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Former FCC Chairman Michael Powell: 'Cable companies are at the mercy of content companies'

ecosystems michael powell

Michael Powell — yes, that’s Colin Powell’s son — has been a driving force for change in the telecom and TV industry for years. After serving as an FCC commissioner under President Clinton, he was appointed Chairman by President Bush in 2001, beginning an active and controversial four-year run. As Chairman, Powell pushed to leave the exploding broadband market free of legacy telephone regulations while still maintaining support for net neutrality and fining internet providers for blocking VoIP services. Powell also stood watch over the FCC during 2004’s infamous Super Bowl "wardrobe malfunction," which led to a series of enormous fines for broadcasters who violated federal decency rules.

Powell is now the president of the National Cable and Telecommunications Association, the largest cable lobbying group in the country. With members ranging from enormous cable companies like Comcast to cable networks like A&E, Powell is witness to both sides of the cable debate — and while he believes we’re in a golden age of television, he made it clear when we spoke that content companies are in the driver’s seat when it comes to change.

You represent the largest cable companies — what’s your take on the future of TV?

It’s interesting. What is the TV experience? Sometimes you’re talking about television storytelling — shows like Homeland, Breaking Bad, or Mad Men. And sometimes we’re talking about delivering that content and the interfaces and devices around that — boxes and remote controls.

We’re all guilty of ignoring the core experience of storytelling. I’m not a big fan of any remote control that I’m currently aware of. I’m not big fan of certain interfaces and experiences. But I also know very little time is spent with a remote control in hand, interacting with a guide or the box. 20 minutes into Homeland you’re waiting to see if Claire Danes is truly out of her mind.

"I’m not a big fan of any remote control that I'm currently aware of."

I’m guilty of this too. Technologists are excited about software or hardware and we forget that people are really buying and holding on to stories. The challenge in the living room — when you talk about new devices and platforms what often gets left out is access to the highly-produced, licensed content that viewers most crave. You’re asking to substitute a fresh experience.

The holy grail for the living room to me isn’t technology. It’s figuring out how to integrate the phenomenal power and interactivity and information of the internet into the highly-produced premium content that we crave.

It seems like there’s been real resistance to do away with the cable box, to allow other manufacturers to tap into the cable stream and offer these alternative experiences. Is that changing?

We should be clear about something: cable companies are at the mercy of content companies on the issue of content rights and use. Time Warner Cable and Comcast have to go into the content market, pay Disney, and negotiate how and in what way they can use that signal. You see them pushing very hard to iterate their experience and get on devices like the iPad and iPhone. Can I put the guide there? Can I put the content there? Can I stream a linear stream? That problem is never technological — they can do that and a lot more very quickly. The issue most frequently is licensing rights.

"Apple and Boxee and Vudu and Roku are going to find out that the content market is tough and expensive."

As a cable guy my neighbors constantly ask me this stuff. I don’t think they realize how much the cable company would like to let you do if they were given the rights, or they weren’t as expensive. At the end of the day Apple and Boxee and Vudu and Roku are going to find out that the content market is tough and expensive, and it’s hard to do the most creative things.

The second thing is that sometimes incumbent industries are hampered by their own successful legacy. Originally the cable industry was built to provide a very highly-optimized, high-quality video signal. The cable box is not a computer — it’s receiver and encryption device. If it didn’t need an IR receiver, we would hide it in the wall.

But cable companies have woken up quite dramatically to the potential of IP-distributed content, and I think every company’s glide path will steadily move to all IP content. I don’t think anybody would disagree that they’re all on that path. There’s a lot of talk about the next generation of boxes, platforms, guides, and remotes.

The cable industry is trying to get from a hardware-centric environment to a software-centric environment. When the guide and content are in the cloud, you can change look and feel overnight. You won’t have to come in and get a whole new box — that’s a horrible model. You can’t ask consumers to constantly get new gear. If you can get that security in software, you can park TV on anything: Boxee, Xbox, iPad.

The best experience would be one box with multiple content sources, of which one happens to be television.

