Ev Ehrlich's Everyday Economics

21Mar/12Off

Art Brodsky, “Cartels,” Ants and Aphids

Yesterday’s Huffington Post had a column by Art Brodsky, the communications director of the interest group Public Knowledge. The gist of it, if I may be trusted to represent it fairly, was that the Federal Communications Commission has been remiss in not taking action in a series of cases in which Comcast has acted abusively, and that if they can’t get their act together to enforce either common sense, past agreement, or the law, then how can they be trusted to take effective action against Verizon, Comcast, and other cable companies as they try to create a “telecom cartel?”

The issue to which he’s referring is a cross-marketing agreement between Verizon and a group of cable companies that comprises - Comcast, Cox, and others, and that I’ve discussed here. I’ll return to that in a moment.

Suffice it to say that I think Brodsky’s criticism is not just wrong, but a bad kind of wrong – out of touch with what’s really going on in the broadband sector. And one way to begin showing that confusion is by noting that Brodsky, while writing what is probably, to him, a standard lambasting of the “telecom cartel,” inadvertently owns up to two ideas that he probably wouldn’t support if he were to be confronted directly
with them.

The first is that wireline and wireless compete. Because, if they do, then much of the concern about a cable-telco “duopoly” to the home disappears. If the FCC were only to recognize what anyone who’s “cut the cord” has recognized, they’d find themselves squarely in the new millennium.

And the second is that anti-trust law is an effective substitute for the kinds of regulation he thinks the FCC alone can accomplish. Because, if it is, then there’s reason to question why one sector of the economy ought to be subject to different standards of competition than any other – particularly if, given that wireline and wireless compete, it’s much more competitive than we might have thought.

Let me start with the second of the propositions – that instead of having the FCC run its own court, we should let the anti-trust laws govern the
regulation of anti-competitive behavior.

Brodsky makes note of the way Comcast arranges its channel line-up, specifically, sending Bloomberg News to a remote outpost while
favoring CNBC, a station it owns. Here’s the story, from Brodsky:

Bloomberg …(is not in)…the channel lineups with the rest of the news channels, and particularly with CNBC, the business channel
that's owned by NBCU, which is owned by Comcast… In Washington, D.C., CNBC is channel 39, MSNBC is 38, CNN is 36. Bloomberg is 103. In Philadelphia, CNBC is at channel 47, Bloomberg is 103. Many other Comcast systems have similar channel lineups.

I have Verizon FiOs at home, so I went over and checked. Lo! and behold, CNN, CNBC, MSNBC, and Bloomberg are all contiguous on the FiOS
channel schedule, in contrast to Comcast. So Brodsky has it right.

Brodsky, however, wants the FCC to force Comcast to change its schedule. Here’s a better idea. Why not let Bloomberg sue Comcast under the
anti-trust laws? In fact, this seems like an easy anti-trust case to adjudicate. Are Bloomberg’s ratings, or the path of Bloomberg’s ratings, different when they’re not located near these other channels? In the many places where there are side-by-side Comcast and other systems – fiber, telecom, satellite – does placement create a meaningful difference? If it does, then not only should Bloomberg be granted relief, but it
would have the prospect of the monetary damages that anti-trust violators and colluders have to pay, much as Major League Baseball paid its players $270 million when it colluded against them in the 1980s. All it has to do is show harm.

I like that solution, and Brodsky should, too. It means that telecoms generally, and television specifically, should be treated using the same norms of competition as are all other sectors of the economy – shouldn’t the same concepts that govern where a channel is placed on a cable
system apply to whether all the laundry detergents are placed together on a supermarket aisle save for one brand that’s put on a lower shelf in the kosher food section? I think the telecoms sector is much more competitive than Brodsky does, but no one would argue that there will never be the prospect of uncompetitive conduct in any sector. That’s why we have anti-trust law. Come to court, show us you’ve been hurt by predatory or collusive behavior, and we’ll fix it. In fact, we’ll fix it in a way that deepens and clarifies our standards for competition throughout the economy. What makes the FCC a better judge of that than the courts to which we’ve entrusted that function?

And now, let’s go back to the first proposition that Brodsky embraces without (to all appearances) realizing it – that wireline and wireless compete.

I’ve got a Verizon wireless antenna that finds LTE (4G) signal if it can and, if not, kicks back to 3G. It’s on 4G now, so I’m going to run a speed test on it. There – 9.05 Meg download and 1.41 upload. I also have a cabin in West Virginia that gets Frontier Communications version of broadband, and it tests out at about 8 Meg download and 1 Meg upload. And there are millions of households with connections that are no better, so I say they compete, in that they do the exact same thing, although wireless lets me carry the laptop to a better chair.

