Transcript: US Internet Users Are ‘Captive Audience’

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Interview with Susan Crawford
Author, Captive Audience: The Telecom Industry and Monopoly in the New Gilded Age

Conducted by
Evan Leatherwood, Associate Director for Communications
Fordham University’s Schwartz Center for Media, Public Policy, & Education

Introduced by Bill Baker

BAKER: Welcome to the next installment of the Schwartz Center Broadcast series. Ten years ago, the U.S. led the world in the speed and inexpensive cost of Internet access. Today, Americans are paying more and getting slower access than most of the developed world. Here to discuss why is Susan Crawford, technology policy expert, Cardozo Law professor, former advisor to the Obama administration, and author of Captive Audience: The Telecom Industry and Monopoly in the New Gilded Age. Speaking with Susan is my colleague Evan Leatherwood.

LEATHERWOOD: Who is the captive audience and why are they captive?

CRAWFORD: We are all the captive audience. So now, Internet access is absolutely essential to life. It’s a utility. You need it. You can’t apply for a job, can’t get a first-rate education, can’t even start a business without it. But we treat it like a luxury. And so these companies that have consolidated and divided markets and found their way out of any possible oversight of Internet access are holding us captive. The rich are paying too much for Internet access, and it’s second-rate compared to what’s available around the world. The poor often don’t have access. So everybody’s being gouged, and it’s terrible for the country.

LEATHERWOOD: Doesn’t everybody in America have access to the Internet?

CRAWFORD: Well, the Internet access passes 95% of Americans, but it’s often too expensive for people to afford, and 19 million Americans don’t have access at any price in America. And 100 million don’t subscribe for whatever reason, and many of them say it’s price. So a third of Americans don’t have daily access in their homes to a wired Internet connection, and that’s a big problem for the country’s competitiveness, for our future as a nation.

LEATHERWOOD: Is that different from the rest of the world? How are we different from, say, France or Japan?

CRAWFORD: It’s wildly different from what’s happening in Japan, where they have very high penetration of cheap fiber to the home access. We can’t even imagine that in America right now. But it almost doesn’t matter what other countries are doing. The international comparisons can get baffling for people when they talk about it.

The United States led the world when it came to the first generation of Internet innovation, and our phone system was the envy of the rest of the globe when we launched it. For a bunch of reasons that I outline in the book, we’ve given up on that. And so, we’re now in the middle of the pack when it comes to high speed Internet access at best. And we should be looking at everybody else in our rearview mirror.

LEATHERWOOD: Why are we so far behind?

CRAWFORD: We gave up on the idea that the government plays a role in ensuring that everybody has access to high speed Internet, that’s what happened. So when we launched the telephone system, there was a lot of government involvement. It’s a policy question. You want to make sure that everybody’s paying a reasonable price for it. We’ve always relied on private companies to provide telecommunications to us. But they’ve been burdened with public obligations from the beginning, so that we can trust our communications to them, so that when we went to Topeka with our communications, they didn’t send it to Chicago, so that people in rural areas paid about the same as what people were paying in urban areas.

All of that went out the window when it came to the early 2000s. We deregulated the entire sector based on the idea that competition would protect Americans, that the market would provide the solution, and that there was no role for government to play. We turned out to be wrong about that, because it’s so much cheaper to upgrade cable infrastructure than it is to upgrade phone infrastructure. That these two industry sectors that had been competing with each other have now been completely overtaken on the wired side by cable. Cable has won. Ninety-nine percent of new Internet access subscriptions go to the local cable provider these days.

LEATHERWOOD: Well, I just assumed that cable companies were the only way you could get Internet access. Are there other options out there?

CRAWFORD: Initially, there were. And so in the early 2000s, high speed Internet access was about evenly divided between phone company services provided over their copper lines called DSL service, and cable modem service over the cable plant. And also, we thought that wireless would be equally competitive to those two other players. All of those assumptions turned out to be wrong.

LEATHERWOOD: How does deregulation lead to less competition? That seems very counterintuitive to me.

