April 2013 Archives

April 19, 2013 9:54 AM

Captive Audience: Any Freedom In Sight?

In my earlier post on Susan Crawford's Captive Audience, I concluded by noting that some of the most interesting questions raised by the book are not actually discussed, or even articulated.  The questions raised all relate to how Professor Crawford explains that Comcast, as the dominant incumbent provider of subscription television service, has used (and, she predicts, will continue to use) sports programming to maintain its current market dominance in subscription TV, and possibly transfer some of this market power into Internet content.  

The Comcast/NBCU Merger

Crawford weaves together a compelling story about Comcast's past anticompetitive behavior toward competitive subscription video providers, like RCN and Verizon.  Comcast's pre-NBCU exclusionary behavior was also predicated on vertical integration with regional sports networks (RSNs).  The acquisition of the NBC broadcast network, she adds, will enable Comcast to purchase even more sports content in the future and extend its pattern of anticompetitive behavior.  Therefore, she speculates that, with the addition of the NBCU cable channels Comcast will have other, non-sports tools with which to weaken, or exclude, video competitors.

This is where Professor Crawford leaves us, but is this it?  Crawford expresses regret at the failures of the FCC and the Antitrust Division to protect consumers in the context of this merger.  Her disappointment is understandable, but it is also crying over spilt milk.  

For Professor Crawford, the only hope would be a regulatory re-write in order to separate content ownership from cable/broadband distribution.  But, if RSNs are the source of Comcast's power over competition, then Comcast obtains this power as a result of an agreement with the sports team or a league.  Agreements that "unreasonably" restrain trade are always a violation of Section 1 of the Sherman Act

Antitrust, Sports and Broadcast Television

 All professional sports leagues get some limited antitrust exemptions to allow their teams to cooperate for reasons that are integral to producing their product.  For example, Congress passed the Sports Broadcasting Act of 1961 to allow professional sports leagues to have antitrust immunity in negotiating television contracts with broadcast networks (not cable, satellite, or RS networks).  

The motivation for this exemption was to allow the leagues to set what were considered commercially reasonable blackout policies in order to protect the live gate revenues of home teams.  In order to protect the home teams' ability to continue to maximize ticket sales, the league believed that it had to prevent other individual teams from striking their own bargains with broadcasters that would allow other games to be broadcast in competition with the home teams' game.

What is interesting about the Sports Broadcasting Act is that, with respect to broadcasters, negotiating a "television contract" was not fraught with much competitive peril.  No matter who won the broadcast rights, every television owner could still watch every broadcaster's channel.  Would Congress have still passed this law if the exemption gave the league and the network owner the power to harm consumers or other networks?  

This is the situation Crawford describes with Comcast and the RSNs.  They make deals with teams or leagues for the "exclusive" rights to games--but not just the exclusive right to televise games to their customers on their systems.  No, the RSN is buying an "exclusive" for an entire market area, and can therefore decide on what, if any, terms competitors and other incumbent cable operators will be able to distribute these games to their customers.  Are the leagues using contracts with RSNs to restrain trade?                                     

 A Second Chance for the Government?  

Yes, of course they are.  This was the recent conclusion of a federal district court judge in Manhattan in ruling that allows class action plaintiffs to move forward to discovery on their antitrust complaints against the NHL, MLB, Comcast, DirecTV, and several RSNs.  In a 53 page opinion the court explains that plaintiffs' complaints make a "plausible" showing that the defendants have violated the antitrust laws through distribution agreements that amount to territorial market allocations that unreasonably restrain competition.

 comcast dr evil.jpg                                             Restrain trade?  moi?

Note, however, that the counts in these complaints do not allege harm to competition and competitors, the harm on which Professor Crawford is focused.  But this does not mean that these antitrust complaints cannot succeed, they just haven't been brought.  In these two cases (joined as Laumann v. NHL, et al.) the class action plaintiffs are consumers (viewers) of the NHL, MLB, and of Comcast.  See plaintiff's complaint against MLB here.

