Anti-trust and telecom/cable: the problem of excessive infrastructure competition

South Park capture

That’s right. There isn’t another cable company.
Southpark/ComedyCentral/Viacom

We really don’t like our cable company, whether it’s for television programming or Internet service.

The proposed Comcast/Time Warner Cable venture has put our misery in the spotlight, along with arguments that market concentration is good for us.

More than 10 years ago, we had a similar national dialog about consolidation in the television programming delivery business. First, Dish Network and DirecTV announced a proposed $26 billion merger. That was followed quickly by a Comcast/AT&T merger announcement.

What derailed the Hughes Electronics and EchoStar Communications merger, and why don’t those arguments apply to cable mergers?

And what’s best for consumers?

Bear with me. It’s a long(ish) story.

There were two telecom merger proposals at 2001 year’s end: one valued at $72 billion and the other at $26 billion; one affecting 22 million American households and the other, 17 million. Guess which one the Bush White House green-lighted? And you probably don’t remember any of this because, well, it was fall 2001.

In late 2001, when the Dish/DirecTV merger made headlines, AT&T Broadband was the nation’s largest “cable company” with 16 million subscribers; Comcast had another 6 million. The combined Hughes/EchoStar firm would have had 16.7 million subscribers. But that mega-deal was soon overshadowed by the cable proposal:

October 29, 2001:
EchoStar wins DirecTV in $26 billion deal

December 19, 2001:
AT&T Broadband and Comcast announce $72 billion deal

October 10, 2002:
FCC kills EchoStar DirectTV Merger (archived pdf)

November 18, 2002:
Comcast and AT&T Broadband complete merger

The new Comcast had 22 million subscribers and tentacles in 17 of our 20 largest metropolitan areas.

What made one proposal anti-competitive but the other okay to proceed?

 

Natural monopolies and “competition”

Analysts resort to classical economics when determining if a merger will result in too little competition; one component is consumer market share.

However, television signal delivery isn’t a normal market: it consists of both non-competing infrastructure (cable, telephone fiber/wire) and competitive infrastructure (satellite). Then there are airwaves (a public resource) if you live in an urban area and only want access to major network programming.

What do I mean by “non-competing” and “completing” infrastructure?

I’ll answer with another question: how many cable or telephone lines (wire/fiber) run through your neighborhood?

If the service is available, then one company provides the infrastructure for each (wire/fiber), although they aren’t the same company. For example, your neighborhood might have Verizon for wired telephony and fiber and Comcast for cable. But there is no competing AT&T line. And no additional cable infrastructure from TWC. Nor can another company appropriate that infrastructure and offer competing service packages. Each infrastructure system – and cable is by far the more common option – is a sole provider.

But if your home is a candidate for satellite service, you have a choice of DirecTV or Dish. These companies are truly competitive, like Coke and Pepsi are competitive. Cable: one choice. Telephone-delivered TV: one choice.

In the case of traditional telephony (POTS, public switched telephone network, aka copper network), the industry is highly regulated; rate hikes have to be justified and approved. Cable infrastructure: very lightly regulated, if at all, and only for basic cable. However, like their older sibling the power grid, telephone and cable infrastructure have elements of a public-private partnership, if only in access to public right-of-way.

Moreover, all are natural monopolies (the infrastructure, not services).

A natural monopoly exists when providing a service entails high fixed costs (all those wires and fiber, whether above- or below-ground), and total cost is less with one provider than with many because economies of scale reduce unit costs. Average cost decreases with each unit of production, and marginal cost may approach zero. Economists call this a market failure; that’s when society benefits from regulation.

In 1907, the head of AT&T argued that the nature of telephone technology meant that it “would operate most efficiently as a monopoly providing universal service.” For society, it made more sense (still does) to have one set of wires running alongside (or under) a street and into a building than multiple sets. [This analysis is focused on "last mile" infrastructure.] Moreover, both telephone and cable service have very high fixed costs (lines, switches, offices, R&D), further supporting the natural monopoly argument.

Natural monopolies are associated with infrastructure (like roads and airports) and related services (like state police and air traffic controllers). It’s why you have no choice over who provides your water and historically have had no choice over your provider for natural gas or electricity. The monopoly cannot be “regulated” by market competition because there is none; that’s why it is regulated by law.

