In The Headlines

Unlocking the Box: The FCC Proposes to Open Up the Future of TV

The cable TV industry is being disrupted in a variety of ways, thanks to the rise of “cord cutting” and the popularity of streaming services like Netflix. But there is one area where the cable business still reigns supreme, and that is the market for “set top” or cable boxes—in other words, the device consumers use to bring in signals from their cable provider and send them to their TV sets. Surveys have found that over 90% of cable subscribers pay monthly for their cable box, charges that add up to an average of $230 per year. That is far more than the device is worth, critics say, and subscribers often pay that amount for several years in a row. The Federal Communication Commission (FCC) now says it wants to “unlock the box” and give consumers more choice when it comes to which cable device they buy and from whom.

FCC chairman Tom Wheeler said this week that cable and satellite providers make an estimated $20 billion a year by renting cable boxes. The cost of these devices has climbed by 185% over the past two decades. During the same period, he says, the cost of almost every other electronic device—including computers—has gone down dramatically. In a post published at Re/code, Wheeler said, “Thanks to advances in technology, American consumers enjoy unprecedented choice in how they view entertainment, news and sports programming. You can pretty much watch what you want, where you want, when you want. But there’s one glaring exception in the competitive video marketplace: The set-top box.”

What the FCC wants to do is to open up the market for cable boxes to third parties, so that consumers can buy their boxes from anyone, whether it is Google or Apple or Roku. As Wheeler notes, this is exactly the kind of thing the FCC did with land-line telephones, which were also part of a monopoly at one point—consumers had to lease their phones from AT&T if they wanted to have phone service. He said, “The FCC unlocked competition and empowered consumers with a simple but powerful rule: Consumers could connect the telephones and modems of their choice to the telephone network. Competition and game-changing innovation followed, from lower-priced phones to answering machines to technology that is the foundation of the Internet.”

In his analysis, Wheeler argues that most cable-TV users are probably frustrated not only with the cost of their cable box, but with the hodgepodge of devices and remote controls they must use to get the content they want to their television. There is the cable box itself, plus many people have at least one or two other boxes like an Xbox, a Sony PlayStation, Roku, Google Chromecast, or Apple TV—each one with its own interface, remote control, and connections.

Not surprisingly, the cable industry is mounting a campaign to oppose the FCC’s proposals. In a strategic gambit, it appears the industry is going to argue that breaking up the set-top box monopoly is a mistake, because they themselves are trying to get beyond the set-top box metaphor, and move to a world where TV channels come through dedicated apps on supported devices. This is a smart response for the cable industry to make because it is arguably true. Apple in particular is trying to move television or video-viewing to an app-style ecosystem with its new Apple TV service. Instead of channels, the interface looks very similar to the iPhone or iPad, with an app store from which consumers pick the shows and movies they want to watch.

At the same time, however, tens of millions of people continue to use old-fashioned cable boxes, and probably will for some time to come, either because they are not interested in Apple TV and downloading a group of apps, or because they are happy with the cable service they have already. And cable providers would probably like to continue getting those billions in rental charges for as long as possible. It is not just a matter of the revenue from the box rental—the cable companies also make money by selling premium ‘real estate’ on their boxes to specific media providers, and the only way they get to make those deals is because they control both the box and everything that flows through it.

Even if they do not aggressively reject the FCC’s proposals, of course, there are other ways for cable and satellite providers to stymie Wheeler’s plans. After all, they managed to kill a previous attempt to open up the cable box market—it was called CableCard, and it was theoretically an open standard. But everything had to be approved by an industry-controlled group called CableLabs, so progress was slow and eventually everyone gave up on the effort. Will opening up the cable box market have any better luck this time?

Citations

1. http://for.tn/1PprLwv – Fortune
2. http://bit.ly/1SQCEd8 – FCC

Looking for Growth, Xerox Splits In Two

Xerox Corp. is rewinding the clock, splitting off a services business it acquired a little more than five years ago, and becoming the latest tech giant taking drastic action to cope with a rapidly changing marketplace. By year-end, Xerox said in a recent statement, it will separate into two publicly traded entities: an $11 billion document technology company based around the namesake copier and scanner hardware; and a $7 billion provider of services to government and industries such as healthcare and transportation. Investor Carl Icahn, who holds more than 8% of the company and has said he would push for operational changes, will select three directors on the services company’s board, according to a separate statement. That business will also seek an external candidate to be chief executive officer.

