c-span, created by america's cable companies 35 years ago and brought to you as a public service by your local cable or satellite provider. >> both cbs and hbo have announced recently that they are going to begin internet video streaming services, thus bypassing the traditional media -- broadcast, cable, etc. that is our topic this week on "the communicators," how people are getting their tv, what's the future of tv. joining us from the new york studio are two leading analysts of the telecom industry, craig moffett and michael nathanson, and they are partners in the moffettnathanson research firm. mr. moffett, let's begin with you. what is the impact, what is your initial reaction to what cbs, hbo have announced, and then add onto that netflix and apple, etc., all these other different services -- what is the impact on the overall television industry? >> well, those are two separate categories, really.

the new ones, hbo and cbs, my guess is the impact will be somewhat limited. on the other hand, the impact of some of the ones that are already here, like netflix, has already been very profound. i think what we are seeing here is a real change in the viewing habits of millennials. they are simply watching tv in a very different way than my generation watched tv, and you are starting to see all the media companies embrace that and recognize that they can't sort of circle the wagons and just try to protect the existing ecosystem anymore. they actually have to reach out to that set of consumers. advertisers want to reach that set of consumers, media companies want to reach that set of consumers, and they are not reaching them today with the traditional product. >> michael nathanson, your reaction? >> heh, well, craig and i worked together, so my reaction is it

is a really complicated question that you gave us. there is so much change going on -- we have been doing this a long time, and i think 2014 will probably go down as the biggest change in our careers. we had two huge mergers announced that change the distribution side of the business, and then you have had advertising weaken for television, and as these changes are happening, we have had our companies -- you mentioned hbo and cbs, and also sony and dish -- launching products targeted for over-the-top distribution, not using traditional cable or satellite plans, to reach customers outside the core bundle. it has been a year -- you would need a half-hour to go through the step by step changes in the business. craig and i agree that the

changes to the pay-tv universe, subscribers to pay tv, are probably not as meaningful as the changes to consumption patterns and advertising. >> so when you hear the terms "cord cutters" and les moonves has used the term "cord nevers," is that our future? >> there is three categories. there is cord cutters, cord nevers, and cord shavers. truth be told, cord shaving is the biggest impact of all, because it is really stripping hours out of the traditional system and taking advertising dollars with it, and there's advertising dollars are now looking for a new home. but the cord nevers are really interesting category, and i think les moonves is absolutely right. the cord nevers is a bigger category than the cord cutters. cord cutters gets lots of attention and everybody likes to write about it and talk about it, but it is pretty small. what you are really seeing is these millennial customers that for years the media companies said are inevitably going to join the traditional ecosystem as soon as they come to a life

change, so today they may subsist on netflix and online content, youtube and what have you, but just wait until they have children and then they will be back to the fold and start getting pay tv. for the first time, i think the media companies are starting to acknowledge that that made be wrong, and those millennials who are the so-called cord nevers may stay cord nevers, and to reach them you are going to have to do something different than just wait for them to arrive. >> there are 9 million homes in the country that take some sort of tv -- excuse me, 9 million people who have broadband who don't pay for tv, and that is heavily, heavily skewed to 18-34-year-olds. andhey become homeowners graduate from college, that grows. the way we have described it in our firm, it looks like the

magazine industry long-term. there is a constant decline of willing customers willing to pay for the big bundle. it is slow and steady, but there is a decline, and the next generation has to be given products to get them back into a paying mode. it may not be a big bundle but a little sized bundle. >> joining our conversation is telecommunications reporter lydia beyoud with bloomberg bna. >> thank you. so the federal communications commission is expected to vote soon on an expanded definition of the traditional multichannel video programming distributor that would include certain times of over-the-top online video streaming services. what is your take on how a changed definition could impact consumers, industry, how investors would look on the change? >> truth be told, it is probably not a huge issue. what the reclassification of ovd's as mvpd's in the parlance of the fcc, what that reclassification really does is

it gives those companies that are delivering video over-the-top access to the so-called program access rules, and that means that they have fair access to programming that is owned by vertically integrated distributors. the list of vertically integrated distributors is comcast, comcast, and comcast. there are a handful of companies that own regional sports networks outside of that, but it is really comcast, and comcast was already bound by rules something like that as part of the consent associated with the nbc merger. truth be told, it is not a huge issue. people have talked about it as if it might be some kind of a lifeline for companies like aereo because it gives them at least a step in the next of -- in the direction of being able to license content from broadcasters, but it doesn't really give them all that much negotiating leverage there. all it says is they have to be negotiated with in good faith.

