Comcast-NBCU forum today in Chicago
NPR story here. Forum will be streamed today starting at 1pm Central here.
My statement:
I often ask people, “Why does Comcast want to do this deal?” The answer I get is not focused on synergies or efficiencies or even shareholder contentment. The answer is that the people with the voting power to steer Comcast into the future want to avoid commoditization of the company’s pipes. Future growth for Comcast, already the country’s leading broadband provider, will come from having the most subscribers to the fastest and most valued pipe. To stay with the pipe metaphor for the moment, Comcast, the country’s leading pay-TV provider providing cable television service to a quarter of all US subscribers, does not want to be operating a dumb pipe that is incapable of monetizing the water that flows through it. Comcast would like, instead, a pipe that is capable of controlling, tiering, and prioritizing online content, just as a cable distributor does. The leadership of the company believes that increased participation in content will delay the day when that pipe is just a pipe.
Comcast, like other cable distributors before it, is already involved in content. The precise legal question before the Commission is whether the addition of NBCU content to the Comcast stable - and, in particular, the addition of NBCU’s leading cable channels - is likely to foreclose competition in such a way that an unconditioned merger is not in the public interest.
What will Comcast be able to do given the addition of NBCU content?
I do not think the answer is black or white. I am concerned that the addition of the NBC content to Comcast’s current dominant distribution operations - and particularly the addition of popular, must-have, continuous, addictive content like live sports, news, and entertainment brands that Comcast can shield from real competition - will give Comcast the incentive and ability to constrain (1) nascent competitive online pay-TV distributors and (2) competition for high-speed Internet access provision to Americans.
I don’t ascribe evil intent to Comcast. The interests of Comcast and the programmers are aligned. Comcast and the programmers are both doing well, people are watching more pay-television than ever and paying incrementally more for it all the time, and keeping the current model in place as we move to an online video world will be good for both Comcast and the programmers. Comcast would like to use NBCU content to continue building a moat - comparative advantages, or barriers to entry - around its distribution business.
But the problem is that this very popular NBCU content, in the hands of Comcast, may allow the building of a moat that no competing online or offline video distribution/Internet access provider will be able to overcome in the short term. (Comcast may choose to allow marginal competition to avoid heightened scrutiny, of course, and the current collaboration between distributors and most programmers is likely to crumble slowly over time if programmers eventually have the courage to bolt.) That may not be good for consumers, for new online industries, or for society as a whole.
In the past, America’s media companies could rely on fixed-cost economies of scale to support their barriers to entry. But Internet businesses are more likely to achieve scale through the benefits of network effects rather than fixed costs. Thus, the Internet is not the friend of the incumbent media companies in America, because it generally lowers the barriers to entry on which they have relied. For this reason, most media companies would like to avoid the growth of over-the-top video distributors.
By virtue of its control over must-have NBCU content, taken in concert with its existing control over 25% of the video distribution market and its standing as the nation’s largest high-speed Internet access provider, Comcast will be able to work with programmers to ensure that the growth of alternative online distribution mechanisms for video is slowed and the emergence of competing high-speed Internet access facilities (that might facilitate the growth of competing online video marketplaces) is blocked.
Here are the logical steps that give rise to my concerns:
A. Comcast’s market power in distribution currently gives Comcast control over programmer behavior and will allow it to protect the leading sports, business, and entertainment brands it gains from this transaction
A1. Cable is a completely local business. The major cable companies do not compete with one another. They have clustered their operations and have strong regional control. Comcast has a greater than 50% market share of cable distribution in the top ten major markets. The markets include Chicago, Philadelphia, San Francisco, Boston, Detroit, Seattle-Tacoma, Miami-Ft. Lauderdale, Denver, Pittsburgh, Baltimore, West Palm Beach, Harrisburg, and Jacksonville. Comcast holds a 45% market share in Washington, DC.
Comcast’s 25% national market share in cable is thus very significant as a local matter - for someone sitting in Chicago (or Ann Arbor), they may be the only choice for wired video/Internet services. Any programmer wanting to reach that quarter of Americans has to go through Comcast.
A2. Because it is so important to programmers to reach that 25% share of the population, Comcast already has the power to exact substantial concessions in terms of (a) equity in channels, (b) agreements not to independently make programming available online (other than through TV Everywhere), (c) most-favored-nation pricing and other discounts that a smaller distributor would not get, and (d) agreements to make programming available only on Comcast’s terms on other platforms (mobile, online, on demand). Comcast also has virtually complete discretion in its the way it decides to distribute programming (tiering, pricing), subject only to program carriage rules that have been extremely difficult and costly to enforce by claimants. Because Comcast and Time Warner collaborate on TV Everywhere, programmers who refuse to play will be denied distribution to an even higher percentage of the population - 37%.
A3. The programmers’ interests are aligned with those of Comcast because of the tens of billions of dollars that Comcast pays out for programming - particularly for the broadcasters, retransmission consent fees are essential. For them, alienating Comcast by (for example) going it alone online will likely lead to reprisals, so it is in their interest to strike the best deals they can with Comcast and not break ranks.
A4. The new entity will control NBC News, MSNBC, CNBC, Telemundo, the Weather Channel, and regional news channels. Comcast will have the ability to combine all of these operations into one must-have news channel that will be the category-killer. CNBC is already said to be the second-most lucrative channel that NBC controls, with an operating profit of between $300 and $400 million and a market share north of 85%. It is clearly in Comcast’s interest to protect CNBC from competition and make it grow; it is also clearly in Comcast’s interest to suppress the success of other business analysis channels. Comcast can use its control over its dominant distribution network to do so, making CNBC even more desirable by making it more difficult for competing business channels to be as widely-distributed as CNBC. Other business channels will be unable to attract the advertising or sponsorship that CNBC has, and CNBC will become even more dominant in the market for continuous business content.
