Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (35 page)

The merger-approval dance requires a series of steps. What is called a “record” of filings with the FCC is created over a period of months, amounting to hundreds of thousands of pages. Deals are struck before and during the process to make stakeholders (such as interest groups and trade associations) who might object feel that they have gotten something out of
the process. In the Sirius-XM merger, for example, the Commission pointed to the new combined satellite radio company's voluntary commitment to offer lower prices for a three-year period as a public-interest benefit that would outweigh the long-term monopolistic harm generated by the transaction.
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Yet after all the filings and the hundreds of meetings, the last phase is often an unseemly scramble for concessions. “At the end,” the content-industry employee told me, “people will all be in the room trying to get something. It will matter who is in the room.”
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Mergers are fact-dependent—particular companies are involved, particular market power issues are at stake—but the final decision sets the stage for broad future policy even though only a few key actors are “in the room” at the end of the process.

For instance, after their last-minute struggles to merge at the end of 2005 with SBC and MCI, respectively, AT&T and Verizon voluntarily agreed to subject their DSL Internet access businesses to the FCC Broadband Internet Access Policy Statement, which entitles consumers to run applications and use services of their choice.
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The companies’ agreement made a nonbinding policy statement by the Commission appear suddenly binding—but for only part of the high-speed Internet access industry and not for the cable companies. The same 2005 merger approvals were used to pressure the phone companies to sell ten-dollar-a-month DSL services separately, divested from bundles of services, for two years. Commissioner Kathleen Abernathy felt that the Commission was overstepping the appropriate scope of its merger review by exacting these agreements, noting that “[i]t should not be standard operating procedure to craft company-specific merger conditions to address unknown and hypothetical competitive threats,” and urging the FCC to use its “customary administrative weaponry” of rulemaking and enforcement actions, rather than merger reviews, to shape policy.
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As Thomas Koutsky and Lawrence Spiwak of the Phoenix Center asked in a 2007 article, “Are consumers really well-served by backroom, closed-door negotiations between the regulator and prospective merging parties over important public issues?”
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Part of the reason for the somewhat chaotic process at the FCC is the interplay between its statutory public-interest mandate and the belief of some commissioners in the power of “intermodal competition.” Former
chairman Michael Powell largely deregulated the information-transport industry beginning in 2002 because he was convinced that different pipes and wires and airwaves would compete with one another, and this competition would protect consumers better than any regulations. Phone companies would battle cable, cable would battle satellite, and wireless and “broadband over powerline” would take on all comers. Given this policy focus, a wave of mergers had inevitably followed among the competitors in each industry.
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The result was extraordinary consolidation in the telephone world (both wireless and wired) and the cable arena but, ultimately, none of the anticipated competition.

At the same time, the FCC has broader authority over mergers than the antitrust division of the Department of Justice (DOJ). The Commission is charged with determining how the public's long-term interest will be served by any merger transaction, and so it takes into account traditional public-interest values like diversity of broadcasts and localism—considerations that are not relevant to DOJ review, in which the agency looks at the effects on competition.
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The Commission thus has the difficult task of addressing the concerns of innumerable groups about the effect of a given transaction on a wide range of public values while tacitly encouraging telecommunications companies that have sufficient scale and scope to survive—so as to avoid the need to regulate. What is fascinating is that this “awful,” detailed, backroom drafting of broad voluntary conditions routinely leads to deal points that are trumpeted by the commissioners approving the merger as wins for consumers but that in the end are either unenforced or unenforceable.

In 1999, the FCC conditioned a merger between SBC and Ameritech on SBC's commitment to enter into thirty markets outside its region. But no one defined “entry” SBC sold service to some of its Boston employees and then shut down the Boston operation.
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The “separate $10/month DSL” offering required by the Commission of AT&T and Verizon in 2005 was buried in the phone companies’ Web sites. The FCC had not said anything about
publicizing
the offering. Adherence to the FCC Broadband Internet Access Policy Statement (giving consumers free choice of applications and services) was meanwhile limited to slow DSL services and did not apply to the companies’ fiber communications—or to Comcast, Time Warner, and Cablevision.

Here is how the process at the FCC works: The merging companies figure out whom they have to please in order to avoid controversy and set to work persuading those groups or companies to support their transaction; the FCC, after much negotiating, creates conditions that it feels will serve the public interest and outweigh the anticompetitive harms created by the deal; the merging parties complain bitterly that the conditions are not specific to the merger but are broad attempts to make policy; a long series of meetings and filings is followed by a last-minute scramble for concessions; and on the day the deal is approved, the parties and regulators both issue press releases claiming victory.

This was the course taken by the Comcast-NBCU merger. The deal faced high hurdles because of its sheer size and the opportunity for abuse the arrangement provided. But thanks to years of positioning, lots of deftly distributed cash, and the organizational brilliance of Comcast's David Cohen, it went through with relative ease. There were a few hearings, but any concerns about the deal were overwhelmed by the orchestrated political support coming from all over America, as well as by the fact that the cable industry was already so concentrated that this single transaction would not by itself change the picture appreciably.

The theater of the deal, the march of posturing, lobbying, arguing, and persuading, followed the usual pattern. It was grand in scale and scope, perhaps, but it was not surprising or even particularly Machiavellian. And following a last-minute flurry of activity, it set the stage for future policy. There were conditions carefully worked out by the FCC (together with the Department of Justice's Antitrust Division) aimed at reducing the distributor's power to raise prices for its rivals and, particularly, its nascent online rivals.

