Broadband Carrier Quandary: Exploit Bandwidth Scarcity, or Reduce It?

            Comcast enhanced the value position of its broadband subscriptions by increasing the monthly data allowance to 1 Terrabyte (1000 Gigabytes). See http://money.cnn.com/2016/04/28/technology/comcast-data-cap/.  As an independent, unsponsored researcher, I can say “Thank You Comcast” without adverse consequences and only a bit of irony.  This company does much to displease, but ab expanded data allowance offers a winning proposition.

            Consumers win, because Comcast has opted not to create artificial scarcity with an eye toward running up subscribers bills. While one subscriber’s glut maybe another’s scarcity, 1000 Gigabytes offers a generous allowance.  Most subscribers will not have to ration their usage including actively cutting off advertisements that increasingly seem to launch despite attempts to prevent “auto play.”

            Comcast wins, because longer and stickier subscriber viewing typically generates more revenues for the company.  Comcast operates in what economists describe as a double sided market.  The company generates revenues from downstream, broadband subscribers and it also receives payments from upstream carriers, such as Content Distribution Networks, as well as content creators and distributors, such as Netflix.

            Additionally, Comcast can accommodate ever increasing demand for bandwidth quickly, efficiently and inexpensively.  The company need only reallocate a 6 MegaHertz channel from video carriage to broadband carriage.  Aljazerra America’s sign off created a candidate channel for reassignment. See http://america.aljazeera.com/articles/2016/1/13/al-jazeera-america-to-close-down.html.  Cable television networks typically now have ample bandwidth affording latitude in assigning capacity for video, data and other services.  A technology known as cable bonding makes it possible to add broadband capacity in 6 MHz increments.

            As cable companies expand broadband data rates, wireless carriers persist in rationing access with monthly allocations typically in 1-10 Gigabyte range. Wireless carriers currently do confront scarcity, particularly if many subscribers in the same vicinity try to stream video at the same time.  As well, wireless carriers do not have the same quick, easy and cheap opportunities to expand broadband bandwidth, although they can install more towers (“cell-splitting”), encourage subscribers to incorporate their wired broadband subscription with cellphone service and acquire more spectrum.

            Currently, wireless carriers appear quite adept at finding the sweet spot that balances scarcity abatement strategies with scarcity-based pricing.  These carriers have paid billions for auctioned off spectrum, but they also want to use unlicensed, free Wi-Fi spectrum to accommodate growing demand, most probably without a data rate increase.  Additionally, they can rely on the spectrum scarcity rationale to justify many tiers of service with pricing rising significantly as data rates increase.  Few current subscribers have truly unlimited data plans, because the service agreement authorizes the carriers to reduce (throttle) delivery speeds to rates that do not support video streaming.

            Wireless carriers can exploit spectrum scarcity to support a much higher per Gigabyte cost of service.  Comcast just widened this differential.

Scale and the Comcast-TWC Acquisition

           Former FCC Chairman Reed Hundt hosts The Digital Show on Business Radio 24/7-- Business Talk from Wharton, channel 111 on Sirius/XM satellite radio.  He invites major thinkers on telecom and Internet issues to chat Mondays from 5-7 p.m. in the Eastern time zone.

            On March 10^th, the program featured prominent buy side analyst Craig Moffett, Comcast E.V.P. David Cohen, Free Press Policy Director Matt Wood and yours truly.  I wish Sirius/XM archived the program, because you would hear the points for and against the Comcast-TWC acquisition in an understandable and comprehensible forum.

 

            Each presenter made his arguments effectively. Mr. Cohen offered the view that the acquisition is not such a big deal, particularly in light of the fact that Comcast and TWC “don’t compete,” while Comcast operates in a fiercely competitive marketplace for both video content and Internet access.

            Clearly Comcast does not operate as a charity, but Mr. Cohen recognized the duty to make the case for the deal based on some articulation of how the public benefits, or at least is “not threatened.” He emphasized that Comcast needs to acquire even greater scale to operate effectively and to provide consumers with the best quality of service, a robust research and development budget and a wealth of next generation services, including a new state of the art set top box.  He did not mention the prospect for lower prices even though larger scale may support the company’s ability to extract lower content prices and better Internet peering terms, in the same manner as Walmart. 

            Chairman Hundt used the phrase “balloon squeezing” to provide a visual reference for the enhanced ability of the company to reduce its costs even as smaller ventures incur higher prices for access to the same content and Internet network links.

