Two weeks ago, AT&T announced plans to bring its "GigaPower," very high-speed (300Mbps and up), broadband Internet service to 38 new markets in 2016--on top of the 18 markets that AT&T already has up-and-running on the service. A day later, Google Fiber announced on the company's blog that it was exploring expanding its service (available in 3 cities/markets, but under construction in 6 more) to Chicago and Los Angeles. Both announcements were widely reported by the news media, which has favored a "fiber race" narrative ever since both AT&T and Google announced--on the same day--their respective plans to deliver gigabit speed Internet service to Austin, TX.
Thus, analyst Jeff Kagan compares the strides of "the two heavy hitters in ultra-fast, ultra high speed, gigabit Internet services." In the Washington Post, reporter Brian Fung observes that, "AT&T is benefiting tremendously from a chain reaction that Google initially began," though he concludes that, "Google's early lead in the fiber race [is] being eaten away by AT&T's traditional advantage in building networks."
But, while the "fiber race" narrative may add an element of human drama to the otherwise impersonal dynamic of broadband competition, Google's fiber-to-the-premise ("FTTP") network is not the first that AT&T would be compared with in the media. It is, however, the first time the media has favorably compared AT&T to a FTTP-based service provider--and this is the more interesting aspect of the story.
AT&T Starts the "Fiber Race"
As AT&T's service name--"U-Verse® with GigaPowerSM"--suggests, AT&T started building its gigabit speed network long before Google Fiber. In 2004, AT&T observed that, by using a fiber to the node ("FTTN") architecture (which deploys fiber to the last traffic aggregation point prior to distribution to the customer's premise (the "node")), it could quickly provide better-than-DSL speeds (i.e., 6Mbps vs. 3Mbps) to the maximum number of customers, and position AT&T to be able to progressively replace copper with fiber as bandwidth demand moved from the network core to the edge (residential consumers). In 2005, AT&T decided it would call its IP network "U-Verse" and service was launched in 2006. See this 2006 timeline/summary from AT&T.
To illustrate how FTTN is designed to evolve, consider the tremendous surge in demand for wireless data over the last 10 years. To expand capacity, AT&T has created more cell sites, and has steadily added fiber to replace the copper lines that "backhaul" traffic from the cell sites to its backbone network. This means that, in some areas, AT&T can use new fiber in order to "groom" existing U-Verse neighborhoods onto new broadband distribution nodes closer to the customer--thus reducing the copper loop length, and enabling faster DSL transmission speeds.
It's No FiOS
In 2005, Verizon began deploying its FTTP network, FiOS, and--although Verizon's FTTP would take longer to deploy (to reach a similar percentage of customers) the network itself was/is considered the gold standard. Thus, among "experts," in the media, and, by self-described "wonks," its early years, AT&T's U-Verse network was always being compared--unfavorably--to FiOS. U-Verse was the "Jan Brady" of broadband.
An industry newsletter, from 2007, reports that (at the FTTH (Fiber to the Home) Council meeting in late 2006), "AT&T, with its FTTN deployment, showed that it was thinking along the same lines as Verizon . . . [b]ut many in the audience were skeptical about whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant." (emphasis added) A year later, when AT&T increased its broadband Internet speed from 6Mbps to 10Mbps, one tech news site reported, "AT&T Bumps U-Verse Top Speed to 10Mbps, Verizon Chuckles." Months later, at the end of 2008, AT&T almost doubled its top speed --to 18Mbps . . . and was still ridiculed.
As recently as 4 years ago, Susan Crawford--who framed the President's views on telecommunications policy--had already counted AT&T out of the "broadband" market. In an essay in the New York Times, Crawford argued for the regressive application of Title II regulations for broadband services (which the FCC adopted this year) on the basis that cable was a monopoly, unlikely to be challenged by U-Verse, which "cannot provide comparable speeds because, while it uses fiber optic cable to reach neighborhoods, the signal switches to slower copper lines to connect to houses."
Perceptions Are Not Reality
Fortunately, for AT&T, its consumers (the people that pay for the network) disagreed with the critics. In fact, almost a year before Prof. Crawford had discounted U-Verse as a competitor to cable, consumers were telling Consumer Reports that U-Verse was among the best choices (with, of course, FiOS) for bundled broadband, TV, and phone service. Only a month after Crawford's essay, AT&T verified the Consumer Reports survey, reporting that consumer U-Verse revenues increased by an impressive 44% in 2011.
