Recognizing the Cable Company Monopolies

In most cities in the US the cable company is now a broadband monopoly. They have won the competition battle and have largely taken customers formerly served by telco DSL. The cable companies have grown into monopolies due to being better competitors and by offering superior broadband products. There are still some markets where the cable companies are not monopolies – they may be competing with a fiber overbuilder or an aggressive CLEC using DSL, or the cable company has not made the upgrades in a given market to the fastest broadband products. But for most towns in the US the cable companies now fit the definition of a classic monopoly.

What I find alarming as a consumer is that there is no talk at the national or even the state level of reacting to the monopoly status of the big cable companies. I know that this conversation will eventually arise as has happened in the past with other monopolies. Monopolies naturally abuse their monopoly power more and more over time until the government is forced to react to regulate them.

The nature of monopolies is well understood and there are well-stablished reasons why governments eventually step in to regulate monopolies:

  • Price Gouging. Monopolies always raise prices over time when there are no competitors to keep them in check. We know that Wall Street is currently urging the big cable companies to aggressively raise broadband prices.
  • Poor Service. Monopolies tend toward providing poor customer service because they have no incentive to do better. The big ISPs are already today are rated by consumers as their least favorite corporations.
  • Monopsony Power. This economics term refers to the tendency for monopolies to exploit their purchasing power by forcing low prices on their supply chain. Perhaps the best example of this is Comcast swallowing up the programmers that supply the content for their cable product.

We know from a few centuries of experience how to deal with monopolies. Governments have numerous options:

Promote Competition. Governments sometimes try to curb monopolies by promoting competition. In the broadband world this could involve the government providing funding to build urban fiber or supporting alternate technologies like 5G to directly compete with the cable monopolies.

Price Regulation. Many natural monopolies are regulated through price caps where regulators must approve rate increases. This remedy is most effective with natural monopolies like electricity or water systems which serve everybody in a community.

Quality of Service Regulation. Regulators have often intervened and forced customer service standards on monopolies. The best example is the old Ma Bell and regulators over the years defined much of the interface between AT&T and customers. They regulated many aspects of that interface such as the rules governing disconnecting customers for non-payment or be defining acceptable time period to make repairs.

Divestiture. An extreme remedy is divestiture, or breaking up a monopoly into different components. We’ve seen this in our industry when the government forced the divestiture of AT&T into local telephone companies and a nationwide long-distance network. It’s harder to see such a clean split for cable companies, but the government could make them divest of programming assets or other ventures that enable them to inflict monopoly abuses.

Rate of Return Regulation. Another effective form of regulation is rate of return regulation. This is still done today for large power companies who must defend their expenditures and rates to regulators. Earnings for the core business are strictly regulated and excess profits returned to customers.

Penalties for Monopoly Abuse. Finally, the government can impose penalties for monopoly abuses. The FCC has always had this authority and issues fines against bad actors in the industry. The Federal Trade Commission also can fine cable companies for operating practices that harm customers.

We are in an environment today where big ISPs and many other large corporations have gained the upper hand in the market through the lobbying of legislators and regulators. However, historically the treatment of monopolies has always been cyclical, and eventually the monopoly abuses become unbearable and the public demands regulation. I would think that if the cable companies follow Wall Street’s advice and raise base broadband rates to $90 per month that we’ll see the government be forced to react.

It’s also possible that some alternate technology like 5G might eventually create competitive pressure for the cable companies. But it’s just as likely that in most places that wireless carriers will be other large companies and we’ll see duopoly competition like we’ve seen for years between Verizon FiOS and the cable companies in the Northeast, where both charge similar prices and don’t really compete.

Can the FTC Regulate Broadband?

When the FCC wrote themselves out of the regulation of broadband, one of the primary arguments made by Chairman Ajit Pai was that the Federal Trade Commission (FTC) would still be empowered to step in to stop any ISP abuses of broadband customers. The FTC has the general mandate to stop large corporations from engaging in unfair or abusive practices and Pai’s argument was made that ISPs are no different than other large corporations and that FTC oversight is sufficient.

There are several reasons why this argument is full of holes and the FTC cannot be an adequate replacement for the FCC. First, the FTC is not structured to regulate monopolies. We are now watching cable companies become a virtual broadband monopoly for residential service in most markets. The FCC loves to point out that there is still usually a telco DSL option, but when Comcast increases minimum broadband speeds to 150 Mbps while DSL is at a small fraction of that speed, then cable broadband and DSL are no longer equivalent services. The cable companies are winning the broadband war and becoming broadband monopolies as DSL disappears from the conversation.

One of the natural roles of government is to regulate monopolies. FERC heavily regulates local electric companies. The FCC was originally created to deal with the monopoly power that the old Ma Bell held over 95% of the country’s telephony needs. The government regulates industries where a few players hold all of the power like airlines and banks.

The government has always dealt with monopolies in one of two ways – regulate them to curtail abuse of monopoly power or else break up the monopolies up to create competition. The government forced the divestiture of the Bell System when it became apparent that their continued existence was a natural barrier to competition. It seems ironic that the FCC would wash its hands of regulating broadband at the point in time when cable companies are becoming classic monopolies.

The other primary reason that the FTC cannot regulate broadband is that they regulate purely by exception. The agency is empowered to pursue specific abuses by a specific corporation and can require and fine a given company for bad behavior. This puts the FTC in the role of corporate policeman – they can go after an ISP for a bad business practice but that doesn’t directly prohibit other ISPs from engaging in the same behavior. The FTC’s powers are pale compared to the ability of a regulatory agency like the FCC to make a ruling that instantly applies to every ISP in the industry. Ajit Pai’s argument that the FTC can take the FCC’s place is faulty because policing is not regulating.

