Monday, February 25, 2013

Former Obama advisor argues Comcast is a threat to the open Internet Yet other sectors of the Internet economy are working better than she admits.

Comcast headquarters in Philadelphia.

Susan Crawford, a visiting professor at Harvard and a former advisor to President Obama, was not a fan of Comcast's acquisition of NBC Universal. In fact, Crawford was so appalled by the transaction that she made the fight over the merger the focus of her book, Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age.
But Crawford's beef isn't only with Comcast. She sees the cable giant's growing size as a symptom of much larger problems with the telecommunications, media, and technology sectors. In her view, these communications industries fester with monopolies, collusion, and consumer-hostile business practices. A few big companies—AT&T, Verizon, Comcast, Time Warner, Apple, Google, and Microsoft—"tacitly cooperate by carving out their separate areas of expertise," leaving customers with low quality and high prices.
Crawford's skepticism of the Comcast deal is well-founded, but her broader critique of the modern media landscape misses the mark. The sorry state of the residential broadband market is a genuine problem that calls for creative policy solutions, but the wireless, media, and online sectors of the economy are more competitive—and more consumer-friendly—than she admits.
Crawford's over-diagnosis of what's wrong with the modern communications sector leads her to go overboard with her policy proposals. Rather than advocating a focus on constraining the power of broadband duopolists, she calls for a broad increase in government involvement in the communications industry. That approach didn't work very well the last time we tried it in the mid-20th Century. And it would likely work even worse today.

Monopolies everywhere?

A careful reading of Captive Audience gives some hints the industry's major incumbent firms might not be as omnipotent, or as collusive, as Crawford claims. At one point, for example, she describes how programmers like Disney and News Corp "mercilessly gouged" AT&T and Verizon when they were trying to put together video packages to deliver over their FiOS and U-Verse networks. In another, she describes how cable companies are "slowly losing market share in video," thanks to increased competition from Verizon, AT&T, Dish, and DirecTV. This is not a story of wink-and-nod collusion among the captains of the media industry. Rather, it's a story of big companies fiercely jockeying for position in a rapidly changing marketplace.
Crawford's pessimism is particularly unconvincing in the wireless market. In 2003, she writes, "Americans were left with just three large wireless providers"—Verizon, Cingular, and AT&T Wireless. These three companies controlled about 60 percent of the market, with the other 40 percent controlled by "Sprint PCS, T-Mobile, Nextel Communications, Alltel, and others." In other words, we were "left with" at least seven competitors not three. That's pretty good for such a capital-intensive industry.
Of course, the market has consolidated somewhat since then. We now have four national carriers. The feds were wise to block AT&T from acquiring T-Mobile. But a market with three or four major carriers is the norm across the industrialized world. And it's certainly not, as Crawford describes it, "in some ways...even less competitive than the wired market." The typical wireless consumer has three or four options, whereas wired customers are lucky to have two choices.
And Crawford's inclusion of Google, Apple, and Microsoft on her list of companies "tacitly cooperating" to carve up the market among themselves is even less plausible. Each of these three companies is pouring billions of dollars into their operating systems, mobile devices, search engines, and other products. It's hard to see any major problems requiring the attention of regulators.
The problem with the communications industry, in other words, is not a problem with "bigness" in general. Apple, Microsoft, Disney, and News Corp. are "big" companies, but consumers who are dissatisfied with their products have plenty of alternatives. Rather, the problem is the structure of the residential broadband market makes it more prone to monopoly than other parts of the Internet economy.

The third way

Over our history, the United States has taken three different approaches to telecommunications regulation. Before 1968, policymakers took for granted that communications was a monopoly service and regulated it as a vertically-integrated public utility. Between 1968 and 1996, regulators focused on fostering competition by discouraging vertical integration. They broke up AT&T and regulated the Baby Bells to prevent them from killing off startups like MCI and AOL. Since Congress passed the 1996 Telecommunications Act, policymakers have abandoned these pro-competitive policies, allowing the incumbents to consolidate and squeeze out smaller firms.
Crawford advocates a return to the first of these three approaches. During the New Deal era, she says approvingly, the FCC "was given the job of providing America with a high-quality, general-purpose communications system at reasonable rates. For fifty years, the state oversaw the development of phone service." It's true that the regulations of the mid-20th Century helped promote universal and affordable telephone service. But granting AT&T a telecommunications monopoly also produced a half-century of technological stagnation.
Crawford's framing of the debate—between the pro-regulatory stance of the 1930s and the anti-regulatory stance of the 2000s—ignores a third option: the pro-competitive policies of the 1970s.
In 1968, the FCC forced AT&T to allow third parties to attach devices to the network, creating a market for answering machines, cordless phones, modems, and much more. In the 1970s, the FCC allowed MCI to enter the long distance market. And in 1974, the Ford administration began antitrust proceedings that would lead to the monopolist's breakup in 1984. The result was flourishing markets for long distance service, answering machines, cordless phones, and online services. And crucially, the FCC avoided heavily regulating these relatively competitive markets, resulting in a rapid pace of innovation.
In other words, the key principle of the 1970s reforms was monopolies should be regulated while competitive markets should not be. And this is a principle neither Crawford nor modern conservatives seem to understand. Crawford seems to regard the competitive sectors of today's economy as just as dysfunctional, and in need of regulation, as the monopolistic sectors. Conservatives make the opposite mistake, reflexively opposing regulation no matter how concentrated an industry becomes.
The result has been a stale and counterproductive debate between "free markets" and "regulation." But the key question is not whether regulation is needed, but what kind of regulation is needed inwhich sectors of the economy. History suggests regulators should regulate when doing so is necessary to constrain monopolies and promote competition. In particular, they should limit the size of monopolistic firms and prevent them from vertically integrating into competitive markets. But it's equally important for regulators to avoid excessive meddling in markets like the modern wireless sector where there is already robust competition.
An important advantage of a policy agenda that's pro-competitive, rather than pro- or anti-regulatory, is it has a better chance of attracting broad bipartisan support. Crawford's sweeping indictment of big business is unlikely to find a sympathetic ear among conservatives or libertarians. Indeed, Crawford herself acknowledges this, arguing "America needs more people who can calmly and rationally oppose the free-marketeer rhetoric." But "free-marketeer rhetoric" is too popular among American voters for an explicitly anti-market movement to gain traction.
The political right may be more receptive to a regulatory agenda focused on constraining companies, like Comcast, who enjoy monopoly power thanks to state-granted franchise agreements. During the 1970s and early 1980s, pro-competitive telecommunications policies enjoyed support across the political spectrum. It was the Republican Ford administration that launched the antitrust case against AT&T, and the Republican Reagan administration presided over the firm's breakup a decade later. There's no reason a regulatory agenda that is pro-competition, rather than merely anti-market, couldn't attract broad support in the future.

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