And edwards. And later, the Senate Returns at 2 p. M. Eastern for general speeches followed later with debate on a vote for the judicial nomination of the 10th Circuit Court of appeals. Cspan, created by americas Cable Companies in 1979, brought to you as a Public Service by your television provider. This week the communicators has interviews from the cable show in washington d. C. Well look at issues facing the cable industry with analyst Craig Moffett and then learn about the Wireless Bureau at the federal Communications Commission with bureau chief milkman. Host well, we want to introduce you to Craig Moffett, managing partner of a group called moffett research. What do you do for a living . Guest i cover the equities, the stocks of the Cable Companies, the Satellite Companies and telephone companies. Ive just started my own firm. Host how did you get into that line of business . Guest i was a consultant at the boston consulting group, and i led the Telecom Practice there. After a short detour in 1999 through 2002, i went back to the Telecom World and started writing about the Telecom Industry and the cable and satellite business. Host so when you speak, do people listen . Guest i hope so. Thats the goal. And, you know, its funny, im probably known better on wall street as a cable and satellite analyst. I still think of myself as a telecom guy having had some 25 years in telecom now. But its, but there are, obviously, two very closelyrelated industries, and i think it helps to have a view on both of them. Host so when you think about the future of the Cable Companies as they currently exist, what is the future . Guest well, i think the first thing to remember is the Cable Companies are not Media Companies. Theyre infrastructure providers. Thats all they are. They are the digital pipe in and out of the home, and i think for ten years people misunderstood, particularly on wall street, people misunderstood what these companies were. They thought of them as Media Companies that were subject to all of the vagaries of online distribution and hulu and netflix, and they were perceived to be old media sign dinosaurs. Thats not what they are. They are infrastructure providers, and they have the best, most advantaged infrastructure at least terrestrially that existed in the vast majority of the country. The Capital Markets understand that view better, and the stocks have done very, very well. Now the question is what do you do for an encore. People understand how good the broadband product is and how strong the Digital Infrastructure is, but there are genuine challenges facing the business with, particularly with respect to video that Going Forward the Cable Operators are going to have to solve. Host what are some of those challenges . Guest its a price problem. Youve had in the Video Industry this blessing of pricing power; that is, that the cable i have and the satellite industry industry and the satellite industry have been able to pass along price increases to consumers which is a blessing, but eventually it becomes a curse. You have raised prices now so much that lower income consumers are being squeezed out of the ecosystem. Meanwhile, the programmers are raising their prices which from a distributers point of view is an input cost at a doubledigit rate. And perversely the rate of price increases so large that people are being squeezed out of the ecosystem, and yet the content openers, the programmers owners, the programmers are responding by saying im getting less unit growth, so i have to raise prices even faster. And youre watching the ecosystem blow itself apart from the inside. Now, its in slow motion. Its not, im not suggesting that the ecosystem is going to collapse in a short number of years, but youre watching the foundation of the video ecosystem start to crumble. Host and is the time washer situation time warner situation an example of that where theyre having fewer customers but higher rates and making more per customer . Guest well, remember, all the Cable Companies have been losing market share for years. Whats different now is this phenomenon of cord cutting that people have been talking about for ten years, at least empirically didnt show up until the second half of 2010. People started talking about it in the first half of 2003. But in 2010 you, there was a watershed moment that the rate of subscription growth in pay tv dropped below the rate of new household formation. Now, new household formation already suppressed by weakness coming out of the great recession. But pay tv penetration growth was even lower than that, or i should say pay tv Subscription Agreement was even lower than that, so mathematically you had negative prescription growth. That has accelerated since 2010 to the point that now the pay tv universe is actual contracting in nominal terms. That is, the whole pay Tv Subscriber basis now contracting at a rate of about threetenths of a percent per year. That will probably continue to accelerate even if new household formation continues to improve. So youve got a genuine problem here that youre no honger seeing unit growth no longer seeing unit growth and, in fact, unit declines. The Cable Companies share losses, meanwhile, are moderating, but in the context now of a shrinking pie, so their numbers cant be expected to