Voice, Video and Broadband: the Changing Competitive Landscape and Its Impact on Consumers
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U.S. Department of Justice VOICE, VIDEO AND BROADBAND: THE CHANGING COMPETITIVE LANDSCAPE AND ITS IMPACT ON CONSUMERS U.S. DEPARTMENT OF JUSTICE NOVEMBER 2008 VOICE, VIDEO AND BROADBAND: THE CHANGING COMPETITIVE LANDSCAPE AND ITS IMPACT ON CONSUMERS ISSUED BY THE U.S. DEPARTMENT OF JUSTICE NOVEMBER 2008 This report should be cited as: U.S. Dep’t of Justice, Voice, Video and Broadband: The Changing Competitive Landscape and Its Impact on Consumers (November 2008). This report can be accessed electronically at: http://www.usdoj.gov/atr/public/reports/239284.pdf U.S. DEPARTMENT OF JUSTICE ANTITRUST DIVISION THOMAS O. BARNETT Assistant Attorney General Deborah A. Garza Deputy Assistant Attorney General for Regulatory Matters Ken Heyer Acting Deputy Assistant Attorney General for Economic Analysis and Economics Director of Enforcement David L. Meyer Deputy Assistant Attorney General for Civil Enforcement James J. O’Connell, Jr. Deputy Assistant Attorney General for International, Policy and Appellate Matters J. Robert Kramer, II Director of Operations Patricia A. Brink Deputy Director of Operations REPORT CONTRIBUTORS: Anne Marie Cushmac Counsel to the Assistant Attorney General W. Robert Majure Chief, Competition Policy Section Jonathan E. Henly Economist, Competition Policy Section Robert A. Potter Chief, Legal Policy Section Nancy M. Goodman Chief, Telecommunications and Media Section Laury E. Bobbish Assistant Chief, Telecommunications and Media Section Hillary B. Burchuk Trial Attorney, Telecommunications and Media Section Luin P. Fitch Trial Attorney, Telecommunications and Media Section Lawrence M. Frankel Trial Attorney, Telecommunications and Media Section Matthew C. Hammond Trial Attorney, Telecommunications and Media Section Brian C. Hill Trial Attorney, Telecommunications and Media Section Deborah A. Roy Trial Attorney, Telecommunications and Media Section Yvette Tarlov Trial Attorney, Telecommunications and Media Section Carl Willner Trial Attorney, Telecommunications and Media Section Drew Austria Paralegal, Telecommunications and Media Section Ashley Becker Paralegal, Telecommunications and Media Section Gabriel Borman Paralegal, Telecommunications and Media Section Ryan Shallard Paralegal, Telecommunications and Media Section Inquiries concerning this report should be directed to: Nancy M. Goodman, Chief, Telecommunications and Media Section (202) 514-5621 or [email protected] ACKNOWLEDGMENTS The Department of Justice thanks the speakers who participated in the Symposium and all those who submitted written comments for their thoughtful and informed contributions. The Department especially recognizes the contribution of the late Honorable Jane Lawton as a speaker at the Symposium. Delegate Lawton was a dedicated public servant who demonstrated exemplary energy and commitment to the development and implementation of sound public policy. TABLE OF CONTENTS EXECUTIVE SUMMARY .................................................... i INTRODUCTION ............................................................1 CHAPTER I: OVERVIEW OF SECTORS AND PARTICIPANTS ..........................5 A. Video Programming Delivery Services ................................................... 5 B. Local Telephone Services ............................................................. 9 C. Broadband Services ................................................................. 19 1. Wireless Providers ............................................................... 23 2. Satellite Providers ............................................................... 26 3. Broadband over Power Line ...................................................... 28 CHAPTER II: THE EFFECTS OF COMPETITIVE ENTRY ............................ 31 A. Economic Principles Affecting Facilities-Based Telecommunications Competition ................ 31 1. The Classic Model of High Sunk-Cost Industries ....................................... 31 2. Sources of Competition: Deviations from the Sunk-Cost Model ........................... 32 3. Regulation and Other Factors that Can Lead to Imperfect Competition ....................... 34 B. Consumer Benefits from Competition in Video and Local Telephony ........................... 35 1. Price Effects of Competition ....................................................... 37 a. Video ..................................................................... 37 b. Telephony .................................................................. 42 c. Bundled Services Pricing ...................................................... 42 2. Non-Price Effects of Competition ................................................... 45 C. Challenges Faced by New Broadband Providers ........................................... 