“Short-term Xerox should get some boost,” Anurag Rana, an analyst with Bloomberg Intelligence, said. “The long-term value for these companies will be how it redefines its services in a cloud-first and mobile-first world. Xerox is not known to be at the forefront of those movements.” Moody’s Investors Service said Xerox’s corporate debt ratings are on review for a possible downgrade, reflecting the view that the split will result in two smaller companies with less business diversity and profitability than the current combined business.

The board decided that the document and service operations had little overlap and requires different capital structures and operating models, according to Xerox. Breaking the businesses up would simplify the decision-making process for what areas to focus on and invest in. “Technology will be high cash return to shareholders,” CEO Ursula Burns said in an interview Friday with “Bloomberg Go.” Document technology will likely return 50% of free cash flow to shareholders, which is in line with what Xerox currently does, according to Burns. She went on to say, “Services will be more about investing and globalizing the business.” Burns emphasized that Xerox made the decision to split before talking with Icahn.

When the 79-year-old billionaire took a stake in Xerox in November, Icahn said he intended to speak with executives and the board to improve operational performance and pursue strategic alternatives. Xerox was then already in the midst of a broad-based review of structural options for the company’s business portfolio and capital allocation. Burns said that Icahn will have governance input into the services business, but will not be directly engaged with the services business or the current Xerox business at all. Burns added that Icahn had no input in the strategic review. “We came out in a place that’s strong for the business, and it happened to align with what Mr. Icahn wanted as well,” she said.

Along with the split, Xerox is planning to cut costs over the next three years that will result in $2.4 billion in savings across the two companies, of which $700 million is expected for 2016. Less than 1 to 2% of the workforce will be impacted by the split, Burns said. The overall employee numbers will shrink, though, in line with previous years, because “every year, it becomes possible to do more with less,” she said. “Every year Xerox has to drive automation, innovation, and to drive productivity in its workforce.”

Xerox acquired Affiliated Computer Services (ACS) in 2010 for $6.2 billion, to help the company build its technology services and supplement its declining hardware operations. The deal allowed Xerox to expand into markets including managing and automating electronic payments for governments, processing claims for insurers, and even operating parking lot pay stations. Last year, Xerox sold its IT outsourcing business to Atos SE for $966 million. Burns said at the time that the divestiture would allow the company to focus on building out the two other services. The service operations from ACS “is not the sexy business people made it out to be 10 years ago,” Rana said. “Lately, there’s been pricing pressure,” as clients want to use more automation and cut costs. Xerox reported full-year revenue of $18 billion. Sales from services, which includes business process and document outsourcing, fell 4.7% to $10.1 billion. Document technology revenue dropped 12% to $7.4 billion.

ACS reported $6.5 billion in sales and $349.9 million in net income for the year ended June 30, 2009, the last full year before being acquired. At that time, about 40% of the company’s revenue came from providing business process outsourcing and IT services to government clients, which included servicing student loans for the U.S. federal government. ACS was then also the only servicer for the portion of federal loans originated by the government, about one-fourth of the volume. After the Department of Education switched to originating loans itself in July 2010 instead of using private lenders, competitors took away the dominant position held by ACS, and the company no longer services new loans.

Citations
1. http://bloom.bg/1NFOK0J – Bloomberg
2. http://reut.rs/1PEyGxL – Reuters

The Good News Is . . .

• The Chicago PMI index, a closely watched regional barometer of economic activity, accelerated sharply to 55.6 in January up from 42.9 in December. New orders are at their best level since January of last year while backlogs, though still contracting, posted substantial improvement. Production is also at its highest in a year. A notable plus in the report is a decline in inventories to a one year low. Future restocking could be a plus for the production and employment outlook.

• VISA, Inc., a global payments technology company, reported earnings of $0.69 per share, an increase of 10% over year earlier earnings of $0.63 per share. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $3.57 billion, an increase of 5.4%. Management attributed the company’s results to strong payments volume growth.