By the end of 2013, despite the early skepticism about "whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant," AT&T's U-Verse passed Verizon's FiOS in numbers of video customers served. AT&T's network and top Internet speeds have consistently improved every year, with its top U-Verse speed increasing to 75Mbps a year ago. Not surprisingly, consumer adoption of U-Verse broadband Internet service has also steadily improved--growing at 30% annually over the last 5 years.
Finally, while the eye of the media has been on FTTP deployments like Google
Fiber, it's what has been happening in copper that has almost-certainly
put AT&T in position to provide super-fast Internet access more
quickly--and in more places--than any other ISP. Over the last 6 years,
advances in DSL technology have allowed for faster transmission speeds--very close to those supported by fiber--over legacy facilities.
Having been "counted out"--or never counted "in"--by the media has some advantages. One of these benefits is all the positive publicity AT&T is now getting from publications that may have never expected something they associate with an "innovative" "edge" company--like super-fast broadband--to be done better by a "monopoly" "ISP."
But, it's difficult to overcome perceptions--particularly when these perceptions have been fed by the FCC. The Washington Post article, cited above, looks for an explanation for how AT&T was able to overcome "Google's early lead in the fiber race." Given the perception of Google's early lead, it would be hard for AT&T to convince anyone that it started the race before Google. Instead, the article quotes AT&T's Jim Cicconi as saying, "[w]e're pretty good at this, and we've had a lot of years to get good at it." That's as good an explanation as any.
In the last post, we discussed how the broad new regulatory framework that the FCC's Net Neutrality/Broadband Reclassification Order imposes on ISPs is predicated on a few, demonstrably erroneous, presumptions about the incentives of broadband ISPs. Contrary to the FCC's assumptions, the evidence demonstrates that broadband ISPs have a powerful economic incentive to efficiently increase output of their most profitable product--broadband Internet access.
But, incentives--and their impact on how consumers receive content today, vs how consumers would like to receive that same content--could use some further fleshing out. After all, if someone didn't have an incentive to keep your favorite content off the Internet--you wouldn't be paying the same company two fat bills--for TV and broadband Internet--every month, would you?
Internet Consumers Love Content, and ISPs [Don't] Love to Sell It
While consumers love the high quality content that broadband providers offer through their MVPD service, TV distribution is not a profitable service for many broadband ISPs and is not the most profitable service for any broadband ISP. See, e.g., this recent AP article, citing SNL Kagan figures, that cable companies earn 60% cash flow margins on broadband service vs. 17% on video service.
But, even though most wireline ISPs would rather not be in the pay-TV business, there is a strong correlation between consumers that purchase pay-TV service and those that purchase broadband Internet service. In the AP article cited above, Comcast says that about 70% of its video customers also purchase broadband Internet service. For non-incumbent cable companies, the correlation may be much higher. See, e.g., Randall Stephenson, Statement to House Judiciary Committee, June 24 2014, at 3 (More than 97% of AT&T's video customers also purchase another AT&T service.) The fact is that broadband ISPs believe they must offer pay-TV service in order to compete for the best broadband Internet customers.
Big Content Loves Consumers' $$ . . . Just Not Consumers
As noted in the last post, the big content companies do not seem to be as responsive to consumer demand as broadband ISPs. In fact, companies like CBS, Comcast, Disney, Fox, Time Warner, Viacom, and various cable/satellite-owned regional sports networks generally don't make their "linear" (sports, news, and primetime) programming available online at any price, unless the customer is also a TV subscriber.
And, it's not cheap to be a TV subscriber. In its most recent Video Competition Report the FCC notes that, in 2012-2013, the price of the most popular tier of channels increased at a rate 3x the rate of inflation for the same year. 16th Annual Video Competition Report, table 5. (5.1% vs. 1.7% inflation) Comcast recently disclosed that its programming costs increased by almost 7.8% in the past year--almost 10x the inflation rate! According to Nielsen, consumers now purchase an average of 189 channels per month, but watch only 17.
