March 26, 2014 Bloomberg View - For a perfect picture of Internet access market power, unconstrained by competition or oversight, consider this week's rumor that Comcast Corp. is talking with Apple Inc. about developing a snazzy new window on television programming. The presumed goal is a service that feels just like online content -- as easy to use as Netflix -- but includes all the sports and first-run programming that Netflix doesn't have. Put that on a sleek Apple tablet, rather than a stodgy cable set-top box, then flood cities with Wi-Fi (as part of a Comcast bundle), and consumers will be hooked.
Since the rumor surfaced, Apple's stock price has soared and Netflix Inc.'s has plunged.
Meanwhile, Comcast, the largest media company in the world, has insisted that Netflix pay Comcast for the privilege of reaching its subscribers. Reed Hastings, the chief executive officer of Netflix, has complained that, although the company will "reluctantly" pay large Internet service providers "to ensure a high quality member experience," infrastructure operators in the U.S. have too much power, and government intervention is needed to constrain it.
Jim Cicconi, government affairs mastermind at AT&T Inc., fired back, "If there’s a cost of delivering Mr. Hastings’s movies at the quality level he desires -- and there is -- then it should be borne by Netflix."
All of these companies are acting rationally to expand their profits. None of them is expected to serve any larger public interest. That's the government's job. But Americans need a cop on the beat.
Because Comcast has so many subscribers, it already has the market heft to require that other physical networks pay to connect to its lines -- that's why Netflix has had to agree to a "paid peering" relationship. Netflix initially refused this option and saw its traffic routed through an overcrowded connection.
This is a sharp departure from what happens in competitive network-infrastructure markets. Around the world, 99.5 percent of "peering" agreements are made without cost, according to a recent report from the Organization for Economic Cooperation and Development. Any ISP under competitive pressure wants to ensure that all Internet traffic gets to the provider's customers, and the most efficient way to do that is to connect with other networks for free. Where free peering isn't available, a second-best alternative for an ISP is to pay for traffic to get where it's meant to go -- so-called "transit" arrangements.
Comcast is so powerful that it can both refuse to pay for transit of its own traffic and insist that other networks -- such as those used by Netflix -- pay it to connect. And Cicconi is saying the same thing about AT&T: Because there is only one way to reach AT&T wireless subscribers, AT&T should be able to charge whatever it wants for that connection. This is why regulators need to intervene. U.S. interconnection markets are at the moment perfectly engineered to raise revenue for Comcast and AT&T, at the same time that these companies are spending no more than 15 percent of that revenue on their infrastructure.
The Apple narrative reveals something similar about Comcast's power. Comcast already pays far less for programming than any other cable provider because it has so many subscribers; if Comcast and Time Warner Cable merge, the new company will control rights to transmit major sports events from the Olympics to Los Angeles Lakers games. Comcast can ensure that negotiations with content providers include special low-cost deals for Apple, its new partner, and can stream its sports content through Apple's service.
Plus, its unconstrained control over its digital pipe will allow it to distribute a new Apple "channel" that will look and feel just like an online application; instead, though, the Apple material will get preferential treatment as a Comcast "specialized service." And Comcast can ensure that a new (and frequently upgraded) Apple device is part of tens of millions of American lives. Meanwhile, the permissionless Internet that has launched so many good ideas and new ways of making a living will become a narrow part of a curated Comcast Experience.
The U.S. needs a better Internet access plan, one that starts with fiber networks uncontrolled by either Comcast or AT&T, one that could give rise to devices made by more companies than just Apple and to online services provided by more companies than just Netflix. But without government intervention we can't keep the market free.
(Susan Crawford, the John A. Reilly visiting professor in intellectual property at Harvard Law School and a fellow at the Roosevelt Institute, is the author of "Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age." Follow her on Twitter at @scrawford.)
To contact the writer of this article: Susan P. Crawford at firstname.lastname@example.org.