Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (3 page)

As a policy issue, the crisis in American communications bears some similarity to the banking crisis and global warming: it has taken decades to arrive; it has happened through incremental policy decisions, mergers, and changes in society; it involves technical terms that enable easy obfuscation; large entities have an interest in maintaining the status quo; and there is a great deal of political bluster about the possible effect of regulation on innovation and investment. In the communications industry no signal crisis—no equivalent of the banking collapse—has erupted to trigger public outrage. Reporters usually don't cover regulatory proceedings because they are slow moving and impenetrable. As a result, the players involved, who know exactly what's going on and why it's important, can get away with dazzling political sleight-of-hand. “Look, there, a new gizmo!” they say to their customers, believing (accurately enough) that few of them will put the pieces together and figure out the truth about the grinding
monopolistic power and lack of social contract that underlies the American communications industry today.

This issue hits consumers’ pocketbooks at the same time that it implicates national industrial policies. When the telephone was the dominant medium of exchange, U.S. law required that every American have access to a phone along with other utility services such as water and electricity. Although the Internet has become the common medium of our era, and no one can get a job or apply for benefits or keep up with the rest of the world without high-speed access, this service is framed as an expensive luxury reserved for the rich; fully a third of Americans don't subscribe to high-speed Internet access, and nonsubscription is highly correlated with low socioeconomic status.
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This situation has arisen because Americans have allowed the companies involved to cherry-pick wealthy neighborhoods for service and charge whatever they like. Now states, heavily lobbied by telecommunications companies, are seeking to get rid of any obligation to provide communications services to all their citizens. None of this was inevitable; all of it is bad for individual consumers.

Americans are suffering as a result; it is already clear that unless something is done the next disruptive Internet innovation, the new breakthrough invention that depends on the existence of an experimental sandbox of millions of users with fiber high-speed Internet access, will not come from America. The country does not have the critical mass of people connected to fiber that other countries do; instead, those American consumers who can are (over)paying for privately provided, pinched-upload cable services. Symmetrical and highly reliable connections are especially important for businesses, which typically make even heavier use of upstream paths than households. So the much-needed economic boost that comes from creating and marketing the next big thing will go elsewhere. But few people with the power to change the situation seem to understand this.

This book tells the story of the forces that made the Comcast-NBCU merger possible. Three paradigm shifts happened between 1996 and 2010 that shaped the narrative. First, the big new idea behind the Internet was that its language—and language is all the Internet is, a couple of simple agreements that allow computers to “speak Internet”—facilitated a general-purpose global
open network of networks that has changed two billion lives around the world while becoming the single common digital platform for communication. Second, the cable and telephone companies across whose wires Internet talk was flowing made a successful concerted effort to persuade the FCC to completely deregulate provision of the two-way, general-purpose communication on which the country's economic, cultural, political, and social life depends: high-speed Internet access. This meant that the success of the cheerfully disruptive activities happening online became entirely contingent on the generosity of the few large companies selling access. And third, newly elected president Barack Obama seemed to understand that high-speed access to the Internet was essential for anyone wanting to participate effectively in the twenty-first-century global economy. He suggested that nondiscriminatory, ubiquitous connections were essential—or he seemed to. It looked as if government intervention to ensure world-leading, reasonably priced, wired open Internet access for everyone would be an important priority for the new administration.

Things did not turn out that way, for a range of reasons that I hope to make clear in this book, and the consequences of this failure in policy are likely to be a drag on America's success for generations.

The February 2010 Senate Antitrust Subcommittee hearing turned out to be a well-produced piece of political theater. It provided a public opportunity for selected opponents of the merger to warn about the risks to communication and culture posed by the merger of Comcast and NBC Universal. But David Cohen had done his work well. All the senators had been visited by well-primed representatives of the merging companies, all the facts had been shaped by messaging experts—this merger is about saving the NBC Peacock!—and nothing would change as a result of any word spoken that morning. Roberts himself was appropriately deferential and polite.

As the hearing wound on, Roberts's calm bearing contrasted sharply with that of consumer advocates Schwartzman and Cooper, who looked comparatively unkempt and sounded far from calm, their voices strained with angry passion as they spoke against the merger. Schwartzman and Cooper understood what was at stake and did their best to explain the threat the merger represented. But they were up against a well-funded, decades-long campaign by the companies involved to free themselves from government
review. The two men were there to speak their part on a stage that had been set long before they arrived.

Roberts never faltered during the hearing, and his performance was judged a success by the trade press articles that appeared the following day. The
Wall Street Journal
reported just a few months later that he was already shopping for a multimillion-dollar apartment in New York City within walking distance of the home of the future joint venture, even though the deal would not be formally approved for another eight months.
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(The head of the merger effort within Comcast, Stephen Burke, later paid almost $17 million for his new New York City home.)
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Comcast's wealth was no secret: according to Bernstein Research, a media analysis firm, the company was soaking up “torrents of cash” in 2010.
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Its profits were up in the middle of a recession, its dividends and buybacks were soaring, and its executives were some of the highest paid in the country. But Roberts usually took care to keep a low personal profile and present an air of earnest engagement with the regulatory approval process; having the news come out about his new apartment was a slip.

Still, he had a lot to brag about: Comcast already dominated the market in many American cities as a physical distributor of digital information. Even before the merger, Comcast was in many ways the nation's all-purpose communications wired network provider; post-merger it would have a multibillion-dollar reason to prefer its own digital interests—the water it owned, rather than the water that simply passed through its conduit—over those of its now vulnerable competitors. The hearing, held to provide oversight, masked a profound, little-understood American problem: the lack of supervision over the mammoth companies that sell Americans access to all information, all communications, all entertainment—all the things that make today's economy, politics, and society function.

