Comcast’s NBC-U Dreams May Be Online Video’s Nightmare

Right now, there’s a very good chance that most people in America will soon have just one choice for truly high-speed Internet access suitable for watching video — their local cable monopoly. With cable’s DOCSIS 3.0 as an intermediate step, we’re reaching the era of true convergence. Soon, all those cable channels will be replaced by virtual digital segments of a single all-purpose fast pipe to the home, providing voice, video & data across one connection. If you’re writing a new app or developing a new online service, you should be worried: There’s no guarantee that whatever you’re doing will work.

Why? Because these large cable carriers won’t face real competition and have every incentive to favor their own business plans, they may not be interested in supporting yours. Right now, they’re doing their best (even linking up with the Tea Party) to convince America that having rules of the road protecting consumers and new online businesses amounts to a “government takeover of the Internet.” Don’t believe it for a minute. These giant companies want to make sure that the Internet poses no threat to them, and they have the market power (and political power) to ensure that their profits remain intact.

The Comcast/NBCU merger is aimed right at competition — avoiding any series of steps that might result in having dumb (but big) pipes serving the areas where Comcast now has dominion, and avoiding having Comcast’s pipe itself made dumb. If the merger goes through as Comcast proposes, the new NBCU will have the power in Comcast’s market areas (where it routinely has a 60 percent-plus share of local pay-TV customers) to raise other pay-TV providers’ (satellite, small cable, telephone, nascent online distributors) costs of doing business substantially.

This will mean, among other things, that competing aggregators of online video who don’t have reasonable access to crucial NBCU content (particularly sports) won’t have the power to constrain Comcast’s prices. Comcast ties access to online video content it controls to a cable subscription, and Time Warner does the same thing with its content. Many of the other pay TV providers will cooperate in this plan, which goes by the nickname “TV Everywhere”. This means that independent online aggregators don’t stand a chance — because consumers will be used to getting highly-branded online video for “free” as part of their bundle from their ISP, they won’t be willing to pay for an independent service.

Without powerful online video distribution companies that can compete successfully with Comcast, the economics won’t be there for any other wired high-speed Internet access provider to enter the market in Comcast’s areas — and so Comcast’s already great pricing and discriminating power will grow. Watch for the mergers that will follow — say, Time Warner Cable (s twc) with Disney (s dis). Or, eventually, the FoxLibertyComcast company.

Imagine a big pipe coming into everyone’s house in a given market area controlled by one actor. Now imagine that you want to aim an online business — particularly an online video business – at that area. You’ll be subject to the whims of the carrier, and there will be no countervailing force to protect your ability to reach your customers. Maybe a small portion of that pipe will be reserved for traditional Internet access, but maybe not, and what’s reserved won’t be very fast or very standardized. Comcast wants to build a moat around its business so that it can avoid being treated like a commodity transport provider, and the addition of NBCU content will make it far easier for Comcast to make this possible.

Comcast spent nearly $90 million in the first two quarters of 2010 related to the deal; promised $20 million in venture funding for minority entrepreneurs; pledged $6 million to support independent productions; agreed to place a Hispanic member on its corporate board of directors; made deals with NBC’s affiliates; and hired (with NBCU) about 100 former government employees to shepherd the deal through — including several former chiefs of staff to key legislators and policymakers.

There’s been very little media coverage of the Comcast/NBCU merger. You may want to pay attention to it, because there’s a good chance that it will go through. This is bad news for up-and-coming video aggregators– who will want to invest in them? It’s bad news for new applications and new uses of the network, because as things stand in Washington Comcast (and other cable companies) will be able to allocate bandwidth however they want. It’s all
one pipe, and there are very few rules.

What about other ways of getting online? Well, Verizon’s FiOS service, which could effectively compete with cable’s high-speed pipe, will reach only about 18 million homes. In early March 2010, John Killian, Verizon Communications’ chief financial officer, told analysts: “We are coming more to the end of the (fiberoptic) build-out.” It’s much more expensive to upgrade to FiOS than swap out cable electronics.

Wireless? Well, the laws of physics tell us that wireless just doesn’t have the capacity of a fast wired cable connection. It will be a complementary service, not a substitute. Wireless is much less efficient in its use of spectrum and faces much harsher signal environments than signals do inside a controlled cable environment, and so the overall number of bits that can be conveyed in a given amount of time in a mobile environment is much lower than that possible in cable systems. We love mobility, but for watching live video, we’ll still prefer wired cable.

The giant cable operators generally do not compete with each other in major metropolitan areas in the US. (The one exception is New York City, which is so large and complex that Comcast, TW, and Cablevision have all stayed in place – but the cable systems have divided up the boroughs among themselves.) In general, non-competing cable systems have at least 70% of the video customers in more than half of the top 50 DMAs in the US. In a series of transactions and gentlemen’s agreements, the operators have carved up the country among themselves and stay out of each others’ territories.

We’ve known since the days of Ma Bell that basic transport of communications to the home has the characteristics of a “natural monopoly.” According to Wikipedia, that’s “an industry in which a business will have such enormous
economies of scale that a single firm can effectively and efficiently supply the market at lower cost than two or more firms. A natural monopoly will dominate these industries if government does not impose restrictions. Electric utilities are generally considered natural monopolies.”

The fact that Verizon is backing off its investment in FiOS signals that we’re reaching a tipping point: Looking at DSL v. cable modem access, and wildly hoping for broadband over powerline or satellite, the BushAdministration believed that there could be competition for high-speed Internet access that would make regulation unnecessary. But DOCSIS 3.0 is such a cheaper upgrade than FiOS that it just doesn’t make sense for the telephone companies to compete. The duopoly we’ve had so far – which hasn’t done prices or competition much good – is about to morph into a cable monopoly.

Bottom line: Competition cannot be relied on to constrain cable. The cable companies have enormous economies of scale and apparently unlimited pricing power — prices keep going up. They have won and, at least at the moment, they’re facing little threat of rules from Washington.

I don’t like the phrase “net neutrality” any more than you do. How about “the ability to compete”? How about a standard interface for everything new you’re building? The cable companies have figured out that there is nothing stopping them, and their business plans may not mesh with yours. Especially if you’re not yet one of the other media conglomerates — and even they may be worried at this point.

Here’s the call to action, and it’s simple: Pay attention. This is why it matters what happens in Washington, because it’s time to consider reining in these businesses.

Susan Crawford is a member of the faculty of Cardozo Law School and also a Visiting Research Collaborator at Princeton’s Center for Information Technology Policy.