Monday, July 28, 2014

A government protected monopoly is not a private enterprise

When I think of some of the icons of American capitalism, GE, GM, and Google, I think of companies that are in direct competition with the world. Each of these three must allocate their resources in such a way as to provide their services at a price that is competitive with other offerings here and abroad.

Our telecommunications companies like Comcast, Time-Warner, AT&T and Verizon would like us to believe that they are engaged in similar competition, as if they are engaged in the art of private enterprise. To the extent that they are not protected by patents, copyrights, state and local franchise agreements, free trade agreements, anti-union laws, etc, you could say that they are.

For today, I would like to emphasize the point that in their respective domestic markets, each of the 4 biggest telecommunications companies have had the luxury to operate a private monopoly. For every city they operate in has agreed to a local monopoly. For example, When Comcast enters into an agreement to provide cable television service to residents in any given city in the United States, they are granted an exclusive right to do so, in the form of a franchise agreement. That means that no other cable television provider may operate a similar business within the boundaries of that same city. This is a private monopoly.

The same thing is true of the phone services offered by AT&T and Verizon. In fact, before 1982, AT&T had a government granted monopoly on phone service throughout the entire nation. This monopoly was created by government intervention and it was broken up (not completely destroyed) by government intervention. There was a time when you could not connect your own device of choice to the phone line without permission from the "phone company". That's what we used to call AT&T.

Since the breakup of AT&T, every city had the option to choose their telephone service providers. Even then, each city provided their respective choices with a government granted monopoly, a franchise agreement, with terms that could run a whole decade or more.

This is what is behind the facade of private enterprise, free enterprise, or whatever you want to to call it, that the telecommunications giants place before us in the public sphere. When they advertise, lobby, or simply do their business, 100% of the time, they are operating in a market that is guaranteed by the government.

You might protest and say that AT&T and Verizon are in competition with each other. Yes, they are in the mobile phone market. But in the landline business, they have mutually exclusive territories. That includes the internet service business. By the way, we still use landlines and they are not going away anytime soon.

The same thing is true of Comcast and Time-Warner. They both operate in mutually exclusive territories with franchise agreements that have very long terms. To switch from one to another is an incredibly onerous process, one that would take many years to complete. So not only do they have a government granted monopoly, but due to their infrastructure investments, they have a de facto monopoly. Even if a city wanted to change their carrier, it's a long and expensive process to make that change.

This arrangement can have many benefits, but it can also have many pitfalls. Let me see if I can enumerate a few of them: complacency, condescension and corruption. These are all attitudes I have observed in the behavior of each of the telecoms. I would like to work on Comcast today, since I'm a "customer" and I'm also most familiar with them now.

I want to also point out at this juncture that Comcast too, is offering voice service in competition with the incumbent carrier, CenuryLink. While there is definitely some churn between these two very large companies, no serious economist is going to tell us that two competitors is competition. What we have here is called a duopoly, a monopoly between two competitors with government granted monopolies in their respective trades.

This is not free enterprise. This is not even private enterprise. This is most certainly not a free market. But this does explain why cable and internet subscription fees have consistently risen faster than inflation for at least the last 20 years. The latest FCC report indicates that in the recent past, subscription fees have increased at a rate four times faster than inflation. These are no doubt, monopoly rents.

So it is a curious thing indeed for me to see people, serious people, talking about a government takeover of the internet in the context of the debate over net neutrality. A casual review of the history of the Internet reveals that the foundation of what we know as the internet today was created by the Defense Advanced Research Projects Agency, "DARPA", a federal agency in the US government. Isn't that interesting how something so great as the internet was not created by one of those "private enterprises"?

It is even more curious to me to see people railing against the very notion of community broadband and how "government should not be engaged in the business of providing internet service". Yet, these same people make no mention of any of the private monopolies we have in place. So I have every right to express indignation when these same so-called "private businesses" use their monopoly power and rents to buy legislation that blocks communities from creating their own solutions.

This is what I mean by complacency: Comcast has a few extra hundred million laying around, so it can invest in Universal theme parks to compete with Disneyland. Remember, this is the same company that doesn't mind jacking up your rates for cable and internet access 4 times faster than inflation - that's the condescension part. The corruption? That comes when they bought laws in 20 states that prevent cities from creating their own broadband networks when Comcast refuses to upgrade their networks. Or when Comcast (or Verizon) allows their Level3 connections to clog up in order to score a deal with Netflix. Verizon got the next deal. Yeah, those monopoly rents are so wonderful...

This is why community broadband makes sense. This is why community broadband is in operation in more than 400 cities nationwide. This is why community broadband is the future.

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