Tag Archives: utility policy

The Trouble with Comcast (and what we should do about it)

by Anders Fremstad

Comcast, America’s largest cable provider, is acting in a way that should worry consumers and citizens.  First Comcast announced its plans to merge with Time Warner, America’s second largest cable provider. Paul Krugman opposes the merger, but its not like the cable providers currently compete.  As Comcast’s CEO notes, Comcast and Time Warner “do not operate in any of the same ZIP codes.”  That’s old news to just about anyone who has “shopped around” for cable and internet services and found that they have little choice.  Now, Comcast has announced a deal with Netflix to provide the site with a faster connection, for an unknown price.  Comcast’s recent actions highlight the problem of monopoly in the media industry.  It also provides an opportunity for discussing a solution.  There is a good economic case for forming a public utility, regulated or run by government, that would provide Americans with a better and cheaper internet access and free streaming of television and film.

Netflix has transformed how we watch television and movies, liberating subscribers from advertisements and the channel guide.  The website for streaming videos has helped usher in a golden age in TV dramas, building up fan bases for shows like Breaking Bad, and producing its own like House of Cards. Netflix recently produced The Square, a documentary about the Egyptian revolution, which has given independent filmmakers some hope that the Netflix might provide both an audience and funding for their films.

But there are real limits to how much Netflix can and will change the media industry on its own.  Comcast and the other local cable monopolies own the connection between Netflix and its subscribers.  A court recently struck down the FCC’s net neutrality rules, allowing the cable companies to slow down internet speeds for sites that don’t pay up.  And even if citizens win back net neutrality, cable companies can charge so much for internet-only access that consumers save little by ditching cable television.  

Moreover, although Netflix is innovative, it is motivated by the same monopoly profits as Comcast and Time Warner.  The company has amassed huge wealth for its investors.  Netflix stock is now valued at over $430 a share last Friday, up from less than $100 in Jan 2013.  Netflix only buys streaming rights for shows and movies that cost less than they will generate for the company, so most films aren’t available online.  (A recent headline from The Onion jokes: “Netflix Instant Thinking About Adding Good Movie”.)  And, of course, Netflix is only available to those families that can afford a subscription, on top of the price of broadband internet.

So what is to be done about our media monopolies?  Economics provides a good idea of how to provide people with internet service and quality content at a good price, despite what some people might think.

The first element of an efficient utility policy would be for the government to regulate or run internet providers like Comcast and Time Warner.  We shouldn’t let these companies charge rates far above the actual cost of the service.  How do we know these monopolies are gouging consumers?  First, they generally lure consumers with teaser rates and then jack up the prices once you’re hooked.  Second, in the handful of cities where internet providers actually compete, Google Fiber offers regular broadband internet for free (after an one-time installation fee).  It’s not rocket science.  Local cable monopolies don’t provide Americans with a good service, because they have almost no competitors.  However, if we regulate these monopolies or set up our own public internet utility, there is absolutely no reason that we cannot provide our homes with reliable, affordable internet in the same way they provide our homes with reliable, affordable electricity, gas, or water.

The second element of a rational utility policy is using public dollars to fund content providers.  Traditional, ad-funded television is technologically obsolete, and we should now build on the Netflix model and create a public streaming service.  It should provide all Americans free access to all shows and movies, since the marginal cost of watching any video, once it has been produced, is zero.  Everyone would be able to watch whatever they like, whenever they like, without wasting our time watching commercials.  The public utility could compensate content providers based on how many people view the content, maintaining (and probably intensifying) competition among them.  

But how much would this all cost?  The answer is, not that much, especially when we compare  it to how much Americans currently pay for restricted, ad-ridden content.  For example, Hollywood earns about $30 billion annually from American consumers.  Right now, Hollywood earns its revenue through intricate price discrimination: first it shows movies in the cinema, then it releases them on DVD, and finally it sells them to TV channels, which usually break them up with plenty of commercials.  Hollywood charges big fans much more watch films on Blu-Ray or in 3D.  A public streaming service would liberate Hollywood and movie lovers from this madness.  Let studios and independent filmmakers upload their movies, and the public service could compensate the producers based how many people watch the film (and, perhaps, how they rate it).  We can keep paying moviemakers $30 billion a year.  But for that price — which comes to $8 per person per month — every American would be able to indulge in Hollywood’s contribution to mass culture on their own terms.

Of course, enacting a rational utility policy will be politically difficult.  There would certainly be losers, from the current cable providers to merchants of pirated media.  But there would be many, many more winners.  So let not just fight Comcast’s plan to gobble up Time Warner and extort Netflix.  Lets start a conversation around designing an efficient utility policy for the 21st century.