Broadband Cable Association of Pennsylvania

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March 24, 2014

Apple Inc. is in talks with Comcast Corp. about teaming up for a streaming-television service that would use an Apple set-top box and get special treatment on Comcast's cables to ensure it bypasses congestion on the Web, people familiar with the matter say.

The discussions between the world's most valuable company and the nation's largest cable provider are still in early stages and many hurdles remain. But the deal, if sealed, would mark a new level of cooperation and integration between a technology company and a cable provider to modernize TV viewing. Apple's intention is to allow users to stream live and on-demand TV programming and digital-video recordings stored in the "cloud," effectively taking the place of a traditional cable set-top box.

Apple would benefit from a cable-company partner because it wants the new TV service's traffic to be separated from public Internet traffic over the "last mile"-the portion of a cable operator's pipes that connect to customers' homes, the people familiar with the matter say. That stretch of the Internet tends to get clogged when too many users in a region try to access too much bandwidth at the same time. Apple's goal would be to ensure users don't see hiccups in the service or buffering that can take place while streaming Web video, making its video the same quality as Comcast's TV transmissions to normal set-top boxes.

While devices such as Microsoft Corp.'s Xbox gaming console and Roku Inc.'s set-top box have made some inroads in the TV industry, none offer the kind of fully formed TV service, with the guarantee of network quality, that Apple desires. Apple has spent several years exploring various avenues to enter TV, but it has been unable thus far to find business models that media companies and cable providers find appealing.

Getting the support of Comcast would give Apple's plans a big boost. The companies share a common goal: advancing set-top box technology so that TV more closely resembles the easy-to-use apps and streaming-video services to which consumers are growing accustomed. Innovation is becoming a high priority for content-owners and operators amid pay-TV subscriber losses and fears that a younger generation of consumers will forgo paying for TV altogether. Apple and Comcast aren't close to an agreement, said one person familiar with the talks. Delivering the service quality Apple envisions would require Comcast to make significant investments in network equipment and other back-office technology, according to people familiar with Comcast's thinking. The companies also differ on how deep a relationship Apple should have with Comcast's customers. Apple has proposed that users would sign on to the new device using Apple login IDs, and it is interested in controlling customer data, the people familiar with the matter said. Apple also has asked for a cut of the monthly subscription fees paid by customers, these people said.

Comcast wants to retain significant control over the relationship with customers and the data. Furthermore, Apple must acquire significant TV programming rights from media companies, one of the people said. Comcast would want to ensure that the price Apple has to pay to acquire rights wouldn't cause the service to be priced higher than traditional pay-TV service, this person said. Apple has had discussions since at least mid-2012 with Time Warner Cable Inc., the No. 2 operator, people familiar with the matter said. Those talks, known internally at Time Warner Cable as "Project Jupiter," came to a standstill when the cable operator became a takeover target, the people said. Comcast in February agreed to acquire Time Warner Cable for $45 billion, a deal regulators are reviewing that would give Comcast a total of 30 million U.S. customers, after proposed divestitures.

Under the plan Apple proposed to Comcast, Apple's video streams would be treated as a "managed service" traveling in Internet protocol format-similar to cable video-on-demand or phone service. Those services travel on a special portion of the cable pipe that is separate from the more congested portion reserved for public Internet access. People familiar with the matter said that while Apple would like a separate "flow" for its video traffic, it isn't asking for its traffic to be prioritized over other Internet-based services. Those distinctions are important because of merger conditions Comcast agreed to as part of its 2011 acquisition of NBCUniversal. Those "net-neutrality" restrictions, which will be in place through 2018, say Comcast cannot "unreasonably discriminate" in how it transmits network traffic.

The Federal Communications Commission is in the process of drafting net-neutrality rules for the broadband industry after the U.S. Court of Appeals for the District of Columbia in January tossed out an earlier set of regulations the agency had in place. The FCC has signaled that its new rules will prevent Internet service providers from blocking or slowing down access to Web content providers that don't pay a toll. It isn't clear what approach the FCC will take to a situation in which a provider such as Apple wants enhanced treatment for a cloud-based service in partnership with an operator. The FCC also could consider net-neutrality proposals as part of its review of the Comcast-Time Warner Cable deal.

Under the FCC rules the court struck down, broadband providers were allowed to treat managed services differently from public Internet traffic. The agency noted the potential risks, however, if broadband providers invest too much in specialized last-mile services but "constrict or fail to continue expanding network capacity" for the public Internet. Comcast could see value forming a partnership with Apple to add and retain customers. In addition, the Apple device likely would be sold at retail to customers rather than leased through the cable operator like a traditional set-top box-something that could reduce Comcast's capital expenditures over time, said one person familiar with the talks.

At the same time, though, Comcast has been aggressively investing in and deploying its own Internet-connected set-top box and guide-dubbed "X1"- that far eclipses capabilities of its old boxes. To date, Comcast has limited the managed-video services it offers only to its own cable TV services. Apple's interest in separating its streaming-TV service from ordinary Web traffic highlights growing concerns in the media industry about the Internet's ability to handle the increasing consumer demand for online video.

