Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age
Page 5
Congress knew that, in the telephone system, it was dealing with an essential basic business; by 1910, millions of Americans had already installed telephones.51 And it was also dealing, indirectly, with J. P. Morgan, who had gained financial control of the Bell System by 1907 and was buying up independent phone companies by the dozens; the Bell System's corporate goal under Morgan became to obtain control of all profitable lines.52 (Morgan knew a good natural monopoly when he saw one.)
Classifications like “common carriage” and legal obligations not to discriminate against particular uses of the phone network have historically been difficult to enforce. The company providing the conduit always wants to find ways to make more profit and drive out competition and will seek to collaborate with other service and content providers to do so. Morgan lost no time in ignoring the Mann-Elkins Act. A year earlier, in 1909, American Telephone & Telegraph had bought thirty thousand shares of Western Union stock, effectively gaining working control of the company that itself controlled 90 percent of the telegraph services market.53 In 1911 and 1912, Western Union's tiny competitor, the Postal Telegraph Company (with a 10 percent market share) complained that Western Union was charging unreasonable and discriminatory prices to carry Postal-originated messages to their final destination.54 But AT&T was doing even more than that.
On April 1, 1912, a New York Times reporter confirmed Postal's complaints that callers to the Bell Telephone Companies asking for Postal services were instead referred to Western Union. Across the United States, patrons trying to reach Postal experienced long delays and, in some cases, outright blocking by Bell operators. Operators routinely told patrons that the company they really wanted was Western Union, and that “Western Union would give faster service and the toll would be charged on the monthly telephone bill.” Postal asserted that this was illegal discrimination: “The law requires a telephone company to treat both telegraph companies impartially and give equal service to both. … What, then, is to be said of a telephone monopoly that is using its monopolistic power to divert the legitimate business of the Postal Company to the monopoly's ally, the Western Union?” Postal demanded that Western Union be separated from Bell Telephone.55 By 1914, following public uproar and additional complaints, AT&T had disposed of Western Union in order to avoid monopoly charges.56
Fast-forward to the present day: all the stages of the railroad story are repeated today in the context of Internet access: rebates are being offered by the carriers to giant “shippers” of content in the form of preferential fast lanes; the carriers have thoroughly consolidated and vertically integrated (just as the railroads had interests in commodities prior to the Hepburn Act and AT&T controlled Western Union); the efficiencies of consolidation have not led to lower prices for consumers; the lobbyists for Comcast and AT&T (our era's railroad lawyers) are making generous contributions to legislators; and inequality between the access of the rich and the access of the poor is growing.
Where it is not sufficiently profitable from a carrier's perspective to provide service, it won't. The rich are paying more for services, the poor can't afford the services at all, and the government is left trying to pick up the tab so that all Americans have access—which is more expensive for everyone.
Like the ICC in the early years of the twentieth century, the FCC is now subject to the concentrated influence of a determined industry and is laboring under enormous information asymmetries; like J. P. Morgan, the carriers treat government as (at most) a peer and will litigate unceasingly in support of their claim that any form of regulation will destroy their incentive to invest in infrastructure and innovation.
2
Regulatory Pendulum
THE LONG TWILIGHT STRUGGLE
In the rise of any new medium, a key factor is its relationship to the dominant technology of the day. Since organizations with a large stake in an existing technology are likely to try to preserve their investment—in today's idiom, they are reluctant to “cannibalize” their current business—any policies or legal decisions that give them influence over the new medium may retard its introduction.
—Paul Starr, The Creation of the Media
CABLE STARTED OUT AS A DISRUPTIVE BUSINESS. The first cable systems were mom-and-pop operations consisting of wire strung from antennas on hillsides providing three or four channels of broadcast television to towns that were too remote to pick up a signal. In the 1950s, these so-called community antenna television systems, or CATVs, were springing up everywhere.1 None of them was being regulated by the Federal Communications Commission, which had virtually no information about CATV. But in the summer of 1951 a lawyer running the Telephone Service System Facilities Branch of the Common Carrier Bureau of the FCC, E. Stratford Smith, was sent out to Pottsville, Pennsylvania, to interview a man named Martin Malarkey about how CATV worked and how it should be treated as a regulatory matter.2 Was this new thing Malarkey was running, a service called the Trans-Video Corporation, a common-carriage system like a telephone or a broadcast service receiving signals and delivering them to homes?
