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August 5, 2014

Tom Wheeler

Chairman, Federal Communications Commission

 445 12th Street SW,

Washington, DC 20554

 

Re: Internet Neutrality including the merger of Comcast and Time Warner Cable

 

Dear Commissioner Wheeler,

 

I am Chairman of GoDigital Media, a venture capital firm making early stage investments in companies solving problems in the media industries - usually by applying technology.  I am writing this letter to share with you the opinions of myself and my colleagues on the issues before the FCC with regards to Net Neutrality.

Internet Neutrality is the foremost issue facing the media industries. I also believe it is also a paramount issue in the economic growth or slide of our nation. With the premise of the national debt being that we will inflate the debt away with productivity growth, the right internet regulations are critical to the continued success of our nation.

 

Decades ago the US made the policy decision to allow private enterprise to build our public network infrastructure. This is an important threshold decision because investors are motivated by a return on their investment. This is as opposed to the government funding nationwide public network infrastructure, in which case no one would have a property right in it. However, since it has been privately financed:

 

Assertion #1: Free Speech Needs to be Balanced with Private Property Rights

We live in an information economy. Our global competitiveness in commerce and in education depends on being competitive with our internet infrastructure. Case in point, Verizon spent about thirty (30) billion dollars and ten years paving a nationwide network of fiber optic roads to the home. It brought blazing fast fiber all the way into the bedroom. I know - I oversaw a small part of Verizon's implementation in Santa Monica, CA.

 

As I write this I'm sitting in a hotel room in Seoul, South Korea with 100mb internet. I'm using a Lenovo laptop, a Samsung phone, and watching an LG television. Do you remember the days when RCA was an American company and actually made TV's? Do you remember when Lenovo laptops were IBM? When everyone had Motorola Razr phones? Verizon paved thousands of roads. Just like the toll roads we often drive on. The tolls pay back the bonds used to finance the construction of the road - with interest for a return on the investment. Would it be reasonable to allow all cars to drive on a toll road without paying a toll?

 

This is what Amazon, Google, Hulu, Netflix and any other IPTV/OTT applications have historically done when they deliver content to the consumer at home.  The application is the new everything. It is the new TV channel, CD, and DVD.  Companies like Verizon make approximately 2/3 of their revenue from selling the television bundle. When companies like those listed previously can deliver a substitutional content offer straight to the consumer's television on the internet side of the pipe without having the cost structure of building and maintaining the network infrastructure they can be more competitive price wise.

 

Production is risky. Most shows fail to find enough audience to justify production costs on their own.  The secret of the television business model, which is the 120 billion dollar-a-year spine of the 250 billion plus dollar-a-year media industry in the United States is that through the mandatory TV channel bundle we all pay for the content we don't watch. Let me say that again, we all pay for the content we don't watch. ESPN gets around five dollars per month from every cable household in America regardless of whether some homes watch even one minute within the month. This guaranteed income allows ESPN to manage the risks of rights acquisition and production. It has a positive trickle-down effect on the revenues of rights-holders earlier in the value chain.

 

Without this risk shifting methodology and with networks delivered ala-carte the following would be the results: (i) a well known cable network that receives two dollars ($2) per cable household at seventy million (70MM) households would make approximately $1.68 billion dollars per year in revenue from which they can support their cost structure and make a return on their investors money.  Now, assuming in an unbundled world that only 10% of cable households watch that network on a monthly basis, they would have to charge $20 per month to generate the same revenue.

 

According to a 2013 PriceWaterhouseCoopers study presented at CES 2014, the average consumer watches thirteen channels per month.  What is the result of ordering 13 channels in an ala carte paradigm where channels are $10 to $20 per month? The average consumer ends up spending $130 to $260 per month for thirteen channels of television content.  Not only is this paradigm more expensive than the standard television bundle, but they have only 13 channels instead of 550! If they keep their current spend, they have around 5 channels.

 

So the consumer is worse off. They pay more and get less. There is less production of new content. With less demand for skilled labor, wages shrink. To boot, companies like Verizon and Comcast have little incentive to invest in more robust networks leading to our infrastructure falling behind the rest of the world.  As a result commerce and education suffer throwing the country further into a negative feedback loop.

