Cable Mergers and Monopolies As media and communications industries enter the digital age, policy makers are confronted with unique new challenges to ensure competitive, consumer-friendly markets. Cable Mergers and Monopolies provides a detailed study of the increas- ingly concentrated cable TV industry, which has dominated the video market for decades and is rapidly gaining dominance in the high-speed Internet market. This book presents a framework for understanding why the convergence of digital media and communications networks facilitates the exercise of two important new forms of market power. “Vertical” market power allows cable giants to leverage their monopoly over “wires” to dominate high-speed Internet service and exert control over the development of new, broadband Internet applications and content. Monopsony, or buyer power, allows cable operators who control hundreds of video channels to dictate the terms and conditions under which programming is made available to the public. For both video and high- speed Internet, the result is raised prices and retarded innovation. The book combines the analytic concept of platforms (which has become in Digital Media and Communications Networks Market Power prevalent in the analysis of the computer and communications industries) with traditional structure, conduct, and performance analyses from the field of indus- trial organization. The book also identifies innovative policies—beyond simply denying mergers—that federal, state, and local authorities can implement to prevent further abuse of consumers and other firms in the industry, and that can promote competition in digital information markets. MARK COOPER is the Director of Research at the Consumer Federation of America where he has responsibility for energy, telecommunications, and eco- nomic policy analysis. He holds a doctoral degree from Yale University and is a former Yale University and Fulbright Fellow. Dr. Cooper is the 2002-03 fellow at the Stanford Law School Center for Internet and Society and an associated fellow at the Columbia University Institute on Tele-Information. He has provided expert testimony in over 250 cases before state and federal agencies, courts, and legislators in almost four dozen jurisdictions in the United States and Canada. His published work includes numerous articles in trade and scholarly journals, including recent law review articles on digital society issues, and he is the author of two books, The Transformation of Egypt (1982) and Equity and Energy (1983). CAbLe MErgERs The ECONOMIC POLICY INSTITUTE is a nonprofit, nonpartisan research organization that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy. The Institute stresses real world analysis and a And MoNopolies concern for the living standards of working people, and it makes its findings accessible to the general public, the media, and policy makers. EPI’s books, studies, and popular education materials address important economic issues, Market power in digital media analyze pressing problems facing the U.S. economy, and propose new policies. and communications networks Economic Policy Institute books are available in bookstores and at www.epinet.org. by MaRK COOPeR ISBN: 1-932066-03-9 EPI ECONOMIC POLICY INSTITUTE Untitled-1 1 11/18/2002, 11:42 AM CABLE MERGERS AND MONOPOLIES• 15866_pi_x.pmd 1 11/18/2002, 9:35 AM Other books from the ECONOMIC POLICY INSTITUTE The State of Working America 2002-03 On Hold: Telecommunications in rural America Putting Broadband on High Speed: New public policies to encourage rapid deployment Narrowing the Broadband: The harmful effects of the proposed AT&T-Comcast merger MCI WorldCom’s Sprint Toward Monopoly: An analysis of the proposed telecommunications merger Monopoly.com: Will the WorldCom-MCI merger tangle the Web? The FCC’s Newspaper-Broadcast Cross-Ownership Rule Bad Deal of the Century: The worrisome implications of the WorldCom-MCI merger 15866_pi_x.pmd 2 11/18/2002, 9:35 AM 15866_pi_x.pmd 3 11/21/02, 10:38 AM Acknowledgments Much of this analysis was developed for comments filed at the Federal Communications Commission on behalf of the Texas Office of Public Utility Counsel, the Consumer Federation of America, Consumers Union, the Center for Digital Democracy, and the Media Access Project. Phil Weiser provided a review and suggestions. Rob Scott provided editorial guidance, Ben Kahn proofread, and Stephanie Scott and Jonnie Patrick provided administrative assistance for this study. Copyright © 2002 ECONOMIC POLICY INSTITUTE 1660 L Street, NW, Suite 1200 Washington, D.C. 20036 http://www.epinet.org ISBN: 1-932066-03-9 15866_pi_x.pmd 4 11/18/2002, 9:35 AM Table of contents Introduction and Overview ........................................................................................ 1 Persistent Abusive Monopoly .................................................................................... 1 Outline of the Paper ................................................................................................... 2 Approach .................................................................................................................. 2 Outline ..................................................................................................................... 3 The Public Understands the Danger of Mergers in the Mass Media and Communications Industries .......................................................................... 5 PART I: VIDEO ................................................................................................ 7 Chapter 1. Underpinnings of Public Policy Toward Mergers in Communications and Media Markets ................................................................................................... 9 Promoting Competition as the Goal of Antitrust Policy .......................................... 9 Horizontal Market Power ........................................................................................ 9 Concerns About Vertical Leverage ..................................................................... 13 Promoting Diversity in Civic Discourse as the Goal of Communications Policy ......................................................................... 14 Conclusion ................................................................................................................ 17 Chapter 2. The Persistent Failure of Competition in the Cable Market ......................................................................... 19 The Enduring Cable Monopoly ................................................................................ 19 The Anticompetitive History of the Industry ..................................................... 19 The Failure of Cross Technology Competition ....................................................... 21 Weak Competition at the Point of Sale ............................................................. 22 Satellite’s Initial Success Came in Entering New, Niche Markets Where It Did Not Compete for Cable’s Existing Customers ..................................... 24 Survey Results Show That Cable-Satellite Competitive Overlap Is Small ..... 28 Market Power in the Video Product Space ............................................................ 32 Local and National MVPD Market Concentration ............................................ 32 Cable Pricing Patterns Indicate the Abuse of Cable Market Power ............... 33 The Bottom Line on Market Power Is the Bottom Line ................................... 35 Chapter 3. Discrimination and Anticompetitive Practices of Cable Operators in Video Programming Markets .......................................... 39 The Dance of the Enlightened Elephants .............................................................. 39 In Reality, the Elephants Crush the Grass and the Mice ..................................... 40 The Incentive and Ability to Discriminate ............................................................. 44 Dominance in Programming .................................................................................. 50 Market Power Exists at 30% Market Share .......................................................... 54 PART II: HIGH-SPEED INTERNET SERVICE ....................................................... 59 Chapter 4. Unique Characteristics of Digital Communications Platforms ..................................................................... 61 A Multi-Purpose Communications Platform ......................................................... 61 v 15866_pi_x.pmd 5 11/18/2002, 9:36 AM Platforms Facilitate the Exercise of Market Power .............................................. 62 The Dynamic Environment of Open Digital Communications Platforms .......... 65 Technological Underpinnings of the Internet Revolution ............................... 65 The Role of Public Policy in Creating Open Communications Platforms ...... 67 Claims That Monopoly Is Preferable Do not Stand Close Scrutiny .................... 70 Chapter 5. The Threat to Open Communications Platforms ............................ 73 Cable’s Strategy to Close the Communications Platform ................................... 73 Manipulation of Access .......................................................................................... 77 Essential Communications Functions ............................................................. 78 Discrimination ..................................................................................................... 80