Media Fri Jul 16 2010

The FCC in Chicago: A Confused Idea of Public Protection

By Timna Axel

[This is Part Three and the last in a series. Read Part 1 and Part 2]

The floating head of Julius Genachowski echoed throughout the Northwestern auditorium, his smiling digital image projected onto a large white screen. The effect was humorous. After all, not only was he addressing a forum which had been convened in part to discuss the future of online video, but one convened by the Federal Communications Committee, the federal agency to which, as its leader, Chairman Genachowski was now blatantly flaunting his absence.

That left Michael Copps in charge, the only FCC Commissioner to show up at Tuesday's hearing. Copps has long been a sharp proponent of government regulation over the telecommunications industry, and he didn't hold back as he addressed the issue at hand; a $30 billion joint venture proposed by Comcast and GE whereby the largest cable and broadband provider in America would acquire the fourth-largest producer of news and entertainment media.

Comcast would own 51 percent of the new venture, allowing GE to unload its apparently burdensome appendage, NBC-Universal. Once the deal goes through, Comcast will move to buy the rest of GE's shares. By then it will have purchased two of four national television networks (NBC and Telemundo), 26 broadcast stations, 13 cable channels, a movie studio and several amusement parks.

The problem, as seen by the FCC and several other federal players, is the sheer market power that such a merger would command. That's because traditionally, giant telecoms like Comcast, AT&T and Verizon work the delivery market. They build the infrastructure that carries information to our TV antennae, cable set-top boxes, telephones and Internet browsers. These pipes carry video and other services at different speeds depending on how much John Smith pays to receive it and how much companies like Google or the Tennis Channel pay to deliver it.

But if the Comcast-NBCU merger is approved, it will give one company control over the whole start-to-end process -- a classic case of vertical consolidation. And since Comcast already owns a suite of regional sports networks, we're talking horizontal consolidation too.

None of that can happen without the FCC. The agency, which was created in 1934 to regulate the communications industry, grants broadcast licenses to every carrier in the country. Comcast will need the FCC's approval to transfer GE's rainbow peacock licenses, or else the whole deal crumbles. As Northwestern law professor James Speta explained to me, the FCC operates based on a statute requiring that a transfer of licenses be in the public interest. That's a broad mandate, and historically the FCC has used it to study issues of competition, diversity and localism in programming, and access of programmers to distribution markets. That explains why the FCC has spent the past seven months holding public hearings, collecting statements and analyzing economic reports.

Of course, the FCC might be extra-picky with Comcast. The two have a bloody battle history, one which recently left the FCC badly scarred. In April, a DC court of appeals ruled that the agency not have the authority to regulate Comcast's broadband Internet pipes, a decision which blew open questions about the place of governance over the open Internet.

Yesterday, the FCC faced an arsenal of media executives, public lobbyists and industry experts who gave their testimony at a marathon bashing of Comcast. But throughout the all the talk of competition and market consolidation, regulatory rules imposed on a dynamic industry and the future of open Internet, one terrifying fact became clear. The real debate wasn't about weighing the harms and benefits of Comcast-NBCU at all. That surface analysis was only a useful conduit for discussing the actual question: What level of public harm should the FCC be willing to risk?

To Josh Silver, the answer is "none." Silver is the young president and CEO of Free Press, a non-profit lobbying group founded by left-wing journalists which has played a critical role in raising the Comcast-NBCU merger to the public consciousness. According to Silver, the FCC is required by law to ensure that mergers will have an affirmative impact for the public.

"Comcast and NBC bear the burden of proving to the Commission that this transaction not only will not harm consumers and competition, but that it will actually advance public interest goals. Comcast and NBC have not made and cannot make this showing."

Indeed, a 2007 decision by the Commonwealth Court of Pennsylvania did rule that merger applicants must demonstrate affirmative benefits to the public from their transaction. But the FCC has a history riddled with light-touch rulings and pro-corporate blessings.

In his opening statement, Copps referenced "a rapid deterioration of public interest oversight by the FCC," and called for setting clear rules for the industry.

"Plain and simple, it's Consumer Protection 101, and none of us should be asked to settle for less," he asserted. "After all, that's what the FCC was designed to be over 75 years ago--a consumer protection agency."

A thorough study of the merger's positive and negative effects might settle the question. But the analysts at the forum didn't really have an answer.

When Scott Wallsten of the Technology Policy Institute talked about the merger, he admitted that theoretical analysis could not determine whether the resulting vertical integration would have negative or positive effects. Citing a study that showed consolidations do result in higher efficiency and consumer benefits, he admitted that results within the cable TV market are mixed.

One of the big questions of the deal is whether Comcast would have an incentive to deny other TV carriers or Internet service providers from carrying NBCU content. This would mean that a Comcast subscriber could watch NBC videos online for free, while a non-subscriber would have to pay extra or even watch the videos with degraded quality.

Wallsten contended that this would only be profitable if online video became a substitute for traditional television viewing. However, if online video is merely going to become a complement platform to broadcast and cable TV, then Comcast will not have an incentive to perform this "foreclosure."

The attention turned to Susan Whiting of the Nielsen Company, an advertising and marketing research giant and probably the only person in the room with enough data to make such a prediction. Her conclusion? While studies show that television is still the primary source of video consumption, online is quickly gaining ground. She said that cord-cutting incidents (users who get rid of their televisions and watch video online) are "exaggerated." Still, both she and Wallsten ended on a note of mystery: the communications industry is simply evolving too rapidly for anyone to make a certain prediction.

That hard reality means that the litany of complaints filed by Comcast's competitors at the forum -- the DISH Network, the Net Coalition (composed of Google, Amazon, Yahoo and other web companies), WOW!, and Sezmi -- might actually come true:

• Comcast would block or degrade any online content that might compete with NBCU
• Block or degrade NBCU content to any users who are not Comcast subscribers
• Control over who has access to Hulu.com, which comes as part of the deal
• Higher subscription fees for users who do not "bundle" all their services with Comcast

Maybe Professor Susan Crawford of Cardozo Law School said it best.

"Comcast does not want to be operating a dumb pipe that is incapable of monetizing the water that flows through it. Comcast would like, instead, a pipe that is capable of
controlling, tiering, and prioritizing online content, just as a cable distributor does."

And yet, despite the laundry list of market and consumer harms which the deal apparently risks incurring, almost every witness at the forum testified that they would approve the merger with a few conditions. Nearly all agreed that the term until reviewing those conditions ought to be five years.

Josh Silver of Free Press refuted those conditions, saying it would be like fixing a broken leg with a Band-Aid and arguing that the only guaranteed benefit to the deal would be in making an already-profitable company that much wealthier.

"The problems of this deal are baked into the very structure of the new company," he said. Nevertheless, most Washington pundits and politicians are predicting that the deal will be passed once the regulatory procedure runs its course.

Where's the disconnect?

Clearly, the parties involved -- the FCC, the communications industry, and the public -- do not have a shared concept of the agency's role in public protection. That means either they are too vaguely defined, or are still up for debate. And when industry spokesmen are shaping the debate over how much public harm the FCC can risk, the connection between governance and democracy is what's being severed. That's a broken cord that no cable company will be able to fix.