Understand natural monopolies and you’ll see why Congress had to bribe companies with low-interest loans to bring electricity to rural America, loans the established profit-driven companies ignored (pdf).

It’s why telecommunication firms would rather operate in high-density urban areas than rural ones (see Verizon selling hard assets and focusing on profits and mobile services, for example).

 

What happened in 2001?

In 2001 the public narrative about these merger proposals revolved around “cable television.” There was little chatter about “telephone” services (VoIP) or even high speed internet service.

It’s clear that Dish and DirecTV are head-to-head competitors for the market segment that (a) can use satellite service (have a clear view of the southern sky and the right to install an antenna) and (b) doesn’t want to use cable (urban) or doesn’t have access to cable (rural). That’s because I can put either a Dish device on my roof or a DirecTV one. Or both at the same time. But up there above the clouds, having two satellite networks is just as inefficient as having two cable lines running down my street.

It’s also clear that satellite service is an alternative to cable television in many urban markets, for at least some of the market. Regulators saw the satellite merger as reducing the number of players in a given market. A satellite merger would have cut the total number of competitors by a third in those submarkets, although it probably would have had little impact on cable offerings. In 2001, cable served about 69 million households and satellite, 16 million (pdf).

Even in 2001, cable rates were grossly exceeding the annual inflation rate (relative to the consumer price index).

Cable v CPI, 2005

This FCC slide shows the rapid rise in cable prices relative to the consumer price index, 1995-2005.
Click image to see entire paper (pdf).

 

In any specific geographic market, there is no competition between cable companies. As far as the infrastructure is concerned, that’s a good thing. Not so much when we’re talking about cable service, the television programming, broadband service and VoIP telephony. That lack of viable competition is one reason cable rates increases exceed CPI.

But it is also one reason cited for giving the nod to the Comcast/Time Warner Cable merger. Look ma, no competition!

In the context of satellite TV service, the proposed Dish/DirecTV deal merger was clearly anticompetitive, especially so in rural areas where there is no alternative cable or IPTV service. Keep in mind that unlike cable and VoIP, satellite service isn’t a substitute for copper-wire telephony: it relies on it!

 

Telephony, mobile and cable infrastructure

For most of its history, telephone infrastructure and service were owned by the same firm (usually AT&T or GTE).

Once it became technically feasible to run competing services across the same copper wire (which resides on public land), along came long distance competition and the DOJ-led breakup of AT&T (1984). Common carriage law required the phone companies to share their copper wire with competing firms. That’s why there is a market for alternative long distance and, until 2005, one for alternative DSL service.

Common carriage law is good for the public interest and has been around for centuries, having modern roots in British common law but going back to the Roman era. From a 1994 article in Telecommunications Policy:

Common carriage, after all, is of substantial social value. It extends free speech principles to privately-owned carriers. It is an arrangement that promotes interconnection, encourages competition, assists universal service, and reduces transaction costs…

For centuries, common carriage principles have played an important role in the infrastructure services of transportation and communications. They intended to guarantee that no customer seeking service upon reasonable demand, willing and able to pay the established price, however set, would be denied lawful use of the service or would otherwise be discriminated against. For one hundred years these principles, despite their often confused application and interpretation, have aided telecommunications users’ access, and thereby also stimulated the development of networks. In return for reduced discretion, a carrier obtained certain benefits, including limited liability for the consequences of its own actions. Some types of common carriers have been given, by statute, powers of eminent domain, use of public rights-of-way, and protection against competition.

Eventually the seven Baby Bells re-consolidated into three mega-firms: AT&T (not the original), Verizon and Century Link. They successfully lobbied the FCC into repealing the common carriage rule for DSL. Then in 2012, Verizon announced it would discontinue DSL service in geographic areas where it has installed fiber. Also in 2012, AT&T said it wanted to abandon copper for fiber. Fiber services are not regulated like copper-based telephony.

There’s a reason the two largest cellular providers want us to shift from wired to wireless telephony: wireless isn’t regulated like wired telephony, and it’s where they make the most money. Verizon has the nation’s largest cellular network, which accounted for two-thirds of its first quarter 2014 revenue. Cellular service was responsible for 55% of AT&T’s first quarter earnings. Century Link partners with Verizon to offer mobile services.