The plaintiffs contend that they have been harmed as the result of an elaborate territorial allocation scheme devised by MLB and the NHL, and enforced through agreements with the RSNs, who understand that none will attempt to compete outside of its specific service territory.  These agreements prevent consumers from buying out-of-market games on anything less than an "all or nothing" basis, and the leagues have agreed to protect the RSNs from competition so that "in market" games are not available, either online or on any other cable/satellite channel, at any price.

Contrast these professional sports RSN agreements with the NCAA agreements, which--as a result of the NCAA's prior antitrust violations--do not mandate exclusivity.  Thus, if a local channel (like UHF channel 20 here in the DC area) buys the rights to broadcast Maryland Terrapins basketball games, their broadcast will still air even though the same game might also be purchased by a national network like ESPN.

While the plaintiffs in the Laumann case have won the ability to move to discovery and a trial, they probably won't, because Comcast, the other RSNs, and the leagues have every incentive to write big checks to the plaintiffs in order to avoid the "NCAA" precedent.  But, the success of these class action suits may well embolden other antitrust enforcers, like state attorneys general, or even the Department of Justice, to bring their own actions.  So perhaps consumers can avoid much of the long-term "captivity" Professor Crawford predicts.




April 17, 2013 5:13 PM

The DoJ's FCC Alley-Oop

At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.  

The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy).  Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots."  Now I know.

The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use."  

If You're Not Low, You Must Be High

The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings.  The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.  

By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing distinguishing the leaders from the laggards in wireless market share.  The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.  

The DoJ warns that this trend should be expected to continue into the next spectrum auction as well.  Why the next auction?  Because the next auction is for LOW frequency spectrum, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile.   

A Low-Down Dirty Shame

If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon.  But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right?  Either way . . . it's cool, says DoJ.   

You see what they're doing here?  First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input.  Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.

Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place.  You see?  The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output.  This is because they know that their competitors cannot increase output to steal customers from the input-favored firms.  Stick to the basic format, and this argument always works. Cool, huh?  

If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal.  But, if DoJ's argument is that transparent, and that malleable, why are they using it now?  

The FCC Lobs . . . And DoJ Dunks!

First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts.  If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.

Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's.  After all, they didn't get to be the two largest companies by not using their "first mover" spectrum.  So, what about all the other low frequency spectrum?

"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008.  The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services.  And, according to no less venerable a source than Wikipedia, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers.  So, why is the DoJ insinuating otherwise?

Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum.  So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.

Lebron dunk.jpgDoJ . . . with no regard for human life!

So, do you think any Senators called out William Baer on this at the oversight hearing yesterday?  According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum.  You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
April 2, 2013 11:54 AM

Captive Audience: A Fairer Review than Most You've Seen

A lot of people have written "reviews" of Susan Crawford's Captive Audience, or, at least, pretended to on Amazon.  But did they really read the whole book?  I kind of doubt it.    Just check the Amazon reviews for this book--nothing but 4 and 5 stars and 1 and 2 stars (i.e., just "homers" and "haters").

If I had to offer an explanation for the polarity of reviews, I would say it's because this book is really two books.  One, the first 232 pages, is a well-done history of competition law/regulatory policy and a generally well-done attempt to give this history a modern context, using the 2010 merger of Comcast and NBC Universal.  You may not agree with Ms. Crawford, but she does offer plenty to think about.

The "other" Captive Audience, couldn't be more different, and shows especially poorly when contrasted with the scholarship that went into the bulk of the book.  The last 2 chapters are only 37-38 pages total.  Thirty pages were supposed to explain and analyze the wireless industry (technology, structure, and competition), the proposed AT&T/T-Mobile transaction, and municipal/government funded retail broadband, plus muni-funded "middle mile" wholesale transmission.  

The remaining 7-8 pages are a spaghetti-style approach to a conclusion. The author offers up several unexplained policy prescriptions based on her casual observations about the "non-cable" parts of the Internet and hopes something will stick.  In the interests of being a charitable critic, I'm going to ignore these last 2 chapters--if they weren't worth the author's time, they aren't worth ours.   


