The US ISP market is staggering in a tightrope between enforced neutrality and consumer rebellion this week, and by some-time later today all of the market internet rules might be changed.
The provision of Title II considerations to internet service providers should be clear as soon as later today, Thursday 26th of February, and while a number of ISPs have threatened to challenge the rule making in the courts, no matter what it says, the order is tightly integrated with the two media megamergers going in the US and they too are waiting on this.
The arguments, slowing reaching boiling point, on whether or not these deals go ahead, threw shadows over this seasons’ financial results, with Comcast, DirecTV and Dish all revealing numbers this week.
Verizon seems to have been the most vocal in the certainty that it will sue the FCC if it goes Title II, and this is perhaps because it has most to lose and least needs favors from the FCC. The FCC can withhold its agreement to either of the two mergers, instead of legislation through Title II, as an alternative to bring adherence to open internet rulings through conditions placed on these mergers. This might produce compliance in AT&T, DirecTV, Comcast, TWC and Charter, leaving only Verizon free to do whatever it pleased if there was no rulemaking.
At the Comcast results CEO Brian Roberts was asked outright if he was prepared to agree to a net neutrality rule in order to gain merger approval. He gave a reply that was outright contradictory – no, he did not want to be different than any other company in the industry, and yes he already had agreed to as part of the company’s 2011 purchase of NBCUniversal, where Comcast agreed to follow the FCC open-Internet rules until 2018, an agreement he believes holds despite those rules being struck down in a court.
Interestingly Netflix might want to disagree. If adhering to Net Neutrality rules means charging Netflix to boost connectivity to the back end of the Comcast network, then it doesn’t seem to count for very much.
Additionally the Comcast CFO said that the FCC is on the shot clock due to expire at the end of March and this week the FCC is dealing with the open Internet order and then it will be able to turn its attention to the Comcast transaction. Roberts then went on to say of the Title II rulemaking, that it is premature to speculate and while he didn’t believe Title II was the right answer, he wants to reflect on what the precise words say. As do we all.
Roberts revealed revenues up 6.4% to $68.8 billion for the year, slowing down slightly in Q4, when it grew just 4.8% to $17.7 billion. Net income was up an impressive 22.9% to $8.4 billion for the year, but was flat at $1.925 billion for the quarter. Video customers fell 195,000 during the year, but rose 6,000 for the past quarter. Broadband customers grew 1.28 million during the year and 375,000 in the quarter, with no sign of that pace letting up. Comcast said it is the 9th year in a row that it has added over 1 million broadband customers and the control this would give a merged Comcast Time Warner Cable, is the nub of the question over the merger.
This was a fairly outstanding financial performance in a market where pay TV operators are not having great quarters, and a sure sign that size is a great ingredient for prosperity – which you may or may not agree can be at the expense of the consumer. Right now having the fastest internet in its footprint, means Comcast can manipulate broadband pricing to extract a seriously high return on broadband, and it is attracting new customers in droves.
At DirecTV that same question was asked, what do you think you could do if you too had broadband. CEO Mike White was coy about when his proposed merger would go through with AT&T and April seems to be his anticipated date, a month or so after Comcast feels it will get the nod. And until then White didn’t want to give away the tactics of how the two merged companies would operate and talked about there being a Chinese Wall between the two teams. He was prepared to say he saw a single set of video Apps for TV Everywhere, a single web site, shifting to a single set top platform as just a few steps that would bring costs, post-merger. He also highlighted how nice it would be to sell AT&T broadband, especially a much faster form of broadband than is available right now, alongside video, on a bundled offer across 50% of the US. He referred to it as satellite-first video, married to broadband.
White also said that on every deal he had signed since the deal was announced, DirecTV had half a mind on the merger in areas such as contract term and porting rights.
When asked if adding 6 million video subscribers would change the tenor of content negotiations White replied that he had not yet factored that in, but said that the idea would be to get content for AT&T at the same prices DirecTV enjoyed, which of course, would be a huge hit to the bottom line, and a big slap in the face of every common content provider.
From our point of view the idea of a set of common set top and TV Everywhere strategies is a bit hollow. AT&T needs a video service that can reach a phone, preferably over LTE or WiFi, whereas DirecTV doesn’t need that, at least not the LTE part of it. And DirecTV set tops are based on an award winning multi-room DVR, with MoCA at the heart of its internal communications – while AT&T uses HPNA for any in-home video traffic, and may opt for G.hn in its next generation. Both of them are using Quantenna WiFi chips for their next generation devices which are potentially WiFi only, and on that part of the spec they might become common, except that as UHD encroaches, and it will happen more rapidly in satellite DTH, WiFi may fall over as quite simply not fast enough to all parts of every home. Yes the software could all be RDK, but they don’t need to merge to make that happen.
DirecTV reported revenues of $33.3 billion for the year, and $8.92 billion for Q4, up 5% and 4% respectively. Net income was down to $778 million for Q4, but up to $3.1 billion from $2.99 billion, for the year. The overall tone was that subscribers are still growing in Latin America, with segments for Brasil, Mexico and the rest of the Latin American market broken out separately due to varying ownership levels. Video subscribers in Latam over the year were up 903,000 (to 12.5 million) with most growth outside of Brasil, while in the US subscribers grew just 99,000, and revenue growth came out of lowering churn and charging more for service. The business is still a land grab south of the border, but is saturated in a congested and competitive market in the US.
How AT&T will play that once the deal is done is straightforward – where there is any prospect either now or in the future, for it to buy a local wireless operator, as it has already done in Mexico with its recent purchases of Iusacell and Nextel, then it will push for a converged play with DirecTV in those countries, but where this is unlikely, it may well de-emphasize DirecTV and cash in the assets.
Which brings us to Dish, which grew revenues for the year by just over $700 million or 5% to $14.64 billion, and net income up $137 million or 17% to $944.6 million. It has also grown a 577,000 home satellite broadband business, up 141,000 over the year. Pay TV subscribers have fallen over the year to 13.98 million a fall of 0.6%, the first time we can remember an entire year being down at Dish, a fact it puts down to higher churn rates. CEO Joe Clayton is to stand down at the end of March, a move which is being interpreted as his failure to nudge subscriber numbers upwards, something that has been a problem for 5 or 6 years now.
Chairman Charlie Ergen will be back at the helm, after spending the intervening years buying spectrum and playing at creating the next big cellular player in the US – something that he has yet to complete.
Lots of CEOs step back down into the job they were used to for years, only to find that the incumbent was doing a great job just holding business where it was, and we wouldn’t be surprised if Ergen messes around with the new Dish toy Sling TV during his first days in charge, as OTT video seems to be where the future success of the business ought to lie.
Dish is perhaps not so worried about Title II’s impact on broadband, since it has so few broadband subscribers, but the emergence of a rock solid OTT route for video across rival broadband networks will create a level playing field for Dish, which Ergen can either exploit by actually using some of that spectrum or he can fund OTT growth by selling the spectrum off.