Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (26 page)

All the fees for advertising and subscriptions Comcast-NBCU can now charge will support the overall strength of Comcast's sports operations—allowing it to outbid other networks for future rights and, in turn, think of ways to raise its rivals’ cost of access to that programming. Comcast-NBCU's sports operations may not be bigger than ESPN, but the cable company may be able to squeeze CBS and Fox out of the game. And with hockey,
Sunday Night Football
, and the Olympics, it can put pressure on ESPN on a national scale.

More generally, the sea of revenue and exclusive arrangements that Comcast now commands will allow it to transform its premerger sports operations into must-have content (the NBC Sports Network) for most of the households in its regions—thus locking in those subscribers for the long term. This is the apotheosis of the TV Everywhere model: streaming sports content on an iPad to users who have paid for a cable subscription.

Comcast wants a share of the enormous revenues ESPN is now commanding. It wants its own quasi-online version of ESPN, but bigger, and it wants to be the only source of the sports content that it controls. As ESPN vice president Damon Phillips told the
Chicago Tribune
in 2008, with broadband Internet today, “people base their decision on speed and price. We think that will change, with content being the deciding factor.”
⁴⁰
The ability of a wire distributor to decide what content goes to which consumers carries with it the ability to monetize that content—charge differentially for it—and Comcast is unquestionably looking to have these additional revenue flows in place. As long as people are willing to pay a lot for sports, Comcast will keep making money.

There are lots of synergies here: Comcast grows sports, sports grows Comcast, and consumers are apparently willing to pay more every year for Comcast's sports packages. You might think that competition between Comcast and ESPN would drive prices down. But because Comcast
controls distribution, Comcast can bid more for rights and pass those increases on to consumers; ESPN then has to bid more and pass those increases on to Comcast. The competition is over revenue share between ESPN and Comcast, and it is the sports lover who pays. The daily cost of bundled programming is about the same as a nice lunch. And who wouldn't enjoy a nice lunch, even if the only restaurant in town keeps raising its prices?

The Comcast-NBCU merger is probably only the first of a series of transactions that will integrate content—particularly sports content—with distribution networks. In that way, Comcast-NBCU now resembles Rupert Murdoch's News Corporation. That giant media conglomerate says proudly that it communicates with 70 percent of the world's population on a daily basis. In the United States, News Corp.’s profits from its Fox cable channels alone amount to around $700 million a year, and it also controls sixteen RSNs, 20th Century Fox, vertically integrated satellite distributors in Italy and the United Kingdom, the
Wall Street Journal
, and 45 percent of Hulu, among many other holdings.
⁴¹
News Corp. has been clear from the beginning of the convergence era that it sees subscription models as the future. It is not enthusiastic about ad-supported online content: “Good programming is expensive,” Rupert Murdoch has told shareholders. “[It] can no longer be supported solely by advertising revenues.”
⁴²
Free content, to Murdoch, is a joke. Only the 2011 phone-hacking scandals involving Murdoch and his
News of the World
stopped News Corp. from buying BSkyB and its premium sports channels, and using them to squash competition from other pay-TV distributors.

As Comcast gets as big as News Corp., how will regulators in the United States react? When free broadcast of sports has been completely replaced by pay TV over a big Internet Protocol pipe, what will constrain the market-powerful distributor from raising prices every six months? Without rate regulation, and in the absence of competitive pressure, what can any federal agency do about ever-increasing prices being charged to loyal consumers? How will competing distributors get access to this programming without rules that govern what happens online, where the FCC's jurisdiction is highly uncertain? Will any programmer put sports online on a one-off basis, faced with almost certain retribution from the giant cable distributors?

With NBC Universal's sports content under its tent, Comcast is now in a position to direct the future of subscription sports in the United States—or at least to give ESPN a run for a lot of money. Comcast's control of its own distribution network changes its incentives and gives it more ways to beat down competitors than ESPN has: it can refuse to supply programming to rival distributors on reasonable terms; deny carriage of independent sports networks so new sports channels cannot reach Comcast's subscribers; extract equity in any channel that wants carriage; ensure that anyone signing deals with Comcast makes sports content available online only through the TV Everywhere authentication scheme, which requires that the viewer subscribe to Comcast pay-TV services; and force everyone else to pay exorbitantly for Olympics content bundled with a lot of lower-value programming. Sports is the battering ram.
⁴³

8

When Cable Met Wireless

BY 2012 THE WORLD WAS GOING MOBILE
, with major consequences for the data and video industries. People around the world love their handheld devices and prize mobility; in dozens of countries, there are more mobile subscriptions than there are people. For billions, a handheld device is always within reach. By 2011, Apple had logged 15 billion downloads of its apps; nearly 90 percent of all app downloads were of Apple-approved applications, and Apple had sold nearly 55 million iPads by the end of that year. By March 2012 the company was sitting on $100 billion in cash reserves.
¹
Some analysts have predicted an eighteenfold growth in wireless data from 2011 to 2016, as young people who want next-generation entertainment and information services come into their own.
²
The Comcast-NBCU deal is wholly compatible with the way things are done in the wireless world and fits neatly with Apple's aspirations as well.