As weak as the FTC’s power is over regulating broadband there is a chance they will lose even that ability. The FTC sued AT&T in 2014 because the company throttled data usage by unlimited customers to try to get them to drop their unlimited data plans. AT&T challenged that lawsuit and argued that the FTC had no authority over the company. Recall that this was at a time when the FCC still claimed jurisdiction over broadband issues.

The US District Court of Northern California recently ruled against AT&T in favor of the FTC. AT&T has until May 29 to appeal that ruling to the Supreme Court. If the company appeals, it will be to directly ask the Supreme Court if the FTC has jurisdiction over them. A ruling in AT&T’s favor would remove the last vestige of broadband regulation and would make broadband a completely unregulated industry.

It’s not hard to imagine how a truly unfettered broadband industry would react over time if not regulated. We will see big price increases, data caps, the free use and abuse of customer personal data and a violation of all of the principles of net neutrality. This would push broadband in the wrong direction by making it too expensive for many households while degrading the online experience for all broadband customers. The Internet as we know it can be broken if the ISPs are allowed to ignore customers and answer only to Wall Street.

We are already near to this point even if the AT&T suit against the FTC doesn’t conclude with an AT&T victory at the Supreme Court. After the FCC washed their hand of broadband regulation we now have the only regulation of the industry being the FTC which can tackle bad behavior at a single ISP on a single topic. Mass bad behavior by all of the big ISPs will quickly swamp the FTC, and within a few years the higher prices and bad ISP behavior will likely become the industry norm.

The fact that only a few companies own the wires of the broadband network makes this industry a natural monopoly just like electricity, water and natural gas delivery. Nobody likes to be regulated and I can’t even fully believe I am advocating for more regulation. Even before the FCC withdrew from broadband regulation it was one of the mostly lightly regulated monopoly industries in the country. Big ISPs have always fought against being regulated, but I don’t think even they thought that all broadband regulation would be removed in one fell swoop. We are going to have to somehow put regulations back in place or watch our industry go down a very ugly path.

Shrinking DSL Competition

turtle_backFor a number of years Verizon has been trying to get rid of DSL customers. Verizon just recently increased the price of its older DSL by $7 in an attempt to drive more customers to FiOS, Verizon wireless, or the cable company.

Unlike the other large telcos Verizon never upgraded DSL to the paired copper wire technology used by AT&T U-verse. In that technology, AT&T and other telcos have bonded together two copper wires and also used a later variety of DSL that, together, can increase DSL speeds to as much as 50 Mbps on perfect copper, but even to 25 Mbps on poor copper. Instead, Verizon put all of their investment into FiOS fiber and most of their DSL is from the very early 2000s. The older DSL that is still operating has speeds of up to 3 Mbps, with ‘newer’ DSL with speeds up to about 7 Mbps.

These are the speeds in urban areas and Verizon customers who live outside of towns get far slower speeds, often reported at near-dial-up slowness. And many of these rural customers have to worry about Verizon wanting to tear down their copper lines, leaving them with no wireline broadband alternative. Verizon is the only large telco that largely rejected the FCC’s offer for taking Connect America Funds to upgrade its rural DSL. Verizon has sold large chunks of its rural market to Frontier and the company has made it clear to the FCC that they would like to walk away from the rest.

If you’ve never read the customer reviews at DSL Reports it’s worth a look. This is a site where customers have been posting stories of problems with broadband for years – everything from lack of speed, poor customer service, slow repairs and pricing. For anyone that happens to have a fast broadband connection it’s an eye-opener to hear from homes that do not.

The FCC tries to paint the picture that there are many markets in the US that have at least two competitors. But when one of the two competitors is a telco trying to edge its way out of the DSL business it’s hard not to argue that a lot of the country really has become a cable monopoly for broadband. The households that stubbornly stick with DSL seem to be those that are willing to accept slow speeds for a lower price. But Verizon seems to want these customers to move on to some other alternative.

Even where the telcos are trying to make DSL competitive it’s a losing battle. AT&T put a lot of money into upgrading and selling its U-Verse DSL product. This was their alternative to building fiber and AT&T thought they could get a few more decades out of their aging copper.

But AT&T total underestimated the huge increase in household demand for bandwidth. The U-verse product uses the paired DSL product – with speeds generally between 25 Mbps and 40 Mbps – to serve both cable TV and broadband. AT&T quickly found out that this data pipe is too small for homes that want to watch multiple TVs or that today want to watch multiple Netflix streams. AT&T is remedying this by working feverishly to shift TV over to their new DirecTV platform, freeing up the full amount of U-verse bandwidth for Internet access.

We are not too many years away from the time when the myth that most urban markets have at least two broadband competitors will fade away. As household demand for broadband keeps growing there will be fewer and fewer people on DSL, and that exodus will be accelerated by companies like Verizon helping to push DSL customers out the door.

Verizon passes many millions of homes with its fiber-based FiOS. But that network has always been very patchwork in that it will serve one neighborhood while bypassing nearby neighborhoods. There is a slight glimmer in the FiOS story since Verizon recently announced that they are going to greatly expand FiOS in downtown Boston.  Boston is like most east coast cities where Verizon built a lot more fiber in the surrounding suburbs while largely ignoring the more costly construction in the city. But after having not built FiOS for a while the company surprised everybody by announcing this new fiber initiative.

The bottom line is that DSL is in its death throes. But like dial-up (which is still sold to millions of homes) there is likely to be DSL around for as long as the telcos don’t physically tear down the copper or pull the plug on the electronics. But it’s clear that Verizon, at least, is hoping for DSL to fade away sooner rather than later.