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Susan Crawford, Captive Audience, and How to Kill the Cable Monopoly

Susan Crawford, author of the just-released Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age, is our guest for the 29th episode of the Community Broadband Bits Podcast. A former adviser to President Obama, she has been a leading figure in the struggle to preserve an open Internet.

Susan has long been an advocate of communities deciding for themselves if a community owned network is a wise investment and recognizes the benefits of smart government policies to prevent big companies like Comcast from dominating the telecommunications arena.

We talk about her book and reactions to it -- big cable and telephone companies are attacking her under false pretenses by either putting words in her mouth or misrepresenting her main points. But we also discuss the steps concerned people can take to bring force some accountability on the big monopolies.

We have previously noted Susan's words and presentations here and we noted some Captive Audience reviews here.

Read the transcript from this episode here.

We want your feedback and suggestions for the show - please e-mail us or leave a comment below. Also, feel free to suggest other guests, topics, or questions you want us to address.

This show is 17 minutes long and can be played below on this page or subscribe via iTunes or via the tool of your choice using this feed. Search for us in iTunes and leave a positive comment!

Listen to previous episodes here. You can download the Mp3 file of this episode directly from here.

Find more episodes in our podcast index.

Thanks to mojo monkeys for the music, licensed using Creative Commons.

Making Markets Work - Information Asymmetry

An article about health care in the 2012 November Wired offers a strong reminder of how important smart government policy plays in making markets function well.

In the early 1950s, it was nearly impossible to know the value of an automobile. They had prices, yes, but these would differ radically from dealer to dealer, the customer a pawn in the hands of the seller. This all changed in 1958, when US senator Mike Monroney of Oklahoma shepherded a bill through Congress requiring that official pricing information be glued to the window of every new automobile sold in the US. The “Monroney sticker,” as it came to be known, has been with us ever since. It became an effective means of disclosing the manufacturer’s suggested retail price, or MSRP, and a billboard for other data disclosures to the consumer: the car’s fuel economy, its environmental rating, and so on.

The sticker price was one of the triumphs of consumer-rights legislation and has made buying a car an easier—though never altogether easy—experience. What’s more, window stickers made automobile pricing rational and understandable. A customer who knows the base price going in will expect more value coming out. In economic terms, the sticker turned a failed market flummoxed by information asymmetry into something resembling a functioning, price-driven marketplace.

There are many smart government policies that could radically improve the telecommunications industry, collectively saving billions of dollars for Americans and businesses. Unfortunately, most of these policies have been ignored by Congress and the FCC, which have focused instead on the solutions put forth by the big cable and DSL companies to further their own narrow interests.

Gotta Love that Efficient, Competitive Broadband Market

As previously noted on both Fiber Evolution and Joho the Blog, Brough Turner (creator of netBlazr) created a slide showing the state of broadband competition in one of our largest cities: Boston.

Commercial Broadband Competition

The building on the right has a bunch of carriers who are competing. But only Verizon serves the building on the left with dedicated access (a committed information rate as opposed to the standard "up to" connections most residents and many small businesses use).

Thanks to Brough for circulating the slide.

Did BT Subsidize Burlington with Cheap Internet Access?

There is so much to say about Burlington Telecom and its struggles that it cannot be covered in a single post. This is one of several posts that will discuss pieces of the situation. One of the questions that has been raised by the Larkin "audit" of BT is whether BT was losing money on the broadband it provided to City Departments.

Though the report prepared by Larkin for the State revealed a number of disturbing practices by Burlington Telecom, a number of them have been strongly disputed. The report clearly has a number of weaknesses, from an apparently lack of expertise on somewhat basic telecom economics to the fact that the "auditors" do not appear to have attempted to talk to anyone who knew anything about how BT operated.

That said, something surely went dramatically wrong with BT and the Larkin report may help shed light on it.

But when one reads articles in the local press about it, it is quickly evident that the writers have practically no understanding of what they write and harbor a strong hostility against Burlington Telecom. Consider this passage from the Burlington Free Press:

Auditors observed as well that the city, a prime user of BT services, was charged “below market rates” and “below BT’s cost of service. The low rates charged by BT ... to the city could be viewed as a form of cross-subsidization,” which, the audit notes, is a violation of a provision of BT’s state license. The building of the system in general, auditors said, was marked by a “lack of timely and accurate accounting information.”