The FCC [Still] Doesn't Understand that Incentives = Profit
It's clear that, despite the evidence, the FCC still believes that, for most ISPs, it's more profitable to distribute programming for "Big Content" than it is to produce and deliver their own broadband Internet access service. That's the only explanation for why Chairman Wheeler would offer this counsel to ISP/MVPDs at NCTA's recent INTX show:
History proves that absent competition a predominant position in the market such as yours creates economic incentives to use that market power to protect your traditional business in a way that is ultimately harmful to consumers. . . . Your challenge will be to overcome the temptation to use your predominant position in broadband to protect your traditional cable business.
Remarks of Chairman Tom Wheeler, NCTA-INTX 2015, (as prepared) at 6.
Chairman Wheeler points out that MVPD's spent $26 billion on programming in 2013, but he doesn't mention that as this number grows, MVPD profit declines. Wheeler Speech at 3. According to data relied on by the FCC, programming costs (as a percentage of revenue) were the highest in 2013 that this expense had ever been. 16th Annual Video Competition Report, at ¶ 89. Meanwhile, also in 2013, the same companies invested even more in the means of production for broadband Internet service ($28 billion (according to U.S. Telecom data) vs. >$26 billion (which includes non-ISP DBS firms' spending on content).
If Profit = Incentive, Who Profits from Keeping Content Off the Internet?
Chairman Wheeler is correct in his (implicit) premise--that the parties that benefit most from the status quo do not tend to willingly embrace disruption of the status quo. But, the Chairman is mistaken about who benefits from maintaining the inefficient, and artificial, separation of the function of content delivery into the "MVPD" business and the "broadband Internet." If the FCC ever thought to ask itself why these two businesses were still separate businesses at all, the Commission might want to "follow the money."
The table above compares profit margins (income/sales) of the largest
ISPs and the largest providers of MVPD content over the past 4 years. Looking at the relative profitability of content distribution, versus broadband Internet/MVPD--and recognizing, as noted earlier, that the ISPs would be more profitable without their MVPD businesses--then there's really no question that the group which benefits most from the "traditional cable business" is not the ISPs/MVPDs, but rather, Big Content.
But, even though Chairman Wheeler's assumptions about ISP's incentives are mistaken, he correctly observes that,
The Internet will disrupt your existing business model. It does that to everyone.
Wheeler Speech at 6. But, if you're a big content guy, at least he wasn't talking to you--you still get to distribute your content through the free-from-Internet-competition biosphere of the federally regulated MVPD model. It could be worse, look at Netflix's profit margins . . . The graph above was part of a Seeking Alpha article by Amit Ghate. Of course, the Big Content companies would probably expect to earn much better profit margins than Netflix, because they have more--and better--content. But, still, how much better?
Until now, the Big Content companies have been lucky that the FCC thinks their content needs to be protected from the ISPs. At some point, though, its always possible that the FCC--or Congress--could start questioning whether parts of the existing pay-TV regulatory scheme are insulating content from the disruptive forces of the Internet. If I was a content company, though, I would only get worried when they stop inviting me to secret meetings about MVPD mergers.
In its recent Net Neutrality/Broadband Reclassification Order, the FCC justifies the need for the Order's pervasive regulations in essentially one statement, "broadband providers (including mobile broadband providers) have the economic incentives and technical ability to engage in practices that . . . harm other network providers, edge providers, and end users." Order ¶ 78. The Commission's discussion of the ISPs' incentives/ability to harm consumers and other market participants is almost as conclusory.
The FCC appeared focused on a result that required it to presume an uncompetitive broadband market. Supporting its premise, the FCC relies on citations from its 2010 Order, and some gerrymandered market shares, in which it defines "markets" by arbitrary selections of speed vs. consumer demand substitution. See, e.g., Order, n. 134. By ignoring broadband market performance, the Commission not only failed to understand that ISPs were unlikely to be the problem, but the FCC also missed a chance to conduct a more circumspect analysis of whether consumers could truly access the content of their choice online.
The FCC Didn't Consider Broadband Market Performance
The FCC states that, "[b]roadband providers may seek to gain economic advantages by favoring their own or affiliated content over other third-party sources." Order ¶ 82. The Commission offers less than a handful of specific examples ISPs "act[ing] to harm the open Internet." Order, n. 123.
Only in the Madison River example, was the ISP clearly seeking to favor its own service (long distance voice termination). It is worth noting, though, that the reason Madison River had an incentive to favor its circuit switched voice was because--as a rural ILEC--the FCC set Madison River's rates well in excess of cost; so its incentive was created by one FCC regulation and then preempted by another (later) FCC regulation.
