Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (2 page)

Now it was seeking to buy NBC Universal, a content conglomerate that owned some of the most popular cable networks in the country and one of the largest broadcast networks, with twenty-five television stations, seven production studios, and several key Internet properties, including iVillage and a one-third interest in Hulu.com. NBC Sports had broadcast more Olympics than any other network and had televised sixteen Super Bowls. Wimbledon, the French Open, the Stanley Cup final, Sunday Night Football, the U.S. Open, and the Kentucky Derby were all NBC Sports properties. Two giant entities, one devoted to distribution of content and the other to programming, were joining forces. Together they would be a media and entertainment colossus with sweeping power to decide what Americans watched and read. The merged company would control one in five hours of all television viewing in the United States, would own more than 125 media outlets (cable channels, television stations, film studios, Web sites), and, most important, could use that control over content to dominate the market for high-speed wired Internet access in most of the country's major cities.
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Other players had taken their places that day in that hearing room or were represented by their proxies. The senators on the committee sat on
raised platforms behind microphone stands, their staffers pressed against the wall behind them ready to hand a note or listen to a whispered question. Witnesses were arrayed facing the senators behind a plain wooden table: Jeff Zucker, the head of NBC Universal, who had come under harsh criticism for his management of the NBC TV broadcast network, was seated to Brian Roberts's left.

NBC-the-network was almost lost in the rounding when it came to NBC Universal's overall success as a media conglomerate; even as the network continued to lose money, Comcast could leverage NBCU's powerful cable channels—like USA and Bravo—as a means of keeping competition from rival distributors at bay. Comcast had used the enormous profits from its pay-TV services to subsidize the construction of the nation's most subscribed-to wired high-speed Internet access service, but without reasonably priced access to key programming no one would be able to follow suit.

On Zucker's left, the other cable companies were represented by a token competitor, Colleen Abdoulah, president and CEO of WOW! (WideOpenWest Networks). A midsized cable system struggling to compete for subscribers in Comcast's territory in the Midwest, WOW! was trying to win over consumers by providing better customer service, but it was forced to pay high prices for take-it-or-leave-it bundles of programming owned by NBC Universal and other media conglomerates. The big cable-distribution companies like Comcast can get those bundles for far less than the smaller companies. Abdoulah would testify that if Comcast controlled NBC Universal, negotiations for the programming WOW! needed to retain subscribers were likely to become even more one-sided. Two public-interest advocates, Mark Cooper (instantly recognizable with his thick glasses and emphatic delivery) and Andy Schwartzman (white bushy eyebrows and a thick moustache), both veterans of decades-long tussles with the cable industry, were seated to her left.

Behind the witness table, several rows of professional Washington sat quietly facing the senators. In the first row, visible behind Brian Roberts from the senators’ perspective, and next to nearly ninety-year-old Ralph Roberts, was David Cohen, the political genius pulling the strings on behalf of Comcast. Long before this hearing, Cohen had used his energetic mastery of national politics and his formidable Democratic credentials to shape
the all-important narrative of the merger, the simple political story that would be patiently, ceaselessly repeated until no other story seemed credible: Comcast, a true-blue American success story of a family company, was merging with NBC Universal in order to save the NBC broadcast network and bring order as well as technical innovation to the cable-TV industry. Cohen's strategic genius had molded the narrative in response to his assessment of the political situation in Washington, and he had probably already planned the next several steps following the proceedings.

Cohen was no slouch as an antitrust lawyer either. For anyone willing to engage them on the substance of the deal, Cohen and his team were ready with smooth responses. From their perspective, the deal was a vertical combination of a distributor and a programming company, not a horizontal combination that would result in fewer competing distributors, and thus it was not the kind of transaction with which antitrust law should be concerned. In a yearlong process of ticking boxes and being respectful of various political offices and regulatory niche inhabitants, Cohen and his team would meet with all individuals, companies, and agencies that seemed relevant and explain why the Comcast merger aligned precisely with their interests. The Comcast team would show interest and professional engagement with the various conditions that the regulators required in order to clear the merger, as long as those conditions did not interfere with the company's business plans.
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Behind the witnesses sat representatives of other media and telecommunications companies, well-groomed, mostly male, and placidly enjoying this rare public ritual. (Major hearings don't happen every week in the telecommunications field.) There is a constant, easy, friendly flow between government and industry in the communications world bounded by the suburbs of Arlington, Virginia, and Bethesda, Maryland. Regulators switch jobs and become the regulated; the regulated leave their posts and take leadership roles in trade associations; everyone stays in touch. This crowd was easy to like; they were well-intentioned, engaging, and undogmatic, with a light touch and a smattering of technical know-how.

Despite the bonhomie of the hearing room, the merger represented a new, frightening moment in U.S. regulatory history. If a few large companies were to get control over electricity or clean water in America in
particular geographic regions and could decide without oversight who would have access to it and what kinds of uses they could make of it, at what cost, there would be a public uproar. Instead of electrical utilities or water companies, the entities involved were media conglomerates: Comcast, the dominant distributor of communications in twenty-two of America's twenty-five largest cities,
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was seeking to buy one of the five media powerhouses that furnished more than 80 percent of America's primetime entertainment and news.
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Instead of electricity or water, Comcast was gaining dominion over the country's latest utility infrastructure: high-speed Internet access. Simultaneously, rather than install twenty-first-century fiber-optic lines to replace the metal wires that had brought all Americans telephone service, AT&T and Verizon, the giant private telephone companies that had ceded the market for wired high-speed Internet access to the cable companies, were working hard to persuade states that they should be released from any obligation to provide all Americans with telephone service where it was not in line with their business plans. By mid-2012, four states had already removed this requirement, and six others were poised to do so.
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Americans would be left with a grotesquely skewed communications-utility picture: the rich would pay whatever the cable companies chose to charge for wired Internet access while poor and rural Americans would be relegated to expensive, second-best wireless connections. At the same time, much of the rest of the developed world was racing to install first-best standard fiber connections to their citizens.

