Broadband Cable Association of Pennsylvania

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May 15, 2014

No telephone or cable company will win a popularity contest. Though these firms install the wires, cables and antennas that bring the wonders of the Internet into the home, customers revile their "provider." Once upon a time "the telephone company" - when there was only one - was the most admired public utility, but now some people think even the government could make things better.

The Federal Communications Commission on Thursday will vote on a proposal to have administration regulators step in to compel the Internet to be "more open." This goes by the name of "net neutrality," but it's actually a battle of billion-dollar companies trying to get a competitive advantage. "Content providers" such as Google, Facebook and Netflix face telecommunications companies such as AT&T, Comcast and Verizon that deliver that content to consumers.

Accounting for more than a third of all Internet traffic, Netflix is at the center of the dispute. So many customers are watching programs like "House of Cards" that Internet service providers are pushed beyond their ability and capacity to deliver the video streams. Some Internet providers have declined to increase capacity to meet the rising demand, resulting in more Netflix viewers getting the dreaded screen message: "Buffering." That's what FCC Chairman Tom Wheeler wants to eliminate with net neutrality regulations, which would order Internet providers to deliver all content equally. For his rules to have teeth, he would put Internet providers in the "common carrier" regulatory category to enable the FCC to tell Internet service providers what they can and cannot do.

Punishing cable companies has populist appeal - "give 'em what they deserve" - but it's nevertheless a bad idea. The free market is capable of punishing companies that mistreat customers. Mr. Wheeler doesn't have the authority now to do what he wants to do. Congress has been clear since the 1990s that it doesn't want the government meddling with the Internet. The hands-off approach is precisely what has allowed Internet entrepreneurs to turn simple websites into billion-dollar enterprises.

The U.S. Court of Appeals for the D.C. Circuit said so in January with its Verizon v. FCC ruling on the issue of net neutrality. "We think it obvious," the judges said, "that the Commission would violate the Communications Act were it to regulate broadband providers as common carriers." If the commission approves Mr. Wheeler's proposal to do what Congress and the courts say it can't do, there will be yet another futile round of court hearings in which expensive lawyers will be the only winners.

In the wake of the D.C. Circuit ruling, Netflix made agreements with Internet providers such as Cablevision, under which Netflix furnishes its own equipment to relieve the strain and ensure that customers get stutter-free video. It has further agreed to pay intransigent companies, such as Comcast, to buy better service for its customers.

Netflix obviously would prefer that the government mandate free carriage of its product in the name of net neutrality. What business wouldn't want that kind of "neutrality?" Customer service, or lack of it, and taxes and fees is what makes telephone and cable companies almost as popular as the latest virus from Africa. Many of these costs are imposed by the FCC. There's little incentive to provide good service because most of these companies are monopolies through cable-franchise agreements with local governments. Government regulation is what gave us the dilemma, and more red tape will only make it worse. Washington Times editorial; more from Washington Post and New York Times

With a deal between AT&T and DirecTV possibly nearing the finish line, Dish Network may be the odd man out as pay-TV companies look to consolidate.

Cable and satellite providers are moving to combine forces amid an exodus of video subscribers, many of whom are cutting the cord and using video streaming websites like Netflix and Hulu. The thirteen largest multi-channel video providers booked an annual decline in video customers for the first time in 2013, according to Leichtman Research Group. Comcast saw 26 consecutive quarters of subscriber losses until the fourth quarter of last year.

In February, Comcast sent a jolt through the industry when it unveiled an agreement to pay $45 billion for Time Warner Cable, fueling anticipation for a new round of telecom mergers. Seeking to assuage regulatory concerns, Comcast subsequently detailed its plans to sell 1.4 million subscribers to Charter Communications for $7.3 million. The largest U.S. cable provider also said it will spin off another 2.5 million customers into a new company if its deal to buy No. 2 Time Warner Cable is approved.