it doesn't suggest that those companies have to license content to them, and i don't think that reclassification is going to change the world. >> michael, do you have anything to add? >> no, craig and i agree and that is more his world than mine. >> fair enough. now, some analysts have said that à la carte programming or new over-the-top services could benefit consumers, and others have said it could make prices rise, could make passion programming all but disappeared. what thoughts do you have on that? >> i don't think we will see an a la carte programming model by choice anytime soon. the business has been built on bundles, and one type of consumer subsidizes another consumer. when you start unpacking those bundles, the price that you will need to charge for a lowly consumed network that is paid for by 100% of the population will rise by a large percentage,

obviously. it is in no one's interest in terms of my media companies and craig's companies -- i will speak for media first -- it is in nobody's interest to unbundle these channels and go à la carte. they have contracts that preclude unbundling. the only way it changes is if there is some regulatory change that puts a gun to the head of the media companies to basically give you the choice of à la carte, but even if they give you the à la carte choice, the comedies will have to charge a much higher price per subscriber to offset the lost economics of going to a single channel model. >> and you have seen that with cbs, cbs talking about six dollars per subscriber for one channel if you are getting it over the top, and that is one of the reasons people have responded to the cbs ott story where initially there was a lot of enthusiasm and excitement and

i think it has now, at least in the investment community it is greeted with mostly a yawn because people think that six dollars, it is not going to resonate that much because it just highlights that there is a very expensive product. >> so, gentlemen -- >> i would add two thoughts -- >> go ahead. >> i would add two thoughts to that, lydia -- first, remember, there are a couple of different kinds of bundling in the value chain. there is not just the bundling of networks together into a package. there is also the bundling -- in fact, really there is three levels. there is individual shows bundled together into a network, individual networks bundled together into a media conglomerate -- say, a disney or viacom or fox. and then there's media conglomerates bundled together into the package that is sold to the end-user. where you are seeing unbundling is not at the middle level that most people talk about when they

talk about à la carte. where you are seeing unbundling is that last level. you are seeing increasingly be disney bundle being disaggregated from the fox bundle or cbs bundle or time warner bundle, and you are starting to let customers by individual packages. that is something that really started with the negotiation between dish network and disney, and you see it gaining a little momentum. the other point i would make -- i think it is probably the more important one -- if you add together a bunch of a la carte channels and then say "could i replicate the existing bundle by creating a bunch of à la carte channels," the answer is also certainly no, it would not be an economically sensible thing to do. but that sort of misses the point. the problem we are trying to solve here is not how can i re-create the same bundle i

already have and deliver it a different way, because that problem has been pretty well solved already. the problem you are trying to solve is is there a way to create a much lower cost alternative for lower income americans, or americans that simply don't want to pay that much for tv because they are not that engaged. the answer is i am not going to -- if i am that customer -- going to aggregate every conceivable à la carte channel and rebuild the bundle i already have because it is not a problem that needs to be solved. >> if i can go further, our firm had a conference in the west coast talking about disruption, and some of the presenters talked about what millennials want are $10 for $10 or 20 -- 10 channels for $10 or 20 channels for $20, that is the idea, 10 for 10. that is not the way the world is constructed today. other presenters talked about when they tried to build the next generation virtual mso, the

research said they needed to build a 50-channel for $50 bundle to take in all the choice that people seemed to want. it is interesting -- there is a set of customers that just want à la carte, 10 for 10, but what is workable for my company's world and the research into the potential economics is something that looks like a big bundle that is delivered over the top, so i'm not sure how innovative that product is, relative to what craig is saying is the current choice right now. >> so, gentlemen, do you see other telecommunications companies -- espn, etc. -- doing what hbo and cbs are attempting to do, and if that model works, what happens to the traditional cable industry? >> there's a difference to hbo is doing and what espn could do. hbo is an à la carte channel. by definition, you have to choose to get hbo.

when they look at the world, they think there are people that, for whatever reason, if it is not marketed to them correctly, are opting not to take that à la carte channel. therefore, hbo thinks they can add new subscribers without damaging the economics of their current business. espn's got a completely different question, which is that they are in 90-95 million households. why would you ever want to change that model if you don't have to to find the 5 million to 10 million people who are not paying for espn? at some point, a very long point, there needs to be a conversation, and there are already announced plans to work with dish on its personal streaming service, a deal with the nba to work through a channel that can go over the top. they are thinking about those choices, but when they pull the plug to do it, it will be when the economics makes sense, and today for hbo, does not make

sense for espn to go over the top. >> michael, to return to something you brought up a moment ago, is there any regulatory action the fcc could take that could hamper growth in the sector? >> they can take a lot of actions that hamper growth in the sector. one thing that is not contemplated would be anything that looks at the bundling issue and looks at the economics of bundling and forces more choice. something they can do to slow down the growth of the business is reevaluate the retrans laws because the past five years have seen a change to the values of stations and networks due to retrans and reverse retrans. i will let craig talk about the distribution side. but those are my two big things that could change the slope of the curve here. >> with respect to bundling, the thing to watch is probably not so much regulatory as it is the slowly percolating viacom-cablevision case.

