Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (14 page)

Another possible competing technology, wireless access, cannot match the speeds cable lines provide. It cannot offer the same capacity unless there are towers connected to fiber lines everywhere—and that's another major up-front expense that the telephone companies don't want to incur. John Malone, among many others, has scoffed at the idea that wireless access could make a dent in cable's dominance: “The threat of wireless broadband taking away high-speed connectivity [market share] is way overblown,” he said in May 2011. “There just is not enough bandwidth on the wireless side to substantially damage cable's unique ability to deliver very high-speed connectivity.”
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Comcast has always been quick to adopt new technology. With Brian Roberts's assistance, in 1988 the cable industry created and funded a technology research center—Cable Television Laboratories, usually called CableLabs—that has played a key role in developing shared technologies and technical advances for the industry. CableLabs is an unsung hero of the cable industry; its founder, Richard Leghorn, predicted back in 1987 (before the birth of the commercial Internet) that the cable industry could become “a multichannel, multi-format video programmer and publisher utilizing its own interactive, point-to-multipoint optical cable plant,” and this is exactly what happened.
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In 1997 CableLabs came up with standards that could be used to deliver packet-switched, Internet Protocol–based voice services over the cable lines (nicknamed VoIP, for Voice over Internet Protocol), and Comcast quickly adopted the technology, making itself the nation's third-largest telephone company.
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The company embraced the “DOCSIS” (Data over Cable Service Interface Specification) standard developed by CableLabs as soon as it was available, and moved its system to all digital communications in 2008–9. That freed up bandwidth inside its pipe (digital signals can be compressed more efficiently than the old analog signals) while enabling new revenue streams for convertor-box rentals (so that analog sets could continue to be attached to cable wires) and high-definition video. More recently, Comcast was the first to offer CableLabs’ DOCSIS 3.0 protocol, a digital channel-bonding technique that makes possible two-way capacity of Internet Protocol traffic of at least 100 Mbps. By 2011, Comcast had covered some 80 percent of its territory with DOCSIS 3.0, on a substantially faster schedule than any other cable distributor, and was selling this high-speed access at high prices.
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Again, only Verizon's FiOS service could hope to compete with the speeds possible with DOCSIS 3.0—and Verizon was backing off.

So Comcast was aiming to stand alone in offering truly high-speed Internet access in each of its markets. This was a sensible move: data access is vastly more profitable than video services—it takes two dollars of video revenues to deliver the same profit as one dollar of Internet access revenues—and Internet access uses only about one-sixtieth of a cable system's total bandwidth.

But technology was only part of Comcast's success. Content was also important.

Brian Roberts knew that Comcast needed to maintain, as long as possible, its power to sell subscribers large bundles of programming that included “must-have” content—particularly live sports. To do that, he needed to make sure that live sports would not be available over the Internet on demand, at attractive prices, without a subscription. The programmers and networks had to be assured that they would make more money selling to cable distributors than directly to online consumers. The Comcast-NBCU deal would stave off the day when programmers revolted; Comcast would become itself a major player in the programming market.

Content was always part of the Comcast story. In the early days, there often was not much programming available to cable operators. In an early system in Sarasota, the community could pull in stations from Tampa through rabbit ears, and local televisions could even get the ABC network from Largo, Florida, about half the time. Roberts, Aaron, and Brodsky were offering Sarasota residents just half a channel of ABC in exchange for a monthly subscription fee—not a very attractive deal.
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As Comcast expanded, it looked for ways to build up content. Dan Aaron thought cable would eventually be bigger than just a reception business—that, in Brodsky's words, “there should be things we can do to bring people other than broadcast television.” Aaron's early attempts to offer content provide fodder for Comcast's autobiography. In Tupelo, one of the first Comcast locations, the trio was operating a three-channel system. Doing an electronic upgrade to five channels by moving amplifiers around within the system would have taken a large investment, and Brodsky worried about wasting money. Aaron said he had a feeling they would be able to use five channels. As Brodsky tells the story,

Telecommunications, Inc., later known as TCI, made a similar attempt at local programming in the 1960s. As Mark Robichaux puts it in
Cable Cowboy
, it was “a TV camera aimed at a news ticker service, another fixed on a thermometer and, occasionally, a camera trained on a goldfish bowl.”
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Aaron's programming was hardly a hit, but Comcast continued to explore the content business. Its logic from the beginning has been that if you don't know whether content is king or distribution is king it is best to spread your bets. You want to be selling something that people can get only from you. When a key partner, the McLean newspaper family of
Philadelphia, dropped out, Comcast had to sell its Florida cable franchises (a decision Ralph Roberts and Brodsky regretted for years), but it continued to acquire lucrative Muzak franchises across the country. In the end, Comcast became the largest Muzak franchisee in the nation, selling off its interest to Muzak managers only in 1993.
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Comcast's $20 million 1986 investment in the QVC (Quality, Value, Convenience) home-shopping channel, a hedge-your-bets deal made just after its acquisition of the Group W cable systems, was one of the best moves the company ever made: QVC eventually brought in a third to a half of Comcast's revenue. For little to no cost, through QVC, Comcast was paid by its subscribers to watch content that was presented by advertisers—the sellers—and then paid again when the subscribers phoned in their orders to QVC. In 1992, Barry Diller, former second-in-command at Paramount, took over QVC; when Diller made a $7.2 billion bid in 1994 to merge CBS with QVC, Comcast blocked the sale with a $2.2 billion offer to take over QVC entirely. Comcast and Malone's TCI divided ownership of QVC (with Comcast in control), and Diller promptly left. Comcast's $250 million investment paid off handsomely; to help pay for the AT&T systems in 2001, it sold its QVC shares to Malone for almost $8 billion. Comcast continued its diversification into content by buying a majority interest in E! in 1997, as well as the Golf Channel and Versus, its main sports channel.
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Comcast's more important moves by far have been in sports: in the late 1990s, it leveraged its majority interest in the NHL's Philadelphia Flyers, the NBA's Philadelphia 76ers, and Philadelphia's two major sports arenas into a twenty-four-hour regional channel called SportsNet Philadelphia. Within a few years, Comcast owned exclusive rights in broadcasts by teams and regional sports networks from coast to coast, with dominion over games played in the Bay Area, central California, Chicago, the mid-Atlantic, New England, New York, the Northwest, Houston, and the Washington, D.C.–Baltimore area—ten owned-and-operated Regional Sports Networks in seven of the ten largest television markets, which became the Comcast SportsNet. Because no competing video provider can hope to survive without access to local sports programming, Comcast's refusal to license Comcast SportsNet to RCN in Philadelphia helped keep that potential
competitor at bay; it did the same thing to DirecTV and Dish Network.
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Comcast has used SportsNet as a sledgehammer in many contexts.