I want exactly that experience. The problem right now is that you’re talking about things that are delivered over entirely different architectures using entirely different protocols and standards. When you get to IP and software-centric encryption, it’s dramatically easier to have parallel streams that talk to the public internet like Netflix and streams that talk in a proprietary way to a cable server. But right now thats kludgy because of how our network is currently built and how their stuff is built — there are limitations in the way Netflix works too.

The other thing is that people should appreciate the order of magnitude increase in capacity for fully streamed high-def video.

That was my next question.

If you ask a cable CTO why they don’t take the cable dial and push all 120 channels over the network in IP, the guy would say "I would love to do that right now, but the internet is 100 times too small." The network couldn’t handle it. It’s too much.

"The curse we’re living with is both the genius of the internet and its limitations."

The curse we’re living with is both the genius of the internet and its limitations. The internet was built to be bursty. And it was built to not command capacity in a continuous and high-quality way. That’s its genius: it was built to be robust against attack. That works really great for Facebook and stuff that doesn’t place a high premium on real-time consistency and quality. Email doesn’t need to all arrive exactly at the same time. But when you go to video at high-def quality, you don’t want it to cache and you don’t want it to blip and break. You’re talking about an enormous increase the network has to handle, and that requires some meaningful changes in internet infrastructure.

Some of the smaller cable operators I’ve talked to would love to stop paying all this money for television and just sell internet services — just let people get whatever they want however they want. Do you see that trend across the industry? Will there be a split between the video delivery business and the network business?

They’re certainly unique. The cable guys are also in the broadband business, and it’s turning out to be a very good business — an important part of these companies’ portfolios. It relieves a lot of the pressure they’re under on the programming side. The NFL asks for a 73 percent increase in football games, which ESPN pays for, and then it turns around and wants another 50 cents or dollar per subscriber. Cable margins are getting pushed down — it’s a trend across even the biggest operators, and it’s the same thing Apple or anyone else will run into.

You can do two things: you can cut costs or find new sources of revenue. So the broadband part of the business has become significant — cable operators are attached to it and enamored with it. I’m hopeful for the living room you’re talking about because their incentives are increasingly in line with fully utilizing the broadband platform. I have many CEOs that will tell you Netflix is a great thing.

"I don't think most of them will dump the video business tomorrow and become a pipe."

We’re not a zero sum in this equation: we sell the infrastructure for the over the top stuff, and you can load that with content we didn’t have to buy. I don’t think most of them will dump the video business tomorrow and become a pipe — there’s a lot of economics in the video business and a lot of value to consumers. But they’ve become more agnostic about content. If you look at the latest Time Warner Cable commercial, you’ll see Netflix in it.

I feel like at some point someone will bundle five channels over the top and call it television. Maybe just the networks and ESPN. Do you think that will come from the cable side or from an independent?

It’s coming from lots of sides.

Here’s the problem with content fragmentation: right now I have cable service, I own a Vudu box, I have an Apple TV, and I have a Roku sitting on my table at home. My wife comes in and she just wants to watch Mad Men — she couldn’t care less what channel it comes through and who provides it. So let’s say this interface you’re describing exists, and there’s Netflix, Vudu… this is the mess of smart TV. All these widgets carrying the same show.

"What I’m really after is the experience. Not your colors, your app, or your interface."

You have to guard against proliferating the consumer with a bunch of fragmented channels that more or less mirror each other. What I’m really after is the experience. Not your colors, your app, or your interface — I want to watch the show.

We asked people "how do you watch TV right now?" and nobody answered with just "I have a cable box." And almost all of the younger people all said they pay for broadband, have Netflix, and pirate everything else. Game of Thrones is the most pirated show on television. How do you bring that huge and growing customer base back to television?

If you want to watch it for nothing…

They’re willing to pay an incremental price if the content is there.

"If the old guys with cable boxes didn't exist, neither would 'Game of Thrones', and neither would the pirating."

Remember, Game of Thrones exists because someone else is subsidizing it heavily. If the old guys with cable boxes didn’t exist, neither would Game of Thrones, and neither would the pirating. If we looked at what that show costs in production, we would be stunned.

