Archive for May, 2012

Where do vendors to cable think the industry is heading? Evidence from trade show data, 2012

Tuesday, May 29th, 2012

For the past three years I have been collecting data about exhibitors at the NCTA trade show from the show’s website. With this year’s show having just ended, it’s time to take a look.

Exhibitor attendance

This year, the website listed 259 exhibitors, down from 271 in 2011 and 345 in 2010. These statistics somewhat exaggerate the number of companies that participate since each company at each booth counts as a separate exhibitor. So, for example, Zodiac Interactive was represented at booth ES-59 and CableNET’s booth, so is included twice.

Hot or Not?

The show website shows the categories of products, services, or technologies each exhibitor selects to describe itself. An exhibitor can select several categories. To evaluate the prevalence of each category I total the number of times each category is selected, and then divide that by the number of exhibitors to make it comparable across years.

The figure below shows the top 20 categories for 2010, 2011, and 2012. The top three categories remain constant and are not surprising, given that this is the cable show: cable programming, video on demand, and IPTV.

Top 20 Product Categories, 2010-2012

Hot

The biggest winners were cloud services, mobile apps, and “multiscreen content” (although it is possible this last category was called something else in past years), which were not (officially) represented at all in previous years but were now in the top 20. Other new categories this year included social TV, broadband services, home networking, and content navigation.

Major New Product Categories 2012

“Broadband services” is rather vague and probably does not indicate any particular new product or service. The others, however, appear to represent new developments in cable. “Home networking” is related to cable companies’ interest in home monitoring services, and “content navigation” indicates interest in user interfaces that do more than change channels.

The following table shows the biggest gainers, in percentage points, for products and services that had also been exhibited in 2010 or 2011. WiFi products and services saw the biggest increase, followed by data analysis, home information services, and business services.

Biggest Gainers 2011-1012

Not

The following table shows the category losers. The biggest losers appear to be categories most associated with traditional cable television: pay programming, pay-per-view, program guides, and video on demand. Personal video recorders showed a sharp dropoff, perhaps corresponding to the increase in cloud services, meaning that the industry sees consumers less likely to be recording content at home as opposed to downloading or streaming it from the cloud. Educational programming decreased significantly, although “children’s programming” increased a bit (see above).

Biggest Losers 2011-2012

What does this mean?

The data themselves have certain problems that make drawing strong conclusions difficult. For example, they don’t control for the size of the exhibitors’ booths. NBCUniversal’s exhibit space (449), for example, is hardly comparable to Cycle30’s booth (2242). This problem is partly mitigated by larger booths holding multiple exhibitors and more categories. Additionally, the categories are self-reported by the exhibitors and do not appear to have strict definitions. Exhibitors have no incentive to select grossly inaccurate categories, since that would attract people unlikely to purchase their products, but exhibitors probably tend towards being overly-inclusive so as not to miss potential clients. This tendency might bias towards especially popular technologies. For example, perhaps exhibitors take liberties in claiming they offer “social TV” or “cloud services” because those contain popular buzzwords rather than because their products truly offer much in the way of those services.

2012 Cable Show Floor Plan

Despite these shortcomings in the data, they provide one source of information on where economic actors with money at stake think the industry is headed over the next year. And, according to them, the industry is moving away from its traditional role as linear video distributor to storing content in the cloud, trying to capitalize on trends in social everything, and providing other services like home monitoring.

New Technology in Europe

Tuesday, May 22nd, 2012

Last week the New York Times ran an article, “Building the Next Facebook a Tough Task in Europe“, by Eric Pfanner, discussing the lack of major high tech innovation in Europe. Eric Pfanner discusses the importance of such investment, and then speculates on the reason for the lack of such innovation. The ultimate conclusion is that there is a lack of venture capital in Europe for various cultural and historical reasons. This explanation of course makes no sense. Capital is geographically mobile and if European tech start ups were a profitable investment that Europeans were afraid to bankroll, American investors would be on the next plane.

Here is a better explanation. In the name of “privacy,” the EU greatly restricts the use of consumer online information. Josh Lerner has a recent paper, “The Impact of Privacy Policy Changes on Venture Capital Investment in Online Advertising Companies” (based in part on the work of Avi Goldfarb and Catherine E. Tucker, “Privacy Regulation and Online Advertising“) finding that this restriction on the use of information is a large part of the explanation for the lack of tech investment in Europe. Tom Lenard and I have written extensively about the costs of privacy regulation (for example, here) and this is just another example of these costs, although the costs are much greater in Europe than they are here (so far.)