49 D. The Competitive Importance of Service Bundles ........................................... 54 E. Wireless Substitution for Wireline Telecommunications Services .............................. 61 CHAPTER III: OBSTACLES TO COMPETITIVE ENTRY ............................. 69 A. MVPD Services .................................................................... 69 1. Local Franchising Requirements .................................................... 69 2. Access to Multiple Dwelling Units .................................................. 73 3. Access to “Must-Have” Programming ................................................ 74 B. Local Telephone Services ............................................................. 77 1. Forbearance Proceedings and Requests to Deregulate Local Services ....................... 77 2. Access to Customers in Multiple Dwelling Situations .................................... 79 C. Broadband Providers ................................................................. 80 1. Spectrum Policies ............................................................... 81 2. Other Regulatory Issues Affecting Broadband Deployment ............................... 82 3. Prices for Local Private Lines ...................................................... 84 CHAPTER IV: OBSERVATIONS AND CONCLUSIONS FOR COMPETITION POLICY ........ 87 A. General Competitive Trends ........................................................... 87 B. Barriers to Entry .................................................................... 88 C. Proposals for Further Action ........................................................... 90 APPENDIX A: GLOSSARY OF TERMS USED IN THE REPORT ....................... A-1 APPENDIX B: SYMPOSIUM PARTICIPANTS ..................................... B-1 APPENDIX C: WRITTEN SUBMISSIONS ........................................ C-1 APPENDIX D: THE EVOLUTION OF WIRELESS TECHNOLOGY ...................... D-1 EXECUTIVE SUMMARY Increasing competition in the telecommunications industry has produced substantial benefits for consumers, and has the potential to generate even greater benefits in the future. Companies that once provided voice telephony or video services alone are increasingly competing against each other across a wide variety of products. Cable companies today offer telephone services to more than 100 million U.S. households (or over 80 percent of households) and have upgraded their facilities to increase Internet broadband speeds and provide a wider array of programming. At the same time, telephone companies are rapidly building and expanding fiber-optic networks to provide a wide range of services to an increasing number of customers, including multichannel video programming and increasingly robust Internet access. In addition, competition among providers of mobile wireless voice and data services is resulting in rapidly rising access speeds, dramatically expanding the functionality of mobile devices, and potentially altering the future competitive dynamic between wireless and wireline services. As telecommunications firms expand their offerings, lines between once well-delineated industry segments blur, and consumers see greater competitive options. Antitrust will continue to play an important role in this process. Antitrust law protects the competitive process, which in turn protects consumers. In the telecommunications industry, the competitive process has helped generate innovation to bring consumers a wider range of choices of products and services. The Department of Justice protects competition through its roles as both enforcer of the antitrust laws and advocate for sound competition policy. The Department’s competition advocacy is particularly important in the telecommunications industry, where government regulations significantly shape the competitive landscape. To enhance its ability to fulfill those responsibilities, in November 2007 the Department hosted a Symposium focusing on competition among providers of video programming delivery, local telephony, and broadband services. Industry executives, economists, analysts, and local government officials participated at the Symposium and through written submissions, offering a variety of perspectives. This report summarizes their views. Chapter I provides an overview of developments in the three industry segments addressed at the Symposium – video, telephony, and broadband. The most significant development in video programming delivery is entry by telephone companies seeking to compete with cable and direct broadcast satellite providers. Trends in local telephony include a decline in the number of residential landlines, primarily as a result of consumers discontinuing second lines, and entry by cable firms. Broadband services have experienced explosive growth.