[Infowarrior] - Cable companies are our latter-day robber barons

[Richard Forno]

Price-gouging cable companies are our latter-day robber barons

Monopolistic cable providers make internet access an unaffordable luxury for tens of millions of Americans

		• Heidi Moore
		• guardian.co.uk, Tuesday 4 June 2013 13.47 EDT

http://www.guardian.co.uk/commentisfree/2013/jun/04/price-gouging-cable-companies

One percent of American households cancels internet service every year – largely because of its artificially high cost. Photograph: Sipa Press/Rex Features
Last year, about 1% of American households cut off their internet service. That's not as surprising as experts may suggest.

The internet – which promised to connect all Americans with everything from educational opportunities to Facebook status updates – has become, unfortunately, a luxury even for the middle class. Cable companies that have functioned as oligopolies have made it that way.

Naturally, more Americans would cut off internet service considering how absurdly expensive it has become to pay to stay connected. The median income for a household in the United States is just over $50,000, which has to support a family with basics like food, mortgage or rent, a car and gas. Inflation has steadily driven up the price of food and gas, which has meant that American wages have actually dropped since the recession. School costs, healthcare and other costs mean many families depend on credit cards on occasion. That doesn't leave a lot of room for splashy purchases.

Yet, strangely, internet access – which is a necessity in homes where children get their homework online and parents may telecommute – has become the splashiest purchase of all. In many big cities, internet access can easily become a budgetary sinkhole for families. Think of $100 a month for cable and internet, another $50 a month for a smartphone, $40 a month for an iPad or a similar device; if you travel, add $70 a month for some kind of wireless hotspot like Verizon's Mi-Fi.

Competition drives down prices, and the world of cable and internet access has largely done away with the threat of competition. At home, if you don't like Time Warner's prices, you can't turn around and get Comcast; you'll have to spring for satellite service or hope Verizon FiOS serves your area. And once you have those, there's no guarantee they'll suit you or that their billing will be any better.

The result is that Americans are being willingly pick-pocketed. Internet service is costly because internet providers refuse to compete with each other, ensuring they can charge high prices. They rationalize it like this: even though the cable companies have a gross profit margin of around 97% – meaning 97 cents of every dollar they make is pure profit – they still have to pay to service cell towers and invest in broadband. They have expensive equipment to maintain, see? That's not monopoly pricing power. That's just basic subsistence.

Unfortunately, their arguments fail for two reasons: the first is that those companies are not actually investing in equipment as much as they would like you to think. There is a cable graveyard littered with "overbuilders" that tried to create fast, wide internet access networks to compete with the giant incumbents like Time Warner and Comcast. Those overbuilders failed.

Another problem with the argument is that "recovering fixed costs" is not a problem; the cable companies' networks are already bought and paid for, many times over. The cable companies have such incredibly high profit margins – "comically high" in the words of one Sanford C Bernstein analyst – that they don't have any problem covering their costs. The Open Technology Institute noted in a recent report, "cable companies invested over $185bn in capital expenditures between 1996 and 2011. But these networks generated close to $1tn in revenue in the same time period."

The lack of either existent or upcoming competition taught the larger cable companies that it pays, literally, to get lazy and complacent: not only would they refuse to compete with each other, but there was also nothing to fear from any aggressive startups.

The lack of any pressure to improve means Americans are forced to keep overpaying for internet service or give it up altogether. There are estimates that 100 million people in the US – or roughly a third of the population – do not have internet access at home.

It's not unusual for middle-class families to spent more than $2,100 a year just to get online; poorer families can't even bother. The price of internet access has also risen faster than wages ever could; since 2006, the price of telephone and internet access has risen by 21%, according to the Wall Street Journal. This is not something that single mothers and struggling families can afford; kids in urban neighborhoods cluster inside and around the local McDonald's to do their homework by grabbing a ride on the stores' free Wi-Fi. Imagine four years of doing that every night just to keep up with your peers, much less scoring the kind of grades that are good enough for college.

Income inequality is also internet inequality.

Americans can make do, of course. The irony of expensive internet service is that cheaper service is everywhere. Wi-Fi is widely available everywhere from most Starbucks to public libraries if you don't mind giving up your mobility; the prevalence of smartphones like the iPhone and Samsung Galaxy require expensive data plans for internet access. And then, of course, people use the internet at work and can easily rationalize that 8 hours or more a day of access is quite enough. (Though that is no help to kids.)

How did we get to this place?

Susan Crawford, a professor at the Cardozo School of Law in New York, has argued for years that cable companies are a monopoly. One of her favorite statistics is that there's not much "competition when 94% of new wired high-speed customers bought service from their local cable distributors" at the end of 2012. In other words, cable companies are internet companies and they have locked down what looks like an oligopoly for their services. In an opinion piece in January, she summed up the problem:

"At the heart of the problem lie a few powerful [cable] companies with enormous influence over policy making. Both the wireless and wired markets for high-speed internet access have become heavily concentrated, and neither is subject to substantial competition nor oversight. Companies like Time Warner Cable routinely get their way when they seek to prevent local officials from encouraging competition. At the federal level, Verizon Wireless is keeping the FCC in court arguing over the scope of its regulatory powers – a move that has undermined the agency's authority. As a result, prices are too high and speeds too slow. A third of Americans opt not to buy high-speed internet access at home, often because they can't afford it."

Crawford's argument is that cable companies are not only monopolistic, but also exercise their considerable power in Washington to squeeze regulators. They walk like a monopoly and talk like a monopoly, trying to block rivals from getting a foothold. Even local governments trying to improve local service feel the lash.

The idea of an oligopoly is a powerful one, which has tended to kick government regulators into gear to defend consumer interests. Naturally, there are those who believe the cable companies are not bad.

"About 89% of US residents have a choice of five or more broadband providers, counting mobile and satellite, and 85% have a choice of two or more wireline broadband providers," ComputerWorld summarized a recent Information Technology and Innovation Foundation report. Of course, if you've ever had internet access in the US any time your life, the one thing you have not found is choice. Satellite service is an expensive and implausible option for many families. If you're like many Americans, you hit a point of frustration with your cable and internet provider and looked for alternatives – only to find none.

There is, of course, no impetus in Washington to repair this. Market forces have only encouraged cable companies to keep raising prices with impunity. There is a strong argument to be made that cable companies have abused their pricing power and should submit to regulation in pricing – but there is likely no one in Washington ready to hear it.

These are times when a person can yearn for the old moustache-twirling, chortling monopolies of the Gilded Age robber barons – the open maneuvering of a vindictive John D Rockefeller, as detailed by Ron Chernow, or an Andrew Mellon (pdf) thundering with retro-Calvinist disdain for the moral weakness of the poor. It would be great to see monopolistic ambition with such clarity.

Alas, in our day, we are left with the milquetoast version that rules our outrageously expensive cable, internet and phone services. These robber barons in rimless glasses and Rockports pick the pockets of recession-hit families as gleefully as any old Carnegie – but they need never fear government interference.

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Just because i'm near the punchbowl doesn't mean I'm also drinking from it.