Observations on Senate Privacy Hearing

Thursday, May 10th, 2012

The Senate Commerce Committee held a privacy hearing yesterday with three government witnesses from the agencies responsible for this issue:  Federal Trade Commission Chairman Jon Liebowitz and Commissioner Maureen Ohlhausen, and Commerce Department General Counsel Cameron Kerry.  The Senators and witnesses went over a lot of familiar ground.  A few takeaways from the hearing:

- Perhaps because of sparse attendance on the part of Committee members, the privacy issue appeared to be more partisan than it used to be.  The two skeptics about the need for legislation were Senator Pat Toomey (the only Republican to show up) and newly-confirmed Commissioner Ohlhausen.  Senator Toomey stressed the need for evidence of market failure, harms to consumers and cost-benefit analysis (a position with which I agree and have made before this committee).   Senator Kerry, on the other hand, stated that the record is clear on the need for a privacy law, even suggesting that Senator Toomey’s concerns have been addressed at previous hearings (they have not).  Commissioner Ohlhausen expressed “concerns about the ability of legislative or regulatory efforts to keep up with the innovations and advances of the Internet without imposing unintended chilling effects on many of the enormous benefits consumers have gained from these advances.”  Senator Rockefeller acknowledged that a consensus doesn’t yet exist on legislation, but indicated after the hearing, “I really don’t see it as that complicated a subject.”  In fact, it is a complicated subject.

- The issue is viewed as a consumer protection issue (which it is), but it is perhaps more importantly an innovation issue, as suggested by Commissioner Ohlhausen.  This is because virtually all innovation on the Internet depends in one way or another on the use of information – to develop the product itself and/or the financial resources for it.  Thus, privacy regulation, which necessarily limits the collection and use of information, can have a profound effect on both the magnitude and direction of innovation on the Internet.  The legislation proponents do not acknowledge these tradeoffs.  They simply assume that regulations can be adopted without any adverse effect on innovation.

- There remains substantial confusion about the anonymity of data.  Much of the discussion conflated data from social networks – clearly not anonymous – with data used anonymously for a variety of commercial purposes on the Internet.  Individuals understandably get upset when personal information posted on social networking sites which was previously available to one group of people becomes unexpectedly available to a wider group.  This is the type of information at issue in the recent FTC consent decrees with Facebook and Google.  In these instances, both companies were forced by their users to stop the questionable practices as soon as they became known, long before the consent decrees were entered into.  In any event, some combination of consumer unhappiness and the FTC’s existing statutory authority was sufficient to stop the questionable practices.  But information on social networking sites is different from the vast amount of data collected and used for behavioral advertising or to refine search engines, to take two examples.  These data are “known” to computers, not to individuals.  No one is sitting around saying, “What can I sell Tom Lenard today.”  Rather, computers are using algorithms to serve advertisements to consumers who have certain interests.

- There is a lot of confusion about the market for privacy and whether firms compete on the basis of privacy.  The two government reports did not do a good job of illuminating this central issue.  Senator Toomey suggested  companies are competing on privacy, while the pro-legislation group at the hearing argued that companies always lose profits by providing more privacy (i.e., sacrificing some data), so they will never want to do it.  But companies do things like this all the time – i.e., provide better service, which costs money, in order to attract more customers, which makes them more money.  What the pro-legislation camp seems to be arguing is that companies won’t be able to attract consumers by offering more privacy, even though consumers are unhappy with the privacy protections they’re currently receiving.  This is not a compelling argument.  In fact, we really don’t know that consumers are, on the whole, unhappy with current privacy protections, which gets us back to Senator Toomey’s opening remark:  “Seems to me neither this committee nor the FTC nor the Commerce Department fully understands what consumers’ expectations are when it comes to their online privacy.”  We should know more with all these reports.

    What Cable Monopoly?

    Thursday, May 3rd, 2012

    “The future is in fiber optic high-speed Internet access, as compared to DSL and cable modem service.”

    “Many new business models are made possible by high-speed access, and fiber access in particular. By contrast, DSL and cable modem access are subject to sharp capacity limitations which are rapidly rendering them obsolete for the types of activities Americans want to engage in online.”

    -      Crawford, Susan P. “Transporting Communications.” Boston University Law Review 89, no. 3 (2009): 871–937, pp. 928 & 930.