 

 

Possible Solutions: Pervasive Federal Regulation to Open Up ISP Competition

Today there is often very little competition within a geographic market for internet service. When I lived in Orange County, CA I had one cable provider and one phone company. I surmise part of the reason why is due to local municipal regulation of the infrastructure laid in that jurisdiction. Time Warner has a virtual monopoly from the city. So if I wanted cable television, I had to get it from Time Warner. 

 

 

Now imagine a single clear and concise set of Federal regulations that leverage the commerce clause to pre-empt local regulations to open up the internet service market to competition. These Federal regulations would provide that internet service is to be a competitive market and that any fixed line or federally licensed wireless operator can use local easements to build infrastructure to the home - subject to local approval of where the pipes are laid on a most favored nations basis. We'd have multiple fixed line cable, telco, and fiber providers and likely high speed wireless providers like the proposed Google Blimps.  Local and regional companies could build last mile networks and then pay backhaul providers to connect to the internet at large. The industry would balloon. Access speeds would increase. Competition would lower price to the consumer. More content would be produced.

 

In a Private Internet environment, Time Warner would not have to allow Netflix to reach its consumers. However, if I want Netflix content I can drop Time Warner and get it through another internet service provider. Chances are, Time Warner will carry Netflix. It will become a part of the bundle of TV channels and the two companies will work out an economic relationship. Everyone wins. The consumer gets vastly more and higher quality content, the cable and telco companies are incentivized to invest in infrastructure, the media companies maintain their revenues so they can continue to take risks on high quality programming, and the jobs created throughout the media value chain are maintained keeping our nation economically on track.

 

The little guys survive in this proposed environment as well. The industry or a government agency could set "pay by the drink" rates for data usage on the part of content senders (the platforms and applications) much like they have for mechanical and public performance royalties with music copyrights.  With a consent decree the internet data equivalent of performing rights societies could be born to collectively bargain and set rates between data broadcasters and infrastructure owners.  Alternatively a baseline rate, such as the mechanical reproduction rate for music compositions administered by the Copyright Royalty Board, could be set and reviewed from time to time by a committee.

 

Hardware technology is now largely the domain of other nations. Do we want the information economy to be led by others as well?

 

Best Regards,

 

 

Jason Peterson

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GoDigital Chairman Jason Peterson, who oversees five media/tech companies, warns in a letter sent today to FCC Chairman Tom Wheeler of the negative consequences to both consumers and US business if issues on Net Neutrality are not quickly solved with a “balanced” approach. 

 “Net Neutrality is not just the foremost issue facing the media industries, the right internet regulations are paramount to the economic growth of our nation,” says Peterson, responsible for the formation of GoDigital, ContentBridge, AdShare, Cinq Music and Media Aggregators. “Decades ago the US made the decision to let private enterprise build our public network infrastructure. Free speech needs to be balanced with private property rights. Long ago, this country lost the battle for hardware supremacy, it’s now the domain of other nations. Do we want the information economy to be led by others as well?”

 Paying for Unwanted Content Is Good

Peterson’s letter included discussion on the controversial topic of “bundling” or, making people pay for programming they don’t want. Peterson sees this as a necessary evil. “We all pay for content we don’t want, because production is risky. Guaranteed income allows media outlets like ESPN to manage the risks of rights acquisition and production. It has a positive effect of the revenues of rights-holders all through the value chain.”

Ala Carte Paradigm Is Bad for Business

“According to PriceWaterhouseCoopers, the average consumer only watches 13 channels,” Peterson states in his letter. “Ordering 13 channels in an ala carte paradigm would require channels to charge $5-20 per month because only those who ‘actually’ watch the channel are paying in, as opposed to everyone with cable. This would result in consumers spending $130-260 per month for content. So the consumer would be worse off. They will have 13 channels to watch instead of 550. They pay more and get less. This spreads to the rest of the economy through less production of content, meaning less demand for skilled labor and shrinking wages. To boot, companies like Verizon and Comcast have little incentive to invest in advancing more robust networks.”

 Proposed Environment

Peterson believes the solution to open up competition for internet service is a clear and concise set of Federal regulations that leverage the commerce clause to pre-empt local regulations. These new FCC regulations would provide that internet service to be a competitive market and that any fixed line or federally licensed wireless operator can use local easements to build infrastructure to the home. “Local and regional companies could build “last mile” networks and then pay backhaul providers to connect to the internet at large,” says Peterson. “The industry would balloon and access speeds would increase.”