The a la carte model is deceptively attractive until you do the math. You’ve done a good job of pointing this out — I read your piece about the Apple TV. Unless you’re really disciplined I can get you to your cable bill and beyond really fast. And that’s at prices that benefit from the cable subsidy.

We’ve modeled this a million times. People assume that if ESPN were a la carte the price would somehow stay within some realm of reasonableness. But for ESPN to maintain its current revenue, it would have to cost hundreds of dollars. If you look at the MLB, NBA, NFL, they’re all a hundred or eighty dollars a year. And that won’t even get you local games — those are going to get blocked because the leagues need to make that money.

I challenge people to to trace the money. Game of Thrones doesn’t come out of thin air.

When you were the chairman of the FCC you always talked about how you didn’t think consumers saw the difference between network television and cable television. But I don’t think people see a difference between cable television and Netflix. I would love Comcast Xfinity TV to be competitive with Netflix, or competitive with my FiOS. How do you make that competition extend beyond the wires in the ground?

Guess what Disney says when you want to stream a service you can get in Ohio and that isn’t the market that you bought it in?

Any conversation that doesn’t want to grapple with the licensing regime and rights is an incomplete conversation. We’d love to provide that service, out of region, on an iPad, on anything you want. But I have one massive problem: the content owners won’t let me do that at a price that I want to pay.

"Why do I have to go to 800 to get the HD channels? This is all a legal mess."

Is there a role for the government to unlock this? Should it get out of the way and let the market figure it out? Or is there a way for the policy side to break the logjam between distribution and content?

The things I used to say about broadcast and cable — I would say them today. There are entirely different regulatory benefits and burdens applied to distribution that are relatively meaningless to the consumer. Under the law today, a cable company is required to let broadcasters onto their platform. Not because the market says so, not because you want to buy it, but because the government says that’s what has to be on the dial. The government says I’m not allowed to sell you subscription tiers until I provide you the basic tiers.

There is an enormous amount of channel flexibility that’s heavily constrained by regulations designed to subsidize broadcasters and the broadcasting model. My criticism is from a consumer perspective: why is the government placing so much regulatory emphasis on sustaining one kind of distribution to the detriment of another?

I have this pet peeve on the cable dial: why do I have to go to 800 to get the HD channels? I grew up in Washington and channel 5 is channel 5. Why do I have to go to 805? It’s not their fault — it’s because the government says that the broadcasters have to do that. This is all a legal mess.

The other thing that has to happen is really a business thing, and I don’t think the government could do much about they even if they wanted to. You can’t write out content costs. The government has very little say on a content owner’s right to charge what they want to charge, or decide what and when they want to distribute.

What does TV look like in two years? Where do you think we’re going?

"Content doesn't have a hit formula. They blew a billion dollars on 'John Carter.'"

I think the thing that I’m most intrigued about is creators and engineers finding something that looks like a new kind of TV. Not just a new way to get Homeland, but a new way for Homeland to be, because you can use information services to change the experience. And that’s a complicated question. It’s not just a technology question — it’s an artistic question, and it’s a monetization question.

Content doesn’t have a hit formula. Studio execs get hired and fired everyday. They blew a billion dollars on John Carter. They were sure they had a hit, but they had garbage. Then shows come out they think no one’s going to watch and they tear up the world. You couldn’t have told me someone was going to watch Honey Boo Boo. We should be a little humble about knowing the key to what people love.

But one of the things I’m pretty darn sure about is that if consumers speak and show they’re passionate about these things and have some willingness to pay, they’ll happen.

Explore the ecosystems

Last week we took a close look at the future of TV and the living room — the great unclaimed space of the technology world. Check out the links below for a close look at all the major players, along with a full range of interviews with industry players and reports on everything from the state of remote controls to the future of gaming. Here’s a sampling:

Tuesday:
Google, Microsoft, Aereo, Boxee CEO Avner Ronen
Wednesday: Amazon, Sony, live sports, TV apps, Condé Nast’s Dawn Ostroff, NBC's Vivian Schiller
Thursday: Apple, the state of remotes, Vizio CTO Matt McRae
Friday: Independents, New Yorker's Emily Nussbaum, Valve

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