Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (7 page)

Broadcasters mounted an aggressive legal campaign against the cable industry at the FCC by way of complaints and lawsuits. In 1967, when Southwestern Cable was found to be transmitting Los Angeles broadcasting stations into San Diego, a local San Diego station complained to the FCC. The FCC decided the dispute in favor of the local station: even though its governing statute at the time said nothing about cable, the FCC reasoned that its authority to regulate and protect the nation's broadcasting system carried with it the power to regulate cable. Authority over cable's scope of business was “reasonably ancillary” to its existing powers. This interpretation of the FCC's powers had precedent: in 1965, in an effort to ensure that free over-the-air television was not destroyed by the advent of cable, the FCC had issued “must carry” rules requiring cable systems to carry the signals of local television stations. The Supreme Court upheld the
FCC's broad view of its statutory powers in 1968.
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Thus, it appeared that the FCC had ancillary jurisdiction to regulate cable, too.

By the late 1960s, the broadcasting companies’ view of cable had changed yet again. Now the cable providers were not simply pirating broadcast programming; under the right ownership, cable might provide additional outlets for network programming by reaching otherwise unreachable audiences. Adding to this impression, the Supreme Court in 1974 held that cable systems were not liable for copyright infringement when they retransmitted broadcast signals as long as they paid standardized license fees. This “compulsory license” helped the cable systems: it brought them access to programming without having to negotiate thousands of individual agreements with powerful, centralized broadcasters. The government intervention helped the insurgent cable business grow. It also ensured that the incumbent broadcasters would remain locked in a relationship with the cable operators.
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At about the same time, President Richard Nixon's Cabinet-level Committee on Cable Communications submitted a stern recommendation to the president. While the nascent cable industry had much to offer and the programming it transmitted should largely remain unregulated by the FCC, the risk of abuse by local monopoly cable providers was too great to be ignored. As the committee warned: “We recommend adoption of a policy that would separate the ownership and control of cable distribution facilities, or the means of communications, from the ownership and control of the programming or other information services carried on the cable channels.”
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The mainstream conservatives at the heart of the Nixon administration felt strongly that cable's “natural monopoly” of distribution facilities—it was so expensive to install that it made sense to have just one in each town—created a risk of the cable operators’ becoming gatekeepers of information. Without a definitive separation between transport and programming, continuous oversight would be needed to ensure that the cable operators’ physical monopoly power was not leveraged into editorial power over the availability of speech and information. A clear separation requirement between content and delivery would impose far less regulatory burden than the constant jockeying and influence peddling that would be involved in assessing whether programming
was being fairly treated. Separation, in short, was the lesser of two regulatory evils.
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But the recommendation that a national policy be adopted that would affirmatively separate conduit from content—effectively turning cable into a common carrier—did not prevail. It was too difficult to get a bill through Congress that would do the job; no one involved had enough will to be clear. As the telecommunications scholar Monroe Price put it at the time, the implicit message back from Congress in response to the White House's draft bill was “to continue to allow the economic bargaining [between the cable industry and the FCC] to take place at the agency level, with Congress available as a last resort, not to be utilized except as an ultimate check on the performance of the Commission.”
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Broadcasters have thus had a love-hate relationship with cable distributors since television became widespread. When broadcasters were powerful, they used their sway with the FCC to constrain the markets into which cable could bring distant broadcast programming and ensured that cable always carried their signals. The failure to separate conduit from content made it inevitable that broadcasters and cable companies would always be in conflict. Ultimately, both industries would later discover that there was more money to be made through cooperation than opposition.

Consumers, meanwhile, made little fuss about paying for television over a cable wire. As John Malone, the foremost U.S. cable executive of the 1990s, described the situation to the
Wall Street Journal
in 2009, “The way it was successful was blending together the transport service with the charge for the content. When you were a cable subscriber, you weren't sure whether you were paying for connectivity or whether you were paying for the content that was embodied in the connectivity.”
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The cable industry from the beginning had blended connectivity with content and did not allow subscribers to buy access to individual channels. But people loved the service, and over the years cable-designed bundles have served the industry well.

