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Comcast, AT&T Fire Back As FCC Moves Ahead With Set-Top Box Proposal

Federal regulators Thursday moved forward with a proposal to make it easier for consumers to switch from set-top boxes leased monthly from pay-TV companies to new devices sold at retail by consumer electronics or Internet companies. Comcast ( CMCSA ), AT&T ( T ) and other pay-TV companies quickly criticized the Federal Communications Commission’s vote to begin making the new rules, calling it unneeded because of advances in Internet and app-based technology. Alphabet ’s ( GOOGL ) Google and Tivo ( TIVO ) are among companies that could gain from the FCC’s proposal. Roku, a maker of video streaming devices, has sided with cable TV industry partners amid the lobbying battle. FCC Chairman Tom Wheeler, an Obama administration appointee, said Thursday in a hearing that rising set-top box leasing fees have hurt consumers. The FCC, with a Democratic majority, voted 3-to-2 to begin a formal rule-making process. The agency aims to develop technical standards so that new hardware suppliers can provide access to programming sold by pay-TV companies. The FCC says that its set-top box initiative is not a threat to copyright protections, although pay-TV providers pay content companies for programming. Republican FCC member Michael O’Rielly said that it would take three years for new products to appear, because pay-TV companies would have two years to comply with any new technical standards for sharing programming. He added that technology innovation would render the FCC’s rules “obsolete” in the meantime. Comcast, in a blog post, said: “A new government technology mandate makes little sense when the apps-based marketplace solution … is driving additional retail availability of third-party devices without any of the privacy, diversity, intellectual property, legal authority or other substantial concerns raised by the FCC chairman’s mandate.” Comcast has stepped up deployment of Internet-ready X1 set-top boxes. The FCC proposal has pressured shares of  Arris International ( ARRS ), a supplier of set-top boxes to the cable industry; they were down 13% in afternoon trading on the stock market today , following the vote, but pay-TV stocks saw no big moves. AT&T, in a statement, said: “While consumers are embracing an apps-based approach that offers a variety of content on more than 450 devices, the FCC has chosen to go down a path that threatens the very competition that has led to a vibrant marketplace. As this proceeding continues, we hope these concerns are given the weight they deserve and the commission allows consumers and not Google to continue to drive the market.” By selling set-top box type devices, Google could target the TV advertising market, raising privacy issues, according to critics. Wheeler’s proposal could also impact Charter Communications ( CHTR ), Time Warner Cable ( TWC ) and  Verizon Communications ( VZ ), as well as satellite TV broadcasters DirecTV and Dish Network ( DISH ).

Roku Sides With Cable TV Partners In FCC Set-Top Box Brouhaha

FCC Chairman Tom Wheeler’s proposal to open up the TV set-top market does not have the support of one of the biggest video streaming set-top makers, Roku, which has partnered with cable TV firms. “We have not been advocating for a rule making in this area at this time,” Tricia Mifsud, a Roku spokeswoman, told IBD. “While we are known for selling streaming players, it is only one area of our business. Customers also access our platform through smart TVs and streaming players that operators deploy.” Comcast ( CMCSA ), Charter Communications ( CHTR ) and Time Warner Cable ( TWC ) are among cable TV firms that could be affected by Wheeler’s proposal. AT&T ( T ), which provides U-verse pay-TV service, also has protested Wheeler’s set-top box rules. The Federal Communications Commission is expected to vote on whether to move forward with the set-top box initiative on Thursday. The agency could adopt new rules by year-end. Alphabet ’s ( GOOGL ) Google has drawn the wrath of cable TV firms in the wake of the Wheeler’s proposal because it may target the TV advertising market.   Tivo ( TIVO ) is another company that could take advantage of new set-top box rules, analysts say. Wheeler aims to make it easier for consumers to switch from set-top boxes rented from cable TV companies to devices sold by consumer electronics or Internet companies. The FCC says making programming bundles sold by pay-TV companies accessible from a wider range of devices is not a threat to copyright protections . Roku recently raised $45.5 million in a funding round and appears to have shelved plans for an initial public offering. Critics say the FCC’s proposal is not needed because of technology and marketing shifts already underway.   Time Warner Cable in New York City is testing a cable service that doesn’t require a set-top box. Its slimmed-down programming package is available through a broadband connection and Roku’s streaming device. “In addition to Time Warner Cable, we also have a similar arrangement with Charter where they are buying streaming players to offer in a bundle,” added Roku’s Mifsud. “Overseas, we have partnerships with Sky in several countries and Telstra where we have licensed use of our platform and they have deployed their streaming video services to co-branded streaming players.” Amazon.com ( AMZN ), Roku and others sell Internet sticks, or dongles, that provide access to Web video. Some cable firms still do not provide access to Netflix ( NFLX ), or YouTube apps on their Internet-ready set-top boxes.