            Mr. Cohen provided clarity on why the company wants to acquire greater market share in the video and broadband marketplace.  The merged company would serve about 30 million cable television and broadband households. In broadband, the company’s market share will likely grow significantly in light of the fact that Digital Subscriber Line service cannot increase bit transmission speeds to satisfy growing demand for video downloading.  Additionally, AT&T and Verizon have largely refrained from investing more funds to expand their high speed, digital fiber or hybrid copper/fiber networks.  So Comcast can only improve its ability to extract even higher payments from retail subscribers, particularly broadband users likely to face lower downloading allowances and more expensive tiers of service.  The company also can extract additional peering and transiting payments from upstream ISPs and content providers as evidenced by the recent paid peering deal with Netflix.  Also the company has greater “balloon squeezing” leverage with content providers, far greater than even Google.  That megafirm won’t have anything near the scale of Comcast even with an expanded footprint of 37 or so metropolitan areas.

            Case closed?  Matt Wood offered a fine rebuttal and the case for the FCC and Department of Justice to reject the deal.  The scale argument and the lack of competition among Comcast and TWC stand as two major elements why the issue of bigness is threatening to consumers and to a robustly competitive marketplace.  Standing as a toll bridge or bottleneck  operator between consumers and content sources, Comcast would have even greater leverage to extract higher charges without having to enhance the value proposition on either side.

            My concern focused on what happens when Comcast can buy out a significant player in the cable and broadband marketplace.  The fact that operators like Comcast and TWC have implicitly agreed not to compete (a mutual non-aggression pact) does not mean that their combination will lack impact.  Without TWC, cable and broadband companies have even less incentives to innovate and to sharpen their pricing pencils.

            Consider the wireless marketplace with a company like T-Mobile and one where AT&T acquired the company.  In the former, consumers benefit by having the fourth among equals forced—perhaps kicking and screaming— to compete aggressively.  In just a few weeks T-Mobile departed from conscious parallelism—simply duplicating the price points and service terms of AT&T and Verizon—to becoming an innovator.  The company has made a huge impact with lower rates for consumers who bring their own devices, roam internationally and want to change carriers in fewer than every two years.

            With its acquisition of TWC, the odds decline even further for a maverick innovator to offer a better value proposition for consumers, e.g., the opportunity to pick and choose networks on an a la carte basis instead of a large “enhanced basic” tier of channels.  Who would evidence “best practices” when doing so results in sleepless afternoons competing and the potential for being targeted by Comcast for balloon squeezing?

            Matt Wood made a series of convincing arguments that most consumers will suffer from the deal, but I would not bet against conditional approval in this politicized, pay to play environment.

Cable A la Carte and Economic Efficiency

  

          In preparing updates to the loose leaf treatise All About Cable and Broadband, I reviewed the FCC’s latest report on cable television prices.  See  http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-12-377A1.doc.  The Commission reports that cable operators consistently raise rates well in excess of the Consumer Price Index, a broader measure of prices.  On the other hand the per channel cost per month has declined slightly in light of expanding inventories of channels offered in each program tier.   So bundling enhances the value proposition, or does it?

         Looking at the FCC’s report and my Comcast bill, I could not help but think about a la carte pricing.  Cable operators and content suppliers hate this option and have refused to pursue it even though cable networks have the addressability and other technological features able to provide it economically. One can appreciate why: who would give up a guaranteed payment from each subscriber, regardless of their interest and viewership, in exchange for perhaps higher payments from the smaller number of viewers actually interested in watching a particular channel?  Most cable and satellite subscribers opt for a handful of program sources with little regard for most offered channels.

         Of course it would support both consumers’ specific content demand and economic efficiency to offer al a carte, but who will emphasize this point?  On the contrary sponsored economists come up with transparently bogus rationales ostensibly proving that a bundle is both cost-effective and efficient.  So cable subscription enhances my welfare and offers a better deal when the operator lards the tier with shopping channels and when proven brands, such as HBO and Discovery expand their number of channel options?  Hardly.

        A la carte would provide consumers the opportunity to customize the number and type of channels.   But just as allowing consumers to pick and pay for selected tracks in a music recording, a la carte would reduce cable operator and programmer revenues.  Pull out all the channels you never watch and then divide that number by your ever increasing monthly video bill.   That represents your true cost per channel.