Parallel Conduct: How ISPs Make The Consolidated Internet Service Market Even Worse

from the making-monopolies dept

Much of the focus on consolidation in the broadband industry has focused on national market share. The problem is focusing solely on national market share implies that large companies are competing, when they don't. Just because there are multiple companies in an industry doesn't mean those companies compete. This is especially true in the broadband and wireless industries. As Susan Crawford explained

These companies don't have to agree in writing to carry this out or even raise their prices; they can simply, within their separate geographic and product territories, bundle and tie their services, buy up inputs that a competitor might need, and refuse to connect to competitors — among many other potential tactics. It's in their interest for these local monopolists to cooperate, because any defection would make the whole system crumble.

What Crawford is describing is parallel conduct, which is when companies that would otherwise compete create a monopoly-like setting without having to merge or coordinate operations. Parallel conduct in the broadband industry is not hypothetical. In 2011, Comcast and Time-Warner Cable sold parts of the wireless spectrum they owned in exchange for an agreement that Verizon would stop expanding its fiber optic network. Essentially, Comcast and Time-Warner Cable paid Verizon to stop offering new high-speed broadband service. (As part of the deal, Comcast and Time-Warner Cable also further divided up the United States geographically, foreshadowing the merger between the two companies.)

The 2011 agreement also resulted in Comcast and Verizon's "joint marketing campaign," where they are charging identical prices for Internet, television and phone service. In addition to charging the same price for the same service, Comcast and Verizon also would strongly encourage customers to buy service "bundles," of Internet, cable TV, and phone service. The bundles themselves are a potentially anti-competitive form of product tying. In antitrust law, tying is presumptively illegal when tied with market power.

Parallel conduct is not, by itself, harmful. In fact, companies imitating one another often benefits consumers. Google, for example, which is widely considered one of the most innovative tech companies of the last decade, has largely offered new services which are already offered by other companies, such as search (Yahoo), email (Hotmail), and driving directions (MapQuest).

There are two forms of parallel conduct: parallel pricing and parallel exclusion. With parallel pricing, companies can mimic monopoly behavior by pricing their products at the same level. Parallel exclusion is where companies can enter into similar agreements with suppliers or customers. For both parallel pricing and parallel exclusion, it is much more likely to occur in industries where there are fewer competitors, and where those competitors compete less within geographic markets. The result of parallel conduct is that a market with a small number of competitors, an oligopoly, acts as one firm, which is referred to—perhaps euphemistically—as a perfect monopoly.

Tim Wu and C. Scott Hemphill wrote an article arguing that parallel exclusion provides a better metric for antitrust enforcement than parallel pricing. In competitive markets, with lots of competitors and low profit margins, companies are forced to price their goods and services at the same price. However, in consolidated, noncompetitive markets, companies may also price goods similarly, through an agreement, explicit or implicit, to reduce competition. If companies are pricing similarly, there is no way to know if that is the result of a competitive marketplace or collusion. Punishing companies that are pricing similarly as a result of competition would be counterproductive.

The deal between Comcast, Time-Warner Cable and Verizon is the most pernicious form of parallel conduct: an exclusionary price control agreement between corporate behemoths. Granted, the agreement isn't exactly news. It happened in 2012. But the Comcast-Time Warner Cable merger has changed the competitive landscape in the industry. Absent the agreement between Comcast, Time-Warner Cable and Verizon, the number of truly national high-speed broadband providers would have gone from two to three. Post-merger, it will go from two to one.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Alien Rebel (profile), Aug 14th, 2014 @ 9:48pm

    Short, Sweet

    There's no need for a long explanation on how broadband providers conduct business, since all you really need to know is found in any Edward G. Robinson movie; The boys from Chicago meet with Miami, agree to stop blasting each other to really make some dough. What was that word they used? Syndicate. I think that's it.

     

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  2.  
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    Whatever (profile), Aug 14th, 2014 @ 11:55pm

    Great story

    This is a really great story, one with plenty of detail and a good explanation of the current situation. However, it seems to be lacking in an explanation of how we get out of this apparent dead end.

    For me, the problem is that the current situation is effectively natural. It has been dictated since the very start of the internet age (and even before).

    As soon as we stopped using dial up to connect to the internet, the natural ISPs were the phone and cable companies who had the ability to provide data services over their existing lines. The amount of investment is high, but it is still much lower than it would be for anyone else wanting to wire up and enter the market. Moreover, both the phone and cable companies were already effective monopolies in their areas, and they have moved on to being duopolies when it comes to the internet.

    Technology and de-regulation has allowed for things like VoIP phones, which means that the cable companies have gotten into phones, and IPtv means that phone companies have gotten into delivering cable TV. In all cases, the reality is formed by who already had the wires in the homes. Few if any are lining up to wire up big parts of the US in a speculative nature.

