A Message for Susan: Dynamic Markets Make Predictions Hazardous

I was thinking of Susan and her book again this weekend. Yep, that would be Professor Susan Crawford of Benjamin Cardozo School of Law and her book Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age. 

I was thinking of Susan because, in catching up on my stack of weekend reading, I came across this recent Wall Street Journal article, "Cutting the Cable Cord and Getting 'Phone TV'" [subscription required]. I'll get back to the article shortly, but first a word about Captive Audience. 

As you may know, the whole premise of Professor Crawford's book is that Comcast especially, but other cable operators as well, are monopolies and that, therefore, they should be operated as public utilities. Just like the electric utilities – rate regulation, non-discrimination obligations, and all. 

I have discussed Professor Crawford's book in more detail in earlier pieces, including this one, "Captive Audience's Captive Thinking." Please read the entire piece if you haven't done so. But, for my purpose here, I'll just reproduce the way I began the essay: 

"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."

I am confident that if you read, or even skim, Professor Crawford's book, you will see that I have fairly captured the essence of her views. Indeed, on the very first page, she calls Comcast "a monopoly provider of wired high-speed Internet access" and then on page 2 asserts that, as a result of its merger with NBCU, Comcast "would probably make content too expensive for any potential data distributor." By page 53, Professor Crawford has concluded, "cable's advantages eventually became unbeatable." 

End of story! 

Except of course, it is not the end of the story – because Professor Crawford fails to appreciate the ongoing dynamism of today's digital age communications marketplace, and the capacity of this marketplace to foster competition and consumer choice. Simply put, Professor Crawford's hypothesized view of her hypothesized market, dominated by Comcast and other cable operators, has turned out to be wrong, certainly at least for now and for the foreseeable future. 

Recall that Professor Crawford suggests the Comcast – NBCU merger "would probably make content too expensive for any potential competing data distributor." Now back to the WSJ article, "Cutting the Cable Cord and Getting 'Phone TV,'" which begins: "The way things are going 'cable TV' may have to be replaced by 'phone TV.'" It contains lots of figures indicating the extent to which AT&T and Verizon are taking market share away from cable operators against whom they compete. For example, the article reports that, according to recent third quarter results, "[t]he top two cable providers, Comcast Corp. and Time Warner Cable, Inc., shed 435,000 video customers in the quarter, while AT&T and Verizon added 400,000." 

According to analyst Craig Moffett, "[t]he third quarter results are a reminder that the biggest threat facing the cable industry is competition from phone companies…." 

The article reports that cable executives and analysts contend Verizon and AT&T have largely won market share using discounted pricing and promotional packages. This sounds like marketplace competition to me, and competition that is benefitting consumers.

And AT&T CEO Randall Stephenson is quoted to this effect: "It’s going to be a dogfight between us and cable for the next 20 years. They will invest, and they will step up. We will invest. It will go back and forth." This dogfight sounds like marketplace competition to me – indeed, vigorous competition – and competition that is benefitting consumers.

And by the way, in this competitive environment, "they will invest" and "we will invest" are not empty words, but proven reality. According to a recent study by the Progressive Policy Institute, AT&T, Verizon Communications, CenturyLink, Comcast, and Time Warner Cable all ranked in the top twenty of non-financial companies making capital investments in the U.S over the past year. All this investment is the result of marketplace competition, and it is benefitting not only consumers but the nation's economy as well.

Let me be perfectly clear. I don't have a dog in this competitive dogfight. And unlike Professor Crawford, I don't pretend I can predict ultimate winners and losers among the competitors in a dynamic marketplace, or know how the market structure will evolve in the years to come. In any event, it's not my business to predict winners or losers.

But what I do know is this: With the ongoing technological changes and evolving business models and experimentation, the marketplace in which Comcast and other cable providers presently operate is competitive. Of course, by definition, the same is true for the cable operators' competitors, AT&T, Verizon, and all the other broadband providers, including the various wireless and satellite operators.

So, I think it is seriously wrong for Professor Crawford to brand Comcast and other cable operators "monopolies." And it would be a mistake of huge proportions to heed her call to regulate broadband companies as utilities, just like electric power companies, which by and large continue to retain dominant market power. Imposing a utility-like regulatory straight jacket on broadband providers, say, to prohibit experimentation with various usage-based billing plans tailored to the needs of different customers' preferences, is a sure-fire recipe for stifling innovation that benefits consumers and investment that benefits the nation's economy.

I wish I could get Susan to agree that it's no time to let captive thinking premised on a hypothesized market trump the competitive realities of the broadband marketplace. If such thinking ever were to lead to regulating broadband providers as public utilities, rest assured that consumers would be the real losers.

