[Infowarrior] - Merger Made Comcast Strong, U.S. Web Users Weak

[Richard Forno]

http://www.bloomberg.com/news/print/2012-12-25/merger-made-comcast-strong-u-s-web-users-weak.html

Merger Made Comcast Strong, U.S. Web Users Weak

By Susan Crawford - Dec 25, 2012

On a gray day in February 2010, Brian Roberts sat facing the U.S. Senate Judiciary Committee’s antitrust subcommittee. The panel was holding its first hearing on a proposed merger between two of the country’s most powerful media companies, the cable distribution giant Comcast Corp. and the entertainment conglomerate NBC Universal.

Roberts, the chief executive officer of Comcast, was a calm and friendly witness. If the Justice Department’s Antitrust Division and the Federal Communications Commission approved the merger, Comcast’s future as the largest distributor of information in the country would be assured.

Comcast had been gaining strength as a monopoly provider of wired high-speed Internet access in its territories, while the U.S. was lagging behind other countries when it came to the prices charged for and the speed and capability of this basic communications tool. At the same time, the Internet was becoming the common global medium. With high-speed Internet access, a farmer in Missouri can access weather conditions and crop prices; American Indians on a remote reservation can have their eyes checked by a distant doctor; entrepreneurs and small businesses in California, New York and all the states between can find inexpensive entry points into global markets.

World Leader

A decade earlier, the U.S. had led the world in Internet access, but by the time of the hearing, in most of Comcast’s markets, the company was the only provider selling services at speeds sufficient to satisfy Americans’ requirements.

The access Comcast sold was less useful than it could have been, however, because the network was designed to be contested among users in the same neighborhood, making speeds unreliable. It also favored passive downloads far more than active uploads. Meanwhile, in most parts of the U.S., the Internet access that all Americans would need within five years -- fiber-optic lines capable of speeds from 100 megabits to gigabits per second -- could not be purchased at all.

With the merger, Comcast would become even more powerful. Any new high-speed Internet provider in Comcast territory would have to enter the market for content at the same time it incurred the heavy upfront costs needed to wire a network. Indeed, by the time the Comcast-NBC Universal merger was announced at the end of 2009, Verizon Communications Inc., the only nationwide company installing fiber-optic lines, had already signaled that it was planning to stop doing so. It was just too hard to compete with Comcast.

In turn, Comcast had no incentive to make its Internet access affordable or available to everyone within its territories. Nor did it have any incentive to upgrade its networks to fiber optics.

In seeking to have business ties to much of the content it provided, too, Comcast was setting itself up to be the unchallenged provider of everything -- all data, all information, all entertainment -- flowing over the wires in its markets. The company would have every incentive to squeeze online services that were unwilling to pay the freight to Comcast.

A few months before the hearing, Roberts had told investors in a conference call that the merger would make Comcast ‘‘strategically complete.” After more than 40 years of steady acquisitions, including some of the largest deals in the industry, Comcast would be done.

New Monopolies

Americans might be surprised at how concentrated the market is for the modern-day equivalent of the standard phone line. Two enormous monopoly submarkets -- one for wireless and one for wired transmission -- are each dominated by two or three large companies.

On the wired side, Comcast is the communications equivalent of Standard Oil. Even before its merger with NBC Universal, it was the country’s largest cable operator, its largest residential high-speed Internet access company, its third- largest phone company, the owner of many cable content properties -- including 11 regional sports networks -- and the manager of a robust video-on-demand platform. Comcast’s high- speed Internet access had almost 16 million subscribers. (The second-largest cable provider, Time Warner Inc., had about 9 million.) Comcast dominated the markets in Boston, Chicago, Philadelphia, San Francisco, Seattle and 11 more of the 25 largest U.S. cities.

NBC Universal, for its part, owned some of the most popular cable networks in the country and one of the largest broadcast networks, with 25 television stations, seven production studios and several crucial Internet properties, including iVillage and a one-third interest in Hulu.com. The merged company would control 1 in 5 hours of all television viewing in the U.S.

The other cable companies were represented at the hearing by a token competitor, Colleen Abdoulah, president and CEO of WideOpenWest Networks. A midsize cable system struggling to compete for subscribers in Comcast’s territory in the Midwest, WOW was trying to provide better customer service, but it was forced to pay high prices for take-it-or-leave-it bundles of programming owned by NBC Universal and other media conglomerates. The big cable-distribution companies such as Comcast can get those bundles for far less than the smaller companies can. Abdoulah would testify that if Comcast controlled NBC Universal, WOW’s negotiations for programming would become even more one-sided.

Behind the witness table was David Cohen, the lawyer who had shaped Comcast’s public narrative of the merger: A true-blue American family company was trying to save the NBC broadcast network and bring order and technical innovation to the cable-TV industry.

To those who argued that the merger would stick U.S. consumers with high-priced, homogenized entertainment and second-class Internet access, Comcast had only to respond that the situation for consumers would not be any worse than it already was. If opponents could not decisively prove “merger- specific harms,” the phrase Comcast employees repeated endlessly to staff members across Washington, the deal could not be blocked.

Internet Future

By February 2010, the accepted wisdom in Washington was that the deal would go through. And it showed Americans their Internet future. Even though there are several large cable companies nationwide, each dominates its own regions and can raise prices without fear of being undercut.

Wireless access, dominated by AT&T Inc. (T) and Verizon, is, for its part, too slow to compete with the cable industry’s offerings; mobile wireless services are, rather, complementary. Verizon Wireless’s joint marketing agreement with Comcast, announced in December 2011, made that clear: Competitors don’t offer to sell each other’s products.

It doesn’t have to be this way. Other developed countries have a watchdog to ensure that all their citizens are connected at cheap rates to fiber-optic networks. In South Korea, more than half of households are already connected to fiber lines, and those in Japan and Hong Kong are close behind. In the U.S., only about 7 percent of households have access to fiber, and it costs six times as much as in Hong Kong.

Rather than try to ensure that the U.S. will lead the world in the information age, American politicians have removed all regulation of high-speed Internet access and have allowed steep market consolidation. The cable industry has done its best to foil municipal efforts to provide publicly overseen fiber Internet access. Now, the U.S. has neither a competitive marketplace nor government oversight.

In the subcommittee hearing, Roberts never faltered, and his performance was judged a success. In the end, the Antitrust Division allowed the merger, and the FCC followed suit.

Compared with people in other countries, Americans are paying more for less and leaving many of their fellow citizens behind. Perhaps they will start to care when they see that the U.S. is unable to compete with nations whose industrial policy has been more forward-thinking.

(Susan Crawford is a contributor to Bloomberg View and a visiting professor at the Harvard Kennedy School of Government and Harvard Law School. She is a former special assistant to President Barack Obama for science, technology and innovation policy. This is the first in a series of three excerpts from her new book, “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” which will be published Jan. 8 by Yale University Press. The opinions expressed are her own.)

To contact the writer of this article: Susan P. Crawford at scrawford at scrawford.net or @scrawford on Twitter

To contact the editor responsible for this article: Mary Duenwald at mduenwald at bloomberg.net.

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