The gentlemen’s agreement
The American Consumer Satisfaction Survey shows that we’re happier with fast food providers, Internet search engines (by far), Internet retail sites (Netflix is way up there), and energy utilities than we are with the cable industry. We’re happier with most consumer products, in fact - from gasoline to life insurance - than we are with the cable industry. Only the airlines make us similarly unhappy.
Why is that?
Part of the problem may be the absence of competition. The major cable players - Comcast, Time Warner, Cablevision - have divided up the country among themselves. They do not compete in any of the top 25 metropolitan areas except New York (and there’s a little competition in DC).
So Chicago, Philadelphia, Boston, San Francisco, Detroit, Houston, Seattle, Miami, Denver, Sacramento, Pittsburgh, and Baltimore are all Comcast areas. Time Warner has Los Angeles and Cleveland. Cox has Phoenix.
Even J.P. Morgan couldn’t get independently-owned railroads to agree not to compete with one another in the late 19th century. Not that he didn’t try. In 1890 one of Morgan’s associates was excited by the prospect of a Western Traffic Association that would include a director from each railroad and set uniform rates: “Think of it - all the competing traffic of the roads west of Chicago and Saint Louis placed in the control of about 30 men!” But the effort fell apart because some of the independents insisted on cutting rates and invading each other’s territories. (Morgan later had the same problem with shipping lines between the US and the UK - Cunard refused to cooperate.)
Morgan had more success when the railroads started going bankrupt during the 1893 panic, and he was able to reorganize (”morganize”) them. According to Ron Chernow, author of The House of Morgan, just about every bankrupt road east of the Mississippi eventually passed through such reorganization - one-sixth of the country’s trackage. Morgan took seats on the boards of these railroads and transferred their stock to “voting trusts” controlled by himself and his associates. He tidied up the market, avoiding ruinous competition and new entry. Chernow: “By 1900 the nation’s railroads were consolidated into six huge systems controlled by Wall Street bankers.”
That’s the familiar Morgan story, but what’s perhaps unfamiliar is that Morgan thought competition was a completely unrealistic proposition. Given the enormous upfront investment and heavy carrying costs involved in running a railroad, he thought there was no option:
“The American public seems to be unwilling to admit . . . that it has a choice between regulated legal agreements and unregulated extralegal agreements. We should have cast away more than 50 years ago the impossible doctrine of protection of the public by railway competition.”
Morgan was happier with unregulated extralegal agreements for the railroads: carving up territory, avoiding rate wars, and maintaining firm control. The railroads gave steep rebates to powerful shippers (sound familiar?), which led to a call for regulation by small businesses and farmers who couldn’t get neutral nondiscriminatory access to the lines. But initial regulatory efforts failed to squelch those rebates, the railways gave free passes to all the state legislators, and Morgan sailed onward.
Obviously the cable situation isn’t exactly like the railroad systems of the 19th century. The major cable systems aren’t owned by the same people. There is no cable czar.
But the major cable systems do apparently have a gentlemen’s agreement in place - something even Morgan couldn’t achieve. With Verizon’s FiOS taking the pressure off (and with satellite unable to provide high-speed Internet access that matches cable’s), they’re undisciplined by current competition. Barriers to entry are so high (as for a new railroad) that it’s extremely unlikely any new competition is going to emerge. These barriers get even higher when cable distributors become content providers as well.
The cable systems are also undisciplined by regulation save for rates for basic cable and a few other elements of their operation. In their role as content providers, program access and program carriage rules don’t seem to be working very well.
So, take it from JP Morgan: do you want regulated legal agreements, or unregulated extralegal agreements? Competition is not going to change next year’s numbers on the American Consumer Satisfaction Survey.
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5 Responses to “The gentlemen’s agreement”
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Good article!
BTW, there’s little or no competition for cable in NYC (as opposed to your comment above). Yes, NYC has TWC and Cablevision, (and a handful of very small providers), but they’ve sliced up the 5 Boroughs just like they did the rest of the company. I know of no one that has any choice in cable service in any building in NYC (I’m sure there are a few, but the number is vanishingly close to 0%).
Interestingly, Verizon’s FiOS provides no help here, since the hardware they are deploying can’t do TV. Their VDSL is limited (in their routers) to 20/5mbps internet service within most of NYC, and there’s no way to get TV since the fiber is to the riser.
So if I want anything other than the handful of broadcast DTV channels, I (and most other NY’ers) still only have 1 option: TWC or Cablevision, depending on where you live.
Two words: structural separtion.
But I had to laugh at this UK story
Incumbent telco BT, which has been dragged kicking and screaming into unbundling, is now demanding similar access to Virgin’s cable network.
Separation!
[…] I just stumbled upon Susan Crawford’s blog post today comparing the current cable companies monopolies with J. P. Morgan’s control over the […]
Susan
Interesting. The even tougher one is the “gentlemen’s agreement” between most cable companies and most telcos to not compete on price. That’s even harder to deal with, but is central to broadband and I believe TV package pricing. Price has been going up while the costs of delivering the technology have been going down.
But there’s every reason to think that this is accomplished by public signaling, not backroom meetings. I don’t think the antitrust people know how to deal with that problem. db