Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age

by Susan P. Crawford J. D.

  Seen from the outside, the Comcast-NBCU deal seemed like a typical big-box media merger. And in some ways it was: the consolidation of market power, deregulation, and tearing of the social fabric in the communications-utility sector had been going on for decades. Opponents of the deal were shooting at a subtarget, in a sense. They argued that media consolidation had reached a saturation point and that the Comcast-NBCU merger would lead to homogenized entertainment sold for high prices by extraordinarily profitable giant companies. Americans would have almost unlimited freedom to watch a dazzling variety of football games, cooking shows, and other forms of entertainment coming from a very small number of sources. Although that was all true, the overarching problem came from control over pipes: with this acquisition Comcast would have even more power in its market areas to dictate the terms on which access to all kinds of information—entertainment, news, sports, data, phone conversations—could be had.

  The deal's supporters (chiefly Comcast itself) had only to respond that the merger would not make the situation for consumers worse than it already was. If opponents could not decisively prove “merger-specific harms,” the phrase Comcast employees repeated endlessly to staffers across Washington, the deal could not be blocked. If there were problems of concentration in the cable-distribution marketplace, they had existed before the merger was announced and could be taken up at a later date. Whether that date would ever arrive was unclear.

  By February 2010, the accepted wisdom in Washington was that the deal would go through. No major company had opposed it publicly, and without an influential corporate entity on the other side to give politicians cover, there was little advantage to fighting the merger. No one wanted to appear unfriendly to business during the dark days of the U.S. recession. Besides, there was some appeal to the vertical argument. If the Department of Justice in a Democratic administration tried to block the merger, it might be pummeled by a conservative reviewing court—there are more Republicans than Democrats on the circuit appeals courts and on the federal bench as a whole—after a protracted litigation battle against one of the deepest-pocketed businesses in America.

  But the deal showed Americans their Internet future. Even though there are several large cable companies nationwide, each dominates its own region. The major cable companies never compete with one another because each wants to reap the advantages of scale that come with control over entire markets. Because no other widely available privately provided wired Internet access product is fast enough or can be installed cheaply enough to compete with cable, each of the country's large cable distributors can raise prices in its region for high-speed Internet access without fear of being undercut.

  Wireless access, dominated by AT&T and Verizon, is too slow to compete with the cable industry's offerings; mobile wireless services are complementary to the wired access Comcast sells. Verizon Wireless's joint marketing agreement with Comcast, announced in December 2011,14 made that truth visible: fierce competitors don't offer to sell each other's products. In a nutshell, the giant companies that dominate high-speed Internet access in America have tacitly divided up the marketplace. AT&T and Verizon are devoting themselves to wireless access, where they are by far the two largest players, rather than competing head to head with Comcast for truly high-speed wired Internet access, and they would do almost anything to shed themselves of their traditional obligation to provide wired access to all Americans. Comcast and Time Warner Cable are concentrating on wired access and reaping profit margins of about 95 percent for the service.15 And consumers are paying more in the United States than people in other countries do—for less speedy service—as inequality between the haves and have-nots is amplified by the digital divide.

  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 the fastest possible open-access ramps (that is, fiber-optic access) to the Internet. In South Korea, more than half the households are already connected to fiber lines that allow for blazing-fast uploads and downloads, and households in Japan and Hong Kong are close behind.16 In America, only around 7 percent of households have access to fiber, and the service costs six times as much as it does in Hong Kong (and five times as much as it does in Stockholm).17 Vertically integrated cable companies, whose Internet access product is not provided over fiber and crimps uploads, are well on the way to controlling America's Internet access destiny, having spent millions of dollars over almost fifteen years lobbying against any rules that might have constrained them.

  Instead of ensuring that everyone in America can compete in a global economy, instead of narrowing the divide between rich and poor, instead of supporting competitive free markets for American inventions that use information—instead, that is, of ensuring that America will lead the world in the information age—U.S. politicians have chosen to keep Comcast and its fellow giants happy. The government removed all rules from high-speed Internet access and allowed steep market consolidation in the hope that competition among providers would protect consumers. But that competition has not materialized; the cable industry, whose collusive practices have been largely ignored by regulators, has decisively dominated the wired marketplace and has done its best to foil municipal efforts to provide publicly owned fiber Internet access.18 As a result, the United States now has neither a competitive market for high-speed wired Internet access nor government oversight.