Overall: 3 stars (out of 5)


This book, or at least the first 86% of it, does a very thorough--and, at times, entertaining--job of explaining potential causes for concern resulting from a dominant provider of broadband distribution also owning at least some "must have" content.  The exercise is not merely theoretical, as Ms. Crawford contends that Comcast is the dominant provider of residential broadband service throughout its service territory.  A position that, she argues, will only be exacerbated and extended as the likely consequence of the combination of Comcast and NBC Universal, which was approved by the FCC in 2010 with paper weight conditions.
 
The two major concerns for consumers--and for society--Ms. Crawford explains, are that 1) ownership of content may raise the already-formidable barriers to entry in the broadband Internet access market--further cementing the incumbent's market power over the broadband "pipe" to the Internet, and 2) content ownership--particularly of "must have" programming, such as live local and national sporting events--will allow the integrated firm to frustrate rival content owners (by withholding access to the broadband firm's content, and (at least constructively) raising the cost to consumers of subscribing to a rival content owner.

The easiest way to avoid these potential problems, Ms. Crawford argues, is to separate broadband distribution (provision of Internet access service) from content ownership.  If Captive Audience has a consistent theme, this is it--structural separation of distribution and content.  All in all, Ms. Crawford does a good job in providing the historical context of the antitrust laws, generally, as well as the regulatory history of this particular policy prescription as it would apply to the cable/broadband industry.

Conflicted About Regulation?

It is notable that, while Ms. Crawford is frequently portrayed as a champion of regulation, her narrative of government behavior virtually throughout the existence of the cable industry, reflects frequent--if not consistent--disappointment with every level of government oversight.  Specialized regulatory agencies, like the ICC and the FCC, are subject to even greater criticism.  At times, it seems like the author is frustrated to the point of questioning whether effective regulation is even possible; hence, her "structural separation" solution. 

Other times, Ms. Crawford simply makes excuses for her disappointment with the actions of the government.  For example, when discussing the Antitrust Division's decision not to challenge the Comcast/NBCU merger, Ms. Crawford blames the Division's reticence on "conservative federal judges" who are regarded as unsympathetic to vertical merger theories. 

Is it really acceptable for the Department of Justice to surrender its role as the enforcer of the antitrust laws just because the judiciary is skeptical of vertical theories of harm?  If someone in the Division made this excuse--for not challenging a merger the Division honestly thought would harm the public--that person does not deserve to hold the public trust.  Why doesn't the author express anything other than resigned disappointment?  If, the public needs protection from Comcast--which Ms. Crawford seems to believe--then doesn't the public need faithful, courageous law enforcement as well?


*    *    *

I don't agree 100% with Ms. Crawford's analysis and conclusions, but you don't need to in order to get something out of this book, because the careful, and thorough, "prosecution" of the "Comcast case" will give you plenty to think about.  While Captive Audience generally succeeds in making the author's points, it also suffers from the fact that the reader knows--from the beginning--that the author is in pursuit of a specific conclusion.  This awareness leaves the reader with the sense that a more complete discussion has been sacrificed for the sake of this conclusion.  Thus, this reader was left with the feeling that the most interesting questions are those that go unasked.  We'll look at some of these in an upcoming blog.
 
April 1, 2013 12:04 PM

Wholesale Wireless Competition Is Important: The FCC Should Care More

About a week and a half ago, the FCC released its 16th Wireless Competition Report.  Among the significant data collected and presented in this Report, there is one important, and growing, indicator of wireless competition that the FCC desperately needs to better understand: wholesale wireless competition.  

Based on my experience at COMPTEL, I know that a healthy wholesale market is one big indicator of effective retail competition.  Because, hey, anytime a retail competitor doesn't have to rely on regulatory compulsion to obtain wholesale access, that's a pretty good indicator that the facilities-based carrier doesn't think it has a whole lot of market power to protect.

The good news is in this Report is that the wholesale wireless segment is getting "healthier" at a faster rate than any market segment.  While still a relatively small number of total wireless connections, wholesale connections grew at the fastest rate of any service type measured by the Commission--almost tripling in the 2 year period 4Q 2009-4 Q 2011. Rpt. para. 250.