CRAWFORD: Doesn’t it? It turns out that where consolidation is possible, competition is impossible. So the cable guys had exclusive franchises historically that they’d gotten in most American cities. They built out aggressively in their areas and clustered their operations. They then swapped systems among themselves. So Time Warner never enters Comcast territory and vice versa. Cablevision doesn’t enter the other guys’ territory, either. New York is big enough that Cablevision has the outer boroughs, Time Warner has Manhattan. But in most other American cities, there’s one major incumbent cable provider.

So that means that when you’re sitting in your living room, which is the place we look when we’re thinking about competition for high speed Internet access, there’s usually just one choice. For 85% of Americans, for the speeds that we’re going to need to keep up with the rest of the world, cable has a monopoly. Eighty-five percent, there’s just one choice, and it’s your local cable operator.

LEATHERWOOD: So what are the long term consequences?

CRAWFORD: The consequences for the U.S. are severe. This is a drag on innovation. It’s just as if water or electricity became unreliable inputs for business, economic growth, also the social cohesion of the country. Imagine if only half of Americans had clean water, or only a third had access to reliable electricity. That’s a big problem for our competitiveness as a nation. We want to be able to sell to an entire American marketplace at least, and other marketplaces abroad. That requires having 300 million Americans adequately connected. We also want people to find new jobs, new ways of making a living, not being struck in their prior jobs that were so dependent on location. And we want people to get the best education possible. We want healthcare resources to be available. All of this depends on having world class Internet access infrastructure, and right now, we don’t have a path to getting there for all Americans.

LEATHERWOOD: Why is it that in America, we think of Internet access as a luxury, but in other countries, they think of it as a utility?

CRAWFORD: I’m not sure how this happened, because we definitely thought of phone service as a utility. Exactly the same thing happened with electricity. We thought of electricity as a luxury until deep into the ’30s. So 90% of farmers didn’t have it, while rich kids in New York City were playing with electric toys. That’s because there were a lot of private electrical companies who were doing the rational thing. This is not evil. This is what companies do. You find dense markets where people can pay a lot for your high fixed cost infrastructure service, and then you just stay there, and you don’t expand, and you reap greater profits from the same number of people. That happened with electricity. And so we had the idea that water was a utility, but electricity wasn’t. And it took leadership – decades of leadership, and in particular by F.D.R. to make sure that everybody in America had adequate, reasonably priced electricity.

LEATHERWOOD: Part of that was probably getting people to think about it differently.

CRAWFORD: Absolutely, and getting people on the coasts to recognize that they should think of it differently, that just because they can pay outrageous amounts for it doesn’t make it right for the rest of the country. The idea of having a single America with access to this essential infrastructure needs to spread, even among the elites on the coasts.

LEATHERWOOD: What are the shared characteristics of Americans who don’t have Internet access?

CRAWFORD: Yeah. Not having a wired Internet connection at home is very closely correlated with socioeconomic status. So, in general, less education. In general, far less income. And in general, minorities and rural actors in America don’t have wired access at home. But the triple whammy is that even people who are rich, well educated, and living on the coasts are paying five, six X what people in other countries pay for worse access. So in Hong Kong, for 25 bucks a month, you can get a 500 megabit symmetrical service, which means you can publish as well as passively download. In France, in Stockholm, in Amsterdam, all over South Korea, and in Japan, they’re paying many, many times less than we are in America.

In turns out, yeah, France has done a very good job on this. So in Paris, there is wholesale fiber running through the sewer system, and every big multi-dweller unit, every apartment house, has conduit running into it that any provider can serve. So there’s competition. There’s competition, and you have a choice of multiple providers. In Seoul – I went there on vacation in January – in Seoul, when you move into a new apartment, you have a choice of three fiber providers, each 100 megabit for seven symmetrical service, and it’s 30 bucks a month. And we can’t imagine that in New York City.

In our great city of New York, 2.2 million people don’t have wired Internet access at home. So their kids are doing their homework at McDonald’s or pummeling the local libraries. Libraries are under enormous pressure to provide people with Internet access, and it’s second-rate and it’s very limited in time. Hard to run your whole life on half an hour a day of Internet access.

