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“Barons Of Broadband”: Extracting Tolls From All Who Pass

Last week’s big business news was the announcement that Comcast, a gigantic provider of cable TV and high-speed Internet service, has reached a deal to acquire Time Warner, which is merely huge. If regulators approve the deal, Comcast will be an overwhelmingly dominant player in the business, with around 30 million subscribers.

So let me ask two questions about the proposed deal. First, why would we even think about letting it go through? Second, when and why did we stop worrying about monopoly power?

On the first question, broadband Internet and cable TV are already highly concentrated industries, with a handful of corporations accounting for most of the customers. Once upon a time antitrust authorities, looking at this situation, would probably have been trying to cut Comcast down to size. Letting it expand would have been unthinkable.

Comcast’s chief executive says not to worry: “It will not reduce competition in any relevant market because our companies do not overlap or compete with each other. In fact, we do not operate in any of the same ZIP codes.” This is, however, transparently disingenuous. The big concern about making Comcast even bigger isn’t reduced competition for customers in local markets — for one thing, there’s hardly any effective competition at that level anyway. It is that Comcast would have even more power than it already does to dictate terms to the providers of content for its digital pipes — and that its ability to drive tough deals upstream would make it even harder for potential downstream rivals to challenge its local monopolies.

The point is that Comcast perfectly fits the old notion of monopolists as robber barons, so-called by analogy with medieval warlords who perched in their castles overlooking the Rhine, extracting tolls from all who passed. The Time Warner deal would in effect let Comcast strengthen its fortifications, which has to be a bad idea.

Interestingly, one cliché seems to be missing from the boilerplate arguments being deployed on behalf of this deal: I haven’t seen anyone arguing that the deal would promote innovation. Maybe that’s because anyone trying to make that argument would be met with snorts of derision. In fact, a number of experts — like Susan Crawford of Benjamin N. Cardozo School of Law, whose recent book “Captive Audience” bears directly on this case — have argued that the power of giant telecommunication companies has stifled innovation, putting the United States increasingly behind other advanced countries.

And there are good reasons to believe that this isn’t a story about just telecommunications, that monopoly power has become a significant drag on the U.S. economy as a whole.

There used to be a bipartisan consensus in favor of tough antitrust enforcement. During the Reagan years, however, antitrust policy went into eclipse, and ever since measures of monopoly power, like the extent to which sales in any given industry are concentrated in the hands of a few big companies, have been rising fast.

At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t the creative destruction of new technology constantly tear down old industry giants and create new ones?

The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be an empire in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.

Moreover, there’s good reason to believe that monopoly is itself a barrier to innovation. Ms. Crawford argues persuasively that the unchecked power of telecom giants has removed incentives for progress: why upgrade your network or provide better services when your customers have nowhere to go?

And the same phenomenon may be playing an important role in holding back the economy as a whole. One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, February 16, 2014

February 18, 2014 Posted by | Cable Companies, Telecommunications | , , , , , , , | Leave a comment

“Coming Soon, The United States Of Comcast”: Comcast Time-Warner Merger Will Create Orwellian Monopoly

In George Orwell’s 1984, the world is divided into three totalitarian superstates, but in the world of broadband and cable television only a single company may soon reign supreme. Comcast announced today it has agreed to acquire Time-Warner, its largest and only significant competitor in the cable and broadband business.

Some financial analysts are claiming Verizon will still provide stiff competition to the new mega-company. “Verizon is offering video service in the most markets Comcast is participating in,” a Yahoo Finance reporter declared. But Verizon’s FiOS service is available to only 15 percent of Comcast’s existing customers, and in the fall 2011, Comcast and Verizon reached an agreement that solidified Comcast’s control over the non-wireless industry. In exchange for parts of the wireless spectrum that Comcast owned, Verizon agreed not to expand its FiOS network, which offers far superior service to that of Comcast or Time-Warner.