Seen from the outside, the Comcast-NBCU deal seemed like a typical big-box media merger. And in some ways it was: the consolidation of market power, deregulation, and tearing of the social fabric in the communications-utility sector had been going on for decades. Opponents of the deal were shooting at a subtarget, in a sense. They argued that media consolidation had reached a saturation point and that the Comcast-NBCU merger would lead to homogenized entertainment sold for high prices by extraordinarily profitable giant companies. Americans would have almost unlimited freedom to watch a dazzling variety of football games, cooking shows, and other forms of entertainment coming from a very small number of sources. Although that was all true, the overarching problem came from control
over pipes: with this acquisition Comcast would have even more power in its market areas to dictate the terms on which access to all kinds of information—entertainment, news, sports, data, phone conversations—could be had.

The deal's supporters (chiefly Comcast itself) had only to respond that the merger would not make the situation for consumers worse than it already was. If opponents could not decisively prove “merger-specific harms,” the phrase Comcast employees repeated endlessly to staffers across Washington, the deal could not be blocked. If there were problems of concentration in the cable-distribution marketplace, they had existed before the merger was announced and could be taken up at a later date. Whether that date would ever arrive was unclear.

By February 2010, the accepted wisdom in Washington was that the deal would go through. No major company had opposed it publicly, and without an influential corporate entity on the other side to give politicians cover, there was little advantage to fighting the merger. No one wanted to appear unfriendly to business during the dark days of the U.S. recession. Besides, there was some appeal to the vertical argument. If the Department of Justice in a Democratic administration tried to block the merger, it might be pummeled by a conservative reviewing court—there are more Republicans than Democrats on the circuit appeals courts and on the federal bench as a whole—after a protracted litigation battle against one of the deepest-pocketed businesses in America.

But the deal showed Americans their Internet future. Even though there are several large cable companies nationwide, each dominates its own region. The major cable companies never compete with one another because each wants to reap the advantages of scale that come with control over entire markets. Because no other widely available privately provided wired Internet access product is fast enough or can be installed cheaply enough to compete with cable, each of the country's large cable distributors can raise prices in its region for high-speed Internet access without fear of being undercut.

Wireless access, dominated by AT&T and Verizon, is too slow to compete with the cable industry's offerings; mobile wireless services are complementary to the wired access Comcast sells. Verizon Wireless's joint marketing
agreement with Comcast, announced in December 2011,
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made that truth visible: fierce competitors don't offer to sell each other's products. In a nutshell, the giant companies that dominate high-speed Internet access in America have tacitly divided up the marketplace. AT&T and Verizon are devoting themselves to wireless access, where they are by far the two largest players, rather than competing head to head with Comcast for truly high-speed wired Internet access, and they would do almost anything to shed themselves of their traditional obligation to provide wired access to all Americans. Comcast and Time Warner Cable are concentrating on wired access and reaping profit margins of about 95 percent for the service.
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And consumers are paying more in the United States than people in other countries do—for less speedy service—as inequality between the haves and have-nots is amplified by the digital divide.

It doesn't have to be this way. Other developed countries have a watchdog to ensure that all their citizens are connected at cheap rates to the fastest possible open-access ramps (that is, fiber-optic access) to the Internet. In South Korea, more than half the households are already connected to fiber lines that allow for blazing-fast uploads and downloads, and households in Japan and Hong Kong are close behind.
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In America, only around 7 percent of households have access to fiber, and the service costs six times as much as it does in Hong Kong (and five times as much as it does in Stockholm).
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Vertically integrated cable companies, whose Internet access product is not provided over fiber and crimps uploads, are well on the way to controlling America's Internet access destiny, having spent millions of dollars over almost fifteen years lobbying against any rules that might have constrained them.

Instead of ensuring that everyone in America can compete in a global economy, instead of narrowing the divide between rich and poor, instead of supporting competitive free markets for American inventions that use information—instead, that is, of ensuring that America will lead the world in the information age—U.S. politicians have chosen to keep Comcast and its fellow giants happy. The government removed all rules from high-speed Internet access and allowed steep market consolidation in the hope that competition among providers would protect consumers. But that competition has not materialized; the cable industry, whose collusive practices have
been largely ignored by regulators, has decisively dominated the wired marketplace and has done its best to foil municipal efforts to provide publicly owned fiber Internet access.
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As a result, the United States now has neither a competitive market for high-speed wired Internet access nor government oversight.

The giant communications companies unite in claiming that the situation is under control. In response to an op-ed of mine published by the
New York Times
in December 2011, Ivan Seidenberg, CEO of Verizon, wrote, “America has a very good broadband story; someone just has to be willing to tell it.” These companies claim that regulation will stifle investment and innovation. This kind of argument is not new. When Brooksley Born, chair of the Commodity Futures Trading Commission (the federal agency which oversees the futures and commodity options markets), suggested during the Clinton administration that derivative financial products should be overseen by regulators, she was immediately met by a firm, flattening political response: interfere with the financial sector, and you will destroy innovation and investment.
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Several years ago, many people made fun of Al Gore for saying that climate change was endangering our future; his critics insisted that the data he was pointing to represented no more than normal fluctuations magnified by over-anxious minds. To regulate carbon emissions would destroy innovation and investment.