LEATHERWOOD: Kids are going to McDonald’s to get Internet access to do their homework?

CRAWFORD: Yeah. The Wall Street Journal just had a front page story about this. Because there’s wifi, which is just sharing a wire, so McDonald’s has purchased a wire access and is letting the patrons of its restaurants share that wire for free, without even buying a burger. It’s good for them, because that increases the brand appeal of McDonald’s. It’s not good for the country to have a bunch of our citizens relying on McDonald’s to do their homework.

LEATHERWOOD: So kids are required to have Internet access to do their homework?

CRAWFORD: Absolutely. So there’s a recent Pew Internet and American Life study discussing how relevant Internet access is for teachers of everything from elementary school on. So we’re thinking of education as moving online, while a third of Americans don’t have that access at home. So parents drive to the local public library at night and hope that the wire is still being shared in an open way, and park in the parking lot, all over the country. Western Massachusetts, this is very prevalent. So it isn’t as if there are just a few people being left behind. It’s a third of the country that doesn’t have this access at home.

LEATHERWOOD: How do we solve this problem?

CRAWFORD: Well, this is a question for policy. Policy. This is not something that magical market pixie dust is going to solve. It is very expensive to build these systems. It is rational for the private companies that have divided markets and consolidated to charge ever more for it and keep their gatekeeper role in place. So if we’re going to make sure that everybody has a reasonably price Internet connection, it’s going to take leadership. And one of the places where leadership is already being shown is by the mayors of American cities who are very worried about their citizens not having adequate access.

So in Seattle and Chattanooga, Tennessee, Lafayette, Louisiana, soon Chicago, looks like Boston may do this too – there will be municipally overseen wholesale fiber networks. Stockholm did this, too. So you build a fiber ring. You have it serve city buildings at regulated wholesale price. The city doesn’t have to own it. It just has to oversee this facility. And then what we call last mile providers, the retail guys who reach into your houses, then have a reliable input into their business and can start serving residences and businesses.

LEATHERWOOD: So what is that’s stopping that from happening?

CRAWFORD: Well, right now, in 19 states, it’s either illegal or very difficult for cities to do this. The incumbents have been quite successful in the statehouses passing laws that raise barriers to these networks.

LEATHERWOOD: When you say incumbents, who do you mean?

CRAWFORD: I mean the giant players. On the wired side, Comcast and Time Warner dominate wired Internet access in America. Wireless, which is a separate marketplace, not substitutable for that wire, dominated almost entirely by Verizon and AT&T, a duopoly in America. And those actors have been quite successful in statehouses, making it difficult for cities to do this for themselves.

LEATHERWOOD: When you say policy, who should be in charge? Is it the White House, the FCC, states?

CRAWFORD: Well, it has to be a concerted effort at all levels, which is why public interest in this is so important, because right now, there’s no political upside to taking this on. We have a terrific statute at the federal level. The FCC needs to have the authority to implement – it needs to take the authority. It has it. It just needs to act on it. So we’ve got the Federal Communications Commission. The state legislatures need to roll back these laws that have gotten in the way. Mayors need to have the backbone to do something about this in each one of their cities. And in each community, this issue needs to get on the radar screen, because right now, the big players are benefiting from a lot of confusion out there about this very, very fundamental issue for America.

LEATHERWOOD: When did you personally begin to notice that something was wrong, or that things were different than how they are in other countries?

CRAWFORD: Well, I’ve been noticing this steadily for the last 10 years or so, but it really came home to me when, at the beginning of the Obama administration, the Congress passed a stimulus law. Right? We all remember that. And one of the elements of that law was a planning process that the country was supposed to take on to make sure that everybody had high speed Internet access. And another element was to stimulate some planning for that by actually giving money, subsidizing some systems in America, seven billion dollars. And I was very focused on this, and in fact, working in Washington at the time. And I learned that, distressingly, the National Broadband Plan was not going to take on these competition issues, not going to grasp the nettle of how bad things had gotten in the country.

