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Summary:

There’s a very good chance that most people in America will soon have just one choice for truly high-speed Internet access suitable for watching video — their local cable monopoly. With cable’s DOCSIS 3.0 as an intermediate step, we’re reaching the era of true convergence.

Image (3) fiberopticscable.jpg for post 75731

Right now, there’s a very good chance that most people in America will soon have just one choice for truly high-speed Internet access suitable for watching video — their local cable monopoly. With cable’s DOCSIS 3.0 as an intermediate step, we’re reaching the era of true convergence. Soon, all those cable channels will be replaced by virtual digital segments of a single all-purpose fast pipe to the home, providing voice, video & data across one connection. If you’re writing a new app or developing a new online service, you should be worried: There’s no guarantee that whatever you’re doing will work.

Why? Because these large cable carriers won’t face real competition and have every incentive to favor their own business plans, they may not be interested in supporting yours. Right now, they’re doing their best (even linking up with the Tea Party) to convince America that having rules of the road protecting consumers and new online businesses amounts to a “government takeover of the Internet.” Don’t believe it for a minute. These giant companies want to make sure that the Internet poses no threat to them, and they have the market power (and political power) to ensure that their profits remain intact.

The Comcast/NBCU merger is aimed right at competition — avoiding any series of steps that might result in having dumb (but big) pipes serving the areas where Comcast now has dominion, and avoiding having Comcast’s pipe itself made dumb. If the merger goes through as Comcast proposes, the new NBCU will have the power in Comcast’s market areas (where it routinely has a 60 percent-plus share of local pay-TV customers) to raise other pay-TV providers’ (satellite, small cable, telephone, nascent online distributors) costs of doing business substantially.

This will mean, among other things, that competing aggregators of online video who don’t have reasonable access to crucial NBCU content (particularly sports) won’t have the power to constrain Comcast’s prices. Comcast ties access to online video content it controls to a cable subscription, and Time Warner does the same thing with its content. Many of the other pay TV providers will cooperate in this plan, which goes by the nickname “TV Everywhere”. This means that independent online aggregators don’t stand a chance — because consumers will be used to getting highly-branded online video for “free” as part of their bundle from their ISP, they won’t be willing to pay for an independent service.

Without powerful online video distribution companies that can compete successfully with Comcast, the economics won’t be there for any other wired high-speed Internet access provider to enter the market in Comcast’s areas – and so Comcast’s already great pricing and discriminating power will grow. Watch for the mergers that will follow — say, Time Warner Cable with Disney. Or, eventually, the FoxLibertyComcast company.

Imagine a big pipe coming into everyone’s house in a given market area controlled by one actor. Now imagine that you want to aim an online business – particularly an online video business – at that area. You’ll be subject to the whims of the carrier, and there will be no countervailing force to protect your ability to reach your customers. Maybe a small portion of that pipe will be reserved for traditional Internet access, but maybe not, and what’s reserved won’t be very fast or very standardized. Comcast wants to build a moat around its business so that it can avoid being treated like a commodity transport provider, and the addition of NBCU content will make it far easier for Comcast to make this possible.

Comcast spent nearly $90 million in the first two quarters of 2010 related to the deal; promised $20 million in venture funding for minority entrepreneurs; pledged $6 million to support independent productions; agreed to place a Hispanic member on its corporate board of directors; made deals with NBC’s affiliates; and hired (with NBCU) about 100 former government employees to shepherd the deal through — including several former chiefs of staff to key legislators and policymakers.

There’s been very little media coverage of the Comcast/NBCU merger. You may want to pay attention to it, because there’s a good chance that it will go through. This is bad news for up-and-coming video aggregators– who will want to invest in them? It’s bad news for new applications and new uses of the network, because as things stand in Washington Comcast (and other cable companies) will be able to allocate bandwidth however they want. It’s all
one pipe, and there are very few rules.

What about other ways of getting online? Well, Verizon’s FiOS service, which could effectively compete with cable’s high-speed pipe, will reach only about 18 million homes. In early March 2010, John Killian, Verizon Communications’ chief financial officer, told analysts: “We are coming more to the end of the (fiberoptic) build-out.” It’s much more expensive to upgrade to FiOS than swap out cable electronics.