And in fact, Brodsky agrees – why else would he worry that a cross-marketing agreement etween Verizon wireless and cable companies amounts to “cartelization?” Cartel members have to sell the same product or else they aren’t cartels – look at how the bicycle/banana cream pie cartel failed to restrict output in both industries. So Public Knowedge now admists that wireless and wireleline cvompete. Good.

Now, as I’ve argued before,, this cross-marketing agreement isn’t an anti-competitive step. In the broadband world, these arrangements come and go as alliances are formed and reformed. The same week as they announced this cross-marketing agreement, Verizon also announced a partnership with Redbox that will create an Internet-based streaming service to take on the cable companies’ bread-and-butter – pay per view.
How does that square with the idea of a cartel?

What I see in the Verizon-cable deal is that the cable companies had spectrum and Verizon wanted it. But the cable companies said, “If we sell you our unused spectrum, then we can’t offer our customers a wireless service. So let us offer them yours,” and Verizon agreed. I mean, I don’t know that, but it seems like a pretty reasonable scenario. Not much of a cartel, particularly compared to such famous cartels as OPEC, the Mexican guys on Breaking Bad, or the National Recovery Administration.
If someone doesn’t like that, tell the FCC to make more spectrum available.

But what’s even more disturbing about this cartel thing is that it ignores reality. Quick – what’s happening in the world of broadband services today? How’s the Comcast or Verizon or AT&T plan for world domination coming along? Have the black helicopters landed yet?

No, they haven’t, and if they do, they’re going to say…Apple.

Brodsky makes this remark in his Jeremiad about Comcast’s market power:

Comcast's power and influence belies its rankings of #66 on the Fortune 500 and #101 on the Financial Times Global 500.

Leaving aside whether being one of the world’s 100 largest companies can be “belied,” how about being Number One? If you’re worried about power, how does one hundred billion in free cash sound?

I’m not wailing about Apple. More than any other once-largest corporation in the world – Exxon, IBM, Gneral Motors, and the like – Apple got there by figuring out what people ould want if it were offered to them. My wife has an iPad and loves it. I don’t, but am sorely tempted now that the ew model gets LTE (again, making it faster than many landlines) and has a ouped up screen, which means it will stream high-def baseball games on a aconic summer night, particularly now that the souped-up Nats look ready to hallenge the aging Phils. Apple sold thee million of those boys in a few days – the last time a thing spread across he universe that quickly, it was the universe.

But the point is that Apple is slurping up the value created y the networks that the telecom “cartel” companies. The better the signal the carriers create, he more value Apple, Google, Facebook, Amazon, and the rest extract. Here’s a strong, but valid analogy. There are some species of ants that gather aphid eggs, hatch them, attach the aphids to the roots of plants, and then “milk” te aphids for the nutrients they absorb from the roots, a process known as “mutualism.” In some ways, Apple has “farmed” and “milked” the signal carriers in the same fashion. The better the signal Brodsky’s “cartel” companies offered, the more powerful the devices that Apple, Amazon, and others have offered, and the more powerful the devices, the more consumers demand of the signal companies. In response, the signal companies have continually innovated and improved their speed and reliability, and are restrained from price increases, lest they incur the wrath of not only Apple’s customers, but Apple itself. Or, as the chairman of Unisys once said to me when I reported to him, “two companies make money every time we sell a computer. Unfortunately, they’re Intel and Microsoft.”

I’ve talked about this “cage match” competition before. It’s what’s going on in the world around us. Apple and other device makers have
colonized the signal producers – video content now clogs the broadband Internet under the FCC’s (and Brodksy’s) “one size fits all” net-neutral policies – Amazon is now a player in cloud computing and Google in device manufacture. The lines between these “stages” or “layers” of the broadband experience are being blurred if not eradicated. Meanwhile, Apple had a hundred billion in free cash, Google is the sixth largest company in America by market capitalization, larger than Verizon and Comcast together.

So is the problem that a telecom “cartel” is restricting our access to broadband (much as OPEC throttles the supply of oil) and gouging us
when we pay for it? Is the cartel’s most heinous crime moving Bloomberg to a spot on the dial near the field hockey channel? Surely ambition must be made of sterner stuff.

Brodsky and his fellow critics should start paying to attention to the ants, and leave the aphids alone.

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