Monday, June 27, 2005

Monopoly Money

     Some businesses take more money and have to overcome more barriers to entry to start than others. For example, if you wanted to build cat condos for a living, you could put a $35 ad in the local paper and wait for an order before building one. Eventually, with good word of mouth, you might hire some help, rent out manufacturing space, and produce a catalog. However, say you wanted to build a computer operating system for a living. Not only would you have to build a top-notch system on your first try, you would have to try to convince computer manufacturers to use your system instead of Windows, even though 97% of PCs use Windows and most of those users have no desire to learn something new. If you really wanted to break into the mainstream market, you would probably have to buy or buy off most of the major computer manufacturers. That would cost a lot of cash, especially considering that Microsoft could probably outspend you no matter who you are.
     That's the power of monopoly. Brief economics refresher: There are two types of monopolies. There are legal monopolies and De facto monopolies. Microsoft Windows is a De facto monopoly. Even though anyone is free to compete, the hurdles they have to face are virtually insurmountable, at least until there is a major technological shakeup in the industry. De facto monopolies are legal, contrary to popular opinion. They cannot, however, abuse their position. They cannot, for example, threaten to deny Windows from one manufacturer unless they promise not to install Netscape, a product that competes with another Microsoft product, Internet Explorer. Because the two products are distinct, Microsoft can't abuse their Windows position to punish IE's competitors.
     The other type of monopoly is a De Jure monopoly, or one specified by law. AT&T used to be a De Jure monopoly. In most places, cable television still is. In my neighborhood, we can't choose which cable company to use. It's Comcast or nothing. Rates are way too high, but they're being held down because they're facing competition from the satellite providers. They did, however, find another way to abuse their monopoly status. There are 3 basic ways for the average consumer to get internet service: Dial-up, DSL, or Cable. (There are other ways, but they are extraordinarily expensive, and thus are usually reserved for large apartment buildings, schools, or businesses) DSL, which runs through your phone line, and Cable are the only two ways to get high-speed internet. The FCC ruled that even though the cable companies and phone comanies had a monopoly on TV and telephone service, they could not use it to unfairly compete against internet providers. That is, anyone trynig to provide high-speed internet would have to install their own wires, while Comcast could piggyback on the cable wires that were paid for by their TV monopoly. Therefore, the cable companies and the telephone companies were forced to rent out their lines at market price to any internet provider, including their own. (Comcast cable would have to pay Comcast TV rent, just like AOL or Mindspring would) That would level the playing field.
     To make a short story long, in another in what is sure to be a long string of poor decisions, the Supreme Court ruled today that cable internet was an "information service", not a "telecommunications service" and that therefore they could not be regulated by the FCC. That means they don't have to rent out their lines. Now, I'm not a Supreme Court justice. I'm not even a lawyer. But I'm reasonable sure that internet is a lot closer to being telecommunications than information. Given that the whole point of the internet is to communicate, and that internet service has information flowing both ways, and that my telephone service, Vonage, is carried over the internet, I'm pretty sure I'm right. According to the article, telephone companies are now looking to get reclassified so that they are not subject to FCC regulation either. In all honesty, that's fair. Why should the telephone companies have an unfair advantage to the cable companies?
     But then again, why should Comcast have an unfair advantage against Earthlink? Business is about risk. Products are priced with risk taken as a factor. If you're selling milk, your prices will have a little extra added in to compensate for the risk of not selling it fast enough before it spoils. If you're buying bonds, you get a better rate of return for the ones given by shakier companies to compensate for the risk of default. When Comcast and BellSouth can have internet service with 0 risk, how can anyone compete? Comcast did not invest in cable lines because they hoped it would payoff someday when internet took off. They invested in the lines with the guarantee from the government that they would make a profit from telephone service.
     So what's next? Will Comcast tell me I can't use Vonage through their service? Will they force me to use their VOIP service? Will they raise their prices to the point where I have to choose between internet and a car payment? So far, I have to admit, they've been very good to me. But that was when they faced competition. Will they be so quick to help me on their 800 line when they know I can't jump to a competitor? (Because I have VOIP, I can't use DSL) Read the Supreme Court decision for yourself. It's interesting to see who dissented. Scalia wrote the main dissent. Thomas wrote the opinion of the court. Scalia's dissent was actually very interesting to read and full of sarcasm and disbelief in how his peers ruled on this case. It's a strange day when I agree with Scalia.


