The Lesson Of Title II and Time Warner Cable: Markets Have Two Sides

On thursday of this past week, I attended a small gathering of academics and policy makers who follow the technology sector. During that gathering, the news came out that the Comcast acquisition of Time Warner Cable was falling apart due to regulatory opposition. The conversation turned to the reasons why this happened.

I surmised that the reason for both the failure of Comcast/Time Warner Cable and the success of the Title II debate several months ago┬áis that regulators and policy makers now understand that markets have two sides and you can’t just look at the consumer facing side of a market.

Comcast was correct in its assertion that they have very little customer overlap with Time Warner Cable and therefore consumers were not being harmed by the consolidation of the two networks. But if you look on the other side of their networks, to the suppliers of applications (Amazon, Google, Facebook, etc) and content (Time Warner, News Corp, Netflix) you see that the consolidation was going to be very harmful. Netflix was going to have one company standing between it and possibly half of its customers in the US. Same with Facebook. And there is no way that was going to be good for them. They may not have come out publicly in opposition to the merger, but you can bet that they came out in opposition privately.

The same is true of Title II regulation of the last mile Internet access. This was not a consumer story either. Very few advocates of “net neutrality rules” believe that this is a consumer issue. Very few have advocated that Internet access prices should be regulated. The debate has always been about the supply side of the market. The side where applications and content live. And the decision to apply Title II regulation to last mile Internet access was essentially a recognition that both sides of a network matter and that it is bad for the economy, society, and innovation to have a network attain enough market power to control what happens on the supply side of a market.

I don’t know enough about communications policy and antitrust policy history to know whether the two sided market construct has played an important role in the past. I think it may well have been an important factor in breakup of AT&T’s monopoly on wired telephony. And I expect there have been other examples as well.

But the one two punch of Title II and Comcast/TWC is a reminder that both sides of a market matter and competition (or the lack thereof) will have an important impact on how these markets function. I am a fan of both decisions and believe that our regulators and policy makers are thinking about this stuff correctly.

#policy

Comments (Archived):

  1. LE

    An area of concern for me has always been Google’s dominance of search. I don’t really care how they got there or how they stay there or whether they have earned it and/or deserve it I just know that it isn’t good. And while it doesn’t outwardly appear to harm consumers (hey I love what I can do with google as most people do) I know that it isn’t good for businesses (or even individuals) to have one company essentially decide, implement and make up the rules on what it takes to be discovered on the Internet.

    1. andyswan

      If they stop providing good results they will lose share quickly. I tried switching to bing and DDG as defaults but the results just weren’t as good for me.

      1. LE

        I know that they are good I just don’t like the fact that they are so good that they have that power. Like I said I don’t care why I just don’t think that the end result and power is good. In a unrelated way it’s the same reason we have term limits for politicians.

        1. andyswan

          You’d prefer they be worse? There are plenty of worse options you can use.

          1. LE

            You are not old enough to remember how good the Bell Telephone/At&t company was (rock solid and reliable service, widow and orphan stock) prior to divestiture (mid 80’s). Has nothing to do with using worse options or whether or not they have earned their position.

          2. andyswan

            Were they not granted monopoly status by government(s)?

          3. LE

            Look I am typically (as you are I believe) a full supporter of the “to the king goes the spoils” with respect to business. However I do make exceptions to that in some rare cases just like there are reasons when murder is justified (or even cheating on a spouse). Not much to me is absolute. It’s all a usually a matter of degree. Even if it is highly tilted toward one conclusion.

        2. Brandon Kessler

          That’s a really interesting comparison between our presidential term limits and corporate monopolies: that, even if you act nobly for the most part, there’s an overwhelming tendency to abuse power that goes against the common good. And it’s pretty cool that our country’s system of checks and balances recognized that with the 22nd amendment.

      2. Joe Cardillo

        (not rhetorical) question: isn’t that irrelevant if they own enough of the market already to strangle competitors? This may not be ideal example, but wal-mart is happy to lose money in plenty of towns if it means no one else can have it either. Seems like that happens a lot with global sized monopolies.

        1. andyswan

          Ask Microsoft how well that works. Monopolies are impossible in the long term without govt intervention.

          1. Joe Cardillo

            Right, I think that like it or not there has to be a balanced approach. The idea that the service layer should be completely free market or completely regulated, those both seem illogical to me. Or do you take a different perspective on that?

