Archive for July, 2010

A blazing summer afternoon yesterday found me on the side of a road in Sunnyvale, California.  I had too much luggage – it’s been a long week of travel for me – plus the viola in its big black case.  I was unreasonably happy because one of those sites for which the Internets are famous had given me five ways to go by public transportation between San Francisco and my Sunnyvale hotel, and as the big bus drew up next to me I knew that the plan – published to me via my phone – was going to work.

I struggled up the steps, found two wrinkled dollar bills in my pocket, and settled down for a ten-minute ride to my destination. I had managed to locate the right bus.  Unbelievable.

Compare, though, Theodore Roosevelt’s 1914 Brazilian adventure.  If you have time for a paperback this summer, make it “Theodore Roosevelt’s Darkest Journey: The River of Doubt“.  It’s hard to come up with a word other than “gripping,” so I’ll use that for now.  The expedition was hopelessly under-equipped: far from enough food (although trunkfuls of condiments), and no boats by the time they reached the head of the completely unexplored River of Doubt.  (They ended up using 2500lb dugout canoes that couldn’t be manuvered in the water or easily portaged across land.)  They had far too much luggage – tons of it – that they had to simply abandon without knowing what useful supplies were in it.

The jungle was teeming with predators, both animal and human, and the nights screamed with terrifying noises.  The river was impossible to predict, full of deadly rapids and alligators and biting fish, and no one knew where it led.  They faced almost certain starvation, disease, and misery, in addition to the obvious mortal danger of the twisting river and its rapids overhung by matted trees and swarms of blood-sucking insects.  They couldn’t retrace their steps once they’d started down the river.  Their only choice was to go ever onward and hope to emerge at the other end someday.  And they had to make measurements, slowly, hundreds of times a day – because they were mapping the river for the very first time.

At the end of my 10-minute bus ride yesterday afternoon, I lumped the suitcase and viola down the steep steps of the bus and walked, oh, 100 yards to the front of the hotel.  We had a pleasant dinner last night at an Indian restaurant – featuring many of the condiments TR had left behind as he plunged down the rapids of the River of Doubt.  On the way back to the hotel the GPS led us astray, sending us up and over a freeway underpass in what seemed to be a long circular route. There was a little grumbling about this.

As always with Roosevelt, I can only imagine what he’d think of us these days.

Yesterday, NTIA posted a proposal calling for rigorous evaluation of the impact of the broadband grants.  The winner will “conduct a study of the impact the Broadband Technology Opportunities Program (BTOP) grant awards are having on broadband availability, adoption, and on economic and social conditions in areas served by the grantees.”

This is crucial work.  It would be good to see a consortium emerge to apply for this money and carry out a first-rate study.  You’ll need an experienced federal contractor involved – you can’t even see the entire RFQ without being registered in GSA’s E-buy system.  Spread the news, and act fast – bids are due August 24.

It’s all about higher prices for consumers.  The American Cable Association – smaller cable systems – has filed a statement with the FCC saying that after an authorized look at confidential Comcast documents they’re convinced that the horizontal and vertical harms of the Comcast/NBCU merger will be even greater than they’d thought.

The harms ACA have identified include higher prices for competing distributors wanting access to programming – and thus higher prices for consumers.  “At its heart,” ACA says, “the proposed transaction is driven by the desire of the Applicants to increase the leverage (market power) of their programming assets, which they can then exercise to the detriment of [competing video distributors]..” and inevitably forcing consumer pricing higher.

ACA claims that the Comcast documents confirm that local NBC programming is “must have,” and so is MSNBC, Bravo, USA, CNBC, Oxygen.. If the transaction takes place, they assert, the Applicants’ market power will increase dramatically.

The redactions made necessary by Comcast’s requirements for confidentiality make this a curious filing – take a look.

Yesterday’s FCC report estimates that at least 80 million Americans don’t have high-speed Internet access – defined as download speeds of at least 4 Mbps and upload 1 Mbps – at home. (Soon the Commission will release another report comparing these results to those in other countries.)

