Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (18 page)

TV Everywhere could be what saves the content business, allowing Hollywood to move content safely online in the bundled, channeled, pay-TV format with which the movie industry feels comfortable. (The programmers have been spooked by the music industry's experience with iTunes; they want to make sure they can hang on to bundles and avoid fracturing their content into zillions of cheap bits.) TV Everywhere is easy to understand and access; and it is likely that popular TV programs and sports will be available online only through the TV Everywhere bundled service. Add a deal with Facebook, as Comcast did in 2011, and it becomes a one-stop, community-minded, well-branded, well-organized place. Just like AOL.

But there is a key difference: the TV Everywhere structure is effectively a joint venture among all the major cable distributors and most of the
media conglomerates around the country. This time the cable distributors in general—and Comcast in particular—have the downstream market power in distribution that Time Warner lacked in 2001. Since then, Comcast and Time Warner have clustered their operations so that they control the “whole of the market” in which they are the providers of bundled wired-distribution services (video plus data).
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TV Everywhere allows them to move their local physical market power online because customers must subscribe to their pay-TV service to access TV Everywhere.

As Mark Cooper testified at the Senate Antitrust Subcommittee hearing in February 2010, TV Everywhere is “a blatant market division scheme in which the two cable operators [Comcast and Time Warner] who have never overbuilt one another, never competed head to head in physical space, would like to extend that anticompetitive gentleman's agreement into cyberspace.”
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And this time around, unlike the situation in the 1990s, the interests of the concentrated media conglomerates and the cable distributors are clearly aligned: they are all threatened by online video and interested in keeping the tens of billions of dollars in payments flowing among them—affiliate fees, retransmission consent fees, and other fees that the cable distributors kick back to programmers based on subscribership and advertising revenue—intact. All those fees will flow only if distribution of high-priced content can be carefully controlled and charged for by way of a guaranteed distribution channel—the downstream control that Bewkes says is essential for any vertical integration scheme to work. The other media conglomerates needed Comcast's goodwill for the money spigot to stay open. From the cable-distributor's perspective, a programmer was either with it or against it. A media conglomerate that put its programming online outside this framework would risk losing the guaranteed revenue that came from staying with the club. The NBC Universal deal made Comcast into a media programming powerhouse, and thus allowed it to place formidable content assets inside the TV Everywhere umbrella to kick-start efforts to fight the rise of competing online video.
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At the same time, TV Everywhere is a modern-day version of AOL—a safe haven from the wilds of the Internet. As an online writer said in a spring 2010 comment on a blog post:

Another key difference from the AOL Time Warner story was good management. Here's John Malone, talking to the
New Yorker
’s Ken Auletta in October 2002:

Brian Roberts and Comcast might succeed where Gerald Levin and Steve Case failed: they had the management ability to turn all of NBC Universal into a smoothly functioning machine in the service of the Comcast brand, and the coordinated power in the programming-distribution market to make the whole thing work.

As John Malone put it in his interview with Auletta, “The vision [for the AOL–Time Warner merger] was taking unique content and marrying that with the Internet, and, particularly as the Internet transitions to high speed, you convince the world—that is, your dial-up subscribers—that high speed creates a value in content that wasn't there at slow speed. And so you shift AOL from being essentially a transport mechanism to being a way to receive unique content services and pay for it—a subscription-content model, as opposed to a connectivity-payment model, where little value goes to the content.”
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By owning programming and controlling access to it, and by selling “specialized services” like TV Everywhere that felt like the Internet
but were treated much more favorably both technically and financially, Comcast could shift its distribution services to the all-subscription-content model, make things simple and friendly for consumers, and forestall the day when its pipes were viewed as transport mechanisms for other companies’ content. In 1996, Steven Levy had scoffed at AOL for serving up a comfortable walled-garden world of content and community; Levy was confident that AOL was about to be destroyed by the advent of the wide-open spaces of the Net, and called it a “dead man walking.”
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Fifteen years later, Comcast's 2011 merger with NBC Universal, taken together with its power over high-speed distribution in its markets, looked to be the implementation of the AOL–Time Warner plan. (The next, inevitable step: in 2012, Comcast announced that its online video flowing through an Xbox would not be subject to usage caps—it would be a “specialized service” with quality guarantees—but that Netflix Internet video would be so subject, even though from the consumer's perspective the two would appear to be exactly the same.)
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The Internet, this time around, seemed like the dead man walking.

The regulators in charge of reviewing the Comcast-NBCU deal were, understandably, haunted by memories of AOL Time Warner. Following enormous public concerns about the deal, the agencies back then had risen to the challenge by trying to make room for new marketplaces in competitive ISPs and Instant Messaging applications. But when the AOL–Time Warner merger turned out to be a fiasco, the regulators looked weak for imposing intrusive conditions that ultimately meant nothing. When the same concerns were raised about Comcast and NBC Universal, the regulators had to be worried that overzealous advocates were crying wolf once more.

