February 24, 2014 Bloomberg View - This week, Comcast Corp. announced a deal under which it will charge Netflix Inc. for the right to deliver streaming video directly into Comcast's physical network. This is a game-changer: America's largest cable network is building a moat around its system and can now charge connecting networks for the privilege of sending traffic to its users.
The Federal Communications Commission needs to get on the case. Otherwise, high-capacity innovative uses of the Internet in U.S. will be subject to an arbitrary Comcast tax.
Netflix may have gotten a relatively good deal out of this, because Comcast doesn't want the regulators who are approving its merger with Time Warner Cable to see it as bullying a popular brand. But what about the next Netflix? Or the next anything-needing-high-capacity-transport? (Think of telemedicine, or long-distance education.)
Comcast's incentives are clear. This is not about cost recovery; in recent years, the company's investments in its own network have amounted to only about 13 percent of its hundreds of billions of dollars in revenue. Rather, Comcast wants to be able to further monetize its network by charging more to connect.
And the company can charge whatever it wants, because it is not limited by either competition or regulation. In communications policy terms, Comcast has a "terminating monopoly" -- and it is acting, quite rationally, to exploit it.
Comcast's explanation is breathtaking: By delivering movies, Netflix is causing lots of traffic to run over Comcast's network, and should pay its share. But Comcast's subscribers are the ones who want that transport service, and they're already paying Comcast for it. If Comcast faced competition for high-capacity Internet connection, it would widen its doors to other networks and build up its capacity to serve subscriber demand. Because it faces head-to-head competition only from Verizon FiOS and only in 14 percent of the areas it serves, Comcast has no incentive to make that modest investment.
Craig Moffett, a Wall Street analyst, has called Comcast's data services "almost comically profitable"; its margins are north of 90 percent. Apparently that's not enough.
Comcast also says that traditional "peering" relationships, under which traffic has been swapped for free, have been symmetric -- the peering networks handled about the same amount of traffic for each other and so agreed not to charge for it. Comcast claims that because requests of Netflix generate so much traffic, it should have to pay for its connection.
Yet Comcast richly benefits from its consumers' enjoying a lot of downloaded video. And, indeed, its network is built to favor downloading -- passive watching of content -- over uploading. Comcast is using the history of Internet use and the traditional paradigm of ratio-based peering as a choke point, an opportunity to exact leverage and tribute. And it has quietly made deals with a number of large players that recognize its awesome market power.
Major content providers, such as Netflix and Google Inc., may find all this acceptable. They can afford it and, in any case, consumers and businesses are the ones that ultimately will get squeezed, when the charges are passed along. We'll all be charged double: for very high data subscription charges in households and then again for any online service that pays Comcast for transport.
This deal is important because it shows Comcast can exert arbitrary pricing power over all communications with little fear of any government intervention. The company has built its castle, and it's widening the moat. Soon, if its merger with Time Warner is approved, it will surround a third of all high-speed Internet-access customers in the U.S..
That's the cable model, the walled garden. And that's great for Comcast and its shareholders. But it's not great for the future of U.S. innovation.
(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.)
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