Communications. Convergence, Technology, and National Outlook. NCGA Revenue Laws Study Committee December 12, 2005
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1 Communications Convergence, Technology, and National Outlook NCGA Revenue Laws Study Committee December 12, 2005
2 Overview Part I: Communications Convergence New Technologies & Internet-based Services Part II: Federal Legislation Proposed changes to Telecommunications Act of 1996 Part III: Conclusion Implications for state & local government revenues
3 Part I, Communications: What does communications include? Voice services (telecommunications) Video services (television) Data services (Internet)
4 Convergence Technological convergence Modern presence of an array of different types of technology to perform very similar tasks Industry convergence Consolidation of all communications (voice, data, and video) onto a single network infrastructure
5 Industry Convergence Easier to combine services by packaging communications into alldigital format Providers of single communications service now able to offer broader array of services delivered via Internet-based technology
6 Broadband Services Two major types used by majority of residential & business consumers DSL (Direct Service Line) Cable Internet Access (Cable modem) Typically, both provide an average Internet connection speed many times faster than dial-up
7 Broadband Services In general Both telephone and cable providers have necessary infrastructure to offer broadband services However Technological differences in the physical infrastructure used by cable & telephone providers can affect their capacity to deliver packaged broadband services
8 Communication Services Are Going Digital Dominant forms of service delivery for voice & video services are now Internet-based The following services are either digital version of existing services, or new services delivered via Internet-based technology
9 VoIP (Voice over Internet Protocol) Routing of voice conversations over the Internet or any other internet protocol-based network Cost is generally lower than POTS (Plain Old Telephone Service)
10 VoIP has become significant Growing in popularity Time Warner reported 1 million VoIP customers as of December 8, 2005 Skype (based in Netherlands) has 10 million U.S. subscribers and 40 million worldwide North Carolina General Assembly recently installed VoIP system
11 Video: Video on Demand (VOD) Allows users to select and watch video content over a network as part of an interactive television system. Either "streaming or "download"
12 Video: IPTV (Internet Protocol TV) System where a digital television service is delivered to subscribing consumers using internet protocol over a broadband connection. Often provided with Video on Demand May also include web service & VoIP Supplied by broadband operators
13 Video: The next generation of IPTV Apple has partnered with NBC Universal to offer downloadable TV shows via itunes (including Lost and Desperate Housewives ) at $1.99 each Shows can be watched on a computer or on an ipod Other networks offer or plan to offer downloadable content a la carte
14 Video: Alternative Service Providers 20.8% of households receiving subscription television now get it from alternate sources Direct Broadcast Satellite companies hold 20.2% of the alternative subscription TV market In 42 markets nationwide, 30% of consumers are reached via alternative distribution methods, primarily satellite
15 Triple Play (Internet, Telephone, & Television) Marketing term for provision of all three services via the same service provider Focus on business model, not common standards or method of delivery Offered by both telecommunications & cable providers Relies on assumption of increased opportunity costs for customers
16 Triple Play (Internet, Telephone, & Television) Telephone companies: Delivered via combination of fiber optic and digital subscriber line (DSL) Verizon rolled out Triple Play in Keller, TX, in September, and Herndon, VA, in early December Cable companies Delivered via switched-ip technology over hybrid fiber coax (HFC) architecture
17 Triple Play (Internet, Telephone, & Television) Rapid growth in sales of this packaged service Time Warner (Reuters, December 8): 75% of new digital phone subscribers also choose triple play service Added 240,000 new subscribers in Q3 Approximately 180,000 new triple play subscribers in Q3
18 Coming Soon: Quadruple Play Same as Triple Play, but utilizes wireless technology to deliver Internet, telephone, and television services Advances in technology are making Quadruple Play an option for competitors looking to gain competitive advantage over other Triple Play providers
19 What are people paying for cable and broadband service? The average monthly cable bill in the United States this year (Kagan): $39.63 for basic service Up to $63.88 for digital cable (VOD) $80.33 for additional high-speed Internet package In areas where there is a wire-based competitor, prices for cable TV service are 15 percent lower (GAO, 2005)
20 And The Winner Is? Despite the influx of new technologies & services in communications, no clear industry winner has emerged
21 Part II, Federal Legislation Several draft and introduced bills that would significantly change the Telecommunications Act of 1996 S. 1504, Broadband Investment & Consumer Choice Act (Ensign/McCain) H. 3146, Video Choice Act of 2005 (Blackburn/Wynn) Draft legislation from House Energy & Commerce Committee
22 Broadband Investment & Consumer Choice Act S (Ensign/McCain) Would immediately allow telecoms to enter video services market without obtaining local or state franchises Cable would no longer be required to meet franchise obligations of multiple localities Up to 5% franchise fee to municipalities from new entrants (same as current pay- TV providers), but applied differently
23 Broadband Investment & Consumer Choice Act S (Ensign/McCain) Would not require build out of services within a particular community Requires new entrants to comply with same rules on copyright, privacy, & public access as cable providers Radio & TV broadcast industries unaffected Bill would preempt state law governing cellular phone providers Does not address Universal Service Fund
24 Video Choice Act of 2005 H (Blackburn/Wynn) Defines competitive video service provider (CVSP) as any provider of video programming, interactive on-demand service or other programming service that has a right, permission or authority to use PROW independent of a cable franchise. Removes franchise requirement for CVSPs
25 Video Choice Act of 2005 H (Blackburn/Wynn) CVSP may be required to pay a fee (up to 5% limit) to local franchising authority based on gross revenue in that area Prohibits economic redlining, but removes build-out requirement Removes local enforcement authority S (Senate version) exempts existing cable franchise agreements from the act for the term of the franchise agreement; H does not
26 Draft legislation from House Energy & Commerce Committee Not yet introduced Major issues addressed in Nov. 9 hearing: Net neutrality and franchising Net neutrality means that subscribers to broadband services are not limited in what legal content they may access over their internet connection Limitations on net neutrality could affect consumer choice regarding broadband service
27 Draft legislation from House Energy & Commerce Committee Franchising Allows local franchise authorities to charge up to 5% fee on gross revenues annually Gross revenue defined to include cash, credits, property, & in-kind; does not include bad debt and refunds, rebates, or discounts to subscribers of any kind Sets forth nationwide franchise concept that would supplant existing franchise structure Broadband internet & video providers would have to file with FCC, not local governments
28 Part III, Conclusions Price wars between new entrants (telecoms) and cable could erode sales tax base for telephone/video/broadband internet service in the short run Unregulated VoIP providers like Skype will most likely continue to cut into both POTS and regulated VoIP provider sales, but to an unknown extent
29 Conclusions Local governments will likely lose some, if not all, control over video franchising process due to federal legislation in 2006 May retain ability to assess franchise fees, but not necessarily at current levels Language of current North Carolina communications tax law does not address or include new services & modes of delivery
30 Conclusions Continuing convergence and competition will lead to erosion of communications tax revenues under current law
31
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