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CHAPTER V - Critical Issues

Against a backdrop of trends in the video industry, participants looked at issues facing industry and policymakers in four areas: distribution, production of content, devices and consumers. They also discussed two issues that may impact video: data caps and usage-based pricing.

Distribution: The Uncertain Prospects for Network Upgrade

The discussion on the means of distributing video content concentrated on the broadband network—its quality and the prospects for upgrading the network’s speed and capacity. In an era when channel scarcity is not a problem, the main issue facing policymakers is how to create an environment in which broadband platform providers have incentives to continually invest in their networks and meet an ever-widening range of demands and diversity of uses.

Network platforms that enable video are both diverse and widely available. Broadcast television is available to 99 percent of Americans and 98 percent of them watch programming on broadcast networks. For the MVPD market, networks pass 100 percent of households (including satellite) and 92 percent of households use some form of premium TV. Broadband networks pass more than 95 percent of homes (i.e., at least one wireline network is available to nearly all households in the United States), and 72.4 percent have broadband service. There is reasonable diversity of providers for broadcast and MVPD, and for broadband most homes have at least two wireline options, along with options such as satellite and mobile broadband service providers.

There were differing views on the quality of the current network and prospects for upgrade. For wireline broadband, although most homes have multiple options for service at the FCC’s current universal service standard of 4 Mbps download and 1 Mbps for upload, it is often the case that for high speeds (in excess of 25 Mbps), most consumers only have a choice of one provider: the cable company. However, this is rapidly changing as telcos and others continue to invest in their wireline networks. Although lower levels of broadband speeds are sufficient for most of today’s consumer usage, the “chicken and egg” nature of the broadband investment proposition surfaced. On the one hand, today’s network upgrades carry the risk that consumers will not demand higher speeds to justify those investments; it is not clear what applications will generate sufficient revenue to pay for them. On the other hand, without the availability of higher network capacity, developers may not have the sufficient incentives to develop innovative, new, bandwidth-intensive applications that will put network capacity to use.

The following equation captures how investors evaluate (positively in the formulation below) the prospects for investing in a new broadband network.

C + O < (1-r)R + SB + (-CL), with the terms defined as follows:

C = Capital Expenditures

O = Operating Expenditures

r = Risk

R = Revenues

SB = System Benefits (i.e., the benefits that drive increased revenues outside the communities where the new or incremental investments are made)

CL = Losses Due to Competition

For the investment to occur, the benefits—which are the discounted stream of revenues the network will generate plus the system benefits, which are essentially the external benefits of faster networks that investors may not be able to capture, offset by revenue losses that may arise as competition drives prices down—must exceed the costs (capital plus operating expenses).

Market forces may be sufficient to bring forth investment in new or upgraded networks. At the same time, the uncertain level of risk in projecting future revenue streams, as well as external benefits (e.g., greater effectiveness and efficiency in delivering government or educational services) may tilt the calculation against investment. History suggests that a change in government policy that has affected one or more of the six factors has preceded every significant investment into a new or upgraded communications network.

Given this analysis, Conference participants agreed that a principle for stakeholders going forward should be:

Policy should incent investments to upgrade existing network assets to higher and better uses. More specifically, this means that policy should encourage:

  • Transition of public assets to higher and better uses;
  • Experimentation to enable all platforms to find more efficient means to deliver video faster, cheaper and better; and
  • Movement of content to the most efficient platform(s).

This principle, and its related corollaries, will mean different things when thinking about the upgrade proposition for different players in the broadband and video markets. For broadcasters, this means encouraging the transition to orthogonal frequency-division multiplexing (OFDM), which is a means of digital broadcasting that “has developed into a popular scheme for wideband digital communication whether wireless or over copper wires, used in applications such as digital television and audio broadcasting, wireless networking and broadband internet access.” This improves the efficiency of the use of spectrum for broadcasters and the potential for new revenue streams.

Participants recommended that broadcasters who do not move toward OFDM in an adequate time frame either lose retransmission consent rights or put 5 percent of their revenues into a trust fund for public programming. For public broadcasters, participants recommended that markets with more than one public-broadcasting station consolidate into a single station, with proceeds from the sale of reclaimed spectrum going to a trust fund for public programming.