A merger between DirecTV and Dish, the nation's two major satellite TV companies, has long been the subject of speculation. But multiple news reports say AT&T is now closing in on an agreement to buy DirecTV for around $50 billion, a move analysts say would represent a strategic gamble by the wireless carrier. So where does that leave Dish in the consolidation game? "High and dry," said Craig Moffett, a senior research analyst at MoffettNathanson. "Dish would be left with very few attractive options."

Potential opportunities for Dish to jump into the fray can be found in both the TV and mobile industries, given the company's large cache of wireless spectrum. There's also a growing appetite within the industry for quad-play packages, or bundles of TV, phone, Internet and mobile service. As a result, some analysts wonder if Dish is a better target for AT&T. Talk of the DirecTV negotiations may be part of a negotiating ploy to "smoke out" Dish, Macquarie Capital senior analyst Amy Yong noted. However, government officials could ultimately balk at seeing AT&T and Dish combine their spectrum holdings. "What we don't know is how regulators would view AT&T and Dish coming together," Yong said.

During a conference call last week to discuss the company's first-quarter earnings, Dish chairman Charlie Ergen seemed unconcerned over the rapid deal-making this year. He suggested AT&T and other companies "would be crazy not to look at DirecTV." "I wasn't a very good poker player, but when a bunch of drunken fools were throwing money around, occasionally I was able to pick up a pot at the end of the day," Ergen explained, saying he "always felt it was better just to sit back and watch them go at it." A combination of DirecTV and Dish clearly presents the best opportunity for synergies, Yong said, whereas AT&T's bid to take over DirecTV is more about strategic opportunities.

If a merger with DirecTV comes off the table, Dish may have to take control of its own destiny. Non-traditional buyers like Google and Amazon.com could make a play for the second-largest satellite TV company, but Moffett sees the odds as extremely low. "Dish would then have to become an acquirer, not a seller," said Moffett, who named T-Mobile as a likely target. Last year, Dish engaged in a bidding war for Sprint, eventually losing to Japan's Softbank. In recent months, Sprint was said to be gauging how regulators would handle an acquisition of rival T-Mobile Antitrust regulators thwarted AT&T's proposed acquisition of T-Mobile in 2011.

Despite a Sprint deal for T-Mobile receiving skepticism in D.C., Sprint chairman Masayoshi Son publicly said the company has to "give it a shot." Ergen said that while Dish would be interested in discussing various M&A scenarios, the Englewood, Colorado-based company he founded is unlikely to outbid AT&T for DirecTV, or Sprint for T-Mobile. A Dish spokesperson declined to comment on speculation over possible deals involving Dish. When asked about the merits of a DirecTV acquisition, Yong said AT&T is hoping to gain more scale for its TV service and acquire programming rights that trump those held by Dish. DirecTV also has a stronger consumer brand.

Moffett believes the reported deal makes little sense for AT&T, since satellite TV has "clearly peaked" in the U.S. AT&T has about 5.7 million U-verse TV customers, compared to 11 million high-speed broadband users. DirecTV ended the first quarter with 20.27 million U.S. subscribers, up from 19.97 million two years ago. Dish has 14.1 million TV subscribers and 489,000 customers using its broadband service.

Perhaps spurred on by the prospect of a combined Comcast and Time Warner Cable, AT&T hopes a DirecTV acquisition can make the company more competitive against cable rivals, in part by moving its TV customers onto DirecTV's satellite service. Bringing DirecTV into the fold would also boost cash flow to support AT&T's hefty dividend. "The question is why AT&T would decide now is the time to buy into the satellite market," Moffett said. On the plus side, AT&T's potential acquisition would likely face less scrutiny from regulators than a deal for Dish or a merger between the two satellite TV companies. About one-third of DirecTV's subscribers already have no other options for traditional video service. The telecom industry's consolidation efforts this year are creating the "perfect storm for all of these M&A scenarios to get tested by the FCC," Yong said. Fox Business News

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