IPTV Innovation's Affect on Deregulating the Telecommunication Industry. Public Policy and Business Final Paper 2008 FSU

1. Public Policy and New Technology in the
Telecommunications Industry
IPTV Innovation’s Affect on Deregulating the Telecommunication Industry
Madeleine Ehrnrooth
Public Policy and Business
August 3rd 2008

2. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 2
Will the Telecommunications industry operate in a less regulated environment as a result
of the convergence of broadcasting, Internet technology, and the telecom networks?
Abstract
We have approached an era of innovation. With new technologies on the rise and increasing
competition in the media market, policy makers and regulators are being pushed to make reformed
policy choices regarding telecommunications regulation. Supportive of Gerber and Kim’s theory on
the gradual but steady process of regulatory reform in the telecommunications industry, this
transitioning period is embodying a more rapid shift in the direction of an incentive or efficiency based
policy regime. As telecom operators are obtaining foothold in the television service sector, further
deregulation caused by the introduction of IPTV will change the face of the television market and
create a more competitive marketplace.
Thesis: The introduction of converged technologies, specifically IPTV, will further deregulate the
Telecommunication industry making it a more incentive or efficiency-based policy regime.
Introduction
The playing field is changing and rapidly expanding the entertainment and television
broadcasting industry. New technologies are allowing entertainment companies to enter new
domains while opening doors for other industries to enter the market and experience the power of
the moving image. Convergence, or the combination of communication media such as
telecommunication, electronic media, and broadcast services has merged these once separate
markets (TM Forum). Now telephone service providers are providing television service, whereas
cable operators are offering triple-play access to cable, telephone, and Internet service. While
there have been a wide array of forecasts as to who sets the stage for multi-platform distribution,
the telecommunication industry are on their way to becoming the most active players in delivering
audiovisual content to mobile, PC, and TV platforms. Where television broadcasters and cable
operators held most of the television market share, telecommunication companies such as AT&T
are moving in on this sector by providing alternative television services that use the Internet. With
new entry made possible by technological advancements, the telecommunication industry is
moving away from conditions of a natural monopoly within sectors and towards a crossing
competitive marketplace. Competitive pressure tends to drive firms towards operating at a peak
efficiency level. In effect, regulations in place to solve problems of natural monopolies become
unnecessary and lifted helping to deregulate the telecommunication industry. In Brian Gerber and
Junseok Kim’s article “Explaining the Dynamics of State-Level Reforms in Telecommunications
Regulation” they recognize a steady move towards the adoption of a competitive market, but their
analysis showed this process to proceed relatively slowly over time (Gerber & Kim 2005). Kim

3. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 3
and Gerber admit new technologies should promote reform but haven’t previously been a catalyst
for changing the regulatory environment of the telecommunication industry (Gerber & Kim, 613).
However, with the convergence of new technologies by the Internet we are facing a sudden
increase in pace at which the telecommunication industry is being deregulated. This sudden
increase in competitive market reform suggests innovation and new technology are influencing
the rate of deregulation. Specifically reviewing IPTV’s affect on deregulating the television sector
of the industry provides evidence to suggest further deregulation of the telecommunication
industry as a whole and at an increased rate than Kim and Gerber expect.
IPTV Technology
Partnerships between media companies and technology firms have been in steady
stream. In cohorts to further diminish the line between Internet and television, cable operators,
consumer electronics makers, content providers and new-media services are forging new
alliances and breaking new ground in the marketplace (Whitney, 2008). One result of such
alliances is the development of IPTV, a competing alternative to television. IP Television is simply
digital television and On Demand sent through a Broadband Internet connection. The signal can
be sent beyond your PC to a mobile device or even television, allowing TV remote interaction; TV
that integrates TV and Internet (see definition)1. As opposed to standard TV signals, IPTV can be
broadcast globally and provides an infinite amount of space for content. This opens broadcasting
up to small companies, services, and institutions to stream their own content, much like the World
Wide Web and creates a unified global market as well as opportunity for competition.
Implications for Television Industry
Network TV will surely continue to deliver programming to mass audiences, however,
declining ratings and diminishing ad revenues will deflate their share in the market. Cable TV
faces a similar fate. Only time, technology, and audience experience can tell when and what
happens to these platforms. However, one can be sure they will be giving up eyeballs and ad
revenue to IPTV’s nonlinear interactive platform. DVR, the most prevalent form of interactive TV
today, is a small first step in this direction, however, the options are limited. IPTV will make
interactive television not only possible, but also open to vast options as far as capabilities and
features.
Background
The telecommunication market environment, being one of high fixed costs and limited
frequencies, poses a natural barrier to entry. In order to ensure competition and diversity in the
marketplace, the Federal Communications Commission pursues policies that promote diversity of
1

4. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 4
ownership (Straubhaar, J. & LaRose, R. 2007). Whether or not diversity of ownership creates
diversity in content is open to debate however, is an issue not emphasized in this literature.
Instead, the goals and subsequent behavior of the FCC to promote competition and diversity is
the important factor to note and one that continues to influence their decisions and ensuing
policies.
Horizontal and Vertical Integration
Prior to 1991, the FCC prevented concentration of ownership by restricting horizontal and
vertical integration. Major television networks were previously not allowed to own or produce their
own programming, as this limited competition and thus did not promote diverse content
(Straubhaar, J. & LaRose, R. 2007). However, with the introduction of cable, television networks
felt such policies hindered their ability to compete. In turn, those rules known as the Financial
Interest and Syndication rules were relaxed. Other laws applying horizontally limited the number
of radio or television stations a company could own. Again the industry faced deregulation with
the 1996 Telecommunication act that permitted a higher proportion of national coverage
(Straubhaar, J. & LaRose, R. 2007).
Entrance of New Competition
Since the 1996 Telecommunication Act deregulated vertical and horizontal integration,
the market has become highly concentrated, with companies such as Fox, AOL, Disney/ABC,
CBS, NBC and Time Warner dominating the television industry (Straubhaar, J. & LaRose, R.
2007). Since the introduction of television few companies have been able to enter the television
market unless their entrance was due to innovation. Throughout the nineties, cable technology
quickly weakened the major television networks position in the market. With the rollout of IPTV
backed by the telecom industry, the television industry will once again face new entry and
competition.
Inferences
It is presumed that the introduction of IPTV as a competitor in the television marketplace
will raise many concerns that interest the FCC in pursuing polices. This decade has already
witnessed an influx of competitors; the Internet, cable, and wireless services and is only receiving
more. With new entry the television market is subject to more diversity of content, a setting
complying with FCC goals and being shaped by their policy decisions.
Recent FCC Policy Decisions

5. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 5
The multi-platform distribution capability of IPTV offers telecom operators the rare
opportunity to join media industry players and perhaps dominate the television market. Still in its
infancy, IPTV has yet to capture the full attention and interest of policymakers, but current
reforms in progress have been consistently pro-competitive. Currently the FCC does not have
jurisdiction over IPTV services due to its Internet based nature and global reach (Krauss, 2005).
Thus imposing restrictions on IPTV service has been difficult to accomplish. This gives IPTV
service providers a marketplace advantage as it currently faces less of the regulatory burdens
imposed on traditional broadcasters and cable operators. This does not however, dismiss IPTV
from facing future regulation. While the FCC’s jurisdiction over IPTV is debatable, if IPTV
becomes a strong competitor to traditional broadcast and cable, congressional interest may
quickly rise.
Cable Television Regulatory Environment
With the introduction of cable service in the 1950’s, FCC jurisdiction was disputable. In
1968 the Supreme Court granted regulatory authority over cable television stating that the FCC
"may ... issue 'such rules and regulations and prescribe such restrictions and conditions' ... as
'public convenience, interest, or necessity requires’”(Rushnak, 2006). As cable television faced
tremendous growth in the 1980’s, the 1984 Cable Act was passed that codified regulations and
tightened FCC authority over cable service providers (Rushnak, 2006). To weaken monopoly
power over cable television service the 1996 Telecommunication Act was passed. This legislation
encouraged new entry by allowing telephone service providers to provide video service. The goal
of which was “to let any communications business compete in any market against any other”
(FCC, 2004).
Telecom Regulatory Environment
The 1996 Telecommunication Act required telephone service providers to obtain
separate local franchise agreements in each city in which they want to operate (Rushnak, 2006).
Such regulations however, have created a barrier to new entry. Verizon and AT&T recently
challenged these regulations as the approval process impeded the rate at which they could roll
out their IPTV services (Mark, 2006). Statewide franchise agreements as requested, would
require instead the approval of state governments. In November 2007, Connecticut granted AT&T
a state franchise for its IPTV U-Verse service, a pro-competitive decision that sets an important
precedent (Fierce IPTV, 2007).
Aside from State-level clearance, the Telco industry made another advancement in FCC
reform by abolishing exclusive contracts between cable operators and apartment buildings
(MDUs) (FierceIPTV, 2008). In hopes to open up MDUs to competition, FCC Chief Kevin Martin

6. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 6
told the New York Times: "Exclusive contracts have been one of the most significant barriers to
competition. … This is a way to introduce additional competition which will result in lower prices
and greater innovation” (Burton, 2008). This move will open nearly 30 million households to new
television services such as IPTV (Burton, 2008).
Recent reforms to The Telecommunications Act of 1996 have created a rather loose
regulatory environment for the telecom industry. For the past decade, and increasingly so today,
the telecommunication industry’s deregulated policy setting has set them up to become a major
influencer on the television market. With greater flexibility, the telecommunications industry is on
its way to becoming a stifling competitor to cable service operators and television broadcasters.
Inferences
The FCC already fostered the telecom industry with the 1996 Telecommunications Act
allowing telephone service providers to provide “video service”. Recent regulations in favor of
Telco giants AT&T and Verizon show the same fostering occurring with new television
technologies. However, to be expected, opening the market to new competition is facing much
dispute from the National Cable & Telecommunications Association (NCTA), and cable monopoly
holders, Comcast and Time Warner (Fierce IPTV, 2007). Persistent lobbying of these large media
companies acknowledges IPTV technology as a potential threat to their dominance and provides
evidence to suggest the television industry is becoming a more competitive marketplace.
Conclusion
The entrance of new technology raises many considerations of how to structure and
regulate the telecommunication industry. The telecommunications industry has been a long-
standing example of a natural monopoly. Where antitrust legislation applied to prevent the abuse
of their monopoly power, new communication technology has changed the business and market
environment creating a complicated area for policy.
As we enter a marketplace with increasing competition and technology to solve traditional
problems previously reserved for policy, can we expect the FCC to continue to accept competitive
reforms? This paper suggests two reasons why we can expect a more competitive market
environment. First, the FCC’s goals to promote diversity of content and ownership in the
marketplace suggest competitive market preferences. Secondly, the FCC’s decisions to
deregulate the telecommunication industry in the past decade prove the industry is continuously
being opened to new entry. Thus the FCC’s goals and actions provide reason to believe in a
continued shift towards an incentive or efficiency based policy regime with media convergence
helping to quicken this move.

7. Ehrnrooth: Public Policy and New Technology in the Telecommunications Industry 7
Note
1. A definition for IPTV is given by ITU: An IPTV service (or technology) is the new
convergence service (or technology) of the telecoms and broadcasting through QoS
controlled Broadband Convergence IP Network including wire and wireless for the
managed, controlled and secured delivery of a considerable number of multimedia
contents such as Video, Audio, data and applications processed by platform to a
customer via Television, PDA, Cellular, and Mobile TV terminal with STB module or
similar device.’
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