Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (11 page)

The FCC had hoped to keep the court focused on process, not on the substance of its authority, and both Genachowski and his lawyers were surprised by the outcome of the Comcast case. All other work stopped at the Commission as the FCC considered legal options. Genachowski and his lieutenants did not want to spark a war with the carriers. But they were deeply worried that everything they tried to do would be the subject of prolonged and painful litigation; every step would be examined to see whether it was “reasonably ancillary” to the exercise of the Commission's authorities under the Telecommunications Act, and the FCC would never be able to get anything done. The situation was a mess. And it was about to get worse.

On Monday, May 3, 2010, the
Washington Post
reported that Genachowski had decided not to reclassify high-speed Internet access as a Title II service in the net neutrality proceeding.
⁷⁸
The incumbent carriers, including Comcast, must have been delighted; this is what they had been fighting for. Then, three days later, the chairman's office issued a press release. The FCC was going to suggest reclassification after all, but would restrain itself—forbear—from carrying out many of the traditional elements of common-carriage regulation under Title II.
⁷⁹
A predictable firestorm of lobbying and complaints arose from AT&T and the other incumbents. How could there be a move toward regulation? Analysts called the FCC's move the “nuclear option.” The rhetoric rose higher: Genachowski, the carriers said, was trying to destroy the communications industry. Even the hint of reclassification was too much for the industry to accept.
⁸⁰

The pressure on the chairman to change his position was intense: AT&T spent almost six million dollars in the first quarter of 2010 alone lobbying the Commission, the Department of Commerce, the White House, and anyone else its lawyers could think of to convince them that the FCC was planning to “regulate the Internet.”
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The company marched on the Hill, getting signatures from 171 House Republicans and 74 House Democrats for letters excoriating Genachowski for considering reclassification of the transport portion of Internet access services.
⁸²
The campaign was reminiscent of John D. Rockefeller's attack on Theodore Roosevelt in 1907, when he proclaimed that Roosevelt's antitrust policies would bring “disaster to the country, financial depression, and chaos.”
⁸³

Eventually the chairman changed his mind once again: in a follow-up document, he suggested that reclassification was just one of many options on the table. One of the other options, he said, was for the Commission to continue as it had been doing—relying on authority based on “ancillary jurisdiction”—the idea that whatever the FCC was doing would support one of its express statutory delegations. Rather than stating which way the Commission intended to go, the follow-up statement presented all options; everything was still on the table. A long, hot summer of lobbying lay ahead.
⁸⁴

The FCC started holding off-the-record stakeholder meetings to explore whether a deal was possible that would preserve an open Internet without strangling the carriers’ ability to attract investment. Congress began its own series of closed-door sessions. The world of telecom policy seethed with rumors and discontent. In the end, after months of wrangling, the FCC agreed with the carriers in late December 2010 that they would keep their Title I classification.
⁸⁵
Within this framework, the Commission applied a very light hand to wired providers of Internet access, embracing usage-based billing and the idea of “managed services” that would not be subject to neutrality requirements. Wireless providers were freed of any obligation to refrain from discriminating against online applications. For Comcast, this was good news: it could continue its vertical integration plans without having to worry (for the moment, at least) about governmental review of its control over its pipe to American homes. Verizon sued. Someone always sues.

Over several decades, the U.S. government has tried—not always successfully—to force incumbents to let new competitors have access to the materials they need to compete. Where incumbents act as gatekeepers, new technology will not emerge without regulatory help that creates a level playing field for competition and the free flow of information. The government did this for the cable industry in the late 1970s when it mandated pole-attachment sharing, for the computing industry in the 1970s and 1980s when it protected the new industry from the depredations of the telephone monopoly, for long-distance service in the mid-1980s with the AT&T divestiture, for the nascent satellite industry in the early 1990s
through program-access rules in the 1992 Cable Act, and for high-speed Internet access in the late 1990s through common-carriage rules for DSL.

Incumbents will also use all available regulatory levers to protect their business models: the broadcast industry used the FCC's broad statutory power to fend off competition from cable in the 1970s; the cable industry used vague program-access rules to make life more expensive for smaller cable providers and satellite companies in the 1990s and 2000s; and the telephone companies used vague language in the 1996 Telecommunications Act to fight attempts to force them to share their local facilities.

Behavioral restrictions are difficult to enforce; structural limitations such as the separation of carriers from content are difficult to achieve politically. The pendulum swings back and forth: cable deregulation in 1984 was followed by reregulation in 1992; the structural separation signaled by Al Gore and feared by John Malone was never carried out, and vertical integration has become common and unquestioned. Genachowski's FCC was apparently not interested in diverging from Michael Powell's view that consumers and innovation would be adequately protected by the market—and that traditional regulation was not necessary.

