states, has been attempting to look for a buyout partner. There was plenty of talk of Charter Communications buying them out and incorporating all of their customers into the “Charter System” but things did not quite go as planned. This past week, Comcast swooped in (for lack of better words) and offered up a hefty $159 per share — the stock was trading around $135 a share before this point. (WSJ)

While I am sure the conclusion, or rather, the beginning of the end of a merger like this is a major weight off of numerous people’s backs within both organizations I fear that these two may have jumped the gun with the cake and streamers. We must not be forgetful of the merger attempts of recent history; American & United Airlines as well as AT&T and TMobile. Both of those previous merger attempts were blocked by the FCC / FTC initially although as many of us know, the American/United merger eventually went through. While to the companies the combo Time Warner and Comcast entity may be a beautiful idea, to the consumer I tend to think this is something of the opposite (especially with net neutrality where it stands at the moment)

Let’s start with just the bare bones of each company — according to the NYPost, TWC had some 11 million video subscribers combined now with Comcast’s 22 million gives you a rough estimate of 33 million subscribers out of a total of 100 million people who have some sort of cable video connection through a provider in the USA. The question then, is what constitutes a monopoly? In terms of Antitrust regulation (and in Econ 432 class), one of the main indicators of monopoly or at least one of the main influencers of regulation from the government is the Herfindahl-Hirschman Index or more simply known as the (HHI). This measurement is used to determine the “concentration” of an industry or given market in an attempt to determine how close to monopoly conditions a given merger would create. According to the article, the formula is computed on a scale of 0-10000 with 0 being perfect competition and 10000 being one single company owning the market. According to the government, a score from 0-1499 is low concentration, 1500-2500 is moderately concentrated and above that is considered to be highly concentrated. Moreover, in a “somewhat concentrated industry” a merger resulting in a 200 point increase gets the government worried and an increase of 100 points in a highly concentrated market does the same. The NY Post did rough calculations and found that the HHI increase due to the Comcast/TWC merger was in the range of 639 points (500 if you want to be conservative they say). This most definitely would make the government look twice.

Today in a time where we are fighting for basic internet rights for everyone around the country and globe itself, as well as fighting for net neutrality, it honestly does not make sense to me to give one entity this much power. I truly do hope that the government will take a second look at this and realize that they are opening the door for less price competition, less innovation, and the continued manipulation of the american consumer. There are other obstacles though however, Business Insider makes the point that because these two companies do not really compete with each other (they have separate geographic markets), the markets we are comparing with the HHI are really not comparable because they are different with different alternatives. It is my opinion though, that in markets with not a lot of competition to begin with (anyone outside of the city can tell you), concentrating the providers even further is the definition of a bad idea.

Cable Merger Drama Heats Up

Back in January, I wrote a post that profiled Charter Communication’s bid to acquire Time Warner Cable. Charter offered Time Warner approximately $135 a share, which the company promptly rejected. Less than a month later, Time Warner has been able to reach the price it was asking for – $160 a share, or approximately $45 billion equity value – with an offer from Comcast, the countries largest cable operator. This deal is huge, not just in size – it is the third largest deal since the financial crisis – but also in terms of the impact it could have the economics of the cable television and broadband industry.

Cable consolidation is not a new idea. John Malone, who’s media conglomerate Liberty Media owns a controlling stake in Charter, has long been a proponent of the idea and pushed the industry in the direction of consolidation with the initial bid for Time Warner. One trend in the media landscape has been rising content costs. Content producers, which include companies like CBS, Walt Disney, Discovery, and AMC have gained economic leverage over content distributers – or the cable companies – which must pay a fee to carry the specific content. While the relationship between content producers and distributors is symbiotic, relations can at times be tense. Last year, Time Warner Cable temporarily even dropped CBS service as the two companies disputed fees. By bringing Time Warner under its umbrella, Comcast has gained significant bargaining power over content producers, who need access to the 30 million subscribers the combined company will boast to create successful content.

