Hunted: Comcast Leads a Plot Against the Internet
Like any bloodless coup, this one takes place within the palace, beyond the purview of prying eyes. It's an inside job spearheaded by the ultimate of inside players, FCC Chairman Tom Wheeler. He's a former Obama fundraiser, cable lobbyist, and head of the cable trade association, chosen by the president to chaperone the same industry he once served.
Wheeler's loyalties were evident in May, when he proposed segregating the Internet between the haves and have-nots. Under the plan, cable operators soon could charge large companies like Netflix extra to move their wares over a high-speed expressway. Anyone who couldn't pay the toll would be relegated to frontage roads.
Critics believe Wheeler's plan will diminish competition and squelch innovation. Present rules dictate that all traffic move at the same speed, part of a long-standing principle known as "net neutrality." It puts a basement blog on the same footing as the Huffington Post and enables smarter companies to eclipse monied market leaders, in the way Facebook dispatched MySpace.
Yet Wheeler's proposal not only would hand a windfall to his former masters; it would allow cable operators to slow customers' content, regardless of promised connection speed. And it would give prevailing tech companies an advantage on upstart competitors who'd disproportionately feel the pinch of cable's fast-lane Internet tolls.
U.S. Senator Al Franken
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Even venture capitalists oppose the idea, saying they're less likely to invest in start-ups placed at such a disadvantage. Wheeler is putting the most dynamic, growing sector of our economy at the mercy of cable, an industry legendary for its abysmal customer service and monopolistic tendencies.
"Yeah," says Minnesota U.S. Senator Al Franken, taking an overly long moment to consider this turn of events. "I'm sorry, you just made me sad."
Dan Gillmor, Arizona State University professor of digital media, is more than sad -- he's a little scared:
"You have a small group of companies deciding which bits of information get priority over others on their way to people's devices -- that's a pretty fundamental free-speech issue. I think we're really asking for trouble if we let what's clearly the most important medium, maybe ever, be brought under the control of very few."
For years, phone companies have been governed by rules similar in nature and intent to net neutrality. These laws are designed to prevent restriction, discrimination, or denial of service.
Public utilities like water and power operate under similar regulations. Many feel broadband should be treated the same way given its increasing importance in every aspect of our lives.
"The heart of the current conversation [is] whether in fact they are utilities," says ASU's Gillmor. "In the past, we have regulated utilities because we consider them essential services."
It's even more critical considering the limited competition among Internet service providers (ISPs) offering high-speed broadband.
While the phone companies' slower copper-line DSL service initially competed with cable, the proliferation of video has exposed the technology's native inferiority. So they ceded high-speed broadband to cable companies, most of which enjoy monopolies in cities they serve.
Cable broadband already serves nearly three-fifths of the country and added 88 percent of all new broadband subscribers last year.
"If net neutrality is about anything, it's the recognition that we're probably not going to have a lot of extra competition quickly in the ISP business," says Professor Gerald Faulhaber of the University of Pennsylvania. "In essence, network neutrality is a way to keep monopoly or duopoly cable/teleco ISPs from abusing their market position."
Trusting cable with our nation's communications backbone requires a leap of faith. The industry's history of price-gouging, litigiousness, poor customer service, faltering investment, and legislative manipulation begs the question whether we're just enabling it.
Now, the industry's biggest player, Comcast, is swallowing its closest competitor, Time Warner Cable, deepening its concentration of power. Comcast has promised to sell enough television markets to limit the new company to 30 percent of the pay-TV market nationally.
The divestiture is voluntary, meant to mollify the FCC. But, tellingly, Comcast has offered no such concessions on its more profitable broadband business. The merged companies would provide service to more than 40 percent of the country, including half of all truly high-speed connections.
Not only would the merger give one company unprecedented market share, but it promises to forge a new standard in bad customer service.
Congressman Raúl Grijalva
By now, many have heard Ryan Block's viral audio of his attempts to cancel his service with a Comcast representative who simply refused to listen or the video of Aaron Spain, left on hold for three hours until the call disconnected because the office had closed.
Even within the most despised American industries -- cable and Internet -- Comcast and Time Warner are annual customer-service bottom-dwellers, according to the American Customer Satisfaction Index.