3

A Family Company

CABLE HAS WON THE RACE
to sell services to Americans seeking high-speed Internet access. People are dropping DSL service delivered over metal phone lines in droves, as those services prove increasingly unable to compete with cable for the kind of speeds that households and businesses demand. And wireless Internet access does not and cannot keep up. Wireless is great for mobility—Americans love their smartphones—but no one starting a business would depend on the wireless data speeds provided by Verizon and AT&T. Wireless is a complementary service, and only people who have no other option (usually rural, minority, or poor Americans who have no wired access where they live or work) are likely to rely on it as their sole route online. Verizon's FiOS fiber-optic Internet access service is as good as cable (better, in fact, because it allows for uploads that are as speedy as downloads), but it is available to only 14 percent of U.S. residences; from Verizon's shareholders’ perspective, it
is too expensive to dig up traditional phone lines and replace them with fiber.
¹

Cable, on the other hand, has exploded into an enormous market: 80 percent of Americans buying a wired high-speed connection these days sign up with their local cable incumbent.
²
The FCC has said that for 75 percent of Americans the only choice for globally standard high-speed Internet access will soon be the local cable guy.
³
Comcast is adding subscribers at an accelerating pace at the same time that its revenue per user is increasing. At this rate, Bernstein Research predicts that about 70 percent of all wired Internet access subscribers in America will be cable customers by the end of 2015.
⁴
And as of 2012, Comcast was getting the lion's share of these new accounts: more than four hundred thousand new subscribers for wired high-speed Internet access per quarter, amounting to a total of almost 19 million subscribers overall.
⁵
Time Warner Cable was a distant second, with about a hundred thousand new customers each quarter and a total of 11 million subscribers. True, Comcast lost thousands of its more than 22 million pay-TV subscribers in the first quarter of 2012 as families gave up on the crushing monthly expense of video, but the rate of loss was slow: hard-core sports fans had nowhere else to go, for Comcast owns eleven immensely powerful regional sports networks across the country.
⁶

Comcast was the best at controlling city markets in America; the media-information company SNL Kagan noted in July 2011 that Comcast had won its designation for “most consolidated” markets, with 94 percent of the cable subscribers in San Francisco and 88 percent of the cable subscribers in Chicago. Comcast has done very well at home as well, with 86 percent of the cable subscribers in Philadelphia. It also has over 85 percent of cable subscribers in Houston.
⁷
The company had 2010 revenues of $36 billion for video and Internet access combined (94 percent of its total revenues), and most of that revenue came from expensive bundled video packages—yet the prices for all of these services continued to climb.
⁸
(Between 1995 and 2008, the price of “expanded basic” video packages sold by cable companies went up 122 percent, three times the rate of inflation; between 2002 and 2012, Comcast's average revenue per user per month for its video services—including high-speed Internet access—climbed 133 percent.)
⁹
Those pay-TV subscribers were a captive audience for bundles of services
that included high-speed Internet access, and Comcast was successfully shifting its business model: the company's high-speed Internet access subscribers were signing up far faster than the video subscribers were dropping off. Comcast faced some competition from satellite for video subscriptions, but virtually none for high-speed Internet access subscriptions.

So as of late 2011, after approval of the merger, Comcast's infrastructure and distribution business was accelerating quickly and the numbers were extraordinary. Revenues for high-speed Internet access were growing by 10 percent each quarter. Comcast's investors were happy because Comcast had finished building its network and was plowing more than 30 percent of its free cash flow (operating cash flow less capital expenditures) into dividends and share buybacks—keeping the price of its shares high. Comcast's costs for high-speed Internet access continued to fall while its margins became very high—40 percent or more—as the company charged high prices for the higher-speed access that more and more of its customers wanted.
¹⁰

Comcast's high-speed Internet access subscriptions were nearly twice as profitable as its video subscriptions because programming was expensive and cut into the profit margin. These high-speed Internet access subscriptions were growing swiftly in number at the same time that support-services costs were declining proportionally due to the greater scale at which Comcast operated—yet Comcast was still charging more per subscription.
¹¹
High-speed Internet access, indeed, was becoming Comcast's core business, contributing most of Comcast's growth. The product is enormously profitable; when the company adds more bandwidth for consumer use this does not mean it is facing commensurate costs: the pipe is already in place. Revenue and prices continued to climb, capital spending was down, and dividends were up: all the arrows were going Comcast's way when it came to control over high-speed Internet access in the markets it dominated.

At the top of the Comcast empire stands Brian Roberts. The Roberts family, like the Gilded Age families of the late nineteenth century, possesses enormous wealth and power; Brian Roberts was one of the highest-paid executives in the country in 2010, with total compensation of about $31 million (including a cash bonus of nearly $11 million).
¹²
Brian Roberts owns
or controls all the Class B supervoting shares of Comcast stock—an undilutable 33 percent voting power over the company, and thus effective control over its every step (though Brian controls just over 1 percent of Comcast's shares).
¹³

When Comcast purchased a $40 million corporate jet for business travel related to the NBCU merger, the jet's most frequent destination (after its home airport in Philadelphia) was Martha's Vineyard, where Brian Roberts, an avid sailor, has a home. According to the
Wall Street Journal
, FAA records also showed that Comcast's new jet made a large number of winter trips to Palm Beach, Florida, where Roberts has another home. In all, nearly two-thirds of this plane's trips were to Roberts's private homes or to resorts.
¹⁴
The travel of this one corporate jet is just a proxy for deeper issues: in 2010, the Corporate Library, an independent shareholder-research organization, gave Comcast an “F” for its corporate governance practices.
¹⁵
At the time, several of Comcast's directors either worked for the company or had business ties to it, and a third of the directors were over seventy—signaling that Brian Roberts's power over Comcast's operations was effectively unconstrained.