For telecommunications companies, participants said that a prompt transition to an “all IP” network would improve the investment prospects for network upgrades. If carriers are able to transmit data on an all Internet Protocol (IP) networks and do not have to also support a legacy time division multiplexing (TDM) network, carriers would have more funds available for network investment, as they would not have to support those legacy networks while investing in new networks. This transition entails a significant review of existing regulations, and the discussion did not go into specifics about the regulatory changes that would facilitate the “all IP” goal. However, there was general agreement that the transition to an all IP network without the overhang and expense of operating two parallel networks, over a rapidly approaching time horizon and without speaking to specific regulatory changes, would improve the incentive proposition for network upgrades.

For cable providers, market forces appear to pushing cable companies to invest in technology that increases the speed of existing hybrid fiber coaxial (HFC) plants. Currently, cable companies are rolling out DOCSIS 3.0, which enables theoretical data rates of 160Mbps downstream and 120Mbps upstream.

New entrants to the market face financial and regulatory challenges. Beyond raising capital, the process is inherently local, as entrants have to gain access to rights-of-way to run new plants and deal with local officials on community issues that generally go along with accessing public rights-of-way. Participants suggested that cities be given the latitude to encourage new investment and not have other jurisdictions—state or federal—impose constraints on cities that encourage new investment, so long as the same incentives are open and applicable to all providers.

Distribution networks raise other policy issues beyond the possibilities of upgrades. Interoperability of devices among platforms is one of these issues. From a consumer perspective, it is optimal for a device or application that runs on one platform to be able to function with devices or applications that run on another. This not only is convenient for consumers, it also improves incentives for innovation in the market. Participants believed that the market would provide sufficient incentives to ensure interoperability, but noted that policymakers should nonetheless watch for possible anticompetitive behavior at all levels of the Internet ecosystem.

Equity of access is another issue, and not just whether a sufficient number of Americans have access to or use broadband networks. On network deployment, discussants thought private investment supplemented by the Universal Service Fund for funding investment for hard-to-serve populations would do an adequate job in ensuring that the vast majority of households would have access to broadband. At the same time, especially as wireless increasingly becomes the last-mile solution in some rural areas, stakeholders should pay attention to whether large institutions in rural areas (e.g., government or health care facilities) will have sufficient capacity should the bulk of network investment in rural areas go to wireless. In terms of access for individuals, participants recommended that schools receiving E-rate funds stay open past school hours to provide access for low-income individuals without broadband at home.

Participants also raised a number of issues that go to the end-user experience of video content, which often depends crucially on marketplace rules for distribution. For example, “must carry” rules require cable systems to show local broadcast stations on their cable offerings. There were a variety of viewpoints on this, with some participants saying that the rules add to the diversity of programming, and others saying it is unfair to competitive providers and still others suggesting that “must carry” should apply only to nonprofits and public broadcasting. Yet another notion was that the rules should be done away with as a way to move content to less expensive and more efficient platforms.

As to required content, the presence of so many choices over so many platforms for children’s content means that there is no longer any need to require children’s programming. Similarly, many argue for the elimination of required public, educational and government (PEG) channels. PEG programming can move to video on demand and online availability, though some participants suggested further study of the issue before eliminating PEG outright. For political content, participants thought it made sense to encourage, but not mandate, that political candidates have time set aside on local airwaves and that entities that pay for political ads—on all platforms—disclose their identities to the public.

Competition policy also entered into the discussion over distribution. First, several participants noted that policymakers should monitor vertical integration among content owners and access providers to avoid the potential hazards of exclusive programming arrangements. Second, some participants said that keeping a media ownership rule at the national level makes sense, though the FCC should reexamine the thresholds it uses when deciding whether a broadcaster can own a newspaper in the same market. As newspapers lose readers, some would like to merge with local broadcasters; current FCC rules presume that such combinations are in the public interest in the top 20 markets only, since such large markets support other outlets that can compete with a combined newspaper/broadcast entity. Expanding this list of markets is something participants thought the FCC should consider.