This service is completely unavailable to at least 14 million Americans – the FCC estimates that “1,024 out of 3,230 counties in the United States and its territories are unserved by broadband[, and t]hese unserved areas are home to 24 million Americans living in 8.9 million households.”  Particularly for Americans in poorer areas, more rural counties, and tribal lands, adequate connectivity isn’t even a possibility currently. The Commission has now said that those Americans will not gain such access in the near future absent changes in policy.

While not downplaying what the carriers in America have already done, the FCC is making clear that much more needs to happen. In a heavily footnoted report, the Commission is saying what most Americans already know:  “Given the ever-growing importance of broadband to our society, we are unable to conclude that broadband is being reasonably and timely deployed to all Americans in this situation.”

That seems like a reasonable and data-driven statement.

A brawl has broken out over basic regulation of high-speed Internet transport services.  The parties are firmly in their camps, the filings are enormous, and the arcana of telecommunications policy is on florid display.

So I thought I’d spend a moment or two on DNS – a calm, thoughtful, placid moment.

In the Brand X decision of 2005, the Supreme Court deferred to the FCC’s determination that cable modem access should be treated as a deregulated “information service.”  Part of Justice Thomas’s reasoning was that the bundling of DNS with access caused a leveling up – because DNS was involved, the whole package needed to be deregulated.

What the heck did this mean?  DNS is the decentralized set of databases that allow for translation between IP addresses and domain names.  It allows resources to be found by humans.  You and I couldn’t communicate online without DNS.  But the Commission at the time – and the Supreme Court – decided that DNS was an “information service,” akin to data-processing, and that ISPs who offered DNS look-up services together with Internet access were providing a finished product that should be deregulated.

In its recent reclassification filing, AT&T says that was absolutely the right way to go. Even if users don’t take advantage of email services, hosting, or anything else provided by the transmission company, the fact that DNS look-up is provided changes the character of the service offered from a point-to-point transmission service to a data-processing-like information service.

Public Knowledge takes a different view.  From their perspective, DNS is the equivalent of routing or switching services – and thus expressly excluded from the definition of information services.  It’s not data processing, they say.  It’s an essential component of the basic service that is used to facilitate the movement of information.  PK points out that all of the carriers advertise speeds and prices, and that these are the key elements that consumers think they’re getting when they buy high-speed Internet access.

It may turn out that a central factual dispute between these two filers is the status of DNS look-up.  That’s interesting.  I always thought that the Supreme Court’s fumbling around about DNS made little sense.

Okay – enjoy.

This week’s Second Circuit decision in Fox v. FCC should make us question, yet again, why broadcast is special.  Could any broadcast indecency regime pass constitutional muster? Why would you want an indecency regime at all?  If you were running the Media Bureau, what would you recommend?

The reasons underlying Pacifica all seem to have vanished.  Cable and the Internet are just as accessible and pervasive.  Parents have many more tools than they used to that will help shield children (analogous to the household-by-household tools available to block particular cable channels).

The Second Circuit suggests that Pacifica should perhaps go away – so that content-related rules for broadcast can get the same strict scrutiny that rules for the Internet do.  But it’s not in their power to wash away the decision, so instead the court focuses on the vagueness of the FCC regime:  “Broadcasters are entitled to the same degree of clarity as other speakers, even if restrictions on their speech are subject to a lower level of scrutiny.”

Confronted with the court’s disparagement of the current incoherent FCC regime, what’s a good regulator to do?  Retreat to the seven dirty words, and hold fast to them even if you feel silly and ineffective for doing it?  Repeal the policy completely, relying on the good faith and earnestness of the broadcasters to protect children until 10pm, when the networks can start swearing again?

But if you blow up indecency regulation, does that have implications for the FCC’s general powers over broadcast?  Does scarcity still dictate control over content?  Or are we back to a naked assertion of power:  We give you a license, so you have to listen to our rules on children’s television and equal time?

And if the naked assertion of power is all you have left, is the hammer of insisting on adhering to public interest obligations a useful negotiating lever any more?  Is it enough (“you aren’t broadcasting local news!”) to persuade the broadcasters to give up their spectrum allocations over time – so that there’s more room for more wireless Internet access? It probably is, but would you want to risk it?