Maybe this merger would also fail. Bewkes of Time Warner (now just a content, not a distribution, company) made it clear during an October 2009 TVWeek Conference that he did not think much of the Comcast-NBCU deal, explicitly comparing it to the AOL–Time Warner disaster. It was not clear to him how Comcast was going to be able to become a more successful business by buying NBC Universal. “Somebody has finally noticed that these things don't work out so well,” he said, adding, “We love
to see our competitors taking risks.”
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Other vertical integrations had been unwound; Bewkes split Time Warner Cable from Time Warner Entertainment in 2008–9; News Corp. went after DirecTV in 2003 but then spun it loose in 2006.
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Whether all vertical mergers are benign is an open question. Forty years ago, the economist Oliver Williamson argued that vertical integration had “dubious if not outright antisocial properties.”
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After years of litigation and, crucially, the defection of maverick Howard Hughes from the studio pack, the Supreme Court forced the movie studios to divest their theater chains in the 1948
Paramount
case, even though the studios had argued that without control over distribution they would have no incentive to invest in expensive content production. (Much the same argument is made today in support of TV Everywhere models.) Studios had forced theater chains to buy films they did not want as part of packages—“block booking”—and often required them not to show films from competing studios. Independent producers had a great deal of trouble getting their films seen in major movie houses, because the theaters would say—often truthfully—that they had no open time.
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Colleen Abdoulah of WOW! would have recognized these practices.

Before the litigation brought the system to an end, the studios had flourished within their vertically integrated format. Modern economists have asserted that block booking brought efficiency gains and that the studios’ vertical integration into distribution and exhibition provided low-priced entertainment to huge numbers of filmgoers. Schemes the Supreme Court at the time saw as “devices for stifling competition and diverting the cream of the business to the large operators” are now praised by many economists as having reduced the costs of doing business, smoothing the way for high-quality mass entertainment on thousands of well-attended screens across the country.
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The idea that there could be a public interest in decentralization—even at the risk of occasional higher costs to industry—is now out of fashion, as is the notion that an inefficient firm might want to vertically integrate in order to use its market power to foreclose change in a dynamic digital world. As the biggest purchaser of television content and the biggest broadband provider in the country, Comcast arguably had the power to influence how the most popular television programming was
distributed over the Internet, and an interest in slowing the rise of online video that might replace Comcast's core transmission services’ revenue stream.

In important ways, critics charged, the vertical integration planned by Comcast resembled what Microsoft had done a decade earlier: using its power in one market to move into another in order to avoid commoditization of the first.
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In 2001, the D.C. Circuit Court found that Microsoft had violated the Sherman Act by unlawfully maintaining its monopoly in the PC operating-system market. (Other claims against Microsoft were thrown out, but this one was upheld.) How did it do that? By bundling its Internet Explorer Web browser software with its Microsoft Windows operating system, thus preventing the distribution and use of products that might threaten its overwhelmingly dominant position in the market for operating systems. The bundling created an “applications barrier to entry” because most consumers prefer operating systems for which a large number of applications have already been written, and most developers prefer to write for operating systems that already have a substantial consumer base. Bundling Internet Explorer with Windows ensured that consumers would find competing Web browsers more difficult to locate or use. As the court put it, “If a consumer could have access to the applications he desired—regardless of the operating system he uses—simply by installing a particular browser on his computer, then he would no longer feel compelled to select Windows in order to have access to those applications; he could select an operating system other than Windows based solely upon its quality and price.” In other words, the market for operating systems would be competitive, and Microsoft did not want that to happen.
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Someone who worried about vertical integration in an era of dynamic digital change could see Comcast's plan as mapping directly onto Microsoft's efforts. Monopoly power may be inferred from a company's possession of a dominant share of a relevant market—here the market for distribution of data and video over a wire—that is protected by entry barriers, factors that prevent new rivals from responding to the monopoly firm's price increases. Ordinarily, increases in price above competitive levels get competitors interested in undermining the incumbent player. Comcast could bundle access to the most popular programming (the new market) with its existing transmission-distribution wires (the old market)
in order to maintain control over wired data transmission.

Comcast's combination of live local sports and NBC Universal content with its high-priced wires, and its ability to use NBCU programming to nudge the entire programming world into the TV Everywhere framework online (unless a maverick bolted), might make it difficult—perhaps impossible—for a new player in the market for high-speed wires to show up, charge less, and compete with Comcast in any of the markets where Comcast operated. Comcast-NBCU would succeed where AOL Time Warner failed.

5

Netflix, Dead or Alive

DURING THE FEBRUARY 2010 SENATE
antitrust subcommittee hearing, consumer advocate Andy Schwartzman testified emphatically about the risks a combined Comcast–NBC Universal would pose to online video. “They have every reason,” he said, “to withhold NBC programming from … online-only competitors.”
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But Brian Roberts had a different view: of all video viewed online, “NBC has less than 1 percent; Comcast has less than half of 1 percent; Hulu [co-owned equally by NBC, ABC, and Fox at the time] has less than 4 percent; and Google has over 50 percent. It is a dynamic, rapidly changing market, but as a broadband company, we want to encourage as much video as possible because the fastest growing part of our company is broadband.”
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Who was right? Would a combined Comcast–NBC Universal help or hurt online video?