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The storm over broadband bundling

Progress & Freedom Foundation's Randolph J. May warns that recent calls to prohibit cable companies from offering packages that include high-speed Net service will backfire on consumers.

Randolph May
Randolph J. May is President of the Free State Foundation. His newest book is "A Call for a Radical New Communications Policy: Proposals for Free Market Reform."
Randolph May
3 min read
After investing more than $70 billion since 1996 to equip their systems to deliver digital broadband, cable operators are keen to sell more Internet access services.

So it was hardly a surprise when Comcast, the nation's largest cable operator, decided to offer discount packages to customers subscribing to both its Internet access and regular television services. But as soon as Comcast--as well as other cable operators--announced the discount packages, the Consumer Federation of America and the Consumers Union, both long-standing cable antagonists, cried foul.

The consumer groups said they would ask the Department of Justice and the Federal Trade Commission to determine whether the cable companies violated antitrust law by charging Internet customers higher prices unless they sign up for the companies' television services. They charged that cable companies are tying TV and Internet service together in a bid to undermine competition from satellite TV and preserve the cable's market power over multichannel video services.

Chiming in, Sen. Barbara Boxer, D-Calif., also urged the Federal Communications Commission to investigate. She also suggested that the discount packages may violate the law and threaten competition.

The antitrust laws are pretty clear about what constitutes an unlawful tying arrangement. As a standard antitrust primer puts it: "A tying arrangement is defined as the conditioning of the sale of one product on the buyer's purchase of another product."

Note the prerequisite that the seller actually require the buyer to purchase a second product as a condition of sale of the first product. In the case of Comcast, no one has alleged that cable television subscribers must sign up for Internet service as a condition of receiving video channels, or vice versa.

Moreover, as noted, antitrust authority and federal appeals court Judge Richard Posner has explained: "The traditional objection to tying arrangements is that they enable a firm having a monopoly in one market to obtain a monopoly in a second market."

Cable companies do not have a monopoly in the market for multichannel video services and while leading the race to provide broadband Internet access, they by no means enjoy a monopoly in that business, either. The telephone companies meanwhile have about a third of the market and are vigorously promoting their DSL services.

The antitrust laws are pretty clear about what constitutes an unlawful tying arrangement.
In a December study of the multichannel video market, the FCC concluded that the satellite video providers, such as DirecTV and EchoStar, gained more than 18 million subscribers in the previous year, an increase of 14 percent. During the same one-year period, the number of cable subscribers grew only marginally, experiencing less than a 1 percent gain.

Now, with the proposed acquisition of DirecTV by Rupert Murdoch's News Corp., satellite services are likely to become even more robust competitors to cable.

Despite half-cocked requests asking the government to initiate half-baked investigations, the truth of the matter is that cable companies do not have a monopoly in the multichannel marketplace. The Justice Department, the FTC and the FCC presumably know that.

Not only is the multichannel video marketplace competitive, but technological advances and marketplace dynamics are driving what might be called a digital multichannel marketplace.

In this world of increased bandwidth, where "a bit is a bit is a bit," we would expect to see video, voice and high-speed Internet access services increasingly bundled together by cable, satellite, telephone and wireless operators. Indeed, local telephone companies such as Verizon are launching bundles of services with great fanfare, including discounts for subscribing to more than one service.

To recoup the huge investment required to build out new broadband networks, cable and telephone companies--along with the other platform providers--have a large incentive to entice consumers to subscribe to as many of their services as they can. Bundles promote more efficient utilization of capacity, reduce customer churn, and aid in cross-selling, all of which reduce costs.

If increasing competition in the digital multichannel marketplace encourages providers to offer discounts for bundled service packages that include high-speed Internet service, then consumers are the real beneficiaries. They benefit from the immediate price break, and they benefit from the circle of competitive actions and reactions from marketplace rivals. And the economy also benefits from the stimulative effects of having more American homes hooked up with broadband.