Europe Lags Behind U.S. in Broadband Speeds and Connectivity

Although some have touted Europe as a broadband leader, Europe generally trails the United States in important measures of broadband performance. The United States has led the world in broadband subscriptions for years, and yet there are some in the U.S. who continue to downplay these broadband achievements as part of an effort to advocate for an increased regulatory role in broadband build-out. As far back as 2007, FSF President Randolph May wrote, in a blog entitled "The 'Talking Broadband Down' Crowd," that those who predictably lament OECD broadband penetration statistics are “getting tiresome." They are getting even more tiresome now in light of evidence of the U.S.’s lead over Europe’s broadband speeds, penetration, and market performance.

The United States generally provides faster broadband than Europe. On average, most Americans have access to broadband speeds of 7.2 Mbps, which ranks the U.S. as the ninth fastest broadband provider in the world according to Akamai’s most recent State of the Internet Report. Last year, average broadband speeds available in the U.S. increased by 20%. In contrast, most major countries and regions in Europe are nowhere to be seen on the top-ten list, with the UK ranking 17th, reporting an average connection speed of 6.3 Mbps, and other major countries lagging even further behind, with Germany and France reporting averages of 5.9 Mbps and 4.8 Mbps respectively.

The United States also far exceeds Europe in overall broadband penetration. The U.S. boasts broadband connections for 95% of Americans.  As reported by the New York Times in December 2012, only 2% of European Union households have access to broadband download speeds of 100 Mbps or greater, while in the United States, at least 50 million homes, or nearly half of all households, are able to connect to networks offering at least 100 Mbps. Additionally, only half of E.U. households have service at even 30 Mbps. The European Commission says it aims to match the 100 Mbps connectivity rates reported by the United States and provide all E.U. households with service at 30 Mbps by 2020.

Due to competition, Americans also have greater choice in access to broadband than European consumers. There are at least two wireline facilities-based providers of broadband in 85% of the U.S. Additionally, the U.S. provides Internet access through DSL, 3G, 4G, cable, cable-fiber hybrid, FiOS, WISPs, and satellite. This multitude of choices enables consumer access to services that meet their particular needs for various features and functions at various price points.

European networks are still not attracting nearly the same levels of investment or profit that U.S. networks do, and the gap continues to widen. The August 2012 706 Report released by the Federal Communications Commission concedes that "[p]rivate industry is continuing to build out broadband and has invested significantly into broadband networks to date." According to figures cited in the 706 Report, between 1996 and 2010 wireline broadband providers invested $41 billion annually in expanding their networks, amounting to more than half-a-trillion dollars in broadband investment over a fifteen-year period. CTIA estimates for years 1996-2010 show that cumulative capital investments for wireless providers totaled more than $277 billion. In 2011-2012 alone, U.S. providers reported making capital investments of more than $25 billion, while wireless providers in 15 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK) spent $18.6 billion combined. Investment in European broadband networks has been lagging amid economic downturn, overcrowded market conditions, and tough regulations, and analysts urge change to the regulatory or macroeconomic environment in order to improve conditions.

Private sector leaders have recognized the need for regulatory reform in Europe based on U.S. success. Vodafone CEO Vittorio Calao urged European telcos to “look very carefully at the American model and more seriously ask ourselves why there is such a successful model for customers, shareholders and governments that we seem not to be able to replicate.” 

Some European regulators also have recognized the need for regulatory reform if EU countries are to keep pace with the U.S., which has built out vast high-speed networks.  Neelie Kroes, Commissioner for the European Union’s digital agenda, has proposed measures that would lower national barriers to consolidation, perhaps motivated by Hong Kong-based Hutchison Whampoa’s acquisition of Orange Austria from France Telecom, which reduced the number of national network operators in the country from four to three.

Commissioner Kroes has also proposed that the European Commission begin allowing large operators that lease their landline networks to competitors to increase their rental fees. Kroes has tried to manipulate the competitive landscape in Europe before, proposing regulating rents paid to lessors down to bolster smaller competitors, resulting in criticism from those landline owners. Although Kroes plans to announce a set of measures to bar discriminatory behavior by landline operators, it remains to be seen whether this complicated, superimposed regulatory framework will actually preserve and promote competition rather than hinder it. 

Rather than celebrating the good news of remarkable U.S. progress in broadband deployment, which is at least partly attributable to the FCC's deregulatory broadband policies, the "talking broadband down" crowd continues to criticize the current marketplace and downplay positive statistics and reports in order to advance a pro-regulatory agenda.  In contrast to the view promoted in Susan Crawford’s Captive Audience, technological advances and new business models will continue to evolve in ways that provide consumers with a meaningful choice of alternatives that meet consumer demands. This is what we have seen in the context of U.S. broadband development over the past decade.

Although the U.S. has made great strides in broadband deployment and provision of high-speed services, it is essential to continue on the path towards completing the transition to a digital world.  Just as FSF President Randolph May said in 2007, the correct path is not “defining down” the U.S.’s broadband progress in an effort to promote increased regulation. In order to remain a world leader in broadband build-out and speed, the U.S. must continue to support innovation and growth by removing unnecessary regulatory barriers to network development and build-out.