Licensing also entered the picture, with some participants noting that, notwithstanding innovations in the marketplace and changes in the competitive landscape, “content is still king” when it comes to thinking about drivers of competitive advantage. In that context, current practices for the licensing of content raise some concerns. As noted, entrants into the video market often face significant hurdles in obtaining the programming they need to attract consumers. Not only can licensing fees be onerous, some desirable content (such as sports) is locked into long-term contracts. This denies entrants the chance to offer content that appeals to viewers. The rising cost of retransmission consent fees that MVPDs must pay broadcasters is another content issue for entrants into the video market. Although discussants did not reach a consensus on what policymakers should do about program licensing or retransmission consent, there was agreement that examining these issues should be part of a path forward in video regulation.

A final set of issues lent themselves to multi-stakeholder processes to sort out, with participants suggesting this approach over a strong regulatory posture. Rules on decency of content seem dated as platforms for video converge, yet there is an understandable desire to discourage indecent content from finding its way to the screens of children. A multi-stakeholder approach that searches for technological solutions and focuses on increasing consumer awareness and education could empower consumers to take sufficient precautions against the display of indecent content, while loosening rules that may unduly burden broadcasters.

An animating theme for the discussion of video was ensuring the availability of high-quality broadband networks in the United States. Yet participants could not agree on one aspiration: namely, that all network platforms should meet a common standard—one based on the undifferentiated ability to transmit the highest level of video quality generally available in countries that are members of the Organization for Economic Cooperation and Development (OECD). Although several people argued that this goal may be important to demonstrate international competitiveness and efficient spectrum use, others worried that such a goal may encourage inefficient network investment and may not be flexible enough to allow investment to follow the evolution in consumer demand patterns.

Production of Content: Changing Costs Mean New Funding Sources Necessary for Public-Interest Goals

Participants identified the production of high-quality, diverse and local programming as the important goal in thinking about content in the future. Although the legal and business issues in this area are similar to those of the past (along with some new ones, such as data caps), the discussion challenged the notion that technological change is driving down all the costs of producing content. That makes funding, in addition to legal and business issues, the hurdles to overcome to ensure a future with the kind of digital content that society expects and needs.

Diverse video content refers to the variety of programming, news, entertainment and online video vignettes that abound these days. The cost of these different kinds of content varies in expected ways. Commercial entertainment is on the expensive range of the spectrum, and many of the new tech-enabled techniques to produce content (e.g., digital editing, three-dimensional video, production for high-definition video and others) require expensive equipment and talented employees to turn artists’ creativity into entertainment for the market. Notwithstanding technological advances that lower the cost of the electronic tools of the trade and the costs of distribution, quality entertainment is typically on the cutting edge creatively, which corresponds to the high end of the market for electronic tools and the talented workers who put it all together.

Other drivers of cost have to do with, ironically, the proliferation of affordable devices, which allows consumers to enjoy content in a number of different ways. Producers must optimize content to appear on screens of different sizes and resolution. People are also coming to expect content to have the capacity to be personalized to them and appeal to local interests (i.e., hyper-localism). All of these costs may work to counter some of the lower costs enabled by digital production and distribution, whether it is high-quality entertainment or public-affairs programming for a community.

More information about consumers may help offset the rising cost of content. As companies know more about consumer preferences, they can target audiences more effectively. Netflix, for instance, collects granular data about consumers’ viewing habits to guide the company in what new programs to develop.

Intellectual property (IP) is another issue where the rich flow of data creates challenges. The ease of access to digital content can, on the one hand, inspire others to create high-quality digital video that can have commercial and public-service benefits. At the same time, creators expect compensation; there must be enough IP protection to justify the release of content, balanced with strong fair-use protections after release, so such content is part of a video ecosystem that encourages creativity. This requires that there be mechanisms in place to balance sensible, fair use of content with IP protection. Such mechanisms include effectively taking down IP-infringing content under the Digital Millennium Copyright Act (DMCA) and better databases to keep track of rights more effectively—with incentives for copyright holders to register. Finally, there are international issues to consider, such as trade restrictions on the global programming market and cross-border content regulation (e.g., libel, indecency or hate speech). Participants suggested that U.S. content producers should have limited liability for possible infractions to limit their financial exposure and encourage bolder programming.