A5. Similarly, Comcast will be able to meld NBC Sports, Comcast regional sports network, and Versus content and then use its tiering and pricing power to shield the resulting sports programming from competition. ESPN’s market power is enormous and Comcast will likely have to continue to carry ESPN, but it will be able to pay less for ESPN than other distributors do because of its countervailing strength made possible by addition of the NBCU content (thus, again, raising its rivals’ costs). Other channels will not be distributed as widely as Comcast content. USA Network, the nation’s leading entertainment channel, will be protected by Comcast from competition as well.
B. Comcast’s current relationships with programmers, enhanced by its pricing and bundling control over key NBCU cable channels and online properties, may allow it to raise the costs of its online and offline distribution rivals
B1. Online. Comcast’s ability to require programmers to eschew independent online distribution as a condition of carriage by Comcast, heightened by its control over NBCU content, will allow it to stave off competition from online aggregators of long-form, professional content. Without certain access to programming from brand-name sources (including, potentially, Hulu.com content), online distribution competitors will not be able to attract investment, advertising, sponsorship, and subscriptions at a scale that will allow them to constrain Comcast’s pricing power.
B2. Comcast rightly perceives online video distribution to be a potential substitute for its cable television business. Cord-cutting is growing quickly, with 800,000 Americans having already abandoned their cable subscription. At least 1.6 million Americans will do so by 2011. In 2001, when asked to choose between giving up their Internet connection and giving up television, 72% of Americans said they would give up the Internet connection and just 26% said they would give up television. Now, just 48% say they would give up the Internet and 49% say they would give up television. Comcast cannot block the eventual emergence of online video distribution as a substitute for the brand-name programming cable distribution they directly or indirectly control, but they can slow it down.
B3. Comcast’s tie between its TV Everywhere service (branded “Fancast”) and its cable subscription service is a crucial tool that will allow Comcast to make it uneconomical for online video distributors to emerge. Putting NBCU content behind the TV Everywhere authentication wall for distribution online will make the network effects of TV Everywhere even greater. No programmer will want to be left out. Additionally, Comcast will have more credibility when persuading/threatening programmers to put their programming behind the TV Everywhere authentication wall because it will be playing more credibly on both sides of retransmission consent negotiations with the addition of NBCU content. Comcast’s ability to tie “free” TV Everywhere access to subscription to Comcast’s cable services effectively prices competing online aggregation services at zero. People who already pay for Comcast or Time Warner cable (and, thus, “free” access to the TV Everywhere universe online) will have no interest in paying for a rival online distribution package.
B4. Wearing its distribution hat, Comcast (in collaboration with Time Warner) can use its payments to programmers to persuade them not to bolt from the cable-distribution model by making content available online outside the TV Everywhere channel. With the addition of NBCU programming, Comcast (now wearing both its distribution and programming hats) will work with its collaborators in the programming and cable giant world to ensure that everyone gets the payments they desire. As Steve Burke said during the April 2010 earnings call: “I also think without getting into in great specificity, we’ve all read and seen a lot of transactions involving retransmission consent in the last six months, and there is real I think understanding that there is cash being paid and value being created and we hope to play a constructive role in finding a way that that can happen over the industry, and over at least our share of Comcast and not be super disruptive.” The emergence of online distributors of must-have content not tied to Comcast or Time Warner is inherently disruptive of both the programming and cable distribution models: if over-the-top video distribution succeeds, Comcast will lose its cable subscribers and will become just a pipe; programmers will lose their guaranteed and ever-increasing payments from Comcast. Both industry segments lose if over-the-top video succeeds; both win if they can act together to slow its progress.
B5. Again, this use of comparative advantages is not necessarily wrong. Indeed, it is understandable. Many people are employed by the content conglomerates and by the cable industry. Comcast and the programmers have built up an extremely successful, profitable, and desirable pay-TV system that brings high-value programming to consumers for dollars a day. It is in their interest to migrate this model online intact. The question is whether the rents that Comcast and the programmers are able to extract from consumers would be attractive to competing, independent online distributors. If so, will the addition of NBCU content to the Comcast lineup make it easier to foreclose competition from those online distributors? The answer is likely “Yes.” In turn, the absence of healthy online video distributors may also suppress the development of “native” online video generally.
B6. Offline. Comcast’s ability to control bundling and pricing of must-have, continuous sports, news, and entertainment programming enhanced by the NBCU content will raise its offline distribution rivals’ costs. Comcast will be able to charge itself whatever it likes and then claim that this “market” price should be borne by competing satellite, telco, and cable companies. It will be able to bundle must-have regional sports content with marquee NBC Sports events - including those parts of Olympics and NFL events that Comcast chooses not to broadcast over-the-air - with other channels that its competitors do not want to carry. More of Comcast’s programming will become must-have because it will include CNBC, USA, and Versus tie-ins that are category-killers. For example, Comcast’s ability to bundle CNBC, the Goliath of news reporting, with other channels for distribution to competing online pay-TV distributors will raise those distributors’ rates and may make it impossible for them to carry this programming. There is ample testimony in the record about Comcast’s pricing and bundling strategies, and Comcast’s power will be enhanced by virtue of the addition of NBCU content.
C. High-speed Internet access prices paid by Americans may get higher
C1. As the Commission is well aware, the market for the provision of high-speed Internet access today is characterized by a lack of competition, high entry barriers, and high end-user switching costs. Most people in America are confronted by, at best, a duopoly: high-speed access is provided only by either the incumbent wireline telephone carrier or the incumbent cable company. Mobile data services are not substitutable at this point. The Department of Commerce and the Department of Justice have agreed that consumers often have no choice among high-speed Internet access providers. Switching costs in this market are very high, and include heterogeneous equipment, long-term contracts, and bundling of voice services with video. Although deployment is getting cheaper, consumer prices for high-speed access are already going up - and more so in markets where there is only one provider of high-speed Internet access.
