Cable TV: The Monopoly That Keeps On Taking

Everything eventually will flow through your Internet connection. That's why we need more fiber optic competition.

Howard Anderson, Senior Lecturer, Harvard Business School

March 5, 2014

7 Min Read

Wake up any tech CEO in the middle of the night and ask what his or her fondest wish would be, and the answer would be "a monopoly." For the longest time, IBM, Microsoft, Intel, Oracle, and Cisco had near monopolies, and their CEOs slept well at night. The greatest advantage: You can make mistakes, be late to market, have quality problems, and still own your market.

For the longest time, no one had a monopoly as strong as either the telephone industry's or the cable television industry's, so it's been with a little humor that I've watched Comcast's bid for Time Warner Cable.

The cable industry has never really had direct competition from another cable company, though direct satellite has 37 million customers and Verizon and AT&T have taken their share. Over the past decade, the cable industry has lost 25% of their subscribers but won lots of telephone and Internet customers.

Once the franchises were let by US cities and towns, each of their owners would trade properties like so many baseball cards, often to build systems contiguous to each other to keep costs down. Because they didn't really compete with each other, they could raise prices pretty much as they chose. Up through the 1980s, local rates were regulated by city councils, which were reluctant to give the cable companies price increases, so they just overcharged for HBO, which was unregulated. DirecTV was seen as Darth Vader, but otherwise they had little to worry about.

[Why isn't everyone already using alternative apps for voice calls? Read Is Mobile VoIP A Telco Killer? ]

What's your cable bill this month -- $120? More? I have foolishly let Comcast sell me cable, Internet, and telephone service, and my monthly bill is higher than the GNP of France. True, if I had to buy a la carte, my phone service from Verizon, cable from Comcast, and Internet from some local provider would probably cost more than what I'm paying Comcast now. And no one is putting a gun to my head. Still, it's hard to believe that in the industry's early days, cable TV was more like $7 a month… and maybe another $7 for HBO.

Cable providers never really understood the Internet and had to be dragged, kicking and screaming, into this new revenue source. But once there, they got it.

Sheer dumb luck
One of the advantages of teaching at MIT is that I'm never worried about being the brightest kid in the classroom. In fact, when I walk out of a classroom, the average IQ there increases. What my very smart students do today, the rest of us will do tomorrow.

My students cut their landlines five years ago and 100% of them use Skype. If they want any programming, it's House of Cards on Netflix, but they want all the episodes at once. Why wait? What would happen to the likes of Netflix, HBO, and ESPN if homeowners started ending their cable subscriptions like they have their landlines? Clearly, those services would still be available over a high-speed Internet line. Today, the cable companies pay ESPN $5 or $6 a month per subscriber, and ESPN makes that much again in advertising revenue. If the cable connection went away, ESPN, HBO, and Netflix would go direct, over the best high-speed fiber available -- and that's cable. Here's where things get interesting.

By sheer dumb luck, the cable guys have lapped both cellular carriers and telephone carriers. The future belongs to high-speed fiber, and the cable guys are there first. I live in Boston, and Verizon has been talking up fiber for five years, but I'm still a third-world citizen as far as they're concerned. Their idea of high speed and mine are worlds apart. Just upgrading its network to a minimally acceptable level is costing Verizon $13 billion, and it still will be far behind. No, if I want high-speed fiber, it's going to have to be Comcast. Or is it? Is there another alternative?

Comcast already has swallowed NBC Universal and a gaggle of cable companies. It owns both the customer and the content. One reason Comcast is in a good position is that direct satellite did do something important: It brought better audio and video. When John Malone was running cable company TCI, it upgraded as little as possible. Comcast, in contrast, poured very serious money into upgrades and today is the beneficiary of that spending. Now, if the Time Warner deal goes through, Comcast will sit on not only 33 million households, but also the right households, in the right areas, all coveted by the biggest advertisers.

Comcast got started when Ralph Roberts, its founder, allegedly won his first cable franchise in a poker game in Tupelo, Miss., in the early 1960s. At least that's the urban myth. In reality he bought that franchise from Pete Muser, an early cable investor who was overextended. (I like the myth better.) In any case, Roberts then decided that this was one great business. His son Brian has continued that thrust, buying other cable companies, buying content companies, and forcing other media companies to bow to Comcast's clout.

That clout isn't just in market size. Today, Comcast has real political clout, one advantage of being close to Washington. (Insert Philadelphia joke here -- I won't be offended.) Comcast has clout with the content it doesn't own. Imagine negotiating with ESPN or Fox -- having 33 million households makes you King Kong. Actually, Comcast got its rear handed to it this year by CBS, and Disney doesn't genuflect to anyone. And if I remember things didn't turn out too well for King Kong.

Furthermore, Comcast can charge more for "expedited service," which is what it will be giving to Netflix under a recent deal. Although the courts have said that cable systems shouldn't penalize bandwidth hogs, the smart guys know that there are too many ways to game the system. If paying for expedited service gets Netflix faster downloads, it will do it.

I spent too many years telling the telephone companies how to get into cable and then telling the cable honchos how to get into telephony. The cable guys will have it both ways. If you choose to avoid their cable offerings and reject their bundled services, you can. But then you will pay up for expensive high-speed lines so you can access Netflix or HBO directly. "You can pay me now or you can pay me later -- but trust me, you're going to pay me."

Rock and a hard place
FCC chairman Tom Wheeler is an old friend of mine. He ran the National Cable Television Association in the early 1980s and later ran the Cellular Telecommunications & Internet Association for more than a decade. Now, in the big chair at the FCC, he's caught between a rock and a hard place. If he lets the Comcast-Time Warner deal go through, he'll be seen as the lap dog to the cable industry. Should he encourage other companies to enter the market? Google, which is already making noises, comes to mind, as does Facebook, or even a band of high-speed Internet entrepreneurs who could stitch together meaningful competition.

Bottom line: We need more competition in fiber, and that costs real dollars. About $1,000 per household. No single company, not even Google, can afford that build-out by itself. But I can see a number of regional players around major cities coming up with solutions.

Is broadband fiber a right or a privilege? I don't think it's a right. Some areas will not have fiber within your lifetime. But the major urban areas will, and the FCC must encourage new competition.

Engage with Oracle president Mark Hurd, NFL CIO Michelle McKenna-Doyle, General Motors CIO Randy Mott, Box founder Aaron Levie, UPMC CIO Dan Drawbaugh, GE Power CIO Jim Fowler, and other leaders of the Digital Business movement at the InformationWeek Conference and Elite 100 Awards Ceremony, to be held in conjunction with Interop in Las Vegas, March 31 to April 1, 2014. See the full agenda here.

About the Author(s)

Howard Anderson

Senior Lecturer, Harvard Business School

Howard Anderson is on the faculty of the Harvard Business School. He was the founder of the Yankee Group and co-founder of Battery Ventures. He attempts to keep his rampant skepticism from morphing into galloping cynicism, a battle he seems to be losing.

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