While the quote does come from the Larkin report, it offers no foundation for the claim and later hedges against it (two paragraphs later -- all from page 26):

The fact that BT is providing services to various City departments at below- market rates that may be below BT’s cost of service, which could be viewed as a form of cross-subsidization, is a problem.

After stating without referencing any evidence that BT is providing services to Departments below the cost of provisioning, the conclusion two paragraphs below states BT may be providing services to departments at prices below BT's cost of service ... which could be viewed as a form of cross-subsidization. This is not credible (unless you are a local reporter trying to make the City look bad).

Sorting it out...

BT provides broadband to all the City Departments. BT says that it charges them the full cost of doing so (according to their statements as well as comments to me over the years). This rate is below prices charged by a private sector provider -- no one disputes that.

So we have two potential charges that are lumped together.

  1. BT is charging the Departments less than it costs to provide the service. If this was the case, BT would have been losing money on the deal to the great benefit of City Departments.

    The only footnote cited in the area of the charge by Larkin that BT was charging less than the cost of providing the service (which Larkin states once and hedge once) is a reference to where BT explains their formula for recovering the full cost of providing the service.

    This is one instance of several in which Larkin seems to overstep the available evidence and make conjectures unsupported by any facts.

  2. BT was charging less than the "market" for broadband services. This charge is more fascinating.
    • It is obvious that BT is charging less than what a private provider would because BT is charging the true cost with no markup. The private sector exists for the markup -- or margin.
    • The "market" for dedicated access consists of probably one or two providers who did not offer 1Gbps services at the time BT started (and may very well still not offer that service yet). There is no "market price" for those services. There are perhaps comparable prices of T.1 and T.3 services that undoubtedly reflect significant monopoly markups.
    • If BT were to charge a higher price closer to those boosted by monopoly power, the very same reporter would undoubtedly argue that the markup amounted to a "subsidy" to BT from the City Departments as the price was above the cost of providing the service. Damned if you do, damned if you don't.

Lesson Learned

So - for our purposes, what is a correct price for a community fiber network to charge City Departments?

This will vary depending on local custom and needs. But it seems foolish to charge only the cost of providing the service. It seems wise to charge some mark-up just as would any other entity - the net income can go toward paying down the debt. If done properly, a new publicly owned network will cut the prices paid by City Departments, increase the capacity of their connections, and have some margin for the provider. Everyone wins.

But if a new community network starts offering a connection at cost, expect a bloody war if the network wants to raise prices. Department heads become quickly accustomed to savings and will not react well to an increase even if they are still getting the best deal in town.

The interesting question is whether Burlington Telecom was subsidizing the City in other ways. This was the question we thought the Larkin report would answer. But it hasn't. Fortunately, City Council members are pushing for a forensic audit to understand exactly where all the money went. We hope they are successful and a proper audit is completed.

The Internet That Might Have Been

Publication Date: 
August 19, 2010

The abstract immediately captured my attention:

Policymakers often tell us that the Internet succeeded because of a lack of government regulation. For instance, FCC Commissioner Robert McDowell recently noted that the “evolution away from government intervention has been the most important ingredient in the Internet’s success.” These views, while widely shared, happen to be inaccurate. In reality, a diverse range of federal regulations, subsidies, and nondiscrimination protections sustained the Internet’s historic growth.

But what if, as many inaccurately assume, these regulations had never existed? What would today’s Internet look like in such a world? In this essay, I provide a fictional alternate history - in form of a satirical book review - to illustrate how differently the Internet might have developed in a truly privatized world. Although the essay below (beginning after this abstract) is fictional, it draws heavily upon both the regulatory history of the Internet and the policy arguments at issue in today’s leading regulatory proceedings.

