Thursday, January 10, 2013

Captive Audience's Captive Thinking

I've just finished reading Susan Crawford's new book, "Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age." It is interesting in many ways, and even entertaining in others. 
But, most importantly, "Captive Audience" is fundamentally flawed. 
"Captive Audience" is flawed because Professor Crawford relies on an incorrect – indeed, a hypothesized – view of the communications and information services marketplace to construct the case for monopoly power. And then she offers anachronistic, legacy regulatory measures to remedy the supposed ills that exist in her hypothesized market. In my view, the book more appropriately might have been titled, "Captive Thinking: Viewing Today's Telecom Industry Through An Analog-Era Lens." 
The book's central thesis is unmistakably clear: Comcast possesses monopoly power with respect both to the provision of broadband services and the provision of video programming. While less clear, at times it appears Professor Crawford may be making the same monopolistic power claim with regard to Time Warner Cable and other cable operators. 
While it doesn't come until the very end of the book, the proposed remedy for this supposed monopolistic power is unmistakably clear as well: "America needs to move to a utility model." Professor Crawford looks back to the days of the early twentieth century creation of AT&T – even further back to the late nineteenth century's railroad regulation model – to support her argument that America needs a "utility" regulatory regime for today's broadband companies, especially for Comcast. 
Indeed, consistent with her backwards-looking focus on public utility models, Professor Crawford equates the provision of electricity service and broadband service. She argues that electricity service, while first considered a luxury, soon came to be viewed as a necessity, and that broadband is like electricity in this respect. Therefore, broadband companies, like power companies, should be regulated as public utilities. 
Among others, a central problem with Professor Crawford's argument, however, is that the provision of electricity, at least to a large segment of America's population, does exhibit, to a degree that differs materially from broadband provision, natural monopoly characteristics. There are not significant competitive facilities-based distributors of electricity to end users. (Resellers of government-regulated wholesale services are in a different market category, and, in my view, do not provide sustainable competition to end users.) This lack of alternative competitive providers is not true with respect to broadband, including video programming. 
There are not alternative providers of electricity that employ cable, wireless, telephone, or satellite network infrastructures. There are for broadband. I dwell on the electricity analogy because, at the end of the day (and at the end of the book!) Professor Crawford rests so much weight on it. She considers the markets for electricity and broadband both to be natural monopolies. I don't. 
Professor Crawford's argument that cable operators like Comcast are now monopolies is based on her assertion that "cable has decisively won the battle for high-speed wired communications in America." Over the decades I've learned it is wise not to be overly certain when predicting the future course of developments in the communications marketplace. Technological advances occur in unpredictable ways, sometimes more rapidly than predicted, sometimes more slowly. For example, when I first got involved in communications law and policy, there were many pundits predicting that domestic satellites (we called them "domsats" and the FCC for years carried on "domsat" proceedings) might become dominant providers of all forms of communications. Today they play an important role in our communications landscape, but they certainly are not dominant. 
In support of her claim that cable already has "decisively" won the battle, Professor Crawford engages in a bit of sleight of hand. This is because her claim is based entirely on substantially narrowing the market definition by defining the relevant market – and this is buried in a footnote [page 284, note 3] – as "cable companies with DOCSIS 3.0-enabled infrastructure that can offer very high peak download speeds." In other words, in the few places where Professor Crawford addresses market power and market definition in any serious way, she distinguishes, albeit very subtly, between "high-speed" and "very high peak download speed" broadband services. The latter only includes services with speeds above 100 Mbps. In other places, she distinguishes between high-speed wired broadband and what she calls "truly" high-speed broadband. 
The problem with this approach is that it doesn't reflect present marketplace reality. Even though Professor Crawford may think otherwise, for most consumers, telephone company-provided high-speed broadband services provide a satisfactory alternative to those of cable operators, even in areas in which fiber technology is not employed. Many consumers consider the broadband service provided by satellite operators a satisfactory alternative to cable broadband. And still other consumers consider wireless broadband services not only complementary to cable (as Professor Crawford maintains), but substitutable as well. This is increasingly so as high-speed 4G wireless services become more ubiquitous. 
Indeed, over 80% of American households have access to at least two high-speed wireline providers consistent with the FCC's definition of high-speed, even if one does not provide service, at peak times, at the "truly" or "very" high-speed above-100 Mbps that Professor Crawford insists on employing for market-defining purposes. 