C2. This duopoly may be shrinking into a monopoly: as the Commission noted in the National Broadband Plan, approximately 75% of U.S. consumers soon “will likely have only one service provider (cable companies with DOCSIS 3.0-enabled infrastructure) that can offer very high peak download speeds” that are necessary for video.
C3. As Brian Roberts told analysis in an April 2010 earnings call, Comcast has already “reached nearly 80% of our footprint with DOCSIS 3.0, reinforcing our leadership position in broadband.” It is a leadership position because DSL cannot compete on speed and Verizon’s FiOS will not be widespread enough to offer a viable alternative to Comcast’s services. Comcast has already incurred the capital expenditure necessary to achieve this leadership position: “With approximately 80% of our footprint now Wideband enabled, we have substantially completed our Wideband project,” Comcast said on the same April 2010 earnings call. Comcast cannot claim that regulatory limits will constrain its future investment, because it asserts that it has already made its investment.
C4. Comcast knows it is securely in the lead, according to COO Steve Burke: “I think, one of the real striking stories to me is that after – over a decade in the high-speed data business that our growth is accelerating, and businesses normally don’t do that, they reach a maturity level and your net adds slowdown, and that’s what was happening with the high-speed data business until about a year ago. And then we and other cable companies frankly have started to reaccelerate our net adds, and I think in each of the last two our net adds for Comcast alone were as much as the entire big RBOC footprint combined. And we asked ourselves what’s going on there. I think, there is a bunch of different things. The most important one for me is that the need for very, very large broadband capacity which is probably related to video consumption on the internet, but also related to gaming and other things. Seems to continue to grow steadily and we made our investment in DOCSIS 3.0 and really making sure that in the majority of the country, something like 75% of the country, our speed is just so significantly superior to DSL that that really shifts the competitive balance. ”
C5. Comcast believes that it has already made the investments that will be needed for years and years to come. According to Brian Roberts: “We’ve said . . . the vast majority of our footprint is going to be all-digital by the end of this year. So that’s only seven or eight months from now. Once you go all-digital, you free up a lot of capacity and there is no question in our minds that we have plenty of capacity to continue to increase broadband speeds in advance, as we have been doing, in advance of the applications that are there for them. We have so much capacity right now, we’re actually looking for bandwidth intensive uses like 3D video and high-def video and other things and trying to do whatever we can to stimulate that market. So, I think if weren’t making that digital conversion at some point, and it would still be a number of years off. You’d say well where we’re going to get more capacity, but once you make that conversion [seven or eight months from now], I think we’re going to have plenty of capacity for years and years to come.”
C6. Comcast’s capital expenditures are already down to about 10% of its revenues, and Comcast expects that they will continue to diminish. The ratio of capex to revenues is set to be much lower than in previous years. (Capex should also be down because cable operators may now lawfully provide remote DVRs - which had accounted for 10-15% of all capex in recent years.)
C7. Comcast has pricing power in its markets. Right now, the company is informing many customers across America that prices will soon be going up for the second time in less than a year. They are telling reporters that the rate hikes are necessary to help counter “new technology, new features, additional programming, higher broadband speeds and improved customer service.” According to DSL Reports, the price increases mean that Comcast bills will go up an average of 3.5% in many markets as of August 1. Prices already went up in March 2010, and Comcast’s total revenue per video customer increased 6.3% as compared to 2009 - to an average $123 per month in the first quarter of 2010. Comcast believes that it has been able to charge such high prices because consumers are taking both cable and broadband services. TV Everywhere will keep this model in place.
C8. Comcast has pricing power over urban, hard-hit areas of this country. Comcast representatives said in April 2010 that the rate increases were not leading to customer defections and that the trends were no different in Detroit, Chicago, Philadelphia, Atlanta, and Boston than in any other area of the country. A July 2010 Bernstein report suggested somewhat facetiously that voice and data connectedness now ranks third in the hierarchy of human needs, behind only food and shelter, and about equal with human intimacy needs. For the poorest among us, ever-rising communications bills are taking a greater portion of whatever monthly paycheck is available.
C9. Comcast’s tying of its TV Everywhere product - enhanced by NBCU content - with its cable service subscription will make the pay-TV/broadband offerings of competing distributors unattractive. Comcast will either make TV Everywhere unavailable to “cut the cord” subscribers of other cable/telco companies or will charge the competing ISP a hefty license fee for access by its subscribers (the ESPN360 model). In either case, competing broadband offerings will be less valuable to subscribers. The absence of healthy over-the-top video distribution competitors will make it difficult for “naked” broadband providers to make their offerings competitive. Given this, companies who might otherwise invest in broadband infrastructure and compete head-to-head with Comcast will avoid doing so, because they will have to enter at both levels (buying Comcast programming at a high premium and building or collaborating vis-a-vis infrastructure) in order to offer an attractive package to consumers.
C10. In sum, the addition of NBCU content will allow Comcast to ensure that other infrastructure providers’ costs are sufficiently raised that, as the National Broadband Plan predicted, they will not be able to compete with Comcast in the provision of high-speed Internet access. If Comcast can deny or over-price content to competing infrastructure providers, these offline competing distributors will not be able to compete with adequate video packages. Comcast will be able to induce substitution away from fiber/DSL connections offered by telcos or cable overbuilders. As a result, these facilities-based distributors will not have the economics in place that will, in their view, justify increased investment in truly high-speed Internet access. Absent this foreclosure of video content, cable overbuilders or telcos allied with satellite companies could enter the market and constrain the price of high-speed Internet access. The addition of NBCU content will allow Comcast to maintain and enhance its pricing power over US consumers with respect to high-speed Internet access, using the steady incremental price hikes
that have characterized cable services for many years.