Nonetheless, the best indicator of a market is performing competitively is whether it is responding to consumer demand by adding capacity, or whether it simply raises prices and takes more profits. Broadband speeds have consistently moved higher, actually following the Moore's Law trajectory. And, the Commission notes, broadband capital investment reached levels in 2013 that had previously only been seen during the telecom bubble. Order ¶ 2. Moreover, connected devices, bandwidth speeds, and user adoption of streaming services has soared. Order ¶ 9.
The FCC Didn't Consider the Evidence on ISP Incentives
The Commission recognizes that, "the growth of online streaming video services has spurred further evolution of the Internet." Order at ¶ 9. But, untethered by evidence to the contrary, the FCC leaps to the [wrong] conclusion that, "these video services directly confront the video businesses of the very companies that supply them broadband access to their customers." Id.
Almost a year ago, AT&T Chairman Randall Stephenson, explained why this theory didn't make sense for most ISPs. In his prepared testimony for the House and Senate Judiciary Committees about the AT&T's proposed acquisition of DirecTV, Stephenson states its motivation to acquire DirecTV is about trying to earn any profit on TV,
Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer's call. As a result, our video product is, on its own, unprofitable.
Statement of Randall Stephenson, CEO and President, AT&T Inc., before the House Judiciary Committee, June 24th 2014 at p. 3 (emphasis added). Thus, the FCC's theory--that ISPs have an incentive to prevent consumers from accessing video content online, because the ISP would prefer to sell them the same content at a loss to the ISP--is simply untenable.
Even if the ISP does earn a profit on video, it would still not have any incentive to discourage their broadband customers from accessing online video content, unless it earns a greater profit from its video service than from its broadband service. This is not the case for Comcast, whose broadband revenues and company profits continue to boom, despite continued losses of video subscribers.
So, if the FCC's theory doesn't even make sense for the Prince of Darkness, then ISPs are unlikely to be the problem. But, why don't consumers have access to more content over the Internet?
Traditional Linear Content Owners Don't Have the Same Incentives As ISPs
Even though the three largest streaming video providers (Amazon, Hulu, and Netflix) have expanded their content through original programming, and consumers have embraced online streaming video, the fact is that consumers still don't have access to that many more online programming choices than they did in 2010. If you compare the most popular streaming sites in 2011, with what's available today, the only significant new entrants are Sling TV and HBO Now. Unfortunately, cord-cutting is more of a media headline than a consumer phenomenon.
At times, the FCC has seemed to (sort of) recognize the problem. A little over a year ago, Chairman Wheeler was telling broadcasters that he was looking out for them with strong net neutrality protections, and that they should embrace Internet distribution of their programming. Except for the few broadcast channels that are part of the Sling TV package, the Chairman's speech fell on deaf ears. Chairman Wheeler didn't seem to appreciate that--because the FCC ensures the broadcasters fat margins on retransmission fees (much like Madison River's terminating access margins)--they have no incentive to expand output!
Similarly, Chairman Wheeler understood that the linear content market had failed last summer, when he asked the CEO of TWC to resolve disputes between TWC's regional sports network (RSN), which carries the Los Angeles Dodgers, and other MVPDs serving the Dodger's home television market. Because of pricing disputes, when Chairman Wheeler wrote to TWC, a large majority of Dodgers' fans--4 months into the 2014 baseball season--could still not watch the team on TV.
Chairman Wheeler probably thought he understood TWC's incentives pretty well--the company had a merger with Comcast pending before the Commission--when he asked TWC to respond in a competitive manner to consumer demand. But, RSNs have powerful economic incentives to restrict output. Thus, Chairman Wheeler was, again, mistaken about incentives. TWC's merger with Comcast has come and gone, but 70% of the Los Angeles viewing market still cannot watch the Dodgers on TV or online.
A Question of Incentives
As of Friday, Chairman Wheeler was [still] telling cable ISPs they should "overcome their temptations" to favor their TV businesses over their broadband Internet services. Meanwhile, in an L.A. Times article yesterday, broadcast programmers candidly noted that, despite using public spectrum to distribute their content, they plan to favor even more of their own content over third party sources. Perhaps the Chairman was talking to the wrong group?
