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

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).

 

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.

 

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.

 

 

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.

 

 

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.

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 carrys 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)

Why is the TWC/Comcast merger a disaster? Let @kegill explain (a REALLY good explainer!): http://t.co/2mhvO8n3oj

— Suzi Steffen (@SOJCSuzi) February 18, 2014

 

Thanks @kegill for explaining why our data services rates are so high in the US, and what we can do about it. http://t.co/QNXVXi3oFV

— Karl Eckler (@beachrubble) February 18, 2014

 

@kegill holy crap, you raise an excellent point re increase in households and decrease in cable subs. no one’s pointed that out before.

— Nick Blake (@numonkeys) February 18, 2014

 

Want to fully understand the implications of the Comcast Time Warner merger & how Google F… http://t.co/X7WsLmkgw7 pic.twitter.com/1gTFVwJJ0d

— Jeris JC Miller (@dakini_3) February 19, 2014

 

Excellent article on cable lack of competition, Comcast/Time-Warner merger by @kegill MT @dakini_3 http://t.co/xxskQnHbxM — Bill Schrier (@billschrier) February 19, 2014

 

@kegill Amazing article, well researched.

— Bill Schrier (@billschrier) February 20, 2014

 

 

 

Fascinating. Thx! @kegill: John, you might like my (longer) take on Comcast/TWC & Internet infrastructure woes: http://t.co/Aaid07ZdTm

— John Hill (@hilljohng) February 19, 2014

 

@kegill Totally agree we should have one regulated monopoly providing infrastructure w competing services on top. http://t.co/Aaid08hn7u

— John Hill (@hilljohng) February 19, 2014

 

 

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

• Broadband Competition and Service: US v Europe, 17 May 2011
• US Broadband: the FCC and Network Neutrality, 6 January  2011
• What Does “High Speed Internet” Mean, Exactly? 26 March 2010
• FCC Broadband Plan: A Round-up, 16 March 2010
• Why the FCC Broadband Plan Underwhelms, 16 March 2010
• FCC Issues New Broadband Stats, 23 February 2010
• Broadband: BBC Calls for More; Comcast Throttles, 23 April 2008
• Apple Wants To Rent Movies, 11 September 2007
• Broadband: US Continues to Lag the World, 21 Feb 2007
• The Race Is On, 6 July 2006