And I also noticed that there was even more emerging consolidating going on on the wired side. So Comcast, at the end of 2009, announced that it was going to merge with NBCU, this giant media conglomerate. So I began to wonder why no one in the mainstream press seemed to notice what had happened in this marketplace, and I thought it was important that someone tell the story plainly. So that’s why I wrote Captive Audience.

LEATHERWOOD: One of the things you say in your book is that Comcast, which is a distributor, is throwing its weight around to help determine what content we’re able to receive. How is that possible?

CRAWFORD: Well, the merger was approved between these two titans because Comcast’s argument was that we’re not making anything any worse than it already is. There’s already great concentration in distribution. We’re not going to change that, because NBCU is not itself in the business of distributing information. And we’re not going to be controlling the market for content, because NBCU is just one of four or five giant media conglomerates, so don’t worry.

As it turns out, the assets within NBCU turn out to be very useful to Comcast when it’s trying to raise any rivals’ costs. So now, anybody building a fiber installation in any city has to enter two markets at once, both the market for building the wires and making sure that you reach people’s houses, the distribution part, and the content marketplace.

And to be able to provide people with programming, particularly sports, they’ve got to get access to that from content providers. Well, now, Comcast owns, controls more than a dozen regional sports networks. So if you’re going to be building fiber distribution in a neighborhood, you’ve got to get access to their sports, because people love sports, they can’t live without it. And Comcast can charge a new very small upstart a lot for that sports programming. And they can say, well, we’re just charging you what we would charge anybody of this size. But they have volume discounts, so Comcast will charge Time Warner cable much less than it might charge a new upstart entering one of its markets.

LEATHERWOOD: So they can make it too expensive for me, a new distributor, to buy content that I need to be competitive at all?

CRAWFORD: That’s right. They can make it very expensive. Also, there’s a lot of cooperation between the programming industry and the distributors of programming. It’s in all of their interests to have a mechanism that keeps the cost of the programming going up. So the programmers keep charging more. Comcast then passes those fee hikes to its customers. And it’s a one-way ratchet. So that not only makes it more expensive for you as a new rival to show up, also makes it increasingly expensive for consumers. And so, Comcast then bundles programming together with Internet access and says we’re giving you a deal. That then results in very few consumers buying just Internet access alone, which makes it very difficult to compare a new upstart to Comcast. So it’s a little bit like trying to get your arms around a giant iceberg. It’s inexorable, it’s enormous, it has many facets, and it’s sort of slowly grinding across the landscape of America.

LEATHERWOOD: You can’t fight an iceberg.

CRAWFORD: Hard to fight an iceberg.

LEATHERWOOD: Another thing you say in your book is that the next squeeze is video distribution. What does that mean?

CRAWFORD: Well, in the book, I spend a lot of time looking at the story of Netflix. Because you would think that getting access to video online would be an answer to these ever-increasing programming costs driven by the programming industry and the cable distributors. Turns out that’s not true, and here’s why. Netflix gave up before a shot was fired. They were forced into complementarity. They never actually competed head to head with the cable distributors, never tried to provide sports, news, first run, anything. And so they’re much more like a cable channel, and their technical fate is also in the hands of Comcast and Time Warner.

Think of it this way – if you’re a little kid trying to get home from school, you’ve got to pass down a few streets, and the bullies may be waiting for you along those streets. Well, when Netflix is trying to reach subscribers, it’s got to go through the gate of the cable distributors. Cable has unlimited power to make life uncomfortable for Netflix, to treat their own video better as it reaches subscribers, to raise the price to Netflix of crossing over to get to subscribers, to make the video experience less satisfying. I mean, the cable pipe is nothing but hundreds of channels in a great, big, wide pipe. Hundreds of digital channels. A few of those, just four, are assigned to Internet access. So the cable distributors’ motive and ability to make life miserable for anything trying to pass through that channel – basically unlimited.

LEATHERWOOD: Susan Crawford, thank you.