AT&T and Verizon don’t have to share cellphone infrastructure because their cell towers are not interoperable. The U.S. government decision not to mandate a cellular standard means we have two mutually exclusive sets of cell towers around the country: CDMA (Verizon) and GSM (AT&T). We’re unique among nations around the world in having competing (read > expensive and duplicative) cellular infrastructure.

There’s a fair amount of greasing of Congressional wheels that dissuades change in the status quo.

open secrets telecom

Telecom industry contributions, 2013-2014; blue = Democrat, red = Republican.
Source: OpenSecrets.org.

 

Like AT&T and Verizon non-copper services, the cable industry doesn’t have to share its infrastructure. In 1958 the FCC ruled that Community Antenna Television (the precursor to what we know today as “cable tv”) was not a common carrier because the content was not under the control of the subscriber. Of course, today that same “wire” is used to access Internet content via a cable connection. But in 2002, the FCC ruled that your cable modem wasn’t subject to common carriage rules.

Effective greasing of Presidential and Congressional skids have kept common carrier categorization at bay. Unlike wired telephony, neither cable, IPTV fiber nor copper DSL must rent infrastructure to competing service companies.

open secrets cable

Cable industry contributions, 2013-2014; blue = Democrat, red = Republican.
Source: OpenSecrets.org

 

Open Secrets - cable industry

Cable industry contributions, 1990-2014. Source: OpenSecrets

 

To recap:

  • Telephone companies are common carriers; their wires into your house must be open to their competitors for telephone service but not DSL.
  • Telephone companies take in more revenue from cellular billings than any other service; we have two non-compatible types of cellular infrastructure.
  • Cable companies are not common carriers; their wires into your house are protected property and not open to competitors. Thus, you are stuck with your local cable provider as your broadband provider if you want cable speeds/service.
  • Telephone company fiber offerings are regulated like cable: they are not open to competitors.

 

What has changed since 2001?

American households are changing the way they watch television programming, whether it’s via DVR, Hulu, iTunes, Amazon or Netflix. All but one of those methods requires high-speed Internet access, which is also used for other things of course.

At the end of 2001, Comcast/AT&T had 22 million subscribers. At the close of 2013, Comcast had about 21 million video customers. But America has more households today than then; this is serious stagnation.

The exodus from cable service has been so pervasive that stemming the flow was news in 2012:

The country’s largest cable company on Wednesday said it lost 17,000 TV customers in the fourth quarter, the smallest number of defections in five years. It compares with a loss of 135,000 subscribers in the same quarter a year earlier…

Customers are displaying a slow but steady shift away from cable to satellite or IPTV (fiber, such as Verizon FiOS or AT&T uVerse) television programming.

Cable, Satellite, Phone TV service

Cable, Satellite, Telephone delivery of television programming, 2004 – 2012

 

Cable, satellite, IPTV market

Market share for cable, satellite and IPTV, 2013. Via Gigaom.

 

However, Verizon sold its western holdings to Frontier Communications and is not laying new fiber. At the close of 2013, AT&T had 10 million uVerse high-speed Internet customers (pdf). Verizon had 5.4 million FiOS high-speed Internet customers in 2012 and a net gain of 126,000 in 2013. This is about the same number of households that subscribed to Dish/DirecTV for television programming (16.1M) in 2001.

AT&T uVerse Subscribers

High-speed Internet access and broadband are not synonyms, although you’d never know it to read news reports or listen to regulators and industry spokesmen.

Residential DSL service rates are not comparable to wired/fiber internet services from cable or Verizon/AT&T. Residential DSL is usually Asymmetric (ADSL, faster downloads than uploads) and speeds vary based on copper wire line quality and your distance from the telephone central office. ADSL download speeds range from 128 kilobytes per second (Kbps) to 5 megabytes per second (5 Mbps or 5000 Kbps).

For fiber and cable, the download speed ranges from 10 to 500 Mbps. Cable speeds may vary based on neighborhood congestion, which can happen if many people are accessing the Internet at the same time. Optical fiber offers faster access over longer distances; here light carriers the signal, not electricity carrying signals over copper wire as with DSL.

Tomorrow’s business opportunity is the customer who wants only high-speed Internet.