          2. andyswan

            Completely Free market is the only moral choice imo.

          3. pointsnfigures

            Twitter might be able to keep it’s monopoly without govt intervention.

        2. LE

          It’s a bit fairer for competition of Walmart in at least one way. People buy retail based on location. In theory anyone can open up where there are many customers. May be easier for Walmart (with their RE prowess) but it is on the dartboard for competitors. Search is a bit different. It’s a habit to go to google.In other news I just actually dealt with Walmart online when I typically always buy from Amazon. I really liked the experience. They actually messed up an order but in one simple email to them (actually was a web form) they apologized and sent me a no questions asked replacement. I was really happy and will now consider using them instead of running everything through Amazon.

          1. andyswan

            Yep WalMart is quietly building a very capable online retail experience

          2. JLM

            .Bravo!WalMart has built from scratch an enormous international retailer, the largest grocery chain in the US and now is creating an incredible on line retail business.Worthy of note also is the differentiation amongst Sam’s Club, WalMart Superstores and their ability to put bricks on the ground internationally.What is even more impressive is their raw buying power. Amazon is a conduit but WalMart is an owner of much of its product.Do not bet against anything coming out of Bentonville.JLMwww.themusingsofthebigredca…

          3. LE

            WalMart has built from scratch an enormous international retailer, the largest grocery chain in the US and now is creating an incredible on line retail business.Sam is the man. I remember when I first heard about him on one of those Forbes Lists in the early 80’s (or could have been late 70’s). It said he “drives pickup truck, drinks cup of coffee at local shop”.Sam was from back in the day when people knew the business that they were in and had some clue. Sam figured it out because he was actually engaged on the sales floor and was able to tap into human behavior on a gut level. [1] Perhaps it was by accident but the other neat thing about Sam was that he kept the business hq in Bentonville. By that one move he greatly reduced the chance of key employees (who became embedded in that community) jumping ship. Also, and this is important, he showed what could be done with what others might consider simple average employees as opposed to what people think are the best and the brightest.That said Walmart and Sam’s Club survives like many retailers do by getting you to buy things that you don’t really need in quantities that you don’t really need. This is less the case with online (not “never” but “less”). Typically when you went into a traditional retail lured by a loss leader you ended up buying other things. Online that doesn’t happen anywhere near as much a guess on my part which I believe to be a correct guess.One thing perhaps people need to keep in mind is that (from what I understand about Walmart) you have to look at Walmart the way we used to look at government jobs (GPO) which we did. We used them to lower our costs and fill in when work was low but we realized that we would die if all we did was get government business (which wasn’t that difficult it was all based on bids and gaming bids) because there was so little profit.[1] Like the guys that you worked for that you always talk about.

    2. JLM

      .The Google argument is much the same argument as the original argument to bust up ATT. One can take either side of that argument and make a case for something.JLMwww.themusingsofthebigredca…

    3. SD

      Totally agree with your point. Algorithmic neutrality is just as important as pipe neutrality. While the EU suit may or may not be bunk, we simply don’t know the instances where goog favors its own interests to the detriment of consumersTo your point about search quality – 10 years ago, a better quality provider could have moved quickly to supplant google. Now, there is too much inertia for a new entrant to take meaningful share away from google (just the safari and chrome address bar defaults alone make it inconvenient to switch to another search provider).

  2. JLM

    .Like a lot of things, the government has picked winners and losers but, worse, not by making a decision but by simply threatening a long, drawn out administrative process of interminable hearings which could have literally lasted for years and years.If they had made a timely decision, they would have had to expose their authority and their logic which would have given the applicants — supplicants? — a target upon which to focus. It would have been timely and perhaps CC/TWC would have taken to the administrative courts to slug it out.By threatening a delay, the government did not expose the theory of their opposition and the deal died by being starved rather then being argued. This is simply government bullying and nothing more.I think one could argue that a speedy and full response is a “due process” argument and that when the government takes a “scorched earth” approach of denying an applicant a speedy answer, it is not fulfilling its regulatory duty.Several interesting points about this deal — there was no breakup fee as if the parties realized they alone really did not control their own fate. That speaks volumes.The government picked a winner in the smaller competitors — the big competition was really between CC/TWC and the cable networks — such as SlingTV.I have no problem with the government picking winners and losers — but only when it is forced upon them through specific requests like this — but it is vitally important to know they are doing exactly that.People need to know when the government is using bullying tactics — IRS anyone?Would a different administration make a different decision? Would a different administration hang out a sign indicating they were “open for business” at a different time.Of course, this is exactly what happened on the net neutrality issue in which the President by virtue of his appointments and his own utterances signaled what was on the horizon.Before the end of the Obama administration, there will be taxes on the Internet that do not exist today.

