from: Media Intell [1]
Friday, September 14, 2007
How Did It Come to This?: The Origins of the Telephone-Cable War over the Internet
The reality that competition over the internet is evolving into two opposing camps is now well established. On the one side are “former” telephone companies, including AT&T, Verizon, and Qwest, the successors and beneficiaries of the Bell System break-up in 1984. Opposing them are “former” cable television operators, including Time Warner, Comcast, Cox, and Charter Communications, the successors and beneficiaries of mergers, acquisitions, and favorable legislation in the 1990’s. (The quotation marks indicate that these “former” companies are no longer just telephone or cable operators, but a new breed that is increasingly vertically integrated, that is, diversified into several different markets, More on this later.)
These companies are now the gatekeepers to the largest network of communications vehicles ever built, made possible by the convergence of video, voice and data into binary code in the 1990’s. Despite the popular belief that “content” and “programming” drive the media, the reality is that producers like Disney, Fox, HBO, Paramount, and Universal are dependent on telephone and cable operators for access to much of their audiences. Without contractual agreements with these gatekeepers, large production companies would not be able to use high speed transmission lines, regional fiber optic systems, microwave facilities, and satellites to exhibit their shows and movies, or for that matter, sell advertising to support them. In fact, the most important acquisitions in media mergers since the mid-1990’s are no longer movie studios, film libraries, broadcast channels, or radio stations. The most prized possessions are the new technology platforms spawned by the internet, including digital television, fiber optic systems, VoIP telephone, cellular services, and specialized networks set aside for gaming, gambling, pay-per-view movies, and downloadable music.
How did it come to this ? How did telephone and cable companies become so powerful ? More importantly, why haven’t they delivered on their promises for an “information superhighway” and a new era of democratic communications ? We now seem to be confronted by the same problems left by traditional media: eroding freedom of speech, questions about our right to free association, a weak and debilitated press, an inability to freely communicate unpopular ideas, and ironically, an inability to develop commerce due to unequal access to the internet. In place of solutions, we are simply told that more information choices are the answer. What happened ?
To understand how the players on both sides of this war ascended to their current positions, we must look at a few key events that affected both camps.
On the telephone side, the first significant event was the 1984 breakup by Congress of AT&T’s “Bell System”, a century old monopoly of regional Bell companies, transmission facilities, and R&D units. The dismantling of “Ma Bell”, spurred by litigation over long distance telephone by MCI and other small companies, created nine independent “Regional Bell Operating Companies” (RBOCs) covering large portions of the country. Through a series of mergers, acquisitions, and hostile takeovers, a smaller group of RBOCs survived in the 1990’s, including a reconstructed Southwestern Bell, later adopting the old “AT&T” standard, General Telephone under a new brand called “Verizon”, and “Qwest Communications”, the successor to USWest. The principal business of these companies remained local and long distance telephone services, however, even through the boom and bust of the Dot com economy in the early 1990’s through 2000.
On the cable side, a prime event was the first comprehensive legislation for the industry: the Cable Communications Policy Act of 1986. This law freed cable operators from most local and federal rate regulation. However, unlike the telephone industry, cable companies through the next decade remained clustered in small regional pockets without the benefit of cost savings from shared facilities and mass markets. It was not until a second major event, the passage of the Telecommunications Act of 1996, ironically pushed by both cable and telephone companies, that established the foundation for the current situation.
The 1996 law had the effect of reducing, and in some cases eliminating, local government regulation of cable subscriber rates, and limiting the amount of extra money and resources, such as community channels and production equipment, that cities, counties, and states could demand from cable operators during contract negotiations. But the new law had other effects that were not so kind to the cable industry.
First, by deregulating subscriber rates 1996 law allowed many cable operators to raise rates without local controls, creating a subscriber revolt that eventually attracted satellite television providers, such as Direct TV and Dish Network, to large urban markets. Second, the 1996 law encouraged telephone companies, such as AT&T, Verizon and Qwest, to look for merger opportunities among cable operators. AT&T’s first venture in 1998 with TCI, the largest cable operator in the 1990’s, died a lingering death because of high interest payments on billions in debt bonds. But the experience provided invaluable a decade later when AT&T decided to enter television. Finally, the high volume of revenue generated by cable television services, now deregulated, and the perception that municipalities were obstacles to internet growth pushed state governments to step in. In California the regulation of cable television was placed in the hands of the Public Utilities Commission (CPUC) in January, 2007. By then, more than 30 other states were making similar moves.