It’s enough to make you wonder whether it’s worth it for the FCC to ask the Supreme Court to review this case. The Commission may not like the answer that comes back.  What is the extent of the public interest obligations of broadcasters?  It may be limited to an agreement not to interfere, to spectrum allocation, and nothing more.

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

Today’s Times obituary of Juanita Kreps was a masterpiece – an entire world in one life story.  I’m re-reading “Barbarians at the Gate” and Dr. Kreps makes a fine series of appearances there, telling Ross Johnson straight out, with great emphasis, that he’s just not treating the RJR/Nabisco board right.

Dr. Kreps had a rich life and a difficult post as Secreatry of the Department of Commerce.  Never forget this description:

Commerce was perhaps the most unglamorous, thankless job in the cabinet: managing 38,000 employees and an oracular mandate to promote economic growth while taking the census, forecasting the weather, recording patents and trademarks, standardizing weights and measures, charting seas, collecting statistics on the nation’s output of goods and services, and managing $6 billion in public works projects.

Have you been to Commerce?  It’s enormous.  The hallways stretch on for miles.  And it’s true that it’s a place of a gajillion lightly-connected functions. Dr. Kreps clearly made the best of it, forging bravely onward, all alone in Washington while her husband went on teaching at UNC.  She wasn’t able to stay on as long as President Carter wanted, but she did a great job.

[By the way, Commerce is no longer "unglamorous." It's got broadband grants - more coming! - and internet policy.  NTIA has a major set of proceedings going on led by its Internet Policy Task Force.  Privacy, copyright, free flow of information, cybersecurity - that - that is glamor.]

Here’s to Dr. Juanita Kreps, “genteel and low-key,” holding her own in the halls of government and the boardrooms of America.

News today about the round 2 BTOP/BIP grants – with a speech by the President:

All told, these investments will benefit tens of millions of Americans — more than 685,000 businesses, 900 health care facilities, and 2,400 schools around the — across the country.  And studies have shown that when communities adopt broadband access, it can lead to hundreds of thousands of new jobs.  Broadband can remove geographic barriers between patients and their doctors.  It can connect our kids to the digital skills and 21st century education required for the jobs of the future.  And it can prepare America to run on clean energy by helping us upgrade to a smarter, stronger, more secure electrical grid.

A favorite is broadband to Western Mass:

This $45.4 million grant with an additional $26.2 million applicant-provided match will bring affordable, high-speed Internet access to residents and businesses in western Massachusetts by constructing over 1,300 miles of new fiber. Massachusetts Technology Park estimates that this project will create hundreds of jobs upfront and help drive economic development in the community that creates jobs for years to come. Over 1 million people stand to benefit from this grant, along with 44,000 businesses and over 700 community institutions.

Very exciting.

In reading filings in the Comcast/NBCU docket today I came across a poignant submission by the Portland Trail Blazers.  You can read it here – it’s short.

Back in 2007, the Trail Blazers signed up with the Comcast Regional Sports Network in their area (CSN).  The idea was that Comcast would distribute their basketball games and, in Comcast’s words, “dramatically increase exposure for the Trail Blazers” and bring more fans more programming related to the games.  Comcast also apparently said that they’d make the games available to other cable and satellite distributors in the region.

Well, that hasn’t happened.  Hundreds of thousands of fans who don’t subscribe to Comcast but who live in the area can’t see the games. They’re irate, and the Trail Blazers are saying that they’re worried that Comcast will use their market power in local distribution to even greater effect once they have added NBCU content to their roster.

It’s not the largest story, but it’s not unique.  (And it may be that the Comcast clean-up campaign is already on its way to fix the situation before the next public hearing or event in connection with the merger.)  Comcast’s response (as of February – there may be an update that I can’t find) is that they’re a private company and they’re negotiating in good faith but haven’t found a price that’s good for both sides.

There are two large gears that mesh together in the Comcast setting – (1) control over programming (or programmers who won’t break ranks for fear of upsetting Comcast) plus (2) control over distribution to competing pay-TV distributors (or ways to raise their competitors’ costs through expensive bundled services).  Put them together in the live sports/business/entertainment sectors, and you’ve got a situation that may make for more poignant stories.