Comcast and Time Warner Cable failed to respond to interview requests for this article.
Thanks to Comcast's monopoly position, there's little need to please its customers. In 2012, Comcast's average revenue per subscriber was $143 a month -- up 140 percent in the past decade. Last quarter's profit was $2 billion, up 15 percent over the year before.
The entire industry has raised prices 2 1/2 times faster than inflation since 1998. Like Scrooge, this accelerated to three times inflation from '05 to '10, when average household income declined.
Meanwhile, its investment in broadband infrastructure is flat -- and more than 15 percent off its 2001 peak. Most businesses see failure to invest as a recipe for trouble. Not cable.
Once the pipe is laid, each new subscriber to broadband almost is pure profit -- a 97 percent margin. With profit like that -- and given that 80 percent of the cost is labor in laying it -- there's little incentive for cable to upgrade to the next generation technology, fiber.
Authority Labs' Brian LaFrance
It takes a company like Google to make the ISPs snap to. After Google Fiber announced Austin as one of its first cities, AT&T quickly followed suit with its own fiber rollout. Then in April, after Google publicly pegged Phoenix as a potential expansion spot, Cox announced its intent to upgrade to fiber here.
But Google's looking at only 34 cities. Where does that leave everyone else? Because while the industry insists that utility-style reclassification would squelch investment, lack of competition appears to be the greater threat.
"I think it's bullshit to say, 'Oh, I'm going to stop investing and creating,'" says Democratic Congressman Raúl Grijalva, a University of Arizona graduate and co-chair of the House Progressive Caucus. "Their investments have been profitable as we sit here. So it's really about how much they want to increase their profit by limiting and discriminating [through fast lanes]."
But it goes beyond just controlling the pipes through which Internet traffic travels.
Comcast has its own content engine, after the company's $13.8 billion purchase of NBC/Universal in 2010. Owning the content, as well as the pipes, gives Comcast an unprecedented advantage.
Acquiring NBC turned Comcast into an entertainment juggernaut with at least two-dozen cable channels (Bravo, SyFy, USA), numerous production companies, a movie studio, and theme parks. It even owns one-third of the pay-TV alternative Hulu.
NBC's valuable sports properties (Olympics, NFL, NASCAR, NHL) join Comcast's eight regional sports networks. This follows Comcast's rebuffed attempts to buy ABC/ESPN from Disney. (Comcast since has poured $2 billion into renovating Universal's studio and theme parks in Florida and California in a not-so-neighborly middle-finger salute.)
Because Comcast controls so much of its own programming, its pay-TV competitors always will face an uphill challenge on price. Meanwhile, because of its sheer size, Comcast can command better rates when buying from other programmers. By owning numerous NBC affiliates, Comcast also pockets rich retransmission fees that pay TV must send to local network broadcasters.
Holding the most dominant market position in both cable and Internet, and a new-found ability to charge content providers extra for faster Internet offers tremendous incentive and opportunity for abuse.
"You're not just speaking to the choir, but to the guy who organized it," says Franken, who was the most outspoken senator against the merger. He grilled Comcast Executive VP David Cohen on the anti-competitive dangers posed by such integration.
"They said, 'Don't worry, we aren't going to integrate horizontally anymore. Don't worry about this. I can understand why you'd object if we were doing that,'" Franken recalls. "Then they come back four years later, 'Oh now we're doing that.'"
Don't expect most Democrats to make a fuss. Last year, Comcast spent $18.8 million in lobbying, the third-most by any corporation. It's made more than $7 million in campaign contributions since the last election cycle, nearly 60 percent to Democrats. (AT&T interestingly has a reverse split.)
StealthMode Partners' Francine Hardaway
Courtesy of Francine Hardaway
With midterm elections looming, politicians typically aren't interested in rustling major donors.
"The public interest is best served by having an open Internet. Once you start introducing payola -- or 'pay to play' to have a faster lane -- you penalize anybody who can't pay the top dollar," says Minneapolis Congressman Keith Ellison, Grijalva's Progressive Caucus co-chair.
"You're going to have special interests trying to advance their profitability and win friends. I hope my colleagues understand they're here to look out for the public interest."
