Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (28 page)

Comcast was not planning to get into the wireless business. It was essentially a wire-distribution company, and the majority of its growth would always come from high-speed data subscriptions. But Comcast needed some connection to the wireless world in order to maintain its edge as a digital leader for the young and to slow its loss of video subscribers for as long as possible. The answer: dump the Comcast brand, relabel its TV Everywhere service (as well as everything else Comcast sold) Xfinity, employ Comcast's lowest-cost rights to use content to extend its model onto wireless devices in the form of Xfinity apps for the iPad, iPhone, Fire, Xbox, and whatever else came along, and tell Comcast pay-TV subscribers that they were getting even more value for their ever-higher monthly bills: a “free” iPad app. Result: a seamless, Comcast-branded, unified experience across TV, mobile, and the Web.

Subscribers to Comcast's pay-TV services took to the Xfinity TV iPad application at once, with more than a million downloads in a few months. David Pogue's March 2011 review in the
New York Times
must have warmed hearts in Philadelphia: “[The] new Xfinity app for iPad is a thing of beauty. Frankly, it's a lot smoother, better-looking and easy to understand than the Web site.”
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Devices using the Android mobile operating system would also have Xfinity TV apps available. Xfinity would be everywhere.

Moving the cable model onto tablets and phones in the form of a jazzy point-and-click app made sense for Comcast; the company could be part of the mobile world, using its existing programming levers in a bid to continue satisfying consumers while keeping in place the bundles and authentication requirements it had deployed so successfully across wires. Comcast had the heft to persuade programmers to extend its rights to stream content online to rights to stream content via the iPad; a relatively easy sell, given the security the iPad promised to media companies.

Time Warner Cable experienced a few more hiccups with in-home wireless streaming. Some programmers raised strong objections to being part of Time Warner Cable's iPad app and had to be coaxed into making licensing deals.
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Comcast, meanwhile, with greater leverage stemming from its enormous subscriber base, steamed ahead.

While the first generation of the Comcast Xfinity TV app was designed to function only inside pay-TV subscribers’ houses, Comcast will be able to hedge its bets: if consumers eventually decided that the speed of a conventional wired cable Internet connection was not worth the amount Comcast charged for it and moved to a cheaper, second-best wireless data connection, Comcast would still be represented by its popular content—as long as consumers continued to subscribe to its expensive pay-TV services. So the deal with Verizon Wireless in late 2011 gave Comcast a reliable source for reselling wireless access as part of its bundles of services, so as not to alienate customers who craved mobility as well as fast wired connections. Bundling resold wireless access with Comcast's wired connections tied customers even more tightly to the company; Comcast's average revenue per subscriber was up to an astonishing $143 a month by early 2012, an increase of nearly 140 percent over ten years. It will inevitably go higher.
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With its huge subscriber base, Comcast will get the lowest prices of any distributor for rights to use programmers’ content, and with Verizon Wireless's help it will be able to stream programming nationwide via iPads and other mobile devices at lower prices than providers in any region of the country. No longer limited to its service areas, Comcast will be able to play both sides of the online video marketplace: charge for traditional pay-TV fees in its service areas as a wired provider (with iPad streaming a “free” add-on) and charge streaming fees outside its service areas as an online video company.

In other words, because Comcast has the most subscribers for pay TV, it can enter the territories of other pay-TV providers with an over-the-top (Internet) product (or app product) that will systematically underprice all other over-the-top products. Comcast has more sports. Comcast has more top cable channels. It can win from any angle.

“Live streaming and the play now feature on our Xfinity TV app are two important pieces of our strategy to deliver any content to any device, any time,” Roberts said in January 2011, just after the deal was approved.
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And all this mobile activity could take place in the controlled, safe world of apps. Comcast had nothing to lose: Xfinity on the iPad and Microsoft's Xbox applications (and Microsoft's Windows operating system for smartphones and tablets) would protect Comcast's traditional distribution model while allowing the company to experiment with mobile streaming video. The Xbox deal, in particular, would help block competition from Google TV and Apple TV, which lacked the 50 million–strong worldwide fan base of Xbox.
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Time Warner's Jeff Bewkes, the originator of the TV Everywhere idea in 2009, sounded triumphant by mid-2011: “If you look at the television business … TV viewing is up, time spent viewing is up, the number of channels and the quality is up—more than films, actually. And the programming investments are up, the profits are up. There's nothing in it that isn't up. And when you say, is it TV vs. the Internet? No, it's TV on the Internet.”
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Steve Case's prediction that people wanted safe walled gardens of well-designed interaction was coming true; the AOL–Time Warner deal had foundered, but the mobile environment was providing the perfect set of affordances for everyone involved. And U.S. regulators have made this
possible: on the wireless side, there are two dominant carriers, AT&T and Verizon. Neither is constrained by competition, both are subject to little governmental oversight, and both have an interest in snapping up whatever slivers of gold will come from prioritizing particular bits of digital information from their friends. This makes Comcast, AT&T, Verizon, and Apple “frenemies”: they have overwhelming strength in their own arenas and a shared interest in a future world that looks a lot like a collection of large, expensive, well-groomed theme parks. Private carriage, not common carriage, is the regulatory approach they are interested in. As the industry heads toward convergence—packets of video, voice, and data over multipurpose communications networks taking the place of single-purpose cable, broadcast, and telephone networks—it is becoming clear that the carriers’ desired model of control, discrimination, and premium services is winning the battle on both the wired and wireless sides.