D. In general, addition of the NBCU content may allow Comcast to raise barriers to entry that amount to foreclosure
D1. There is nothing wrong with exploiting a competitive advantage. Barriers to entry are required to generate superior returns. Without barriers to entry, and in the presence of good financial returns, others will enter. The process of entry will drive down prices, bringing everyone’s returns back to earth. The existence of barriers of entry means that incumbent firms are able to do what potential rivals cannot. The problem with the barriers to entry made possible by the NBCU content is that they may make competitive entry almost impossible - or, in other words, foreclose competitive entry.
D2. Comcast has a strong incentive to impair competition from over-the-top video aggregators through exclusionary conduct that will be enhanced by the proposed transaction. Comcast also has a strong incentive to impair competition from competitive facilities-based communications providers through exclusionary conduct that will be enhanced by the proposed transaction.
D3. Comcast has the competitive advantage of scale. Economies of scale come from having high fixed costs. Larger players can spread fixed costs over greater volumes and operate more profitably than competitors. Here, Comcast’s sunk capital improvements and ability to control programming costs - particularly for sports and news programming over which it will gain access through this transaction - over the largest group of subscribers of any provider constitute scale advantages that are substantial.
D4. Comcast has the competitive advantage of customer captivity. Habit, addiction, and longterm contracts keep customers paying for continuous programming, particularly in the live sports and news context. This content may be “must-have” in ways that are deeply addictive and unavoidable. Where content is continuous, like sports, business news, and entertainment analysis, fixed costs are high and customer captivity is greater. Such programming is embedded in peoples’ lives. Switching costs are high, bundles are heterogeneous and so difficult to compare across competitors, and the search costs of finding a substitute for (e.g.) CNBC is high.
D5. Comcast has the competitive advantage of a cost structure that cannot be duplicated by its rivals. It has or will have rights to sports and news content that cannot be duplicated and the ability to enhance the popularity of that content through control over access to its own distribution channel. It has control over franchises that cannot be duplicated, and the advantage of clusters worked out over the last few years. RCN’s experience in Philadelphia is illustrative - there, Comcast had the competitive advantage of relationships with franchisors and contractors that made it impossible for an overbuilder to emerge.
D6. These competitive advantages are even more sustainable when they act together. Scale and customer captivity, in particular, make for a mutually-reinforcing barrier to entry that may be unassailable. In general, Comcast operates with enormously high barriers to entry that will be enhanced by the addition of NBCU content: continuous, addictive, live content; physical packaging/bundling; local retail operations; and large scale in its provision of high-speed Internet access. As Comcast said in April 2010: “We are constantly evaluating our cost structure to gain more efficiencies, and as a result, we continue to extract scale benefits in our voice and high-speed internet businesses.”
D7. In the past, America’s media companies could rely on fixed-cost economies of scale to support their barriers to entry. But Internet businesses are more likely to achieve scale through the benefits of network effects rather than fixed costs. Thus, the Internet is not the friend of the incumbent media companies in America, because it generally lowers the barriers to entry on which they have relied. For this reason, media companies would like to avoid the growth of independent over-the-top video distributors. By virtue of its control over must-have NBCU content, taken in concert with its existing control over 25% of the video distribution market and its standing as the nation’s largest high-speed Internet access provider, Comcast will be able to work with programmers to ensure that the growth of alternative online distribution mechanisms for video is slowed and the emergence of competing high-speed Internet access facilities is blocked.
E. Rules will need to be set in advance that are enforceable
E1. The Commission should work with DOJ to create merger conditions that will be enforced. Behavior, not ownership, is the crucial problem in this context. Because Comcast will be one of very few (perhaps no more than two or three) ways to ship large quantities of bits in America, Comcast should not be allowed to discriminate in favor of its own business plan or affiliated content.
E2. Network neutrality conditions should be put in place that do not allow for discrimination by Comcast in favor of particular content or applications. “Managed services” should either be eliminated or defined as narrowly as possible so as not to include video aggregation services.
E3. The current program-carriage regime should be overhauled. Independent programmers’ material should continue to be carried during the pendency of program-carriage complaint processes if it is already being carried. Baseball-style arbitration should take the place of the current complaint process. Comcast demands for equity in independent channels should be generally outlawed. Comcast should not be allowed to condition carriage in any way on extra-carriage agreements, including but not limited to any agreement not to post content online.
E4. Comcast should not be allowed to tie access to online content to purchase of a Comcast cable video subscription. Program access rules should be overhauled and applied equally to online as well as offline distributors, across all distribution media. Comcast should be required to unbundle channels for access by competing distributors, online and off, at the wholesale level. A key and difficult element of this remedy will be to set prices for content at a level that is realistic and avoids Comcast’s ability to charge itself a high price that then must be absorbed by its competitors. Hal Singer has suggested that the wholesale price for a given channel be reflected in an amount that a consumer can be refunded for that channel’s place in a retail bundle should the consumer elect not to buy the channel when buying the bundle.
E5. The Commission should continue with its work on set-top boxes, and require Comcast to work with it in facilitating the creation of open interfaces that will allow access to pay-TV content by subscribers using any device, any combination of communication modalities (Internet, subscription TV, wireless telephone), and any layering of functionalities. Consumers should be able to use and comment on pay-TV content, once they have paid for access to it, as part of applications that companies other than Comcast or the programmers have developed.