Wireless? Well, the laws of physics tell us that wireless just doesn’t have the capacity of a fast wired cable connection. It will be a complementary service, not a substitute. Wireless is much less efficient in its use of spectrum and faces much harsher signal environments than signals do inside a controlled cable environment, and so the overall number of bits that can be conveyed in a given amount of time in a mobile environment is much lower than that possible in cable systems. We love mobility, but for watching live video, we’ll still prefer wired cable.

The giant cable operators generally do not compete with each other in major metropolitan areas in the US. (The one exception is New York City, which is so large and complex that Comcast, TW, and Cablevision have all stayed in place – but the cable systems have divided up the boroughs among themselves.) In general, non-competing cable systems have at least 70% of the video customers in more than half of the top 50 DMAs in the US. In a series of transactions and gentlemen’s agreements, the operators have carved up the country among themselves and stay out of each others’ territories.

We’ve known since the days of Ma Bell that basic transport of communications to the home has the characteristics of a “natural monopoly.” According to Wikipedia, that’s “an industry in which a business will have such enormous
economies of scale that a single firm can effectively and efficiently supply the market at lower cost than two or more firms. A natural monopoly will dominate these industries if government does not impose restrictions. Electric utilities are generally considered natural monopolies.”

The fact that Verizon is backing off its investment in FiOS signals that we’re reaching a tipping point: Looking at DSL v. cable modem access, and wildly hoping for broadband over powerline or satellite, the BushAdministration believed that there could be competition for high-speed Internet access that would make regulation unnecessary. But DOCSIS 3.0 is such a cheaper upgrade than FiOS that it just doesn’t make sense for the telephone companies to compete. The duopoly we’ve had so far – which hasn’t done prices or competition much good – is about to morph into a cable monopoly.

Bottom line: Competition cannot be relied on to constrain cable. The cable companies have enormous economies of scale and apparently unlimited pricing power — prices keep going up. They have won and, at least at the moment, they’re facing little threat of rules from Washington.

I don’t like the phrase “net neutrality” any more than you do. How about “the ability to compete”? How about a standard interface for everything new you’re building? The cable companies have figured out that there is nothing stopping them, and their business plans may not mesh with yours. Especially if you’re not yet one of the other media conglomerates — and even they may be worried at this point.

Here’s the call to action, and it’s simple: Pay attention. This is why it matters what happens in Washington, because it’s time to consider reining in these businesses.

Susan Crawford is a member of the faculty of Cardozo Law School and also a Visiting Research Collaborator at Princeton’s Center for Information Technology Policy.

  1. Ever since the digital conversion by my local Comcast cable, I have been po’d. I LOST completely the ability to view HD TV on my 52-inch LCD that has its own HD capability. I was not routing the cable signal through the cable box that makes the signal atrocious. Now the only way I can watch my cable TV is with a DTA converter box attached to the cable. Once upon a time I could watch practically all channels in HD WITHOUT paying for the service. They are carried over the same cable as the crappy STD signals.

    I also lost the ability to view the TVGuide that once upon a time listed the TV schedule for all the channels. No longer does Display tell me all the particulars of what I am watching.

    The only thing my TV is good for is watching movies on DVD and BD, and that is no small thing.

    Comcast, and I suspect all other cable companies, have set out to control exactly what we can watch. They don’t care about the features that are built into an expensive TV. They just care about monopolizing the televised programs.

    On http://getsatisfaction.com/comcast/topics/comcast_cable_and_the_feb_2009_digital_tv_switch_over I have complained, but apparently my last post from a month ago is the last post. Maybe the FTC and the FCC really only care about maintaining their own power.

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  2. These are same criticisms that the so-called public interest watchdogs raised about the AOL – Time Warner merger in 2000. AOL was a walled garden, and Time Warner controlled a major cable system, a publishing empire, a group of record labels, movie and TV studios, Turner Broadcasting, HBO, etc, etc, etc. AOL took over Netscape, the the dominant browser and a big player in web servers. It was the biggest corporate merger in history.

    How did that turn out? Well, the worry warts weren’t exactly vindicated, and the company ultimately decided to voluntarily spin off its cable properties to focus on its core content businesses. Turns out forcing people into a walled garden ain’t that easy after all.

