Over the Top Video and the Future of Cable Franchising Ken Fellman, Esq. Kissinger & Fellman, P.C.

Special thanks to Tony Perez, Director, City of Seattle Office of Cable Communications and Joe Van Eaton, Esq., Best, Best & Krieger for some of the information contained in this presentation

“Change is the law of life and those who look only to the past or present are certain to miss the future”

WHAT IS “OVER THE TOP?” Pending FCC proceeding: Promoting Innovation and Competition in the Provision of Multichannel Video Programming Distribution Services, Docket No. MB Known as the “OTT Proceeding” – in that proceeding, discussion of whether … Linear IP video service falls within the Cable Act’s definition of “cable service,” 47 U.S.C. § 522(6), and Therefore is any entity that provides such services over landline, ROW- crossing facilities that it owns or in which it or its affiliates have a significant interest is a “cable operator,” 47 U.S.C. § 522(5), providing such a “cable service” over a “cable system,” 47 U.S.C. § 522(7) Linear: scheduled programming; virtually simultaneous with transmission - not like on-demand (such as Netflix or Apple TV)

WHAT IS “OVER THE TOP?” Almost all comments in the proceeding, including those of the cable industry, agreed that providing linear IP service over landlines controlled by the provider is a cable service and governed by the Cable Act CenturyLink only major provider to disagree – it’s comments include objection to the NPRM conclusion that “regulating an IP-based video service that a provider distributes over its own facilities as [a] cable service is necessarily good policy” Yet, CenturyLink has not claimed in its Colorado franchise negotiations that its Prism product is not a cable service – not sure how to reconcile these positions

THE FCC OTT PROCEEDING The main issue in the proceeding doesn’t directly impact local government: What kind of entity qualifies as a Multi-Channel Video Programming Distributor (MVPD) under the Communications Act The Act defines an MVPD as: [A] person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming The regulatory benefits of MVPD status include the right to seek relief under the program access rules and the retransmission consent rules Among other things, these rules require cable-affiliated programmers to make their programming available to MVPDs on nondiscriminatory rates, terms, and conditions If content providers of video using the public internet are MVPDs, they get access to programming that might otherwise not be available – potentially enhancing video programming competition

FCC’S TENTATIVE CONCLUSIONS AND HOW THIS IMPACTS CABLE FRANCHISING If the provider offers managed linear video services over IP, on a network it owns or controls, is it a cable operator? (tentative answer: YES) If the provider offers video services over IP but does not own or control the network, is it a cable operator? (tentative answer: NO) Are these OTT video programming services “cable services” for purposes of the Cable Act? (tentative answer: it depends upon whether the services are delivered over a “cable system” as that term is defined in the Cable Act) Does it matter that the managed video service is provided over an IP platform (likeCenturyLink’s Prism, AT&T’s U-Verse, etc.)? (tentative answer: NO)

AND THIS IS IMPORTANT TO US BECAUSE …? If the service is not “cable service” there is no requirement for franchise fees or PEG support under Cable Act cable operators may transition most video to OTT, which has the potential to significantly reduce the number of subscribers to traditional cable service raises a question of whether PEG fees can be used to support OTT provision of access programming (and does it make a difference if the PEG fees are used for capital expenditures for products used to support both PEG delivered over traditional cable access channels as well as OTT?) the service is not subject to cable service consumer protections (note: this could change if the FCC’s competitive cable franchise order - the Section 621 Order - is overturned on reconsideration) consumer protection and customer service enforcement issues will be complicated when complaints arise implicating both traditional cable and OTT service

LOCAL AUTHORITY IN COLORADO OVER NON- CABLE SERVICES Limited under SB 10, CRS , et seq., to exercise of police power Public Utilities Commission used to have more authority to protect consumers with respect to telecommunications issues that were not within the scope of local authority But the General Assembly has deregulated almost all PUC authority over broadband related services Is there local police power authority to protect consumers on broadband matters, given lack of PUC authority? Maybe, but insisting upon it will likely lead to litigation

DISRUPTION OF THE CABLE INDUSTRY? We have about cord-cutters, cord-nevers and cord-shavers for years Many predicted that cable subscribers would leave their expensive bundles and switch to lower-cost Internet video options – yet this has been slow to happen Until now! Why now?

