Friday, June 15, 2012

Antitrust and the Cable Industry

I was recently contacted for an article for TechNewsWorld on the Justice Department's apparent antitrust investigation of the cable industry.  Below is the full text of the comments I sent to the reporter,  Erika Morphy.

It's a really good article and an interesting issue.  Take a couple minutes and give it a read.

My comments to Erika on the DOJ investigation:


This arises primarily as a result of the dual role played by cable companies in many households.  Not only does the cable company provide access to televised programming, but in many households, the cable company also provides the high-speed internet service.  In fact, I believe many cable companies provide financial incentives to encourage consumers to “bundle” those services together.  Technically, the programming and the Internet access are carried over separate networks within the cable company, but both services come into the home over the same cable and are billed on the same bill.

 In general, the U.S. legal system attempts to protect consumers from price-gouging by creating competitive markets (as opposed to imposing price controls).  The basic goal of antitrust law is to assure that there is legitimate business competition in every market which creates choices for consumers and thus (theoretically) keeps prices in check as a result of economic pressure (i.e., competing companies must keep their prices competitive or consumers will choose a cheaper alternative).  The Department of Justice is charged with the task of enforcing federal antitrust statutes and maintaining these competitive market environments.  This means that they investigate situations where competition is being artificially suppressed by a company’s ability to dominate a particular market sector.

In the case of the cable companies, consumers are increasingly seeing Internet-based streaming as an alternative to cable and television programming.  Consumers use Netflix, Hulu, Amazon and other streaming services as a means of viewing films and previously-aired television programs.  Presumably, this takes viewers away from the cable programming, including the cable companies’ own pay-per-view services and premium channels.

At the same time that this is occurring, cable companies are seeing massive increases in the amount of data that their Internet networks are being required to carry (with the increased use of the streaming services being a substantial part of this increased data traffic).  This results in increased costs for the cable company as it must provide additional bandwidth in order to maintain acceptable levels of performance for its customers.  In order to control this burden and/or shift the cost of this increased traffic to the responsible parties, cable companies have implemented caps on the amount of Internet data that consumers can transfer in any given month.  If a household goes over this amount, then there is either an extra charge or the speed of service to that household is reduced for the remainder of that period.  This reduced level of service causes delays in video streaming, making it difficult or impossible to watch programming from any of the Internet based providers (Netflix, Hulu, etc.). 

It is important to note that these data caps do not apply to the cable company’s own private network which carries the cable programming, cable company pay-per-view and other proprietary programming from which the cable company makes additional revenue (e.g., Comcast’s Xfinity).  Thus, the data caps on the Internet side of the cable companies’ business could have the effect of making the cable companies’ own programming a more attractive alternative, or in some cases, perhaps even the only alternative.  If consumers know that watching too much Netflix or Hulu could cause them to lose their Internet service at some point in the month, they will naturally limit their use of those services.  This makes those services less attractive and/or valuable to the consumers, and it pushes the consumers toward the cable companies’ own programming as the only practical alternative.  While the cable companies, of course, claim that there is no anti-competitive intent in their actions, there would appear to be a significant chance of an anti-competitive effect.  If that is the case, then the policy of capping Internet data capacity could very well be a violation of federal antitrust law. 

This can be summed up as cable companies using their unilateral control of digital data access in many households to create circumstances which give the cable companies’ own programming an unfair technical advantage over Internet-based competitors.  This technical advantage is being converted to an economic advantage as it creates a disincentive for consumers to use the alternative programming sources.  It also could allow cable companies to charge higher prices and still maintain their market share.  That is bad for consumers, who generally rely on market factors to assure that they are paying the best prices for their goods and services.

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