Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age
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Online video-distribution companies worried that Comcast could make things especially difficult for them; with control over more programming and no obligation to allow competing broadband companies to use its pipes, Comcast could deny new online companies a platform. Comcast's ability to offer its own online video with TV Everywhere would make the situation even worse; the cable bundled subscription model would be successfully moved online.31
Toward the end of the process, the FCC paid glancing attention to the issue of high-speed Internet access and the power of Comcast (and other cable incumbents) to dominate wired access in its market areas. Earthlink, the Internet service provider that had been allowed onto Time Warner's cable system as a result of the AOL–Time Warner merger a decade earlier, strongly argued for wholesale stand-alone broadband access so that it could compete.32
Public-interest groups trooped to the FCC offices about once a week. Like some of the companies, they wanted rules to ensure Comcast's rivals access to programming, better rules covering Comcast's obligation to carry programming from independent programmers, and a requirement that Comcast make its high-speed Internet access services available on a wholesale basis.33 To the end, the public-interest groups thought that wholesale access to high-speed Internet services was a strong possibility.
Comcast, for its part, kept asserting that the review was certain to be settled in 2010—the company was expert at creating an air of inevitability, and it had financial reasons for wanting to get the deal done that year. It had seen an opportunity in a business-friendly administration and had gone forward. But approval of the merger on Comcast's schedule would not be possible, given the work that had to be done on net neutrality and the compromises the staff had to get through in order to complete that order. Approval would have to wait until January 2011.
Some outsiders to the process found it hard to believe that public policy would permit the deal to go through. “If the framers could see what has happened to their First Amendment, they'd be shocked,” one commenter told me. “It now protects corporations. … Comcast owns the Internet now.”34
But the unthinkable had become commonplace. At the end of 2010, after months of work, the FCC staff was nearly ready to circulate its proposed conditions for a vote. There was, predictably, a last-minute scramble to add on conditions that had personal appeal for one actor or another. The commissioners all had their own requests. Commissioner Mignon Clyburn had already made hers known; she wanted to ensure that the deal was used as an opportunity to provide low-income Americans, as well as schools and libraries, with better access to low-cost broadband.35 Commissioner Michael Copps, after a period of disengagement, submitted a host of requests at the end, including requiring Comcast to sell Internet access on a wholesale basis as well as putting in place much stiffer rules about programming—both access to Comcast's programming and carriage by Comcast of independents’ programming.
The Republican commissioners, McDowell and Baker, had had little involvement in the process beyond preliminary briefings; now, however, they insisted that the conditions on the merger expire as quickly as possible. And they wanted to be sure that the Commission did not say anything about either net neutrality or the terms under which Comcast would make programming available online; the FCC had never extended its program-access rules to the Internet.36
Brian Roberts and David Cohen came in to see Chairman Genachowski on Thursday, January 13, 2011. The results would be announced the following Tuesday. Genachowski told them that the merger would be approved, and Comcast was comfortable with the conditions that had been proposed. The Republicans had gotten some minor language tweaks but had not otherwise prevailed; Commissioner Clyburn's concerns had largely been addressed and she would support the merger; Commissioner Copps's end-of-process list of requests had not made it into the deal, but his nay vote would not affect the final outcome.37
Investment analysts looking at the announced conditions saw a positive outcome for Comcast. Although competing distributors got the ability to trigger “baseball arbitration” for programming (in which both sides are obliged to make a last best offer, one of which will be chosen by the arbitrator), Comcast could still bundle at will—which would make any arbitration extremely difficult to win.38 And online video distributors would get access to Comcast-NBCU content, but there were enough exceptions and details and expenses involved to keep lawyers busy for a long time; the most potentially disruptive condition required Comcast-NBCU to license to an online video distributor (OVD) broadcast, cable, or film content comparable in scope and quality to the content the OVD received from one of the joint venture's programming peers. There would be fights over the meaning of “comparable,” and in order to trigger the obligation at all one of the four peer conglomerates would have to break ranks with the others in making programming available online outside the TV Everywhere umbrella, a situation that left ample room for maneuvering and litigation. Little had changed with regard to Comcast's ability to protect its own programming from independent competitors (the “program carriage” issue), and the net neutrality obligation did not apply to IP-based services Comcast carried over its own “private network.” This exception effectively negated the rule because Comcast would be the source of the definition of its “private network.”39
On the plus side for the public, Comcast was obliged to offer a retail stand-alone high-speed Internet access service at $49.95 a month for 6 Mbps speed—a service it was already selling. It would have to bring data services to an additional four hundred thousand homes (but could impose whatever terms it wanted) and would be obliged to promote greater broadband adoption by 2.5 million low-income households through a $9.95 per month service—information the FCC tried to ensure would be more public than AT&T and Verizon's ten-dollar-a-month DSL offer had been a few years earlier. The FCC adopted Comcast's low-cost broadband suggestion nearly verbatim, but although the program looked like a public benefit, it would not be easy for customers to apply for it.40 Means-tested plans were not going to affect Comcast's existing services, and, as the company had found back in Meridian, Mississippi, in 1963, when it is difficult to apply for something, customers won't. The company would not be offering the program to anyone who had recently been a customer of Comcast. In effect, the merger condition opened new business opportunities to Comcast without creating any pressure on the company to offer the same deal to its existing customers. And when the program ended, families would be forced to choose between canceling their access or paying Comcast's higher rate for the same services. Most important, the voluntary nature of the program substantially lowered the risk that Comcast would be regulated by the FCC: if the Commission tried to wield power, the company could threaten to withdraw its voluntary assistance. In the meantime, the program would give Comcast essentially free advertising facilitated by government and nonprofit organizations.