    “…the broad consensus seems to be that the long-term fixed platform will likely be fiber, and cable plant too will likely become increasingly fiber-based over time, as the theoretical and long-term practical capacity of fiber to the home systems will be orders of magnitude larger than for cable systems.”

    -       Benkler, Yochai, Rob Faris, Urs Gasser, Laura Miyakawa, and Stephen Schultze. Next Generation Connectivity: A Review of Broadband Internet Transitions and Policy from Around the World. The Berkman Center for Internet & Society, 2010, p.63

    What a difference a few years makes! As late as 2009 Susan Crawford was arguing that cable broadband was becoming obsolete and Harvard’s Berkman Center believed the only long-term answer to increasing broadband demand was fiber.

    Today, Crawford is warning of a looming cable monopoly. To be sure, DOCSIS 3.0 technology has given cable a relatively low-cost upgrade path while traditional telcos generally have to invest far more in fiber to achieve similar performance.[1]

    So, what is really happening in the market? As the chart below shows, data on fixed broadband subscriptions contradict the claims of monopoly. The most recent FCC data only goes through December 2010, so we extend the figure to June 2011 using data from the OECD.[2] The data show that cable has always held the majority of connections, peaking around 2003 when it held close to 60 percent of the fixed broadband market.

    Sources: FCC reports on local telephone competition and broadband deployment, and OECD http://www.oecd.org/document/23/0,3746,en_2649_34225_33987543_1_1_1_1,00.html

    The share of cable connections is trending upwards, but, at least as of last year, did not appear to be significantly different from the past.

    More recent data comes from companies’ financial reports. The following chart shows the quarter-to-quarter percentage change in the number of high-speed Internet subscribers for Comcast, Time Warner Cable, Verizon, and AT&T. Cable companies have been doing well in terms of net additions for several quarters, but not significantly better than Verizon, and even AT&T is reporting net gains from its U-Verse platform.

    Sources: Company quarterly and trending reports.

    Note: Time Warner Cable reported 10.716 million HIS subscribers in Q1 2012, which represented close to a 7 percent increase over Q4 2011. However, 550,000 of that increase came from TWC’s acquisition of Insight Communication and 42,000 of it from the acquisition of NewWave Communications. The percentage shown in the figure deducts increases due to acquisitions.[3]

    None of this evidence means that Crawford’s warnings are necessarily wrong, of course. Whether cable’s cost advantage will ultimately translate into a monopoly or any increased market power, however, will depend not just on technological differences but also on changes in demand.

    When an HD video stream comes from Netflix at less than 5 Mbps there is little advantage to cable DOCSIS 3.0 relative to a DSL connection with at least 5 mbps. But demand will surely change over time, and cable’s cost advantage will be an important point in its favor. That’s one reason why AllianceBernstein’s analyst Craig Moffett is so bullish on cable stocks.

    Even as critics are pivoting from demanding that we focus only on fiber to warnings of a cable monopoly, the market is shifting under their feet again. Today, consumers are adopting smartphones and tablets in droves. The trend towards wireless is already affecting the development of Internet innovation (think mobile apps). Cable still has some advantages in that area—wireless providers need to offload their data somewhere, after all—but it may yet not end up as the dominant technology.

    More generally, this market changes quickly. A few years ago policymakers were being urged to focus on fiber. Now they are being warned about a cable monopoly even as wireless broadband is taking center stage, as the FCC data shown in the figure below demonstrate. And surely in a few years technology and demand will have moved us in directions we can’t yet predict.

    Source: FCC Internet Access Services Report, October 2011, Table 7 http://transition.fcc.gov/wcb/iatd/comp.html

    Policymakers should, without a doubt, keep a close eye on market conditions and work to ensure an environment conducive to competition. But if this fast-changing market teaches us anything, it’s that we should think twice before we conclude we know the endgame.


    [1] Christopher Yoo has pointed out the fiber-cable worry flipflop, so I can’t claim credit for noticing it.

    [2] I have been very critical of the OECD rankings. However, data for a single country over time should be reliable if the within-country definitions remain constant. Judging from how closely the OECD data track the FCC data it is likely they come from similar sources.

    [3] http://www.fiercecable.com/story/insight-leadership-team-departs-following-completion-time-warner-cable-acqu/2012-03-01 and http://www.businesswire.com/news/home/20110613005676/en/Time-Warner-Cable-Acquire-Cable-Systems-NewWave