it is worth watching to see whether something really disruptive comes out of the ruling out of that case eventually. short of that, i think breaking the bundle is a very hard thing to do, because the fcc doesn't have the statutory authority to do it. the key questions on the distribution side of the business, where i spend my time -- the comcasts of the world, the at&t's and verizons of the world, and obviously, directv and dish -- the questions there are really about how broadband is treated, and i think your viewers have probably spent enough time talking about title ii that we won't go into it here, but that set of issues i think dwarfs all the others on the distribution side of the business at the moment. >> all right. actually, you mentioned title ii and i was going to go there.

we are not sure what action the fcc is going to take, but how would title ii broadband reclassification possibly impact online video streaming, this larger sector? what are your thoughts right now? and how are investors reacting to the regulatory uncertainty that is in the market now? >> you know, lydia, it is interesting. investors i think have largely shrugged off the risk of title ii reclassification. the distribution stocks fell fairly sharply when president obama first made the statement asking for title ii, and then have since recovered more or less everything that they had lost. and i don't think that that is the case of investors thinking that the chairman and his fellow democrats on the commission will find the title i-based compromise.

instead, it is because the investment community has decided they can live with the risks of title ii. personally, i am a bit more cautious than that. i think the risks to the business of title ii as an investor are more significant, because i think the questions around forbearance are a bit more complicated than they have been made out to be. there will be this period of regulatory uncertainty. but as it relates what we are talking about today, which is online video, the questions there are really at the center of the network and the interconnection side of the network. and fundamentally, what is at stake here is not a series of high-minded questions of first amendment rights and that sort of thing so much as it is a set of very simple commercial questions about will transport be free or will transport be a paid service?

today you have got a sort of hybrid model where most peering is done for free, some is done on a paid basis -- peering meaning the ingest by the end-user isp, where comcast takes that traffic into their network. most of the time they are not charging to take that traffic onto their network. sometimes they are. what is really at stake at the fcc and the policy arena in general is how do we want that market to evolve? is that going to evolve into a largely paid market, and if so, is it going to be expensive, is it going to be cheap? or will it remain a largely free market where the customer is the payee -- or the payer? it is fair to say that there is still a lot of uncertainty not just in policy circles but everywhere as to how the market will ultimately evolve. >> gentlemen, another policy issue.

fred upton has announced he would like to revisit the telecommunications act. how much of a disruption could that be? >> if that happens, it could be -- i don't know if "disruption" is the right word. it would be a very big deal. it could be a very positive thing if it finally provided some real clarity, and remember, when the 1996 act was written, the internet was barely mentioned because it was not really a particularly big deal. the 1996 act by and large focused on the wireline phone business. and so i think there is lots of good reasons why it would make sense to revisit the 1996 act. notwithstanding upton's comments, though, i tend to be relatively pessimistic as to whether we will see a rewrite in the next couple of years.

the problem is you can start with an issue that is already very partisan and complicated and fraught issue like net neutrality, but you have to start to layer onto it all of the adjacent issues around peering, around privacy, around cybersecurity, around telemedicine. and you eventually start to accrete copyright and those sorts of issues, somebody -- so many different issues here that it becomes something like rewriting the laws for one third of the economy and that is not something that tends to happen quickly. once you get down into details, it starts to slow way, way down, and count me as somewhat skeptical we will see a rewrite anytime soon. >> lydia beyoud. >> craig, you brought up the two big mergers that are currently under review by the fcc right now, as well as the consent

agreement conditions that were placed on comcast in its 2010 deal with nbc that could affect program access in the online video space. are there any conditions that you might be watching for that could be placed on either comcast or at&t in these current mergers that could affect this space? >> there certainly are some. i think one of the real questions is to return to the interconnection market, will there be conditions around interconnection for comcast? the doj is, i suspect, struggling more with the questions of the creation of a vertical market power because of comcast's high market share among end-users. they are probably struggling more with that question than any other question. it is quite possible that they could feel that a remedy for that vertical market power could

simply be an arbitration process for paid interconnection agreements subject to arbitration, and that may satisfy any potential concerns about anticompetitive behavior, or may not. they may decide that those issues are so large that they are insurmountable. i think that is going to be the fulcrum issue, and so we look for what are the conditions there. i think you are likely to see conditions around the regional sports networks. you might actually see state-level conditions from the state of california about the dodgers and the lakers in particular, and trying to solve that long-standing issue that time warner cable has had with the state of california. so there are some specific issues. generally speaking, though, i think the chairman has said repeatedly that his goal is to not regulate through merger conditions but instead to regulate through regulation, and by and large he seems to be sticking to that promise. i don't think there will be any conditions on this deal that are

