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A Review of Captive Audience by Susan Crawford

The United States of American Broadband

by CARL E. KANDUTSCH

It’s no secret that the state of broadband deployment in the United States is inadequate by any measure applicable to the world’s wealthiest nation. According to backbone provider Akamai’s most recent assessment of web traffic, the number of people who have adopted broadband (measured at anything above 4 Mbps) was 62 percent, which puts the U.S. at number twelve in the worldwide rankings when it comes to adoption, and number nine when it comes to average speeds. These are not impressive rankings for the world’s largest economy, and current trends do not bode well for America’s future.

While people may debate the reasons for America’s broadband lag, it’s hard not to see lack of competition as the major factor: When network providers aren’t forced to compete, they won’t invest in the infrastructure needed to bring faster broadband connections to Americans, particularly those who don’t live in concentrated urban areas. But because communications networks have natural monopoly characteristics – very high up-front capital costs and very low marginal costs – overbuilding is usually infeasible, and the “free market” does not encourage network providers to compete.9780300153132_p0_v1_s260x420

Therefore, government intervention is necessary to force competition among network providers, as in the early 20th century when the Interstate Commerce Commission used the newly enacted Sherman Antitrust Act to force railroads to compete. But in the first decades of the 21st century, the federal government (specifically the Federal Communications Commission (“FCC”)) has largely abdicated its interventionist responsibilities, thanks to the economic power of industry in American politics and the prevailing ideology of privatization. Consolidation among carriers, the sweeping effects of the convergence of different media and media companies’ tightening control over information flows have all overwhelmed the FCC, as regulators find themselves outmaneuvered, under-resourced, constantly under attack and short of information. How did we reach this point?

Susan Crawford’s Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (2013) sketches a history that looks something like this, in its most general terms:

The emergence of the commercial Internet in the mid-1990s posed a threat to both cable and telephone companies. Swarmed by hoards of well-paid lobbyists and buried in endless litigation following enactment of the 1996 Telecom Act, the FCC deregulated the entire sector over a five-year period beginning in 2002, when the FCC classified broadband Internet access as an unregulated Information Service. The basic assumption underlying deregulation was a belief that “facilities-based” competition between cable and telephone companies serving the same geographical and product markets would protect Americans against the predatory practices of former monopolists.

However, competition did not pan out. Cable companies were able to upgrade their networks at far less expense than the telephone companies. At some point, both Verizon and AT&T in effect ceded victory to the cable operators in both the video distribution and wired Internet access sectors, and the major MSOs in turn divided up the geographical markets amongst themselves. Ceding victory to cable in the wired broadband allows the telephone companies to focus on wireless voice and broadband, leaving them little incentive to maintain their obsolete copper wire telephone networks, which they seek to abandon rather than upgrade. And, like their cable compatriots, the four major wireless carriers chose to divvy up the country region by region rather than compete head-to-head.

Because wired and wireless data services are not adequate substitutes for one another, the entire sector has become uncompetitive. Potentially competitive new entrants, such as Internet-based video aggregators and municipalities seeking to build their own networks, are shot down by the heavy handed tactics of entrenched industry incumbents and the passivity of policy-makers.

The Comcast-NBC Universal Merger – What it Means for Online Video Distribution

Captive Audience uses the 2011 merger between Comcast and NBC Universal as the backdrop against which a deeply disturbing picture the state of America’s cable and broadband communications industry today, including the cable television, high-speed Internet access and wireless telephone sectors. Although Crawford delves into each of these sectors, space limitations prevent us from describing more than a few details of the picture, and for that reason, this review focuses on developments in the area of video programming distribution.

Even before the NBC merger, Comcast was the country’s largest cable operator with almost 22 million subscribers), the largest residential high-speed Internet access provider and the third largest telephone company, not to mention the owner of numerous popular cable networks (including eleven regional sports networks).  On the other side, NBC Universal was a content conglomerate that owned one of the largest broadcast networks, twenty-five television stations, seven production studios and several of the country’s most watched cable networks. In addition, NBC controlled a number of significant Internet content companies, and held a one-third interest in Hulu.com.

Thus, Comcast-NBC Universal involved the marriage of the nation’s largest content distribution system with one of the largest content owner conglomerates – a prime example of vertical integration. The combination gave the merged company ownership of 125 media outlets (cable channels, television stations, movie studios and Web sites) that collectively control one in five hours of all television viewing in the United States, as well as a last-mile subscriber base that exceeded any of its competitors. The merger gave Comcast the ability to leverage its control over a vast content library to dominate wired Internet access markets in most of the country’s largest cities.

