Price Regulation Concerns Under Title II Broadband Order 'Overblown,' FTC's Nuechterlein Says

Some market and regulatory concerns are arguably misguided, Nuechterlein said, pointing to ISP tolling as not necessarily anti-consumer just because money flows from content delivery networks to ISPs. The notion of a gatekeeper is problematic because it assumes any ISP has some kind of "special power" regardless of its size or the competitiveness of the market in which it operates, he said. Nuechterlein said he hopes to "hear less" about the First Amendment -- an argument brought by some critics of the FCC (see 1510060040). "The First Amendment is misplaced in this context," and ISPs raising it as an argument "tends to be a conversation stopper," he said. "A lot of nuance gets lost." But he said one issue that likely will be more in the regulatory forefront in coming years is data caps and "zero rating" -- with ISPs not counting selected streams against a customer's data caps. Concerns have been voiced about ISPs using zero rating to discriminate against unaffiliated over-the-top providers (OTTs), he said. Focus on market share similarly "is probably wrong" because a bigger issue is how a company is positioned to capture incoming customers, said Christopher Yoo, Chestnut professor, University of Pennsylvania Law School.

Meanwhile, a good long-term regulatory change for the broadcast TV market would be phasing out compulsory copyright licensing, so "the more baroque regime" of multichannel video programming distribution/broadcast rules are brought in line with the rules governing MVPD dealings with non-broadcast content, Nuechterlein said.

The only video regulation issues with which Wall Street is concerned deals with retransmission consent and broadband pricing, said Jason Bazinet, Citi managing director. "The fear in both cases is the government will regulate rates," said Marci Ryvicker, managing director, Wells Fargo Securities.

Fostering competition and antitrust concerns remain foremost in looking at any regulatory issue, said William Baer, assistant attorney general-Antitrust Division. The control cable companies have over the broadband pipe and what that could mean for OTT competition is why regulators took a tough stance against the now-abandoned Comcast/Time Warner Cable merger plan, given the risk of that merged company having "too much control and too few competitors" in both video and broadband, Baer said. That potential was "a classic antitrust concern," because it could stifle both new OTT competition and new fiber overbuilding because there would be fewer sources for investment in that, he said. Beyond concerns about consumer protection and artificial barriers to competition, the FCC looks at such non-economic issues as promoting localism in broadcast TV and "the ecosystem in which ... markets exist," such as the relationship between the video and broadband markets, Sallet said.

On the issue of wireless broadband as a legitimate competitor for fixed broadband, Nuechterlein said the point where it becomes a viable substitute could mark one of the next major shifts in regulatory purpose. "We don't have the spectrum -- it's too clogged, too costly," Baer said. "It's not today or in the near future an adequate substitute." Until there are sizable numbers of consumers cutting their landlines to go to wireless broadband, it won't be considered a substitute, Nuechterlein said. "There are lots of interesting things engineers can do [but] we're not there yet," he said. Wireless broadband also remains uncompetitive in pricing, Sallet said.

Data suggest most media companies -- but not Disney -- would be financially hurt if they put all their content online, Bazinet said, recapping Citi research released last month (see 1509180036). The analysis points to incentives for media companies to "break ranks" on the cable bundle, though that would perhaps kick off a self-destructing sequence of more consumers cutting cords, and thus more breaking of ranks, he said. "No one is going to proactively do this, but the incentives (to stay in a bundle) are not uniform," he said. However, with there still being roughly 100 million pay-TV households -- and cable capturing about 53 million of those -- big changes in video consumption will take time, and cord cutters and cord nevers will remain for now "the exception, not the rule," Wells Fargo's Ryvicker said. Media companies would be well served by shutting down their small, lesser-watched networks and investing in their "franchise brands," she said.

For now, media company consolidation is unlikely because no one has shown that larger media companies actually get advantageous leverage over distributors that would bend the cost curve, Bazinet said. Meanwhile, the risk is overpaying if the cable bundle unravels and valuations subsequently drop, he said.

Production costs for movies and TV have plummeted, leading to increasing amounts of content, and that paired with the booming OTT distribution options mean "a golden age" of production and distribution, said Joel Waldfogel, the Kappel Chair in Applied Economics, University of Minnesota. But the industry still faces such issues as the relatively closed Chinese market, the possibility of distribution platform bottlenecks, and the lack of good publicly available data on the inner workings of, for example, the online video distribution industry, he said.