In other words, because Comcast has the most subscribers for pay TV, it can enter the territories of other pay-TV providers with an over-the-top (Internet) product (or app product) that will systematically underprice all other over-the-top products. Comcast has more sports. Comcast has more top cable channels. It can win from any angle.
“Live streaming and the play now feature on our Xfinity TV app are two important pieces of our strategy to deliver any content to any device, any time,” Roberts said in January 2011, just after the deal was approved.37 And all this mobile activity could take place in the controlled, safe world of apps. Comcast had nothing to lose: Xfinity on the iPad and Microsoft's Xbox applications (and Microsoft's Windows operating system for smartphones and tablets) would protect Comcast's traditional distribution model while allowing the company to experiment with mobile streaming video. The Xbox deal, in particular, would help block competition from Google TV and Apple TV, which lacked the 50 million–strong worldwide fan base of Xbox.38 Time Warner's Jeff Bewkes, the originator of the TV Everywhere idea in 2009, sounded triumphant by mid-2011: “If you look at the television business … TV viewing is up, time spent viewing is up, the number of channels and the quality is up—more than films, actually. And the programming investments are up, the profits are up. There's nothing in it that isn't up. And when you say, is it TV vs. the Internet? No, it's TV on the Internet.”39
Steve Case's prediction that people wanted safe walled gardens of well-designed interaction was coming true; the AOL–Time Warner deal had foundered, but the mobile environment was providing the perfect set of affordances for everyone involved. And U.S. regulators have made this possible: on the wireless side, there are two dominant carriers, AT&T and Verizon. Neither is constrained by competition, both are subject to little governmental oversight, and both have an interest in snapping up whatever slivers of gold will come from prioritizing particular bits of digital information from their friends. This makes Comcast, AT&T, Verizon, and Apple “frenemies”: they have overwhelming strength in their own arenas and a shared interest in a future world that looks a lot like a collection of large, expensive, well-groomed theme parks. Private carriage, not common carriage, is the regulatory approach they are interested in. As the industry heads toward convergence—packets of video, voice, and data over multipurpose communications networks taking the place of single-purpose cable, broadcast, and telephone networks—it is becoming clear that the carriers’ desired model of control, discrimination, and premium services is winning the battle on both the wired and wireless sides.
In fact, the communications industry is at a point of equipoise with all these major actors. Each of them (AT&T, Verizon, Comcast, Time Warner, Apple, Google, and Microsoft) is too big for any of the others to swallow up or crush. They all have achieved enormous scale. So they tacitly cooperate by carving out their separate areas of expertise, much as tough kids will find separate playing areas and stay there when they know equally tough kids occupy the other parts of the room. Comcast gets wired distribution and stays out of the wireless distribution and device marketplace—and the other guys don't stop it from streaming its content wirelessly across iPads and Xboxes. Comcast's strength gives it room to maneuver in negotiations for transport over wireless networks and through wireless devices, getting better rates than its satellite competitors on the video side. AT&T and Verizon get wireless distribution and avoid having to install fiber lines into Americans’ houses—and Comcast does not try to take over their wireless marketplace. Comcast does not need to control the last mile of a wireless transmission: 95 percent of any wireless network is a wire, and Comcast is in a position to sell the wireless companies its “backhaul” products—carrying the data generated through wireless uses over Comcast wires from cell towers to Internet access points. Comcast and Apple are similarly strong enough to collaborate while flourishing financially: as long as people love high-speed Internet access and the design of Apple devices, they'll buy products from both Comcast and Apple that work well together.
Everyone is doing well: profits are climbing, allowing the communications giants to pay ever-higher dividends even as worldwide economic woes mount; free cash is piling up; investment in infrastructure is down because there is no competitive pressure in either the wireless or the wired sector to increase it; and all the companies have been increasing dividends or buying back stock (or both) in an effort to concentrate each stakeholder's profit—boosting their earnings per share and driving up the popularity of their equity in a virtuous cycle. Inequality grows, as poor and rural people are left behind completely or are relegated to second-best wireless “substitutes” for high-speed Internet access. But those zippy iPad apps look just great.
9
The Biggest Squeeze of All
In the end, the distributors are really the middlemen. It's the American public that's going to end up paying.
