Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (37 page)

As one experienced Comcast watcher told me, the merger conditions would be completely ineffective in limiting Comcast's ability to use its market power; there are a number of ways for Comcast to legally wriggle out of every condition imposed by the DOJ and FCC. “I would take
structural competition any day,” he said, “over trying to regulate behavior. The Comcast [merger] conditions are regulating behavior.”
⁴¹

His prediction came true just months later.
Bloomberg
had succeeded in getting a condition included in the merger approval that appeared to require Comcast to carry
Bloomberg
—and other independent news and business channels—in the same neighborhood of business channels as MSNBC, CNBC, and Fox News. The interpretive lawyering had begun. Comcast chose not to comply and claimed that it did not have to. As David Cohen's subordinate Sena Fitzmaurice argued: “Bloomberg simply misinterprets the ‘neighborhooding’ condition in the FCC's Comcast NBCUniversal transaction order. It does not ‘neighborhood’ news channels in the way Bloomberg seeks to be repositioned.”
Bloomberg
responded, “This is something of a test case of how serious Comcast is about implementing the conditions set by the FCC order,” and filed an enormous record of documents aimed at convincing the FCC that Comcast was deliberately misinterpreting the condition in order to harm
Bloomberg‘
s ability to compete with CNBC. Comcast responded with enormous filings of its own.
⁴²

The day after the merger was approved, with the disappointed FCC commissioner Copps offering the lone voice of dissent, Cohen talked about the government conditions for the deal. His argument now pivoted: his audience was no longer the regulators, whom he had been praising for more than a year, but the investment community. “None of these commitments or conditions will prevent us from operating these businesses the way our business plans call for us to do so,” he said, “and none of them will prevent the businesses from being competitive in all of the markets in which we do business.”
⁴³
Cohen knew better than to sound triumphant, but he clearly was. Comcast had not been pinned down by the regulators, and it was now ready to move ahead as one of America's four media powerhouses.

Meanwhile, the company continued to bulk up its Washington lobbying force. FCC commissioner Meredith Attwell Baker, a Republican and the daughter-in-law of former secretary of state James Baker, announced that she would leave at the end of her two-year term to join Comcast. A well-respected former Department of Commerce official with a substantial
telecom legal background, Baker had been seen as a shoo-in for reappointment by the Obama administration, so her departure seemed sudden. More important, her quick transformation from regulator to voice of the regulated struck many observers as inappropriate.
⁴⁴

One of Comcast's nonprofit grantees, a small media nonprofit organization in Seattle called Reel Grrls, sent out a tweet expressing shock. A Comcast manager wrote to Reel Grrls: “Given the fact that Comcast has been a major supporter of Reel Grrls for several years now, I am frankly shocked that your organization is slamming us on Twitter. I cannot in good conscience continue to provide you with funding.” Following an outcry, Comcast quickly apologized and said the whole thing was a mistake; it “reach[ed] out” to Reel Grrls to let the organization know that its funding was not in jeopardy.
⁴⁵

After a couple of weeks of bluster, the issue died down; Baker hadn't broken any laws. Comcast hired a slew of other Washington notables.
Politico
characterized the spate of hires as “a veritable tour de force of Beltway know-how—and a possible sign that the company anticipates some big battles on the policy horizon.”
⁴⁶

12

Aftermath

AFTER ITS $13.8 BILLION PURCHASE OF
51 percent of NBC Universal in January 2011, Comcast moved professionally ahead.
¹
A cheerleading town meeting for NBCU's thirty thousand employees was sent via Webcast from the
Late Night with Jimmy Fallon
studio at 30 Rockefeller Plaza, with Ralph Roberts, emcee Ryan Seacrest, and
Saturday Night Live‘
s Seth Meyers onstage; during that event, according to
Daily Variety
, the ordinarily calm and reserved Steve Burke told the crowd that “whatever we do, we should be in it to win it. … We got big for a reason.” A new logo was revealed: no more peacock, just lettering. And Jeff Zucker was gone; after nearly a quarter century presiding over the extraordinary growth in the company's cable business he had been replaced by Burke.
²

Shortly after the merger was approved, President Obama appointed Brian Roberts to the newly restructured Council on Jobs and Competitiveness headed by General Electric CEO Jeffrey Immelt. In a blog post expressing pride in his appointment, Roberts invoked family lore: “My father Ralph is one of America's great entrepreneurs; he started Comcast as a small business with just a few hundred customers in Tupelo, Mississippi. With the recent completion of the NBCUniversal joint venture, we now have over 127,000 employees.”
³
Comcast's tradition of public-private service continued.

Following the merger, Comcast remained predominantly a distribution company: its non-content operations generated 80 percent of the company's
$55 billion in annual revenues and accounted for 70 percent of its employees. Its growth area, high-speed data services, was picking up steam, just as Roberts had predicted.
⁴
Profits were soaring. Americans in Comcast Country—which included people living in twenty-two of the twenty-five largest cities in America—were signing up for Comcast's very expensive highest-speed data offering.

And the profit margin was getting better and better. The cable-television advertising market had weathered the economic downturn without much of a dip; ad revenues were up more than 9 percent in 2010, the average price of a pay-TV subscription had risen 29 percent between 2005 and 2010 (despite a decline in average household income), and cash-flow margins for the top cable networks were climbing over 50 percent as Americans continued to watch more television.
⁵

Comcast's ability to bundle its offerings was undiminished; subscribers were getting dozens of channels whether they wanted them or not. To hedge against video losses, Comcast started testing the waters with triple-play packages (high-speed Internet access, Voice over Internet Protocol, and television) that were a little cheaper and included smaller bundles of video channels—but true a la carte offerings were still unavailable. And the TV Everywhere model was flourishing, as viewers kept their cable accounts even as they streamed movies and shows over iPads.