    There should be little surprise that there is no real competition between the parties. The markets themselves are finite, there are only so many customers in the pool, and hugely discounted prices may gain you some market share but may not gain you bottom line profits. After the initial predatory behavior as each has encroached on the other's native services (TV or phone), the real market development comes from getting your existing customers to buy more services from you, thus bundling is a pretty good business option. It gets you more income, and locks you competitor out.

    The companies who are wanting to come in and wire homes are doing it in the worst ways possible. Google is already a monopolistic player who are willing to use their insanely deep pockets to purchase a seat in the monopoly world. Muni broadband tend to be both cherry picking and long term costly, nobody seems to be thinking through the long term implications of the municipality having another service to maintain.

    So the question is: If you want to kill a monopoly, you need a solution: What is the actual proposal to fix it?

     

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  3.  
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    Ninja (profile), Aug 15th, 2014 @ 4:47am

    Re: Great story

    Granted some more remote parts may need incentives to get the infra-structure running but this is bullshit generally speaking. If the pricing of setting up infra-structure was so high I wonder how to explain that 2 new broadband providers are actively installing their own cables/fibers here when there already are 3 other private networks in place and a public one that they are allowed to use for quite moderate fees. Sure if you move to the countryside or the coastline things sometimes get complicated getting down to 2 networks or even just the Govt.

    Google is already a monopolistic player who are willing to use their insanely deep pockets to purchase a seat in the monopoly world.

    Google became a "monopoly" because they offer the best solutions overall. You have plenty of competition though. The fiber thing is the best thing possible, something the competition wouldn't offer before facing Google competition even with fat tax/govt funding.

    Muni broadband tend to be both cherry picking and long term costly, nobody seems to be thinking through the long term implications of the municipality having another service to maintain.

    You are taking this out of your ass again. There are failures yes but there are also plenty of successful examples.

     

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  4.  
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    Anonymous Coward, Aug 15th, 2014 @ 4:54am

    Re: Great story

    You need competition in the market (it seemed to be implied in the article but went whoosh over your head).

    In the UK BT allow other ISPs (i.e. their competitors) to use their infrastructure (ADSL) to provide service to customers.

    It's basically the same to how it was in the dial-up days, ISPs are using BTs infrastructure to supply broadband to the market.

    LLU (local loop unbinding) has had the great effect of lowering prices and providing better service and faster speeds to consumers.

    BT also have another form of competition from Virgin Media (DSL) who have a fairly established cable network which has recently had the effect of speeding up the BT fibre roll out (also with help from the UK tax payer), increasing speeds and lowering prices once again.

    So yes the solution is simple, force the incumbents to compete by taking the bastards to court for their illegal price fixing.

     

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  5.  
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    Vidiot (profile), Aug 15th, 2014 @ 5:00am

    The rules have changed

    While it's true that cable/telco/ISP's are the logical heirs to the telephony monopoly, there's a crucial foundation missing: Old-school copper telcos were correctly termed "common carriers", clearly indicating their role as providers of essential, but content-agnostic, infrastructure.

    If Verizon and Comcast today took that same role, they'd maintain separate content divisions that handed off to, but received no special favors from, their core transport technologies. A similar structure was put in place after Judge Green dissolved the AT&T monopoly... an elaborate arrangement where CLEC's could create their own phone companies, and connect directly to the network itself. (Each one had an actual closet at the local telco exchange where they could house equipment.)

    Sometimes, it's hard to declare unilaterally that free market is best, and any form of regulation is evil...

     

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  6.  
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    Whatever (profile), Aug 15th, 2014 @ 5:07am

    Re: Re: Great story

    I wonder how to explain that 2 new broadband providers are actively installing their own cables/fibers here when there already are 3 other private networks in place

    I have to ask, where is this?

    Google became a "monopoly" because they offer the best solutions overall.

    Google got rich by offering good solutions, and is using that money to try to buy itself monopoly or duopoly positions in broadband and smart phones, to "feed" the search side of things. It's a good marketing move for them, but I cannot say that I like the idea of monopoly Google fiber anymore than I like monopoly comcast or monopoly TW.

    There are failures yes but there are also plenty of successful examples.

    Read carefully. I have seen a couple of successful ones (rural England I think or Wales), but even those end up with a basic problem, which is they are one flavor and one flavor only of internet, and do no encourage competition. Municipal monopolies are potentially short term gain for long term pain, as competition may not want to get involved.

    More importantly, many of the muni fiber deals depend on bond issues. We have yet to see if these things are going to balloon in installation and operating costs to the point that they hurt. It's early days and hard to draw a conclusion. I am very interested to see how it works out.

    For me, muni fiber needs to be a utility point to point that lets the consumer obtain internet service from any number of companies using the same fiber - and TV and phone services as well. The current muni deals seem to be based on obtaining internet service from one provider and making everyone take it, which is just another monopoly play.

     

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  7.  
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    Anonymous Coward, Aug 15th, 2014 @ 5:24am

    Not only is competition completely lacking, but there is obvious collusion, no worry - business as usual - must be a freedom of speech thing.

     

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  8.  
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    Ninja (profile), Aug 15th, 2014 @ 6:42am

    Re: Re: Re: Great story

    I have to ask, where is this?

