The Comcast-NBC Merger & the Future of Internet Video


 

Sometimes history offers moments of wonderful irony. The week that Comcast announced its intention to acquire a controlling interest of GE’s entertainment operations, including NBC and Universal Studios (NBCU), AOL was formally spun off from TimeWarner (TW). These two mega-mergers serve as bookends to corporate arrogance within the media industry during the first decade of the 21st century.

With much fanfare, TW acquired AOL for $164 billion in January 2001. Within a year AOL-TW’s stock price plunged and the much-hyped "synergies" that were the merger’s rationale turned out to be a mirage. The company wrote off $99 billion in losses. Only bankers and corporate management benefited from the get-rich-quick scheme. The AOL-TW merger exemplified the financial scam at the heart of the tech bubble. That merger and the Comcast-NBCU deal were sold on the basis of a distinct business model or financial analogy. For AOL-TW, the analogy is publishing; for Comcast-NBCU, it is cable television. In both cases, the logic of the then-current performance of these distinct lines of business provided the investment rationale for "guaranteed" long-term financial gain. As TW found out the hard way, the publishing model failed. As broadband Internet evolves as the principal video distribution medium, Comcast may face a similar crisis with regard to the cable model.

 

The ongoing restructuring of the music industry signifies the powerful force of digital disruption transforming popular culture. The same forces are remaking the print magazine and newspaper businesses. The long-term impact of this disruption on video may result in the end of the television channel as we know it. In its wake, we might witness the emergence of something best understood as web-based "open video" or "no channel" television. Such a development could turn the Comcast-NBCU deal into a replay of the AOL-TW debacle.

Comcast’s acquisition of a controlling interest in NBCU should be stopped on the basis of anti-competitive media consolidation. Equally critical, it should be opposed on the basis of the cable model that drives the venture. Comcast is seeking to extend the conventional two-tier cable-pricing model to a two-tier structure for Internet media traffic. In addition to a "basic" and "premium" fee structure, we are likely to see the imposition of a data-rate structure divided between a "faster" or privileged and "slower" or normal data-rate. This model would not only overthrow the established practice of content "net neutrality," but would put the final nail in the coffin of an American communications system based on open architecture and meaningful network competition.

The Trusts Are Back

 

The same logic of market consolidation that refashioned most industries in America has refashioned the media industry. Some major mergers and acquisitions suggest the pull of industry restructuring. In the U.S., Murdoch’s News Corporation gobbled up 20th Century Fox, Harper Collins, MySpace, and the Wall Street Journal, the ideological jewel in the crown. The Disney enterprise has gone far beyond Donald Duck and a movie studio to include ABC, the ESPN channels, and Broadway productions. Like the AOL-TW catastrophe, the mismatched CBS-Viacom venture included a TV network and innumerable broadcast stations, media production entities, radio stations, Simon & Schuster, and the Blockbuster home video chain. After five years or so, the marriage ended in divorce.

Mergers within the entertainment sector parallel those within the telecom industry that led to the dominance of AT&T and Verizon. Clinton’s Telecommunications Act of 1996 restructured the old telephone business. With each merger, the FCC, after much fuss and deliberation, required the merged company to meet nominal requirements (e.g., service upgrades) that, in nearly all cases, it failed to meet.

AT&T, the rebranded Southwestern Bell (SBC) that was originally a Texas RBOC (Regional Bell Operating Company), came out of the 1984 breakup of Ma Bell. Between 1992-2005, it gobbled up Pacific Telesis (in California and Nevada), then SNET in 1998 (in Connecticut), then Ameritech (in 5 midwestern states, including Illinois and Ohio), BellSouth (in 12 southern states, including Florida and Louisiana), and took over AT&T. Verizon grew by gobbling up Bell Atlantic, NYNEX, GTE, and MCI. These two mega-merger conglomerates now dominate the wireless market, with AT&T controlling 78 million and Verizon 80 million subscribers. In terms of high-end broadband, AT&T’s U-verse has an estimated two million and Verizon’s FiOS has nearly three million subscribers—as well as their respective wireline services.

In 2008, Jupiter Research estimated that the top four Internet Service Providers (ISPs)—AT&T, Comcast, TW-AOL, and Verizon—controlled more than half (56.2 percent) of subscribers. According to the Census Bureau, between 2000 and 2005, the number of ISPs shrank by almost 75 percent, from 9,335 to 2,437. No current estimate of total ISPs is available from either the FCC or Census Bureau.