  The giant communications companies unite in claiming that the situation is under control. In response to an op-ed of mine published by the New York Times in December 2011, Ivan Seidenberg, CEO of Verizon, wrote, “America has a very good broadband story; someone just has to be willing to tell it.” These companies claim that regulation will stifle investment and innovation. This kind of argument is not new. When Brooksley Born, chair of the Commodity Futures Trading Commission (the federal agency which oversees the futures and commodity options markets), suggested during the Clinton administration that derivative financial products should be overseen by regulators, she was immediately met by a firm, flattening political response: interfere with the financial sector, and you will destroy innovation and investment.19 Several years ago, many people made fun of Al Gore for saying that climate change was endangering our future; his critics insisted that the data he was pointing to represented no more than normal fluctuations magnified by over-anxious minds. To regulate carbon emissions would destroy innovation and investment.

  As a policy issue, the crisis in American communications bears some similarity to the banking crisis and global warming: it has taken decades to arrive; it has happened through incremental policy decisions, mergers, and changes in society; it involves technical terms that enable easy obfuscation; large entities have an interest in maintaining the status quo; and there is a great deal of political bluster about the possible effect of regulation on innovation and investment. In the communications industry no signal crisis—no equivalent of the banking collapse—has erupted to trigger public outrage. Reporters usually don't cover regulatory proceedings because they are slow moving and impenetrable. As a result, the players involved, who know exactly what's going on and why it's important, can get away with dazzling political sleight-of-hand. “Look, there, a new gizmo!” they say to their customers, believing (accurately enough) that few of them will put the pieces together and figure out the truth about the grinding monopolistic power and lack of social contract that underlies the American communications industry today.

  This issue hits consumers’ pocketbooks at the same time that it implicates national industrial policies. When the telephone was the dominant medium of exchange, U.S. law required that every American have access to a phone along with other utility services such as water and electricity. Although the Internet has become the common medium of our era, and no one can get a job or apply for benefits or keep up with the rest of the world without high-speed access, this service is framed as an expensive luxury reserved for the rich; fully a third of Americans don't subscrib
e to high-speed Internet access, and nonsubscription is highly correlated with low socioeconomic status.20 This situation has arisen because Americans have allowed the companies involved to cherry-pick wealthy neighborhoods for service and charge whatever they like. Now states, heavily lobbied by telecommunications companies, are seeking to get rid of any obligation to provide communications services to all their citizens. None of this was inevitable; all of it is bad for individual consumers.

  Americans are suffering as a result; it is already clear that unless something is done the next disruptive Internet innovation, the new breakthrough invention that depends on the existence of an experimental sandbox of millions of users with fiber high-speed Internet access, will not come from America. The country does not have the critical mass of people connected to fiber that other countries do; instead, those American consumers who can are (over)paying for privately provided, pinched-upload cable services. Symmetrical and highly reliable connections are especially important for businesses, which typically make even heavier use of upstream paths than households. So the much-needed economic boost that comes from creating and marketing the next big thing will go elsewhere. But few people with the power to change the situation seem to understand this.

  This book tells the story of the forces that made the Comcast-NBCU merger possible. Three paradigm shifts happened between 1996 and 2010 that shaped the narrative. First, the big new idea behind the Internet was that its language—and language is all the Internet is, a couple of simple agreements that allow computers to “speak Internet”—facilitated a general-purpose global open network of networks that has changed two billion lives around the world while becoming the single common digital platform for communication. Second, the cable and telephone companies across whose wires Internet talk was flowing made a successful concerted effort to persuade the FCC to completely deregulate provision of the two-way, general-purpose communication on which the country's economic, cultural, political, and social life depends: high-speed Internet access. This meant that the success of the cheerfully disruptive activities happening online became entirely contingent on the generosity of the few large companies selling access. And third, newly elected president Barack Obama seemed to understand that high-speed access to the Internet was essential for anyone wanting to participate effectively in the twenty-first-century global economy. He suggested that nondiscriminatory, ubiquitous connections were essential—or he seemed to. It looked as if government intervention to ensure world-leading, reasonably priced, wired open Internet access for everyone would be an important priority for the new administration.

  Things did not turn out that way, for a range of reasons that I hope to make clear in this book, and the consequences of this failure in policy are likely to be a drag on America's success for generations.

  The February 2010 Senate Antitrust Subcommittee hearing turned out to be a well-produced piece of political theater. It provided a public opportunity for selected opponents of the merger to warn about the risks to communication and culture posed by the merger of Comcast and NBC Universal. But David Cohen had done his work well. All the senators had been visited by well-primed representatives of the merging companies, all the facts had been shaped by messaging experts—this merger is about saving the NBC Peacock!—and nothing would change as a result of any word spoken that morning. Roberts himself was appropriately deferential and polite.