• Royal Dutch Shell PLC announced plans to acquire BG Group for $70 billion. The deal marks the most aggressive step yet in the competition to be the world’s dominant supplier of liquefied natural gas (LNG)—a fuel with a fast-growing and increasingly global market. The merger is a bet that countries like China, India, and others in the developing world will move toward cleaner burning fuels like natural gas instead of coal amid growing pressure to curb emissions. It is also a gamble that Asian markets will come to rely on U.S. exports of the product, when the first shipments leave the country—expected sometime in late 2015 or early next year. Building up its LNG business would also give Shell some insulation from volatile oil prices, which have plummeted since last summer.

Citations

1. http://bloom.bg/1Dl6vPO – Bloomberg
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1KhUVxd – VISA, Inc.
4. http://on.wsj.com/1NSQDrZ – Wall Street Journal

Planning Tips

Guide to Changes in Social Security for 2016

For 80 years, Social Security has been a key part of how Americans ensure their financial security after they retire. As reliable as Social Security has been, it has often gone through major changes, and 2016 will be an unusually active year for the program as important legal revisions take effect. Below are some of the biggest changes to Social Security for 2016. Consult with your financial advisor to better understand these changes and how they will affect you.

The myRA is available – The myRA is a new type of Roth retirement account launched in late 2015 that has no fees and is guaranteed by the government never to lose value. There is only one investment option, a Treasury savings bond with a variable interest rate that has averaged 3.19% over the past 10 years. The savings bond interest is not taxed while in the account and will not be taxed at all if you leave it in the account until after age 59 ½ . Savers who earn less than $131,000 for individuals and $193,000 for couples are eligible to contribute up to $5,500 per year, or $6,500 if they are age 50 or older. However, once the account balance grows to $15,000, or the account turns 30 years old, the money will be transferred to a private sector Roth IRA. You can contribute via direct deposit through your employer, by setting up a payment using your checking or savings account, or direct a portion of your tax refund, to the account.

No more claiming Social Security twice – Some married individuals who are 66 or older have been claiming Social Security benefits twice. They first collect spousal payments and then later switch to payments based on their own work, which will then be higher because they claimed it at an older age. However, workers who turn 62 in 2016 or later will not be able to claim both types of payments, but must select one or the other.

Stricter Social Security suspended payment rules – Beneficiaries who do not need the money are allowed to suspend their payments and then resume higher payments at a later date due to the accumulation of delayed retirement credits. In the past, spouses and dependent children could claim payments based on your work record while your payments were suspended and continued to grow. However, beginning in May 2016, suspending your payments also suspends payments for anyone else receiving payments based on your work.

Higher Medicare Part B premiums for some people – Most Social Security recipients will continue to pay the same $104.90 Medicare Part B premium in 2016. This is the case because Part B premiums are prevented by law from climbing faster than Social Security payments for most existing beneficiaries and there will be no Social Security cost-of-living adjustment in 2016. However, people who newly enroll in Medicare Part B in 2016 will pay a slightly higher Medicare Part B premium of $121.80 per month. This increase was a last-minute fix in the 2016 budget bill that prevented a much larger premium increase to $159.30 for new beneficiaries. As in previous years, high income beneficiaries will pay higher Medicare Part B premiums. The Medicare Part B deductible will increase from $147 in 2015 to $166 in 2016.

Bigger saver’s credit threshold – It will be slightly easier to qualify for the saver’s credit in 2016. The adjusted gross income limit to claim the credit will climb by $250 to $30,750 for individuals and by $500 to $61,500 for married couples. The Saver’s Credit is a tax credit above and beyond the advantage of tax-deferred savings when contributing to a 401(k), 403(b), or IRA. This valuable tax credit for low- and moderate-income retirement savers is worth between 10-and- 50% of the amount contributed to a retirement account up to $2,000 for individuals and $4,000 for couples.

Citations

1. https://1.usa.gov/1SMOzFM – Social Security Administration
2. http://bit.ly/1P4bsSd – The Motley Fool
3. http://bit.ly/1KhV7wy – Investopedia
4. http://bit.ly/1MxPIgk – US News & World Report
5. http://bit.ly/1QOfmmZ – MSN Money