So, the problem with Professor Crawford's claim of cable monopoly power is that it rests on a hypothesized marketplace based on an unduly restrictive market definition, not on the broadband market as it presently exists. Her hypothesized market definition is based on her own personal predilections concerning the level of service she thinks she will demand in the future, rather than on an analysis of the services consumers demand in today's actual marketplace. Note that she does not report that when the FCC last surveyed consumers, the agency found that 93% were satisfied with their broadband service. And note also that right at the outset of her book [on page 2] she predicates her assertion of Comcast's dominance on the level of service that she hypothesizes will be sufficient to satisfy Americans "in the near future," without explaining what that means.   
It is possible – although I don't think it is likely – that the market may evolve in the way Professor Crawford hypothesizes, that is to say that Comcast and other cable companies come to dominate the broadband distribution marketplace because telephone companies, wireless providers, and satellite operators simply cannot compete for the "truly" high-speed services that consumers may come one day to demand. I doubt this will be the case because, barring regulatory policies that constrain ongoing investment by cable's competitors, I expect that technological and innovation advances, along with new business models, will continue to evolve in ways that provide consumers with meaningful competitive alternatives that satisfy evolving consumer demands. If I am wrong about this, there will be time enough then to consider what remedial measures may be appropriate to prevent consumer harm.          
Rather than going on at length now, I want to make a few additional points briefly. They likely warrant more attention in subsequent posts. 
As I said at the beginning, Professor Crawford claims that Comcast possesses dominant market power not only with respect to broadband transmission but also with respect to video program acquisition and distribution, although she doesn't make the latter claim with the same degree of certainty. Although she apparently envisions a "captive audience," in an age of media abundance, most Americans would beg to differ. Indeed, in a chapter describing the Comcast-NBCU merger, accompanied by broad allegations concerning Comcast's alleged chokehold on video program distribution, Professor Crawford pivots, declaring at page 134 that broadcasters "have more distribution outlets for video than they had before – they can get their programing out through satellite (Dish, DirecTV) or telco (Verizon, AT&T) video offerings as well as cable." This concession – or at least recognition – concerning the availability of satellite and telco video distribution alternatives undercuts the claim that Comcast monopolizes this market segment, whether with regard to broadcasters or other independent programming entities looking for distribution outlets. 
Now, even if Professor Crawford were to concede the existence of alternative providers or outlets, as she seems at times to do, I'm quite certain she would not back away from her plea for public utility regulation of Comcast and other cable operators. This is because she would claim, as she does throughout, that these service providers nevertheless possess enough market power that other entities (that she happens to favor) do not receive "fair treatment." [p. 175]. Especially with respect to Netflix (a company she particularly favors) and other online video providers, Professor Crawford expresses concern that these entities may not be treated fairly. And in this regard, she targets usage-based billing offerings as an especially egregious means of treating Netflix and other online video providers "unfairly" because, in her view, such plans may cause users to curtail the amount of video streamed. Thus, she argues the FCC needs to examine cable operators' revenues, costs, quality of service, and other data – in other words, conduct a traditional public utility rate case – to determine the ultimate "fairness" of usage-based billing. 
We have explained many times on these pages why this plea for the FCC to conduct what, in effect, would amount to an old-fashioned rate case is a recipe for disaster. Usage-based billing plans are employed throughout the economy to enhance economic efficiency by using the price mechanism to allocate scarce resources, here limited bandwidth capacity. Employing price signals this way promotes overall consumer welfare. Not coincidently, to the extent Professor Crawford is really concerned about "fairness" to consumers, and not merely to Netflix, such plans may be fairer to consumers than non-usage-based plans because consumers' charges are more nearly aligned with the costs they impose on the network. Here I am just going to refer you to the recent FSF Perspectives published by Daniel Lyons, a member of FSF's Board of Academic Advisors, entitled "Why Broadband Pricing Freedom Is Good for Consumers." Please review. 
Professor Crawford's single-minded focus on "fairness" for Netflix and others who ride on top of broadband operators' networks, and the supposed harm these "on-toppers" might experience under usage-based billing plans, means there is little acknowledgment that, having invested billions of dollars in building and maintaining their networks, broadband providers are entitled to a fair return on their invested capital. 
Again, Professor Crawford's book is interesting and informative in many respects, especially with regard to some of the historical information concerning the companies and industry leaders she discusses. At times, it is even gossipy, and this can be entertaining. 
But "Captive Audience" is fundamentally flawed because the call for public utility regulation of cable companies is based on an incorrect view of the market. Only by hypothesizing market developments that she predicts – wrongly in my view – will come to pass in the future is Professor Crawford able to construct an argument that provokes her reach back into history for ill-conceived remedial measures. The call for public utility regulation may have been appropriate for the early analog-era of Theodore Vail and the late nineteenth century's railroad magnates. But Professor Crawford's plea to apply such utility regulation to broadband providers operating in today's dynamic digital environment should be rejected.