    1. andyswan

      Exactly right. Doesn’t matter though…net neutrality activists don’t care about logic or the long term effects of federal govt intervention and additional taxation (which they refuse to even admit)…they are just thrilled to have their first skin on the wall.

    2. Joe Cardillo

      I agree, clarity on how & why the gov’t approaches these things is a must. Be curious to hear what you (or anyone) think should be the framework for making decisions that involve both service and content/application layers.

      1. JLM

        .In most instances, the government fails to embrace the third rail — do nothing. Wait. Be patient.There is a lot of life that improves by simply letting nature run its course.Government — politicians susceptible to lobbyists holding big bags of money — is often too quick to act and when it does, it accumulates power rather than making a definitive decision which allows the game to resume.In the recent net neutrality case, a solution looking for a problem perhaps, the government instituted a “reasonableness” standard that is a beauty contest wherein all the contestants are pigs.By using a reasonableness standard, the gov’t has ensured that all supplicants must come to them for a decision which then empowers the gov’t and provides yet another power — the power of bureaucratic delay.Power given to administrative bodies which must deliberate BEFORE the supplicants can get to a Judge and perhaps a jury is always time consuming and expensive and susceptible to manipulation by lobbying.JLMwww.themusingsofthebigredca…

    3. Derek Pignatelli

      Lack of intervention and a streamlined path to merger approval can be framed as picking a winner just as easily. Gov’t is in the position to pick the poison (too wide a pipe and too many deals get in, too narrow and you delay or starve beneficial mergers). This seems like more of a gripe with antitrust law and the FTC existing than anything else.The governments goal isn’t to slow the process (in my view that’s cynically (and satisfyingly) attributing ill will without evidence). The “threat of delay” wasn’t as you framed it because delay isn’t the point (unless you buy into a mustache twirling villain theory of government. And many do). The question of monopoly is the issue and the process for determining when antitrust law has been violated hinges heavily on the debate over what the market at issue is (as Fred pointed to in his original post). That makes the process necessarily slow in part because government is unnecessarily large but also because these aren’t issues that can be hashed out in memo form.

      1. JLM

        .I agree with you that the government would be picking a winner in the scenario you describe — a streamlined path to a merger approval — and as I stated in my comment, I have no problem with that.I did add the caveat that the government has to be transparent and acknowledge that that is exactly what they are doing,Where we diverge is the basic facts. The government clearly informed the participants that to continue to pursue the merger would result in a long and tedious hearing process — effectively smothering the baby in the cradle.In that regard, we do have a mustache twirling government effectively unilaterally denying the merger through inaction and its unacceptable attendant costs.If the issue is anti-trust, which is just a code word for stifling competition and thereby creating undue pricing control, then spell it out. The applicants have a right to be heard and to rebut the government’s assertions and findings. That is, after all, the very point of an administrative approval process, no?In developing markets, and there is no more rapidly developing and complex market than the one we are discussing, the government is just like anyone else — cursed to do the best they can with what they’ve got.Laying back and not doing anything and thereby pretending that the issue was resolved is lazy and fails to rise to their duty. The gov’t has a duty to act in a due process method — after all, they are the ones who control the process. They need to own it.JLMwww.themusingsofthebigredca…