    Of all goddamn places we are talking about Brazil, a place that suffered with high prices and slow/bad connections not long ago (the speeds greatly improved in the last 3-5 years). Granted it is a metropolitan area but I highlighted this issue as well. The Govt is trying to tackle it using a Federal network that covers most of the country by letting any private entity pay to use such network. So far it has worked sparking some competition where there was none and the pricing for the low end of the speeds (seems to be sitting at 10mbit now) has greatly declined in general.

    t's a good marketing move for them, but I cannot say that I like the idea of monopoly Google fiber anymore than I like monopoly comcast or monopoly TW.

    Excuse me but they are competing in the places where Google Fiber is available. People can still choose not to go with Google. I highly doubt they'd price anything below what's profitable. If you are referring to the free option where your connection is paid by using Google products and being exposed to their ads that's perfectly fine and bundling products together is a very common (if obnoxious) practice in the industry. Except that this is not mandatory at all and by actually paying for any tier you get much faster speeds and you aren't tied to using Google online services. Your fear of Google would be reasonable if the company was acting like Comcast. It isn't. You should be displaying the same skepticism against the usual carriers.

    I am very interested to see how it works out.

    And yet you keep demonizing them. There are successful examples inside the US and we discussed it in the last article this subject came up.

    The current muni deals seem to be based on obtaining internet service from one provider and making everyone take it, which is just another monopoly play.

    You are misunderstanding it. You can still get internet from wherever you want. Period. Nobody is blocking another ISP from installing a cable to your home and providing you the service (the cases where this isn't true are obviously totally wrong). It's just that there usually isn't any other alternative. Some municipalities go for this municipal solution just because the only isp in the city is a stinking pile of shit. Granted it doesn't always solve the problem but it's barely a monopoly if you have other options. If there's no other option then it's another problem that has other solutions (such as Brazil that is using a Govt owned network to provide services to "less attractive" places).

     

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  9.  
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    Whatever (profile), Aug 15th, 2014 @ 7:38am

    Re: Re: Re: Re: Great story

    Nobody is blocking another ISP from installing a cable to your home and providing you the service

    Yes, but since your tax dollars (current and future) paid for the muni fiber, the competition is essentially self defeating. Moreover, the point of putting a nice fat (skinny) fiber into someone's house is so that you don't have to keep re-doing it over and over again.

    The muni systems I have seen reported in the US and in England have no provision for alternate providers, nor do they have any provision for multiple providers (tv, phone, internet) on the same client. It's a single high speed internet connection to the one company their have chosen to use, period. Since they financed it on the public dime, they can offer it and run it for less. The chance of competition surviving through this is effectively zero.

    Google is the same issue - they are giving away 5 meg service for the cost of one time installation, and the higher speeds are significantly cheaper to the point of potentially being below market cost. They don't care, it's not about making money as an ISP, it's about making money as a search engine / ad sales mega-machine. Everything else is measured on how it feeds the monster's maw.

    The Google Kansas experiment will be telling. The only thing keeping the incumbent players in the game is that Google cherry picked neighborhoods, so some areas don't have their service.

     

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  10.  
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    John Fenderson (profile), Aug 15th, 2014 @ 8:38am

    Re: Great story

    "What is the actual proposal to fix it?"

    The fix is actually very easy: common carrier status for the delivery infrastructure (the cable, for example). That would allow actual competition in the ISP business.

     

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  11.  
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    John Fenderson (profile), Aug 15th, 2014 @ 8:46am

    Re: Re: Re: Re: Re: Great story

    "It's a single high speed internet connection to the one company their have chosen to use, period."

    Which is an indictment of the specific muni plan, not the idea of municipal internet. I'm actually surprised that, after being burned by giving monopolies to cable companies, municipalities still lean toward doing the same brain-dead thing again.

     

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  12.  
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    Name, Aug 15th, 2014 @ 5:09pm

    "What is the actual proposal to fix it?"

    I had Cox "Communications" cable and internet bundle. Everytime I called about a problem they always asked what phone service I had, trying to push me into all three. Then one day I was disconnected. I picked up the phone and called to see what was going on. They said they sent an e-mail telling me I went over my internet cap. They asked me what I was downloading to go over the cap and I replied that it was none of their business. I asked if it would impact my cable connection or if I would be throttled on the internet from this point on. They told me no, it was a first time offense. I blew it off until I got a second notice telling me I was over my cap about three months later.

    That's when I called to cancel my cable. And when they asked why I was cancelling I informed them I was helping them with their bandwith.

    In my opinion the FCC should regulate these companies. If you provide a cable service and an internet connect which throttles Hulu or Netflix which are in competion with them, then do one or the other. Not both. And I have no idea how much all of the VOIP programs use (Teamspeak Magicjack, etc...), but when you throw those into the mix competing with Cox's phone services, you have another conflict of interest.

    We need to segregate the different services and maybe it would lead to more competition.

     

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