The transfer of cable regulation to state governments has been a boon to the telephone industry. In California, while eliminating most regulation of rates and services for both cable and telcos, AT&T, Verizon, Qwest and others were granted access to media markets without going through long negotiations and hearings with city councils. Waiting periods were virtually reduced to days, instead of months or years. Each telephone company was also granted specific regions in which they can operate, eliminating direct competition with companies in their own industry, but placing them at odds with incumbent cable operators. Using the resources they were able to accumulate through years of monopolies in local and long distance telephone, AT&T, Verizon, and Qwest have invested hundreds of millions of dollars to upgrade and expand their digital networks.
Former cable television operators have had a more difficult time. In Los Angeles there were fifteen different franchise areas in 2002 operated by six different companies. Since then many of the companies have been merged, acquired, or in the case of Adelphia Communications, gone into bankruptcy. Among the survivors are Comcast Communications and Time Warner Cable, the number 1 and 2 cable television operators respectively in the country. In 2005 both companies purchased Adelphia’s cable TV properties, as well as its broadband internet and telephone rights at a 40% discount. By that time Comcast and Time Warner, like their telephone competitors, were no longer just cable TV operators, but fully integrated media conglomerates with extensive holdings in film and television production, sports franchises, high speed internet distribution, publishing, and marketing.
Time Warner subsequently traded most of its east coast and southeastern cable systems to Comcast for the latter’s systems in Los Angeles, adding to Time Warner’s already central position as the principal multiple system operator in Ventura and San Bernardino counties. The completion of the deal in 2006 resulted in Time Warner’s access to 98% of all TV households in Los Angeles, and more than 70% in Southern California. Time Warner’s dominance of the nation’s # 2 TV market allows it to compete only with AT&T and Verizon for bundled television, internet, and telephone services.
Implications of Cable’s Competition with Telephone Companies
The differences in services between Time Warner and its telephone competitors are almost negligible to the average consumer. As each of these companies roll out bundled services on their high speed platforms, consumers will be offered similar television, internet, and telephone options. But it is important to understand the implications of Time Warner’s acquisitions in Los Angeles, as well as the entrance of telephone companies into this important market.
Since Time Warner will be the only company grandfathered under an existing cable television franchise agreement in Los Angeles, the city receives approximately $20 million annually in franchise fees, an expense not imposed on AT&T or Verizon. This revenue will likely grow as the city also earns fees from new services that require access to streets, including broadband internet access, shopping channels, and VoIP telephone, for the remaining 10 years of the agreement. This means that telephone companies have, in effect, received a $200 million bonus from the California state legislature to provide internet based services, presumably to catch up on the lead built by cable operators, and perhaps as a penalty on cable for several years of customer neglect. Similar advantages are enjoyed all over the country because many cable franchise agreements will be in effect for several more years.
There is another side to this competition, however, that is less visible. When it comes down to it, Time Warner will not be significantly affected by a $200 million loss over ten years. The company will probably make the money back through rate increases and new services. Those most adversely affected will be consumers, both in the wallet and in terms of personal freedom. Consumers will pay higher fees because cable’s loss will be passed through on customer bills. They will also lose because in the process of competing to deliver internet services cable and telephone companies have succumbed to pressure from a lame duck presidential administration to trade vital customer data for favorable standing as participants in the so-called “War on Terrorism”.
Recent news reports illustrate this disturbing trend. Item: AT&T and Verizon approved electronic spying by the National Security Agency on its users under the Patriot Act. Item: The Los Angeles Times reports that consumers who purchase bundled television, internet, and telephone services from Time Warner and other large cable operators will likely be forced to sign contracts allowing government agencies to mine personal data with little or no recourse in the courts. Item: Reports in the New York Times and other papers indicate that Google, despite resisting Bush Administration pressure to conduct domestic spying, continues to assist the Chinese government to observe and censor its internet users, and in some cases provide information for their incarceration. Ironically, even the claim that broadband services in the United States are second to none fails to acknowledge a little known fact: Item: As reported by the Electronic Freedom Foundation, the United States is now 14th in the world in the deployment of broadband internet access behind Luxembourg and Sweden.
All this leaves the impression that the battle over the internet is not so much a competition between companies, or even a rivalry between industries, as if it were such an abstract and distant conflict. The real war is more likely an assault on individual rights and personal freedoms that we are suppose to enjoy living in a democracy. Ironically, the vehicle for this assault has been the very technology we were told would set us free: the internet. (This is not the time to blame the technology: It is those who apply it that are at fault.) Still, this is something to think about the next time we’re sent glossy brochures or approached by one of these companies to sign up for new services.