        1. Derek Pignatelli

          Fair points. I struggle to comprehend why there would be no problem with a streamlined process. If the gov’t operates as a slow bar to approval its problematic just as the gov’t operating as a quick but shallow stamp of approval. The size of the pipe the gov’t allows deals to flow through will always be debatable and you’re right to point that it depends in large part on the industry and the environment. The gov’t is a blunt instrument, but self-regulation is probably a worse solution.I don’t agree that the gov’t informing the parties what an evaluative process of a merger as large and complex as this one was is evidence of a black hat government. Merger fights can and do happen. It may have effectively killed this one but if the cost/benefit shook out another way the merger would continue. Change the parties and the environment and the merger would continue. It’s like a 78 year old going to get a license from the DMV, seeing the 3 hour wait and thinking “Not worth it. I probably won’t get a license due to my flawed vision anyway”. The gov’t is operating inefficiently due to the process but change the party to an eager 16 year old and they would wait 3 days in a tent to get their license. Neither of these things make the process good or efficient but the cost/benefit depends on the party. The gov’t didn’t care to kill the 78 year olds goal of obtaining a license, but the process is the process.The gov’t does own part of the responsibility for the process but so do the firms who’ve made this process appear (or be, depending on your perspective) necessary. I agree that there is a far more perfect solution to be had, but I have to admit a high degree of cynicism that such an effort would only lead to increased gov’t largess.Lastly I disagree with the characterization that the gov’t laid back and did nothing while pretending that the issue was resolved. On this point we don’t disagree about the basic facts, we disagree on the character and motives of fairly large gov’t entities. I agree that the gov’t has a duty to act in a due process method. But I haven’t seen an articulation of how they haven’t. They have acted in accordance with the process that has been in place for quite a while. I haven’t seen a theory advanced suggesting that what happened w/this merger wasn’t due process. Criticisms of the process, sure. But this isn’t a murder trial without a jury. It’s more like a threat of a suit that has just enough merit, causing a party to settle because the cost of a protracted legal fight isn’t worth it… even though they think it would be in pursuit of what they believe is right. That’s not a violation of due process. That’s the inadequacy of a large inefficient system that (by necessity) is charged with reconciling conflicts of variable size, complexity and scope. The justice system and our antitrust administration have gaping flaws and inefficiencies. That unfortunately is the processes we’re due.

          1. JLM

            .I don’t have sufficient time to debate the points you raise, not because they are not valid, I am simply busy today.When a big administrative request is made, the government should, and often does, issue a “scheduling order” in which they layout the process for the applicants to consider, discuss and perhaps modify.The government did not do this. Instead, they told them verbally that it would be long, tedious and time consuming.The fact that the applicants had no break up fee is indicative of the notion they had an inkling that this was going to happen.The FTC’s best work should be safeguarded for the toughest cases because those are the ones that really matter.In the example you offer, the 78 year old will come to the DMV at dawn, knowing the 16 year old will still be sleeping. These applicants are represented by the BEST law firms in America, they aren’t afraid of a fight, they get paid by the freakin’ hour!The biggest question may simply be — is America open for business or not? If they take our taxes, they should do our business, no?JLMwww.themusingsofthebigredca…

          2. Derek Pignatelli

            Sounds like we could go back and forth for a while. Thanks for your insight and good luck with your busy day. I enjoyed our discussion.

          3. JLM

            .Back at you. Thanks.JLMwww.themusingsofthebigredca…

  3. Joe Cardillo

    I wonder, what would that other side of the market be called? The supply (content + applications) side makes sense to me but demand doesn’t quite seem to address what you’re talking about here…Also, and I may be simplifying things too much, but one question that’s been rattling around in my brain for a few months is whether or not we can ever trust one co to be deeply invested in both, which seemed to be the crux of the Comcast deal. I have a hard time believing that Comcast could ever own both sides and be expected to foster innovation or competition. Seems antithetical as a business model.

  4. pointsnfigures

    More government regulation creates larger corporations. They will figure out ways to get together in the long run.

    1. andyswan

      Creates Larger, more powerful, more abusive and more connected [X] with less concern for the citizen.X = politicians, corporations, regulators, etc etc

    2. PhilipSugar

      I agree more government regulation is bad. And government can put in so many regulations that it makes it hard for the small guy.However, another cause of larger corporations is unfettered M&A. My father was in charge of M&A for Sunoco. They tried to buy Conoco and were blocked, and that was during the Regan administration. Fast forward to Exxon Mobil.So while I am adamant government is too big, exists for itself, government salaries are too high, government pensions make below average workers millionaires, and a slew of other things, I do think it should have a role in not letting things get out of hand, and that especially happens when you have finance guys engineering deals. (this comes from a Moore School Engineer and Wharton School grad)If Republicans could figure this out and realize that no matter what they personally believe the “Christian” values that they want impose make them unwinableOr the Democrats could understand government is too damn big, and no have class warfareEither would win my vote.And while I’m on my rant both could stop bickering like lawyers. That is the worst part of having most politicians lawyers. In the U.S. lawyers are taught you oppose the other side at all costs whether your side is right or wrong. This causes huge issues when you are actually trying to get to the right answer.

