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COLUMN-Who's afraid of Comcast?

Source: Reuters - Thu, 20 Feb 2014 17:03 GMT
Author: Reuters
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By Jack Shafer

Feb 20 (Reuters) - Set aside for a moment everything you've read about the $45 billion bid Comcast made for Time Warner Cable last week. Blank from your mind Paul Krugman's prediction that the deal will result in a Comcast monopoly. Pretend you didn't read the New York Times piece about the acquisition presaging further consolidation in the cable market, with Charter Communications picking off Cox Communications. Thump yourself with a neuralyzer, if you can, and remove from your memory the protest against the transaction by Michael Copps, former Federal Communications Commission commissioner. Finally, purge from your bile ducts the seething hatred you hold for Comcast and Time Warner Cable, those hurtful memories of rising bills, rotten service, and phone-tree purgatory and allow me to persuade you that we're having the wrong telecom argument when we quarrel about mergers and acquisitions. Instead of blocking mergers or beating concessions out of the telecom giants, let's give them the treatment they really fear: Policies that encourage the entry of competitors, which are the bane of every monopolist. If you hate your cable television company - to simplify a half-century of history - blame it on the government. In the founding days of the industry, local municipalities mistakenly insisted that cable TV was a "natural monopoly" that must be regulated like telephone service. In nearly every case, the selection of a cable operator was a political one, with the most flattering supplicant winning the right from city councils to string wire on utility poles and cross right-of-ways to sell cable service. The municipalities collected franchise fees from the cable companies, shook them down for sweeteners like municipal channels and public access studios, regulated their rates, and required the operators to wire all if not most of their jurisdiction. Of course, cable TV wasn't a natural monopoly but a government-made one. By the time Congress and the courts reduced the power of the municipalities to regulate cable in the 1980s and the 1990s, the die was cast. Sure, new cable operators could apply to compete, but they still had to run the regulatory maze and face well-entrenched government-made monopolists. In many cases, the new entrants have been companies that already provide the area with telephone service and know how to play the regulatory game, such as Verizon (Fios) and AT and T (U-Verse). By legislating local cable monopolies, the municipalities inadvertently helped create national oligopolies. Comcast, Time Warner Cable, Cablevision and the other large cable firms grew to market dominance by purchasing existing franchises, market by market. Such a quick roll-up would not have been possible if regulators had pursued policies easing the way for new entrants. The unfettered growth created huge valuations. Indeed cable companies currently sell for $4,000 to $5,000 per subscriber (the Time Warner Cable deal is just under that). That's right Comcast customer, your cable TV and Internet subscription is worth at least $4,000 to them! But just as New York City taxi-cab medallions could not sell for $1 million if new cabs could freely enter the market, cable TV companies would not sell for such premiums if they were competing in a freer market. New entrants would progressively batter their power to price. In the cable industry, the regulatory scheme has been captured by the regulated, which is an old story. The picture isn't as disparaging as I paint. Since some of the barriers to entry have been removed, the telephone companies have captured about 10 percent of the pay-TV market, according to the Wall Street Journal. (Oh, you hate Verizon's Fios? It's been pretty good to me since I switched from Comcast: Faster Internet, more channels, better picture, lower price, and better customer service. But go ahead and hate Fios if you want to.) Satellite broadcasting - a lightly regulated enterprise - commands about 35 percent of all customers, leaving conventional cable with about 52 percent, down from about 69 percent in 2007. All have gained Internet subscribers since 2007, the Journal reports. Rather than drag Comcast around by the ear, demanding this concession and that concession for the right to devour Time Warner Cable, policymakers would be smarter to remove the regulatory barriers that benefit Comcast and other legacy cable providers. In Kansas City, Provo, Utah, and Austin, Texas, regulators have done just that, trimming red tape to allow Google to bring super-high-speed Internet and TV service to the choice neighborhoods it covets at competitive prices. (The cities were seduced by the promise of Internet speeds that will be 100 times greater than what the average American consumer gets when he buys something billed as "high-speed.") Yesterday, the company announced similar expansion to nine more cities. The brilliant thing for consumers about Google's entry - dare I use the I-word and the D-word in one sentence? - is its penchant for innovation and disruption. Where the traditional cable companies have traditionally dithered about improving their services, Google has routinely leapfrogged its competitors, sometimes destroying previously lucrative businesses like GPS navigation by turning them into "free" (advertising-supported) services. One example of Google's forward thinking is that it's not offering telephone service to customers, thinking they'll use their mobile phones or attach VOIP hardware to their connections if they want a land-line replacement. Given a freer rein than traditional cable companies, Google is more likely to bring imaginative new products to its customers. My guess is that Google looks at those $4,000-per-subscriber valuations and sees a market ripe for their brand of capitalistic pillage. Obviously, Google can't combat the cable companies in every market, but the Google approach can. If Google succeeds in its pilot cities - and I have no doubt it will - others will imitate its red-tape cutting maneuvers, possibly beating it to the choice markets it has selected. The products and services Google introduces will be imitated, creating a spillover effect in markets it doesn't enter. Existing cable companies will, one hopes, get their competitive acts together to counteract Google and its imitators. We all win! (Except the current shareholders of the legacy cable companies.) Beyond the Google example, cable and Internet customers could be better served by the radical allocation of spectrum to wireless broadband users, as former FCC Chief Economist Thomas W. Hazlett has written. We should applaud entrepreneurs like Barry Diller and Chet Kanojia for Aereo, which is billed as a way to get clear reception of broadcast channels but is really Diller's way of providing original TV programming to viewers without having to negotiate with cable companies. (Remember, Diller created the Fox network for Rupert Murdoch and built out the USA network.) While we're at it, we should applaud inventors like those working for Steve Perlman, who year after year find new ways to milk more radio bandwidth out of the same spectrum. Perlman, profiled in yesterday's New York Times, promises to bring faster wireless to mobile devices with his new technology. Conceivably, Perlman's wireless technology could replace the cable that provides your TV and Internet service. So let Comcast spend $4,000 per subscriber to purchase Time Warner Cable. As long as policymakers encourage new entrants into the company's markets, Comcast will come to regret it.

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