Netflix Inc. recently agreed to pay Comcast to directly connect to the cable provider's network to improve the quality of its streaming-video service. That "interconnection" deal was different from Apple's proposed approach in that it didn't address how Netflix's traffic would be treated over the "last mile" to households. The arrangement Apple is seeking could give it a leg up over other new entrants vying to offer online versions of pay-television service, such as Sony Corp., whose traffic would travel over the public Internet. Anticipation built about a breakthrough TV offering from Apple after founder Steve Jobs told biographer Walter Isaacson three years ago that he "finally cracked" a way to revamp the television. But Apple's only television product since then has been Apple TV, which offers users access to iTunes movies on the larger screen of a television as well as streaming video from Netflix, Hulu and other online services.

There is some precedent to the kind of deal Apple is seeking with Comcast. The cable operator has a years-old relationship with TiVo Inc., the DVR pioneer, which allows subscribers to receive Comcast TV service through TiVo boxes they buy at retail stores and, in some markets, with certain newer boxes access Comcast's on-demand library. Apple's proposal is different than TiVo's in that it has sought a share of customer fees and a deeper relationship with customers and content owners. Wall Street Journal

A top AT&T Inc. executive blasted Netflix Inc.'s argument that Internet service providers should link to its network free of charge, calling it an "arrogant proposition" that unfairly tries to spread around the streaming video company's cost of doing business. The comments came as debates over who should pay for rising levels of online video traffic have broken out into the open, shining a light on little-known commercial details of how the Internet works.

At issue now are the terms by which big online companies such as Netflix and Google Inc. connect to the networks owned by companies such as Comcast Corp., AT&T and Verizon Communications Inc. that provide Internet access to households. Netflix Chief Executive Reed Hastings stoked the flames in a blog post Thursday, accusing the largest Internet service providers of demanding unfair tolls for reasonable access to their networks and hinting that the Federal Communications Commission should step in with stronger rules if they don't agree to upgrade their links fast enough to handle the traffic.

Jim Cicconi, AT&T's senior vice president for external and legislative affairs, fired back in a length blog post Friday. "Mr. Hastings' arrogant proposition is that everyone else should pay but Netflix," he said. "That may be a nice deal if he can get it. But it's not how the Internet, or telecommunication for that matter, has ever worked." The FCC is considering new rules for enforcing access to the Internet after in January losing a major court challenge over so-called net neutrality rules brought by Verizon. Companies on both sides of the debate have pumped up their rhetoric this week, as a suggested window for public comments on the new rules with the commission nears a close.

The commission last month asked network operators to state their case in writing before government regulators start the process of drafting new rules. The process could take months to finish. Instead of focusing on the details of the old regulations, which barred broadband providers from blocking certain traffic, arguments from companies such as AT&T, Netflix, Level 3 Communications Inc. and Cogent Communications Group Inc. suggested the debate will now revolve around the "peering" connections they make with each other, a largely unregulated field.

A Verizon spokesman referred back to the company's own filing with the FCC, which warned the government to avoid "prescriptive rules aimed at preventing theoretical problems." A Comcast spokesman declined to comment, referring to a statement from Executive Vice President David Cohen that argued "the open Internet rules never were designed to deal with peering and Internet interconnection." The comments are revealing the outlines of commercial terms that not long ago were swathed in secrecy. Long-distance Internet carrier Level 3, for instance, criticized broadband providers for demanding fees that cost more per bit than it costs to send similar traffic over the "public" Internet. Level 3 argued the higher costs of reaching Internet service providers' customers represents an abuse of market power. "Said another way, some ISPs want to charge an access fee for access to their little corner of the Internet (i.e. their customers) that frequently equals or exceeds the fees Level 3 charges its transit customers to reach every destination on the Internet," Level 3 said in its filing.

Cogent's 39-page argument focused on a perceived lack of transparency about the way networks agree to hook up to each other. The company suggested regulators should adopt more explicit rules requiring Internet companies to disclose network speeds, which might make it easier for the public to pinpoint the cause of slow service while avoiding the business disputes that often cause congestion. It was once uncommon for Internet companies to release detailed network data that could run afoul of nondisclosure agreements. The filings from Cogent and Level 3, however, revealed explicit signs of congestion with networks downstream from them, showing how eager those companies are to make their case in public.

Netflix, meanwhile, publicly acknowledged it agreed to pay Comcast to link its network directly to the cable company's 20 million subscribers instead of paying middlemen such as Cogent to carry that video. Many Internet companies have done the same thing, but Netflix engineers had resisted paying directly for interconnection. Netflix on Friday continued say the practice was anticompetitive, but the company conceded it would be willing "in the near term" to pay broadband providers for the links needed to support high-quality video. Wall Street Journal

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