really dramatic, and it is not because they aren't dramatic changes going on, but it is to the chairmanuse seems to be very intent on making sure that those changes apply to everyone and not just to the one or two companies that are coming through with transactions at any given time. >> michael nathanson, have google and apple tv been disruptors, or have they had an impact on how we view tv? >> i think they have. i think people had in the beginning a lot more hope that google and apple would be even more disruptive, but roku, apple, google, toshiba, samsung -- the ability to get your video delivered through your wi-fi to a smart tv has allowed businesses like netflix and hulu, amazon prime to grow. it is so much more rewarding to watch television programs on a tv than a laptop or an ipad that by connecting your tv set your

your connection, it opens up a whole new choice of programming. they have been very, very impactful. i think going forward, smart tv's in particular -- when prices for smart tv's come down, the ability to use your smart tv to get on the web and get video on the web will move more even consumers to fragment their viewing across a wider array of choices. probably not as disruptive as they first imagined. they thought they would be buying programming, buying super bowl rights. but they have caused change through the technology to how we consume media. >> you said earlier that 2014 has been a major year of change for you, but i'm curious what issues you are watching for in 2015 that will interest the market. >> ok, so for media, we worry about -- we will continue to

look at advertising. 2014, for an election, olympic year, has been surprisingly weak for television advertising. so next year, without those nice stimulis, what is going to happen to television advertising? we are all concerned about that. second is ratings and measurement. i am sure all your consumers are watching television, watching video, in a way that is very different than they did five years ago. the measurement of television has to change more quickly. we are going to see how nielsen and maybe some of their competitors move to capture viewing away from the television sets. measurement of viewing is going to be critical. and third is going to be, as we talked about, hbo and sony and cbs and dish, will there be any more rollouts of over-the-top services? does showtime join the fray? can netflix keep growing?

along the line of fragmentation of pay-tv choices, we will watch that as well. >> i would add it to that, there is still the looming question of consolidation on the media side of the business, and there have been questions all year in 2014 about will the comcast merger with twc trigger a set of mergers on the other side of the negotiating table among the content companies? we will be once again looking to see whether that happens in content. and in the distribution world, where i spend my time, assuming that the comcast-twc deal does close, and i think -- we have put something like an 80% probability on approval -- it is certainly not a slam dunk that it closes, but if it closes, i think you are going to see another round of consolidation on the cable side of the world, where charter, i think, starts to follow through with additional transactions in the

wake of its portion of the merger that is on the table today. you might start to see some of the smaller cable operators start to do roll ups of the very small cable operators not so much to grow their own scale, but actually, oddly enough, to make them a more attractive target eventually to be acquired by charter. and so i think you will start to see the pieces on the chessboard move in distribution once the comcast-twc transaction is settled one way or the other that it will free up a logjam and you will see a whole series of additional dominoes fall in consolidation on the distribution side of the business. >> fall into consolidation -- it is interesting, we had a deal announced, or we had a plan to takeover of fox by time warner. that deal did not go through, but to craig's point, right away, there was a hope plan to get bigger on the content side.

it is going to be interesting to see how it happens in 2015. that deal obviously did not get done, but yeah, we see consolidation on distribution, my side consolidates. i don't think there is the same urge for large companies to buy small companies. the question will be will the smaller companies get together, how will they, who is going to lead that consolidation of content? but we did have a deal that tried to get finished, and just couldn't get done this year. >> and unfortunately, gentlemen, we are out of time. craig moffett, michael nathanson up in new york. moffettnathanson research. and lydia beyoud of bloomberg bna. thank you all. [captions copyright national cable satellite corp. 2014] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] as a publicut you service to your local cable or satellite provider. "newsmakers,"

georgia congressman tom price is our guest. as incoming chair of the budget committee, he talks about the $1.1 trillion spending bill just signed by the president and what will happen when the republican-led congress the gains in january -- begins in january. >> the american people made a decision in november and what they said was that the government was too large, it was too expansive, it was too prescriptive in all sorts of areas of our society. that theey made it so senate is now 54% republican, made it so that the house of representatives has the largest republican majority since 1928. republicans now control 62% of the edited rolled out in further abuse the legislative level, all from an present posted are by

republicans. but is a message we ought to be listening to as a nation. we hope we can bring democratic colleagues along and about this is an imperative time for this country. the nation has been frustrated that congress has not done a job. and you get ted cruz to sign on to whatever strategy red do you think you can get ted cruz on board? >> as we move through the process and let folks know, certainly in the house, but every member will have an opportunity to of input into the , every single individual will have an opportunity to talk to colleagues about what they think ought to be the solutions that that kindorward it is of process, open process, deliberative, logical, ambitious , that will allow individuals to say, it get