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

by Susan P. Crawford J. D.

  The government standardizes, regulates, provides tax subsidies, and puts price supports in place every day. By abdicating that task with regard to the utility service of high-speed Internet access, federal agencies have enabled a situation in which a few companies control America's informational destinies and policies.

  Americans must rest their hopes on the generation after mine—people now in their twenties and thirties. My generation, which came of age after the breakup of the New Deal consensus, has succumbed to the idea that markets fix everything and that the government has no business intervening in things like privately provided high-speed Internet access. The very rich among my generation, the people who have the time to be involved in politics, often don't care about public infrastructure; as one of my media-industry interviewees said to me, “I don't know anyone who rides the subway.”

  America needs more people who can calmly and rationally oppose the free-marketeer rhetoric. People who don't have the knee-jerk response that “we tried regulation in the 1996 Telecommunications Act and it didn't work.” People who see the public provision of high-speed Internet as a vital role of the public sector, who are willing to fight for years against vested interests to make it happen. People who can understand this issue and then channel their understanding into useful, long-term political engagement. People who will make this an electoral issue for all public offices.

  The country's current political leaders operate with a sense of constraint. Convinced that they have little freedom to act, they find it increasingly difficult to act at all. Even though a core function of the modern state is to provide certain goods and services that are in the public interest—such as transportation, communication, clean water, sewage systems, and electricity—the complexities of modern-day applications and devices, and the enormous market and political power of both wired and wireless carriers, have been allowed by U.S. policy leaders to create a spectacularly dismal national communications infrastructure.

  American leaders need to insist on the nation's shared interests. They need to have conviction and authority as well as a coherent set of principles and policies. At the moment, the carriers themselves seem to be in charge. Like J. P. Morgan in 1902, they view government as—at best—a peer; at worst, they have no respect for government save as a client for their surveillance and networking systems. Without a strong, sympathetic, authoritative policy, the development of widespread, low-cost, very-high-speed Internet access will not happen. Without it, America will have no free market for new investment in uses of the network. America needs a plan. The incumbents have their plan, and it is working well for them. But it is not working for the rest of the country.

  Without government intervention, there would have been no Internet in the first place. Sen. Al Franken knows this. At a morning meeting with me at his office in September 2010, he sat on a couch looking a little sleepy, and recalled a speech he had recently made. “I was at an FCC meeting in Minneapolis, a public event out there,” he said, where “some folks said, ‘Keep the Internet the Way It Is.’” He laughed briefly. “You want to say, ‘That's what we're doing.’” Franken shook his head. “They'd say, ‘Get the government out of the Internet, it was developed by free enterprise.’” Franken answered himself, with humor, “'No, it wasn't, it was developed by DARPA [Defense Advanced Research Projects Agency, a federal agency].’”

  He went on. “Aside from … having to deal with people who … are just reflexively anti any kind of regulation—even if it's regulation to make sure that the Internet is the way it is and it has been from the very beginning, it's the much much bigger issue of making sure that we have a free and open Internet, free for innovation, free for freedom of speech, it's desperately important to our first amendment rights and to the functioning of a democracy.” I asked him what he thought would happen in the next five years on this issue. He sat up on the couch, bristling with earnestness. “I think they'll write of this period: this was the moment in which the Internet was saved by a few brave souls who had the vision to see what was happening and took tremendous political risks and summoned up an amazing amount of courage to save not just the country but the world as we know it.” And then he laughed, self-mockery taking its turn. “Not to be self-serving.”34

  Since America last tried to regulate the cable industry, in 1992, the world of communications has been transformed. The Internet has taken the place of the telephone as the world's basic, general-purpose, two-way communication medium. All Americans need high-speed Internet access, just as they need clean water, clean air, and electricity. But they have allowed a naive belief in the power and beneficence of the free market to cloud their vision. The enormous private cable distributors—particularly Comcast—on whom the country increasingly depends for high-speed Internet access have a giant conflict of interest. Comcast is a great American success story, but its interests are not necessarily aligned with those of the country as a whole. Their interest is in keeping their profit margins as high as possible by exacting tolls from any independent company or entrepreneur seeking to use their wires, and from bundling and pricing their services so that Americans pay a lot of money for products they're not sure they need. No competitive pressure will force these companies to act otherwise. Traditional wisdom dictated that competition would protect consumers from the cable companies’ abuses and obviate the need for regulation, but things did not work out that way, and now America has the worst of both worlds: no competition and no regulation.