    These breathless prophecies of doom were questionable the last time around, and by now they’re tiresome, as well as a bit of an insult to the intelligence of the American citizen. If we’re really interested in enabling competition over DOCSIS and its two competitors, VDSL as well as FiOS, let’s open up the pipe to Differentiated Services instead of demanding the technically crippling and ultimately anti-competitive “all packets are equal rule” that Crawford wants.

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    1. “How did that turn out?”

      It was a bad merger for a lot of reasons, but that doesn’t mean somebody won’t hit on that golden combo. Right now the two major fight zones are video delivery (and its navigation and content) and mobile payments. A few in each space will get it “right” as far as the public is concerned and afterwards there will be a lot of dead companies littering the roads.

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    2. FormerTimeWarnerEmployee Monday, September 13, 2010

      Sorry, but the AOL-Time Warner and NBCU-Comcast mergers have absolutely nothing in common.

      Your knowledge of the AOL-Time Warner merger is obviously very superficial. I worked for Time Warner for several years. The merger failed because:

      1) the integration plan was poorly thought through and did not adequately reflect the vast differences in culture between the two companies and

      2) The accounting scandals at AOL and the dotcom crash sent the stock plummeting. Many rank-and-file TW employees throughout the divisions had a large portion of their savings in Time Warner stock and lost a lot of money. What this meant is that CNN employees for example did not return AOL employees’ phone calls and thus none of the advertised “synergies” came to pass.

      From a strategy perspective, the walled garden was insignificant. AOL’s strategic problem was that it had a slowly, steadily declining yet highly profitable ISP business that continued to generate very healthy cash flows. This cash flow (and AOL’s margins) remained strong enough to prevent AOL from making the changes it needed to transition to another business model.

      Complacency and inertia almost always win at the end of the day.

      Comcast-NBCU is COMPLETELY different and far more threatening. Unfortunately Comcast also practically owns Congress, having “invested” very heavily in both parties.

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      1. I’m neutral on the Comcast-NBCU merger, as I’ve yet to be convinced it’s either going to be good or bad.

        As far as the AOL-Time Warner merger goes, I think the more instructive lesson comes from TW’s decision to spin off TW Cable long after the merger. If you take AOL out of the picture, the combination of TW’s content assets and TW Cable ultimately failed to make sense from a business perspective.

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  3. Some simple, sensible rules could fix this. Pure competition is the answer, but the market needs to be open for it to work. A simple rule that states if you have a near monopoly in the access pipe, you can;t also be in the content business.

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  4. Another Obama lefty trying to take control of the internet because she knows better than the market does.

    Just stay out of it…Jesus, you lefties want to control everything!

    Makes me want to go back to law school to argue with this whackjob.

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    1. What an arsenine comment!

      Makes me think the ‘right’ thinks of itself as always being the right position in everything they can affect. Look where that’s gotten us.

      What 1,000 lawyers at the bottom of the ocean?

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  5. If this is so why did Time Warner spin off Time Warner Cable?

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  6. I’ll sound like a communist to say this (which I’m not), but the answer is to nationalize the nation’s telecommunications infrastructure.

    Just the backbone (the cables). The retail side stays in corporate hands, and competitive.

    Look at what they’ve done in Korea, or what they’re about to do in Australia. Glass fiber cable into every home, paid for by the government. Telcos then connect to that fiber network, and retail it to the consumer.

    It’s easier to take the tough action now, before the cable companies get too powerful, after which it becomes much more difficult to constrain them.

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    1. Korea Telecom owns the fiber network in Korea, and it’s a private company. It’s also not clear that the Aussie system will ever be built, as it’s an election issue between the Labour Party who want to sink taxpayer funds into it and the Conservatives who don’t. The voters are yet to be convinced that they need 1 Gbps pipes on top of the other public money priorities they have at the moment.

      Australia’s Internet issues are largely the result of relatively poor undersea connections to the Rest of the World, and fatter pipes to the home don’t help that problem.

      By and large, average Internet connection speeds are on the decline on advanced countries as more people spend more time connecting via mobile devices. The race for the top in fixed line connection speeds isn’t the best way to look at Internet use anymore.

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  7. While there are certainly things to be concerned about in the proposed Comcast-NBC/U merger, Crawford seems to have a highly deterministic view of how the pay-TV business actually operates. The paramount question facing everyone in the pay-TV value chain, distributors, programmers and consumers alike, is not how many aggregators there ultimately will be in the market but whether consumers will continue to purchase bundled programming services at all.

