August 5, 2014
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?