Comcast and the rest of the cable industry were successfully boxing Google and Apple out of the set-top-box marketplace; when the FCC suggested that it might make sense to require standardized video connections to which any device could be attached without permission, former FCC chairman Michael Powell, now leading the cable industry trade association, called the idea a classic example of “jobs-killing, cost-raising, innovation-crushing regulation.”
⁶
The cost of providing data services was dropping, but revenues per user for the cable distributor's bundles were going up. Comcast's investment in its networks was essentially over for the time being, and equipment—modems and gear—was getting cheaper. All the arrows were heading in the right direction. John Malone predicted in November 2009 that whatever restraints Comcast had to agree to as a condition of the transaction going through would provide “clues to other distributors as to whether they need to go vertical, and have something to
fight back” with against Comcast; more vertical integration deals (AT&T and DirecTV?) might follow in the path of Comcast's success.
⁷

Comcast's Video on Demand strategists were feeling confident; consumers would clearly want to watch high-production-value, long-form video anytime, anywhere, and on multiple devices, and Comcast was ready to rent programming to capture users who might have bought DVDs in the past. If users cut out their cable company, they would not be able to watch pro sports or popular network programs. Comcast even introduced a sixty dollar onetime video service in late 2011 that would allow consumers to watch movies while they were still playing in theaters—showing that the company believed that consumers would pay a premium to watch something as soon as it became available. “The [$60] pricing is insanity,” jeered
TechDirt
, a blog that reports on the business and economics of technology companies.
⁸
Comcast backed down but vowed to figure out another way to get first-run movies to customers’ homes.
⁹

Netflix, meanwhile, was struggling in late 2011, having apparently outraged subscribers and shareholders alike by focusing single-mindedly on its streaming business rather than its shipping DVDs business. It was also having trouble getting access to first-run content. Comcast's CFO, Michael Angelakis, was questioning as of late 2011 whether licensing current NBC Universal shows and movies to Netflix made sense: “You have to be really careful about what the value of that current content is,” he said. “I think we are more comfortable monetizing the deep library.”
¹⁰
Translated: Netflix, as Brian Roberts so pungently said, was for reruns. Maybe it had a future as a cable channel.

Meanwhile, the only potential competitor for customers looking for high-speed data services was backing down. In 2010, Verizon cut FiOS expenditures by two-thirds, and company executive Francis Shammo explained that “wireline will continue to come down year over year” Verizon had already announced that it would not be extending FiOS to new cities.
¹¹
DSL connections to the Internet were obsolete, could not compete with cable services, and were being dropped by customers in huge numbers. Roberts sounded understandably gleeful: “We really do start 2011 on a positive note,” he said. “Our competitive position has never been better. Now it's really all about execution, in order to maintain our momentum
and drive profitable and sustainable growth.”
¹²
Responding to the news that Comcast share prices were rising sharply, Roberts said, “Hallelujah.”
¹³

But there was a slight softening in one part of the Comcast universe: video customers were dropping off slowly and were being picked up by AT&T, Verizon, and the satellite companies. Cable still had the lead in the pay-TV market, however, and Comcast could slow its video losses using sports and its new NBC Universal channels.
¹⁴
Meanwhile, Americans’ appetite for data was growing. In the areas it served, Comcast had little or no competition for these high-spending, high-speed data customers; it was pivoting to focus on higher-spending subscribers in data to offset its losses in video. For Roberts, all the numbers pointed to “an exciting new beginning.” Comcast was adding broadband subscribers in droves while steadily increasing its revenue per user.
¹⁵

The merger seemed to be going well, too. Although, as Cohen said in a speech to the Chamber of Commerce of Southern New Jersey in mid-2011, “Comcast is not a Hollywood culture,” Steve Burke showed that he could make the two companies work effectively together.
¹⁶
He promptly launched “Project Symphony,” aimed at using cross-promotion opportunities across the Comcast megalopolis to support key programming. Burke, determined and no-nonsense—his father once headed Johnson & Johnson—made clear to the
Wall Street Journal
that Comcast-NBCU employees would be thinking of their jobs “not as programming Bravo or the lead story on NBC.com” but as working to better Comcast-NBCU.
¹⁷

And Comcast was carefully centrally managed. John Malone, recalling the failure of the AOL–Time Warner integration, had said: “When the AOL merger took place, I think what was lacking was a power base that the C.E.O. had which allowed him to be somewhat dictatorial.”
¹⁸
Comcast-NBCU would be no soap opera of conflict and turf battles; the cable guys were in, and they would systematically wring the inefficiencies out of the merged company, just as Cohen had wrung out the waste in Philadelphia's spending. Some of the broadcast stars, including the fabled Dick Ebersol of NBC Sports, were out.

When asked by
Bloomberg
about the NBC Universal joint venture, Malone had responded that the merger was probably good for Brian Roberts. “He gets to be king. It's good diversification of risk for Comcast.
It's a good economic deal for GE to avoid a big check to Vivendi. And the market power Comcast will achieve by owning NBC will allow Comcast to extract higher economic returns. The open question is, ‘Will they be allowed to do that without some regulatory restrictions?’ Because in the end the distributors are really middlemen—it's the American public that will end up paying.”
¹⁹

Had adequate regulatory restrictions been put in place? Both the FCC and the Department of Justice's Antitrust Division argued strongly that they had done a good job in constraining the possibilities for abuse. The FCC's chief economist, Jonathan Baker, wrote that he viewed the Commission's merger review process with pride: “The FCC worked with the applicants and other parties to craft an order that protects the public interest,” he said, “without restricting the applicants’ ability to accomplish their legitimate business objectives.” Baker went on to quote (approvingly) David Cohen's post-approval statement: “I don't think any of the conditions is particularly restrictive.”
²⁰