Netflix About-Face Smoothes Charter-TWC Approval Process

As goes Netflix, so goes regulatory approval of cable TV industry mergers? The notion that the Web video streamer is a bellwether for government approval could gain credence if  Charter Communications ’ ( CHTR ) proposed acquisition of Time Warner Cable ( TWC ) gets the OK. Netflix ( NFLX ), which opposed Comcast’s proposed purchase of TWC, is fine with Charter’s deal. The Department of Justice and Federal Communications Commission thwarted Comcast ’s ( CMCSA ) TWC acquisition in April 2015. Netflix’s endorsement aside, the deal has plenty of opponents. Consumer groups and local phone companies in January stepped up criticism of a Charter-TWC merger. Satellite TV broadcaster Dish Network ( DISH ) and AT&T ( T ) had earlier warned about the combined Charter-TWC’s clout over Internet video. And even former TWC parent, media giant Time Warner ( TWX ), has voiced similar worries. Yet many analysts contend the Charter-TWC deal stands a high chance of approval, even if California regulators delay a closing until June. And Netflix’s stance is one big reason analysts expect approval. Bryan Kraft, an analyst at Deutsche Bank, cited Netflix when saying Charter has garnered support from “key tech constituents.” And said Craig Moffett, senior analyst at MoffettNathanson, in a research report: “Netflix’s 180-degree turn to support Charter speaks volumes.” Besides TWC, Charter is also seeking approval to buy privately held Bright House Networks. Charter must pay TWC a $2 billion break-up fee if the deal is blocked. On Charter’s Q4 earnings conference call early Thursday, Charter CEO Tom Rutledge said the company is aiming to close the TWC deal in late March. Charter has petitioned California regulators to move up a hearing date. He says Charter expects a green light from the Department of Justice and FCC. “We remain hopeful that the process can be completed in March,” Rutledge said. Charter stock closed down 3.7% Thursday at 169.93. Netflix Likes Charter’s Net Neutrality Stance What’s behind Netflix’s change of heart on cable consolidation? Critics say that a Charter-TWC deal would create a broadband duopoly. No. 1 cable firm Comcast and a combined Charter-TWC, which would be No. 2, would reach more than 70% of U.S. homes with broadband service, says a Barclays report. Combined, Comcast-Charter would have nearly 43 million high-speed Internet customers. Charter, whose biggest shareholder is John Malone’s Liberty Broadband, has aimed to disarm critics. For one, it is not following the lead of Comcast, which is forging ahead with “usage-based” data pricing — charging for data consumption like wireless phone companies do, with caps on monthly usage. In a growing number of markets, Comcast now charges an extra fee if customers go over a 300 gigabyte monthly limit. Charter, on the other hand, has promised not to impose data caps on customers. Netflix likes that, says Moffett. On Netflix’s Q4 earnings conference call last month, CEO Reed Hastings said, “I think it (Charter-TWC) would be a tremendous positive for the (over-the-top Internet TV) industry, because Charter has agreed to a multiyear, strong net neutrality policy, something no one else has publicly agreed to, and that would cover not only the Charter footprint, but the Time Warner cable footprint.” Charter has promised that it will provide free connections to its network for Netflix and others for three years. Interconnection fees were an issue in Netflix’s opposition to the Comcast-TWC deal. The FCC, meanwhile, imposed new public-utility-type regulation on broadband services this summer. These revised net neutrality rules are being challenged in federal court by Internet service providers. Net neutrality rules bar ISPs from throttling, blocking or prioritizing Web traffic. The worry is that the FCC will extend its authority over broadband pricing in the long run. Most of the conditions of Comcast’s purchase of NBCUniversal expire in 2018, so the Charter-TWC deal presents a new opportunity for the FCC to clamp down on the industry. While analysts expect approval of the Charter-TWC deal, they also expect that approval to come with many conditions. Some conditions could involve Liberty’s Malone. Liberty Broadband ( LBRDA ) would own 20% of the new Charter. Malone’s sprawling media and telecom holdings include stakes in Liberty Global ( LBTYA ), Discovery ( DISCA ), All3Media, Starz ( STRZA ) and Lionsgate ( LGF ). “Malone’s ownership of distribution and content assets globally implicitly has a scale larger than even Comcast, but with a much more fragmented ownership structure and working relationships,” says a Barclays research report. Analysts say that the FCC’s study of the Charter-TWC deal could go beyond ownership structure and board overlaps and into strategic relationships. Besides the FCC, state regulators have been taking a close look at Charter’s deals. In December, New York granted approval for the Charter-TWC deal. Charter agreed to expand its broadband service to more areas and provide discounts to low-income households. Charter, like Comcast, has expanded voluntary low-income programs. California, however, might not hold a key hearing on Charter’s TWC deal until June. “The California PUC (public utility commission) appears to be the long pole in the tent,” Mike McCormack, a Jefferies analyst, said in a report.