  Incumbents always have an interest in slowing down developments that might disrupt their plans. Comcast has an interest in slowing the advent of fast, cheap, reliable, universal Internet access. The only threat it faces is action by the government to force it to respect the valuable tradition of common carriage. While concerned citizens continue fighting that battle in the courts—which will take time—all Americans can work on another idea that is as old as the electrical cooperative: encouraging towns and municipalities to oversee their own open-access, nondiscriminatory, fast fiber networks. When it comes to bringing high-speed Internet access to all Americans, the country cannot afford to fail.

  NOTES

  Introduction

  1. As of May 2012, Comcast was the largest high-speed Internet access provider in the nation, with nearly 19 million subscribers—a nearly 14 percent gain over the previous two years. The company added nearly half a million new subscribers during the first quarter of 2012, its best quarterly result in four years. The Associated Press, “Subscriber Data from Internet Service Providers,” May 8, 2012. As will be clear from this book, Comcast is rapidly gaining subscribers as telephone companies Verizon and AT&T steadily and steeply lose copper-phone-line customers and cease expanding their fiber installations. With more people using the Internet to access bandwidth-consuming services such as Spotify, Netflix, and Major League Baseball games, copper high-speed Internet access (DSL) does not provide adequate service.

  2. As of June 2011, the Organisation for Economic Co-operation and Development (OECD) ranked America fifteenth among developed nations for wired Internet access adoption.

  3. Governments that have intervened in high-speed Internet markets have seen higher and earlier levels of adoption and lower subscriber charges. Many have required their telecommunications providers to sell access to parts of their network to competitors at regulated rates, so the competition will lead to lower prices. See Berkman Center for Internet and Society, “Next Generation Connectivity: A Review of Broadband Internet Transitions Around the World,” February 2010. Meanwhile, they are working toward, or already have, fiber-optic networks that will be inexpensive, standardized, ubiquitous, and equally fast for uploading and downloading. Many countries, not only developed nations like South Korea, Sweden, and Japan but also less-developed ones such as Portugal and Russia, are already well on their way to wholly replacing their standard telephone connections with state-of-the-art fiber-optic connections that will even further reduce the cost to users, while significantly imp
roving access speeds. See Susan Crawford, “The New Digital Divide,” New York Times, December 7, 2011.

  4. David Folkenfilk, “Comcast to Buy 51 Percent Stake in NBC Universal,” NPR, December 3, 2009, http://www.npr.org/templates/story/story.php?storyId=121046318.

  5. Peter Svensson, “Verizon Winds Down Expensive FiOS Expansion,” USA Today, March 26, 2010, available at http://www.usatoday.com/money/industries/telecom/2010-03-26-verizon-fios_N.htm.

  6. “What if the cable operators are forced to rebuild their networks with fiber to the home? The best answer is perhaps a question. Who would force them to? … With no competitor other than Verizon FiOS (which exists in just 14% of the US) able to offer speeds that are even remotely competitive, there seems little risk that the cable [distributors] would feel compelled to widely upgrade” (Bernstein Research, “U.S. Telecommunications and U.S. Cable & Satellite: Nature Versus Nurture,” May 2012, 139).

  7. Senate Committee of the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights, The Comcast/NBC Universal Merger: What Does the Future Hold for Competition and Consumers? 111th Cong., 2d sess., February 4, 2010, 8–10.

  8. Folkenfilk, “Comcast to Buy 51 Percent Stake in NBC Universal.”

  9. Letter from Al Franken, United States Senator, to Marlene Dortch, Secretary of the Federal Communications Commission, Washington, D.C., June 21, 2010, available at http://apps.fcc.gov/ecfs/document/view?id=7020510670.

  10. David L. Cohen, “Comments on Comcast NBCU Joint Venture Due Today at FCC,” Comcast Voices: A Place for Conversations with Comcast (blog), June 21, 2010, http://blog.comcast.com/2010/06/comments-on-comcast-nbcu-joint-venture-due-today-at-fcc.html.

