Content, quadplays and regulation: uneasy digital bedfellows?

What extent should regulatory authorities govern how individuals consume media today?

Tom Dailey, Verizon’s international vice president and general counsel, gave a keynote on this topic at the Digital Regulation Forum (UK) last month. Here’s what he discussed:

The start point for all discussions around the future of regulation in the digital world has to be a brief history of convergence – of wireline and wireless voice services, plus internet access (data), plus content. Convergence is really about changing delivery models and the consumer-driven move away from traditional, linear content platforms to service delivery models that are IP-based, on-demand, and served up in an over-the-top, network-agnostic way. Ultimately, convergence is all about consumer choice – and the challenges that it provides to service providers and regulators alike to keep pace with rapidly evolving business and demand models. The implications of convergence have been a key topic of debate in the U.S. for years, as cable customers have migrated onto new services that are less and less tied to traditional linear programming.

Let’s look at the history.

First came time-shifting, with devices allowing customers to record a show so they could watch it later. Then televisions with USB ports started appearing, allowing interconnection of additional devices to the TV in addition to the cable box.  Apple-TV and Google Chrome made the scene.  So did services like Slingbox, which allowed you to watch your cable service from anywhere with a good Internet connection.  Now your television is Wi-Fi-enabled straight out of the box, so you can effortlessly stream content straight from the Internet to the big screen in your family room.  And the content creators have entered the fray, offering their own content over-the-top – hbo.go and hulu, to name just two.

As if all this market evolution weren’t enough, the Federal Communications Commission is now proposing new “set-top-box” rules that would require cable companies like Comcast or DirecTV to make their video services available as an “open” set of streams which would allow other companies to create their own hardware and software to deliver cable content. Predictably, the new rules have met with a cold reception among some cable providers, elements of the entertainment establishment and even members of Congress.

All this is a big part of what’s causing the disruption we are seeing in the content creation and distribution industries today. And the technology that has enabled all this to happen? Broadband. As the Internet has got faster – at every step in the network, not just the “last mile” – the quality and variety of television and video services has also increased. But customers have also changed their behavior. They are no longer as interested in buying television programming packages of hundreds of channels – they want to watch what they want to watch, when they want to watch it.

What’s most interesting today is that those consumers with the audacity to take advantage of all the technical options being made available to them, the erstwhile cord-cutters, are now giving way to a new and even more troubling brand of consumer, the “cord-nevers”.

These consumers – who are in large part “millennials” – don’t own a fixed phone line, or a cable subscription, and don’t see why they should. This combination – “cord-nevers” and premium content offered on a direct to customer basis – spells trouble for traditional models where content producers sell bundles of stations and programming, and platform operators sell those packages of programming to the consuming public. The consuming public today wants to substitute their own programming choices – and can do it lawfully through their broadband connection.

Here’s the bottom line: In an industry where the disruptive effects of the Internet are so clear and so compelling, and business models are changing rapidly, investment, innovation and regulation are inextricably linked.  The interplay between them will affect the continuing evolution of the entertainment market. To make matters worse, today’s pay-tv provider is competing against much more than just TV, film or sport.  Short-form content, UGC, gaming and social networks all compete for attention and the consumer’s time.

One of the major drivers of sociological and commercial change is the enormous democratizing power of the Internet, which has enabled consumer choice to have a significant influence on the direction of the online entertainment distribution industry. In the middle of all this sit policymakers and regulators who are trying to sort out the best path forward in a landscape that is shifting underneath their feet. How do they engage in the industry without skewing markets, or creating uncertainty that discourages investment and quells innovation?

What is clear is that regulatory simplicity, predictability and harmonization are essential to the development of the digital economy. But it’s important to keep regulation in perspective. Some regulation is good and appropriate; but too much regulation (or regulatory inertia) stifles investment, which stifles innovation and slows digital economies. Regulatory burdens and complexity translate into business headwinds that can dis-incent investment and inhibit the development of the innovation culture that the world needs to grow and thrive.

Today’s digital economy is enabled by one technology: the high speed, broadband network. Today the network high water mark is 4G LTE, fibre and Global IP. Tomorrow it will be 5G, small cells and software defined networks.  The network is table-stakes.

The next strategic tier is the platform. From a technology standpoint, the platform is the enabler of participation at the next tier up in the ecosystem — the solutions or applications layer. “Platform” technologies – the cloud, IoT and machine-to-machine, telematics, software defined networks, and of course, video and content distribution – enable themselves, and other technologies and e-commerce, to happen. They enable the distribution of content “over-the-top” – on-demand, anywhere, anytime.

 The third strategic tier is the solutions or applications tier. In the enterprise space, these are the products and services that help our customers to do business better. In the consumer space, these enable customers to watch movies, or secure their computer, or manage their finances or personal health.

The companies that occupy one or more of these three tiers – connectivity, platforms and applications – share many common features, but one that they all face market headwinds. The most pertinentheadwinds in the technology sector are:

• Competition (which is vigorous at each tier)
• Technology disruption (that next big thing that undercuts your current big thing), and
• Regulatory uncertainty

To a large degree, competition and technology disruption are the results of healthy markets. Regulation is not. Regulation often happens where competitive safeguards are not performing or have failed. Regulation steps in to protect consumers and competitors. Indeed, not all regulation is bad.  Properly constructed consumer protection regulation is appropriate and necessary. Competition or antitrust regulation keeps markets properly disciplined. The problems with regulation arise when regulation is inserted into developing markets where there has been no market failure, or where governments attempt to pick technology winners and losers by incenting certain behaviors or dis-incenting others.

The key for policymakers is to find ways to keep innovation and investment momentum flowing, while minimizing regulation to instances where it is necessary, and avoiding regulation that skews markets.

This is part one in the series. In our second — and final — article on this topic, we’ll discuss Verizon’s view on the future of regulation —  http://news.verizonenterprise.com/2016/05/verizon-uneasy-digital-bedfellows-part2/.