Standard Oil committed many sins on the way to infamy, and Teddy Roosevelt’s s**t list, but a big one was “vertical integration.” Rockefeller’s people owned oil refineries, and trucks that delivered gasoline, and the gas stations that sold it, and so on. It owned businesses up and down the supply chain, right down to the person who took the money from the consumer.
A clever business model, that. And believe it or not, it’s not necessarily illegal. Companies purchase firms in their supply chain all the time. IKEA famously purchased acres of forests in Romania, for example. That’s just smart, unless it leads to abusive monopoly power. If IKEA were the only place to buy furniture, purchases of forests would raise alarms bells. Were IKEA to buy all the forests in Europe, well, now I’d hope someone would step in and stop them.
Better yet, I’d hope we’d have a rule to stop that kind of thing before it starts. Or if we had one, I’d hope we wouldn’t rescind it because IKEA asked nicely.
That’s not precisely what happened this week when FCC chairman Ajit Pai announced he would dump net neutrality, but it’s a pretty decent approximation. If net neutrality goes down in flames, you better believe TV prices are going up. I’d bet my over-the-top SlingTV subscription on that. Let me explain.
Net neutrality sounds like a complicated concept. (So does vertical integration.) It’s not. The rule simply stops an internet service provider from favoring some 1s and 0s over others. It prevents some content providers from being charged extra to be in the fast lane, which in turns, obviously means other companies would be relegated to the slow lane.
“That’s too much government interference,” neutrality opponents have said. Then comes the Economics 101 argument that free markets, rather than the government, should decide such things. If only these folks would take Econ 102, when monopolies come up.
The myth of the free market
See, there is no free market in internet service. How many options do you have for broadband at your house? If you have three, you’re lucky. Many Americans — 50 million — have no choice at all for internet provider; they are forced to pay the exorbitant price their single carrier requires. So, stop with the free market cliche. In a situation where choice is not naturally occurring, it’s just and necessary for government to step in.
Let’s add to this discussion the fact that broadband internet is a necessity today. A quick quiz: Does internet service have more in common with electricity, or with a subscription to a wine club? A: internet service is a utility.
I’ll bet zero percent of those who’d argue internet is somehow optional live without internet in their homes. I do wish FCC Chairman Ajit Pai had to live without home service from now until Dec. 12, when the final net neutrality vote will be held. Let him argue then that internet service is not a utility.
Now, back to vertical integration, and your soon-to-be higher TV prices. Comcast is one of America’s largest internet service providers. It also owns NBC. That means it owns both the pipe that goes into your home, and some of the stuff that goes through that pipe. That’s vertical integration. After Dec. 12, Comcast will be within its rights to make NBC content look better than competitors’ services when viewed over its internet service. Maybe Saturday Night Live arrives in brilliant HD, but that Netflix movie you are trying to watch instead keeps pixelating and hiccuping.
(Comcast, naturally, says it would never do this. Perhaps it won’t. Understand, however, that Comcast is far more responsible to its shareholders than its promises.)
Maybe that wouldn’t be so bad if you had a dozen choices for internet service, and you could easily say, “screw Comcast! I’m switching to Bob’s Internet, where Netflix always looks great.” You already know what I’m going to say next. This magical world of ISP competition does not exist. Furthermore, as anyone who tried to intelligently purchase cell phone service in the past 15 years knows, there is no way to know how reliable your bandwidth will be when you switch services. Even if there were options, would they really be better? Throw on top all those anti-competitive habits like early termination fees and equipment contracts and you have a really broken market on your hands. In that environment, competition doesn’t solve all ills.
The fear you usually hear from the mega-companies involved in this fight is that without net neutrality, Netflix will end up being extorted by ISPs, forced to pay extra to be in their fast lane. Well, I’m sympathetic to ISPs on this one. At one point, Netflix and YouTube accounted for half of all internet traffic in the evening. Should those firms have to pay something to help build out the pipes they using so much? Yes, I can see this argument. I don’t care much; let the billion-dollar corporations bicker over that. They can hold their own. They are equal adversaries in a big marketplace dispute. They can handle themselves.
The pay TV conundrum
Here’s what I’m worried about. Pay TV companies are in big trouble. They are losing subscribers all the time — so-called cord-cutters. Some 2 percent of pay TV watchers annually are dropping cable or satellite every year. That doesn’t sound like the end of the world. There are still almost 100 million households in America who do pay. The real problem is the reality of “cord-nevers” — young people who’ve never paid for traditional TV in their lives, and never will. That group includes some 35 million young people. Many of them just watch stuff on Amazon Prime, or Hulu, or Netflix, or Major League Baseball Advance Media instead. Or, they get basic TV from over-the-top services like SlingTV instead. That costs $25 a month, and it’s great. The presence of these alternatives has also forced TV providers like Verizon to get creative and offer “skinny” bundles at much lower costs. Ain’t competition great?
Even with all these great new options, cable user ARPU (average revenue per user) keeps setting records. Comcast made about $150 per subscriber last year. But that revenue is under serious threat. In 2009, only 10 percent of American paid for a streaming service. Today, that number is 49 percent and growing. Many over-the-top users live just fine without CNN, or NBC, or ESPN.
How can pay TV companies stop the bleeding? Well, it’s easy. Make the over-the-top services under-the-weather. Make your service better than something you can buy from a competitor. If you own the pipe, and you can discriminate over traffic, you can do that. You can make your content look better than theirs. You can drive out all the other gas stations — er, TV stations — to the point where your ARPU is no longer under pressure.
Ajit Pai says clear disclosures of fast lane/slow lane arrangements are all that’s needed to Make the Internet Great Again. That’s hooey. What good is a notice saying your favorite shows won’t work so well on service A if you have no service B?
Here’s what would work. Guaranteed minimum service standards that are real, change with the times, and are expediently enforceable. If the net neutrality rollback came with a real way to prove that there would be no slow lane, I’d listen. Hey, I said I was sympathetic to the view that Netflix should pay a fair share for hogging the Internet. Without such a real guarantee, however, everything you are hearing about net neutrality is a farce. It’s an abdication of the responsibility to govern. It’s picking winners under the guise of “light-touch” regulation. And, it’s going to hurt you.
We’ll get back to this, I promise. The temptation ISPs will have to abuse their monopoly power will simply be too great. In fact, you’d almost believe these companies would be derelict to not exploit their newfound market power as soon as they can. That’s what companies are supposed to do. Grow as big and powerful as possible. And governments are supposed to act as a counterbalance to that urge.
Without net neutrality in place, there is only one other option. ISPs need to be broken up. There simply is no way we can allow Rockefeller to own the gasoline trucks and the gas stations. I mean, we can’t have single firms owning internet pipes and the content that travels along them. We can deal with this now, or deal with it later, when the problems are far more endemic, and a generation of innovation has suffered. I fear we are about the chose the latter, dumber path.