  11. David L. Cohen, “The Intersection of Politics, Business, and Public Policy,” posted by “SwarthmoreCollegePA,” December 5, 2008, Thomas B. McCabe Lecture at Swarthmore College, http://www.youtube.com/watch?v=oZ2y2hcKHQM, at 18:56.

  12. “Competition in the Media and Entertainment Distribution Market”: Hearing Before the H. Comm. on the Judiciary, 111th Cong. 63 (2010) (Testimony of Jean Prewitt, President and CEO, Independent Film & Television Alliance).

  13. Cecilia Kang, “Landline Rules Frustrate Telecoms,” Washington Post, April 12, 2012, available at http://www.washingtonpost.com/business/economy/landline-rules-frustrate-telecoms/2012/04/12/gIQAG2XvDT_story.html.

  14. Brian Stelter, “With Verizon's $3.6 Billion Spectrum Deal, Cable and Wireless Inch Closer,” New York Times, December 2, 2011, available at http://mediadecoder.blogs.nytimes.com/2011/12/02/with-verizons-3-6-billion-spectrum-deal-cable-and-wireless-inch-closer.

  15. Alex Sherman, “Watching Netflix Could Lead to Higher Cable Bills,” Bloomberg, November 30, 2011, http://www.bloomberg.com/news/2011-11-30/netflix-viewing-seen-swelling-u-s-cable-bills-next-year-tech.html.

  16. “Canada Joins Global Ranking of FTTH Countries,” Fiber to the Home Council press release, February 16, 2012, http://www.ftthcouncil.org/en/newsroom/2012/02/16/canada-joins-global-ranking-of-ftth-countries.

  17. Diffraction Analysis, November 2011, on file with the author.

  18. Brendan Greeley and Alison Fitzgerald, “Pssst … Wanna Buy a Law?” Bloomberg Businessweek, December 1, 2011, http://www.businessweek.com/magazine/pssst-wanna-buy-a-law-12012011.html.

  19. Manuel Roig-Franzia, “Brooksley Born, the Cassandra of the Derivatives Crisis,” Washington Post, May 26, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/05/25/AR2009052502108.html.

  20. U.S. Department of Commerce, Exploring the Digital Nation: Computer and Internet Use at Home (Washington, D.C.: U.S. Department of Commerce, November 2011), available at http://www.ntia.doc.gov/files/ntia/publications/exploring_the_digital_nation_computer_and_internet_use_at_home_11092011.pdf

  21. Josh Barbanel, “Comcast Chairman Digs In,” Wall Street Journal, May 6, 2010, available at http://online.wsj.com/article/SB10001424052748703961104575226831270560658.html.

  22. Josh Barbanel, “Co-op Triple Play for Chief at NBC,” Wall Street Journal, July 6, 2011, http://online.wsj.com/article/SB10001424052702304760604576428363664891984.html.

  23. Bernstein Research, “Comcast: Torrents of Cash,” April 28, 2010.

  24. Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 2008), 208.

  25. Yinka Adegoke, “Malone: DirecTV Would Be ‘Compatible’ with a Telco,” Reuters, November 19, 2009, available at http://www.reuters.com/article/2009/11/20/industry-us-libertymedia-malone-idUSTRE5AJ06K20091120.

  26. Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove, 2001), 56.

  Chapter 1. From Railroad to Telephone

  1. Ron Chernow, Titan: The Life of John D. Rockefeller Sr. (New York: Vintage, 2004), 71.

  2. Charles Perrow, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism (Princeton: Princeton University Press, 2002), 134.

  3. Frank Dobbin, Forging Industrial Policy (Cambridge: Cambridge University Press, 1997), 44–45.

  4. Lewis Henry Hany, A Congressional History of Railways in the United States, 1850–1887, Bulletin of the University of Wisconsin no. 342 (Madison: University of Wisconsin, 1910), 49.

