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'Future of Video' Hearing to Focus On Online Competition, Regulation

Tuesday, July 3, 2012
By Paul Barbagallo

Representatives from the pay-TV industry, including Netflix Inc., will face off June 27 at a hearing before the House Subcommittee on Communications, Technology and the Internet, in what is expected to feature clashes over how competitive the nascent online video market is and whether new laws are needed to ensure a level playing field.

“Over-the-top” video service, in which companies, like Netflix, use the internet to bypass traditional pay-for-TV control points and deliver programming “over the top,” via a consumer's broadband connection, rather than on existing cable or satellite systems, has been long feared in the cable business, leading many cable operators to launch their own web-based TV services.

The hearing, among other things, will mark the first opportunity for lawmakers to question a representative from the cable industry since the Justice Department reportedly began investigating whether cable operators are trying to stifle competition for online video services.

Cable Industry Appraisal.
Michael Powell, the president of the National Cable and Telecommunications Association, who will testify at the hearing June 27, said such claims are “flatly wrong.”

“The largest multichannel video subscriber service, it should be noted, is Netflix,” as measured by the number of subscribers, Powell said during a June 26 briefing for reporters. “Comcast [Corp.] is next followed by the two satellite companies [DISH and DirecTV], which were not even in existence in the prior age.”

Powell said that despite suggestions of cable's market power, his association's member companies have had flat growth and in some cases experienced “modest declines” since 1996, when Congress last updated the Communications Act.

“That competitive rigor is quite real, and that's before we start having a conversation about over-the-top video,” Powell said.

Responding to a question about the long-term viability of the traditional model of packaging broadcast TV channels (ABC, CBS, FOX, NBC) together with hundreds of cable channels (like ESPN and HBO), Powell noted that cable providers will innovate and experiment and evolve, but all the while will still sell a broadband internet service.

“Both [Neflix and Roku, which will testify at the June 27 hearing] take an enormous amount of credit for stimulating the growth of broadband and the purchasing of higher tiers,” Powell said. “Well, who sells those higher tiers? We do. And I always am a little frustrated by the suggestion that an enormous amount of consumption running over a broadband pipe is an anathema to our business. If it were, Time Warner Cable wouldn't be running a television ad right now featuring Netflix. So at best, the relationship is quite a bit more conflicted than it seems on the surface. And this sort of simple narrative of 'we have a video business to protect … so we're going to use leverage to drive you to our online video business' is not a fair valuation of our incentives.”

Pricing Policies, Data Caps.
The DOJ's reported exploration of the complex and ever-changing business of entertainment distribution has sparked new debate about cable providers' tiered-pricing policies and newly imposed data caps.

Commenting on the issue of usage-based pricing, Powell said that 1 percent of “heavy broadband users” probably account for 42 percent or more of a provider's network consumption, and that cable operators should be free to experiment with different business models.

“Heavier users who cause more cost should pay more than lighter users should pay who cause less cost. It's really that simple,” Powell said. “Most consumption services with fixed costs work that way.”

“The reality is--and I think we should do a better job telling this story--this is about how to fairly allocate the price of the network among users who have different use and demand profiles over time. And we don't know the answer yet,” he added.

But companies like Netflix are concerned about the shift to data caps and usage-based billing.

Comcast, for one, announced in May that it plans to raise its residential internet service data cap by 20 percent as it tests different pricing models over the next few months in two metropolitan markets.

Motivation for Anticompetitive Conduct Seen.
“As traditional platforms and networks move to distribute their programming in an on-demand fashion over the internet, they are beginning to compete more directly with pure-play or 'over-the-top' Internet video providers like Netflix. As this trend continues, issues such as discriminatory data usage caps and IP interconnection must be examined with a much more discerning eye,” David Hyman, general counsel for Netflix, said in his prepared testimony to the committee, made available June 26.

In sum, Hyman said that limited competition for wireline broadband internet service coupled with a “strong desire to protect a legacy video distribution business” gives cable and satellite providers the means and motivation to engage in anticompetitive behavior.

“Add to this mix a regulatory and legislative framework largely crafted before the modern Internet era and you have the makings for confusion and gamesmanship,” he added.

According to the company, Netflix delivers close to a billion hours of streaming movies and TV shows to its consumers every month.

Also testifying at the June 27 hearing will be Gigi Sohn, president of the public-interest group Public Knowledge.

In her testimony, Sohn notes that the current pay-TV “MVPD” model, short for multichannel video programming distributor model, can be quite lucrative for some companies because it “forces viewers to pay for programming they don't want,” a fact not lost on a company like Netflix.

Public Interest Group: Make Cable More Flexible.
“Even some popular programmers like Time Warner, who have no direct stake in the [Time Warner Cable] cable business, find it more profitable to give exclusives to MVPDs than to make their programming available to willing buyers online,” Sohn said in her prepared testimony. “This is because people pay for large bundles of cable channels, some of which are very expensive, even if they only want to watch a few. Every cable subscriber has to pay for broadcast channels, even though they are available over the air for free. This leads to high prices that just keep getting higher. The result of all of this is a loss for consumers.”

Sohn said that one way to fix the situation would be to eliminate the rules requiring cable systems to carry broadcast TV stations as part of their basic tier. To Sohn, consumers should be able to choose what they pay for.

“While video providers should be free to bundle content and should not be required to offer everything 'a la carte,' it seems logical that increased competition from online providers would force today's providers to begin offering their customers more flexibility,” Sohn said.


For witness' testimony, visit http://energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=9613.

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