By the dawn of the new century, competition over the internet evolved into two opposing camps. On one side were former telephone companies, including AT&T, Verizon, and Qwest, the successors of the Bell System divestiture in 1984 and numerous consolidations in the years that followed. Opposing them were the nation’s largest cable television operators, including Comcast, Time Warner, Cox, and Charter Communications, the beneficiaries of mergers, bankruptcies, and favorable legislation in the 80s and 90s.
In less than a decade, these companies became the gatekeepers to the largest network of communications vehicles ever built, made possible by new regulations, advances such as the convergence of video, voice and data into binary code, and the continued dominance of “distribution” over “content” providers. Indeed, despite the popular belief that content drives the media, producers and TV station owners such as Disney, Fox, HBO, Paramount, and Universal remained dependent on telephone and cable companies for access to their audiences.
Without favorable long term agreements for distribution over airwaves, long distance trunk lines, cable channels, and broadband networks, even the largest media production companies could be denied access to exhibit their programming, and sell advertising to support them. Smaller companies without such deals could be denied access to the market.
As a result, the properties in most media acquisitions beginning in the mid-1990’s shifted away from broadcast channels, radio stations, movie studios, and film libraries. Beginning in 2000 the most prized assets became the new technology platforms spawned by the Internet, including digital television facilities, fiber optic networks, VoIP telephone services, wireless and cellular systems, and other specialized networks set aside for gaming, pay-per-view movies, on-line gambling, and downloadable music.
How did it come to this ? How did telephone and cable companies become so powerful ? To understand the current state of American, and in many respects, global media, we should consider some key events that affected both industries.
On the telephone side, the first significant event was the 1984 breakup by Congress of AT&T’s “Bell System”, a century old monopoly of regional Bell companies, transmission facilities, and R&D units. The dismantling of “Ma Bell”, spurred by litigation over long distance telephone by MCI and other small companies in 1968, created nine independent “Regional Bell Operating Companies” (RBOCs) covering large portions of the country. Through a series of mergers, acquisitions, and hostile takeovers, a smaller group of RBOCs survived in the 1990’s, including a reconstructed Southwestern Bell, later adopting the old “AT&T” standard, General Telephone under a new brand called “Verizon”, and “Qwest Communications”, the successor to USWest. The principal business of these companies remained local and long distance telephone services, however, even through the boom and bust of the Dot com economy in the early 1990’s through 2000.
On the cable side, a prime event was the first comprehensive legislation for the industry: the Cable Communications Act of 1984. This law freed cable operators from most federal rate regulation, and began to weaken local regulation of basic rates. However, unlike the telephone industry, cable companies through the next decade remained clustered in small regional pockets without the benefit of cost savings from shared facilities and mass markets. It was not until a second major event, the passage of the Telecommunications Act of 1996, ironically pushed by both cable and telephone companies, that established the foundation for the current situation.
The 1996 Telecommunications Act had the effect of reducing, and in some cases eliminating, local government regulation of cable subscriber rates, and limiting the amount of extra money and resources, such as community channels and production equipment, that cities, counties, and states could demand from cable operators during contract negotiations. But the new law affected the cable and telephone industries in different ways.
First, by eliminating many franchise rules the 1996 law allowed cable operators to raise rates without local controls, creating a subscriber revolt that eventually attracted satellite television providers, such as Direct TV and Dish Network, to large urban markets. On the other hand, the 1996 law encouraged telephone companies, such as AT&T, Verizon and Qwest, to look for merger opportunities among cable operators. AT&T’s first venture in 1998 with TCI, the largest cable operator in the 1990’s, died a lingering death because of high interest payments on billions in debt bonds. But the experience provided an invaluable lesson that informed AT&T’s decision in 2006 to bundle television, internet, and telephone services.
The high volume of revenue generated by cable television companies also pushed that industry to bundle services, but also had another consequence. After rates were deregulated, remaining franchise barriers created a widely held perception that cable’s ability to provide additional internet services was being blocked by municipalities. Lobbied by both cable and telephone, state governments intervened. In California the regulation of digital media was placed in the hands of the Public Utilities Commission (CPUC) in January, 2007. By then, more than 30 other states were making similar moves.
The transfer of local media regulation to state governments was a boon to the telephone industry. In California, while eliminating most regulation of rates and services for both cable and telcos, AT&T, Verizon, Qwest and others were granted access to media markets without going through long negotiations and hearings with city councils. Local franchise proceedings were reduced to days, instead of months or years. Each telephone company was also initially granted specific regions in which they can operate, eliminating direct competition with companies in their own industry, but placing them at odds with incumbent cable operators. Using the resources they were able to accumulate through years of monopolies in local and long distance telephone, AT&T, Verizon, and Qwest have invested hundreds of millions of dollars to upgrade and expand their digital networks.
Cable television operators have also benefited. In Los Angeles, for example, there were fourteen different franchise areas in 2000 operated by six different companies. Since then many of the companies have been merged, acquired, or in the case of Adelphia Communications, gone into bankruptcy. Among the survivors are Comcast Communications and Time Warner Cable, the number 1 and 2 cable television operators respectively in the country. In 2005 both companies purchased Adelphia’s cable TV properties, as well as its broadband internet and telephone rights at a 40% discount. By that time Comcast and Time Warner, like their telephone competitors, were no longer just cable TV operators, but vertically integrated media conglomerates with extensive holdings in film and television production, sports franchises, broadband internet distribution, publishing, and marketing.
Time Warner subsequently traded most of its east coast and southeastern cable systems to Comcast for the latter’s systems in Los Angeles, adding to Time Warner’s already central position as the principal multiple system operator in Ventura and San Bernardino counties. The completion of the deal in 2006 resulted in Time Warner’s access to 98% of all TV households in Los Angeles, and more than 70% in Southern California. Time Warner’s dominance of the nation’s # 2 TV market allows it to compete only with AT&T and Verizon for bundled television, internet, and telephone services.
What will be the Future of the Internet?
The lack of competition among service providers, in addition to government pressure on media companies beginning in 2002 with the “war on terrorism", and weaker regulatory controls, has actually led to more turmoil. New issues after 2005 were the mining of telephone and cable customer information by intelligence agencies, a national debate over the openness or “neutrality” of the internet, and competition over the development of wireless broadband and mobility by AT&T, Verizon, Google and others. How those issues might shape the future of the Internet will be the subject of the next installment.
Next Time: Episode 10: An Internet Forecast: Cloudy with a Chance of Neutrality
Copyright © 2008 R.E. Xavier
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