—John Malone
AS HE OPENED THE SENATE ANTITRUST SUBCOMMITTEE hearing on the Comcast/NBC Universal merger in February 2010, Senator Herb Kohl was clearly worried: “We must pay particular attention,” he said, “to the effects of this merger on a new and promising form of competition—video programming on the Internet.”1 Later in the proceedings, consumer advocate Andy Schwartzman chimed in: “NBC and Hulu have denied access to NBC programming to existing over-the-top video provider Roku. That is not hypothetical. That is a fact. So there is every reason to expect that the combined entity will have even greater reason to … withhold NBC programming from … online-only competitors.”2 Hulu.com, a free online video site launched in 2008 by NBC Universal and Fox as a competitor to YouTube, had become a popular locus of online television content accompanied by advertising. Hulu's owners had become concerned in 2009 that people would use the video-watching software Boxee (which gives a computer screen the appearance of a television media center) or a Roku device (allowing users to stream online video directly to television screens) to access Hulu video. Hulu had therefore denied Boxee and Roku access to its content; as CEO Jason Kilar had explained it, “Our content providers requested that we turn off access to our content via the Boxee product, and we are respecting their wishes.” The worry then from NBC Universal's perspective had been that the line between Hulu's online videos and the cable industry's video business would be blurred, and the programmers—and the cable industry—did not want that to happen. Hulu's CEO, in turn, felt his company had no choice but to block Roku and Boxee: “Without [the programmers'] content, none of what Hulu does would be possible,” he wrote in 2009.3 NBC Universal wanted Hulu to be an addition to its pay-TV business, not to undermine advertising sales on NBC.com. Following the blocking fracas, Hulu marched on, adding a monthly payment plan and climbing to a million paying subscribers (and 30 million viewers overall) by 2011.4 Schwartzman was clearly worried that a combined Comcast-NBCU would have even greater incentives to block competing consumer products.
Brian Roberts took a different view, pointing out that Hulu was responsible for less than 4 percent of video online and had revenue of just $108 million in 2009; Netflix had revenue of more than $1 billion. From Roberts's perspective, online video was a “dynamic, rapidly changing market” over which the new Comcast-NBCU could not possibly exert control.5 Indeed, by the fall of 2010 Hulu, a joint venture among Fox, NBC Universal, Michael Powell's employer Providence Equity Partners, and Disney, was being described (not by Roberts) as “the unloved bastard offspring of a doomed tryst among three aging TV giants.”6
The two camps seemed to be talking past each other: Kohl and Schwartzman were worried about the future distribution of long-form video (NBC programming) online, but Roberts was including ten-minute YouTube videos in the online video category. Kohl and Schwartzman seemed to think Comcast-NBCU would have an interest in withholding long-form video from competitive distributors. Roberts (and NBC Universal's Jeffrey Zucker) repeatedly claimed that it was in Comcast's and NBC Universal's interests to ensure the widest possible distribution for the mer
ged entity's programming.7 Comcast probably saw Hulu primarily in defensive terms—as an online platform that would allow the traditional programming-distribution complex to retain its pricing power while neutralizing any over-the-top competition.
Meanwhile, in the world outside the hearing room, the pay-TV industry (including Comcast) was finding its former unchecked growth beginning to slow down.8 Distributors kept passing along higher programming costs to consumers, but some Americans were growing tired of cable rate increases that were running at about triple the rate of inflation.9 A few, ground down by the worsening economic situation, were cutting the cord—discontinuing traditional pay-TV subscriptions in favor of low-priced online video alternatives. In mid-2011, SNL Kagan estimated that 4.5 million of more than 100 million pay-TV subscribers would have discontinued their subscriptions in 2011.10 It seemed likely that people under thirty would find life without a cable subscription easier than their elders did.
Who was right? Was online video threatened by the merger, or was cord-cutting threatening the future of the pay-TV model? The answer, it turned out, was yes. Comcast saw the numbers of cord-cutters and knew that long-form online video threatened its video business model. But it also saw that cord-cutters were still a small group—somewhere between 1 and 4 percent of the adult population of America. There was time to delay the advent of successful online competition for Comcast while increasing the advantages that would give Comcast an overwhelming head start in high-speed Internet access services.
As Roberts put it in early 2011, “If you think about Comcast, I believe that the best business we may well be in is our broadband business.”11 Comcast's almost unchallenged hold on the high-speed Internet access market in the areas it serves puts it in a position to make even greater profits in the years to come. Comcast's service areas cover 50 million U.S. television households, or about 45 percent of households nationwide, but only half of those households (23 million) subscribe to at least one Comcast service.12 When it comes to high-speed Internet access, the company has a lot of headroom and no real competition. As SNL Insurance Daily reported in September 2011, Comcast CFO Michael Angelakis has told analysts that Comcast has captured only a third of the market in high-speed Internet access in its coverage area, but he “expects the figure to eventually hit 85% to 90%, as consumers clamor for higher speeds to watch such things as [high-definition] video.”13
Reaping ever-higher revenue per user for high-speed Internet access alone—even in the absence of a viable traditional pay-TV business—would still be a profitable pursuit. While overall revenue might fall (because high-speed Internet access revenue by itself would be less than the traditional video-plus-access bundle), costs would fall even farther and faster if Comcast no longer had to pay for content. Comcast faces high programming costs from other actors—particularly in sports, where ESPN is rumored to charge as much as seven dollars per subscriber for its content.14 On the whole, Comcast's margins in video are being squeezed by the demands of other programmers—its programming costs rose 7 percent in 2010, to $7.5 billion.15
If Comcast someday became simply a conduit pipe, it would still be in a good position: customers would continue to buy their favorite programming, and they would get much of it from Comcast online. Comcast would have even more cash on hand and could stop spending money on set-top boxes. Even if pay-TV swooned, Comcast would continue making torrents of cash, and if all went well, in 2014 Comcast could buy out General Electric's 49 percent stake in the Comcast-NBCU joint venture.16
Meanwhile, Comcast needed to slow the development of successful long-form online video-distribution businesses so as to control the timing of the transition to a mostly online video ecosystem and get Americans accustomed to the TV Everywhere authentication model. Comcast and its programming allies had many dials to turn, many ways to make sure independent professional distribution of long-form online video did not thrive. Online video distributors needed Comcast-NBCU: access to its programming, access to its pipes on a predictable basis, and access to its subscribers. Comcast-NBCU neither needed nor wanted competition.
