Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (27 page)

This carrier-centric walled garden includes applications as well as devices. The smartphone you carry in your pocket is part of an ecosystem in which the network provider acts as a gatekeeper in deciding which
communications move across its network onto users’ (authorized) handsets. Verizon does not allow wireless subscribers to download applications or software of which it does not approve. As one online commentator put it in 2012, “It's like saying heres this 2000$ laptop. You can't remove or install any software unless you get proper authorization. You can't even upgrade your OS [operating system] until we deem that your computer can handle it without any issues.”
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Verizon says that it does this in order to avoid harm to its network—which is just what the old pre-divestiture AT&T used to say.

All this behavior is the opposite of the common-carriage idea now fighting for existence in the arena of high-speed access to the Internet. Common carriage separates content from conduit by requiring the pipe to be only a pipe. Since the early 1990s, wireless networks, like high-speed Internet access generally, have been subject to less and less government oversight. Verizon and AT&T have managed to rejoin content to conduit, making themselves into very powerful vertically integrated entities unconstrained by either competition or regulation; they can set prices, decide what uses and users of their networks they will allow, control what handsets are permitted on their networks (and what features those handsets can have—sometimes requiring manufacturers to cripple features that the carrier does not want), sell highly subsidized phones attached to long-term contracts, and make the switching costs involved in moving to another carrier prohibitively high.
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The wireless carriers, in short, are just like cable pay-TV distributors leasing set-top boxes to customers: they think of themselves as editors.

The big differences between wireless and cable lie in how these networks are actually used. Mobile wireless communications are a separate product, clearly distinguishable from the wired data-distribution marketplace that Comcast dominates in its U.S. regions. No one at the Senate Antitrust Subcommittee hearing in February 2010 even mentioned wireless.

When people want to download a lot of data—say, to make a video call—they overwhelmingly opt for high-speed wired connections. Wireless can never match wired in this regard; the laws of physics constrain the amount of data that a wireless connection can carry through the harsh environment of the outside air. As Sanjay Jha, chairman of Motorola, said in 2011, a
wireless platform “just isn't big enough” to support the huge amounts of video that people want to watch. “That is why the [high-speed Internet access–equipped] home will be the central hub” for all the bits people consume.
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A fiber (or cable) wire is twenty to a hundred times as fast as a 4G wireless connection, and those wireless connections will slow down as they are shared by more people.
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The only way out of this trap for the wireless carriers is to add enormous swaths of spectrum to their holdings (in an environment in which all the relevant frequencies have already been allocated to others) or build cellular towers everywhere, at enormous expense. Neither of these things will happen.

Once you leave your cable-wired home, the quality of your wireless video will degrade sharply. Small screens with low-resolution images will be the norm, and you'll be able to carry out a video call on a large screen with a high-resolution image only if you're standing near a tower fed with fiber. Wireless could probably do about the same job as a DSL connection over a copper wire, but, as AT&T's CEO Randall Stephenson said in a moment of frankness during the summer of 2011, DSL is now “obsolete” in comparison with Comcast's DOCSIS 3.0 wired speeds.
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But the telephone companies are not trying to compete with DOCSIS 3.0. That's not where their profits are. Even though most of their business assets are wires, America's dominant phone companies, Verizon and AT&T, are walking away from their residential wires and focusing wholly on wireless.
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As Americans have dropped their landline phones, and as the moat around the cable companies’ high-speed wired data-distribution product has grown wider, investing in digging up streets and putting fiber into consumers’ homes appears to be a losing proposition for the phone companies. The telephone companies would be savaged by Wall Street if they tried; high capital expenditures would drive down free cash flow, dividends, and buybacks, making their stock far less attractive.

The phone companies are safe with wireless: the distribution product that Comcast sells, the wired transmission of large amounts of data, is n0t directly threatened by handheld devices. And there is growth in wireless; in fact, it is the source of
all
the phone companies’ growth. (AT&T's and Verizon's wireless margins are much higher and more resilient than their wireline margins; their wireless revenue growth is positive and relatively
strong, in comparison to stagnation and decline on their wireline sides.)
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The companies know they're on solid ground with wireless: cable distributors can't provide mobility outside of a narrow range around a subscriber's house without reselling the wireless carriers’ services. Both markets—wired and wireless high-speed Internet access—are extraordinarily profitable, and by and large they do not intersect.

The programming-distribution cycle on the wireless side will be as it is on the wired side: Verizon and AT&T have the incentive and ability to charge content providers for the privilege of reaching their subscribers with the “premier” compressed and curated video services they offer. Watching more video by way of the carriers’ handheld devices will also trigger overage charges as users hit their monthly allotments and end up paying more. As Lowell McAdam, CEO of Verizon, told the
Wall Street Journal
in March 2012, “On the wireless side, I think the bill will probably go up because people are going to be using [a handheld device] a lot more [to watch video].”
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In time, it may make sense for a large wireless carrier to merge with one of the media conglomerates to capitalize on the efficiencies of scale and scope that such a deal will make possible. Until then, joint ventures will have the same effect.

Given the capacity problems of their wireless networks, Verizon and AT&T will claim (and have claimed) that it is essential that they curate and prioritize the tidal waves of data flowing to users’ wireless handsets. They have to be choosy, they say, because their networks can handle only so much video traffic. This is why Verizon fought so hard against the extension of common-carriage-like network-neutrality mandates to wireless Internet access in late 2010; the company was planning on charging for online video and other “premium” services and did not want to have to treat all bits of data equally.
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From Verizon's perspective (which Google joined in August 2010 in order to forward its own plans for the Android wireless handset operating system), imposing common-carriage-like rules on wireless networks would be job-killing, cost-raising, innovation-crushing, anti-investment regulation.
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Worse, it would get in the way of Verizon's business plans. And Verizon and Google won.