By now, you probably understand that I think the FCC would have been wise to spend some time thinking about whether the industries it regulates have incentives that are aligned with consumer welfare. Had the FCC thought about it, they probably didn't need to impose such pervasive regulations on ISPs. Likewise, if the FCC's rules are distorting the incentives of traditional TV programmers, then the FCC should eliminate these rules, also.
On the other hand, what if traditional linear programmers simply like their FCC incentives more than those of the competitive broadband Internet, and are simply in "harvest" mode (restricting output/raising prices in the face of a slow decline in demand)? Broadcasters aren't (usually) ISPs, so who will police them?
Certainly not the FCC. But, to be fair, neither have the DoJ or the FTC looked into the matter. However, some parties are looking out for consumers . . . and the answer may surprise you. We'll discuss further in the next post. .
On September 4th, in a speech to the startup-focused group, 1776, Chairman Wheeler gave a speech where he discussed consumer broadband deployment and competition. The Chairman seemed to be of two minds about the state of broadband competition.
On the one hand, the Chairman praised the valuable benefits that competition has yielded, in terms of spurring ISPs to deploy new, and upgrade old, networks in order to increase the speed and availability of broadband Internet to more Americans. The White House has previously recognized broadband competition as producing better networks and faster speeds.
However, after recognizing the value of these new last mile networks, Chairman Wheeler also concludes that the present state of competition is simply not adequate to ensure that consumers can realize all the benefits of these networks,
Looking across the broadband landscape, we can only conclude that, while competition has driven broadband deployment, it has not yet done so in a way that necessarily provides competitive choices for most Americans.
Chairman Wheeler began by introducing the graphic below. The chart shows, by percentage of households, the number of providers offering service at not only the FCC's currently-defined "broadband" speed (4Mbps down/1Mbps up), but also 3 additional, speed-defined, categories--10Mbps, 25Mbps, and 50Mbps.
The Chairman explained that 10Mbps was the minimum speed that a household would need to stream one HD movie, and allow for simultaneous Internet use from other devices. Wheeler also proposes changing the definition of "broadband" to 10Mbps downstream for purposes of participation in the Connect America fund.
The Chairman further argued for changing the definition of broadband, because "only wussies use less than 10Mbps/month, and the United States will not subsidize wussy Internet usage."  The 25Mbps and 50Mbps levels of service, Wheeler predicts, will quickly become the standards, as households continue their inexorable march toward dedicated, fully redundant, OCn SONET service.
Wheeler observes that, at the 4Mbps and 10Mbps tiers, most Americans have a choice of no more than 2 service providers. Moreover, the situation only deteriorates at higher speeds, "[a]t 25 Mbps, there is simply no competitive choice for most Americans." Speech at 4 (emphasis added).
The poor picture of broadband competition that the Chairman paints has created situations where "public policy" (read: FCC regulation) must intervene to protect consumers and "innovators" from firms with "unrestrained last mile market power." In these situations, he says, "rules of the road can provide guidance to all players and, by restraining future actions that would harm the public interest, incent more investment and more innovation." Speech at 5.
Title II Just Got Trickier
As most are aware, the FCC is currently evaluating public comments on its "rules-of-the road-for-broadband-ISPs" NPRM, in which the Commission is also considering whether to reclassify broadband Internet service as a "telecommunications service" under Title II. Supporters of reclassification often contend that it would not compel the FCC to impose any obligations on ISPs, beyond the general statutory duties of fair dealing imposed under Sections 201 and 202 of the Act.
Title II Is Different for Dominant Carriers. The obligations of any specific common carrier under Title II, however, depend on that carrier's classification within Title II for the relevant telecommunications service. Consistent with what Title II proponents argue, "non-dominant" carriers have few, if any, company-specific obligations.
On the other hand, carriers classified as "dominant" have to abide by additional obligations that stem from both the statute, as well as a more specific application of the general terms of the statute, because the FCC cannot assume compliance with its general statutory obligations for the dominant carrier service.
Thus, dominant carriers' rates can be regulated by the Commission, and they must file tariffs, subject to FCC review, describing their terms of service. Moreover, dominant carriers have longer review times and more stringent standards for initiating new, and retiring old, service offerings.
Finally, once imposed, dominant carrier regulations are all but impossible to get out from under. At the end of 2012, U.S. Telecom filed a Petition with the FCC, seeking to have its members (holding less than a 50% market share in a declining segment) declared "non-dominant" for voice service. The FCC has still not acted on U.S. Telecom's Petition.