But we have a serious problem.

When it comes to broadband service, Americans pay more for less than folks around the world.

In July 2013 Verizon announced a new 500 Mbps service (with 100 Mbps upload speeds) available in selected areas of its FiOS service.[4] However, this new 500 Mbps service costs around $300 a month. In Amsterdam, a symmetrical 500 Mbps broadband plan (with 500 Mbps download and upload speeds) costs just over $86.

There’s a Wall Street-driven reason for this discrepancy:

“Everybody would agree that starting from zero, fiber today is probably the most attractive solution,” [John Chapman, CTO of Cisco's cable access business] told Ars. But with the vast amount of infrastructure cable companies already maintain, it’s better to “use your existing assets more efficiently” than to make giant fiber investments, he said.

We can’t rely on a system that rests on another company parlaying its monopoly rents from a different sector (Google, search) to spur local infrastructure investment.

What we need is a regulated monopoly laying fiber with competition between companies that provide service using that fiber. Just like today’s telephone lines and competing long distance companies, and like Internet service companies of old. And like electricity in about half of these United States.

Yeah, I’m talking about common carriage. That should solve the network packet discrimination (aka network neutrality, a poorly-constructed phrase for the issue) problem, too. Expect AT&T, Verizon, Comcast et al to scream bloody murder about how a program like this is bad for “competition.”

Not true. It creates competition where today there is very little, which is good for society because it is bad for monopoly rents.

Our problem isn’t a lack of competition.

It’s too much infrastructure competition.

“Infrastructure” … can best be described as those services that are a basic input to most other economic activities, and which provide substantial positive externalities to the economy as a whole. Transportation, energy, communications, education, and protection are prime examples. Network industries, in particular, are considered infrastructure services. The positive externalities to members of the network increase positively with added membership, for example by the greater reach of the telephone.

Infrastructure services can greatly contribute to the economic growth of individuals, regions and the nation. In consequence, in most countries they are provided by government. When historically they were provided in the past by private firms, English common law courts often imposed some quasi-public obligations, one of which one was common carriage. It mandated the provision of service of service to willing customers, bringing common carriage close to a service obligation to all once it was offered to some. [source, 1994]

By this description, Internet connectivity is clearly an infrastructure good.

Comcast and TWC want to merge? OK, split off the infrastructure side of the business from the service side (NBC/Universal, “cable TV”, cable Internet, VoIP). DirecTV and Dish want to merge? OK, make it a regulated monopoly focused on infrastructure.

Let there be true competition in the types of television programming (packages, a la carte) and high-speed internet service.

AT&T has been vocal about its desire to retire the traditional telephone service (and its regulatory model). And the new FCC chairman, a career cable-telephone industry lobbyist, seems to think it’s a good idea.

Fine. In urban areas, lets replace both old telephone lines AND old cable lines with fiber, assuming sufficient safeguards for natural disasters, a working 9-1-1 system and other sectors (like security services) that rely on copper. If those safeguards aren’t possible, then replace only the cable lines. Heck, this might make a great New Deal-type jobs program.

But only if the new fiber, buried underground, is managed by a regulated monopoly that is prohibited from being vertically integrated. Philosophically, I don’t care if it’s a national or regional company or even a local government, just that its one-and-only mission is to provide infrastructure. And I’m quite willing to have the federal government offer low-interest loans, just like we did with electricity and telephony.

This isn’t something that one local government or one state could implement. A system like this would require a wrenching change in national telecommunications policy.

This approach is probably not economically viable for rural areas. However, upgrading our rural telephone system seems to be needed. Would above-ground fiber be a viable replacement? Certainly, abandoning copper for cellular service is not viable in much of rural America (nor through our mountains).

Finally, our current telecommunication system has operated under the principle that every citizen should have access to phone service. This new system should rest on the principle that every citizen have access to Internet service. It is as important to the viability of our 21st century economy as power and phone were in the 20th century.

Once we get our high-speed wired internet service system fixed, we can turn to mobile. And in both cases, we’ll need to rewrite our privacy laws as well.

 

Some tweets (since I have no Twitter-comment widget)

 

 

 

 

 

 

 

 

 

 

 

Updates

Updated: 1:05 pm Pacific
Corrected typo and re-structured some sentences.
Added the FCC cable/CPI index graph and re-wrote the prior explanatory paragraph.