A hundred years ago, the big basic-infrastructure story—the story of a network that makes other businesses possible—was the power of the railroad, a new technology that tied the country together for the first time and spurred decades of economic growth. After the completion of the first transcontinental railroad in 1869, the railroad system had mushroomed rapidly, and consolidation of independent systems by the railroad barons,
chiefly J. P. Morgan, Cornelius Vanderbilt, and James J. Hill, had introduced complex new questions involving American competition and consumer protection.

Soon enough, barons in different industries began colluding: John D. Rockefeller's Standard Oil worked with the railroad barons (particularly Morgan) to control up to 90 percent of the oil refining business. Morgan-controlled consolidated railroads, operating under collusive trust arrangements, granted secret rebates to Standard Oil and undertook corporate espionage, giving Standard Oil information about competing oil shipments, which allowed it to underprice potential rivals.
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The growing power of the super-rich oil and railroad capitalists created widespread fear that fundamental American values and public interests were being destroyed in favor of private profits; populists, Progressives, farmers, working-class activists, public leaders, and journalists joined together to call for strict regulation to constrain the power of these giant infrastructure industries.

The railroads were essential scale businesses, and everyone wanted cheap and clean oil. But the cooperation between the two industries (their own “vertical integration”), their abusive practices, and their clear disdain for oversight angered Americans across the political spectrum. The country emerged from the ensuing regulatory battle as a nation with the idea that big essential infrastructure requires vigilant oversight and intervention to ensure that all Americans are served, all Americans are protected, and a level playing field is kept in place for innovation and fair competition. The government passed the Sherman Antitrust Act, launched the first infrastructure oversight agency, the Interstate Commerce Commission (ICC), and sued the railroads for antitrust violations.

It took years of attempts at legislation, public uproar, and litigation to achieve the dismantling of Standard Oil and the creation of a system of oversight for the railroads. The ICC, understaffed and inexpert, was swiftly overwhelmed by the lobbying efforts of the railway lawyers, and railroad supervision is now largely in the hands of the railway industry. Special-purpose agencies, which depend on the particular industry they regulate for information, for future jobs for underpaid agency employees, and for their institutional sense of self-esteem, have not proven effective. And the government has not always shown good stewardship in implementing or enforcing
disinterested industrial policy that depends on words that govern behavior. But during the same era, the federal government brought into being the Antitrust Division of the Department of Justice and increased its own capacity to protect the public from the depredations of an unconstrained market system. The Antitrust Division, unlike niche-expert agencies, has been able to act structurally by requiring divestitures and structural separation in monopolistic infrastructure industries so that competition will flourish.

Consider the AT&T divestiture of 1984, which forced long-distance prices down and led to innovations in long-distance service. That divestiture has now been completely undone by litigation and lobbying; instead of the twentieth century's Ma Bell, we now have Ma Cell. Part of the story of communications in America is the fact that in the separate market for wireless access, two giant companies, AT&T and Verizon, have the power that Comcast and Time Warner have in wired access.

In the twenty-first century, America is bound together and connected to the rest of the world not by skinny iron rails but by big communications pipes, an all-purpose digital infrastructure. Where once there was a separation of different media—television, voice, and text—now, thanks to the rise of digital technology and the advent of the Internet, they have become lightly differentiated uses of the same physical connections. The question of who controls the wires is thus about who controls the connections that unite the economy, politics, and society.

Yet the country's regulatory structure, as much because of politics as of reasoned policy making, has not kept up with the consolidation in carriers, the sweeping effects of convergence of all media, and the increasing control over information flows possessed by the giant carriers in this country. The regulators themselves are outmaneuvered, under-resourced, constantly under threat of attack, and short of information.

For more than a hundred years, U.S. policy has been to support regulatory conditions that will foster competition. The notion is that competition will protect consumers; the assumption is that the free market will flourish as long as ground rules for competition are put in place.

When it comes to natural monopoly industries, however, up-front capital costs are high and the marginal cost of serving one additional customer is low—but the presence of that one additional customer will not only mean
more revenue for the provider, it will also reduce the company's average cost of serving its entire customer base. Those lower average costs mean huge advantages to the incumbent, particularly if it has managed to control the entire local geographic market where it operates. So it may not make sense for another competitor to enter the market.

Utilities like water and electricity are natural monopoly services. So is telecommunications. It costs a great deal to set up a telecommunications system (and the U.S. government has helped immensely along the way by handing out franchises and access to rights-of-way to the corporate ancestors of today's giants) but very little to add one more revenue-producing customer, and at this point competitors to incumbent cable providers survive only by sufferance of the local monopolist. But Americans persist in hoping for competition to emerge. When it comes to telecommunications the government has a long history of setting up market-enforcing regulatory structures—the state as umpire rather than intervener—that have failed to constrain the naturally monopolistic behavior of incumbents. Who loses? Consumers and innovators.

When it comes to the distribution of information, the situation becomes even more serious. Self-interested agents in a market-driven economy will, naturally, invest only in what they can make a profit from. Access to the Internet can create public benefits—spillovers—in the form of new jobs and new ways of making a living. But a market-dominating private-access provider will want, unless constrained by regulation, to find ways to drive its own profits up through exacting fees and tolls based on differential treatment of information in an atmosphere of continuing scarcity of truly high-speed access. This can't be good for American society as a whole.