Brian Roberts's only public misstep came in 2004, when he made an unsolicited $54 billion takeover bid for Walt Disney in the mistaken belief that the Disney board would welcome it. He first approached then-CEO Michael Eisner with an offer, but Eisner turned him down without even consulting the board. Taking Disney under Comcast's wing would have doubled the number of Comcast employees and given it access to premium content, not to mention theme parks and merchandising. But Roberts also wanted the Walt Disney Company because it owned ESPN—the QVC of sports. The lucrative ESPN channel, launched in 1979, had become the highest-priced must-have content in the cable world, and Comcast had little leverage against it. To give Comcast a sledgehammer it could use against all other pay-TV distributors, Roberts needed ESPN. If it took acquiring the under-performing broadcast network ABC (also owned by the Walt Disney Company) to get it, he would do it.

So after Comcast's bid was rejected by Eisner, Roberts sent a letter to the Disney board, making the offer public. But whoever had hinted to him that the Disney board had had enough of Eisner's leadership and was willing to see him outmaneuvered had been mistaken. Following Roberts's hostile takeover announcement, Comcast's share price swooned while Disney's went up, making Comcast's all-stock offer—based on giving shareholders 78 percent of a Comcast share for every Disney share—less attractive to the Disney board, which publicly rejected the bid.
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After a few weeks, Comcast backed down. Roberts claimed that stepping back from the deal showed discipline, but the reality was that he had miscalculated the board's reaction. This signal failure on Roberts's part led directly to the Comcast-NBCU merger, which gave him another chance to acquire giant sledgehammers in the form of must-have cable channels and premium sports content.

The Disney bid sheds light on the concentrated nature of the content industry. Merger mania has been widespread on the programming side since the 1970s, and by the time Brian Roberts made his attempt to buy Disney there were few media conglomerates left to choose from. In 1999, Fox, Time Warner, Disney, and John Malone's Liberty dominated the programming industry; by 2005, News Corp. (News Corporation)
controlled Fox and its valuable networks and the
New York Post
; CBS and Viacom (owner of DreamWorks, Paramount Pictures, MTV, Comedy Central, BET, and Nickelodeon) were both controlled by Sumner Redstone; GE owned NBC Universal, USA Network, and its long list of popular cable channels; Time Warner owned HBO, Warner Bros., and TBS; and Disney owned ABC, Miramax, and ESPN. Since Robert's Disney bid, media conglomerates have become even more global, owning television, newspapers, magazines, publishing outlets, and sports rights in many countries.
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Many voices speak, but there are only a few ventriloquists behind the screen.

Brian Roberts's announcement in December 2009 that the Comcast-NBCU merger made his company “strategically complete” represented a moment of extraordinary personal and professional achievement. Comcast had grown by shrewdly rolling up independent cable systems—just as the enormous railroad combinations of the nineteenth and twentieth centuries were created by buying failing systems throughout the country. Together with the other major cable operators, Comcast found a way to geographically cluster its operations to take advantage of the enormous returns to scale that characterize the cable industry. It had achieved success by embracing innovative technology and paying what it took to install upgrades that others could not match without enormous investments. It had also achieved scale and diversification by buying up content—first Muzak, later regional sports operations—that people couldn't live without. Thanks to its powerful business model and desirable sports content, among other factors, Comcast weathered the 2009 recession well: cable revenue growth rates were unaffected.
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Comcast was becoming a high-speed Internet access company; that's where the growth was. The Comcast model was extraordinarily resilient economically, and it came with enormous amounts of free cash and a vanishingly low level of default risk.

Comcast achieved all this by keeping its costs low and targeting dense, urban centers rather than far-flung rural communities that might be more reluctant to pay high subscription fees. It consolidated its back-office and other overhead services and was extremely careful with its finances. “We were lucky, and we were good,” said a wistful Brodsky as he stepped down after decades of service. “We never saw a cable company we didn't like.”
Mark Cooper, one of the consumer advocates who testified against the merger in February 2010, might rail about Comcast's being among the lowest-ranked companies in America for customer service; Comcast had bigger fish to fry.
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The company achieved all this while maintaining the image of family management. Wall Street believes in the Roberts family story. Legislators believe that Brian Roberts is a highly competent, low-drama executive who does his best to treat his employees like family. It is a trait Brian shares with John D. Rockefeller; Rockefeller “presided lightly, genially, over his empire,” according to Ron Chernow's biography of the ruthless mogul, and “placed a premium on internal harmony.”
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