Broadband Cable Association of Pennsylvania


February 12, 2013

In Tuesday's New York Times, Edward Wyatt reports from Agate, Colo., on the $4 billion Broadband Technology Opportunities Program, part of the Obama administration's 2009 economic stimulus effort. The aim of the grant program is to extend high-speed Internet access to parts of the country that had little or none of it because private companies said it was too expensive to build.

But local phone companies have complained about waste or unfair competition, like using some of the grants to build fiber networks where they already exist - including, in Colorado, in the easily accessible eastern plains that include Agate - ather than where they are most needed, in rural mountain towns. Nationally, $594 million in spending has been temporarily or permanently halted, 14 percent of the overall program, and the Commerce Department's inspector general has raised questions about the program's ability to adequately monitor spending of the more than 230 grants.

In Illinois, for example, a $12 million broadband grant was sanctioned when a subcontractor was caught routing fiber optic cable through neighborhoods where its project engineers lived. A $39 million grant in Arizona was suspended over questionable expenditures on travel, transactions that appeared to involve conflicts of interest and other unbudgeted activities. In Agate, two high-speed connections already existed in a school that had been teaching students from kindergarten through 12th grade. Now the oldest students are fift graders, and the school says the high-speed fiber optic service is of little use and beyond its means. It has requested bids for a slower-speed connection to replace it.

Agate's third fiber optic connection was among the projects built with funds from a $100 million grant to an education consortium called Eagle-Net. The grant has been suspended since December, when officials discovered that Eagle-Net had changed nearly all of its plans for wiring the state. Four months earlier, Eagle-Net was warned about questionable spending and lack of budgetary controls, according to Commerce Department documents. New York Times

Netflix: A house of cards or built on firm foundations?

The online-video and DVD-by-mail company long paid top dollar for content, raising questions over its ability to generate consistent profits. For example, its deal with Walt Disney alone, announced in December, will cost around $300 million a year, or about 12% of its current content budget, from 2016. But Netflix hasn't gobbled up everything on offer. Monday, premium channel Starz agreed to a deal with Sony Pictures Entertainment that analysts estimate is modestly higher than the $200 million a year it currently pays.

And even as content companies enjoy the extra revenue from aggressive Netflix bids, the Internet-video service is starting to show early signs that the model is working. It added a healthy net 2.1 million U.S. streaming subscribers in the fourth quarter to take it to 27 million. This helped the division's "contribution" profit-revenue less cost of sales and marketing-exceed the loss in its newer international business for the first time since the company started breaking out segment results in the fourth quarter of 2011. Content expenses are included in cost of sales, making it a major driver of contribution profits. Meanwhile, net subscriber losses in Netflix's high-margin DVD business slowed. And the contribution margin from domestic streaming was 18.5%, up from 16.4% the previous quarter and 10.9% a year earlier. Netflix aims to expand that margin by about one percentage point a quarter on average and expects the contribution profit from domestic streaming to top that of its DVD business for the first time in the current quarter.

The key is to ensure subscriber numbers continue to rise. While Netflix has said it can reach 60 million domestic-streaming subscribers, getting there may be difficult considering only about 77.6 million U.S. households have broadband, according to UBS. Competition from and other services could harm growth, as could pushback over rising bandwidth usage from cable operators who control most broadband connections and see Netflix as a competitor for TV viewership. Netflix's churn-the rate at which subscribers quit-may also have to fall for it to get that big. The company doesn't report churn, but Sanford C. Bernstein puts it between 40% and 50% annually. At that rate, Netflix would have to acquire between 24 million and 30 million gross customers a year just to maintain a 60-million-subscriber base if it ever reached that level.

Still, even if Netflix reaches a more manageable 40 million domestic-streaming subscribers, the business could make 30% contribution margins, Bernstein estimates. And its attempts to build a position as a stand-alone premium cable channel recently got a lift from the popularity of its original series "House of Cards." None of this means Netflix shares are cheap. Indeed, they trade at 119 times forward earnings estimates. But with a clearer path to profitability, the road to a less volatile Netflix business is finally in the cards. Wall Street Journal

Lawyers for Dish Network Corp. told jurors on Monday that ESPN Inc. offered more favorable rates for its sports programming to the satellite-television provider's competitors in violation of a long-running licensing agreement. However, a lawyer for ESPN, a unit of Walt Disney Co., said that Dish Network wants to "cherry pick" the best parts of agreements ESPN has reached with other cable providers and not take on the terms and conditions it finds unpalatable.

The trial is the latest clash between cable- and satellite-television providers and TV networks over rising programming costs and addresses a federal lawsuit in which Dish Network is seeking $152 million in damages. The case, being heard by a Manhattan federal jury, is over an eight-year broadcast-licensing agreement between ESPN and the satellite provider that expires later this year. Rising broadcast-licensing costs have led to a number of disputes in recent years between cable and satellite providers and TV networks, sometimes resulting in blackouts on programming for days or weeks.

Dish Network claims a "most favored nation" clause in the agreement, which Dish says entitles it to receive the same rates and cable-packaging options as other competitors. "In violation of this most-favored nation provision, ESPN provided more favorable terms to Dish's competitors and made the calculated decision not to offer those terms to Dish," said Barry Ostrager, a lawyer for Dish Network. Dish Network claims that ESPN offered lower licensing rates for ESPN Deportes, the network's Spanish-language channel, to the satellite provider's competitors and offered Dish Network's competitors a better deal when it came to a cable-packaging placement for ESPN Classic, which rebroadcasts classic sporting events.

The satellite provider also claims ESPN allowed another competitor to offer streaming broadcasts of its programming without charging an additional fee in violation of the licensing agreement with Dish Network. ESPN claims that Dish is essentially trying to use the most-favored-nation provision to renegotiate the deal in the middle of the contract. "Dish got a fair deal; they want a better deal," said Diane Sullivan, a lawyer for ESPN. Wall Street Journal