In Blue Skies: A History of Cable Television, the communications professor Patrick R. Parsons reports that when Smith got back to Washington, he wrote a memo saying that Trans-Video could be treated as a common carrier, but the FCC deferred any action on the recommendation.3 Smith eventually left the FCC to become counsel to the National Community Television Association (the ancestor of today's National Cable & Telecommunications Association), formerly the National Cable Television Association, which Malarkey had founded in the wake of Smith's visit. In the process of moving from regulator to member of a regulated industry, Smith also changed his opinion: no cable operator has ever wanted to be classified as a regulated common carrier.4
At first, over-the-air broadcasters ignored CATV, considering it a niche market that helped spread their signals farther. But as cable distributors began to sell their own ads, the broadcasters began to realize that cable's growth could undermine their profits. Cable-system technology had improved by the mid-1960s, making twelve-channel systems standard.5 Cable owners used the additional channel territory to rebroadcast signals from distant markets and began exploring non-network, cable-only channels. Television-station owners argued that the cable operators’ importation of distant signals reduced their audiences, while the owners whose signals were being imported complained that those signals had not been paid for.6
Broadcasters mounted an aggressive legal campaign against the cable industry at the FCC by way of complaints and lawsuits. In 1967, when Southwestern Cable was found to be transmitting Los Angeles broadcasting stations into San Diego, a local San Diego station complained to the FCC. The FCC decided the dispute in favor of the local station: even though its governing statute at the time said nothing about cable, the FCC reasoned that its authority to regulate and protect the nation's broadcasting system carried with it the power to regulate cable. Authority over cable's scope of business was “reasonably ancillary” to its existing powers. This interpretation of the FCC's powers had precedent: in 1965, in an effort to ensure that free over-the-air television was not destroyed by the advent of cable, the FCC had issued “must carry” rules requiring cable systems to carry the signals of local television stations. The Supreme Court upheld the FCC's broad view of its statutory powers in 1968.7 Thus, it appeared that the FCC had ancillary jurisdiction to regulate cable, too.
By the late 1960s, the broadcasting companies’ view of cable had changed yet again. Now the cable providers were not simply pirating broadcast programming; under the right ownership, cable might provide additional outlets for network programming by reaching otherwise unreachable audiences. Adding to this impression, the Supreme Court in 1974 held that cable systems were not liable for copyright infringement when they retransmitted broadcast signals as long as they paid standardized license fees. This “compulsory license” helped the cable systems: it brought them access to programming without having to negotiate thousands of individual agreements with powerf
ul, centralized broadcasters. The government intervention helped the insurgent cable business grow. It also ensured that the incumbent broadcasters would remain locked in a relationship with the cable operators.8
At about the same time, President Richard Nixon's Cabinet-level Committee on Cable Communications submitted a stern recommendation to the president. While the nascent cable industry had much to offer and the programming it transmitted should largely remain unregulated by the FCC, the risk of abuse by local monopoly cable providers was too great to be ignored. As the committee warned: “We recommend adoption of a policy that would separate the ownership and control of cable distribution facilities, or the means of communications, from the ownership and control of the programming or other information services carried on the cable channels.”9 The mainstream conservatives at the heart of the Nixon administration felt strongly that cable's “natural monopoly” of distribution facilities—it was so expensive to install that it made sense to have just one in each town—created a risk of the cable operators’ becoming gatekeepers of information. Without a definitive separation between transport and programming, continuous oversight would be needed to ensure that the cable operators’ physical monopoly power was not leveraged into editorial power over the availability of speech and information. A clear separation requirement between content and delivery would impose far less regulatory burden than the constant jockeying and influence peddling that would be involved in assessing whether programming was being fairly treated. Separation, in short, was the lesser of two regulatory evils.10
But the recommendation that a national policy be adopted that would affirmatively separate conduit from content—effectively turning cable into a common carrier—did not prevail. It was too difficult to get a bill through Congress that would do the job; no one involved had enough will to be clear. As the telecommunications scholar Monroe Price put it at the time, the implicit message back from Congress in response to the White House's draft bill was “to continue to allow the economic bargaining [between the cable industry and the FCC] to take place at the agency level, with Congress available as a last resort, not to be utilized except as an ultimate check on the performance of the Commission.”11
Broadcasters have thus had a love-hate relationship with cable distributors since television became widespread. When broadcasters were powerful, they used their sway with the FCC to constrain the markets into which cable could bring distant broadcast programming and ensured that cable always carried their signals. The failure to separate conduit from content made it inevitable that broadcasters and cable companies would always be in conflict. Ultimately, both industries would later discover that there was more money to be made through cooperation than opposition.
Consumers, meanwhile, made little fuss about paying for television over a cable wire. As John Malone, the foremost U.S. cable executive of the 1990s, described the situation to the Wall Street Journal in 2009, “The way it was successful was blending together the transport service with the charge for the content. When you were a cable subscriber, you weren't sure whether you were paying for connectivity or whether you were paying for the content that was embodied in the connectivity.”12 The cable industry from the beginning had blended connectivity with content and did not allow subscribers to buy access to individual channels. But people loved the service, and over the years cable-designed bundles have served the industry well.
