Comcast puts squeeze on competitors

Comcast's decision -- to charge Netflix-partner Level 3 Communications Inc. a premium to stream movies and television to its broadband Internet service customers -- is just the latest salvo in what the cable TV giant surely sees as a challenge to the dominance of its lucrative business model.

While this looks like a spat between a two big players, it's important to step back a bit. The problem for competitors is that, when it comes to Internet service, Comcast controls access for millions of Americans. In many areas it has largely unregulated monopoly control over the users' Internet onramp: There is simply no other option. In other areas Comcast shares market power as part of a duopoly. There is little competition, so the company can and does use its power to set prices in a way that thwarts competition for value added services delivered over the Internet.

Rather than lower its prices to be competitive, it has leveraged its position as an ISP to raise the cost of competing services.

It does this successfully on the consumer end by charging a stiff premium for basic broadband services if users refuse its cable TV and voice service offerings. Now it is driving up the costs of competing value-added services and content by charging a toll to those providers on the back end to route traffic over its Internet infrastructure.

Is this simply a fight about Level 3's balance of traffic with Comcast? Or is there a bigger picture here? It's a slippery slope.

The consumer tariff

Basic Internet service from Comcast in my area can cost as little as $33 per month when you buy cable TV, telephone and Internet services bundled together. Buy Internet access a la carte, however, and Comcast boosts the price to $65 per month for up to 12 Mbps, and $75 if you want up to 16 Mbps.

Say you want to break your bundle to go with Vonage's $24.95 per month VoIP telephone service, which depends on that Internet pipeline into the home. The total incremental cost will be more like $50 to $60 per month when you factor in the increase in Internet service costs.

Comcast offers bundling discounts. But the steep jump in a-la-carte pricing for Internet service looks more like a surcharge. Comcast's discount model is weighted in that way for a reason: It serves as a competitive tariff that protects Comcast's content and value-added services delivery business. The provider uses its market control over the Internet pipeline to the home to raise the bar, to choke off competitors by making their services more expensive.

Netflix's $7.99 per month unlimited streaming plan is clearly destabilizing to that core business model. A user with a $59 Roku box or Web-enabled TV, a $7.99 Netflix subscription for movies and a $7.99 per month subscription to Hulu Plus for TV (which Comcast will soon own as part of its acquisition of NBC-Universal) could peel away many of Comcast's traditional cable TV customers. Still other services allow customers to pick and pay for content a la carte, rather than paying steep monthly fees for large bundles of channels or a monthly all you can eat service plan.

The content tariff

Unfortunately, that competitive tariff on unbundled broadband services isn't enough to level the playing field when it comes to Netflix. But by increasing value-added service providers' costs on the back end, Comcast can force them to raise prices for those services. This puts price pressure on competing services from both ends -- on the back end by issuing tariffs on competing content providers for use of its network, and at the edge by charging a tariff for Internet services when users choose to just buy the Internet pipe, forgo the TV and telephone service bundles, and buy those services from third parties who deliver them over the Internet.

Comcast is also protecting its flanks by buying a major content provider, vertically integrating its service offerings. (Care to place odds on whether the monthly price of those Hulu Plus offerings will increase post-merger?) But it still resists the one consumer-friendly response that would make a competitive difference: Offering channels a la carte. Surveys show that users want choice. It's a key reason why some customers are willing to defect. But letting the consumer choose would upend the industry's business model.

Comcast is the gateway. It tightly controls what users can see . It forces customers to purchase expensive bundles of channels they don't want just to get the one or two they really do want. Web-based content providers such as Netflix threaten that model.

Consumer loses

Where is this all going? It is not in the best interests of an NBC/Comcast to build and deliver reasonably priced, net neutral, high-speed Internet services to customers who may turn around and use the open Internet as a delivery platform for competing value-added services and content offerings.

But the recent power shift in Washington has largely silenced any serious talk of net neutrality within the legislative branch of government, and Comcast and NBC-Universal are arguing aggressively with the FCC to close down any further talk of net neutrality or the setting of any conditions on their proposed merger. They also argue that third parties shouldn't get to stream content across Comcast's Internet backbone and down to its broadband subscribers without paying a premium (even though users are paying through the nose for that bandwidth).

If the talk of net neutrality at the FCC finally falls by the wayside, competing content service providers will probably resort to back-room deals to lock in access to Comcast's captive customers.Those negotiations will favor the big players over smaller, more innovative businesses.

It's still not clear whether Comcast's vertical integration strategy will work in the long run. NBC isn't seen as an innovator, and its acquisition by Comcast isn't likely to change that. But it's hard to see how any of this will benefit the consumer.

UPDATE December 1: Computerworld blogger Richi Jennings doesn't think my argument holds water -- and he does have a point. View Richi's thoughts on Comcast here. Lest we throw out the baby with the bathwater, however, I've summed up my concerns about Comcast here.

Note: I enjoy engaging in conversations with blog readers but it's difficult to keep track of ongoing threads from regular readers if everyone posts as "anonymous."  To keep the dialog going please consider taking a moment to enter a regular identity "handle" with your posts.  Keep the comments coming! --RLM

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