The Cable Monopoly: Very Short Summary of 185 Pages

Imagine you’re a consumer sitting in your living room. You like sports. You like high-speed Internet access; in fact, you’ve gotten completely fed up with your DSL connection because it’s so awful and you’ve seen how much better a truly high-speed wire would be. So you’re interested in some kind of bundle that includes TV as well as broadband.

If you’re that consumer, in 85% of the U.S. your only choice will be your local cable incumbent.

If you’re really lucky and live in Verizon’s existing FiOS territory – the other 15% – you’ll be able to choose Verizon. But Verizon has said it’s not expanding that service. In a December 2011 interview with UBS analyst John Hodulik, Lowell McAdam, Verizon President & CEO, stated, “With FiOS we are about 16 million POPs at this point and we want to get to about 18 million. If we built out the whole footprint, we would be more in the 21 million, maybe a little bit more, range. . .  But for now the bottom line is we are going to build out what we said and not any more.” (For comparison: Comcast already passes about 52 million homes.) And Verizon’s product is very expensive compared to what’s available in other countries [very useful new report from New America comparing connectivity in different cities around the world - PDF].

If you’re that consumer, you’ll pay whatever it is the local cable player wants to charge you, because that local cable operator isn’t constrained by competition or regulatory oversight. Sports have moved away from over-the-air broadcast to cable, so you’ll just have to sign up. And the packages are getting more and more expensive.

Or, say you’re an Internet access user or a new business that depends on high-speed uploads – symmetric access at 300 Mbps. You want to send a lot of files around – medical data, video, whatever. Your local cable provider won’t be offering that product.

Or, say you’re Netflix. In order for your business to be predictable and survive, you need several things: Access to programming, access to subscribers, and access to a reliable connection to those subscribers. Because it was so hard to get access to programming you were forced at the start into being an additional service, a complementary service, to the cable operator’s television product. Now life is getting harder all the time, as programming costs for you keep going up (you’re a threat to the $154 billion TV business in which the media conglomerates are engaged) and the technical ground keeps shifting beneath your feet. Usage based billing means that cable subscribers will view your product as “extra” – they’re getting TV Everywhere for “free” because they’ve already bought a TV package. You might plan to just give up and become a cable channel.

Or, say you’re in a rural area. Forget it!:  Verizon and AT&T are taking DSL out of service as fast as they can across the country, and rural areas weren’t doing well to begin with. In 2011 the Commission found that 72.5% of the 26.2 million Americans that still lack access to 3 Mbps/768 kbps or faster of fixed broadband service live in rural areas, even though only 21.7 percent of all Americans reside in rural areas.  Close to 3 out of 10 rural Americans – 28.2 percent – are without access to fixed broadband at 3 Mbps/768 kbps or faster, which is nine times larger than the three percent of Americans without access in non-rural areas.

Yesterday, the FCC released its Fourteenth Video Competition Report, covering the video marketplace for the last four or five years. It’s long and detailed, and clearly represents an enormous amount of work by dedicated, careful people. It’s a very “on the one hand this, on the other hand that” report, giving equal credence to both sides of innumerable arguments over the power of the cable incumbents – chiefly Comcast (passing 52 million households in 39 states) and Time Warner (27.5 million). It makes no recommendations and draws no conclusions.

But many of the stories are there, if you look.

Netflix and other online video providers have been forced into complementarity. In this Report, we treat OVDs [online video distributors, like Netflix] as a separate group because we have concluded that for most consumers they are not a substitute for MVPD service today, but rather an additional method for viewing video content.. . . According to Nielsen, during the second quarter of 2011, Americans watched each week on average 32 hours and 47 minutes of traditional TV, two hours and 21 minutes of time-shifted TV, 27 minutes of Internet video, 7 minutes of smart phone video.. . .By bundling traditional MVPD services with Internet delivery of content [TV Everywhere], vertically integrated MVPDs leverage their dominant market position at the expense of competitive online offerings.

The major cable players don’t enter each others’ territories. As a general rule, the geographic footprint of a cable MVPD [Comcast, Time Warner Cable] rarely overlaps the geographic footprint of another cable MVPD. As such, cable MVPDs rarely compete with one another for the same video subscriber.

The real competition in the video marketplace is for bundles that include high-speed Internet access – and the cable players are winning. DBS [satellite] MVPDs acknowledge that their systems cannot deliver VOD services and other two-way services like Internet access and telephone services that play an ever larger role in the business models of MVPDs. DIRECTV and DISH Network have difficulty competing against cable and telephone MVPDs and other land-based systems that have the ability to offer two-way services. They have cooperative arrangements with phone and broadband companies to provide Internet access and telephone service. But these arrangments are with phone and broadband companies that do not offer video services in the same geographic area. For example, DIRECTV typically has cooperative arrangements with Verizon to provide Internet access and phone services where Verizon offers DSL and not in areas where Verizon offers FiOS TV. . .. Analyst Craig Moffett explains that DBS MVPDs remain enormously dependent on telephone legacy DSL as their partner for broadband. . . .

Prices keep going up and there is no reason this will stop. Statements from analysts in the MVPD industry suggest, however, that incumbents and new entrants prefer to avoid price wars and compete on other features of the MVPD service. . . .Average prices for cable video programming increased between 2006 to 2010. 

Cable is doing better all the time; Comcast and Time Warner are in harvesting mode. Cable MVPDs’ per-subscriber monthly revenue has risen steadily from 2006-2010 due to growth in subscribers to cable bundles, growth in subscribers to advanced services, and price rate increases. . . . Cable MVPD infrastructure spending has fallen since 2002 – now focused on upgraded set-top receivers to new subscribers of advanced services, and sales to businesses. . . . Comcast says it is experiencing 20 percent plus free cash flow growth year after year. All advanced service segments (digital cable, Internet, telephone) are growing. Comcast’s margins are in the 40 percent range from 2006-2010.

It’s unfortunate that the Commission doesn’t have the zip-code level data about cable that it asked for in 2009. As a result, the FCC is apparently unable to report on what real consumers are facing in their living rooms. As a result, all they can say is that for 2/3 of Americans, the video choice is the local cable incumbent or one of the two satellite companies. They’re forced to state national percentages when this is a purely local, physical decision.

And, more importantly, video isn’t the real choice for most people; they’re looking for broadband. So they’re interested in bundles. And they’re fleeing DSL in droves and heading right to cable, just at the same time that Verizon (with the only really competitive broadband offering to cable, given AT&T U-verse’s reliance on copper wires to reach homes) is backing away. (Recall what Brian Roberts of Comcast said to investors in March 2011: “We have one competitor.”)

It’s unfortunate that the Commission simply accepted that “video competition has increased” because of the entry of U-verse and FiOS, without taking on the question of where that competition is meaningful. Helpfully, the Commission did say that VZ and AT&T do not offer MVPD service in the same geographic areas; they avoid competing with one another, just like the cable actors do.

There is a great deal of useful information here. But a different report would capture the picture from the consumer’s point of view.

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