  As the hearing wound on, Roberts's calm bearing contrasted sharply with that of consumer advocates Schwartzman and Cooper, who looked comparatively unkempt and sounded far from calm, their voices strained with angry passion as they spoke against the merger. Schwartzman and Cooper understood what was at stake and did their best to explain the threat the merger represented. But they were up against a well-funded, decades-long campaign by the companies involved to free themselves from government review. The two men were there to speak their part on a stage that had been set long before they arrived.

  Roberts never faltered during the hearing, and his performance was judged a success by the trade press articles that appeared the following day. The Wall Street Journal reported just a few months later that he was already shopping for a multimillion-dollar apartment in New York City within walking distance of the home of the future joint venture, even though the deal would not be formally approved for another eight months.21 (The head of the merger effort within Comcast, Stephen Burke, later paid almost $17 million for his new New York City home.)22 Comcast's wealth was no secret: according to Bernstein Research, a media analysis firm, the company was soaking up “torrents of cash” in 2010.23 Its profits were up in the middle of a recession, its dividends and buybacks were soaring, and its executives were some of the highest paid in the country. But Roberts usually took care to keep a low personal profile and present an air of earnest engagement with the regulatory approval process; having the news come out about his new apartment was a slip.

  Still, he had a lot to brag about: Comcast already dominated the market in many American cities as a physical distributor of digital information. Even before the merger, Comcast was in many ways the nation's all-purpose communications wired network provider; post-merger it would have a multibillion-dollar reason to prefer its own digital interests—the water it owned, rather than the water that simply passed through its conduit—over those of its now vulnerable competitors. The hearing, held to provide oversight, masked a profound, little-understood American problem: the lack of supervision over the mammoth companies that sell Americans access to all information, all communications, all entertainment—all the things that make today's economy, politics, and society function.

  A hundred years ago, the big basic-infrastructure story—the story of a network that makes other businesses possible—was the power of the railroad, a new technology that tied the country together for the first time and spurred decades of economic growth. After the completion of the first transcontinental railroad in 1869, the railroad system had mushroomed rapidly, and consolidation of independent systems by the railroad barons, chiefly J. P. Morgan, Cornelius Vanderbilt, and James J. Hill, had introduced complex new questions involving American competition and consumer protection.

  Soon enough, barons in different industries began colluding: John D. Rockefeller's Standard Oil worked with the railroad barons (particularly Morgan) to control up to 90 percent of the oil refining business. Morgan-controlled consolidated railroads, operating under collusive trust arrangements, granted secret rebates to Standard Oil and undertook corporate espionage, giving Standard Oil information about competing oil shipments, which allowed it to underprice potential rivals.24 The growing power of the super-rich oil and railroad capitalists created widespread fear that fundamental American values and public interests were being destroyed in favor of private profits; populists, Progressives, farmers, working-class activists, public leaders, and journalists joined together to call for strict regulation to constrain the power of these giant infrastructure industries.

  The railroads were essential scale businesses, and everyone wanted cheap and clean oil. But the cooperation between the two industries (their own “vertical integration”), their abusive practices, and their clear disdain for oversight angered Americans across the political spectrum. The country emerged from the ensuing regulatory battle as a nation with the idea that big essential infrastructure requires vigilant oversight and intervention to ensure that all Americans are served, all Americans are protected, and a level playing field is kept in place for innovation and fair competition. The government passed the Sherman Antitrust Act, launched the first infrastructure oversight agency, the Interstate Commerce Commission (ICC), and sued the railroads for antitrust violations.

  It took years of attempts at legislation, public uproar, and litigation to achieve the dismantling of Standard Oil and the creation of a system of oversight for the railroads. The ICC, understaffed and inexpert, was swiftly overwhelmed by the lobbying efforts of the railway lawyers, and railroad supervision is now largely in the hands o
f the railway industry. Special-purpose agencies, which depend on the particular industry they regulate for information, for future jobs for underpaid agency employees, and for their institutional sense of self-esteem, have not proven effective. And the government has not always shown good stewardship in implementing or enforcing disinterested industrial policy that depends on words that govern behavior. But during the same era, the federal government brought into being the Antitrust Division of the Department of Justice and increased its own capacity to protect the public from the depredations of an unconstrained market system. The Antitrust Division, unlike niche-expert agencies, has been able to act structurally by requiring divestitures and structural separation in monopolistic infrastructure industries so that competition will flourish.