As one experienced Comcast watcher told me, the merger conditions would be completely ineffective in limiting Comcast's ability to use its market power; there are a number of ways for Comcast to legally wriggle out of every condition imposed by the DOJ and FCC. “I would take structural competition any day,” he said, “over trying to regulate behavior. The Comcast [merger] conditions are regulating behavior.”41
His prediction came true just months later. Bloomberg had succeeded in getting a condition included in the merger approval that appeared to require Comcast to carry Bloomberg—and other independent news and business channels—in the same neighborhood of business channels as MSNBC, CNBC, and Fox News. The interpretive lawyering had begun. Comcast chose not to comply and claimed that it did not have to. As David Cohen's subordinate Sena Fitzmaurice argued: “Bloomberg simply misinterprets the ‘neighborhooding’ condition in the FCC's Comcast NBCUniversal transaction order. It does not ‘neighborhood’ news channels in the way Bloomberg seeks to be repositioned.” Bloomberg responded, “This is something of a test case of how serious Comcast is about implementing the conditions set by the FCC order,�
�� and filed an enormous record of documents aimed at convincing the FCC that Comcast was deliberately misinterpreting the condition in order to harm Bloomberg‘s ability to compete with CNBC. Comcast responded with enormous filings of its own.42
The day after the merger was approved, with the disappointed FCC commissioner Copps offering the lone voice of dissent, Cohen talked about the government conditions for the deal. His argument now pivoted: his audience was no longer the regulators, whom he had been praising for more than a year, but the investment community. “None of these commitments or conditions will prevent us from operating these businesses the way our business plans call for us to do so,” he said, “and none of them will prevent the businesses from being competitive in all of the markets in which we do business.”43 Cohen knew better than to sound triumphant, but he clearly was. Comcast had not been pinned down by the regulators, and it was now ready to move ahead as one of America's four media powerhouses.
Meanwhile, the company continued to bulk up its Washington lobbying force. FCC commissioner Meredith Attwell Baker, a Republican and the daughter-in-law of former secretary of state James Baker, announced that she would leave at the end of her two-year term to join Comcast. A well-respected former Department of Commerce official with a substantial telecom legal background, Baker had been seen as a shoo-in for reappointment by the Obama administration, so her departure seemed sudden. More important, her quick transformation from regulator to voice of the regulated struck many observers as inappropriate.44
One of Comcast's nonprofit grantees, a small media nonprofit organization in Seattle called Reel Grrls, sent out a tweet expressing shock. A Comcast manager wrote to Reel Grrls: “Given the fact that Comcast has been a major supporter of Reel Grrls for several years now, I am frankly shocked that your organization is slamming us on Twitter. I cannot in good conscience continue to provide you with funding.” Following an outcry, Comcast quickly apologized and said the whole thing was a mistake; it “reach[ed] out” to Reel Grrls to let the organization know that its funding was not in jeopardy.45
After a couple of weeks of bluster, the issue died down; Baker hadn't broken any laws. Comcast hired a slew of other Washington notables. Politico characterized the spate of hires as “a veritable tour de force of Beltway know-how—and a possible sign that the company anticipates some big battles on the policy horizon.”46
12
Aftermath
AFTER ITS $13.8 BILLION PURCHASE OF 51 percent of NBC Universal in January 2011, Comcast moved professionally ahead.1 A cheerleading town meeting for NBCU's thirty thousand employees was sent via Webcast from the Late Night with Jimmy Fallon studio at 30 Rockefeller Plaza, with Ralph Roberts, emcee Ryan Seacrest, and Saturday Night Live‘s Seth Meyers onstage; during that event, according to Daily Variety, the ordinarily calm and reserved Steve Burke told the crowd that “whatever we do, we should be in it to win it. … We got big for a reason.” A new logo was revealed: no more peacock, just lettering. And Jeff Zucker was gone; after nearly a quarter century presiding over the extraordinary growth in the company's cable business he had been replaced by Burke.2
Shortly after the merger was approved, President Obama appointed Brian Roberts to the newly restructured Council on Jobs and Competitiveness headed by General Electric CEO Jeffrey Immelt. In a blog post expressing pride in his appointment, Roberts invoked family lore: “My father Ralph is one of America's great entrepreneurs; he started Comcast as a small business with just a few hundred customers in Tupelo, Mississippi. With the recent completion of the NBCUniversal joint venture, we now have over 127,000 employees.”3 Comcast's tradition of public-private service continued.