With cost of developing content remaining substantial and possibly increasing, and complex legal and business issues to solve, participants postulated that the production of quality video will have higher financial and transaction costs in the foreseeable future. This is particularly true for the development of programming that serves as an outlet for diverse voices, as well as for programming that is local and otherwise serves public purposes. Participants therefore explored new mechanisms to fund those categories of content. These included:

  • Tying obligations to government benefits; meaning, for example, that cities that receive federal funding should require public facilities, such as schools or universities, to make their content and facilities available for the production of locally relevant content. Similarly, tax incentives for local video production might also encourage the creation of content that fosters diversity and localism.
  • Exploring new sources of subsidy; for example, universities developing massively open online courses might be a source of funding for content.
  • Broadening uses of existing franchise fees (or other similar local fees) to support local content available on a variety of platforms.
  • Broadening the mission of the Corporation for Public Broadcasting.
  • Using inducement prizes from government or foundations to encourage the creation of local content.

Devices: Possibility of Market Power Calls for Policy-Monitoring

End-user devices are the means by which people experience video and other digital content. In discussing issues that arise in the market for devices, participants defined devices as anything “that is connected to a network and displays (and/or stores and transmits) digital video content.” Front and center in any discussion about devices is the nature of the technology and how it can impact the competitive landscape that businesses face and consumers experience. From the technological perspective, it is possible for businesses to try and reinforce their competitive advantages in the distribution of video by expanding the prevalence of their proprietary operating systems across multiple devices. Someone with a smartphone running on a particular operating system may be reluctant to use a tablet that runs on a different operating system—especially if access video or other types of content on the different devices is not seamless (i.e., if software and content providers have exclusive agreements that tie content to specific software platforms). Additionally, it is possible for content developers to use standards in video so that their content runs only (or, if not exclusively, with costly work-arounds) on particular kinds of devices. At the same time, some participants argued that the opportunity to win customers across different devices and operating systems can encourage innovation and investment, as firms aim to serve customer needs.

This brings competition policy squarely into the discussion of devices in the video market. In addition to the competition issues raised with standards, some participants also argued that there have been historical concerns over the extent of the cable providers’ ability to be able to control the video devices that connect to the network. This could have harmful consequences in two ways: (1) it could stifle innovation in the device field; and (2) it could limit competition in the device field.

More consumer choice would be ideal, along with strong safeguards against piracy and unauthorized use. However, new entrants to the MVPD marketplace, such as telcos and online-video distributors (including those that use an Internet-enabled set-top box), are increasingly making inroads in this market, bringing more innovation and more competition.

Other issues create additional challenges for policymakers as they evaluate the market for devices that display video. Externalities in the development of new displays may inhibit investment in them. A company developing a new type of display, such as flexible displays or low-power displays, may not be able to capture all the economic value in the marketplace. Consumers may be willing to pay extra for low-power displays, as they lower energy bills, and the environment benefits from less pollution from power generation. But because those benefits are not captured by the display manufacturer through higher prices, overall investment in energy-saving displays may be below the socially optimal level. Intellectual property is another concern in that patent trolls and patent litigation can sap resources that might otherwise go to investment in new products.

The potential policy responses in these areas fall into two categories. First, the presence of externalities and the potential for private-sector under-investment suggests that the public sector has a role to play in funding research and development. This is not to say that government should invest directly in new display technology or other devices in the video market. Rather, as has traditionally been the case, there is a role for government to play in funding upstream research (e.g., enabling research with uncertain commercial value) in the university setting that effectively primes the pipeline for ideas and talent that may someday have commercial relevance.

The second set of policy responses pertain to several important social issues. They fall into the categories of equity, privacy, protection of content and accessibility for those with disabilities. Some participants raised the question of whether the proliferation of devices to access video and other digital content, and their use in areas such as education and health care delivery, creates societal inequities if certain population segments, such as the poor, cannot afford them.

With smaller video devices making it easy to record our environment ubiquitously, personal privacy has greater importance. People may be unaware that cameras are recording many of their activities, and, conversely, if they are aware, they may be less willing to use applications on the devices.

The protection of digital content means discouraging piracy, which is easier than ever to copy. Such protection is not only important to content developers, but some participants also noted that allowing piracy to occur may encourage a culture of ignoring the law.

Finally, accessibility of devices arose in the context of people with disabilities. Some 19 percent of Americans have some sort of disability, which means millions of people. As they use the latest innovations, they will require devices to include a functionality that enables them to consume content in a manner that overcomes impairments in sight or hearing. Participants emphasized that the industry must be mindful of these needs when developing new devices.