This article covers decisions like Carterfone, the FCC's Computer Inquires, giving control over TCP/IP to the National Science Foundation rather than AT&T, and the intentions of the 1996 Telecommunications Act. It also includes a reminder of the difference between open systems and closed systems:

One important way that open policies achieve this goal is by reducing various types of transaction costs. In open networks, new market entrants can completely avoid negotiating with companies who have “gateway control” over the network. The aspiring entrants do not have to pay—nor seek permission from—the network owners for access. Accordingly, these policies encourage vastly more experimentation and amateur “tinkering.” Closed networks, by contrast, produce relatively less innovation because they rely on centralized network owners to introduce—or at least approve—innovation before it becomes available.

This is a fantastic read (really riveting telecom reading -- how often do you get that?) and a good history lesson for people who were not there to see it firsthand over the years.

In Broadband Networks, Private Ownership Leads to Consolidation

In all the talk of the need for competition in broadband (or in the mobile space), there is remarkably little attention paid to the difficulties in actually creating competition. A common refrain from the self-interested industry titans (and their many paid flacks) is: "keep the government out of it and let the market decide."

Unfortunately, an unregulated market in telecom tends toward consolidation at best, monopolization at worse. Practicioners of Chicago economics may dispute this, but their theories occur in reality about as frequently as unicorn observations. In our regulatory environment, big incumbents have nearly all the advantages, allowing them to use their advantages of scale to maintain market power (most notably the ability to use cross-subsidization from non-competitive markets to maintain predatory pricing wherever they face even the threat of competition).

The de-regulatory approach of telecom policy over the past 10 or more years has resulted in far less competition among ISPs, something Earthlink hopes to change with a condition of the seeming inevitable NBC-Comcast merger. Requiring incumbents to share their lines with independent ISPs is one policy that would greatly increase competition - but the FCC has refused to even entertain the notion because big companies like AT&T and Comcast are too intimidating for the current Administration to confront.

In the Midwest, Windstream is cutting 146 jobs as part of its acquisition of Iowa Telecom. When these companies consolidate, they can cut jobs to lower their costs... but do subscribers ever see the savings? Not hardly. The result is less competition, which leads to higher prices. Consider that Comcast is the largest cable company, but they are known better for their poor record of customer service than low prices enabled by economies of scale.

We need broadband networks that are structurally accountable to the community, not private shareholders located far outside the community. The solution is not more private companies owning broadband infrastructure, but more private companies offering competing services over next-generation infrastructure that is community owned by coops, non-profits, or local governments.

Photo by therichbrooks on Flickr - used under Creative Commons license.

Broadband Truth-in-Labeling

Kudos to the New American Foundation's Open Technology Initiative (OTI). Earlier this week, I told Geoff Daily that we would all benefit from some form of a truth-in-labeling requirement for broadband. This should be a no-brainer that both the FCC and FTC embrace because it will educate subscribers and allow them to make better, more informed choices - which is a requirement for a functioning market.

One day later it became apparent that I was too slow in my idea, because OTI already had a prototype. They even have a sample label and have come up with a great set of required disclosures.

To make sure the broadband service is clearly expressed, the Broadband Truth-in-Labeling disclosure should be standardized to comprise several typical elements as indicators of broadband service quality, such as minimum expected speed and latency to the ISP's border router (where the ISP connects to the rest of the Internet) and service uptime. These minimum assurances will be supported by the ISP as guarantees in the delivery of broadband services, backed by technical support and service charge refunds or credits. In addition to the description of minimums being guaranteed of the service, the disclosure should include all applicable fees, a common description of the technology used to provide the services, any service limits such as a bandwidth cap or the application of any traffic management techniques, the length of the contract terms, and a link to all additional terms and conditions. Requirements should be established for disclosing any highly objectionable or surprising terms such as arbitration restrictions or information or data selling. 

Public vs. Private? Who is Private?

It is duplicitous to suggest that the incumbents represent the “free market” against “government-subsidized” municipal networks. Incumbents are incumbents precisely because they have had the weight and resources of government to back them up for years. Furthermore, they have had backing from those levels of government - the federal and state - which are least pervious to direct participation by local residents. Municipal networks, funded by the public and accountable to the public, represent a balance to the domination of telecommunications infrastructure by huge corporations which have long enjoyed substantial government subsidy. Banning or restricting municipal networks will end this effort to create a level playing field.