      1. JLM

        .Regulation is like spice — a pinch is both necessary and makes the soup more savory while a handful ruins the soup. Almost every instance in which the long term result is NO SOUP, is the wrong solution.As to the energy biz, know this — Exxon went looking for oil and found it was cheaper to drill on Wall Street than it was anywhere else, in part, because of the high cost of regulation.When Exxon looked at the cost per recoverable barrel, it was cheaper to buy Mobil than it was to explore.That is one of the reasons why we should have a forward looking attitude toward the energy business — a rational national energy policy — because drilling on Wall Street doesn’t come close to creating energy independence (zero sum game, no new reserves) and does not create nearly as many jobs as sinking a bit.JLMwww.themusingsofthebigredca…

      2. pointsnfigures

        I actually could be persuaded to agree to block this merger-if they were doing something in the regulatory regime to make it much easier to compete. Prof. George Stigler’s theory on reg capture will be proven right once again. Give it time.

  5. kenberger

    A key talk at TNW in Amsterdam this week (I attended) was by Andrew Keen http://en.wikipedia.org/wik…. I’d never heard of this guy before, don’t know what I think of him, and need to think about what he said and hear rebuttals to his speech.He gave a big pessimistic view of the world, saying other than improvements in our technical/gadget lives, how internet-enabled social matters (Arab Spring citizens, unemployment, etc) are so much worse in 2015 compared to 2005. And how the big techcos are much MORE centralized, wealthy and powerful, as opposed to the Long Tail which he said really never came to pass.He attacked a lot of Jeff Jarvis’ and Chris Anderson’s writings.His big call to action was for MORE REGULATION, all over the place, especially ANTI-TRUST. I’d love to see a post here on AVC to debate these sort of topics.

  6. LissIsMore

    Bad Craziness. It is not the Government’s job to protect one business model from another.How is it that “Cable Companies” have such a stranglehold on the communication/media market. Oh yeah, the Government created the cable companies and gave them a monopoly by geographic area. D’oh!These are Markets, to be sure – but not Free Markets. It is a giant game of Jenga in which we wish for Solomon to be making the choices on which piece to pull.

    1. William Mougayar

      I agree. We need to RE-imagine everything. What if there was No regulation in telecommunications and Internet access? Let the market forces dictate what happens.Is there a country where that exists?

      1. pointsnfigures

        Unfortunately, no.

  7. Tom Labus

    The financial TV networks have cast this story as some kind of tech BS and anti business. No one has been able to tell the story correcty and the hosts laugh at attempts to do so. Your post today is a great explantion that would fly. I know you don’t do TV but someone needs to tell this stroy right in simple basic terms

  8. William Mougayar

    This analogy from a 9-year old made me understand Net Neutrality really well.Well, the Internet unbundles a whole lot of things- but technical un-bundling doesn’t automatically result in political or business related un-bundling as they takes a lot longer to catch-up or keep fighting back.

    1. LE

      The analogy is fine but I call bullshit on the “my 9 year old son” part.That’s an obvious attempt to get attention by playing on the apparent “maturity and wisdom” of a 9 year old. I would be willing to bet the analogy was not written by that 9 year old.It follows a classic pattern that even appears to mimic urban legends or folk tales.

      1. William Mougayar

        i agree it sounds concocted by an adult. but it does paint the picture well.