Meanwhile, as pay-TV subscription fees continue to rise at super-inflationary rates while consumer income and spending remain flat, it is becoming crystal clear that the traditional cable television model is unsustainable. Hence the buzz about “cord-cutting” – an ever increasing number of households are terminating their cable TV subscriptions in favor of online entertainment viewing.

The Comcast-NBC Universal combination is best seen as a highly sophisticated play to head off the mounting threat posed by online video distribution. The question for content owners and content distributors alike is how to control the delivery of digital video content by means of an Internet connection, because control is the key to maintaining the huge flow of cash passing between them – affiliate fees, retransmission consent fees and other fees, amounting to more than $30 billion annually, that cable operators pay to the cable and broadcast networks based on subscribership and advertising revenue.

But tight control over content distribution is exactly what the Internet disrupts. In fact, the end-to-end design of the Internet – making it possible in theory for any user with a computer and an internet connection to access any content made available by another user – is fundamentally at odds with the one-to-many model of content distribution on which the cable and broadband industries are based. Unless networks and production studios working in tandem with content distribution networks possess the ability to strictly control the distribution of proprietary content, that content loses its value, and cable systems risk becoming mere transport facilities. From the perspective of established media companies, beneath the dream of the Internet lies the nightmare of common carriage.

How TV Everywhere Stifles OTT

“TV Everywhere” represents the collective response of the cable industry and the media conglomerates to the threat of online video distribution. With TV Everywhere, users may watch high-quality, full-length video programming online – provided they are “authenticated” subscribers to the cable operator’s pay television service. If you subscribe to HBO as part of your cable television package, you can watch HBO on your computer or on your mobile device. TV Everywhere is really a joint venture of the cable and media companies seeking to preserve the subscription-content model against the threat of the connectivity-payment model used by ISPs prior to the advent of broadband.

By combining the country’s largest internet access provider with one of the biggest content owners, the Comcast-NBC Universal marriage amounts to a coming-out party for TV Everywhere.  Comcast’s enhanced access to NBC Universal’s content portfolio would staunch the bleeding inflicted by cord cutting consumers who prefer to watch video online, and for those who do switch, Comcast’s Internet subscribership could be expected to grow. TV Everywhere means that Comcast wins on both sides; by making popular cable television programming available online, but only to those who are authenticated Comcast subscribers, the Comcast-NBC Universal can push potential cord-cutters toward bundled pay-TV and Internet packages simply by making the charging more for Internet alone than for the bundle. As expected, Comcast’s per-subscriber revenue has spiked.

If large cable MSOs like Comcast and Time Warner have a gentleman’s agreement not to compete in each other’s respective territories, what about competition from a new generation of “over-the-top” (OTT) services that make full-length, high-quality video programming available directly to Internet users?  For example, Netflix is an online, long-form video service that allows consumers to stream movies and archived television programming through an Internet connection such as Comcast’s in exchange for a low monthly subscription fee. Internet connectivity allows Netflix to function as a cable provider, but without having to invest billions in building cable system, and by mid-2011, Netflix’s high-value content and low subscription fees had given it more subscribers than Comcast. Needless to say, Netflix represents a threat to the cable companies. Susan Crawford demonstrates how cable companies like Time Warner have worked to ward off the Netflix threat – for example, by leveraging its power as the number two cable distribution network to persuade the premium cable channel Starz to raise its streaming license fees for Netflix, a move that ultimately resulted in the severing of Starz’ relationship with Netflix.

The Netflix case illustrates the dilemma of OTT services generally, trying to gain a foothold in markets dominated by media giants. If enough cable subscribers, sick and tired of inflated cable bills, shift to online entertainment, then the content owners, with or without the tacit encouragement of big cable, will raise the price of online content to match what they are paid by the cable companies. Netflix recently announced that it is considering teaming up with the cable operators, allowing them to put a Netflix app on their set-top boxes. This development represents a major change in the Netflix model, as if Netflix has decided that since it cannot beat the cable companies, it might as well join them.

The Netflix case illustrates the threat of OTT platforms from the content distribution side, but the threat is just as real from the content providers’ perspective, meaning that OTT services find themselves under attack from both the downstream (ISP) and the upstream (content) sides at the same time. Big media’s hostility toward OTT video is best illustrated by the broadcasters’ ongoing fight to destroy Aereo TV, an innovative start-up that distributes off-air broadcast television content to subscribers by means of an antenna and an Internet connection, all without paying copyright license or retransmission consent fees to the broadcasters. Having lost twice in the federal courts, the broadcasters are taking their fight all the way to the U.S. Supreme Court. How it will all shake out is anyone’s guess.