The FCC's numbers are telling us that wholesale competition is on fire.  But when you try to figure out what this really means, well . . . the Commission doesn't seem too sure.   

Understanding Wholesale Wireless Competition

The FCC introduces us to the wholesale market in paras. 29-36, and it explains how it uses wholesale data for purposes of calculating market concentration in paras. 53, and 57.   The largest use of wholesale wireless service is by mobile virtual network operators (MVNOs).  These service providers rely on the facilities of other carriers for their mobile service, but handle every other aspect of the customer's account themselves.  

Because wholesale wireless relationships are voluntary, we have to presume that both the buyer and the seller expect the relationship to be beneficial.  That presumption alone, though, does not tell us too much about how wholesale sales affect retail competition. According to carriers, such as Verizon, a carrier's relationship with its MVNOs is fundamentally "arm's length." Report n. 102.  And, why wouldn't it be?  Wholesaling at arm's length has long been a routine part of the wired telecommunications world.

Wholesale Confusion--Some Say . . .

Well, the FCC's not so sure.  Take a good look at the FCC's explanation of the wholesale industry (paras. 29-36), read all the footnotes, and it becomes clear that no less than two academic articles (cited in n. 109), and one report by an "industry analyst" (providing his "predictions" for 2011) (n. 110) characterize MVNO "competition" as something less than the real thing.  The only one of these sources freely available on the Internet is the report by the analyst for the Yankee Group, available here.

The Yankee Group report is a relatively short article with some of the analyst's "4G" predictions for 2011, and a brief summary of the analyst's thinking in making the prediction.  Although, the "predictions" don't seem to be much more than the author's personal opinions, the FCC cites the explanation behind a single prediction in order to characterize the nature of MVNO/network operator competition.  

For example, in n. 110, the FCC cites this document as the basis for this insightful gem, "Like a small bird on an elephant's back, if an MVNO can establish a symbiotic relationship with its host and provide some direct commercial benefits, it can flourish." Yankee Group at 7.   See also, n.123 "[I]t's critical the MVNO does not compete to any meaningful degree with the host."  Id.  MVNOs are also cautioned to never look the host carrier directly in the eyes, as this is seen as a sign of aggression by network operators.

With insights like these, I'm sure readers would like to know how this analyst's "predictions" for 2011 worked out.  Well, the prediction backed up by the insights quoted above was this: "MVNO Hype Will Build, But Most of It Will Lead to Nothing."  

In reality?  MVNOs were able to increase connections by 182% between Q 4, 2010 (when the Yankee Group predictions were released) and Q 4, 2011.  FCC Rpt, Chart 13, p. 159.  This was the fastest one year growth in wholesale connections to date.  Suck it, Yankee Group.

But, Maybe Not?  

The FCC seems to regard MVNO competition as somewhere between the "franchisee" characterization of the non-industry sources, and the "real thing" characterization of some carriers. See, e.g., n. 125 where AT&T's assertion that competition between carriers for a portion of TracFone's 19 million customers has led to lower wholesale and retail prices is balanced against this quote from a 3 year old academic paper:

It is found that MNOs host MVNOs if and only if the latter do not exert a competitive constraint on MNOs' retail businesses. Thus, absent access regulation, MVNO entry may happen but is unlikely to reduce consumer prices.     

Report, para. 35, n. 125.  The problem here is not that the carrier disagrees with the theoreticians, or even that the theoreticians' point doesn't make a whole lot of sense for any wholesaler with less than a 50% retail share.  No, the problem is that the FCC does not seem to have an opinion as to which is more credible.

*     *     *     *     *

If you type the term "industry analyst reports" as a search term in the Report, it turns up four results.  Each and every instance is the Commission relying on "industry analyst reports" as an excuse for why it is unable to account for MVNO competition.  There is no excuse for the Commission not to try to understand and account for the competition provided by MVNOs in its next Wireless Competition Report.  The public needs for the Commission to be the "expert agency" on all things wireless--but especially on the fastest growing customer segment in the wireless industry.