HOW FAR ARE WE INTO A DIGITAL DISRUPTION? Consider …

HOW DISRUPTIVE WILL OTT BE TO THE CABLE INDUSTRY?

HOW DISRUPTIVE WILL OTT BE TO THE CABLE INDUSTRY? According to NATOA’s immediate past president, Tony Perez: Cable appears to be in the position of the music industry in the days before iTunes – and we know how that played out Four converging forces that will soon lead to major disruption of the cable TV business model These will be good for consumers, but likely to lead to adverse consequences for local governments unless changes to existing laws are made

TONY’S FOUR CONVERGING FORCES (1) Intense Customer Dissatisfaction with Cable Companies. Why do cable companies routinely place near last in consumer satisfaction surveys? The reasons are obvious: high prices; poor customer service; excessive fees and charges (e.g. HD fee); forced bundles etc. (2) Increasing Bandwidth. Expanded bandwidth capacity makes it easier to access large video files over the Internet with reduced buffering times

TONY’S FOUR CONVERGING FORCES (3) Emergence and Acceptance of low-cost and no-cost alternatives to Cable. Increased bandwidth makes possible compelling new platforms for delivering internet video. In August 2013 Netflix stock was worth about $54 per share – as of the stock price is $103 (after a 7 – 1 split!!!). Other platforms such as Sling TV are quickly emerging. HBO is now available a la carte and for the first time we are beginning to see live sports programming over internet platforms (Query: when local sports are delivered over the internet, will consumers abandon cable in droves?)

TONY’S FOUR CONVERGING FORCES (4) Tech Industry Innovation. Companies like Apple, Intel and Amazon have made clear their intention to disrupt the existing pay TV model. They have the financial means to do it. The combined market cap of major tech companies dwarfs that of the six major content providers, including Comcast. Expect Apple to have a internet TV service soon. Apple alone has enough case and cash equivalents on hand to buy Disney or Comcast. It could write a check to buy Comcast and CBS. MARKET CAP BIG 6 CONTENT PRODUCERS Disney - $160B Comcast – $142 B News Corp -$70 B Time Warner – $67 B CBS - $30 B Viacom - $27 B Total $496 B MARKET CAP TECH COMPANIES

COMPARE THIS BILL WITH …

… OTT AND OVER THE AIR

WHY DOES THIS MATTER TO US? Seattle example: cable subscribership dropped 13% in the past 4 years as options for viewing video over the internet have grown Younger people much less likely to subscribe to cable 48% of year olds subscribe compared to 74% of those 65 and older ¾ of those surveyed (and 86% of online respondents watch video over the internet, using services like Hulu, YouTube, Netflix and Apple TV Source: – 2014 Seattle Technology Indicators Survey

WHY DOES THIS MATTER TO US?

CONCLUDING THOUGHTS The FCC OTT proceeding will give some direction as to the evolving notion of what is a cable service And the decision may be litigated In the long run, the traditional cable model is going to change … we just can’t predict exactly how State law will continue to limit revenue to local governments for use of the rights of way by broadband providers that are not cable operators providing cable service

CONCLUDING THOUGHTS The Federal Communications Act needs to change Remove the silos that treat different technologies in different ways, even though they all provide broadband service If it is ever changed, we don’t know how Congress will treat public interest obligations going forward, but we need to prepare for an end to those obligations, including franchise fees and PEG Even if Congress provides a new model for fees and network capacity as a public interest obligation, state law may still prohibit it NATOA’s Blueprint for Localism in Communications: “Communications Policy in an IP Environment: Principles, Challenges and Strategies” advocacy/documents/NATOA'S%20Blueprint%20for%20Localism%20in%20Communications% pdf A great resource for promoting policies that recognize localism

Ken Fellman, Esq. Kissinger & Fellman, P.C.