E6. Experience with prior mergers for which FCC exacted conditions demonstrates that DOJ should be involved in enforcement. Examples include failures to enforce fiber commitments in SBC-Pacific Telesis, SBC-SNET, and NYNEX-Bell Atlantic; competition commitments in SBC-Ameritech, Bell Atlantic-GTE (Verizon; and promised cost savings in AT&T-BellSouth.
Thank you for the opportunity to testify today, and I look forward to your questions.
Susan Crawford
Professor, Cardozo Law School
Visiting Research Collaborator, Center for Information Technology Policy, Princeton University
Canaries in coal mines
Several canaries in several coal mines:
1. In a filing in the FCC’s net neutrality proceeding, Netflix notes the “growing concern that [cable companies] will use their control over programming networks to stifle competition, including the growing competition from online video providers like Neflix” and urges the Commission to take a broad view of discrimination:
There is substantial discrimination and consumer harm if a network operator uses its ownership affiliation with a program content provider, or even its bulk buying leverage with a video content provider, to deny attractive programming to a competing online service.
2. After today, “The Daily Show” and “The Colbert Report” (owned by Viacom) will no longer be available via Hulu.com, which is 1/3 owned by NBCU. Six companies (Disney, TW, News Corp., Viacom, CBS, and NBCU) control more than 80% of viewing hours in the US. These companies have the power to yank all must-see video from online sites and put it behind pay walls.
3. Comcast’s 2009 10-K (available here via Businessweek) notes at p.69 that about 57% of the company’s cable services revenue comes from video content (including regional sports networks), compared to about 23% from high-speed Internet access - and just about 4% for advertising.
4. According to Broadcasting & Cable (here), if the deal goes forward as planned Comcast’s advertising revenue will jump to 23% of its overall take. Comcast is very excited about the possibilities for cross-platform advertising - its ability to provide a one-stop shopping place for advertisers who want to reach, say, all affluent women in their 40s who redecorate their homes.
5. As Steve Burke of Comcast said at a recent conference, “Now more than ever, content and distribution put together can really change everything as long as you’re willing to lean forward.” He’s talking about the possibilities of addressable advertising. (Recent post about this here.) Indeed, he suggested at the same conference that the NBCU merger was “a bet that the advertising business wil remain robust.”
6. If any of the six content giants combine with any of the four major network providers, the resulting vertically-integrated monoliths won’t be interested in supporting online video that isn’t behind a pay-TV wall. (See the scrap over the Olympics and Sen. Kohl’s questioning.) Why?
Maybe these are two reasons: First, the advertising possibilities are so much greater if the resulting monolith can target ads based on everything they know about the user. Demographic information based on network-provider information, video viewing information, response to ads - all of this added together makes for a powerful targeting arsenal that will be attractive to advertisers.
Second, moving the cable model online (moving sports and other must-have programming behind online pay walls and tying access to this online content to a cable subscription) makes it more difficult for regulators to bust up exclusive deals, potentially avoids regulatory schemes to which traditional cable systems are subject (like must-carry, retransmission consent, program access, and program carriage), makes it easier to destroy local cable competition, makes it easier to discriminate less visibly, and is generally extremely difficult to unwind once it starts happening.
This isn’t good for independent programmers. Nor is it likely to be good for the American consumer.
Comcast sells a lot of expensive video services (including those all-important sports channels) to Americans. How about this performance in a recessionary time:
Our average monthly total revenue per video customer increased to approximately $118 in 2009 from approximately $111 in 2008 and approximately $102 in 2007.
That’s a lot. Will the merger bring these figures down?
IPSC 2
Don’t worry, I won’t blog all 99 talks. But this is the first plenary session so I thought I’d note what’s going on.
Chris Cotropia is up next, talking about the early filing doctrine in patent law. He’s saying that filing early amplifies the patent system’s problems. It creates more applications that are more underdeveloped (so hazy boundaries for patentability) and encourages “patent troll” activity - it may be more valuable to litigate than commercialize the right. So there should be a “reduction to practice” requirement. You’d have to have real implementation information in order to file. This would push the filing date later. It would be costly, true. Maybe we should also require more implementation information before renewal too.
Question: What about the value of ideas that never get commercialized? Do we benefit from being able to separate out invention (by tagging it with a patent) and buy it (even if not commercialized)? Good question!
Wendy Gordon is next. She’s working on gifts, and trying to organize the literature there. Thesis: for three kinds of intangible products, “gift” should be the the starting point for analysis. First, “high culture,” second, pure science, three, software programming. She’s including these (inexhaustible, imperfectly handled by markets) things because people inside these fields talk about gift relations all the time - desire to share, taking pleasure in the sharing of others. Second, these fields are areas where “doing the work” is the thing, not making money. Making a contribution by doing something wonderful. In these areas, direct payments can work harm for creativity. It can make a huge difference how rewards come in - if they come in in a way that feels like gift (non-tit-for-tat), artists have sense of community and a creative spark. Indeed, if things are commercially successful, the community may look down on it. The big problem with gift is reciprocity, the pressure to pay back. We need some of that (not to mention the wherewithal to eat). She’s interested in a model of soft reciprocity.
Jeanne Schroeder has written that gift is hierarchy/reciprocity and contract isn’t. But intangibles allow you to give and take simultaneously, because they’re inexhaustible. And through attribution and memory people will know about it. Should we eliminate patent and copyright and makes things compulsory gift? No, eliminating these things doesn’t fit the gift model. Whole point of the perfect gift is that it encourages soft reciprocity and voluntariness and longterm returns, and GPL has accomplished that. So she thinks a gift model is a useful place to start for these intangibles. A good place for a gift economy.
