The Other Side Of The Net Neutrality Coin

As I was enjoying a couple of slices for lunch in nearby Summit, N.J., last Saturday, I tapped open an email from Randy Bongarten of Bonten Media Group, which operates a collection of small-market stations out of New York City offices. My column of the previous day was, in his estimation, “seriously flawed.”

That got my attention.

My column argued that broadcasters were among the winners in the FCC decision to impose so-called net neutrality regulation on broadband providers to ensure that all users of the Internet were treated equally.

Without such regulation, I wrote, the big content providers would be able pay for “fast lanes” on the Internet that would give them an unfair advantage over smaller content producers like most broadcasters.

And cable operators could favor their own content on their own last-mile Internet links to the detriment of competitors like broadcasters.

But Bongarten didn’t buy it. His email outlined his objections and suggested that I was looking at it all wrong — from the perspective of someone with “antiquated prejudice” against cable, an industry that was, after all, pumping billions into broadcasting through retransmission consent.

Net neutrality doesn’t make broadcasters winners, he told me when I called him Tuesday to hear him out. It makes them losers.

As a TV medium, broadcasters’ great advantage is efficiency, their ability to deliver programming to the most people at the lowest cost, he said.

What net neutrality will do is strip broadcasting of that advantage by allowing big companies like Netflix, Amazon and Google to distribute TV over the Internet at artificially low prices.

As heavy users of the Internet, Netflix and its ilk should have to pay more, not less, to broadband providers. “But net neutrality will prohibit the cable companies or other distributors from charging the real market value of their products and services.

“What’s happening here really amounts to a subsidy for Netflix to allow them to be able to distribute their programming on equal terms at lower costs than they would otherwise have to pay.”

According to Bongarten, it’s the same kind of subsidy-by-regulation that cable got back in the 1970s when Congress promulgated the compulsory copyright license that allowed operators to carry broadcast signals for practically nothing.

“They leveraged the free programming of broadcasters to build up their other programming services and that ultimately came to bite broadcasting in the butt.

” I have confidence in our system of the one-to-many to do very important things, but not if the cost of distribution of the one-to-one is set artifically low, which is what net neutrality is going to do.”

Bongarten conceded the big online content providers may be able pay more for fast lanes in a world without net neutrality as I had argued. But that’s irrelevant because broadcasters — local broadcasters, anyway — are never going to be able to compete head-to-head with the big boys. “It’s not going to happen.”

It’s that subsidy that matters, he said. “The amount of money they are going to save on distribution now is going to kill us.”

Bongarten’s other argument is net neutrality threatens the broadcasting-cable ecosystem that is now generating about 30% of network affiliates’ revenue in the form of retrans payments.

“The programming fees that we’re getting from cable are escalating and have become just an absolutely critical part of the financial structure both for us and for the networks.”

Broadcasters’ demands for retrans have put tremendous pressure on the profitability of cable operators’ TV service, Bongarten said.

But they have been able to meet the broadcasters’ demands because the TV service is bundled with more profitable telephone and broadband services, he said.

“When you limit their ability to set the broadband distribution pricing, you limit the value that they are getting from that and that’s going to impact what’s happening to us on retransmission.

“We have got to protect the system. You have got to  let the marketplace decide. You have got to let the marketplace sort out where the relative values are.”

Along these same lines, Bongarten said, it is simply unfair to change the rules on cable.

Operators invested billions upon billions in broadband infrastructure based on a long-standing understanding of the FCC rules. “Now they are being told they can’t monetize those investments the way that they were originally told that they could. “

The FCC used the same trick on broadcasters last year when it cracked down on those who set up second stations in markets through joint sales and shared services agreements, Bongarten said. “We assume that we can do something and made investments on that basis and then the FCC changed the rules of the game in the middle. It’s not right.”

Bongarten’s interest in the financial well-being of cable only goes so far. He applauds the FCC order opening the door for municipalities to offer competitive broadband services, noting the irony of the FCC adopting the order that same day it adopted net neutrality.

“I love when cable has competition. That’s what generates our ability to get higher retransmission consent fees. Believe me, if there weren’t competition in the distribution marketplace we wouldn’t be getting anything.”

So, there you have it — either my analysis is seriously flawed or Bongarten’s is.

I guess is comes down to the strategy of each TV station group. If it is based on preserving the “current ecosystem” in which broadcasters remain primarily over-the-air, one-to-many distributors and get a hefty share of cable earnings through retrans, then maybe net neutrality as Bongarten says is not such a great idea.

If, however, if it is based on digital distribution being an important, or perhaps vital, complement to the over-the-air service, then maybe net neutrality is, as Jessell says, good insurance against the bigger companies like Netflix speeding ahead and leaving broadcasters in the digital dust.

If nothing else, Bongarten made me appreciate more the complexity of the issue. He made me think again.

But I remain thoroughly convinced on one point I made last week. With the stakes for broadcasters not entirely clear and the politics fraught, the NAB was smart not to get mixed up in it.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or [email protected]. You can read earlier columns here.