    The goal of TV Everywhere, which was first proposed by content owners not by cable operators, is not primarily to squelch competition from other aggregators. It’s to make sure pay-TV content remains within the confines of a bundled-subscription business model. That model is highly favorable to content owners because generates a second revenue stream, which they participate in through carriage fees, in addition to advertising. The problem facing content owners is that, while they would love to pursue incremental advertising opportunities via new digital platforms, most of the obvious ways of doing that tend to undermine the bundled subscription model. Thus, the effort to square the circle that is TV Everywhere. While cable operators like Comcast certainly recognize the potential competition-squashing potential of TV Everywhere, ultimately, it’s in the interest of content owners to have as many potential buyers of their programming as possible, not fewer, so long as those other would-be buyers don’t threaten the golden goose. But that’s a question of business economics, not technology or the carrying capacity of the pipe.

    More critically, it is programmers that are raising prices right now, much more so than are cable operators. Just look at the latest round of carriage and retransmission negotiations as reported right here on GigaOm. The consistent theme has been content owners extracting higher fees from cable/sat operators in exchange for online distribution rights (i.e. TV Everywhere). Those price hikes, ultimately, pose a greater threat to aspiring online distributors’ ability to offer a competitive service than anything cable operators could do.

    It short, it’s the content owners that are raising the price of entry right now, not the incumbent service providers. If anything, Comcast’s acquisition of NBC Universal could actually work to arrest that trend by readjusting the balance of power between programmers and distributors.

    That doesn’t mean there’s no reason to be concerned about the merger. But it’s important to get the analysis the right-way around.

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    1. Thanks for that comment, Paul, it goes to the critical point. Crawford’s claim that cable companies are raising prices willy-nilly is one of those things that goes unchallenged because everyone knows it’s true, but the reasons are more important than the phenomenon itself. Cable operators have a number of “must carry” mandates that amount to a license to steal by the content owners, and a number of de facto programming mandates that are exploited by content bundlers like ESPN to their considerable advantage.

      Ultimately, Internet distribution is a gold mine for content producers because it gives them so many more ways to monetize content, and the downfall of aggregators who provide no real value in a world where HBO can contract with Akamai to make its content available to more people than it reaches today via cable.

      The people who run Comcast aren’t stupid, they understand that NBCU reaches a broader population than Comcast Cable does, and they’re aware that content is a better business to be in than plumbing; all you have to do is compare their net margins to those of Google to see that.

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  8. Interesting article.

    Not sure what the incompetent clowns in DC have done in the past 100 years to win our trust or show that they have our best interest at heart…. but you do raise some valid concerns that point out the importance of having a competitive marketplace.

    There is however a lot of evidence to suggest that it is the epidemic collusion between DC and corporations that in the end leads to market failures and a lack of competition.

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  9. [...] Welcome, all of you who got here from Gigaom (Comcast’s NBC-U Dreams May Be Online Video’s Nightmare). [...]

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  10. [...] “Comcast’s NBC-U Dreams May Be Online Video’s Nightmare” [Gigaom] — According to the opinion piece, “right now, there’s a very good chance that most people in America will soon have just one choice for truly high-speed Internet access suitable for watching video — their local cable monopoly.” [...]

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  11. [...] the deal are concerned it could limit the voices available in media, but there are also fears that Comcast would become much too powerful. A statement from the Free Press explains this point of view: “This case shows the dangers of [...]

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  12. [...] critics of the deal have questioned the effect that a Comcast-NBC combination would have on the future of online video, and some have even suggested that certain restrictions are placed on Comcast before the deal is [...]

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  13. [...] the one hand, Hulu has the Comcast-NBC Universal deal hanging over it; until the deal is completed and Comcast has taken a majority stake in the new [...]

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  14. [...] Over-the-top video will clearly be a sticking point for the FCC, considering NBC’s stake in Hulu and Comcast’s interest in keeping its pay TV business from being cannibalized by free, ad-supported TV shows online. Comcast’s ability to influence the market through its Hulu stake or its control of NBC’s online rights, as well as its broadband ISP business, must give the commission pause. [...]

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