Though the two groups of massive carriers are not competing with each other, they have shared interests. In the wireless world, as in the
cable-distribution marketplace, it is clear that the carriers will favor some data over others, using their power in the wireless Internet access marketplace to reap additional returns and shape speech. And like the cable distributors, the wireless carriers will have two streams of revenue: subscription fees and payments from programmers of various kinds for the right to reach those subscribers. Additional fees may include up-front payments by subscribers for network activation of their phones and early termination fees if they quit the carrier's network before the end of the contract period. In return for signing a contract, customers receive subsidized phones. Both groups are accustoming their subscribers to usage caps and overage fees. They have every reason to cooperate.

Just one other oligopolist keeps the carriers on their collective toes: Apple's wildly popular devices, permitted to attach to the wireless network by the grace of the carriers, allow only rigidly circumscribed communications through preapproved apps—and Apple takes a 30 percent cut of the revenue those apps generate.
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At the same time, Apple routinely closes the iPhone/iPad world to apps that would compete with its core default device functions.
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Control and monetization are layered on control and monetization.

There is currently a standoff of sorts. AT&T's essentially unconstrained ability to act as an editor gives it power to decide how its network is used, and it has enough subscribers to demand (at least in limited ways) that Apple treat it well. That explains why Apple's iPhone was for so long (2007–11) available only through AT&T; AT&T, the network provider, had the legal power to decide which devices were allowed to attach to its network, and was able to use its enormous number of wireless subscribers as leverage to get an exclusive deal from Apple. At the same time, AT&T spent a great deal of money subsidizing iPhone purchases so that consumers would lock themselves into long-term contracts.
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Apple needed AT&T as much as AT&T needed Apple.

Wireless provides a friendly environment for the supply side of the transaction as well: the iPhone and iPad app store, with its appealing graphics and wealth of choices running on extraordinarily beautiful devices, has been a treasure trove for consumers and developers alike. The guaranteed distribution mechanism, discrimination in “carriage”
decisions, and resistance to piracy made possible by the Apple environment mimic what the cable operators have created on the wired side, but with even more diversity of programming and ease of use. Apps for iPhone and iPad use a single payment mechanism, look great, and have all been rigorously checked for security issues.

This private-carriage wireless model appeals to more than just consumers and developers—old-line industries are jumping in too. When Rupert Murdoch launched the
Daily
, an iPad-only newspaper, in February 2011, there was a bit of a kerfuffle from both journalists and Web enthusiasts: the
Daily
had great graphics and its own staff, could not be accessed via a Web browser, and had an attractive gee-whiz newness, but Apple was taking its 30 percent cut, subscriptions cost just ninety-nine cents a week (which seemed to undermine traditional print journalism), and it was available only in America.
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Was this the future of newspapers? Murdoch thought he was on to a good thing, predicted confidently that the iPad would lead to “the end of the laptop” (meaning the end of the common-carriage, PC-based model of communications), and hoped aloud that Apple's cut would go down after the first year.
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Whether the
Daily
itself survives, it could be a sign of things to come.

Indeed, because of the careful control embedded in the iPad and iPhone, media companies have seen these devices as potential saviors. Not just newspapers but music, film, and book publishers have fallen in love with their possibilities. The advent of the Internet has rumbled through their business models, making ad-supported businesses (particularly newspapers and magazine publishers) tremble and decimating the recorded-music industry. Search engines permit users to find exactly the news they want rather than being forced to buy a bundle of disparate bits of information in the form of a hard-copy newspaper. The easy availability of single-song digital files online in unencrypted form has made it extraordinarily difficult for CD producers to persuade people to buy an entire physical album.

Book publishers, television studios, game developers, and film studios all needed some way to reintegrate their content with a guaranteed delivery network that could track, bundle, and charge for access. The wide popularity of the iPad, together with its control over unauthorized uses of media and its facilitation of online video, seemed like the answer. The private-carriage
model of mobile, controlled, authenticated, billed-for transactions has been overwhelmingly successful, to the point that Morgan Stanley suggests that in 2014, more people—more than 1.6 billion—will be accessing the Internet from their mobile device than through their desktops.
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Revenue from mobile apps for iPad tripled between 2010 and 2011, to $15 billion according to marketing research firm Gartner, and will climb to almost $60 billion by 2014.
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The cable distributors, particularly Comcast, were watching the wireless world carefully in 2010. Although they were not competing head to head with wireless and were not expert in wireless technology, they did not want to be left behind. As John Malone put it in 2009, “The whole strategy for those of us in the distribution business is to be able to deliver it over multiple distribution channels. If you're a cable company right now, you're busily trying to increase the speed of your Internet offering. You're already delivering digital voice. You're trying to give people a device that will allow them to store [programming] and play it back in very high quality. You're probably now experimenting with a thing called Slingbox, or technology that allows you to take [programming] off of your device and put it on the Internet and receive it somewhere else. You're trying to evolve with the digital technologies and the wave as it comes in.”
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Comcast found a way to ride the wave by hanging on to subscribers who wanted to watch television on sleek new tablets that were not plugged into sockets but were physically near a Comcast cable connection.