Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (31 page)

At bottom, the connecting networks are irritated that Comcast appears to be asking them to subsidize its local network when it is sitting on huge profits and should have the incentive to improve its local network infrastructure on its own. From their perspective, it appears that Comcast would rather have an inefficient network and charge everyone for it than have interconnecting networks carry traffic to Comcast in the most efficient way. Comcast has the power to protect its business by preventing any infrastructure provider from building facilities closer to Comcast's subscribers. Comcast can require that interconnecting networks be built only to its designated “meet points” at its network boundaries.

This dispute has grown into a major business and policy problem because the carriage of traffic to Comcast subscribers is not competitive. Content providers have no other way of reaching Comcast customers. So Comcast has an incentive to constrain its interconnection capacity with other networks and to charge for interconnection in ways that will raise its rivals’ costs. If Comcast decides not to play nice at the edge of the network, there is no way to route around it.

In November 2010 a battle royal over Internet interconnection broke out when Level 3 made a deal with Netflix to carry its traffic to Comcast's retail, last-mile network. Although the details are unknown, Comcast apparently demanded that Level 3 pay for local distribution, which had the effect of raising Netflix's costs. Level 3 felt that Comcast was making up its rates arbitrarily and planning to disadvantage Netflix through its interconnection arrangements. But Level 3, which carries the most Internet traffic of any network in the world, also felt it had little choice but to pay up—while complaining to the news media.
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Coverage of the fracas was swift and confused. A few months later, Level 3 announced that it would buy another connecting network, Global Crossing; the betting was that Level 3 needed even greater scale and power to control its own destiny in the face of ever-consolidating last-mile providers.
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Complicating the story further, content companies like Google have begun building their own pipes and connecting directly with last-mile networks like Comcast, thus avoiding having to buy connectivity from Level 3.
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To prepare for the coming battles, everyone is bulking up and consolidating, hoping to achieve advantages of scale and scope that will give them the upper hand in disputes over payments.

In effect, Comcast and the other major cable distributors, unconstrained by competition, are segmenting the market for wired Internet access in America. The rich will get moderately high (by global standards) speeds at very high and incrementally increasing prices (or for incrementally increasing revenue per user as Comcast's costs go down and users sign up for impenetrable bundles of services); the poor will often not be served at all; and the state will be left to fill in the gaps, at a higher cost for everyone. Comcast's plan seemed to be to provide high-data traffic speeds (up to 105 Mbps) to major markets at a very high price—an initial cost of $105 a month as part of a bundle, or $200 a month a la carte, with a $249 installation fee.
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Standalone data access was twice as expensive on its own; to avoid being treated as a mere pipe Comcast wanted to be able to ensure that consumers were paying for its video and voice services.

A 300-GB monthly cap—Comcast's analogue to the controversial Bell Canada formula—will remain in place. That cap would be reached in several hours with steady use at Comcast's highest speed or, perhaps more realistically, in a week by watching one high-definition movie a night at 30–40 GB each. Tim Beyers of the financial-services company Motley Fool noticed the tension in Comcast's announcement of its initial 250-GB cap: “Anyone notice the conflicting messages? Here, have a Maserati. All we ask is that you stay within the 25 mph zone.”
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The costs were very high indeed: by contrast, in Paris consumers have 100 Mbps service for $40 a month, in Lisbon the same service costs $63 a month. And Comcast's expensive services were available only in major markets like Seattle, San Francisco, Portland, Denver, Salt Lake City, Baltimore, and Philadelphia.
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Meanwhile, for less well-off areas, nonurban areas, and poorer consumers, high-speed Internet access is simply not available. Towns fifty or sixty miles away from downtown metropolises often cannot get cable, and even “obsolete” DSL is hard to obtain. The FCC says that as many as 26 million
Americans live in areas unserved by even very slow (4 Mbps) broadband, and a third of Americans (roughly 80 million adults) do not subscribe even if they can.
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By contrast, over 90 percent of people in South Korea and Singapore subscribe to high-speed Internet access.
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Why has this happened?

The third of Americans who do not subscribe say that cost is a major obstacle to adoption.
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A thirty-dollar-a-month offering of one gigabit per second (Gbps) service, to be available throughout South Korea by the end of 2012, is unthinkable in America today.
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The Americans who are not served suffer from the country's lagging deployment of high-speed access. Wall Street frowns on major capital expenditures by the carriers, preferring companies that have large amounts of free cash and pay handsome dividends. Outside major markets where they can cluster and charge high prices to city dwellers, the carriers doubt there is a business case for high-speed Internet access, and the situation is particularly hopeless for Americans in rural and tribal areas. It looks like we will all end up paying for federal subsidies of high-speed data service in those areas. The resulting connections will still probably be substantially slower than those provided to urban dwellers. We will have created two digital Americas, at tremendous expense to all involved.

At the same time, when it comes to usage-based billing and interconnection fees (not to mention monthly subscription fees charged to consumers in urban areas), Comcast and the other cable distributors have the market power to raise these at will, without regard to actual costs—and in clear service of their own corporate goals of avoiding just-pipe treatment for as long as possible so as to delay the advent of competitive services. So far, would-be regulators have shown little initiative or seemed to lack the information necessary to change the situation. At the Cable Show in May 2012, Julius Genachowski praised usage-based billing, calling it “healthy and beneficial” for broadband and high-tech industries.
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Pure communications transport services like those offered by Comcast have historically been subject to extensive regulatory oversight. The government has always, in the past, imposed common-carriage and universal-service obligations on these companies so that they would offer service to all comers without unreasonable discrimination at reasonable rates, terms,
and conditions. Regulators have recognized that these transport services are expensive to build and that it makes no sense to build more than one in a given area, so they have given out franchises in exchange for promises to serve the entire licensed area for reasonable rates—which the government then monitored. Those rates have allowed the creation of cross-subsidization schemes that made it possible to provide all Americans (even those in remote areas) with communications transport. Result: a large national market to sell to, commercial and personal freedom based on the inability of the monopoly carrier to discriminate in its own favor, and a single basic facility on which all Americans could depend that knitted them together as a country.