The combined company would now serve about thirty percent of the cable television market. That doesn’t seem large until you realize that it would have a virtual monopoly in 19 of the 20 largest media markets. (Here’s a useful map.) It would also serve over half of the customers who buy “triple-play” cable-telephone-broadband services. (I haven’t seen figures on the companies’ high-speed internet penetration, but according to the National Broadband Plan, only about 15 percent of consumers have a choice of more than one plan.) The companies claim that the merger wouldn’t threaten consumers because they operate in different markets. But that’s ludicrous. The merger would replace two monopolists (that is, very large companies with monopoly power over a market) by an even more powerful single monopoly, even better equipped to discourage competition.

Large companies, even monopolies, are not necessarily contrary to the public interest if they are strictly and intelligently regulated. But in the wake of the 1996 telecommunications act (which idiotically assumed that deregulation would lead to competition) and a pliant Federal Communications Commission, the big telecom companies have progressively avoided regulation. As a result, they are already committing many of the abuses that come with monopoly power, and if the new merger passes muster, will do so with a vengeance.

Monopolies make it more difficult for new entrants to compete. As a result, they allow the larger companies to raise prices without fearing a loss of market share. Since deregulation in 1996, cable prices have risen at about three times the rate of inflation. According to a study from the Free Press, prices for expanded cable service (what most consumers purchase) went up five percent from 2008 top 2013 –almost four times the rate of inflation. Monopolies also allow companies to neglect service to consumers. The American Customer Satisfaction Index rated Comcast and Time-Warner the two worst cable and broadband companies.

Monopolies can also have a corrosive effect on related industries. The big cable companies have been able to squeeze cable content providers—even to cut off access to customers, as Time-Warner did with CBS last fall.  If they also own content providers, as Comcast does, they can harm rival content providers—as Comcast seems to be doing to Netflix.

Monopolies also slow innovation, because companies have less incentive to replace older equipment. That was a major argument for the breakup of the old AT&T telephone monopoly in 1982. According to a report from the New America Foundation’s, Open Technology Institute, the United States has lagged behind other countries in the price and quality of its broadband service. The American city with the highest quality internet is Chattanooga, Tennessee, which gets its service from a municipally owned provider.

Under the new merger, the new company—let’s call it Xsanity—will be in an even stronger position to raise prices, neglect service to its customers, squeeze content providers, harm rival content providers and slow innovation. If local, state or national officials attempt to police them, the single big company will have even greater clout. Of course, Comcast will promise to keep prices down, enforce net neutrality, and spur innovation. There is reason, however, not to take these promises seriously.

When Comcast and Verizon were seeking FCC approval of their agreement in 2011, they promised that they would create a technology/research and development joint venture. Comcast Executive Vice President David Cohen told a Senate Subcommittee that “by enhancing the Cable Companies’ and Verizon Wireless’s own products and services, the Joint Venture will … spur other companies to respond, perpetuating a cycle of competitive investment and innovation.” Two years later, the two companies abandoned the joint venture.

In short, the only beneficiary of these merger will be Xsanity’s management and stock holders. Consumers will get screwed. The American telecom/broadband industry, already lagging behind South Korea and other upstarts, will fall further behind. Of course, the FCC or the Justice Department could block the merger. But what has happened before does not inspire confidence. Obama’s Justice Department did threaten to block the merge of AT&T and T-Mobile, USA, but Comcast has strong ties to the administration—Comcast’s CEO Brian Roberts is one of Obama’s golfing buddies and Cohen has been a major fundraiser—and in the past, the administration has been soft on the company. The FCC approved the merger of Comcast and NBC and the agreement between Comcast and Verizon.

The merger of these giants on the top of American business—not simply insulated from regulation but with the power and money to block any future attempt at regulation—is an awful prospect to contemplate, but it could well come to pass.

 

By: John B. Judis, The New Republic, February 13, 2014

February 16, 2014 Posted by | Cable Companies, Telecommunications | , , , , , , , , | Leave a comment

   

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