In fact, the communications industry is at a point of equipoise with all these major actors. Each of them (AT&T, Verizon, Comcast, Time Warner, Apple, Google, and Microsoft) is too big for any of the others to swallow up or crush. They all have achieved enormous scale. So they tacitly cooperate by carving out their separate areas of expertise, much as tough kids will find separate playing areas and stay there when they know equally tough kids occupy the other parts of the room. Comcast gets wired distribution and stays out of the wireless distribution and device marketplace—and the other guys don't stop it from streaming its content wirelessly across iPads and Xboxes. Comcast's strength gives it room to maneuver in negotiations for transport over wireless networks and through wireless devices, getting better rates than its satellite competitors on the video side. AT&T and Verizon get wireless distribution and avoid having to install fiber lines into Americans’ houses—and Comcast does not try to take over their wireless marketplace. Comcast does not need to control the last mile of a wireless transmission: 95 percent of any wireless network is a wire, and Comcast is in a position to sell the wireless companies its “backhaul” products—carrying the data generated through wireless uses over Comcast wires from cell towers to Internet access points. Comcast and Apple are similarly strong enough to collaborate while flourishing financially: as long as people love high-speed Internet access and the design of
Apple devices, they'll buy products from both Comcast and Apple that work well together.

Everyone is doing well: profits are climbing, allowing the communications giants to pay ever-higher dividends even as worldwide economic woes mount; free cash is piling up; investment in infrastructure is down because there is no competitive pressure in either the wireless or the wired sector to increase it; and all the companies have been increasing dividends or buying back stock (or both) in an effort to concentrate each stakeholder's profit—boosting their earnings per share and driving up the popularity of their equity in a virtuous cycle. Inequality grows, as poor and rural people are left behind completely or are relegated to second-best wireless “substitutes” for high-speed Internet access. But those zippy iPad apps look just great.

9

The Biggest Squeeze of All

AS HE OPENED THE SENATE ANTITRUST SUBCOMMITTEE
hearing on the Comcast/NBC Universal merger in February 2010, Senator Herb Kohl was clearly worried: “We must pay particular attention,” he said, “to the effects of this merger on a new and promising form of competition—video programming on the Internet.”
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Later in the proceedings, consumer advocate Andy Schwartzman chimed in: “NBC and Hulu have denied access to NBC programming to existing over-the-top video provider Roku. That is not hypothetical. That is a fact. So there is every reason to expect that the combined entity will have even greater reason to … withhold NBC programming from … online-only competitors.”
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Hulu.com, a free online video site launched in 2008 by NBC Universal and Fox as a competitor to YouTube, had become a popular locus of online television content accompanied by advertising. Hulu's owners had become concerned in 2009 that people would use the video-watching software Boxee (which gives a computer screen the appearance of a television media center) or a Roku device (allowing users to stream online video directly to television screens) to access Hulu video. Hulu had therefore denied Boxee and Roku access to its content; as CEO Jason Kilar had explained it, “Our content providers
requested that we turn off access to our content via the Boxee product, and we are respecting their wishes.” The worry then from NBC Universal's perspective had been that the line between Hulu's online videos and the cable industry's video business would be blurred, and the programmers—and the cable industry—did not want that to happen. Hulu's CEO, in turn, felt his company had no choice but to block Roku and Boxee: “Without [the programmers'] content, none of what Hulu does would be possible,” he wrote in 2009.
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NBC Universal wanted Hulu to be an addition to its pay-TV business, not to undermine advertising sales on NBC.com. Following the blocking fracas, Hulu marched on, adding a monthly payment plan and climbing to a million paying subscribers (and 30 million viewers overall) by 2011.
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Schwartzman was clearly worried that a combined Comcast-NBCU would have even greater incentives to block competing consumer products.

Brian Roberts took a different view, pointing out that Hulu was responsible for less than 4 percent of video online and had revenue of just $108 million in 2009; Netflix had revenue of more than $1 billion. From Roberts's perspective, online video was a “dynamic, rapidly changing market” over which the new Comcast-NBCU could not possibly exert control.
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Indeed, by the fall of 2010 Hulu, a joint venture among Fox, NBC Universal, Michael Powell's employer Providence Equity Partners, and Disney, was being described (not by Roberts) as “the unloved bastard offspring of a doomed tryst among three aging TV giants.”
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The two camps seemed to be talking past each other: Kohl and Schwartzman were worried about the future distribution of long-form video (NBC programming) online, but Roberts was including ten-minute YouTube videos in the online video category. Kohl and Schwartzman seemed to think Comcast-NBCU would have an interest in withholding long-form video from competitive distributors. Roberts (and NBC Universal's Jeffrey Zucker) repeatedly claimed that it was in Comcast's and NBC Universal's interests to ensure the widest possible distribution for the merged entity's programming.
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Comcast probably saw Hulu primarily in defensive terms—as an online platform that would allow the traditional programming-distribution complex to retain its pricing power while neutralizing any over-the-top competition.

Meanwhile, in the world outside the hearing room, the pay-TV industry (including Comcast) was finding its former unchecked growth beginning to slow down.
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Distributors kept passing along higher programming costs to consumers, but some Americans were growing tired of cable rate increases that were running at about triple the rate of inflation.
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A few, ground down by the worsening economic situation, were cutting the cord—discontinuing traditional pay-TV subscriptions in favor of low-priced online video alternatives. In mid-2011, SNL Kagan estimated that 4.5 million of more than 100 million pay-TV subscribers would have discontinued their subscriptions in 2011.
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It seemed likely that people under thirty would find life without a cable subscription easier than their elders did.

Who was right? Was online video threatened by the merger, or was cord-cutting threatening the future of the pay-TV model? The answer, it turned out, was yes. Comcast saw the numbers of cord-cutters and knew that long-form online video threatened its video business model. But it also saw that cord-cutters were still a small group—somewhere between 1 and 4 percent of the adult population of America. There was time to delay the advent of successful online competition for Comcast while increasing the advantages that would give Comcast an overwhelming head start in high-speed Internet access services.