Implications for Cable ISP's Higher Speed Services
The one thing that Chairman Wheeler could not have expressed more clearly is his belief that cable is the only alternative for broadband service at or above 25Mbps. Thus, if the Commission were to reclassify broadband Internet service as a telecommunications service, it would be difficult for the Chairman to explain why the incumbent cable providers are not dominant in the provision of higher speeds of consumer broadband service.
The specific Title II provisions, and Commission rules (such as the Computer Inquiry rules), that would apply to the cable companies' dominant telecommunications services would depend in large part on how the Commission chose to reverse the Cable Modem Order. Although, with respect to the Computer Inquiry rules, in particular, it seems highly unlikely that the Commission would revisit its earlier unwillingness to "in essence create an open access regime for cable Internet service applicable only to some operators." Order at � 46 (emphasis added).
Whither the Dominant Carrier ISP?
If we pause for even a second to consider the Commission's reasoning in refusing to apply Computer II to broadband over cable, it becomes very clear why Title II regulation is not the answer. The easiest way to avoid the incremental hassles that come with being "the firstest with the mostest" is don't be that guy.
What's that, dear broadband network? You could offer the fastest broadband on the market, but because some additional regulation intended to "simulate" competition means you'll earn less than you would on the "slower" speeds? Well, the easy answer would be: don't offer the higher speeds!
This almost seems like that classic case where rent control regulations have the paradoxical effect of creating artificial shortages for the regulated service, limiting access for the very people the laws were supposed to help. But, I'm sure that could never happen here...
I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it. I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth. See and believe (whole hearing here).
Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something. It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke. So, yeah, that pretty much set the tone.
The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT). I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors. In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service.
The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months. The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.
And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them. Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.
3 Reasons Why "Net Neutrality" Is Comcast's Best Friend
1. The only "managed service" Comcast needs is the one they already have. I can't say it any simpler than that. When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV. If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.
If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service. The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company.
2. Internet interconnection is not a merger issue (either). Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard. In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room.
In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm. She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals. Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."
The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.
3. Data Caps. The essence of this complaint is that the heaviest users don't like the ISP's pricing structure. This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs.
The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption. These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne.
At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill. My guess is that Comcast will have no problem offering this one up.
Look, the net neutrality people aren't the "bad guys" here. But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame.
This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model. The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality. The consequences are too high.
I wanted to end on a cheerful note, so I'll leave it at this. Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will. Enjoy!
Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press. So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.
In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not than by what it is. So, we know that the merger is not going to result in any significant efficiencies, because it's not going to reduce consumer prices for cable (even an unconstrained monopoly reduces prices when costs decline).
We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete. TWC's CEO says, "[w]hether you're talking about broadband or video, we don't compete with one another." Comcast's CFO goes as far to state, "[w]e don't compete in one single zip code."
Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory of Comcast and TWC is not relevant (because, you know, they don't compete)?
Product Market Definition
The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES). The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES at C and D.
Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.
Consider that, among multi-channel video providers, cable companies lost 1.7 million customers in 2013. But, AT&T and Verizon added 1.5 million MPVD subscribers last year. The Leichtman numbers show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers. Very high percentages (according to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers. The Leichtman data confirm this for Comcast and TWC, as well.
Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix. In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES, at C.2(b).
Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market. Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses. For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.
Geographic Market Definition
If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable. Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.
What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon. For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.
Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory. This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).
To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers as a proxy, in order to allow us to get some ballpark market share numbers.
So, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3.
The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming. Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and "linear," of linear programming to broadband and online video competitors.
This last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.
How do we know the significance of real-time sports programming to the value of the broadband Internet? Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks!
If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry. But, commenters on the political left and right have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition. Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.
The first day of March Madness is one of the greatest TV watching days in America, made even better by our special devotion to drinking and gambling. Monday's article on Recode reminds us, though, that broadband-only consumers will be forced to spend this great national holiday watching TV in a bar.
The value consumers place on sports content is as obvious as the rising prices of subscription TV. But, sports content, and its regulation (or lack thereof) can also provide some insights into the FCC's priorities, and the relative value that the FCC places on the sports consumer (vs. the sports programming distributors). It is also interesting to compare how the FCC views sports content distribution practices with how a court might view the same practices under the antitrust laws.