Turning to specific policy prescriptions, participants suggested the following:

  • Competition: To address market power that limits competition in the device field, public databases could lessen transactions costs that inhibit entry. Some suggested that spectrum-sharing could invite new players into the mobile market and reliable databases on available spectrum could facilitate spectrum-sharing. Others suggested that databases on patents and copyright could make it easier to promote fair and legal use of content and new technology. In the market for video content, some participants recommended that the FCC address its AllVid Section 629 notice of inquiry to create the conditions for greater competition in the set-top box market. However, others took strong exception to this notion, pointing to the proliferation of competitive entry into the MVPD market as well the proliferation of online video and the availability of alternative set-top boxes from several large and growing online video distributors. Giving consumers more choice, while continuing to provide balanced protections against illegal copying and distribution of content, could spur greater competition in the content-creation industry. A multi-stakeholder forum to monitor and advise policymakers on competition issues could aid in resolving problems as an alternative to litigation or legislation.
  • Research and development: Create a “focus center” (not unlike the National Network for Manufacturing Innovation) for device, display, battery and spectrum innovation. This would take action from Congress and involve the Defense Department and the National Institute for Standards and Technology.
  • Patent wars and trolls: Congress should act on current legislation proposed to limit patent trolls, entities that accumulate patents for the purpose of spurring litigation to collect licensing fees from alleged infringers. Technology companies argue that such litigation is unwarranted, costly and stifles innovation. Lawsuits from patent trolls, also known as “non-practicing entities,” because they own patents but do not use the patents for business purposes, cost firms $29 billion in 2011 (up from $7 billion in 2005). Additionally, the Patent and Trademark Office should discourage litigious patent wars.
  • Re-shoring: The United States has experienced an increase in manufacturing in recent years as some companies close overseas manufacturing facilities in favor of building new ones here. To encourage this, some argued that policymakers should adjust the tax code accordingly for global companies, have a stronger trade policy on IP theft and force localization of manufacturing abroad.
  • Maker movement: The improvement in manufacturing materials and the decline in machines to manufacture goods have led to a “maker movement,” in which individuals or small teams of people can design and manufacture electronic devices. This innovative movement could benefit from investments in education to support it and better IP laws to limit misappropriation of “maker” products.
  • Coordination across stakeholder forums: Regarding privacy, accessibility and security, participants noted that these issues to date involve a number of stakeholder conversations on specific issues, which is constructive as far as it goes. However, these discussions are often disconnected and would benefit from better coordination.
  • Access to devices: Participants suggested that as the FCC undertakes reform of the Lifeline/Link-Up program, it should also consider support for devices to access video content from the Universal Service Fund. Additionally, the government should encourage the adoption of new devices through the power of the government as user. That is, through delivering services electronically, government should provide incentives for citizens to adopt the latest devices and services as a way to improve the effectiveness and efficiency of service delivery.

Consumers: The Need for Empowerment and Inclusion Amid Digital Abundance

Even as consumers benefit from innovation in the video market, they also need support in two areas to maximize these benefits:

  • Cultivating a trusted environment, which involves ensuring that:
    • There is enough transparency and user-friendly information to help people navigate the marketplace; and
    • Sufficient privacy protections exist, so that consumers understand how businesses and the government use the data that consumers share with them.
  • Increasing access and use—expanding the adoption of new services through development of digital skills that will lead to sustained use of broadband-enabled services.

These focus areas resulted in the overarching theme of empowering consumers in a market where there is a robust choice of ways to access digital content. People can and do have multiple devices to go online, often with service plans from more than one provider. More choice is not always an unalloyed good; it can impose new informational burdens on consumers as they try to discern the attributes of new means to access and consume content. Tools to empower consumers need to have broad impact throughout society—including those presently not online.

In elaborating on what it means to create a trusted environment for consumers, the discussion began with privacy. A bedrock idea was the need to make sure consumers have informed choices about how businesses or government use the data they share online. Using personal information in a materially different way requires sufficient transparency and informed choices for individuals. Advertisers can benefit from using individuals’ personal data to target ads and offer discounted services, but consumers should have clear information about how this process works and what the trade-offs are.

Some participants also said that a baseline privacy law, such as the Kerry-McCain

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