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How Does The FCC’s Deregulation Of Net Neutrality Impact College Athletics?

By Dr. Steve Dittmore

 

I was scrolling through Twitter on Nov. 25 as the Iron Bowl concluded and learned Alabama’s basketball team, with only three players, was playing against Minnesota. Like many, I was drawn to the novelty of this, so I logged onto Facebook (!) and pulled up the Stadium live stream, along with 31,000 others. Thankfully, I don’t have a data limit on my home wifi usage. Nor do I have an internet service provider (ISP) which creates fast lanes and slow lanes for content. Nor have I had to make a decision about which “packages” – messaging, audio, video, or social – I want to purchase from my ISP. I could log on and watch the content I wanted to watch.

 

But that all might change, perhaps as early as next year.

 

The Federal Communications Commission (FCC) votes tomorrow (Dec. 14, 2017) to repeal Obama-era regulations on what is referred to as “net neutrality,” a phrase coined by Tim Wu in his ground-breaking 2003 article. Wu argues that in order to achieve a goal of open and public access to information and ideas, all Internet content should be treated equally. The spirit of net neutrality is to prevent telecom companies from discriminating against various types of web traffic when it suits their business needs.

 

What FCC chairman Ajit Pai’s has proposed will not only change the way individuals and businesses conduct all aspects of their daily lives (commerce and social), but it has the potential to dramatically upend legacy revenue streams in the sport industry.

 

This issue is generally viewed along strict party lines, with the Republican-controlled FCC looking to undo the actions of the previous Democratic president. It is such a partisan issue that FCC member Jennifer Rosenworcel, a Democrat, authored an op-ed for the Los Angeles Times in which she implored readers to help her not to kill the internet. It is unclear how quickly this undoing would impact consumers. Klint Finley of Wired.com wrote it may be 2020 before corporations, wary of how mid-term elections and potential legal challenges fall out, revamp their businesses to reshape the internet in a non-consumer friendly way.

 

A strong proponent of net neutrality, Stratechery’s Ben Thompson authored a thoughtful perspective on Nov. 28, concluding Pai’s underlying reasons for wanting less regulation may be correct. However, Thompson noted, “There is no evidence of systemic abuse by ISPs governed under Title I, which means there are no immediate benefits to regulation, only theoretical ones.” Further, he surmised, “There is evidence that pre-existing regulation and antitrust law, along with media pressure, are effective at policing bad behavior.”

 

But, a post-net neutrality world will likely trigger two highly intertwined events, both of which could have great impact on consumers of college sports, and should be pertinent to athletic administrators. First, access to the Internet in general might be reduced while access to specific content on the Internet may cost consumers more. Second, the dominant broadband providers (e.g., Comcast) stand to benefit most from this arrangement and this helps explain why vertical convergence, such as the proposed AT&T-Time Warner merger, is occurring in the media industry.

 

I have previously written in this space about how the power the mass media oligopoly (e.g., Fox, Comcast, Disney, etc.) enjoys helps to shape and direct which sports content reaches end consumers. In that piece which focused on traditional linear distribution, I suggested the power in that context was shifting to the distributor. Think about the perceived benefits AT&T would enjoy if it is able to couple its DirecTV and U-Verse pipes with Time Warner’s content.

 

One big reason broadband distribution important is that for 55 percent of the United States, only one choice in high-speed broadband internet service providers (ISPs) exists. This is particularly true in smaller, rural communities near “college towns” such as Starkville, Miss., West Lafayette, Ind. or Manhattan, Kan. The monopoly power these companies possess means consumers in single-provider areas have no market choice in the event their provider discriminates against certain content.

 

Discrimination could manifest as charging consumers a premium or requiring consumers to view advertisements prior to visiting certain sites; enforcing data caps similar to wireless providers; or censoring certain content altogether. Imagine being a Verizon customer with no alternative provider and being forced to use Yahoo (which Verizon owns) instead of Google for search or email. Perhaps Verizon could allow you to access Google after watching a 30-second ad. Or, perhaps Verizon could charge an additional fee (kind of like a tariff) to access Google.

 

Access to the Internet in a post-net neutrality world may begin to resemble today’s cable bundle. One highly circulated chart from Business Insider offered insight into how the FCC administrative change would look, by examining the situation in Portugal where one ISP, Meo, charges consumers more for additional data based on the type of app used (messaging, audio, video, social, etc.). The Meo example from Portugal raises a myriad of questions.

 

What would a sports-only bundle look like? ESPN, Fox, CBS, etc. would likely be included. But what about MLB.TV? Would start-ups like Stadium be included? What about regionals like Monumental Sports Network in Washington, D.C. which relies on OTT delivery? How about SoonerSports.tv?

