Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (29 page)

As Roberts put it in early 2011, “If you think about Comcast, I believe that the best business we may well be in is our broadband business.”
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Comcast's almost unchallenged hold on the high-speed Internet access market in the areas it serves puts it in a position to make even greater profits in the years to come. Comcast's service areas cover 50 million U.S. television households, or about 45 percent of households nationwide, but only half of those households (23 million) subscribe to at least one Comcast service.
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When it comes to high-speed Internet access, the company has a lot of headroom and no real competition. As
SNL Insurance Daily
reported in September 2011, Comcast CFO Michael Angelakis has told analysts that Comcast has captured only a third of the market in high-speed Internet access in its coverage area, but he “expects the figure to eventually hit 85% to 90%, as consumers clamor for higher speeds to watch such things as [high-definition] video.”
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Reaping ever-higher revenue per user for high-speed Internet access alone—even in the absence of a viable traditional pay-TV business—would still be a profitable pursuit. While overall revenue might fall (because high-speed Internet access revenue by itself would be less than the traditional video-plus-access bundle), costs would fall even farther and faster if Comcast no longer had to pay for content. Comcast faces high programming costs from other actors—particularly in sports, where ESPN is rumored to charge as much as seven dollars per subscriber for its content.
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On the whole, Comcast's margins in video are being squeezed by the demands of other programmers—its programming costs rose 7 percent in 2010, to $7.5 billion.
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If Comcast someday became simply a conduit pipe, it would still be in a good position: customers would continue to buy their favorite programming, and they would get much of it from Comcast online. Comcast would have even more cash on hand and could stop spending money on set-top boxes. Even if pay-TV swooned, Comcast would continue making torrents of cash, and if all went well, in 2014 Comcast could buy out General Electric's 49 percent stake in the Comcast-NBCU joint venture.
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Meanwhile, Comcast needed to slow the development of successful long-form online video-distribution businesses so as to control the timing of the transition to a mostly online video ecosystem and get Americans accustomed to the TV Everywhere authentication model. Comcast and its programming allies had many dials to turn, many ways to make sure independent professional distribution of long-form online video did not thrive. Online video distributors needed Comcast-NBCU: access to its programming, access to its pipes on a predictable basis, and access to its subscribers. Comcast-NBCU neither needed nor wanted competition.

As Steve Burke, Comcast's second-ranked executive, said in May 2011, “What we really bought when we did the deal for NBC Universal was a bunch of very, very well run, very strong cable channels.”
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As we have seen, Comcast can use its ownership of NBC Universal cable channels to protect itself against losses to traditional video-distribution competitors: by bundling and pricing its programming offerings at the wholesale level, Comcast can make these channels more expensive for competing distributors.

Comcast can do even more against new kinds of online video-distribution competitors. Here's Roberts again, speaking to investment analysts two months after the closing of the NBCU merger: “As more and more applications require bandwidth, as the bits per home go up, the bet we're making and the bet you're making, if you own us, is that over the next 10 years, people will want more bits in their house over a wire than ever before. And whether that is called Xbox Live, whether that is Skype, whether that is Netflix, whether that is Comcast, Xfinity, streaming, whether that is some kid in the garage inventing an application that we all wish we'd thought of, Facebook Junior, next Google—I like that position.”
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Comcast's position as pipe provider gives it a bristling armature of techniques for squeezing independent online video aggregation that might increase cord-cutting. It can withhold programming—because the program-access rules that helped the satellite industry take off do not apply online.
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It can prioritize its TV Everywhere programming by calling it a specialized service over which the FCC has said it has no power to require even the weakest common-carriage obligation.
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It will thus make any independent Internet-based video seem jittery, less reliable, and subject to long buffering periods by comparison because the independent video (say, Netflix) will be available only over a “best efforts” Internet connection that the cable company will have every incentive to narrow and, ultimately, refuse to offer. The company's “specialized service” will “feel” just like the Internet and will take up a growing share of the company's digital channels, but will be devoted to the distributor's own Video on Demand services and its partners’ online communities—similar to, say, Facebook. A cable company like Comcast can enhance its own video with innumerable digital add-ons and make independent online video harder to find. And it can simply charge consumers more for watching movies that come from anyone other than Comcast.

The bottom line: policy makers might be thirsty for a new source of competition to discipline accelerating price increases for content coming from the cable companies, but Comcast's interest is in neutralizing the possibility of online competition. Netflix, for its part, has long since been forced into complementarity: given the policy makers’ inability to constrain the pipe owners and all the vertical advantages those pipe owners have,
Netflix has never had the ability to compete directly against Comcast in the video realm. The battle ended before the first shot was fired; without sports or broadcasting content, and without a guarantee of fair treatment by the pipe owners, neither Netflix nor any other online video shop will ever provide a full substitute for cable's pay-TV services.

At the time this chapter was drafted, Netflix was the closest thing to a viable online competitor to Comcast's video services. It was moving toward becoming a cable channel;
Reuters
ran a story in early March 2012 reporting that Netflix was in negotiations with the cable incumbents to be part of their Video on Demand packages.
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If Netflix as an independent over-the- top service has disappeared by the time you read this book, crushed by the forces I have described here and its own missteps, just insert the words “any new online video-distribution company” every time you see the word “Netflix.”