As Steve Burke, Comcast's second-ranked executive, said in May 2011, “What we really bought when we did the deal for NBC Universal was a bunch of very, very well run, very strong cable channels.”17 As we have seen, Comcast can use its ownership of NBC Universal cable channels to protect itself against losses to traditional video-distribution competitors: by bundling and pricing its programming offerings at the wholesale level, Comcast can make these channels more expensive for competing distributors.
Comcast can do even more against new kinds of online video-distribution competitors. Here's Roberts again, speaking to investment analysts two months after the closing of the NBCU merger: “As more and more applications require bandwidth, as the bits per home go up, the bet we're making and the bet you're making, if you own us, is that over the next 10 years, people will want more bits in their house over a wire than ever before. And whether that is called Xbox Live, whether that is Skype, whether that is Netflix, whether that is Comcast, Xfinity, streaming, whether that is some kid in the garage inventing an application that we all wish we'd thought of, Facebook Junior, next Google—I like that position.”18
Comcast's position as pipe provider gives it a bristling armature of techniques for squeezing independent online video aggregation that might increase cord-cutting. It can withhold programming—because the program-access rules that helped the satellite industry take off do not apply online.19 It can prioritize its TV Everywhere programming by calling it a specialized service over which the FCC has said it has no power to require even the weakest common-carriage obligation.20 It will thus make any independent Internet-based video seem jittery, less reliable, and subject to long buffering periods by comparison because the independent video (say, Netflix) will be available only over a “best efforts” Internet connection that the cable company will have every incentive to narrow and, ultimately, refuse to offer. The company's “specialized service” will “feel” just like the Internet and will take up a growing share of the company's digital channels, but will be devoted to the distributor's own Video on Demand services and its partners’ online communities—similar to, say, Facebook. A cable company like Comcast can enhance its own video with innumerable digital add-ons and make independent online video harder to find. And it can simply charge consumers more for watching movies that come from anyone other than Comcast.
The bottom line: policy makers might be thirsty for a new source of competition to discipline accelerating price increases for content coming from the cable companies, but Comcast's interest is in neutralizing the possibility of online competition. Netflix, for its part, has long since been forced into complementarity: given the policy makers’ inability to constrain the pipe owners and all the vertical advantages those pipe owners have, Netflix has never had the ability to compete directly against Comcast in the video realm. The battle ended before the first shot was fired; without sports or broadcasting content, and without a guarantee of fair treatment by the pipe owners, neither Netflix nor any other online video shop will ever provide a full substitute for cable's pay-TV services.
At the time this chapter was drafted, Netflix was the closest thing to a viable online competitor to Comcast's video services. It was moving toward becoming a cable channel; Reuters ran a story in early March 2012 reporting that Netflix was in negotiations with the cable incumbents to be part of their Video on Demand packages.21 If Netflix as an independent over-the- top service has disappeared by the time you read this book, crushed by the forces I have described here and its own missteps, just insert the words “any new online video-distribution company” every time you see the word “Netflix.”
Even in offering complementary services, Netflix's powers are constrained. As a pipe provider, one important lever available to Comcast in its efforts to slow the advent of competitive online video is “usage-based billing” or “consumption billing.” Usage-based billing sounds innocuous enou
gh: charge consumers additional fees if their network usage exceeds a set level. Network operators have often claimed that these overage fees are necessary to allow them to invest in upgrading their networks to handle the high volumes of bits needed for consumers to access the video they love and that they need the flexibility to charge higher fees to heavy users who are congesting their networks. When you dig into the details, however, usage-based billing rates bear little relationship to actual network costs or to solving the problem of congestion. It is purely a way to raise revenues.
Network operators justify usage-based billing by arguing that light users should not be subsidizing heavy users. If your neighbor is paying a hundred dollars a month but streaming high-definition movies every night, and you use the same service just to send e-mail, why should you both have to pay the same rate? It sounds like a simple fairness argument. What's more, the network operators argue, they have to do something since their networks are becoming congested: it is expensive to build networks, the high volume of use of data is clogging the pipes, and no one should expect them to build more networks if they cannot charge the biggest users more.22
While these arguments have a superficial appeal, usage-based pricing is a crude instrument with which to manage traffic congestion. If your hoggish neighbor is streaming those high-definition movies during the day, you probably don't care. The real problem for cable broadband networks, which are shared within neighborhoods (and so subject to “contention,” which means that you are battling with your neighbors for the flow of bits you want, in a context in which the cable distributor has no incentive to invest in better connections to increase the flow of bits), is the traffic during peak usage time, not the total amount of usage.23
Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age Page 21