Question: what about the fact that gifts are usually personal? How does term “gift” work for commercial context? Answer: I’m just trying to create a context for creativity, and recognizing people as people; also trying to organize thinking and research agendas. Does this scale? Yes, just do it through recognition. If you’re in a truly commercial realm, then you’ll have gift failure. Question: what work does “gift” for you? What about community and sharing? Doesn’t “gift” assume that you have something in the first place?
Frank Pasquale is now up to talk about reputation regulation - he wants to “think about intermediaries from a broader policy perspective.” He thinks social interests of users aren’t being addressed. What if GoogleBooks starts charging? or Google manually chages ratings, or eliminates sites from its index? Should Google have to disclose what it’s up to? Should eBay be able to favor certain sellers legally? Should Facebook be able to kick members off without due process? Should Google be required to make AdSense data portable? Right now, the debate is between free market abolutism on the one hand and expanding the common law on the other - terms of use, antitrust, business torts. Maybe these things are natural monopolies!
These are very concentrated markets, Frank says. Lots of barriers to entry have been erected. It’s hard to compete. Litigation won’t have a broad enough effect, and the courts are clueless. Wants to apply stuff from the net neutrality movement to intermediaries. Wants to regulate intermediaries to the extent competition is unlikely to develop, and particularly auction platforms and portability for social networks; these things are becoming carriers (as an analogy). We’re all worried about NN, Frank says, because of worries about other layers. He is analogizing all the NN arguments to the intermediary level.
Wants no tiering for GoogleBooSearch, transparency, and a level commercial playing field. If we allow Google to get books together, they shouldn’t be allowed to make special deals.
Google, after all, Frank says, calls itself a neutral conduit. So it should have the same responsibilities. Points out that intermediaries don’t have absolute immunities. He thinks they’ll ask for immunity from lawsuits just like the carriers did.
So - Google shouldn’t be allowed to do any stealth marketing or denying access to copyrighted works once they are indexed. Google’s going to make the same arguments as the carriers are - we need to knock all those down, says Frank. He really wants to treat intermediaries as carriers.
FCC and Comcast
We don’t have a draft order to read, as far as I know. (Back-story here; Martin is suggesting that he will persuade two other Commissioners to say that Comcast violated the we-thought-unenforceable 2005 Principles.)
Blair Levin and Rebecca Arbogast suggest that the order will say something about inadequate/misleading information provided to Comcast customers (FTC-like); something about Comcast having the burden of showing that its practices were reasonable; and something about Comcast having failed to meet that burden. They’re also saying that the order won’t deal with the larger questions of prioritization that started the whole NN battle some time ago.
Litigation over the FCC’s jurisdiction to do whatever it does is certain.
Richard Bennett says that
The cable companies have a better feel for the tactical side of the question than the telcos do at the moment, as they’re the ones who’ve been taking the heat. Letting the FCC sanction Comcast will only embolden the neutrality mob, and they’ll damn sure push on to Congress regardless of the outcome in the FCC. So it’s like letting Hitler take Poland - they’re not going to be satisfied ever, so the only way to beat them is to win every battle and kill off their movement.
I’d like to see what the order says. I’m feeling cautious. My core intuition is that regulatory tinkering is insufficient to deal with the problem created by the re-definition of “information services” by incumbents, courts, and regulators. This is a fundamental problem, this move away from the nondiscrimination principles that shaped communications policy for general-purpose networks for so many years.
In the meantime, though, I’m glad so many people in this country are talking about communications policy. That can only help our new president to exercise real leadership once he has it.
==update - wanted to add Rob Topolski’s comment on the Times blog post - here. He’s the guy who started off the Comcast story.
Bit caps, consolidation, and Clearwire
The news that Comcast, Time Warner, and AT&T are all considering capping use of their networks - so that “overuse” would trigger a charge - has prompted intense discussion of just why these network operators are moving in this direction. One camp suggests that these operators have to do *something* to manage congestion, and because any protocol-specific discrimination plan raises howls of protest from the Net Neutrality side of the fence adopting bit-usage discrimination schemes is inevitable. It’s the least-bad approach, following this view.
The Net Neutrality side, for its part, points out that (1) each of us will fall into the 5% of “over-users” at some point or another, (2) the operators want to make sure that they remain the chief sources of video content, rather than allowing internet access to video undermine their business plans, and (3) it seems odd to manage to scarcity rather than invest in improved access for everyone. It’s as if the operators would prefer to keep internet access expectations at 2003 levels. And if you really wanted to manage congestion you’d charge differently for usage at different times. (Meanwhile, Korea.)
People in countries with experience in volume limits (e.g., Australia) tell us that it’s miserable having fixed caps and overage charges. In Japan, they began with expensive metered access and left it as soon as they could move towards an unbundled/separated regime - now costs are low (and flat) and speeds are very high.
Bit caps are portrayed as similar to familiar cellphone models - getting a “bucket of minutes” for a fixed price. But the history of internet usage hasn’t proceeded that way, and it should be hard to force users into these plans. Should be - but may not be, both because users here in the US don’t expect to be able to access enormous amounts of video online at high speeds, and because users don’t have a lot of choices for network provision. If most of the big ones move in the bit-cap direction there will be few opportunities for users to vote with their subscription fees and escape.
Speaking of “most of the big ones,” the big ones may get bigger. Verizon’s purchase of Alltel will mean that two companies - AT&T and Verizon - will “control 150 million of the 260 million wireless customers in the US.” (From Public Knowledge.) Verizon will have 80 million of those customers alone. All around the world, wireless providers are consolidating as they seek to “become national players in next-generation mobile networks.”
So here we are: a retrograde move towards metered pricing, increased consolidation, and no necessary link between any of this activity and better internet access for everyone.