The Comcast acquisition of a controlling interest in NBCU will likely receive only the most nominal regulatory scrutiny. In keeping with the Obama administration’s public performance style, we are likely to see much fulmination over the merger at FCC, FTC, and the Justice Department. Hearings will be held, media barons and NGO critics will testify, much deliberation will take place, and, when all is said and done, the deal will probably go through and Comcast will be required to meet only the minimalist of public-interest requirements, most of which it will fail to fulfill.

The goal of a major merger, in addition to the ostensible and much-ballyhooed benefits of increasing corporate profit and a company’s stock price, is to attempt to maximize control over a market. For media conglomerates, mergers like that of the Comcast-NBCU plan are efforts to impose integration on the market by securing control over the three principle phases of media operations—content, distribution, and audience. This has been a key feature of the entertainment media business since its inception a century ago.

Comcast’s media-merger effort occurs on the 100th anniversary of the attempt by Thomas Edison and other early pioneers of the movie business to impose a trust, the Motion Picture Patents Company, on movie production. Not unlike today, the trust was challenged by indies who became producers to circumvent the trust. Their efforts were exonerated in 1915 when the U.S. courts charged the trust with restraint of trade. In 1948, the Supreme Court ruled in what is known as the Paramount Decision that the Hollywood studios violated anti-trust laws in their control over exhibition. The studios had exercised monopoly control over the movie business by joining film production companies with theater chains and prohibiting exhibition of non-studio movies. With the consumer adoption of television in the 1950s, the studio system ended and new modes of mass-market full-motion entertainment content were introduced that fundamentally transformed the media marketplace.

Now, the likely Comcast-NBCU merger points to a possible wave of consolidation, but one in which those controlling distribution will take over some of the major media companies. In effect, today’s battle reflects the inherent tensions between those controlling the "pipe" (distribution companies) and those making the "content" (media conglomerates).

Comcast is a $34 billion-a-year telecommunications utility that operates in 29 states and has 24 million cable and 16 million Internet subscribers. For years it has been active in the relative fringes of the content side of the media industry. In 2004, it failed in an effort to acquire Disney. It put its toe in the media waters through its interests in the Golf Channel, E! Entertainment, G-4, Style, and regional sports cable services, as well as the lifestyle website Daily Candy.

NBC is one of the four major broadcast networks and controls 33 local TV stations, the Spanish-language network Telemundo, 13 cable networks (USA, CNBC, Bravo, SyFy, MSNBC, CNBC, NBC Sports, Oxygen, the Weather Channel), as well as Universal (a major movie studio, theme parks, Focus Features, a boutique "art house" micro-studio). In addition, it controls numerous websites, including a 30 percent stake in Hulu, the free online TV re-broadcaster owned with Fox and Disney.

The acquisition of NBCU may well spike a round of media mergers in which the big pipes, most notably AT&T and Verizon, could seek to acquire major content companies like Viacom and possibly Disney or Sony Entertainment. Equally important, it could likely lead to the majors introducing new ways to address the content-pipe battle, the tiering of data-rate. In turn, this will lead to profound changes in the American consumer’s experience of media and the long-term viability of independent media makers.

Video and the Future of the Internet

The business analogy at the heart of the proposed Comcast-NBCU merger is cable television. This model is based on securing an exclusive subscriber who pays a monthly fee for a package of programs that includes both "basic" services (broadcast networks, ad-sponsored cable channels, PEG access channels) and value-added "fee" services (premium channels like HBO, pay-per-view offerings, and video-on-demand).

 

The mass adoption of broadband Internet services, facilitated by companies like Comcast, challenges the cable model. As indicated by viewer preferences, Internet users are more aesthetically curious, more open to independent innovation than offered by conventional TV fare. In reaction, the big-media players are seeking to kill Internet neutrality and further erode the open architecture communications model in order to maintain control over what Americans see on next-generation Internet-TV.

The market tracking firm comScore reports that in July 2009, "online video reached another all-time high…with a total of 21.4 billion videos viewed during the month." It also claims, "158 million U.S. Internet users watched online video during the month, the largest audience ever recorded."

More compelling, comScore also found that online video is dominated by nontraditional media sites like Google, Microsoft, and Yahoo. It estimates that this sector accounts for more than half of all videos viewed (56.7 percent); YouTube accounted for 99 percent of Google’s 9 billion videos viewed. More traditional media company sites—like CBS, Fox, and Disney—accounted for only 12.4 percent of total views; Hulu garnered only 2.1 percent of all views.