NOTE: Economists call the “television market” served by cable television (CATV), satellite (DBS), and telephone companies (IPTV) the Multi-channel Video Programming Distribution (MVPD) market. The name was coined by Congress and its definition enshrined in law in Section 602 (13) of The Communications Act of 1934 as amended by the Telecommunications Act of 1996 (page 250 of 333, pdf).

Updated: 5:04 pm Pacific
Added data for Verizon FiOS internet customers for 2013 and clarified that the existing link was 2012 data, per Kevin’s comment.

Updated: 5:41 pm Pacific
Elaborated on the DSL/cable/fiber comparison and added new links, per Kevin’s comment.
Added tweets.

Updated: 20 February 2014
Added tweets.

Related articles @ WiredPen

 

8 thoughts on “Anti-trust and telecom/cable: the problem of excessive infrastructure competition

  1. Kathy E. Gill on

    I’ve never understood the “data” v “voice” artificial distinction — I didn’t understand why the No Spam FAX law didn’t apply to email, for example.

    Standards (which is related to interconnection, I think) are usually opposed by firms who are seeking to (a) control the size of a pie and (b) keep as much of the pie as possible for themselves.

    Standards such as interoperability benefit consumers and move markets closer to the Adam Smith vision of undifferentiated products — which makes it really hard to wrest monopoly rents out of consumers so you can put the $ in the hands of senior execs and stockholders. Witness how expected ROI and profit % have changed in my adult lifetime. :-/

  2. Kathy,

    But in this case we don’t need to assume anything like economists everywhere; stranded on islands or not.

    We have very valid and good examples over the past 30 years where govt mandated interconnection and/or equal access has been enormously generative, driven marginal costs down for all, and stimulated enormous demand elasticity such that incumbents and new entrants alike have grown and prospered.
    -Dial-1
    -Part 15 (aka Wifi)
    -Computer II
    -Cellular A/B roaming/interconnect extended to PCS
    -Pole attachments (and even, perversely, must carry)

    And let’s not forget the most recent interconnection example, namely Steve Jobs’ forcing AT&T to provide equal or open access to Wifi offload for his iOS which spawned the application ecosystem explosion and smartphone revolution over the past 7 years. And that was a market enabled solution because of the original Part 15 rules. It was interconnect all the way at the edge. Repeat that everywhere because very few understand or appreciate that; not even Wheeler understood it completely when it happened.

    These fact-based occurrences are what the competitive forces should be continuously and repeatedly be driving into the FCC record in the coming weeks and months.

    IMO net neutrality was actually a fiction conjured up by those who are unwilling to recognize that data and voice are the same (funny/tragic that Tim Wu is now saying that the internet is telecommunications!) and that what got us here over the past 30 years were policies that forced network effect onto the market participants where market forces failed based on govt granted monopolies to public rights of way or frequencies.

    Michael

  3. Kathy E. Gill on

    Hi, Michael – apologies for the lag. Thanks!

    This made me smile:
    “The only thing holding us back are legacy business models perpetuated by current policy. ”

    It sounds kinda like the joke about two economists stranded on a desert island when a container with canned goods comes ashore. One economist looks to the other and says, “Assume we have a can opener!”

    Legacy business models are linked to powerful legacy organizations – and they helped write the current policy. They are also, in the main, anticompetitive (i.e., oligopoly/monopoly/oligopsony/monopsony) in structure. They don’t dislodge easily.

    And I hope you are right about the FCC chairman.

  4. Kevin, perhaps you are conflating Ed Markey with William (Bill) McGowan? I maintain that without vertical separation of AT&T we never would have had the remarkable digital booms in voice, data and wireless over the past 30 years.

    Kathy, very thorough expose.

    A couple of points:
    1) do you know of a study that forecasts what would happen if equal or open access were applied uniformly to layers 1-3 to all service providers that receive access to a govt granted, public RoW or frequency license?
    2) isn’t there a big missing hole in the discussion and analysis of settlements? Bill and keep is the kiss of death for competition.
    3) haven’t the past 30 years revealed enough datapoints that call for wholesale policy change that is simultaneously both deregulatory and regulatory across all the disparate, yet converged sectors?
    4) aren’t we at this point simply far, far behind where the technology present is and future will be? I mean we should be talking about policy that results in low-cost collaborative, mobile (and therefore necessarily universal), synchronous 4K HD video sessions, as this future is very much in our 5 year supply/demand windscreen, no?

