AEI-Brookings Joint Center Policy Matters 04-09


Liberating the Market: Cable's Regulatory Stranglehold on Broadband. Robert W. Hahn.  March 2004.

Comcast's hostile bid to acquire the Walt Disney Co. promises to transform Disney's shareholder meeting Wednesday into a raucous and perhaps riveting referendum on the stewardship of CEO Michael Eisner. The world will be watching, and many people will be wondering: How did Comcast, a once-sleepy regional cable operator acquire the moxie, muscle and money to take on the mighty Mouse and threaten to bring down its longtime leader?
  
The answer is not the stuff of which fairy tales are made. Quite the contrary. Comcast has been the beneficiary of a complex federal regulatory system that tilted the playing field toward cable. This system hobbled cable's potential competitors, generated enormous new streams of revenue and made cable operators players in the game once reserved for the entertainment world's most powerful moguls.

How did we get here? In the mid-1990s, Congress decided to regulate cable rates, only to watch in horror as cable investment plummeted and quality deteriorated. When Congress later reversed course and lifted cable regulations, the results were predictable. Quality improved and cable subscriptions grew, even as cable prices rose.

Make no mistake. The decision to deregulate cable was good public policy. Yet deregulation has been a one-way street that favors cable at theexpense of potential competitors in the telecom industry. For more than 20 years, telephone companies have been aching to compete as a rival deliverer of entertainment services. But while cable has largely been freed of federal regulation, the Federal Communications Commission continues to put a thumb on the scale against telecom. Cable companies, including Comcast, have exploited their regulatory advantage for all it's worth. They have used their pre- eminent position to boost cable rates and rack up revenues. And they have extended their dominance from multi-channel programming into broadband.

For its part, Comcast now has more than 21 million cable customers in 41 states and 5 million high-speed Internet customers. With cable now controlling two-thirds of the broadband market, local telephone companies are the clear underdogs.

It doesn't have to be this way -- and it shouldn't. Telecom experts report that the price-point for fiber-optic deployment is now reasonable enough for local telephone companies to invest billions to roll out a new fiber-line network that will give cable a run for its money in the broadband market. It doesn't take a Merlin to see that such competition would be a boon for consumers. When companies are forced to compete, they respond by lowering prices and enhancing services.

Telephone companies have the technological acumen and financial wherewithal to compete with cable on a national basis. But this will never happen as long as telephone companies are forced to walk the regulatory plank. Last year, the FCC seemed to clear the way for telephone companies to compete with cable. Then the commission "clarified" its position by releasing the actual rules. These clarifications were laced with provisions that continue to make large-scale entry by the telephone companies uneconomic.

But the FCC still has time to act. While its main potential competitor remains shackled, Comcast is shrewdly leveraging its regulatory dominance to extend its lead. There's nothing inherently wrong with Comcast's proposal to acquire Disney. But companies should build their empires by beating the competition, not through regulatory favoritism.

There may be high drama at the Disney meeting, and it should be a learning experience as well. Although it has stalled for now, the bid by the nation's biggest cable and high-speed Internet provider to buy what is perhaps the world's best known entertainment icon highlights the basic unfairness of federal regulatory policy -- a policy that ultimately harms consumers, hinders high-tech innovation, and slows the broader U.S. economy.

It is bad enough that the FCC keeps trying to pick industry winners and losers. But by keeping telecom out of the broadband race, regulators are contributing to the telecom meltdown. Reforming those regulations would help end that meltdown and kick off broadband competition that some economists say could generate up to $300 billion in economic benefits. In the face of a potential Comcast-Disney powerhouse, isn't it time the FCC unshackled the telecom industry and created real competition for cable?

Robert Hahn is executive director of the American Enterprise Institute-Brookings Joint Center.

This articled appeared in the San Francisco Chronicle on March 1, 2004.