But to the country's detriment, America has wandered far from this model. As Representative Ed Markey says, “As a nation, in constructing our economic strategy, we should be saying that we should be number one in speed and access. We need to be Number One, looking back over our shoulders at Number Two.”
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But we are not, and the costs to innovation, economic growth, and national competitiveness—not to mention fair treatment of new businesses and ordinary citizens—are great. How is Netflix doing today?

10

Comcast's Marathon

THE FEBRUARY 2010 HEARING BEFORE THE
Senate Antitrust Subcommittee was more about politics than policy. The senators were there to put the witnesses through their paces, and they had the ability to raise the political stakes, but the merger would ultimately be reviewed by the Antitrust Division of the Department of Justice and the Federal Communications Commission. Opposition was strong from the public advocates’ side, but it was a vertical merger, and suing to block it would be an uphill battle for the Justice Department, given a string of cases in which vertical deals had received favorable reviews. Senator Herb Kohl, opening the hearing, saw his role as setting the political stage: “So the role of the antitrust regulators at the Justice Department and the FCC will be vital to preserving competition,” he said. “Should these agencies decide to allow this merger, we believe it is essential that they insist on strong conditions to protect consumers.”
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The signal was clear: most of the people at the hearing considered the merger a done deal. Some conditions might be imposed, but it was going to go through. Eleven months later, it did.

Comcast's run through the process was a marathon, not a sprint. The company prepared a battle plan in 2009, anticipating months of maneuvering. The Comcast government affairs office prepared (and inadvertently sent to me) a spreadsheet of “priority 1” contacts the company planned to make as it rolled out the merger announcement. These were people or entities who might oppose the merger, listed with contact information and
a designated Comcast (or NBC) employee tasked with keeping in touch. Public-interest groups, networks, sports teams and leagues, and unions were all on the list.

The campaign started off with a bang. The initial FCC filing was a hefty document—almost 150 pages long—laying out the structure of the transaction and the benefits and synergies it was expected to create. These benefits included an increase in the amount of content available to consumers, more and better local programming, and the fostering of innovation. And there was more: “the Applicants propose to enhance those benefits by offering an unprecedented array of specific and verifiable public interest commitments to expand the amount, quality, and diversity of programming across multiple platforms.”
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These public-interest commitments included promises to maintain free over-the-air broadcast and to provide the same amount of local news on NBC-owned stations that the stations were currently offering.
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But the beneficiaries were strategically chosen as well; for example, commitment 5 was targeted at a pet charity of FCC chairman Julius Genachowski, Common Sense Media, whose board he had helped to form years earlier: “In an effort to constantly improve the tools and information available for parents, Comcast will expand its growing partnership with Common Sense Media ('CSM'), a highly respected organization offering enhanced information to help guide family viewing decisions. Comcast will work to creatively incorporate CSM information in its emerging On Demand and On Demand Online platforms and other advanced platforms, and will look for more opportunities for CSM to work with NBCU.” Whether Genachowski saw through the ploy or not, he must have had to smile at the giant company's personal touch. Another friendly dart aimed at the chairman: “Comcast is currently in discussions with CSM about a broader partnership to be launched on completion of the transaction”—in other words, provided Genachowski's FCC approved the merger. “Comcast will devote millions of dollars in media distribution resources to support public awareness efforts over the next two years to further CSM's digital literacy campaign.” Common Sense Media honored Genachowski with its Newt Minow Public Policy Award for Outstanding Leadership on Behalf of Children and Families in February 2010; Comcast was a
“benefactor” of the Kennedy Center event at which the chairman received the honor.
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Genachowski's connection to Common Sense Media had existed long before Comcast announced its commitment to the nonprofit; in turn, Common Sense Media's honoring of Chairman Genachowski was no doubt equally heartfelt, based as it was on a long friendship between Genachowski and Jim Steyer, CSM's energetic chairman.
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Still, recognizing the connection was a brilliant move on Comcast's part.

Genachowski was not the only target. Commitment 12 was aimed at FCC commissioner Michael Copps, a progressive Democrat who was expected to have concerns about the merger. The company promised to develop new approaches to the distribution of public, educational, and governmental programming. Commitment 16, a promise to maintain the journalistic integrity of NBC News, was likewise aimed at Copps.
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This isn't speculation: David Cohen, the man in charge of Comcast's merger strategy, acknowledged the importance to the merger of these kinds of commitments, saying, “We've proposed a series of conditions that we think make sense and that we think are appropriate. … We have things [in the joint venture agreement] that are near and dear to Copps's heart, including commitments to maintaining local news coverage at NBC owned and operated stations.”
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Comcast's list of public-interest commitments focused importantly on broadcast, even though NBC-the-network was not at the heart of the deal's value. The company committed to maintaining free over-the-air television and to preserving NBC News's independence. Minority groups also received attention—Comcast would expand Hispanic broadcasting—and unions’ concerns were addressed: Comcast would honor NBC Universal's collective-bargaining agreements.
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