That's easier said than done when Comcast President Brian Roberts golfs with Obama, Executive Vice President David Cohen raised $2 million for the president's campaigns, Wheeler raised an additional $700,000, and former Comcast Vice President David Krone now serves as Senate Majority Leader Harry Reid's chief of staff.
The cherry on top: Comcast also owns MSNBC, the official cheerleader for the Democratic Party.
"Millions of people raising their voice is one thing, Comcast raising millions of dollars is another," says Christopher Mitchell, director of the Community Broadband Networks Initiative at the Institute for Local Self-Reliance. "Comcast is a huge fundraiser for the party, and you just can't get away from that."
U of A law Professor Derek Bambauer
The origins of net neutrality go back a dozen years to when then-FCC Chairman Michael Powell (Colin's son) decided to deregulate cable broadband. (The FCC failed to respond to multiple interview requests.)
Powell, now president of the National Cable and Telecommunications Association, believed this would spur competition and new technology. Instead, it hastened industry consolidation and slowed investment. The FCC's been trying to walk back Powell's decision ever since.
The easy move would've been to reclassify all Internet providers to be regulated like phone companies. But the agency chose an industry-friendly path, attempting to agree on a set of rules that protected the Internet's role as a free, open medium of communication. Twelve years later, befuddled and backpedaling after numerous legal setbacks, the FCC's still trying to corral the industry.
Absent regulation ISPs have felt free to push the line. In 2007, Comcast was caught secretly throttling the speeds of customers using the file-sharing software BitTorrent. The company claimed it was necessary because its customers were using more bandwidth than they'd paid for. (Wireless companies heretofore have been allowed to throttle because of their more limited bandwidth.)
This behavior not only violated net neutrality, but it prompted the FCC to demand greater transparency in how ISPs manage traffic. Comcast took the FCC to court and won.
In January, the FCC's latest attempt at net neutrality rules was tossed out. The rules were judged too similar to those governing utilities. If the FCC didn't want to classify broadband companies as utilities, they couldn't be regulated as such. Otherwise, the court said, what's the distinction between the two levels of oversight?
Appointment-Plus founder Bob La Loggia
The FCC's only choice was to anger broadband providers by reclassifying them as utilities or to surrender some of its net neutrality principles.
Time Warner and Comcast have given Washington their input -- to the tune of $30 million since the last election. With volume like that, the politically appointed FCC couldn't help but listen.
In May, Wheeler offered new rules that carve out a loophole in net neutrality for "paid prioritization." All data still would move freely. But it would move faster for those with cash.
Wheeler claims that ISPs will be barred from "commercially unreasonable" behavior -- such as Comcast's creating an even faster lane for its own content.
"If the proposal before us now turns out to be insufficient or . . . if anyone acts to degrade the service for all for the benefit of a few, I intend to use every available power to stop it," he promised in an April blog post.
University of Arizona law professor Derek Bambauer sees Wheeler's ploy as offering fast lanes as a sop to appease the cable industry while drawing a tight line on any further discrimination.
"This regulation is something of a Trojan Horse," he says. "It would ban unreasonable discrimination, and that means providers could of course engage in pay-for-performance, and something closer to 'reasonable discrimination.'
"My guess is that there will be no such thing as reasonable discrimination in the FCC's view," he continues. "So this will get them to the net neutrality regulation they want, just framed in such a way to pass judicial scrutiny."
The problem is that there's nothing stopping the next chairman from reversing that stance if it's not codified into law. Once birthed, such loopholes typically only expand.
It's certainly easier to limit anti-competitive behavior from the start -- before smaller companies already are vanquished or debilitated. By the time the government's antitrust department shows up, the block's typically torched.
Limelight senior marketing director Jason Thibeault
Meanwhile, cable industry chief Michael Powell's promising "World War III" if the feds attempt reclassification. While Wheeler's latest rule-making includes the possibility, most industry observers see it as an idle threat on par with, "If you kids don't stop, we'll turn this car around."
Insists Franken,"We should turn the car around. Other countries that turned the car around and went in another direction wound up with a lot more choices for people and [are] much more wired than we are."