Another industry was afraid that cable companies might soon muscle into its business: the telephone companies. In the 1970s, the issue was not whether cable would replace telephone's voice service; that was decades away. It was something more mundane: whether cable could have access to the millions of telephone poles that phone companies had erected around the country. By the 1970s, 4.5 million Americans had subscribed to cable services. But AT&T was charging the cable companies a hefty fee for the right to use its telephone poles to string cable. At the time there was no particular economic reason for AT&T to refuse the cable companies access to its poles on reasonable terms. But no phone company wanted the cable broadcasters showing up in its neighborhood before it had had a chance to roll out its own video service, even though that service was years in the future.13
Representative Ed Markey of Massachusetts, who began his career in the House in 1976 just as the pole-attachment wars began, remembers being mystified by AT&T's attitude. “The phone companies were using their leverage over the poles to jack up prices. Sure, having twenty companies attach their lines to your poles might be a problem. But this wasn't about twenty companies. This was about one or two cable companies. I was amazed that it took invoking the machinery of government to get these guys [the cable companies] in the game.” After three decades in the House, Markey is silver-haired but bright-eyed, his strong Boston accent undimmed by years of commuting to Washington, his shining tie descending expertly from a well-turned collar, his hands relaxed and expressive. He has been at the middle of telecom tussles for years—serving as either the chairman or the ranking member of the House Energy and Commerce Committee's Subcommittee on Telecommunications from 1987 to 2008. There he was the principal author of many of the laws now governing the nation's telephone, broadcasting, cable television, wireless, and broadband communications systems—all the while exuberantly holding hearings and handing out pungent quotes. In Markey's mind, pole attachments are a good example of the ongoing struggles between incumbents and new, disruptive actors who want to provide services to the public. As he put it, “The government is the midwife in helping technology get to the marketplace.”14
Pole attachments had been an issue for cable companies from the beginning. Cable operators can reach houses and offices only by running wires along streets so that lines can be “dropped” to individual subscribers. Wires can be threaded through existing conduits or hung on poles, and in many places early cable-systems operators depended on access to poles that had been built by the local telephone utility. But the phone companies used their control over poles to gouge cable systems, often by doubling or tripling the rates they charged electrical utilities and other phone companies.15 The FCC took up the issue in 1967 and was asked to expedite the inquiry by the NCTA in 1970.16 But six years later the FCC decided that it did not have clear jurisdiction over the issue and tossed it over to Congress.17
After a great deal of wrangling, in 1978 Congress passed a law requiring that where phone companies gave the cable industry access to their poles they would have to do it on reasonable terms to be set by the FCC. These pole-attachment rules are a good example of government intervention enabling a new market. The law gave cable a subsidy—in the form of a preferential rate on access to telephone poles—that is still in place today.18
In the ensuing decades, cable ceased to be a mute pipe for distributing existing content to places with poor reception and became a source of programming. There was a great deal of investment in cable infrastructure to tie together cities and towns, and many new networks cropped up that were delivered solely over cable. But cable operators often overextended themselves and lacked the money to maintain or enhance their networks; they had to raise their prices, and customers complained. Companies began to consolidate, and throughout the 1970s and 1980s, cable distributors fought for control over exclusive municipal franchises. Dozens went out of business.19
Meanwhile, the rules that were supposed to govern the relationships between cable and broadcast, and between cable and telephone, were not altogether clear—and regulators began to worry this could be a problem as the market expanded and the technology progressed. There was a patchwork of authority drawn from federal and state sources, and municipalities and city councils were finding creative ways to be persuaded by cable operators to grant exclusive franchises. As Paul Baran, the father of packet-based communications, described the situation in a 1999 speech, “When the economics of cable allowed extending cable to the cities, there was a bidding war for the franchises. All sorts of games were played at the time, including rent-a-citizen, givi
ng out cheap stock to bribe local political figures, etc.”20 Cities made exorbitant demands for “sweetened” bids, and city officials sometimes used their power to have part of the local cable company's profits assigned personally to them; in return, cable-system operators sought affiliations with well-known locals (“rent-a-citizen”) to bolster their bids and promised cities whatever they asked for—services to libraries and schools, community channels, and interactive systems that often were never built.21
In an attempt to bring order to a complex system of federal and state requirements and to make the franchising process more certain for the cable operators—and in response to concerns expressed by state officials and federal representatives about the discretion and opportunity for corrup-tion inherent in the patchwork of cable-franchising rules—Congress passed the Cable Communications Policy Act of 1984. The FCC had been concerned throughout the 1970s about local franchising decisions but felt that it could not impose uniformity without legislative authorization.
The centerpiece of the law was a provision that only locations without “effective competition” for cable—which the FCC determined to mean locations that did not have at least three over-the-air broadcast channels—would be subject to rate regulation. For everywhere else (about 97 percent of the country) the act lifted price controls at the end of 1986, freeing the cable industry to charge whatever the market could bear for its local monopoly services. The only rates that remained regulated were those for “basic packages,” but cable operators were free to remove from “basic” tiers any channels that were not subject to the “must carry” rules. In effect, this meant almost anything other than the broadcast networks. In short, the FCC's definition of competition meant that cable systems were deregulated by the end of the decade.22