get much better on the video subscriber side. Host is that all because of cord cutting, people going wireless . Guest well, the unit growth of the industry, its cord cutting. And i would suggest its not the way that people think of cord cutting in i think the stereotype of the cord cutter is some 30something master of the universe with a terrific computer and access to all the Digital Content in the world at their fingertips. The reality of the cord cutter is quite different. The reality is a lower income american that may not even have a broadband subscription and is looking at the pay tv subscription as a necessary cost reduction, and theyre switching not to the consumption of netflix and hulu and a bunch of online content as much as they are switching back to overtheair broadcast tv because its all they can afford. So youre seeing an affordability crisis, not so much a technology revolution. Host so, Craig Moffett, at the end of the day are you bullish, bearish, neutral on Cable Companies . Guest well, the Cable Companies are really good businesses. For the first time in my experience covering them on wall street in 11 years, theyre actually fully recognized to be good businesses, and the nature of stock picking is that its not good enough to be good, you have to be better than people expect. And for the first time, i think expectations are more or less in line with these businesses prospects and at least in the aggregate i think these stocks are probably fairly priced. Host when you look at a comcast model whether a broadcaster, distributer, operator, is that a model for the future for other Cable Companies as well . Guest its not clear. The idea of vertical integration has been a pendulum that swings back and forth. Remember, this Time Warner Cable was part of time warner corporation, and they just unwound their digital, their vertical integration just about five years ago. Cablevision did the same thing and spun off its content assets in the form of amc, and theyve become a pure play. Comcast went in the other direction and vertically integrated. I still think the balance of the industry has moved more away from vertical integration than toward it. Now, there are some regulatory complexities that go along with being vertically integrated. Comcast operates under Consent Decree obligations that last for five years post the 2009 or 2010 closing of the deal. And so its not entirely clear that right now what that vertical integration can get them. A few years from now when their, when those obligations sunset, it may be that we start to see some more innovative ways to put that vertical integration to work, but right now i think most people are in the wait and see mode. Host mr. Moffett, are the charters, the coxes, the bright houses, the etc. S ready for a Wireless World . Are we ready for a Wireless World . Guest i think it depends what you mean by a Wireless World, and there is, theres a lot of fuzziness about the term wireless. When youre using your ipad, Something Like 80 of the time youre probably using it via wifi. That may feel like wireless to you and me, but from an economics perspective, thats actually a wired connection. When you think about wireless in the traditional definition which is macrocellular, macrocellular from an economics point of view has a very hard time competing with terrestrial broadband. And so the and, remember, this is not just an issue of speeds, its an issue of throughput which is in tech know speak techno speak, it is a function of not just the connection, but how long the session lasts, session frequency. Wireless networks arent really designed for people to go on all the time and stay on all the time to do things like streaming video. And so, in fact, the world isnt moving wireless as quickly as people think. Wireless devices are capturing more and more of the usage, but a surprising amount of the time those wireless devices are actually connected or tethered to wired, not wireless networks. Host how closely do you follow what congress is doing, what the fcc is doing as an analyst . Guest very closely. And i think, look, the Telecom Industry writ large and by that i include cable and satellite comes from a long history of regulation. Personally, i started working with the fcc back when i was a consultant in the late 1980s. And so i think if you come from a background where the divestiture of at t was a genuinely recent event or the breakup of at t in the big bang in 1984 was a genuinely recent event, i think you have a profound appreciation for how important the rules are. And having done this for 20something years with a lot of that time spent in washington, i think, yes, i have a pretty profound appreciation for the rules. Host the Net Neutrality case currently in the courts, could that adversely affect this world, this cable world . Guest absolutely. And in a perhaps counterintuitive way. I think if, in fact, the d. C. Circuit overturns the fcc and vacates the open Internet Order, on First Reading, a First Reading might be that that would actually be a victory for the Network Operators. Im not so sure. I think vacating the open Internet Order would create a void that i suspect that google and a lot of other Internet Service providers would step in to try to fill. And once you create that void and you