Opinion

Felix Salmon

Monopolizing bandwidth

Felix Salmon
Feb 17, 2014 19:04 UTC

Paul Krugman makes a simple but powerful point about Comcast’s acquisition of Time Warner Cable:

One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

Broadband is the area which Krugman, and most other opponents of the Comcast-Time Warner tie-up, are most worried about. It can’t be a good idea to give a single company 37% of the market in broadband, especially when its real monopoly power would be much stronger still:

The reason this deal is scary is that for the vast majority of businesses in 19 of the 20 largest metropolitan areas in the country, their only choice for a high-capacity wired connection will be Comcast. Comcast, in turn, has its own built-in conflicts of interest: It will be serving the interests of its shareholders by keeping investments in its network as low as possible — in particular, making no move to provide the world-class fiber-optic connections that are now standard and cheap in other countries — and extracting as much rent as it can, in all kinds of ways. Comcast, for purposes of today’s public , is calling itself a “cable company.” It no longer is. Comcast sells infrastructure subject to neither competition nor a cop on the beat.

The argument from Comcast is, essentially, that it doesn’t matter whether it has a national monopoly, because it (and Time Warner Cable) already have local monopolies. If individuals and businesses don’t have any choice of broadband providers right now, then what difference does it make if the existing providers consolidate?

The argument does have a little bit of merit, if you believe that the main reason not to have monopolies is to encourage competition. But take a step back, and it’s abundantly clear that the US has something approaching a national broadband crisis on its hands.

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In comparison with the rest of the developed world, the US has slower broadband speeds and higher broadband prices than just about anybody. When you do find exceptions, they always turn out to be cases of a very clear monopoly: Carlos Slim more or less owns broadband in Mexico, for instance, while a company called Southern Cross controls all of the bandwidth into New Zealand.

What’s more, in cases like Mexico and New Zealand, the rule of supply and demand at least still obtains. Broadband prices are high — but in large part that’s because the supply is constrained. The supply is constrained mainly because the monopolist sees no particular reason to increase it: they’re already charging monopoly prices, which means that they wouldn’t make more money by providing better service.

The US, by contrast, is unique in that it has very high broadband prices and an abundance of bandwidth. The country as a whole — or at least its urban centers — has no shortage of bandwidth at all. But if you want to connect your home or business to the major internet backbones, the cable-company gatekeepers will charge you an arm and a leg for doing so.

Farhad Manjoo has the explanation for why this should be. Internet service is very cheap for the cable companies to provide, and it’s also price-sensitive: if you reduce the price, more people will sign up. As a result, the cable companies would make more money from their broadband offerings if they reduced the price. So why don’t they? Because right now, 91% of Americans with broadband also have cable TV (I think, I can’t find the link for that right now), and the cable companies make their real money from TV, not broadband. The cable companies therefore have every incentive to price broadband as high as possible, so as to make the marginal extra cost of getting TV as well as small as possible.

In the US, cable TV rates are very high; as such, the best way to prevent cord-cutting is to ensure that broadband rates are also very high. That’s bad for broadband adoption, but it’s reasonably effective at keeping people paying very large sums for TV every month. In other words, high broadband rates are a bit like most newspaper paywalls: they’re not so much a way of making lots of money themselves, as they are a way of persuading you to pay lots of money for something else. (Physical newspaper delivery, or cable TV.)

If Comcast is allowed to buy Time Warner Cable, that model won’t change — but it will be reinforced. The cable companies will continue to price broadband at uneconomically high rates, in order to protect their cable TV cash cows. And as Krugman notes, they will have essentially no incentive to improve their own broadband infrastructure, since providing high-quality broadband is not how they make money. Instead, they will just continue to extract monopoly rents, which is good for their shareholders, but bad for everybody else.

There isn’t a market solution, here: there’s only a regulatory solution. The US government regulates the amount that the post office can charge, so that everybody has access to the mail; it also regulates the maximum amount that phone companies can charge for basic landline telephone service. Both of those regulations are beginning to look increasingly anachronistic, in an era where the internet has replaced both mail and telephony. But the obvious regulatory response — to mandate that utilities provide universal access to low-price, high-quality broadband — seems as far away as ever. If Comcast is allowed to buy Time Warner Cable, the current model will become even more entrenched. And the USA will slide ever further backwards in the global connectivity race.

COMMENT

KenG_CA

Ah, but they wouldn’t be providing broadband. They would be providing wires/fibers/cables (OSI Layer 1). The stuff that goes on the wires (OSI Layer 2+) would be provided by some sufficiently corrupt capitalist entity.

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Justice makes the right decision on AT&T

Felix Salmon
Aug 31, 2011 16:14 UTC

The Justice Department’s official complaint seeking to stop AT&T from taking over T-Mobile minces no words:

T-Mobile in particular – a company with a self-described “challenger brand,” that historically has been a value provider, and that even within the past few months had been developing and deploying “disruptive pricing” plans – places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition… unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger. Because AT&T’s acquisition of T-Mobile likely would substantially lessen competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, the Court should permanently enjoin this acquisition.

One thing which fascinates me is the way in which neither the complaint nor the press release makes any mention of the fact that the proposed deal would give the merged company substantially all of the market in GSM cellphones — the only ones which work in most of the rest of the world. Americans who travel internationally pretty much have to get their cellphone service from one of these two providers — and they’re highly sensitive to exorbitant international roaming fees. Which would almost certainly go up in the event of this merger.

The noises coming from the FCC in the wake of this suit are supportive, with FCC chairman Julius Genachowski saying that he too has “serious concerns about the impact of the proposed transaction on competition.” He adds for good measure that “vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile.”

AT&T hasn’t officially given up, but I can’t see it winning this particular fight with the law. This, then, is a good day for the American consumer, not to mention a great day for Sprint and Verizon. AT&T and T-Mobile have both put enormous amounts of management time and shareholders’ money into putting this merger together, all of which will now be for naught. Rather than fight the inevitable, they should go back to fighting each other where it matters: in the marketplace.

COMMENT

@Keng_CA says “All this talk about T-Mo doing horribly is not true – they just weren’t performing as well as DT likes.”

T-Mobile has not had an RoE above 7.1% in any year since 2006. For the last 12 months it has been 4.1%. For comparison, AT&T and Verizon (and indeed almost any healthy company) have RoE in the teens.

If you were a manager or shareholder of Deutsche Telekom, how would you justify investing the $3B settlement in a business that is returning 4-7% rather than distributing it to shareholders or finding a better use for the capital?

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