    2. JLM

      .The problem with the 9-year old’s analogy is this — he has disregarded the reality that while you have been going to that ice cream shoppe, you have been paying an entry fee to your cable provider to bring that straw to your lips.In recent years, the cost of entry has gone down while the speed of service has gone up. Dramatically. In fact, you are receiving 1Gig service at lower rates than you were receiving 50Meg service just two years ago.With bundling and competitive forces, you are also able to pick your type of milkshake flavor at an increasingly cheaper price. More flavors, lower prices. Better stomp that out, right? Right?In addition, folks who had formerly only been seat suppliers (conduits) are now going into the milkshake business themselves (content creators).The competitive marketplace is supplying all the energy that is driving these changes — lower costs and more flavors.What was not happening was that the government had no means of controlling flavors, seats, seat prices — or enacting taxes on the entire enterprise.So, the government put the three stooges in charge of things and attempted to solve a problem that “could” have happened but actually hadn’t happened yet.All that was happening was more service, lower prices, more flavors and an imagined problem.I heard this story from a 7-year old who says that when he meets the 9-year old he intends to kick his ass.Hey, it could be true.JLMwww.themusingsofthebigredca…

      1. William Mougayar

        Maybe that’s happening in Texas and that’s a good thing. But from the little I know, it seems that’s not evenly distributed across other states, no?

        1. JLM

          .I do think that ATX is a top tier city for a number of reasons. But I find that service is expanding everywhere. In Steamboat Springs, a place that had no — NO — Internet service about 10 years ago, we have great service.I think a lot of what is happening is driven by the magnitude and quality of the content. People want service to be better because they want content more desperately.I am typing this in lovely Cashiers, NC in the mountains. I have NO cell phone service but I have Internet service.I use VOIP and Skype and Google calls.JLMwww.themusingsofthebigredca…

  9. Charlie Crystle

    too big to sail.time to break up these behemoths, compensate for the infrastructure and make it available to anyone who wants to offer competing services.

  10. William Mougayar

    I have this hypothesis in the back of my mind that the value chains and “value stacks” are changing and shifting, and it takes time for the market, regulations, and politics to catch-up.A “value stack” is the enabling technology for a given value chain.Typically, users are the first to detect and adopt these changes, and it takes a while for others to realize that.How and where value flows are very telling signs of where things are going.

  11. Ann Greenberg

    Fred, take a look at the United Artist vs Paramount anti-trust case, where the means of production were broken apart from the means of display. And even if it doesn’t have direct application to the situation of Comcast & TimeWarner, I think its interesting to contemplate what this means for streaming video and how the manufacturers of display (Apple, Samsung, Amazon) will approach their inevitable need to invest in content creation. Look what happened with Apple tried to give away the U2 album, for instance. http://en.wikipedia.org/wik….

  12. Adrian Bye

    This type of yin-yang thinking is exactly right and has been understood in asia for thousands of years. If you look at any given situation from only one side you will end up with a distorted answer.I moved to central china to work on precisely this problem.

  13. Jon Smirl

    In my opinion the core problem is having content providers own last mile pipes. That creates a built-in conflict of interest that is impossible to work around. So if I had a magic wand I’d split Comcast into two companies – last mile pipe and everything else. Last mile pipe would be Title II regulated. Everything Else Co. else would not be regulated. I would also give Everything Else Co. a non-renewable ten year lease on the analog delivery portion of the last mile pipe. At the end of that ten year period the last mile will go IP only and the analog portion will not be accessible anymore for non-IP use.

  14. gregorylent

    water, electricity, internet, public utilities all .. the only sane future

  15. Pete Griffiths

    I believe that the breakup of AT&T’s wired monopoly was very different. It was not initiated by government to protect consumers but by AT&T who had come to recognize that their status as a government regulated monopoly was a strategic problem cutting them out from changing market realities. Hence they broke themselves up into the ‘baby bells.’

  16. carlos kirjner

    I would offer an alternative – perhaps too cynical – explanation of why we have Title II. The FCC was working with all constituencies to find an agreement that would not be challenged in court (not saying this was a good idea, jut relating what I think was happening). In this context we also have, 1) President Obama is not running for re-election; 2) Considerable political pressure was put on the White House; 3) In a way that horrified anyone currently or previously involved with the FCC, the President makes a prescriptive speech, leaving the Chairman with no politically feasible alternatives, except reclassify broadband as a Title II service. Here we are. If in the future we have a Republican Chairman (and obviously White House), perhaps backed by a Republican Congress, they may very well reverse it, just like Michael Powell did (not only did he first classify broadband as a Title I service, he also killed unbundling.. – quite a legacy.)

  17. PhilipSugar

    My fault, I broke no politics in the bar rule. No comment.

  18. pointsnfigures

    I think he is referring to gay marriage, abortion. Social issues. He is right for now, but things are changing albeit slowly.