One might suppose that an independent online video distributor could look to the FCC to defend it from the cable and media behemoths. To date however, the FCC has refused to take any action to allow new entrants to compete on a level playing field. To illustrate, the FCC recently ruled that SkyAngel, an aggregator of online video content available to subscribers for a small monthly fee, may not rely on the Commission’s program access rules to gain non-discriminatory, competitive access to cable-affiliated video programming content. According to the Media Bureau, only traditional “facilities-based” video distributors (i.e., distributors that own their own cable networks) have standing to bring such a complaint. Since SkyAngel used the public Internet rather than its own distribution infrastructure to deliver programming to consumers, Sky Angel was not entitled to rely on the program access rules.

Thus, vertically integrated cable companies like Comcast and Time Warner Cable are free to withhold popular programming from potential online competitors; without access to that programming, competition cannot get off the ground. Similarly, there is nothing in the FCC’s anemic “network neutrality” rules (assuming they survive Verizon’s pending legal challenge) to prevent a cable company from engineering a consumer’s Internet connection to prioritize its TV Everywhere video content over unaffiliated Internet-based programming, simply by calling its own TV Everywhere platform a “specialized service” that is exempt from the net neutrality rules altogether. Furthermore, the cable company can simply charge subscribers more for watching movies that are not offered as part of the TV Everywhere package, or use data caps or usage-based bandwidth pricing to achieve the same result. These are just a few of the myriad dials that big cable can turn in order to make life miserable for any independent online distributor that refuses to cut a deal, and the FCC has shown little interest in getting involved.

The Challenge of Public Policy

The lack of competition among broadband access providers over the past eleven years has resulted in “expensive, second-rate, carefully curated wired services for the rich, provided by Comcast and Time Warner; expensive, third-rate, carefully curated wireless services (or no services at all) for those who cannot afford a wire; close cooperation among the incumbent providers of wired and wireless services; and no public commitment to the advanced communications networks the rest of the developed world is adopting.” While many countries view universal broadband access as a public good, like bridges and roads, and an essential foundation for prosperity in the new century, many Americans, including most of our key policy-makers, continue to view broadband connectivity as a luxury item, just as private electric power companies sold their product a century ago. Not surprisingly, America lags behind in the global race toward universal high-speed connectivity, with fewer than 8 percent of Americans currently receiving fiber service to their homes.

What is the government’s response to this state of affairs? America’s national broadband plan states its goal as universal connectivity at rates of 4 Mbps for downloads and 1 Mbps for uploads, to be achieved by year 2020. This is wholly inadequate. As Susan Crawford puts it, “[i]n a sense, the FCC adopted the cable companies’ business plan as the country’s goal.” Instead, she recommends a plan that calls for symmetrical 1 Gbps connections over fiber to every home, along with regulatory separation between wholesale and retail transport and access facilities, as well as governmental support for municipal networks. Such a re-shuffling of priorities would of course require a radical shift in how broadband communications are perceived both by policy-makers and by the general public – not as a luxury available to the wealthiest few, but as a utility available to everyone.

To skeptics who would say that Crawford’s recommendations must remain a utopian dream, her response would be to point to history – specifically, the break-up of Standard Oil and AT&T and the government-subsidized construction of a national highway system. And to doubters who point to the cost of bringing fiber to every home (estimated by Corning to be about $90 billion), Crawford’s response is this:

Think about what $90 billion means in terms of the total U.S. budget. Security agencies were given a combined total of $682.8 billion in discretionary funding during 2010. The Defense Department was given $80 billion in FY 2010 just for research, development, testing, and evaluation of new weapons systems. For the same amount that the country spends on defense research in one year, America could bring access to fiber networking to all Americans for generations. Eighty percent of the cost would be labor – which is good for job growth. The payback to the operators would be slow; in exchange, the economy would be stimulated via a massive national infrastructure project that would set the stage for strong economic and cultural health for generations to come.

Crawford wrote those words before Edward Snowden leaked documents showing a joint venture between the NSA and most of the major telephone and broadband companies to monitor the electronic communications of tens of millions of people in the USA and around the world. The budget for that venture is unknown.

Carl E. Kandutsch owns and operates the Kandutsch Law Office in Plano, Texas, representing real estate and broadband service provider clients across the United States. For further details please see www.kandutsch.com or write to carl@kandutsch.com.