Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (38 page)

Keeping track of all the details of the Philadelphia city budget and safeguarding the welfare of the metropolis takes a pretty smart lawyer, and there is no question that Cohen is that. Although the FCC and DOJ had done their best to ensure that the merged company was obliged to allow in new competitors—a nondiscriminatory Internet and online video—it looked to the outside world as if the regulators had been outlawyered by Cohen and his team. Every requirement imposed by the agencies was subject to interpretation, and none of the obligations dealt directly with the consequences of Comcast's overwhelming dominance in high-speed Internet access.

There was no change to Comcast's obligation (or not) to carry independent programming.
Al Jazeera
would not get any help. Comcast was confident that program carriage rules were unnecessary; from its perspective, the company told the FCC in 2011, it was facing intense competition from the two satellite companies, traditional telephone companies, and “overbuilders” and had “every incentive” to carry unaffiliated programming “that is valued by subscribers.”
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But that meant that programs not owned by any of the media conglomerates would continue to have a tough time getting carriage.

What's more, the program-access rules were not extended online; Netflix (or whatever other online video distributor wanted to claim the benefit of the rules) would have to show that it had a deal with a peer for “comparable content” and for the “same business model” that it wanted for Comcast content. A good lawyer could run rings around those open-ended definitions. Comcast assured the Commission that it had “strong incentives to seek the broadest possible distribution of its networks,” and that all NBC Universal networks, “including RSNs,” were “available to all distributors that are willing to pay a fair market price for the network at issue.”
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That might not be a price that any online video distributor could afford.

The other route for online video distribution allowed the requestor to ask for NBC Universal's entire scheduled lineup of programs. Cohen asserted the day after the condition was set up that Comcast would be asking for
not only
the full-freight charge for that programming (the charge it assessed against the smallest overbuilder ineligible for volume discounts from Comcast) but also any retransmission or other fees it traditionally requested
plus
any amount it was going to lose in advertising because the programming was going online.
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Comcast could gently suggest that the requestor had misunderstood the condition, and schedule another meeting. And another meeting. And then stop responding to the requests for meetings.

Given its ability to strangle online players by withholding NBC Universal content, and its incentive to do so to protect its own video subscription business, Comcast was likely to find ways to avoid the obligation to provide NBCU input to online video distributors. And the “peer” obligation might never be triggered at all. If all the programmers wanted to keep the tens of billions of dollars they got in fees from traditional video distributors, they would not jeopardize that structure by licensing to an online actor; and unless one of them moved toward independent online distribution, Comcast would not have to hand over NBCU content.

Comcast's bet was that the TV Everywhere model and the company's ability to stream programmers’ material to iPads and other devices would satisfy consumers’ needs for online video long enough to forestall the development of true online competitors. Programmers (now including Comcast) could withhold content, and pipe providers (still Comcast) could make the rules about connections and prices. As Malone put it, “On the
video side, you have a pretty robust, pretty profitable, pretty predictable business. And those who kind of undermine it—I think are playing at their own peril.”
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One condition that could have made a difference to Comcast's future power over online innovation generally was that proposed by Earthlink: a requirement that Comcast provide wholesale standalone high-speed data access to companies, which would then be allowed to resell that service. Wholesale access, the thinking went, would allow competition to emerge, driving a wedge into Comcast's domination of high-speed Internet access. This remedy had been imposed in the AOL–Time Warner deal and was the basis for much of the telecommunications structure in the rest of the developed world. As Yochai Benkler wrote on behalf of Harvard's Berkman Center in a February 2010 report, “In countries where an engaged regulator enforced open access obligations, competitors that entered using these open access facilities provided an important catalyst for the development of robust competition which, in most cases, contributed to strong broadband performance across a range of metrics.”
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In other words, figuring out a predictable and fair structure under which competitors could share infrastructure has led to faster, competitive Internet access at lower costs around the world. When the distributors cease to have gatekeeping power, they become providers of a commodity input to other businesses, similar to the electrical utilities.

For Comcast, such a condition was unthinkable. Cohen explained in a 2009 interview with C-SPAN that the idea of wholesale access was a serious mistake: “Any requirement that our networks—built with private dollars, with no guaranteed taxpayer return—would have to be opened to anyone who wanted to retail or wholesale those services at a governmentally regulated rate, that is not a very good way to stimulate ongoing investment in the private network.” The threat seemed plausible to regulators: if the government pushed for wholesale access, the cable industry would never build faster networks. (John D. Rockefeller had often made a similar point: “To justify Standard's plush earnings,” Ron Chernow writes, “Rockefeller cited everything from fire hazards to the vagaries of drilling to the need to invest in new fields.”)
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Moreover, the agencies were anxious not to repeat the failures of the AOL–Time Warner merger; they were convinced that wholesale access
would have been complicated (how much of Comcast's costs for the network would the retail provider have to bear? who would work out the details?) and ultimately fruitless. And, again, the company was strongly opposed to the condition. Even though the public-interest groups thought that a wholesale condition was right around the corner, the leadership of the agencies was not ready to impose it.
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The Commission did not seem anxious to pressure Comcast or any other cable incumbents on their ability to route around the FCC's weak net neutrality rules by labeling online video services “specialized” when asked whether an online video service would be permitted to make a business arrangement to be carried on a provider's “managed” network (whatever that meant), an FCC official said in late 2011 that the issue would have to be decided “on a case-by-case basis.”
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Translation: the idea of common carriage was gone. Comcast was free to prioritize TV Everywhere and to make special deals that allowed online videos in which it had an economic interest to look better and be more interactive with other services. If there were complaints, they would have to be litigated.