Even in offering complementary services, Netflix's powers are constrained. As a pipe provider, one important lever available to Comcast in its efforts to slow the advent of competitive online video is “usage-based billing” or “consumption billing.” Usage-based billing sounds innocuous enough: charge consumers additional fees if their network usage exceeds a set level. Network operators have often claimed that these overage fees are necessary to allow them to invest in upgrading their networks to handle the high volumes of bits needed for consumers to access the video they love and that they need the flexibility to charge higher fees to heavy users who are congesting their networks. When you dig into the details, however, usage-based billing rates bear little relationship to actual network costs or to solving the problem of congestion. It is purely a way to raise revenues.

Network operators justify usage-based billing by arguing that light users should not be subsidizing heavy users. If your neighbor is paying a hundred dollars a month but streaming high-definition movies every night, and you use the same service just to send e-mail, why should you both have to pay the same rate? It sounds like a simple fairness argument. What's more, the network operators argue, they have to do something since their networks are becoming congested: it is expensive to build networks, the high volume of use of data is clogging the pipes, and no one should expect them to build more networks if they cannot charge the biggest users more.
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While these arguments have a superficial appeal, usage-based pricing is a crude instrument with which to manage traffic congestion. If your hoggish neighbor is streaming those high-definition movies during the day, you probably don't care. The real problem for cable broadband networks, which are shared within neighborhoods (and so subject to “contention,” which means that you are battling with your neighbors for the flow of bits you want, in a context in which the cable distributor has no incentive to invest in better connections to increase the flow of bits), is the traffic during peak usage time, not the total amount of usage.
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Charging for peak-load usage, or congestion pricing, might take care of these contention issues. If the cost to deliver a bit to a particular house during key evening download hours were higher, users would probably change their behavior. But that would involve tinkering with all subscribers’ bills, not just the hogs’, and—to be cynical—might not discourage people from subscribing to the online video services that could cause them to exceed the network operator's cap. Providers are not interested in this solution.

Because the United States has given up on rate regulation for high-speed Internet access services, and the reporting requirements that go with it (number of subscribers, revenues, costs, service outages, quality of service), regulators have no reliable data about how pricing is computed.
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No regulator seems to know what it costs to deliver the extra gigabyte the operators want subscribers to pay for. The actual cost of delivering bits over the last mile is probably pretty low; according to Netflix, an Internet service provider's cost to “deliver a marginal gigabyte, which is about an hour of viewing, from one of our regional interchange points over their last mile wired network to the consumer is
less than a penny
, and falling, so there is no reason that pay-per-gigabyte is economically necessary.”
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But overage charges (per-gigabyte charges imposed once the user has exceeded the network operator's cap) can be two dollars per gigabyte or more; Canadian ISPs have been known to charge five.
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In the absence of concrete information, regulators are stuck: carriers claim they need to charge overages, and the government—needing to encourage the building of infrastructure by these private parties—has no choice but to agree. And given the concentration in the marketplace for network operators, users have no choice but to pay.

According to the FCC, network operators in the past have routinely advertised “up to” speeds that are twice as high as the speeds subscribers actually experience; part of the reason for this phenomenon may be the prevalence of shared (contended-for) connections. Cable operators, in particular, routinely oversell their services.
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If everyone is downloading a movie between 6
P.M.
and 9
P.M.
, those shared networks burden the bitrates that everyone gets. The same amounts of bits go through the pipes, but they go more slowly. Between six and nine, you're battling your neighbor for bandwidth.

As a result, online video distributors face the prospect of being squeezed out: users won't sign up for independent online video if they believe they will end up paying more for Internet connectivity as a result.

To see how this might play out, consider our frozen neighbor to the north, where usage-based billing has been a major consumer issue. In 2010, Bell Canada convinced the Canadian telecommunications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), to approve a rate structure that it could impose on buyers of its wholesale data services—entities that planned to resell Internet access to their retail customers. The wholesale offering would have a number of options, ranging from a “Lite” rate of up to two gigabytes per month, with a $1.87 surcharge for every gigabyte over the cap, to a “Basic” plan of up to sixty gigabytes per month with a $1.12 overage fee.
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Those are pretty meager usage rates before the surcharges kick in: by streaming video you could use up the Basic monthly allotment within six hours.
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Bell Canada argued that it had to impose caps to deal with fast-rising usage of video that had caused a 25 percent uptick in the volume of data carried over its networks.
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But the real targets were Netflix and other online video providers. Netflix had launched services in Canada in 2010. Rather than build out its networks to allow consumers to watch video more readily, Bell and the other Canadian network providers had decided to enforce scarcity.
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Bell's technology, though, seemed incapable of accurately measuring how much subscribers were using, and the resulting overcharges and undercharges caused a furor. More than five hundred thousand people signed an online petition to the Canadian government demanding an end
to usage-based billing.
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Both Michael Geist, Canada Research Chair of Internet and E-commerce Law at the University of Ottawa, and Cory Doctorow, a Canadian-British futurist and author, pointed out that Bell had conceded that the rates it was charging for overages had nothing to do with the actual costs of providing services. The fees, instead, were designed to constrain users’ behavior by making it unattractive for them to do things that required a lot of data. “In other words,” Doctorow wrote, Bell had “set out to limit the growth of networked based business and new kinds of services, and to prevent Canadians experimentation that enables them to use the Internet to its fullest.”
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