acknowledge that you dont know how its going to be filled, it introduces a significant amount of uncertainty. I suspect the Cable Operators and the Network Operators in general would probably be better off with the status quo, the dell you know, if you will. Than throwing the entire question back up in the air and waiting for it to be reresolved, if you will. Host Craig Moffett, are the googles, apple, netflix, amazon, are they positioned to take a chunk, a good chunk of business away from the Cable Companies . Guest well, i think the short answer is probably not. But remember where we started this discussion. The Cable Companies are not Media Companies. Theyre infrastructure providers. If you understand that they are the physical layer that is the Network Layer of or in the network parlance the fiscal layer of distribution, none of those other players actually participate at the physical layer. Many people, i think, used to use the term there are all these internship pathways e alternative pathways emerging into the home, and by that they would mean hulu and netflix and what have you. In fact, those are not alternative pathways into the home, those are alternative aggregations of content. And i think you have to be precise in thinking separately about the aggregation layer and the physical layer. The physical layer where the Cable Operators compete is not a layer where they see google that is outside of the google fiber project which is still relatively small. Its not a layer where they see google or apple or amazon. Host what is the Aerial Technology bring to this marketplace . Guest it remains to be seen. Technologically, i think,aerio is simply another way to do over the air broadcast tv. Ironically, its not free. Theyre still charging customers for an experience that at least in theory they could get with an overtheair antenna. Now, they add to that dvr and a lot of interesting functionality to it. It remains to be seen how the courts decide between where the Second Circuit has come out so far and where the ninth circuit has come out on its peer, aerio killer and how that potential, those two potentially different readings will end up getting resolved whether et has to go to the it has to go to the Supreme Court will determine the legality of aerio. But from a User Experience and technology perspective, its an interesting design not so much because of what gets all the press about the an 9 11 thats and the way that antennas and the way that they have worked around the rules to comply with the cablevision ruling, but i think more importantly its a very interesting test of consumer appetite for paying 7 or 8 a month for an online streaming version of broadcast channels that they can get free over the air for 8. Sorry, for the cost of an antenna, i mean. St so finally, Craig Moffett, when you think about the future of tv, what comes to mind . Guest well, use the phrase the future of tv, and i dont know whether the is whether tv is the right phrase anymore. Its the future of video consumption. And i suspect that the old adage in technology is everything changes less in five years and more in ten than you would ever expect. Five years from now i think were still going to be looking at a world that is dominated by the traditional pay tv packages. You know, people have waited for years to see the pay tv package blow apart, and i think in some ways that was almost, that required a willful ignorance of the economics of the ecosystem to believe that that was going to happen anytime soon. Its start starting to happen though. Youre starting to see rogues around the edges not through some seismic change in the Business Model or technology, but through the leakage of people out of the system at a very slow but accumulating rate. Over ten years that will be a very large audience that the programmers and the Entertainment Industry will have to address and have to serve, and i think youre somewhere in that 510 year range where things really start to accelerate, and the traditional bundle starts to come apart. Host and weve been talking with Craig Moffett, managing partner of moffett research. This is the communicators on cspan. Host and now joining us here at the cable show in washington, d. C. Is ruth milkman who is the Wireless Telecommunications bureau chief at the fcc. Ms. Milkman, what do you do . Whats the Wireless Bureau . Guest well, i run the Wireless Bureau which is about 200 people. We do all the licensing of the various Wireless Services. So everything from your Cell Phone Service to amateur radio to aviation and private Land Mobile Services like those that are used by taxis. We oversee about two million licenses. So thats one of our main functions. Host are you also responsible for, like, cell phone tower placement and licensing of that . Guest were responsible for antenna registration and for making sure that the notifications that are necessary to comply with the environmental laws and the Historic Preservation laws are complied with, and we also work a lot with our state and local counterparts who, as you know, have a lot to do with the zoning regulations that dictate where cell towers can be placed. Host when was the Wireless Bureau created . Guest i think it was created in about 1995 around the time of the first pcs auctions, the first wire