CONTRIBUTORS

Competition in Broadband? Not Likely

Posted March 22, 2012, at 5:48 p.m.

Three months ago, Verizon Communications Inc. and three major cable companies announced a $3.6 billion joint marketing deal. Congress is getting around to the question of whether it’s a good idea.

The Subcommittee for Antitrust, Competition Policy and Consumer Rights of the Senate Judiciary Committee on Wednesday held a hearing titled, “The Verizon/Cable Deals: Harmless Collaboration or a Threat to Competition and Consumers?” A better question might be: Why isn’t the American public paying closer attention?

Consider the context for the deal. The three cable companies are Bright House Networks, Time Warner Cable and Comcast (Disclosure: Bloomberg LP, the parent company of Bloomberg News, petitioned the FCC in 2010 to deny Comcast’s acquisition of NBC Universal.) Comcast is the largest wired distributor of data, news, entertainment and sports in the United States, dominating markets in Chicago, Miami, Philadelphia and San Francisco, among other cities.

Chief Executive Officer Brian Roberts has said that in its geographic footprint Comcast has just one competitor for these high-speed wired distribution services: Verizon FiOS. (The major cable incumbents — Comcast, Time Warner, Cablevision Systems Corp. and Cox Communications Inc. — never enter one another’s territories.) Right now, Verizon FiOS is available in just 15 percent of Comcast ‘s market.

When it comes to high-speed wired data distribution — America’s critical information infrastructure — Comcast and the other cable incumbents have won the battle for subscribers and face neither oversight nor competition.

Although the deregulation of the communications sector over the last few years was premised on the notion that competition among platforms — wired, wireless and satellite — would protect consumers and businesses from price surges, the laws of physics have gotten in the way: Lower-capacity (but mobile) wireless services are complementary to the high-capacity (but stationary) wires Comcast sells.

According to a TechNet report, 83 percent of those with smartphones also have wired high-speed Internet access at home. Very few Americans are substituting wireless access for a wire when it comes to data, and no one would start a business relying on a wireless connection. (Satellite access, slow and expensive, never posed a real competitive threat.)

On the wireless side, the powerhouses are Verizon and AT&T, which collectively accounted for 65 percent of all wireless subscribers and 71 percent of all net new subscribers in 2011; of the two, Verizon is larger. When it comes to the crucial issue of spectrum licenses, Verizon Wireless already holds approximately 43 percent of all 700 MHz spectrum in the nation (nicknamed “beachfront” spectrum for its favorable propagation characteristics) and 48 percent of cellular spectrum. These are the two most suitable (and valuable) bands for mobile data transmission services.

To be sure, most of AT&T’s and Verizon’s assets are still wires. Their only growth area these days, however, is wireless. Both companies are backing off from continued investment in wires, as the cable industry’s overwhelming cost advantage in building high-speed wired distribution networks becomes clearer. The reason: The cable guys don’t have to install a second network to sell high speeds over their existing pipes. The phone guys have to dig up the streets to replace their low-capacity metal phone lines with a new fiber optic network.

In December 2011, these two giant complementary industries — wired and wireless data distribution — retreated to their separate corners and made common cause. Comcast, controlling about two-thirds of a joint venture with Time Warner called SpectrumCo, said it would sell spectrum licenses it had bought a few years ago to Verizon; Cox, the third largest cable company in the country (after Time Warner and Comcast) similarly agreed (in a separate deal) to assign spectrum licenses to Verizon. The companies also agreed to sell each other’s cable and wireless services and carry out joint research and development.

By buying more spectrum — frequencies it arguably doesn’t need — Verizon Wireless is pushing Sprint Nextel Corp. and T- Mobile USA further to the margins. At the same time, by selling all of its spectrum, the cable industry is foreclosing any possible foray into wireless services. Verizon will have zero continuing incentive to expand FiOS now that it’s reselling the cable guys’ wires. Both industries are tacitly acknowledging that they don’t intend to compete in the future.

Like water and electricity services, these are natural monopoly businesses characterized by crushing advantages of scale, high upfront investments and sharply declining costs for additional customers. Unlike other utilities, however, the wireless guys and the cable companies are essentially unregulated.

Both the Federal Communications Commission and the Justice Department’s antitrust division are looking at these deals. Craig Moffett, an analyst at Bernstein Research, says the transactions “amount to nothing short of a complete reordering of every facet of the telecom landscape in the United States.” Now we have evidence that competition is not going to protect Americans from the depredations of either the cable guys or the wireless guys.

Comcast Executive Vice President David Cohen, who is responsible for the company’s government relations, has said that this deal will have no effect on the competitiveness of either video or wireless access in the United States. He may be right. Most Americans already have only one choice — their local cable incumbent — when it comes to high-speed wired distribution of information and entertainment.

He may also be right when he says that the transaction will have no bearing on the cable industry’s decision to go into the wireless business: Verizon and AT&T already had such a lead in wireless that it didn’t make sense for the cable companies to attempt to compete.

Cohen has also said that the FCC and the Department of Justice have no power to review the joint venture agreements among Verizon, Comcast and Time Warner. On that issue he may be right as well — and that’s a problem.

Susan P. Crawford is a Bloomberg View columnist and a visiting professor at the Harvard Kennedy School of Government and Harvard Law School. She is a former special assistant to President Barack Obama for science, technology and innovation policy.

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