    The only thing holding us back are legacy business models perpetuated by current policy. Past regulations erected the arbitrary geographic, market segment and application silos that are resisting the horizontal, digital forces unleashed 30 years ago.

    I think the current FCC Chairman may be more balanced in his outlook than most people think. If one reads his past writings and understands that he championed industries when they were underdogs, and then reads his recent comments closely, we might see that he is asking for concrete plans of action to getting to #4 that is generative for all parties.

  5. Pingback: Netflix as Cable’s Whipping Boy: Oligopoly and Oligarchy Power at Work | Political Ration

  6. Pingback: The Blow Magazine | Netflix as Cable’s Whipping Boy: Oligopoly and Oligarchy Power at Work

  7. Pingback: Netflix as Cable’s Whipping Boy: Oligopoly and Oligarchy Power at Work | The Daily Float

  8. Pingback: Netflix as Cable's Whipping Boy: Oligopoly and Oligarchy Power at Work

  9. Maybe — maybe — one solution is to split off cellular from Internet delivery. Corps like AT&T and Verizon have no incentive to invest in “wired” technology when they can make so much more money from wireless data (slow/tres expensive to us, the consumer).

  10. Kathy Gill on

    Thanks, Kevin! I searched again and found a “net gain” number for 2013 and so I rewrote that sentence. I need to find a definition of DSL that includes your higher number, since I was merely paraphrasing the source. Then I’ll update it, too.

    And I know that this proposal is, erh, radical.

    I wonder – what was the rationale when the feds forced railroads to make their tracks interoperable? Although I think that multiple firms investing – in a cherry-picking manner – in fibre is the wrong way to go, I’d settle for a revisiting of the common carriage designation and for local governments to force cable franchises/telecos to upgrade everywhere, not just where it’s easy or their is high density.

    I truly don’t know what to do about copper in suburban/rural areas, and I worry about rural areas falling behind the rest of the world, not just the rest of the U.S. Data-over-power-lines seems to have gone no-where — at least as far as my search skills could find.

    I honestly didn’t know where this was going to go when I started. I wanted to see what happened in 2001 with Dish/DirecTV. I had no memory of the AT&T Broadband/Comcast merger. And then it kinda rolled from there. The infrastructure duplication argument — when my fingers typed that I sat back and went, “Oh!” It was my epiphany – it seemed so obvious after typed it but I’d not thought the situation through like this before now.

  11. Kevin Laverty on

    You cover a lot of turf here, Kathy, and most of it is accurate. I concur with your notion of a regulated monopoly on common infrastructure with a major caveat – The U.S. Congress and Federal government never bought into subsidizing the deployment of high speed Internet when the Telecom Act of 1996 was passed. That Act allowed for more competition in the traditionally regulated telecom environment beyond what came about with Ed McGowan’s MCI that demanded to access to AT&T’s network to provide services which precipitated the end of the AT&T monopoly in 1983.

    Since the government and society has never chosen to use taxpayer dollars to underwrite the new broadband architecture’s nationwide deployment of fiber-to-the-premises, we have a telecom, cable and wireless system that have evolved on their own with some limitations based in law and via the FCC. So, now, to extend a long overdue fiber infrastructure or to rely on advances in DOCSIS technology from cable providers, essentially requires the government to nationalize high speed broadband. That ain’t likely to happen. However, cable, in particular, could be more heavily regulated – presuming such an uphill fight is winnable in Congress.

    I wanted to correct a couple of small items – the customer figures you cited for Verizon’s FiOS service link to 2012 rather than 2013. I think the number is more like 6 million FiOS Internet customers now. The other is that DSL – like cable via DOCSIS – has long offered higher speeds greater than 3 MBPS depending on how far you are from the company’s central office. Generally speaking, if the copper wire loop your on is within 2 miles of a telecom DSL central office 7/1 MBPS service is available. If you are within a mile, the speeds increase up to as much as 20 MBPS on the download side.

Leave a Reply

Loading Facebook Comments ...