These viewing preferences, which may well change, are indicative of a deeper crisis confronting corporate American media. The viewership of broadcast network programming is shrinking. Inexpensive Reality TV and 24/7 talking-heads programming predominate; leading cable channels repeatedly show recycled network fare; niche-oriented cable channels proliferate as optical fiber capacity increases. Viewers are often bored by what’s on the tube. Americans, channel-surfing in a supersaturated media environment appear more open to innovative programming, particularly user-generated-content (UGC) or do-it-yourself (DIY) videos, as represented on YouTube.

Since the post-WW II era, UGC has grown in variety and popularity as wave after wave of more democratic (i.e., cheaper and easier-to-use) technologies were introduced. The self-printing Polaroid instant camera was introduced in 1946 and revolutionized photography. It enabled users to take a photograph and have it automatically duplicated in about a minute. The Xerox photo-duplication process introduced in the 1960s further enabled the mass reproduction of images, if only in black-and-white. Analog home video superseded 16mm and 8mm film. In the wake of the 1984 Supreme Court’s Sony decision permitting off-air videotape recording and Sony’s introduction of the camcorder in 1985, there was an explosive growth of UGC—by the late-1980s, DIY porn accounted for 30 percent of new porn video releases. And the digital revolution led by the Apple computer, HD cameras, and easy-to-use video editing software has turned everyone into a potential videographer.

Traditional content companies, along with the pipe companies, are aggressively promoting standard television programming on their websites to attract viewers. They know that the digital disruption will in time engulf them like it did the record, magazine, and newspaper industries. Comcast-NBCU is offering free programming through Hulu and its TV Everywhere initiative. TV Everywhere is a "trial" launched by Comcast and TW (along with most of the media big-dogs) during the 2008 summer to offer "free" online TV programming to existing cable subscribers. How long these services will remain free is anyone’s guess.

The dominant content and pipe companies know that YouTube is stealing the show. YouTube, together with other forms of UGC or DIY content, poses a different and more innovative business model, though Google has begun to introduce advertising on YouTube. For years the company has struggled to figure out how to monetize its free "self-broadcasting" service. Adopting a revenue-sharing model, Google will pay independent suppliers for their content and this will likely encourage both more and better-produced programming submissions. (Google also recently announced that YouTube will sell indie films.) With an endless stream of potentially better UGC functioning as a viable alternative to conventional corporate-media fare, viewers may obtain a significant choice over what they watch on their TV/computer.

UGC is but one genre of the programming formats and distribution options likely to be found on next-generation "no channel" or "open video" web-television. In the new digital music world, people don’t buy records or discs anymore, but acquire singles for both a fee and for free ("liberated" IP sharing among friends and others). Video will be ubiquitous and with it new forms of "programming" will emerge. Instead of network executives determining what you see, sophisticated web 3.0 semantic search algorithms (on Google, of course) can match you to your programming choices. The user will always have the power to intervene and select their own lineup.

Faced with this possible development, the major media conglomerates, led by the telephone and cable duopoly (and their new content holdings), will likely marshal their collective power to halt or delay this eventuality. Political influence is the easiest card to play. Given the Obama administration’s conduct with regard to the "public option" in the health-insurance reform debate, one might expect a similar fate for "net neutrality" and "open infrastructure."

In simplest terms, under net neutrality, the pipes—the cable and phone companies—agree to treat the flow of each application’s digital data equally; all roads on the metaphorical optical-fiber information highway travel at the same speed. Within an open architecture communications network, multiple access providers compete based on services offered and prices charged. The corporate agenda seeks, first, to impose a two-tier structure on the flow of digital data, thus all applications would no longer be treated equally. Second, through consolidation, it seeks to limit competition, in this case to only the most aggressive cable and telephone companies.

Obama and the Democrats (like the Republicans) are likely to support programs to further the interest of big-media as they have with finance and health. This policy will constrain Internet-media innovation. According to Bruce Kushnick, head of TeleTruth, "America is now 15th or so in the world in broadband because of the practices of the cable-phone company duopoly. Other countries, such as Korea, Japan, and France, offer speeds 20 to 100 times faster in both directions, and for the price of the inferior copper-based DSL offered in the U.S. The American public is the big loser."

Corporate media’s tendencies toward content consolidation and network monopolization must be resisted. If we are lucky, the Comcast-NBCU merger will be a disaster like the AOL-TW catastrophe.

Z


David Rosen is the author of Sex Scandal America: Politics & the Ritual of Public Shaming (Key) as well as Off-Hollywood: The Making & Marketing of Independent Films (Grove). He has been on the board of directors of the Independent Television Service and Film Arts Foundation as well as an advisor to the Video Collection/MoMA.