  5. Dobbin, Forging Industrial Policy, 54.

  6. Edward Winslow Martin, Behind the Scenes in Washington (New York: Continental, 1873), 271–74.

  7. Dobbin, Forging Industrial Policy, 58.

  8. Clarence D. Long, “Chapter 1: Introduction,” in Wages and Earnings in the United States, 1860–1890 (Ann Arbor: UMI, 1960), 4, available at http://www.nber.org/chapters/c2495.pdf.

  9. David A. Skeel, Debt's Dominion: A History of Bankruptcy Law in America (Princeton: Princeton University Press, 2001), 51–52.

  10. Peter Tufano, “Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U.S. Railroads in the Nineteenth Century,” Business History Review 71, no. 1 (Spring 1997): 28–29.

  11. William G. Roy and Philip Bonacich, “Interlocking Directorates and Communities of Interest Among American Railroad Companies, 1905,” American Sociological Review 53, no. 3 (June 1988): 368–79.

  12. Louis D. Brandeis, Other People's Money: And How the Bankers Use It (New York: Frederick A. Stokes, 1914), 36.

  13. Chernow, Titan, 136.

  14. Worth Robert Miller, “Farmers and Third-Party Politics in Late Nineteenth Century America,” in The Gilded Age: Essays on the Origins of Modern America, ed. Charles W. Calhoun (Wilmington, Del.: Scholarly Resources, 1996), 235–60.

  15. Dobbin, Forging Industrial Policy, 74.

  16. Paul Teske, Michael Mintrom, and Samuel Best, “Federal Preemption and State Regulation of Transportation and Telecommunications,” Publius 23, no. 4 (Autumn 1993): 73.

  17. Dobbin, Forging industrial Policy, 48.

  18. Robert Rabin, “Federal Regulation in Historical Perspective” Stanford Law Review 38, no. 5 (May 1986): 1189–1326 (see esp. 1199–1202).

  19. William G. Thomas, Lawyering for the Railroad: Business, Law, and Power in the New South (Baton Rouge: Louisiana State University Press, 1999), 84–99; Dobbin, Forging Industrial Policy, 78.

  20. Ripley, Railroads, 452–53.

  21. Teske, Mintrom, and Best, “Federal Preemption,” 26.

  22. Peter George, The Emergence of Industrial America: Strategic Factors in American Economic Growth Since 1870 (Albany: State University of New York Press, 1982), 155.

  23. “Populist Party Platform (1892),” available at http://www.wwnorton.com/college/history/eamerica/media/ch22/resources/documents/populist.htm.

  24. Theodore Roosevelt, Presidential Addresses and State Papers: December 3, 1901 to January 4, 1904, vol. 2 (Whitefish, Mo.: Kessinger, 2006), 556–57.

  25. Rabin, “Federal Regulation in Historical Perspective,” 1227–28.

  26. Sherman Antitrust Act, 15 U.S.C. §§ 1–7 (1890).

  27. Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Mode
rn Finance (New York: Grove, 2001).

  28. Chernow, Titan, 131–33, 226.

  29. Mitchel P. Roth, Crime and Punishment: A History of the Criminal Justice System, 2d ed. (Belmont, Calif.: Wadsworth Cengage Learning, 2010), 199.

  30. Brandeis, Other People's Money, 135–47.

  31. Jerry L. Mashaw, “Federal Administration and Administrative Law in the Gilded Age,” Yale Law Journal 119, no. 7 (May 2010): 1370.

  32. Edmund Morris, Theodore Rex (New York: Random House, 2001), 60.

  33. “Private Divestiture: Antitrust's Latest Problem Child,” Fordham Law Review 41, no. 3. (1973): 581; Carl N. Degler, Out of Our Past: The Forces That Shaped Modern America (New York: Harper and Row, 1984), 272.

  34. Chernow, Titan, 433.

  35. Sherman Antitrust Act, 15 U.S.C. §§ 1–7 (1890).

  36. Morris, Theodore Rex, 91–92.

  37. Chernow, House of Morgan, 106.

  38. Milton Handler, “Industrial Mergers and the Anti-Trust Laws,” Columbia Law Review 32, no. 2 (1932): 184–85.

  39. “1904: A Retrospect,” New York Times, January 8, 1905; Morris, Theodore Rex, 313–16.