The Sprint/Clearwire transaction seems like a possible work-around (thanks to those of you who sent me the filing from last week - I still can’t link to it but I will when it’s available). Their claim is that they’ll create “a new nationwide advanced wireless broadband network that will increase competition across the country and vault the US into a leadership position in the broadband innovation and deployment.” They’re planning to provide speeds that are five times as fast as current wireless speeds, as they roll out the “world’s first nationwide WiMAX network.” (It’s always good to appeal to our national pride.) They’re planning to allow wholesale access - although perhaps only by the cable investors in the plan, Comcast and Time Warner. (There’s a vague mention of other unaffiliated firms, but no assertion that just anyone will be allowed to re-sell their network.) Now, they’re not giving up on “reasonable network management” or “no devices that harm our network.” But they’re asserting that wireless access is the future, that it’s the fastest-growing segment of the US telecom industry, and that a new competitor is needed.
There are worries - will the $3.2 billion from the investors be enough to make a nationwide network possible? Will the technology actually work - penetrate walls, go through anything? What about backhaul problems? Backhaul may be the big unexplored issue here - without a line taking all of those WiMAX communications somewhere, they won’t succeed, and those lines are controlled by incumbents who don’t have any incentive to charge market prices. Because there isn’t a market.
So that’s today’s picture. Head-scratching about bit caps, intense consolidation, and the glimmer of a possibility that a “third pipe” might emerge. It all ties together, because without the cooperation of the incumbent network operators (the people who feel bold enough, market-powerful enough, to float metered pricing), the third pipe may not have a realistic chance of succeeding.
Meanwhile, the rest of the world watches US wireless policy closely.
Skype, M2Z, and termination fees
All being discussed at the FCC June 12 meeting, according to this report.
Here’s what may happen: the Skype petition will be denied, more spectrum may be suggested for auction (on the condition that some of it be made available for free wireless use - relates to the M2Z plan that was rejected by the Commission), and a quiet deal between the FCC and wireless carriers on early termination fees may be struck.
Meanwhile, I’ve been spending time working on whether Clayton Act amendments would solve net neutrality issues. At this point, I’m not confident this approach makes sense. The current proposed bill, H.R. 5994, would allow for discrimination (as long as the discrimination was equal) by network operators, and is subject to substantial exceptions (including permitting measures by network operators that are designed to “prevent a violation of a Federal or State law” or to “manage the functioning of its network”).
More importantly, case-by-case antitrust-like remedies don’t fit the network problems that the neutrality movement has identified. By the time we’ve managed to fight through the facts of a particular issue, the real battle - the battle for attention and user expectations - will have been lost. More on this next week.
CFP08
The Yale Information Society Project recently posted its 9.5 Theses for Technology Policy in the Next Administration:
1. Privacy. Protect human dignity, autonomy, and privacy by providing individuals with control over the collection, use, and distribution of their personal information and medical information.
2. Access. Promote high-speed Internet access and increased connectivity for all, through both government and private initiatives, to reduce the digital divide.
3. Network Neutrality. Legislate against unreasonable discrimination by network providers against particular applications or content to maintain the Internet’s role in fostering innovation, economic growth, and democratic communication.
4. Transparency. Preserve accountability and oversight of government functions by strengthening freedom of information and improving electronic access to government deliberations and materials.
5. Innovation. Restore balance to intellectual property rules and explore alternative incentives to better promote innovation, freedom, access to knowledge, and human development.
6. Democracy. Empower individuals to fully participate in government and politics by making electronic voting consistent, reliable, and secure with voter-verifiable paper trails.
7. Education. Expand effective exceptions and limitations to intellectual property for education to ensure that teachers and students have access to innovative digital teaching techniques and educational resources.
8. Culture. Ensure that law and technology promote a free, vibrant and democratic culture, fair exchanges between different cultures, and individual rights to create and participate in culture.
9. Diversity. Limit media concentration and expand media ownership to ensure a diverse marketplace of ideas.
9.5 Openness. Support innovation and fair competition by stimulating openness in software, technological standards, Internet governance, and content licensing.
As Michael Zimmer says, the idea was to post some “guiding principles from which specific tactics can be formulated.” And to get people talking in advance of CFP2008, which will be held May 20-23 in New Haven, Conn.
The rock star, the Christian Coalition, and NN
Yesterday’s House Judiciary hearing (witness statements and archived video here) had a deeply political angle - what committee should have jurisdiction over network neutrality issues - but also revealed to me that:
We’re seeing the moment when Hollywood, law enforcement, and the network access providers publicly attempt to join hands in favor of monitored/monetized network access.
I loved meeting Damian Kulash and hearing him testify. His opposite number (for purposes of the hearing) was the president of the Songwriters Guild, Rick Carnes. Carnes was there to talk about piracy, p2p file-trading destroying his industry. Here’s the angle, from Carnes’s point of view: isn’t it true mandating neutral internet access won’t allow network access providers to watch for copyrighted files?
And then there was the “but what about pornography” line of questioning. Although the Christian Coalition representative, Michele Combs, was there to testify about the importance of neutral network access for speech of all kinds (and it was great to see the alliance with the ACLU), the direction of questioning seemed to be: isn’t it true that mandating neutral internet access won’t allow network access providers to watch for nasty files of various kinds?
There are many responses to both of these points.
Copyright infringement is a judgment call, not something that can be figured out automatically at the network level;
screening for infringing files will make the last mile grind to a halt;
network access providers will lose their immunity from copyright claims if they search for these files;
given the concentrated market for internet access, the idea of screening for (and filtering out) particular content creates the opportunity for a great deal of anticompetitive mischief;
content-layer applications are a far better place for this kind of screening - they know what artists they have licenses with, and they can actually respond to notices under the DMCA structure.