Following the merger, Comcast remained predominantly a distribution company: its non-content operations generated 80 percent of the company's $55 billion in annual revenues and accounted for 70 percent of its employees. Its growth area, high-speed data services, was picking up steam, just as Roberts had predicted.4 Profits were soaring. Americans in Comcast Country—which included people living in twenty-two of the twenty-five largest cities in America—were signing up for Comcast's very expensive highest-speed data offering.
And the profit margin was getting better and better. The cable-television advertising market had weathered the economic downturn without much of a dip; ad revenues were up more than 9 percent in 2010, the average price of a pay-TV subscription had risen 29 percent between 2005 and 2010 (despite a decline in average household income), and cash-flow margins for the top cable networks were climbing over 50 percent as Americans continued to watch more television.5
Comcast's ability to bundle its offerings was undiminished; subscribers were getting dozens of channels whether they wanted them or not. To hedge against video losses, Comcast started testing the waters with triple-play packages (high-speed Internet access, Voice over Internet Protocol, and television) that were a little cheaper and included smaller bundles of video channels—but true a la carte offerings were still unavailable. And the TV Everywhere model was flourishing, as viewers kept their cable accounts even as they streamed movies and shows over iPads.
Comcast and the rest of the cable industry were successfully boxing Google and Apple out of the set-top-box marketplace; when the FCC suggested that it might make sense to require standardized video connections to which any device could be attached without permission, former FCC chairman Michael Powell, now leading the cable industry trade association, called the idea a classic example of “jobs-killing, cost-raising, innovation-crushing regulation.”6 The cost of providing data services was dropping, but revenues per user for the cable distributor's bundles were going up. Comcast's investment in its networks was essentially over for the time being, and equipment—modems and gear—was getting cheaper. All the arrows were heading in the right direction. John Malone predicted in November 2009 that whatever restraints Comcast had to agree to as a condition of the transaction going through would provide “clues to other distributors as to whether they need to go vertical, and have something to fight back” with against Comcast; more vertical integration deals (AT&T and DirecTV?) might follow in the path of Comcast's success.7
Comcast's Video on Demand strategists were feeling confident; consumers would clearly want to watch high-production-value, long-form video anytime, anywhere, and on multiple devices, and Comcast was ready to rent programming to capture users who might have bought DVDs in the past. If users cut out their cable company, they would not be able to watch pro sports or popular network programs. Comcast even introduced a sixty dollar one-time video service in late 2011 that would allow consumers to watch movies while they were still playing in theaters—showing that the company believed that consumers would pay a premium to watch something as soon as it became available. “The [$60] pricing is insanity,” jeered TechDirt, a blog that reports on the business and economics of technology companies.8 Comcast backed down but vowed to figure out another way to get first-run movies to customers’ homes.9
Netflix, meanwhile, was struggling in late 2011, having apparently outraged subscribers and shareholders alike by focusing single-mindedly on its streaming business rather than its shipping DVDs business. It was also having trouble getting access to first-run content. Comcast's CFO, Michael Angelakis, was questioning as of late 2011 whether licensing current NBC Universal shows and movies to Netflix made sense: “You have to be really careful about what the value of that current content is,” he said. “I think we are more comfortable monetizing the deep library.”10 Translated: Netflix, as Brian Roberts so pungently said, was for reruns. Maybe it had a future as a cable channel.
Meanwhile, the only potential competitor for customers looking for high-speed data services was backing down. In 2010, Verizon cut FiOS expenditures by two-thirds, and company executive Francis Shammo explained that “wireline will continue to come down year over year” Verizon had already announced that it would not be extending FiOS to new cities.11 DSL connections to the Internet were obsolete, could not compete with cable servi
ces, and were being dropped by customers in huge numbers. Roberts sounded understandably gleeful: “We really do start 2011 on a positive note,” he said. “Our competitive position has never been better. Now it's really all about execution, in order to maintain our momentum and drive profitable and sustainable growth.”12 Responding to the news that Comcast share prices were rising sharply, Roberts said, “Hallelujah.”13
But there was a slight softening in one part of the Comcast universe: video customers were dropping off slowly and were being picked up by AT&T, Verizon, and the satellite companies. Cable still had the lead in the pay-TV market, however, and Comcast could slow its video losses using sports and its new NBC Universal channels.14 Meanwhile, Americans’ appetite for data was growing. In the areas it served, Comcast had little or no competition for these high-spending, high-speed data customers; it was pivoting to focus on higher-spending subscribers in data to offset its losses in video. For Roberts, all the numbers pointed to “an exciting new beginning.” Comcast was adding broadband subscribers in droves while steadily increasing its revenue per user.15
The merger seemed to be going well, too. Although, as Cohen said in a speech to the Chamber of Commerce of Southern New Jersey in mid-2011, “Comcast is not a Hollywood culture,” Steve Burke showed that he could make the two companies work effectively together.16 He promptly launched “Project Symphony,” aimed at using cross-promotion opportunities across the Comcast megalopolis to support key programming. Burke, determined and no-nonsense—his father once headed Johnson & Johnson—made clear to the Wall Street Journal that Comcast-NBCU employees would be thinking of their jobs “not as programming Bravo or the lead story on NBC.com” but as working to better Comcast-NBCU.17