The day the merger was approved, Cohen said that the conditions imposed by the reviewing agencies would not impair Comcast's ability to operate its business or disadvantage its competitiveness.
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The conditions Comcast had accepted did not seem likely to make any difference to media market structures in the United States—and particularly to the overwhelming dominance of local cable incumbents in the market for high-speed Internet access. Four months later, one of the FCC commissioners who had voted to approve the merger left to work for Comcast.
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As communications behemoths routinely consolidate, the public could be left with the impression—if it were paying attention—that nothing much happens between the announcement of a proposed deal and then, a year or so later, its approval by the relevant agencies. But this is not the case. For the gargantuan Comcast-NBCU merger, the staffs of the Federal Communications Commission and the Antitrust Division of the Department of Justice pulled large teams together to review documents, hold meetings, and agree on conditions. So did the company and industry lobbyists.

Comcast hired almost eighty former government employees to help lobby for approval of the merger, including several former chiefs of staff for key legislators on congressional antitrust committees, former FCC staffers and Antitrust Division lawyers, and at least four former members of Congress: Reps. Robert Walker (R-Pa.), William Gray (D-Pa.), and Chip Pickering (R-Miss.), and Sen. Don Nickles (R-Okla.). Many Comcast vendors were hired who did not need to register as lobbyists because they were strategizing in the background rather than meeting directly with agencies or legislators.
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Such profligate hiring had two advantages: in addition to attracting talented lobbyists who could speak meaningfully to former colleagues inside government, every lobbying or economic consulting firm whose employee was retained was effectively barred from offering objections to the deal because the firm would have a conflict of interest. To get the merger approved, Comcast spent many times what it had lavished on its last major deal, the colossal 2002 purchase of AT&T's cable systems, which had made Comcast the largest cable provider in the nation. David Cohen was rumored to have joked, “Let me know if there's anyone I haven't hired.”
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To avoid internal turf battles and ensure that its wide-ranging review process had a single manager, the FCC hired John Flynn, a former Supreme Court clerk, general counsel at a satellite company, and partner at a large Washington law firm.
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By all accounts the poker-faced Flynn kept a steady if not charismatic hand on the tiller at the FCC and was an extraordinarily quick study, something a deal with this many angles needed. He approached his task with humility and a low-key intensity. He had come to do this single job and would be gone when it was over.

On his arrival in the spring of 2010, Flynn was almost immediately presented with a demand from FCC management that the review go faster
than the staff had initially thought possible. The broad scope of the FCC's public-interest standard for reviewing mergers meant that the agency had to consider a host of issues beyond antitrust matters, including broadcasting, children's programming, diversity, and localism. Flynn's charge was to harness the staff's expertise in all these areas while ensuring that every secondary issue had economists and lawyers assigned to help, and to get the work done as quickly as possible. At the same time, he would be acting in public: summaries of meetings at the FCC and comments submitted on a merger are posted online; although these summaries are often unhelpfully superficial, the fact that X has met with Y will probably be known. Flynn and his team set to work, creating clear lines of responsibility and dividing up tasks. The Comcast-NBCU process would be the most intense review the FCC had ever run for a single transaction.
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Meanwhile, at the Department of Justice, the Antitrust Division assigned more than thirty lawyers, plus a group of economists, to its review process. The DOJ review would be more narrowly focused on whether the transaction had the potential to strangle nascent markets and raise competitors’ costs of doing business. The department is a law enforcement agency with a broad mandate rather than an administrative agency focused on a single industry, so it is less of a hotbed of gossip and public-private intrigue than the FCC; its lawyers tend to be discreet, and its documents and meetings are not made public. Lawyers within the Antitrust Division hoped to use their relative confidentiality to reassure companies and individuals who were worried about retribution from Comcast if they spoke up or handed over documents. Christine Varney, the division chief, quickly zeroed in on the merger's potential effect on online video, and the team met with scores of people (more than 125 companies in all) and sent out extensive and detailed demands for information to small and large cable operators, broadcasters, online video providers, and many other companies. The division ultimately reviewed more than a million business documents from the merging companies.

The Antitrust Division and the FCC closely coordinated their analysis. They held several key meetings jointly, pooled their economic and telecommunications expertise, and simultaneously announced harmonized conditions for the deal when the merger was approved. Such close coordination differed
from past procedures, and agency personnel told me that they thought their joint work had made it harder for the companies to play the agencies off against each other.
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At the same time, the coordination made some companies nervous: they were leery of talking to the DOJ for fear their discussions would leak out through the FCC and irritate Comcast. As one content-industry person told me, “You can't overstate the amount of fear people have in dealing with Comcast. The programmers are terrified, and they don't want to give things to DOJ that will then go to FCC. Even if a programmer has a multiyear contract with Comcast, things come up all the time—ambiguities—and they have to renegotiate. So having a long-term contract doesn't give a programmer any comfort. They're still completely stuck with Comcast.”
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Months of meetings and filings followed. Varney regularly met with Genachowski; she was said to be urging Genachowski to be firm. It was a rough time for the FCC chairman. While the Comcast-NBCU review was going on, the net neutrality issue was raging and staff were holding ten meetings a day internally trying to resolve policy and technical questions. By mid-2010 Genachowski's careful effort to consider all points of view, take a thoughtful centrist position, and not risk having President Obama attacked as hostile to business appeared to be backfiring. The carriers knew that Genachowski was considered thin-skinned, someone who could not abide the politics of personal destruction that prevail in the telecommunications and media sector; they figured that all they had to do was rattle his cage, and they would probably get what they wanted. The same dynamics seemed to apply to the Comcast-NBCU review, and Varney and her staff may have worried that when push came to shove, the FCC would be unable to stand up to Comcast.
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