Another industry was afraid that cable companies might soon muscle into its business: the telephone companies. In the 1970s, the issue was not whether cable would replace telephone's voice service; that was decades away. It was something more mundane: whether cable could have access to
the millions of telephone poles that phone companies had erected around the country. By the 1970s, 4.5 million Americans had subscribed to cable services. But AT&T was charging the cable companies a hefty fee for the right to use its telephone poles to string cable. At the time there was no particular economic reason for AT&T to refuse the cable companies access to its poles on reasonable terms. But no phone company wanted the cable broadcasters showing up in its neighborhood before it had had a chance to roll out its own video service, even though that service was years in the future.
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Representative Ed Markey of Massachusetts, who began his career in the House in 1976 just as the pole-attachment wars began, remembers being mystified by AT&T's attitude. “The phone companies were using their leverage over the poles to jack up prices. Sure, having twenty companies attach their lines to your poles might be a problem. But this wasn't about twenty companies. This was about one or two cable companies. I was amazed that it took invoking the machinery of government to get these guys [the cable companies] in the game.” After three decades in the House, Markey is silver-haired but bright-eyed, his strong Boston accent undimmed by years of commuting to Washington, his shining tie descending expertly from a well-turned collar, his hands relaxed and expressive. He has been at the middle of telecom tussles for years—serving as either the chairman or the ranking member of the House Energy and Commerce Committee's Subcommittee on Telecommunications from 1987 to 2008. There he was the principal author of many of the laws now governing the nation's telephone, broadcasting, cable television, wireless, and broadband communications systems—all the while exuberantly holding hearings and handing out pungent quotes. In Markey's mind, pole attachments are a good example of the ongoing struggles between incumbents and new, disruptive actors who want to provide services to the public. As he put it, “The government is the midwife in helping technology get to the marketplace.”
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Pole attachments had been an issue for cable companies from the beginning. Cable operators can reach houses and offices only by running wires along streets so that lines can be “dropped” to individual subscribers. Wires can be threaded through existing conduits or hung on poles, and in many places early cable-systems operators depended on access to poles
that had been built by the local telephone utility. But the phone companies used their control over poles to gouge cable systems, often by doubling or tripling the rates they charged electrical utilities and other phone companies.
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The FCC took up the issue in 1967 and was asked to expedite the inquiry by the NCTA in 1970.
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But six years later the FCC decided that it did not have clear jurisdiction over the issue and tossed it over to Congress.
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After a great deal of wrangling, in 1978 Congress passed a law requiring that where phone companies gave the cable industry access to their poles they would have to do it on reasonable terms to be set by the FCC. These pole-attachment rules are a good example of government intervention enabling a new market. The law gave cable a subsidy—in the form of a preferential rate on access to telephone poles—that is still in place today.
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In the ensuing decades, cable ceased to be a mute pipe for distributing existing content to places with poor reception and became a source of programming. There was a great deal of investment in cable infrastructure to tie together cities and towns, and many new networks cropped up that were delivered solely over cable. But cable operators often overextended themselves and lacked the money to maintain or enhance their networks; they had to raise their prices, and customers complained. Companies began to consolidate, and throughout the 1970s and 1980s, cable distributors fought for control over exclusive municipal franchises. Dozens went out of business.
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Meanwhile, the rules that were supposed to govern the relationships between cable and broadcast, and between cable and telephone, were not altogether clear—and regulators began to worry this could be a problem as the market expanded and the technology progressed. There was a patchwork of authority drawn from federal and state sources, and municipalities and city councils were finding creative ways to be persuaded by cable operators to grant exclusive franchises. As Paul Baran, the father of packet-based communications, described the situation in a 1999 speech, “When the economics of cable allowed extending cable to the cities, there was a bidding war for the franchises. All sorts of games were played at the time, including rent-a-citizen, giving out cheap stock to bribe local political figures, etc.”
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Cities made exorbitant demands for “sweetened” bids, and
city officials sometimes used their power to have part of the local cable company's profits assigned personally to them; in return, cable-system operators sought affiliations with well-known locals (“rent-a-citizen”) to bolster their bids and promised cities whatever they asked for—services to libraries and schools, community channels, and interactive systems that often were never built.
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In an attempt to bring order to a complex system of federal and state requirements and to make the franchising process more certain for the cable operators—and in response to concerns expressed by state officials and federal representatives about the discretion and opportunity for corruption inherent in the patchwork of cable-franchising rules—Congress passed the Cable Communications Policy Act of 1984. The FCC had been concerned throughout the 1970s about local franchising decisions but felt that it could not impose uniformity without legislative authorization.

The centerpiece of the law was a provision that only locations without “effective competition” for cable—which the FCC determined to mean locations that did not have at least three over-the-air broadcast channels—would be subject to rate regulation. For everywhere else (about 97 percent of the country) the act lifted price controls at the end of 1986, freeing the cable industry to charge whatever the market could bear for its local monopoly services. The only rates that remained regulated were those for “basic packages,” but cable operators were free to remove from “basic” tiers any channels that were not subject to the “must carry” rules. In effect, this meant almost anything other than the broadcast networks. In short, the FCC's definition of competition meant that cable systems were deregulated by the end of the decade.
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The Cable Communications Policy Act was a triumph for the cable companies, for in addition to deregulating rates it also prohibited phone companies from competing in the cable business. (Even with the breakup of AT&T at about the same time, people believed that the local incumbent Baby Bells could act anticompetitively toward the emerging cable industry if they were given a chance to offer programming.) Monopoly without oversight made the cable companies attractive to Wall Street. Almost every municipality in America had already given a cable company an exclusive franchise, and those companies were poised to make enormous profits.

As things turned out, the broadcast networks did not provide the “effective competition” that was supposed to constrain cable rates, even if there were many municipalities that had enough over-the-air signals to meet the FCC's requirements. Indeed, no business was in a position to constrain these rates; today's satellite pay-TV services that market directly to consumers had not yet been launched. The cable industry did invest in upgrades that improved the country's overall data infrastructure, but this did not improve day-to-day service for many smaller customers. Although in later years the cable industry began providing new services or other inducements to retain customers when rates went up, in the heady days of 1980s deregulation cable companies simply raised their prices.
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By 1990, John Malone's giant TeleCommunications, Inc. (TCI), a Denver business he took over in 1972, was the largest cable distributor in the country, with 8.5 million subscribers, about a fifth of the market.
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TCI had grown through Malone's tough, shrewd management as well as acquisitions and partnerships; as Ken Auletta reported in a 1994
New Yorker
profile of Malone, a dollar invested in TCI in 1975 was worth eight hundred dollars in 1989.
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Believing that cable would grow by offering content that was unavailable from free over-the-air carriers, Malone had cut deals with networks like CNN, ESPN, HBO, and MTV that gave TCI the best discounts for programming in exchange for guaranteed distribution to TCI subscribers. Meanwhile, TCI's rates soared, even as customer service plummeted.
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