On the indecency etc. front, same kinds of arguments:
there’s a dramatic risk of overblocking, threatening innocent speech;
it’s impossible to tell in advance which packet bears the “wrong” kind of flesh tones;
screening will cause the last mile to grind to a halt;
network access providers already cooperate with law enforcement;
we should go after behavior, not tech mandates that will burden all uses of the network;
etc.
But it’s a concerted theme. Avoid network neutrality by summoning up all the evils that it will loose upon the world. Never mind that law still applies online, and that the idea of neutral access is not predicated on facilitating unlawful activity; never mind the costs to all users of creating a carefully (and invisibly) filtered access regime; never mind the outright impossibility of the task - just do it.
It seems to me that it is not in the long-run interests of network access providers to be too closely tied to any particular content industry representative, or set of representatives, given the dramatic change in liability risk that such a partnership represents; it also seems to me that it is not in the long-run interests of law enforcement to push users towards a dramatic uptick in the use of encryption technologies; and it seems clear that it is in no one’s interest to establish a kind of private police force in this highly-concentrated market for highspeed internet access. Mischief, unaccountability, arbitrariness, censorship for commercial reasons - why would we want this?
I had my picture taken with the guys from OK Go. It was an interesting hearing. I’m hoping that these various industries discover their differing interests soon.
Call for proposals for CFP - ten days to go
COMPUTERS, FREEDOM, AND PRIVACY: TECHNOLOGY POLICY ‘08
It’s time to get ready for the 18th annual CFP conference - a key meeting.
Dates: May 20-23, 2008
Location: Omni Hotel, New Haven, CT (”the hub”) (”the Paris of the 2000s”) (seriously, the Omni is a nice hotel, you’ll be fine)
Here’s the official text. Send those proposals in!
CALL FOR PROPOSALS
This election year will be the first to address US technology policy in the information age as part of our national debate. Candidates have put forth positions about technology policy and have recognized that it has its own set of economic, political, and social concerns. In the areas of privacy, intellectual property, cybersecurity, telecommunications, and freedom of speech, an increasing number of issues once confined to experts now penetrate public conversation. Our decisions about technology policy are being made at a time when the architectures of our information and communication technologies are still being built. Debate about these issues needs to be better-informed in order for us to make policy choices in the public interest.
This year, the 18th annual Computers, Freedom, and Privacy conference will focus on what constitutes technology policy. CFP: Technology Policy ‘08 is an opportunity to help shape public debate on those issues being made into laws and regulations and those technological infrastructures being developed. The direction of our technology policy impacts the choices we make about our national defense, our civil liberties during wartime, the future of American education, our national healthcare systems, and many other realms of policy discussed more prominently on the election trail. Policies ranging from data mining and wiretapping, to file-sharing and open access, and e-voting to electronic medical records will be addressed by expert panels of technologists, policymakers, business leaders, and advocates.
Open participation is invited for proposals on panels, tutorials, speaker suggestions, and birds of a feather sessions through the CFP: Technology Policy ‘08 submission at http://www.cfp2008.org/submissions/.
Suggested topics for discussion include:
* Information Privacy
* Anonymity Online
* Government Transparency
* Voting Technology
* Online Campaigning
* Social Networks
* Citizen Journalism
* Cybercrime & Cyberterrorism
* Digital Education
* Copyright and Fair Use
* Patent Reform
* Open Access
* P2P Networks
* Information Policy and Free Trade
* Media Concentration
* Genes & Bioethics
* Electronic Medical Records
* Web Accessibility
* Open Standards
* Network Neutrality
* High-Speed Internet Access Policy
* Freedom of Information
* Technology Policy Administration
Submission Deadlines:
Panel, Tutorial, and Speaker proposals: March 21, 2008.
Birds of a Feather Session (BoFs) proposals: April 21, 2008.
Panel, tutorial, and speaker proposals accepted by the Program Committee will be notified by April 7, 2008.
Registration available online at http://www.regonline.com/Checkin.asp?EventId=193762.
Meta moment
I did a short segment on NPR’s Bryant Park Project with Rachel Martin this morning - for broadcast tomorrow, Tuesday. The plan had been to talk about the Cuba OFAC story from last week. But when I got there they had switched gears - they really wanted to talk about net neutrality instead.
So we did an interview about everything. We talked about registrars freezing web site registrations at the direction of the Treasury Department, about a judge knocking Wikileaks off the internet, and about network access providers filtering/managing internet access. All in about eight minutes.
What’s the meta story? Well, all three of these vignettes involve gatekeepers of various kinds whose direct or indirect control over private assets within the U.S. gives them the power to affect how we use the internet. The Wikileaks judge understood that he had inadvertently blocked a lot of innocent speech, and so he reversed himself. But OFAC and the network access providers aren’t backing down. Sites/protocols/uses go on lists of various kinds, we sometimes can’t see the lists, we don’t know what the process is for changing the lists or getting off them, and users are stuck - without adequate choices in many case.
When it comes to net neutrality, it seems to me this is a constitutive moment in American communications. When we have created general-purpose communications networks in the past, we have designed liberty into them - think about the post, the telegraph, and the telephone - even though they have often been controlled by private parties. We don’t allow private parties to use their own commercial interests to decide how we’ll use these general-purpose networks. Charging for use is fine, and charging for heavy uses is fine too - but picking and choosing among letters or telegraphs or phone calls based on their content is something we haven’t allowed.
And ISPs shouldn’t want to be in the position of picking and choosing because they’ll lose their conduit protections from liability, be treated as a kind of private police, and set the precedent for being a hammer-for-hire for all kinds of various content-related desires.