To be fair to the regulators, they were presented with a highly concentrated market, and it was not clear how much difference the merger would make to it. The transaction illuminated the state of communications in the United States: high-speed Internet access was dismally uncompetitive and getting more so; the potential for offline/online tying arrangements by the media conglomerates—in ways that would prevent competition from disruptive online video—was high, and it looked as if TV Everywhere would be the model for all programmers; there were very few programmers, and they were all cooperating within the cable-distribution structure; the transaction threatened net neutrality as a huge combination of content with a pipe that had many incentives to differentiate in favor of its own business plans; there were concerns about the future of media and innovation generally.

But these industry-wide issues had existed before the deal was announced. So the regulators did their best, created a new category of actors called “online video distributors,” and tried to limit Comcast's occasions for abuse.

In the end, what they had over Comcast was oversight authority. The Department of Justice, in particular, had put itself in a position in which it would monitor every programming contract, both for traditional pay TV
and online distribution. There might be compliance actions in the future; there might be enforcement; the story wasn't over. In terms of law enforcement oversight, Comcast was a more regulated company after the merger than it had been before.

But absent some kind of public blowup leading to a call for new legislation or antitrust investigation, Comcast was not worried. It had a new stable of content with which to pressure competitors. It had its pipes in place and it could charge whatever well-off Americans could afford to pay. Profit margins were increasing, and Comcast was buying back its stock in order to increase its earnings per share—and thus the attractiveness of its equity. (None of this activity served to generate positive spillovers that would help the country's economic recovery.) Both TV Everywhere and usage-based billing had been enthusiastically embraced by the FCC despite pleas from Netflix chief counsel David Hyman to consider the “anticompetitive aspects of consumption-based billing.”
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And Comcast did not have to share its pipes.

Comcast was also confident that it could defeat any call for government action that would materially affect its business. Any attempt to implement the Nixon-era idea of separating content from the pipe would be nothing more than an irritant, a gnat buzzing uselessly around the giant company's ears.

Labeling cable a utility based on its natural monopoly tendencies and its benefits from decades of effectively exclusive government franchises and favorable treatment would be an uphill battle in the political context of the merger. Breaking up cable was not under consideration: legislators and the executive branch were not focused on telecommunications. Senator Herb Kohl was retiring; Al Franken could be dismissed as a crank; and no one else had an interest in sticking his or her neck out, particularly when the telecommunications industry was being so generous with its contributions.

As David Cohen said in 2009, “If you were to take a poll of 435 members of Congress and 100 U.S. Senators to name the five top issues you think this Congress has to deal with over the next two years, you will be hard-pressed to find a telecommunications issue in the list of the top hundred that would come out of that polling. And I think that's right, by the way. I think we, Comcast, the cable industry,
the telecommunications industry, deserve some credit for that. I think that we're conducting ourselves in appropriate ways and we're pursuing agendas that are working for the American consumer and for the country.”
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Senator Franken, in particular, knew that opposing the giant carriers would be politically destructive to him. He knew the political risks he was taking by being so outspoken about the risks of control over Internet access to society. “They [the carriers] are very powerful interests, and … you have a situation where corporations can really put unlimited money into campaigns or into defeating people, and I suppose that they might look at me as Public Enemy No. 1, and they don't have to disclose where the money is coming from. So I think this could be seen as foolhardy and inviting a tremendous amount of money to be spent to defeat me the next time.” But he was undeterred: “I came here to do what's right, and I really don't have any choice, because it's the way I see it. I see pretty clearly what the battle is here, and I think it's partially because of my experience in the business that I see it, where others don't.” Then he turned contemplative. “It's ironic, because I'm on the Judiciary Committee, so I'm on the Antitrust Subcommittee, and even though I'm not a lawyer and I've only been in this business for a little while, I found myself being the only one who was seeing this.” Franken thought he saw a good deal of self-delusion in the statements and actions of the legislators around him.
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Meanwhile, most people in the United States were not getting leading-edge Internet access. Fewer Americans, as a percentage of the population, had high-speed Internet access than in South Korea, Japan, or most of Europe. Speeds for uploading data, necessary for “cloud computing,” were at a crawl compared to other countries. About a hundred million Americans had no high-speed Internet access at all.
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The major reason: cost. And none of the cable companies was under any obligation to serve all Americans with globally relevant high-speed Internet access, much less at a reasonable price.

The Comcast-NBCU merger had shed light on concentration and market power in high-speed Internet access, programming, and devices, but after it was over there was scarcely a ripple; Comcast continued on its path, strengthened.

The investment bankers were already hard at work on the AT&T–TMobile merger.

13

The AT&T–TMobile Deal

FEDERAL REGULATORS HAD BARELY
recovered from their efforts to understand the cable industry when they were confronted with AT&T's plan to merge with TMobile. AT&T and its grand strategist James Cicconi made David Cohen and Comcast look junior league. Imagine creating a spectrum crisis, getting the commander in chief to warn the nation about it, and then claiming to solve it—and America's Internet access crisis—through a proposed merger. You had to admire these guys.