January 9, 2013 TIME Magazine - Should broadband Internet service be treated as a basic utility in the United States, like electricity, water, and traditional telephone service? That’s the question at the heart of an important and provocative new book by Susan Crawford, a tech policy expert and professor at Cardozo Law School. In Captive Audience: The Telecom Industry and Monopoly in the New Guilded Age, released Tuesday by Yale University Press, Crawford argues that the Internet has replaced traditional phone service as the most essential communications utility in the country, and is now as important as electricity was 100 years ago.
“Truly high-speed wired Internet access is as basic to innovation, economic growth, social communication, and the country’s competitiveness as electricity was a century ago,” Crawford writes, “but a limited number of Americans have access to it, many can’t afford it, and the country has handed control of it over to Comcast and a few other companies.”
Because the U.S. government has allowed a small group of giant, highly profitable companies to dominate the broadband market, Crawford argues, American consumers have fewer choices for broadband service, at higher prices but lower speeds, compared to dozens of other developed countries, including throughout Europe and Asia.
“In Seoul, when you move into an apartment, you have a choice of three or four providers selling you symmetric fiber access for $30 per month, and installation happens in one day,” Crawford told TIME in an interview Tuesday. “That’s unthinkable in the United States. And the idea that the country that invented the Internet can’t get online is beyond my imagination.”
Crawford, who has been a visiting professor at Harvard, Yale and Michigan, spent a year on the National Economic Council as a top telecommunications advisor to President Obama. In her book, she directs much of the blame for the sorry state of the U.S. broadband market at the federal government. “Instead of ensuring that everyone in America can compete in a global economy,” she writes, “instead of narrowing the divide between rich and poor, instead of supporting competitive free markets for American inventions that use information — instead, that is, of ensuring that America will lead the world in the information age — U.S. politicians have chosen to keep Comcast and its fellow giants happy.”
One of the main themes in the book is the “digital divide,” which refers to the fact that millions of people in the U.S., mostly in the poorest and most rural communities, don’t have access to affordable broadband service, including 2.2 million people in New York City, according to Crawford. “We’re depriving people of basic communications access,” she says. Still, broadband and wireless services have become so important to our business and personal lives that most people are willing to pay up, even in the face of high prices driven in part by a lack of competition in the broadband and wireless markets.
Crawford’s top target is Comcast, the nation’s largest cable company, which recently purchased a controlling stake in NBCUniversal, the iconic news and entertainment company. In completing that purchase, which was opposed by media reform advocates and heavily scrutinized by federal regulators, Comcast achieved what might be called the “holy grail” of telecommunications: ownership of a major content creation company, and control of a vast content distribution network.
The FCC‘s approval of the Comcast/NBCU merger created a huge conflict of interest, according to Crawford. “Even as the Internet was becoming the world’s general-purpose network, the merger would put Comcast in a prime position to be the unchallenged provider of everything — all data, all information, all entertainment — flowing over the wires in its market areas,” writes Crawford, who is also an adjunct professor at the School of International Affairs at Columbia University. “Instead of electricity or water, Comcast was gaining dominion over the country’s latest utility infrastructure: high-speed Internet access.”
Let’s take a step back and look at the basic contours of the landline U.S. telecom and cable market. In general, there are three types of wired networks that serve America’s phone, cable, and Internet consumers. Copper wire (traditional phone lines, DSL, slow speeds); cable (faster speeds, mostly for downloading); and fiber (potentially unlimited speeds, data is transmitted through pulses of light). In over 75% of the country, the only broadband choice for Americans will soon be cable, according to Crawford. Consumers are fleeing their relatively slow DSL service so rapidly that 94% of new broadband subscriptions in the third-quarter of 2012 went to faster cable service.
In most of the country — including major cities like Chicago, Boston, Philadelphia, Detroit, Houston, and Denver — there is only one major cable provider, which happens to be Comcast. In many of these markets, much smaller providers do, in fact, exist around the edges of the dominant company. “Standard Oil did the same thing,” Crawford said during a lecture last fall at Harvard’s Berkman Center for Internet and Society, where she recently joined the board of directors. “You let a little bit of competition exist so you can point to it and say ‘Ha, we’re competing!’ But otherwise it’s mostly controlled by one company.”
Meanwhile, Comcast has sharply reduced its capital expenditures, which have now fallen to 14% of revenues from over 35% a decade ago, even as it enjoys a whopping 95% profit margin on its broadband service. “They’re not expanding and they’re not enhancing their service,” Crawford says. “They’ve done their investment, now they’re just harvesting.” Not surprisingly, Comcast’s stock price increased over 50% in the last year, and nearly 200% over the last four years. “Shareholders are doing well,” Crawford says. “The rest of the country, not so great.”
Verizon’s FIOS high-speed fiber service, which is faster than cable, is available only to about 14% of residences nation-wide, Crawford says, and wireless service “will not substitute” for the lack of fiber access because it is slower. That reality was driven home last year after the FCC allowed Verizon and Comcast to strike a deal to market each other’s services. Verizon will sell Comcast cable service; Comcast will sell Verizon’s wireless service. This is not competition. “Fierce competitors don’t offer to sell each other’s products,” Crawford writes.
Indeed, AT&T and Verizon — which dominate the U.S. wireless market — are moving aggressively to exit their traditional wireline phone businesses, in favor of much more profitable wireless service.
