The Blog

Since January 2010, I’ve been writing about the Comcast/NBCU merger.  Now we’re in the end-game – so let’s pull some threads together for this last post for the year.

This merger has more angles than a marathon trick-billiards match, but the most important one is this:  Comcast is mostly a distribution company with unconstrained pricing power.  Its cable customers pay nearly $130/month, up 10% from last year, and its growth area is in high-speed Internet access.  Almost 50% of Comcast’s gross revenues from subscriptions are now coming from high-speed data and voice services – a big jump up from 35% in 2006.  Subscribers to high-speed Internet access are choosing their local cable monopoly 90% of the time these days – not the phone company, which can’t usually offer subscribers the high speeds they want.  Where Comcast is doing business, Comcast is or soon will be consumers’ only choice for high-speed Internet access.

Comcast, the largest high-speed Internet access provider and largest pay-TV company in the country, is a dominant player in most of the top 10 DMAs – all but Los Angeles and New York.  In the rest of the top 50 DMAs, Comcast is also enormous, with a dominant presence in Detroit, Seattle, Minneapolis, Denver, Miami, Sacramento, Portland, Pittsburgh, Baltimore, and West Palm Beach.

Comcast has already made all the capital expenditures it needs to make in order to bring video-quality speeds (DOCSIS 3.0, digitized cable plant) to its subscribers.  Now, with its network rolled out and ready to go, Comcast will be able to use the additional market power that NBCU content gives it to protect itself from becoming commoditized as a pipe provider.

The crucial thing to understand is that high-speed Internet access to the home really is a crushingly-expensive natural monopoly service to install.  The telephone companies haven’t found a way to make this work, because it’s so much more expensive to dig up the streets to install fiber than it is to upgrade cable electronics to DOCSIS 3.0.  So they have backed off.  The cable industry has made its investment, and is ready to reap its rewards of scale and high fixed costs – secure in the knowledge that no competition is coming after it, and having divided up the country neatly among its members.  Meanwhile, the telcos are steadly losing fistfuls of money.

As Morgan once said of railroads, “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.”  In the cable world, we are deep into unregulated extralegal agreements, and competition is not going to rescue us.

In 2011, as the telcos continue to sink, we’re going to need to confront this natural monopoly problem head-on.  How do we ensure a nationwide, affordable, better-than-all-the-competition high-speed Internet service that is characterized by BOTH high fixed costs and increasing returns to society?  How did we confront our need for electricity?

Well, that’s the question for later.  In the meantime, the FCC and the DOJ have to decide what to do with this merger.  What does Comcast get from the addition of NBCU programming?

• As a programmer, Comcast can raise the costs of both its infrastructure rivals (small cablecos) and potential online video competitors (eg, Netflix), making it even less likely that any of them will attempt to compete. And, of course, it can raise consumers’ cable bills.  This is all to the good for the other large cable distributors and programmers – they’re happy.
• Comcast will have a strong interest in making its extraordinarily popular NBCU cable channels (CNBC, USA) even more must-have – and so it will use its tiering/channeling/bundling power to avoid any competition from independent programmers riding over its distribution network
• By tying “free” access to its online TV Everywhere service (made newly powerful through the addition of NBCU content) to a cable subscription, and by charging a premium for “breaking the bundle” to allow consumers to have “naked” Internet access, Comcast will be able to make it very difficult for independent providers of online video (so-called OTT video) to survive – it won’t appear cost-effective to consumers to cut the cord, and they’ll think of online video as being “free”
• Comcast can squeeze satellite providers, who can only sell video, by making access to its broadband services very expensive (in addition to driving up the programming costs of the satellite companies).  No one wants just video these days.
• Comcast will have an unparalleled ad distribution network, combining its roles as the largest high-speed Internet access provider and largest pay-TV company – no one else will be able to provide these cross-platform advertising opportunities, and if Comcast succeeds in controlling its set-top box destiny it will be able to target individual households
• Using its last-mile power, Comcast will be able to raise the costs of potential OTT video providers in innumerable ways – making it more expensive for them to reach its subscribers (this is the Level 3 issue), charging a fee for them to reach subscribers (this is the pay-for-priority and specialized services issue), and routing their traffic in ways that consumers eventually find unsatisfying.  Not to mention usage-based pricing.
• Comcast will be able to enrich its sports offerings (which are already very powerful regional sports networks) with NBC Sports, and it will probably bid for even more must-have sports programming (like the Olympics)
• Who answers Fox News?

I’m sure there’s more.  I’ve decided on the final title for my book:  The Big Squeeze.

Happy New Year, everyone, and best wishes for a happy, healthy, and peaceful 2011.