The FCC On Sports Blackouts
A good way to see just how the FCC views sports content consumers, relative to broadcasters and pay TV providers is to look at the FCC's NPRM to eliminate its sports blackout rules. The proceeding began in November of 2011, when a group called the Sports Fan Coalition (Public Knowledge, Media Access Project, and some sports fan sounding groups) filed a petition to eliminate the rules.
The petitioners were absolutely right and reasonable. The FCC should have simply said, "we agree--and we're actually a little embarrassed that the rule was adopted at all, much less still on the books."
In reality, it took the FCC two more years to unanimously approve . . . a Notice of Proposed Rulemaking to ask questions about the effects of "repealing" the sports blackout rules (that it had no clear authority to adopt in the first place). To reassure industry that the FCC hadn't found religion, Acting Chairwoman Clyburn was careful to explain that, "[e]limination of our sports blackout rules will not prevent the sports leagues, broadcasters, and cable and satellite providers from privately negotiating agreements to black out certain sports events."
Because, you know, what could go wrong with private blackout agreements between leagues, RSNs, and their MPVDs? It's not like the agreements could be more anticompetitive than the rules themselves, right?
A Year Earlier, In a Court of Law . . .
In December 2012, a federal district court in New York issued an opinion refusing to dismiss antitrust complaints filed by TV and Internet consumers against Major League Baseball, the National Hockey League, Comcast, DirecTV, and other affiliated RSNs. (Yes, the defendants are the same parties the FCC "will not prevent" from entering into private blackout agreements.) The Southern District of New York ruled that the complaints presented a "plausible" claim that blackout agreements between the baseball and hockey leagues, and Comcast, DirecTV, and their RSNs were being used to eliminate Internet competition, require customers to purchase from MVPDs, and generally increase prices to consumers.
Here are some excerpts from the court's opinion describing how real consumers view the types of agreements the FCC "will not prevent" (internal quotes refer to the plaintiffs' complaints):
Plaintiffs challenge "defendants' . . . agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts" and by "collud[ing] to sell the 'out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices." Opinion, at 2. Emphasis added.
The Complaints allege that the "regional blackout agreements," made "for the purpose of protecting the local television telecasters," are "[a]t the core of Defendants' restraint of competition." "But for these agreements," plaintiffs allege, "MVPDs would facilitate 'foreign' RSN entry and other forms of competition." Plaintiffs argue that the "MVPDs also directly benefit from the blackout of Internet streams of local games, which requires that fans obtain this programming exclusively from the MVPDs." Id. at 8.
Back at the Commission . . .
Public comments on the FCC's sports blackout NPRM were a filed a few weeks ago. Major League Baseball does not typically blackout telecasts in response to gate sales. But, realizing that its own private blackout agreements may soon be illegal, the MLB, predictably, argues the FCC rules are still needed--as an anticompetitive backstop to the anticompetitive agreements the FCC "will not prevent." Of course, the MLB doesn't tell the FCC why it might not have as much access to private blackout agreements in the future.
In its comments, the Sports Fan Coalition devoted a several pages of its comments to explaining (as then Acting Chairwman Clyburn noted) that, even without the FCC's rules, anticompetitive private blackout agreements will still be available to the leagues, the RSNs, and the big cable and satellite companies. But, the SFC is simply responding to the FCC's primary concern in the NPRM.
FCC Priorities: TV, TV, and TV
The contrast between the federal district court's skepticism and the FCC's comfort with private blackout agreements could not be clearer. It is notable, but not terribly surprising, that there is no reference to the two year old consumer antitrust cases anywhere in the sports blackout docket; not in the original petition, the FCC's NPRM, or in any party's comments. It's almost as if the FCC and sports consumers are in different worlds.
If you just read the FCC's press releases, and the speeches from the Chairman and other Commissioners (and their tweets), you might think broadband Internet was a huge priority. Yet, it's difficult to reconcile the FCC's statements with the fact that the Commission tolerates agreements by regulated TV distributors (broadcast, cable and satellite) that require sports leagues/teams to refuse to deal with broadband-only consumers on any terms for "in market" games.
The Chairman says that he will target legal restrictions on the ability of cities and towns to offer broadband service. I'd be more impressed if he targeted restrictions in sports content distribution agreements that intentionally reduce the value of the broadband Internet to all consumers.
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.
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.
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.