In Europe, where there is much more robust wireless competition, one gigabit service with unlimited minutes and text messages is available for $12 per month, according to Crawford. A comparable service in the U.S. costs anywhere from $50 to $90 per month, depending on the contract. It’s no surprise, then, that the average revenue per user raked in by AT&T and Verizon in the U.S. is soaring, while in Europe the average revenue per user is steadily declining. “People who come here from other countries are just perplexed,” says Crawford. “They wonder what is going on here?”
Given how profitable broadband and wireless service is for the cable and telecom giants, it’s also no surprise that the CEOs of these companies are among the most highly-paid executives in the country. In 2011, Comcast CEO Brian Roberts (whose family controls the voting stock of this ostensibly public company) made $27 million; Verizon CEO Ivan Seidenberg made $26 million; and AT&T CEO Randall Stephenson made $22 million. Seidenberg and Stephenson made about 500 times their employees’ average annual salary, while Roberts and Time Warner Cable CEO Glenn Britt made about 1,000 times what their employees earn every year. (Time Warner Cable is a completely separate public company from TIME parent Time Warner, which spun off the cable giant in 2009.)
For most American companies the ratio is about 380 times, according to Crawford. “I’m not saying we’re doing great on the inequality metric,” she says, “but when it comes to these media companies that would have been viewed as utility companies in the past, it’s really striking.”
According to Crawford, the interests of cable and telecom giants like Comcast, Time Warner Cable, Verizon, and AT&T, are not aligned with the interests of the public. Those corporate giants are concerned first and foremost with maximizing the profits of their shareholders. And all too often, profit maximization — especially in a market that lacks robust competition — is not consistent with providing the best possible service at reasonable prices.
After spending a year as a top tech advisor to President Obama, Crawford concluded that federal policy makers have little incentive to upset the telecom and cable giants. She attributes this partly to the fact that, since 1998, AT&T, Verizon, and the National Cable and Telecommunications industry trade group have spent nearly half a billion dollars lobbying the federal government, according to the Center for Responsive Politics. Just in terms of campaign contributions to Congress, AT&T has spent $50 million since 1989, making it the third largest donor during that period of time. And no fewer than 49 members of Congress are actual AT&T shareholders, giving them a direct financial interest in the telecom giants’s profitability.
This has led to what some legal scholars call “regulatory capture” at the Federal Communications Commission, the agency charged with overseeing the industry and preventing abuses that harm consumers. Like many other federal agencies, the FCC has seen numerous examples of the “revolving door“ dynamic in Washington, D.C., in which insiders move back and forth between telecom industry heavyweights and the agencies that are supposed to regulate them. For example, Michael Powell, who served as FCC chairman for four years in the mid-2000s, would later become CEO of the National Cable and Telecommunications industry trade group. He is now the cable and telecom industry’s top D.C. lobbyist.
Meredith Attwell Baker, who was one of the FCC commissioners who approved Comcast’s merger with NBC Universal, left the agency four months later to join Comcast as a highly-paid lobbyist, in a move that infuriated media reform groups. At the time, Craig Aaron, president and CEO of Free Press, a public interest group, described Attwell’s move as “just the latest, though perhaps most blatant, example of a so-called public servant cashing in at a company she is supposed to be regulating. No wonder the public is so nauseated by business as usual in Washington, where the complete capture of government by industry barely raises any eyebrows. The continuously revolving door at the F.C.C. continues to erode any prospects for good public policy.”
Crawford makes a series of policy prescriptions that she says would improve U.S. broadband service, penetration, and competition, while reducing prices. At a minimum, the U.S. government should see to it that each citizen has access to a low-cost (say, $30 per month) Internet connection, says Crawford, much as it does with other basic utilities like electricity and water. Where it’s too expensive for the private sector to provide that service, in very rural areas for example, the federal government should step in.
State and local laws that make it difficult — if not impossible — for new competition to emerge in broadband markets should be reformed, according to Crawford. For example, many states make it very difficult for municipalities to create public wireless networks, thanks to decades of state-level lobbying by the industry giants. In order to help local governments upgrade their communications grids, Crawford is calling for an infrastructure bank to help cities obtain affordable financing to help build high-speed fiber networks for their citizens. Finally, U.S. regulators should apply real oversight to the broadband industry to ensure that these market behemoths abide by open Internet principles and don’t price gouge consumers.
Should broadband Internet service be considered a public utility like water and electricity? “We treated the telephone industry like a utility and people don’t seem to be surprised by that,” says Crawford. “High-speed Internet access plays the same role in American life. It’s just that these guys have succeeded in making us think that it’s a luxury.”
Crawford’s book is the most important volume to be released in the last few years that describes the sad — some might say embarrassing – state of the U.S. telecommunications market. Reasonable people can and do disagree about policy solutions, but the facts are not in dispute. Americans have fewer choices for broadband Internet service than millions of other people in developed countries, yet we pay more for that inferior service. The reason for that, according to Crawford, is that U.S. policy makers have allowed a small number of highly profitable corporate giants to dominate the market, reducing competition and the incentives for these companies to improve service and lower prices.
By taking on one of the most powerful industries in the United States, Crawford knows that she will not endear herself to the CEOs of Comcast, Time Warner Cable, AT&T and Verizon. “I’m not going to be on their Christmas card lists this year,” she quips. And given the entrenched influence of these companies in Washington, D.C., many — if not most — of her policy prescriptions seem a tad far-fetched. Is the U.S. government about to mandate low-cost broadband Internet access for all Americans? It’s not likely any time soon. But her book does provide a vivid and eye-opening description of what ails America’s cable and telecom market, and for that reason, it should be required reading for anyone interested in tech policy. Crawford’s book also lays out a road-map for solutions, quixotic as they may be. But, as Crawford says: “There is always hope.”