The second issue at hand is the concept of net neutrality, which has been a hot topic recently. Net neutrality is the idea that all internet traffic should be treated equally by internet service providers, like Comcast and Time Warner. Some internet companies, like Netflix and Google, use disproportionate amounts of bandwith on ISPs’ networks – ending net neutrality would allow the cable companies to charge these bandwith hogs extra, which would ultimately raise costs for consumers. An FCC court, recently ruled that ISPs are not required to maintain net neutrality, but with Comcast’s move to acquire Time Warner, the idea may gain traction as regulators look to make the deal more consumer friendly as the Wall Street Journal points out.

The last issue at hand is the regulatory review of the deal. In order to go through, the Department of Justice and the Federal Communications Commission must both sign off. The primary question they will be asking is whether the costs to consumers through increased market power are great than or less than the efficiencies created by combining the company. Regulators have already promised a strict review of the deal as the New York Times reports but there are surely reasons for Comcast to be optimistic about the deal going through. One important consideration, is that there is relatively little overlap in existing coverage areas between the two companies so most consumers will not experience a change in number of choices. If the deal does get blocked by regulators, Comcast will not have to pay any break up fee, which is unusual for high profile transactions like this.

Overall, the Comcast/Time Warner Cable deal highlights the changing economics of the American media and telecom landscape. Whether the deal goes through or not, there are sure to be ripple effects across the industry as competitors and partners scramble to adapt to the new juggernaut or to become powerhouses of their own. In the end, let us hope that consumers are the ultimate winners.

 

The Future Of Cable TV

We are bound to see some serious problems in the next 10 years regarding Cable TV. Just this past Thursday, Comcast announced its $45 billion bid for Time Warner Cable, its rival provider. If you aren’t already anxious or worried about this potential buyout, you should be. This merger would mean that Comcast would control more than half of all American cable subscribers. For some of you, this may not be a big problem, but I can guarantee it eventually will be. I’ve always been a big Comcast fan. They have always had great channels and fast internet speed. However, with this potential dominance, Comcast has a huge opportunity to regulate the future of TV.

Now you might say to yourself, how could Comcast truly change the way we watch TV? Well, according to Kevin Short from Huffington post, some experts say that “this majority could mean slower speeds and fewer good choices on streaming services like Netflix, Amazon, and Hulu. Because Comcast considers Netflix a competitor, the company doesn’t have any reason to put effort into remedying congestion and the slow speeds it produces on these streaming services.” It is also believed that Comcast could “pressure content providers not to offer their shows to its competitors, leaving us with fewer good choices when we fire up our streaming services.” Not only could Comcast have the potential of ‘fixing’ what we are currently able to watch and raising the pricing for consumers, but they are also restraining us from the opportunity to expand the whole concept of Cable TV with the great technology we have today.

Personally, I have always believed that a new Cable company needs to enter the market and truly dominate the way we watch TV. We have the technology to revolutionize cable! Why can’t we do so? Some examples I have are as follows. Rather than just being able to scroll through and see what is on, consumers should be able to go to a channel or know what the most popular program on TV is at that moment. In a way, Cable TV should have a similar system like Netflix, but in real time.  I shouldn’t have to find shows myself and miss a great show that is on, the cable provider (Comcast) should tell me what is the most popular show, most favorite show, most watched show, all in real time and all in their own genres of entertainment. We have the technology to expand Cable TV, why should we regress?

The only hope we have from regression will come down to the decision of the Federal Communications Commission. The big issue the commission is leveraged to act on is “net neutrality.” Net neutrality is the principle that Internet service providers should enable access to all content and applications regardless of the sources and without favoring or blocking particular products or websites. According to the Wall Street Journal, Comcast Executive Vice President David L. Cohen turn a blind eye to suggestions that the deal would negatively impact competition in the broadband market. “Where is the evidence, where is the analysis? The fact of the matter is the broadband market has multiple competitors, and we face intense competition nationally. Every wireless carrier is national competitor,” Cohen said.

Whether or not Mr. Cohen is talking complete nonsense and secretly knows Comcast’s true plans to control what consumers watch, the bigger picture we should look at is the fact that this potential acquisition will prohibit the future growth of Cable TV. If this deal goes through, Comcast would have no reason to expand what they currently are working with (at least within the next 10 years) because they will instead work on ‘fixing’ the streaming services market to gain more control. I couldn’t say it better myself as Kevin Short put it, “Good luck binge-watching House Of Cards, America.”