The idea of opening up the pipes already has been attempted in other countries, like South Korea, where our broadband speeds would seem primitive. Across Europe and East Asia, ISPs are forced to lease their lines to all comers.
It's led to dramatic gains in coverage during the past decade, pushing America toward the middle of the global pack in terms of usage (we're 24th) and average speed (10th) and broadband penetration (15th).
The federal government did the same thing in the 1980s, when it forced the Baby Bell companies to share their lines with anyone who wanted to sell long-distance or dial-up Internet.
"The history of regulating the 10 Bells and AT&T, is one of basically them impeding innovation," says the U of A's Bambauer. "It took them a while to roll out stuff like voice mail when the data capabilities of their networks didn't change that much."
Of course, a corporation's existence is based on exploiting advantages, not serving the public good. So when some cities began to lay their own lines and offer broadband and pay TV, cable moved aggressively to protect its turf.
In more than 20 states, the industry has promoted laws restricting cities from creating their own fiber networks. Many require municipalities to pass a referendum with 65 percent of the vote.
When votes were held in cities like Longmont, Colorado and Chattanooga, Tennessee, cable spent millions on lobbying and lawsuits to squelch the efforts.
Chattanooga fought back. Its municipal power company, the Electric Power Board (EPB), wanted to improve its grid, since electricity disruptions cost the local economy $100 million annually. By connecting high-speed fiber to every home, it could improve the resiliency of the electrical grid, quickly diagnose problems, and produce greater efficiency. Outage times were cut by 60 percent.
The lines had the added advantage of providing the city's power customers with television, phone, and Internet connection speeds more than 10 times faster than the national average.
"The cable folks didn't want us to do it," says EPB Vice President Danna Bailey. "It was very clear. They launched a pretty aggressive advertising campaign against it when we first started the process.
"It was kind of funny because the campaign encouraged viewers to call the City Council and tell [members] you don't want EPB to build this network," she says. "[The] City Council reported more calls -- by a huge margin -- saying [members] do want EPB to build this network."
Today, the city's broadband not only pays for itself, it reimburses the power company with a reasonable licensing fee for using the lines. You can understand why cable feels threatened.
"It's a different model," Bailey says. "We get to wake up every day and think about what we can do to be a better asset to the community . . . That's the whole reason municipal power exists in the first place."
Indeed, the entire idea was sparked when Chattanooga Mayor Jon Kinsey asked EPB's new chief executive officer, Harold DePriest, "What exactly do you do for this community?"
Bailey says, "It kind of pissed Harold off. But the more he thought about it, the more he thought, what are we doing here? How can we do more? Do we have opportunities to be more of an asset to this community than we have been? And it started there."
Higher-speed Internet has helped attract small but growing tech companies like Claris Networks, EDOps, and Lamp Post Group. New start-ups also have flocked to the area. All of which has caused Fortune to label Chattanooga "a center for innovation," while Wired believes it could be the next Silicon Valley.
While fiber was a side benefit, for many municipalities, it's the only answer to under-responsive telecom franchises. Especially for out-state cities without the size to keep Internet and pay-TV providers honest.
Wheeler has signaled a willingness to fight restrictions on cities. In June, citing Chattanooga's example, he wrote: "It's in the best interests of consumers and competition that the FCC exercises its power to preempt state laws that ban or restrict competition from community broadband. Given the opportunity, we will do so."
Unfortunately, anti-competitive alarms won't stop ringing at the FCC. In addition to municipal fiber and the Time Warner merger, Wheeler's investigating complaints by Netflix that it's been mugged.
Netflix has accused Comcast, AT&T, and Verizon of holding its customers hostage. Last September, Netflix suffered a sudden, simultaneous decline in the speed in which its shows traveled across those companies' networks. Video sputtered and picture quality decayed.
Video files consume huge bandwidth, and Netflix's avid customer base is prone to binge-watching. That leaves the company accounting for 28 percent of all U.S. web traffic. (By comparison, YouTube's second at 17 percent.)
"Netflix users make up 40 [percent] of our bandwidth," reports Cox spokesman Todd Smith. Yet Cox customers haven't experienced the same issues as the three larger ISPs. "We believe it's important to serve our customer and do our best to bring them the content they want."
