Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (8 page)

Malone's maneuverings made it clear that it was time to rein in the cable industry. Regulators began to notice that competition from broadcasting services was not keeping cable prices down. TCI's power to obtain programming at the lowest rates going and to control the fate of new programming services was apparent. According to Mark Robichaux's excellent biography of Malone, in 1986 TCI paid ninety cents a subscriber a month for HBO, the largest pay channel of the time, while small cable operators had to pay more than five times that rate.
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Malone had programmers over a barrel: without access to TCI's portion of the market, cable-network programmers could not be certain of getting enough distribution to attract the national advertising that would make the network viable. Then-senator Al Gore called Malone “a monopolist bent on dominating the television
marketplace” “he called me Darth Vader and the leader of the cable Cosa Nostra,” Malone later recalled.
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In self-defense, Malone pointed to cable's investment in infrastructure, its wide variety of programming, and consumers’ affection for their cable service. He insisted that he wanted to plow his profits back into growth and investment that would bring communications into the twenty-first century—if only Washington would stay out of the way. Big wasn't bad, he reminded Congress in the early 1990s. On the contrary, to have a world-class cable industry, big was necessary; this was a business that depended on scale and scope. But suspecting that government regulators wanted to break TCI into separate content and distribution businesses, Malone preempted them: he spun off most of his content interests into a new company, Liberty Media.
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The core issue of rate hikes for cable services remained. The General Accounting Office (now the Government Accountability Office) sent a report in 1991 to Representative Markey, then chairman of the Subcommittee on Telecommunications and Finance of the House Committee on Energy and Commerce, showing that the cable industry had taken advantage of price deregulation by raising rates for the most popular basic-service package by more than 37 percent in real terms since 1986. During a single fifteen-month period alone—from the beginning of 1990 until April 1991—the monthly rates for that package had risen by 15 percent while the average number of channels per package had decreased. Consumers were paying more for less.
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In response to public anger over the cable operators’ abusive pricing and practices, the FCC suggested that six over-the-air stations (rather than three) would now be needed to show effective competition in markets where cable penetration was less than 50 percent before cable operators would be exempt from price regulation. But Congress objected to the FCC's attempts to regulate without its own explicit authority; the Cable Communications Policy Act had firmly reinserted Congress into the equation, and the legislature acted again to ensure that the FCC would exert no more “ancillary” authority without the go-ahead from Capitol Hill. Markey and Senator John Danforth, in particular, believed that cable operators were running a scandalously abusive business: rates were skyrocketing,
customer service was poor, and the growing vertical integration between cable programming and cable distribution was suppressing competition from satellite-based systems. Markey and Danforth doubted that regulators could rein it in alone, and they hoped that consumers’ anger over cable rates would be powerful enough to support a large-scale legislative effort. After prolonged wrangling, the two struck a remarkable deal.
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The 1992 Cable Television Consumer Protection and Competition Act

Even as cable rates for consumers rose in the late 1980s, the cable industry argued that it needed continued protection from competition from AT&T to enable it to grow large enough to reach all Americans. At the same time, access to programming controlled by the cable distributors was an increasingly contentious issue: satellite-service providers, who were just getting started, would have a hard time surviving unless cable distributors were required to give them access to their programming on reasonable terms. Meanwhile, the broadcasters, who were looking for new revenue streams to supplement their traditional advertising-supported model, wanted to be able to charge cable for the privilege of redistributing their very popular content.
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With all these factors to consider, Senator Danforth and Representative Markey envisioned a deal that would finally bring real reform to the industry. The phone companies were looking to get into cable someday (by entering what they then called the “video dialtone” market), and their competition might force the cable industry to ensure that cable programming was made available to satellite companies (and presumably, someday, to phone companies too). Consumer advocates, while not eager to see telephone companies using their monopoly status to sell video, did want to see an end to exclusive cable franchises and a firm reregulation of cable prices, and they were willing to cooperate with the phone companies to achieve this. They could also find common cause with broadcasters who wanted to ensure that cable paid more than a standard license fee for their network programming.
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Here was a unique chance to do something big: Congress could tackle cable exclusivity, help satellite services, give broadcasters a chance to make some deals, and impose price regulation on cable, all in one
legislative swoop. Senator Danforth introduced the bill, called the Cable Television Consumer Protection and Competition Act, on January 14, 1991; Representative Markey launched the same bill in the House, calling it “a pro-consumer, pro-competition bill designed to rein in the renegades in the cable industry who are gouging consumers with repeated rate increases.”
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What made the deal work was adding the broadcasters into the mix—the phone and satellite providers could make the argument that their competition benefited consumers and the still-powerful broadcasters, acting in their own interest, could push the bill through.

The only problem was that the first Bush administration was pushing a deregulatory agenda, and taking shots at cable did not fit in with that goal. In mid-September 1992 the cable industry launched a full-out campaign to defeat the bill, including ads in the
New York Times
and the
Washington Post
claiming that broadcasters were trying to “add a 20 percent tax to your basic cable bill” and that any money raised in this manner would “go right into the broadcaster's pockets.”
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Nearly four hundred cable executives traveled to Washington to appeal to their representatives to vote against the bill and sustain the expected presidential veto if it passed.
Broadcasting and Cable
, an industry magazine, reported that “congressmen were being bombarded by calls and letters stirred up by the industry's massive media campaign against the bill.”
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After the bill passed, President Bush dutifully vetoed it in October 1992, but the Democratic Congress overrode him—for the first and last time during the Bush presidency.
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The resulting legislation, the 1992 Cable Television Consumer Protection and Competition Act, reregulated cable rates, brought competition from the telephone companies into local cable service, helped the fledgling satellite industry gain access to cable programming, and gave the broadcast industry “retransmission consent”: the right to ask the cable companies to pay it for broadcasters’ programming. The central thing that
did not
happen—the thing that John Malone had feared regulators
would
do, that Nixon's appointees had urged, and that FCC lawyers had considered appropriate in the 1950s—was to separate content from distribution, forcing companies with de facto municipal monopolies over distribution to act as common carriers. In the end, the act created a thicket of rules that the cable industry has been able to sidestep through relentless litigation and
creative interpretation. And cable companies have consolidated through a long series of trades, acquisitions, and deals: where once there were thousands of cable operators with a few systems each, now there are just a few serving millions and staying out of one another's territory. By far the biggest of these is Comcast.

