The Industry

Trusting Big Company Promises

When AT&T proposed to merge with Time Warner in 2016, attorneys at the Justice Department argued against the merger and said that the combined company would have too much power since it would be both a content provider and a content purchaser. Justice Department lawyers and various other antitrust lawyers warned that the merger would result in rate hikes and blackouts. AT&T counterargued that they are good corporate citizens and that the merger would be good for consumers.

In retrospect, it looks like the Justice Department lawyers were right. Soon after the merger, AT&T raised the prices for DirecTV and its online service DirecTV Now by $5 per month. The company raised the rates on DirecTV Now again in April of this year by $10 per month. AT&T accompanied the price increases with a decision to no longer negotiate promotional prices with TV customers. In the first two quarters of this year DirecTV lost over 1.3 million customers as older pricing packages expired and the company insisted that customers move to the new prices. AT&T says they are happy to be rid of customers that were not contributing to their bottom line.

In July of this year, CBS went dark for 6.5 million DirecTV and AT&T U-verse cable customers. AT&T said that CBS wanted too much money to renew a carriage deal. The two companies resolved the blackout in August.

Meanwhile, AT&T and Dish networks got into a dispute in late 2018 which resulted in turning off HBO and Cinemax on Dish Network. This blackout has carried into 2019 and the two sides still have not resolved the issue. The dispute cost Dish a lot of customers when the company was unable to carry the Game of Thrones. Dish says that half of its 334,000 customer losses in the fourth quarter of 2018 were due to not having the Game of Thrones.

I just saw headlines that AT&T is headed towards a rate fight with ESPN and warns there could be protracted blackouts.

It’s hard to fully fault any one of the AT&T decisions since they can be justified to some degree as smart business practices. But that’s how monopoly abuses generally work. AT&T wants to pay as little as possible when buying programming from others and wants to charge as much as possible when selling content. In the end, it’s consumers who pay for the AT&T practices – something the company had promised would not happen just months before the blackouts.

Programming fights don’t have to be so messy. Consider Comcast which is also a programmer and the biggest cable TV company. Comcast has gotten into a few disputes over programming, particularly with regional sports programming. In a few of these disputes, Comcast was leveraging its programming power since it also owns NBC and other programming. But these cases mostly got resolved without blackouts.

Regulators are most worried about AT&T’s willingness to allow prolonged blackouts because during blackouts the public suffers. Constantly increasing programming costs have caused a lot of angst for cable TV providers, and yet most disputes over programming don’t result in turning off content. AT&T is clearly willing to flex its corporate muscles since it is operating from a position of power in most cases, as either an owner of valuable content or as one of the largest buyers of content.

From a regulatory perspective this raises the question of how the government can trust the big companies that have grown to have tremendous market power. The Justice Department sued to challenge the AT&T and Time Warner merger even after the merger was approved. That was an extraordinary suit that asked to undo the merger. The Justice Department argued that the merger was clearly against the public interest. The courts quickly ruled against that suit and it’s clear that it’s nearly impossible to undo a merger after it has occurred.

The fact is that companies with monopoly power almost always eventually abuse that power. It’s incredibly hard for a monopoly to decide not to act in its own best interest, even if those actions are considered as monopoly abuses. Corporations are made up of people who want to succeed and it’s human nature for people to take any market advantages their corporation might have. I have to wonder if AT&T’s behavior will make regulators hesitate before the next big merger. Probably not, but AT&T barely let the ink dry on the Time Warner merger before doing things they promised they wouldn’t do.

Regulation - What is it Good For?

Why We Have Crappy Rural Broadband

I believe that there are two simple reasons why we such poor landline infrastructure in rural America – the big telcos decided to walk away from rural America and the regulators let them do it.

It’s easy to contrast the rural areas served by the big telcos and the smaller telephone companies. A large percentage of the smaller telcos have built fiber in rural America and are offering broadband today as good as anything found in any city.

By contrast, the big telcos all stopped supporting copper many decades ago. The existing copper networks were largely built or rebuilt in the 1960s and 1970s by AT&T. However, soon after AT&T was split into the Baby Bells they decided to stop spending money to support rural America.

For example, I clearly remember in the 1980s when Bell Atlantic, which became Verizon, wanted to sell off the entire telco property in West Virginia. I worked with several groups trying to buy the network there. It became quickly clear that the telco had slashed maintenance for the West Virginia copper network. Bell Atlantic had shut down local customer service centers and steadily reduced the number of repair technicians. Bell Atlantic still happily collected the monopoly revenues in the state but didn’t roll any profits back into the network.

The big telcos didn’t only walk away front rural America. To rub salt in the would they worked hard to keep others from serving in the areas they abandoned. The big telcos undertook an aggressive policy of stopping anybody else from competing against them. They lobbied in every state legislature to pass laws to stop municipalities and electric cooperatives from competing against them. They worked tirelessly to weaken the 1996 Telecommunications Act and dragged their feet and took every opportunity to make it harder for CLECs to compete.

Their fight against competition hasn’t stopped. Just last year the big telco lobbyists were able to insert language in the new federal $600 million ReConnect grant / loan program that makes it hard to use the grant money to compete against the big telcos.

I was recently on a panel at the Broadband Properties convention and another panelist made a comment along the lines of, “it’s natural for the big ISPs in the industry to try to squash competition – that’s what big companies are expected to do”. That sentiment only works if the big telcos have been engaging in normal competition – but instead their actions have been monopoly abuse.

I don’t think you can find another industry where the monopoly abuses have been so blatant. I can’t think of another industry where the biggest companies not only kill off small competitors, but also aggressively lobby to keep competition out of the market. There is a gigantic difference between competition and monopoly abuse, and the lack of rural broadband can be chalked up almost entirely to monopoly abuse.

Susan Crawford recently suggested that the only long-term solution for rural broadband is to treat rural broadband networks as a regulated utility. What’s sad is that before 1980 that’s exactly what we had, but the regulators blew it and allowed the big telcos to walk away from their regulatory responsibilities.

I firmly believe that both state and federal regulators were completely complicit in allowing the big telcos to walk away from their networks. Some states tried to make the telcos do the right thing, but over time the big telcos wore down regulators by constant lobbying and by non-stop foot-dragging on anything required by regulators.

Not only did regulators not enforce existing regulations, but in most states they unbelievably deregulated the big telcos and lowered or removed any obligation of the big telcos to do a good job. It was easy to justify deregulation in urban competitive markets where cable companies competed with the telcos, but deregulation should never have been allowed in rural America where the telcos own the only landline network.

Regulators turned a blind eye as the big telcos ignored rural America for decades and then rewarded them by deregulating and shielding them from the consequences of the mess they had made of rural copper networks. I defy any regulator to tell me that they were looking out for their rural constituents when they deregulated the telcos. They should honestly all be ashamed, because protecting the public against monopoly abuse is one of the primary purposes of regulation. Regulators are the second culprit in why we have crappy rural broadband.

I’ve always wondered why some smart lawyers haven’t latched onto this story as the basis for a huge class action suit. The damage to rural America from not having broadband are almost incalculable. How do you even begin to quantify the damage to households with no broadband connection today – when it was clearly the responsibility of the big telcos to serve their monopoly customers and the responsibility of the regulators to make them do it?

Regulation - What is it Good For?

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.

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