This is not strictly about net neutrality, which traditionally has focused on traffic moving across networks -- and not the different network interconnection points. The FCC's primarily concerned with the speed on the highway, not the width of the on-ramps.
Comcast, AT&T, and Verizon feel Netflix should pay for expanding their on-ramps and have the leverage to do it. After much gnashing of teeth, Netflix caved and paid Comcast. Almost immediately, Comcast users saw an extraordinary jump in quality. Eventually, Netflix worked out deals with AT&T and Verizon. The next month their users also saw speeds increase 80 percent and 60 percent, respectively.
The collective nature of the whole episode has the appearance of collusion. It also demonstrates the power of Internet providers to make or break services customers enjoy. Even after paying the ransom, Comcast users experienced slower Netflix speeds than Cox and Cablevision customers. But if it wanted to maintain its business, Netflix had no choice but to pay.
"Comcast knows it can charge Netflix more," says Mitchell of the Institute for Local Self-Reliance. "Netflix had to choose between watching their business model crumble and paying Comcast a toll to access its customers."
Tempe-based Limelight Networks is a content-delivery company (CDN) that contracts with companies such as Netflix to distribute content quicker. It mirrors companies' content on servers placed near major population centers and on network hubs enabling companies' traffic to reach its customers quicker.
"We've tried to remain Switzerland on it, because we see benefits and detriments to net neutrality," says Limelight senior marketing director Jason Thibeault. "There are going to be companies that aren't going to be able to participate. That could prevent them from expanding or growing, as well as they [could] if the Internet was completely free to move traffic through. At the same time, it could open the doorway for new business models."
This ambivalence isn't surprising in the Valley of the Sun, where tech innovation runs into the area's long-standing libertarian streak. Many local executives are torn, Appointment-Plus founder Bob La Loggia says. His Scottsdale dot-com handles more than 4 million appointments a month, but he's not concerned about the fast-lane tariff affecting his business.
"Because it's a regulated industry, I don't see it getting out of control, but I think what's really causing people to have heartburn about it is the principle," La Loggia says. "It can be a bit of a slippery slope if those ISPs can start segregating and charging more for the extra speed, in that [they're] a bit of an oligopoly already."
Bambauer concurs about the future-driven outlook: "Net neutrality is much more about the conceptual future than the present. This is about the rules we set in place, the values they encode, and how they will affect the future. And that's hotly disputed -- there are reasonable arguments on both sides."
Such equivocation is common in Arizona, but it's also present in California. There simply isn't the same level of outrage as when Congress attempted to pass the (depending on your perspective) anti-piracy/censorship bill, SOPA. Francine Hardaway, co-founder of local entrepreneurial enablers StealthMode Partners, credits an Arizona attitude developing in San Francisco.
"In a lot of ways, they're even more libertarian about this than Arizona," she says. "They don't want the government regulating them on anything else so they are very loath to say, 'Net neutrality protects our start-up companies,' because if they say that, then, they're opening the door for government regulation on everything."
However, in April, nearly 150 tech companies did send a letter to the FCC, arguing against the fast lanes. "The open Internet," they wrote, is "a central reason why the Internet remains an engine of entrepreneurship and economic growth."
Amazon, eBay, Facebook, Google, Microsoft, Netflix, Twitter, and Yahoo are among those that signed on. (Apple conspicuously was absent.)
A day later, 50 venture capital firms also sent a letter, noting how often they invest in fledgling companies trying unproven ideas. Since then, there have been reports of a decline in tech investments over fear that new companies will be placed at a disadvantage.
"Without lawyers, large teams, or major revenues, these small start-ups have had the opportunity to experiment, adapt, and grow, thanks to equal access to the global market," the investors wrote to Wheeler. They worry that ISPs will favor their own offerings or discriminate against competitors. "They just need to create a credible threat so that investors like us will be less inclined to back those companies."
Of course, we all know how many times a sharply worded rebuke has shamed a company into better behavior. "At the moment, the Internet companies are at least talking a good game on this," ASU's Gillmor says. "Whether they're willing to really fight for it in the end isn't entirely clear."
Indeed, more cynical observers suggest that it's all about appearances for many of the bigger proponents of net neutrality.