Meanwhile, the telephone industry was pursuing its own video market. The pole-attachment wars of the 1970s demonstrated the leverage AT&T could use to protect its existing market power. AT&T was not pressured by competition at that point; it controlled the U.S. telephone system through its equipment-manufacturing arm (Western Electric), its long-distance arm (Long Lines), and its twenty-two local Bell Operating Companies.

In the late 1970s and early 1980s, AT&T was making it difficult for new competitors to get a toehold in a variety of markets by using its power over local and long-distance service as well as its control of the telephone poles. John DeButts, then the president of AT&T, testified at a 1976 hearing before the House Subcommittee on Communications that if someone were to plug non-AT&T equipment into the AT&T network, the entire system might collapse.
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AT&T also made it difficult for long-distance competitors: MCI tried to connect its microwave-based system (which used the airwaves instead of wired phone connections) to AT&T's local monopoly networks, but AT&T refused; its Long Lines division had a lock on this business.
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MCI first filed suit in 1974, to be joined by the Department of Justice later that year. It was not until the beginning of 1981, with the support of William Baxter, President Reagan's first antitrust chief, that the case finally went to trial. Even then, AT&T did its best to stop the case during the summer of 1981 through both pressure from its allies in the White House (Commerce Secretary Malcolm Baldrige and Defense Secretary Casper Weinberger were widely reported to be in favor of dropping the lawsuit—Weinberger's argument was that an integrated AT&T was good for national security)
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and through legislation: HR 5158 would have forced the Antitrust Division to drop the case by legislating a less onerous solution to AT&T's monopoly power than divestiture. Markey was unable to prevent HR 5158 from leaving the Energy and Commerce Committee in the House,
and the bill was subsequently referred to the Judiciary Committee. There Chairman Peter Rodino sat on it, a brave decision, given that his home state of New Jersey was also AT&T's home state. Markey mounted the House of Representatives equivalent of a filibuster in 1980 to stop AT&T's efforts to pass HR 5158. As he told me in an interview, “I came to see that AT&T's resistance to innovation was at their heart.” His delaying tactics included demanding a reading of the complete bill (a formality that is usually waived) and the introduction of more than fifty amendments on which he forced debate. “We dragged it out so long that time eventually ran out.”
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The Reagan Justice Department's antitrust suit continued despite staunch opposition from within the administration. Finally, in 1982, Baxter persuaded AT&T to spin off its local companies and re-form them into seven independent regional Bell Operating Companies (RBOCs, pronounced “ARE-box”), a long-distance company (which retained the AT&T name), and Western Electric. The court document setting forth the terms of the breakup, the Modified Final Judgment (MFJ), was finally implemented in 1984 under the jurisdiction of Judge Harold Greene of the Federal District Court for the District of Columbia.
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The breakup of AT&T worked, mostly. It allowed MCI and new competitor GTE Sprint to offer long-distance phone service, creating a more competitive marketplace. Meanwhile, however, the RBOCs were prevented under the MFJ from providing long-distance or computer-processing services and from manufacturing telephone equipment.
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The MFJ limitations did not last long. Just three years after the corporate reorganization called for by the MFJ was finished, the RBOCs arranged for the introduction of legislation, the Swift-Tauke bill, that would let them back into these markets. Markey did his best to keep the bill from being voted on; he repeatedly introduced discussion drafts that kept the clock ticking, in an attempt to run out the clock. “I wanted those Baby Bells to develop their own independent lives,” he said. He remained focused on the importance of competition: “I thought that innovation would spring out of the best regulatory environment, one that honored competition. The longer we could avoid the mother-and-child reunion, the more innovation we'd be able to bring into the marketplace.” He managed to stave off the mother-and-child reunion in 1987, but in 1993 the Baby Bells succeeded in getting
the MFJ's limitation on their ability to perform computer-processing tasks lifted through a successful appeal at the D.C. Circuit Court of Appeals. Judge Greene issued a fifty-three-page opinion following a remand from the Appeals Court, forcefully expressing his view that the Baby Bells were anticompetitive and should not be permitted to generate the content of information services. As Judge Greene put it, “Were the Court free to exercise its own judgment, it would conclude without hesitation that removal of the information services restriction is incompatible with the [MFJ] and the public interest.” But the Department of Justice had recommended elimination of the restriction and the Court of Appeals had mandated that Judge Greene lift it. With the passage of time the Baby Bells had amassed the political capital they had wanted: they were ready to rid themselves of Judge Greene's control through legislation.
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In response, Markey offered a bill in which the telephone companies could be allowed into video services and long-distance services but would have to open their networks up to competition. Markey's bill, which passed the House in June 1994 by a vote of 423 to 5, required the phone companies to open up the “local loop” (the lines between a central switching station and individual houses) to competitors. It preempted state laws against competition with local phone companies and also included a provision to unbundle equipment with cable service. And it let the phone industry into the cable business. Phone would do cable; cable would do phone; manufacturers would be allowed into a new area of competition. All parties—cable as well as phone—would get what they wanted, but in exchange they would have to submit to the marketplace.
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