 

The revised FCC rules occur as ESPN looks to launch its ESPN Plus OTT service in May 2018, followed by the launch of the linear ACC Network in 2019. Assuming the ACC Network operates similarly to the SEC Network, the network would use Internet pipes for considerable content distribution, placing increased importance, and strain, on distribution systems. Speculation, however, is that ESPN Plus will not include OTT content from the Power 5 conferences, which I find difficult to believe given the amount of SEC Conference programming which currently airs on Watch ESPN. Consumers accustomed to tuning in to Olympic sports such as soccer, volleyball and baseball on SEC Network+ or similar platforms may no longer enjoy that luxury.

 

Verizon’s deal earlier this week to pay the NFL $1.5 billion for five years worth of streaming rights could also be impacted by new FCC regulations. While all of the Verizon games are reported to be free regardless of carrier, it is hard to imagine AT&T or another Verizon competitor allowing consumers to stream those NFL games without paying a premium.

 

All of this could lead to a reduction in streaming numbers at a time when an increasing amount of college sports, like the aforementioned Alabama-Minnesota basketball game, are available exclusively through web streams. It is possible this could drive content to other platforms such as Twitter, Facebook, and Amazon Prime. John Ourand speculated in Sports Business Journal in mid-November that those platforms may attempt to enter the market on a permanent basis early in the next decade. But none of those sites control distribution.

 

One potential end result of an FCC decision to repeal net neutrality rules could be to accelerate cord cutting. The assumption here is consumers in a post-net neutrality world will be confronted with a decision. Should I continue to pay $200 per month for cable and Internet? Or, should I just plunk down $125 per month for all the Internet I can consume, knowing that an ancillary benefit could be access to the Internet “fast lanes”?

 

Unlike carriage and retransmission agreements which benefit networks by allowing them to receive subscriber fees, Internet service providers stand to be the beneficiaries of slowing or throttling of websites by charging a fee to video-heavy websites such as Netflix. Back in 2014, Netflix and Comcast agreed on a “transit” agreement in which Netflix paid Comcast an undisclosed settlement to insure its content is delivered without interruption.

 

The popularity of connected-TV streaming devices such as Roku, Chromecast and Apple TV have soared, with more than 70 million U.S. households now having one. Those devices pair nicely with many of the cord cutting options such as DirecTV Now or Playstation Vue, as well as Netflix and Hulu. Given that level of penetration, it is not surprising to hear of increasing numbers of cord cutters and, as a result, fewer ESPN subscribers. Awful Announcing reported in late November that ESPN has dropped nearly one million subscribers since January. The corresponding revenue loss at ESPN has led to two rounds of layoffs in the last several months at the worldwide leader.

 

Andrew Buchholtz of Awful Announcing spelled out in clear detail how the FCC’s proposal will impact sport media. As Bucholtz pointed out in that Nov. 21 piece, ESPN and Disney enjoy scale in a deregulated environment which could allow the company to negotiate favorable arrangements with ISPs. He concluded the post-net neutrality world could be more negative than positive for ESPN, “they might be able to strike some deals and get some favorable treatment, but that usually comes with a cost, and they would probably run into some less-than-favorable treatment that could reduce their potential subscriber pool.”

 

The news from CNBC’s David Faber on Dec. 5 that Disney was closing in on deal for Fox’s stable of Regional Sports Network adds additional layers to this. Ad Age’s Anthony Crupi speculated “the acquisition of the rights to an additional 5,500 live events per year would sweeten the pot for fans who may be thinking of signing up” for ESPN Plus. Eric Jackson, also of CNBC, agrees, stating he could “envision ESPN including a lot of out-of-region games to the ESPN+ app to make it a much more compelling subscription product than it will be when it launches in May.”

 

Where does this leave us? With a lot of “ifs” for sure, but let’s say that in a post-net neutrality world a monopoly ISP throttles ESPN to basic customers but places ESPN on a “sports” tier for consumers willing to pay for a throttle-free ESPN. Consumers decide they can no longer afford premium cable and premium Internet subscriptions and elect to cut the cord on cable, while agreeing to pay the upcharge to the ISP for ESPN. In this scenario, charging consumers a high premium for the ESPN Plus OTT app seems like a no-brainer.

 

Faced with the choice of paying for ESPN on cable or paying for an ESPN fast lane on the Internet, the latter will win easily in my household. I need the Internet to pay bills, to connect with friends, to work from home, and so my son can play video games. If I have to choose between those items and having cable, it really isn’t a choice at all. Supplement my $125 Internet bill with a $35 digital antenna and I’m good to go.

 

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