 Public/Private Concerns Need Balance by FCC

Peterson foresees a future where the consumer gets better content, the cable and telco companies are incentivized to invest in infrastructure, the media companies maintain their revenues and jobs created throughout the media chain help to keep the country economically strong. But only if the FCC acts in a balanced fashion with both private and public concerns in mind. “The little guys can survive in this proposed environment as well,” says Peterson. “The industry or a government agency could set “pay by the drink” data usage rates on the part of content senders (the platforms and applications) much like they have for mechanical and public performance royalties with music copyrights.”

 About GoDigital Media Group:

GoDigital Media Group (“GDMG”) is a media and technology incubator and early stage venture capital fund. Founded in 2005, its portfolio companies are recognized industry leaders in the monetization of music, movie, and television assets. GDMG’s operating businesses include:

Cinq Music – 360 degree distribution, protection, and collection services for recording artists

cinqmusic.com

GoDigital – Full service distribution of over 1500 motion pictures through every window from theaters to nearly 500 million homes around the world on dozens of digital platforms such as iTunes, Amazon, & Netflix

godigital.com | amplifyreleasing.com

 AdShare – Monetization of audience engagement online for over 2.8 million copyrights including an MCN on YouTube with over two billion consumer impressions per month adshare.tv

ContentBridge Systems – A leading provider of digital supply chain solutions and technologies to the media industry

contentbridge.tv

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Ultra High Definition

Wanted: Bigger Pipes.  Less Complexity

 

by Doug Reinart, COO, ContentBridge

 

 

Now home from NAB, we should all expect to see, hear, and read more about the ‘imminent’ arrival of 4K Ultra HD (UHD) in the home.  [Editorial note:  let’s put aside the semantics around “4K”, “2160p” and other related terms for now, and focus on the “consumer grade” UHD variant].  At CES in January, television manufacturers drove UHD to the center of the discussion. For anyone taking in the detailed images and wide color gamut on one of those gorgeous OLED or curved LCD displays, widespread UHD adoption seemed just months away.

 

Of course, that won’t be the case.  Technical and economic factors will extend the mass adoption timetable to late 2018 or 2019.  For perspective, that is a dramatically shorter window (6-7 years from completion of the technical standard) than HD, which took 16 years from technical standard completion (1990) to mass adoption (2006).  Although UHD television manufacturers will put their considerable marketing resources behind UHD, the reality is that the display device is simply the last link in an extended content value chain – the looking glass fed by a vast digital supply chain affected by UHD’s demands.  Much has been written about the technical challenges posed by UHD, but three business issues are worth a closer look.

 

The first issue is bandwidth cost, or more properly, the economics of delivering more data per “unit” of entertainment content.  At 8.3 megapixels, a 4K image has four times the pixel count of an HD image (2.07 megapixels) or twice the line resolution (2160 vs. 1080).  Codec advancements – primarily implementations of the new H.265 High Efficiency Codec standard – will help squeeze the data need somewhat, but will not completely eliminate the increased bandwidth requirement of UHD.  Cable companies and major OTT services like Amazon, iTunes, and Netflix may absorb the increased bandwidth cost, or establish new UHD pricing tiers to offset the cost.  Smaller services may struggle to make UHD-grade content delivery a viable business opportunity.

 

The second issue lies at the far end of the chain occupied by the studios and content distributors.  Today, their servicing libraries are not suitable for UHD sales.  Mezzanine files may have sufficient resolution, but they most likely do not support the larger UHD color gamut defined by Rec. 2020.   Content owners will have to make intelligent choices about which titles they elect to re-master for full UHD compliance.

 

Lastly, content owners recognize another reality:  UHD will not suddenly and completely supplant existing content distribution standards.  In fact, good old full frame SD content will still be kicking long after UHD has its day in consumers’ homes.  To content owners, what 4K really represents is an additional ‘SKU’ requiring a fresh set of rights and avails, artwork, pricing, and metadata and delivery procedures – yet another example of digital increasing supply chain complexity and cost.

 

ContentBridge lives at the intersection of content owners, digital retailers, and aggregators.  We believe that truly effective automation is the solution to ever growing digital supply chain complexity.   So while the bandwidth-related economics of higher-resolution content distribution and the costs of re-mastering titles will be a factor in UHD roll-out, we are confident that added supply chain complexity won’t impair the UHD march forward.

 

Which is good, because we haven’t had a chance to discuss 8K UHD yet…

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