"It might be a little incumbent protection on the content-provider side of things, similar to why Netflix cut the deal with Comcast," Bambauer says. "If you're Netflix, you're willing to do that because it's going to be hard for a start-up to invest that kind of cash."
That's something the Progressive Caucus is concerned about. "I'm worried we're pulling the ladder up after some big boys have gotten on top of the roof," says Congressman Ellison.
"We don't need a situation where these big companies, once their fortunes are made, solidify their position by closing off the Internet."
The problem is that we don't know what entrepreneurial ideas we might be cutting off. Consider the network demands required for driverless cars?
Brian LaFrance, chief marketing officer of leading national web-tracking company Authority Labs, suggests companies like DropCam will face added pressure in a world without net neutrality. DropCam offers cheap real-time cloud-based streaming of surveillance cameras it sells and the bandwidth that might've made feasibility a question. Instead, Google bought it for $555 million in June.
"My thought is, it opens too much opportunity to be abused by people seeking money, and it's not really costing them anymore," LaFrance says. "It just gives them an excuse to charge more, abuse the power, and throttle things they don't agree with. Censor stuff. It just leads to too much of a mess if you get rid of neutrality."
In the end, regulating broadband firms as utilities appears the simplest way to ensure the Internet doesn't grow as concentrated as the rest of the economy.
"It's [about] the centralization of information," Congressman Grijalva says. "If one believes as I do -- that information is power -- you're also concentrating power."
Looking back to the Bell breakup, it's apparent that rules imposed on the phone companies didn't break them. Verizon and AT&T are doing just fine. While cable may be dealing with the slow erosion of its pay-TV franchise, its broadband service continues strong growth.
"If we forced cable and fiber to share their lines at a reasonable cost, that would also create more competition," Gillmor says. "Competition, in the end, is the thing that gives you the kind of Internet we want. And if you think the best way to get competition is through handing monopolies to companies that have demonstrated over the years that they will abuse them, at least you have that discussion."
It's no one's preference, and there would be a high political cost, but the industry's history of anti-competitive behavior and consumer indifference make a strong argument. Wall Street taught us the folly of trusting those guided by naked self-interest. Nor has regulation stymied innovation in even the most restrictive cultures.
"Look at China," says Limelight's Thibeault. "It's a communist country where the telecos are governed by the municipality, and yet they still are able to innovate with companies like Alibaba and Tencent. Content plays even though it's a regulated environment -- so that's something to keep in the back of your mind."
During the FCC's four-month comment period, more than 3 million people replied, an FCC record. An early analysis of the comments found that 99 percent of the first million who commented were in favor of preserving net neutrality.
Despite campaigning on the issue, Obama's support since 2008 has been tepid at best. But this summer -- perhaps reading the public's mood -- he unveiled a midterm pivot, speaking out for the first time forcefully against fast lanes.
"You don't want to start getting a differentiation in how accessible the Internet is to different users," Obama told reporters on August 5 at the U.S.-Africa Business Forum. "You want to leave it open so the next Google and the next Facebook can succeed."
It's unclear what weight, if any, this may have with the man he appointed, Commissioner Wheeler, or if it's even meant to.
While Congress has oversight and could intervene, it barely can muster consensus to scratch its own belly, much less pass legislation. This leaves the five FCC commissioners to decide, with Wheeler as the swing vote. At least he has a sense of humor -- sort of.
In a segment on his HBO show Last Week Tonight, host John Oliver suggested that putting a former cable lobbyist in charge of net neutrality was like calling a dingo to babysit your kid. The episode caused such an uproar that viewers crashed the FCC's website with their comments.
Wheeler responded by insisting, "I'm no dingo."
Time will tell, but there's some indication that he's heard the people. He recently questioned whether wireless carriers should continue to be exempt from net neutrality rules at a wireless-industry trade show, telling them that the market had changed since that 2020 decision and noting the prevalence of smart phones.
Could Wheeler's remarks on widening net neutrality's reach signal a similar shift on "fast lines?" Do earlier comments about municipal broadband and the lack of competition for cable broadband suggest potential rough sailing for the Time Warner merger?
There's no telling yet when or what the FCC will rule, but the future of the Internet hangs in the balance.
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