All the big carriers—Comcast, Time Warner Cable, AT&T, and Verizon—are happy with the existing regulatory environment, which amounts to no supervision at all, and they are all doing well as scale businesses with no serious competition. But the two groups, wired and wireless, also do n0t compete with each other. The cable industry and AT&T/Verizon seem to have divided up the world much as Comcast and Time Warner did; but instead of “you take Philadelphia, I'll take Minneapolis,” it's “you take wired, I'll take wireless.” At the end of 2011, the market-allocation relationship between Comcast and Verizon became explicit when the two giant
companies agreed to market each other's services jointly.
³
Comcast, as well as Time Warner Cable, will promote Verizon Wireless services as part of its bundles, and by 2015 the cable companies will have the option of selling mobile services under their own brands. “We do not believe it is feasible to enter the wireless market as a freestanding new entrant,” Time Warner Cable CEO Glenn Britt wrote in a blog post about the Verizon deal.
⁴
Comcast, Time Warner, and Verizon Wireless will work together to shape the future as well, forming a joint venture to develop advanced wireless/wireline integration technologies. The deal came about because, with Time Warner, Comcast owned a substantial amount of spectrum that the company had bought during an auction held by the FCC in 2006; Verizon Wireless gets that spectrum for $3.6 billion in exchange for intertwining its business with that of Comcast and Time Warner. As Comcast CFO Michael Angelakis put it to analysts in September 2011, “We have no desire to own a wireless network. We have no desire to write large checks, but we would like to find a way where we can offer that kind of mobility for our products in a strategic way that makes sense.”
⁵

This cooperation indeed made eminent sense. In most areas served by Comcast and Time Warner, Verizon's FiOS—the only real competition the two face for wired Internet access—is not present. (Comcast and FiOS overlap in just 15 percent of Comcast's physical market; Time Warner and FiOS overlap in 11 percent of Time Warner's.) By cooperating, Verizon Wireless is implicitly promising that the FiOS service will spread no farther; Comcast and Time Warner, for their part, are implicitly promising that they will not go into the wireless business. At the same time, much-smaller Cablevision is in for a rough ride: it overlaps with Verizon FiOS installations in at least 40 percent of its market and will have to keep competing.
⁶

But the most important thing about the cooperation between Comcast and Verizon is that it sheds light on the fact that the wired truly high-speed access sold by Comcast and the wireless services sold by Verizon are not direct substitutes for each other. They are, instead, complements. Competitors would not agree to market one another's services.

Before we get into the differences between these two access networks—cable and wireless—let's consider their similarities. Both are highly concentrated and highly profitable realms. On the wireless side, AT&T and
Verizon Wireless together control two-thirds of the marketplace and generate 80 percent of its revenues, while enjoying (like Comcast) margins of roughly 40 percent. Sprint and TMobile, the third and fourth national players, trail far behind, lacking access to key infrastructure inputs—making their operating costs much higher.
⁷
The barriers to entry for any new national player are insurmountable.

The major wireless carriers, like the major cable distributors, have market power that allows them to raise prices at will: AT&T and Verizon often raise fees in concert, as they did in early 2010 by requiring all of their customers using feature phones to adopt data plans.
⁸
In 2011–12, first AT&T and then Verizon Wireless, looking to boost their average revenue per user, ended unlimited data plans for new users and instituted overage penalties. As a result, AT&T and Verizon subscribers buying new Apple iPad tablets found that they were using up their monthly data allotments within hours and paying hefty additional fees.
⁹

Devices are also central to this story. Smartphones (handsets used to process data and access the Internet as well as make phone calls) and tablets have different DNA from the personal computer and the World Wide Web. To most consumers, a smartphone's computing power makes it feel like a personal computing device, and about half of American mobile subscribers had one by 2012.
¹⁰
But the whole idea behind the classical model of Internet access was that any device could “speak Internet” and contribute to the network of creativity and invention that is the Internet as long as it followed a few simple rules. When Michael Bloomberg switched his proprietary news business network from devices hooked up to private telephone lines to terminals connected to the Internet, he did not have to ask anyone's permission to launch a new “service,” or check whether his terminals complied with anyone's idiosyncratic technical specifications. The owners of the telephone lines that Bloomberg's terminals first connected to in the 1980s were required to let his new business go over their wires without “editing”—interference of any kind. He could innovate while assuming that the network—the common-carriage telephone network—would not interfere with his plans.

The personal-computer model of communications comes from a tradition of nondiscriminatory commodity transport of information,
in which the network provider is not in charge. As discussed in Chapter 2, in the 1970s and 1980s, the FCC, worried that phone companies might control nascent data-processing services, drew a line between transport—conduit—and content, and instructed the phone companies to stay in the transport box.
¹¹
The network providers’ job was to make the tubes available and get out of the way; they were tasked with providing information-transport service to all comers without unreasonable discrimination and at reasonable rates, terms, and conditions. The FCC also required that any devices meeting published technical standards be allowed to attach to the communications network without asking permission from the network-service provider.
¹²
This model made the Internet and World Wide Web possible.

The smartphone/tablet explosion began in a radically different environment. Although wireless phone companies are labeled common carriers by statute, the FCC in early 2007 deregulated Internet access services provided by those same companies.
¹³
(Wireless voice services, which are accessed by the same devices using the same towers and other facilities, are still formally provided on a common-carriage basis, but the FCC has avoided imposing most of that regulatory scheme—particularly price regulation—on voice services.) Since then, both Verizon and AT&T have found a variety of ways to ensure that only smartphones and tablets of which each company approves can be used on their networks, that each device is tied to a particular authenticated subscriber, and that no device can easily be used on a different network.
¹⁴
The December 2011 joint venture between Verizon and Comcast represented another step down this walled-garden path: the spectrum Comcast sold Verizon allowed Verizon to consolidate its position so that it was operating only outside AT&T's frequencies. The device marketplace result: Apple's new 4G iPad, introduced in 2012, came in two flavors—one version that worked on Verizon's system, and one that worked on AT&T's.
¹⁵
Although smartphones and tablets may have great reservoirs of processing capability, the network operator—for the most part Verizon or AT&T—decides whether they will be permitted to use that capacity on its network.