Here's How Comcast Plans to Rule American Cable and Internet

It's been a little more than 100 years since this country witnessed an accumulation of economic power to rival what Comcast is assembling. Like the Gilded Age magnates who controlled oil and refining and leveraged their product with railroads, Comcast, the country's largest cable company, is building a cash-generating machine that controls every aspect of its business.

In the 1890s and early 1900s, the Gilded Age magnates took advantage of the laissez-faire philosophy of the time. Today, even though there are in theory more safeguards, regulations, and guidelines to prevent such industrial consolidation, no one is even suggesting that they be used, certainly not to an extent that will prevent a lot of damage. The prevailing view of what constitutes an abuse of power is too weak -- and so are potential protections against such abuse.

Much of the news in the internet world has been taken up by the possible consequences of Comcast's proposed $45 billion takeover of Time Warner Cable, the second-largest cable system. But the issues extend well beyond this deal. There's also the recent Supreme Court decision that gives Comcast complete control over its TV channel lineup. And there's the news that Netflix has decided to connect its broadband distribution to Comcast, paying for the privilege. Together, they portend a truly frightening future for both television and the internet.

Controlling the Channels

Let's start with the cable TV network, the core of Comcast's business and the most pedestrian contrasted with the relative flash of high-speed Internet access. On February 24, the U.S. Supreme Court rejected Tennis Channel's final legal gasp on a complaint against Comcast that was filed in 2010. That year, the Tennis Channel went to the Federal Communications Commission (FCC) and claimed discrimination because Comcast put the channel on a pay tier, where it would have fewer viewers, and thus a lower advertising base, than if it were on basic cable like the Golf Channel, which Comcast owns.

At the FCC, an administrative judge held extensive hearings and decided for Tennis Channel. The relevant FCC bureau held for Tennis Channel. And the Commission itself decided for Tennis Channel. Then Comcast went to the D.C. Circuit Court of Appeals, which more often than not takes the opportunity to knock around the FCC. The Appeals Court reversed the FCC, finding that Tennis Channel's placement on a different programming tier wouldn't benefit Comcast. No harm (to Comcast at least), no foul.

There are a couple of lessons to take from the Tennis Channel experience that bear on the bigger picture. First, Comcast now has legal carte blanche to do whatever it wants on its channel lineup, including discriminating against independent programmers. That means if you want to start a channel on the country's biggest cable operator, you may have to agree to some special conditions, maybe even take on Comcast as an "investor."

Second, the more universal lesson that that small businesses are out there on their own. The government and its laws which exist in theory to protect them are, in practice, useless. Tennis Channel probably spent millions in legal fees, won every round they were supposed to win, and then lost. There is a reason only two complaints have been filed against Comcast. The other was from Bloomberg, which has deeper pockets than Comcast. Bloomberg wants its financial news channel to be put in the same "neighborhood" as other news channels like CNBC and MSNBC, which Comcast owns. Bloomberg thought that the wording of one of the conditions on which Comcast was able to gobble up NBC-Universal required a channel switch immediately. Bloomberg spent millions litigating the word "now" before the FCC agreed with the company, three years after Bloomberg filed its complaint. The matter is now pending in a Federal appeals court

These cases are the reasons that whenever anyone talks about putting conditions on an FCC-approved deal, they are basically wishing out loud. Big companies have more money and lawyers and will make mincemeat out of conditions, throwing more into it than most mortal companies can afford. Conditions only work when they are enforced, which is rarely. Senator Al Franken (D-MN) listed some of the conditions and lack of enforcement in a letter to the FCC. Conditions are window dressing.

Expanding the Empire

Once the channel guide is set, then the question becomes: who will get the service? The answer shows the utter futility of modern anti-trust law. The largest cable company, Comcast, wants to pay $45 billion to buy the second-largest, Time-Warner Cable. The combined company would span 70 million subscribers -- about 40 percent of all broadband subscribers and 30 percent or so of cable subscribers -- and it would have access to 19 out of the country's top 20 markets, including New York and Los Angeles, where Time Warner is the local cable company. However, the companies don't compete directly because each has its own service territory, and so it would be hard to say there would be lessened competition. That's the argument Comcast executives make to justify the deal.

That's also the theory that allowed telephone companies created after the breakup of AT&T to reassemble most of AT&T in two existing companies, except stronger than the old Ma Bell because of the profit-engine of wireless services. What the theory ignores is the enormous market power of a company with 30 million subscribers stretching across the country. The problem is acute for broadcasters. They have to negotiate terms with cable companies to get their channels on cable systems. When there is an impasse, and there have been many, the cable system simply drops the TV network until there's agreement. With Comcast in all but one of the top markets, its power to force terms on broadcasters will be considerable. There will be disruptions in ad sales as well.

The "competition" for wired Internet access has been over for a while, as Verizon and Comcast cut a deal. Comcast ditched plans to get into the wireless business and will sell Verizon wireless to customers. Verizon, in areas that don't have FiOS, will recommend Comcast broadband. Will that continue in territories now served by Time Warner that would be gathered into the Comcast empire, like, say, New York City? Say what you will about wireless, it's still not as robust a service as wired broadband services are.

That leads to the last building block.

The Toll Plaza

This is where the deal between Netflix and Comcast comes in. Comcast now will determine which program providers, like Netflix, have the privilege of paying extra to provide content their customers want. Big companies like Netflix, or other video providers, can afford those direct connections. Smaller, newer services can't, and their growth will suffer.

The timing and the framing of the deal lead to any number of questions, but the conclusions seem fairly clear. First, look at the circumstances. For some reason, in the months prior to the deal, Netflix customers on Comcast and Verizon's networks had been experiencing some very serious service issues. There can be many reasons for the degradation of picture or more frequent buffering, but remember on basic fact: consumers have paid for Netflix content twice already. They (we) pay once for the broadband service and another time for a Netflix subscription.

Every bit that goes over the network has been requested by a customer. This isn't Netflix pushing traffic. It's Netflix responding to customer demand. If you look at it that way, then the "agreement" between Netflix and Comcast becomes a little more interesting. Netflix will pay Comcast an undisclosed amount of money to connect directly to Comcast's network, but Netflix will not get "preferential treatment" from Comcast. On the other hand, it may be that Netflix's service problems will magically improve as a result of the payments to Comcast.

Verizon will be next to charge Netflix for the privilege of delivering movies and TV shows customers wanted.

The End Result

The one company that may truly know what's going on is Cogent, the Internet access carrier which had been carrying Netflix traffic. Cogent CEO Dave Schaeffer has said Comcast and Verizon aren't investing in creating more capacity for exchanging traffic. His larger point, however, is that companies which can't afford to pay whatever Comcast, Verizon, and AT&T want for non-prioritizing direct connections will have their traffic degraded.

If Comcast buys Time Warner, the toll gate gets much larger, encompassing not only Comcast's 22 million customers but Time Warner's eight million (after Comcast ritual of discarding three million) in the largest markets. As it is, Schaeffer said, Netflix is paying a lot to connect to one cable company.

The sum of those Comcast actions is pretty impressive. They can discriminate among programmers on their cable networks, expand their market of those networks to millions more people, and can charge Internet commerce companies for direct access to their newly enlarged service territory.

Once upon a time, government agencies might have been interested in such things. But with the narrow definitions of anti-trust hobbling the Justice Department, the Federal Communications Commission having given away (so far) its authority over broadband and Congress more in the thrall of large companies, it's almost a certainty that consumers will get the short end of the stick, again.