Amber said...

...97% of PCs use Windows

I would be interested to know how, exactly, they got those numbers. I think they're wrong.

Scott said...

They're from a "global Web site analysis". does web page statistics. So Mac and Linux would be underrepresented if they're used to surf the web less often than Wintel machines. Linu users are skeptical, but this study only looks at where Linux developers came from - it doesn't look at how many are going the other way, back towards Windows.

Master of None said...

I live in the Atlanta area, and I recently switched from DSL to Comcast, only to find Comcast's customer service horrible. But what can I do? Those are the only two options, and I can't live without it.

BTW, I stumbled on your site today, and realized that I used to work with your wife at her previous employer.

Mike said...

I haven't read the decision and only know a little bit about this case. But it seems to me, if Comcast put up the capital to run cable lines all over the country, they should have the power to say who has access to use those lines. They have every right to protect their investment. If that right were denied, what incentive would anyone have to invest in infrastructure like that? Should they put up millions only to have the government say "Ok, now you have to let XYZ Internet company have access to your lines and undercut your prices." That's not fair.

Scott said...

Yes, that would be true. But the point is, because the cable company had a legal monopoly status when the lines were put up, they were paid for through government guarantees. Put it this way. Say you decided to save money to buy a bicycle by selling girl scout cookies in your neighborhood. That's hard work! I mean, everyone likes thin mints, but there are 20 other girl scouts living nearby. You'd better bust your hump to sell those things. After all that hard work, you earn the money and buy the bike. Hell if anyone's going to take that away from you!
Now try a different scenario - you've decided to sell girl scout cookies to buy a bicycle. The Girl Scouts tell you - we're going to make sure you're the only person selling girl scout cookies in your city. In fact, we might even harrass any stores that sell any cookies at all. People still want their thin mints. How fast do you think you can buy that bike? Who do you really owe the bike to? Your hard work or the Girl Scouts that gave you the territory with guaranteed no competition and a guaranteed profit?
The cable companies and the pone companies are crying that they invested so much money and hard work into their networks, when the reality is that it was easy to do so since we guaranteed it for them. You see how Bellsouth advertises now? You think the phone company had to advertise to get customers 20 years ago when it was the only game in town? Customers went beggin to the phone company, which charged an arm and a leg for service. Long distance rates aren't $0.03/min to New Delhi now because of technological improvements. They're low because there's competition. And they're still making money! When LD rates to other countries were $1.5/min, imagine what kind of markup they were charging us to pay for these network lines. But we didn't have a choice!
But - even so - nobody ever suggested taking the lines away from the companies. Just that they rent them out at a fair price. Just that they keep their line ownership separate from their phone service business.

Ben said...

I agree with Mike, except I wonder how much civic help that Comcast may have had setting up their cable infrastructure. If it was all on their own dollar to set up this gigantic cable network, then they should have complete control. If, however, it was subsidized or assisted by various governmental entities, then no, they should not have exclusive use of the cable network.

Personally I'm more incensed about the Grokster decision, which says that software creators are liable for an illegal use their product is put to. Bittorrent, for instance, is a P2P program that is used to transfer files of any sort over the internet, usually at blazing speeds. Companies now use it to distribute software updates, but pirates also use it to trade copies of games, movies, TV shows, stc., and now the company that made bittorrent is liable for all that piracy. That's going to kill a lot of innovation. The worst part is that it can easily be stretched to say that Microsoft is liable because people are using Windows aps to copy copyrighted content. Just about any company that makes ANY software could concievable run afoul of this.

Mike said...

I see where you're coming from with the Grokster case, Ben. I'm not sure how I feel about it. We need to have some sort of way to protect against copyright infringement, but we shouldn't hamper the free exchange of information. I think the decision just said companies like Bittorent couldn't "encourage" exchanging music files. So as long as they aren't advertising "Come to our site and download free music" I think they will be ok. You can't punish them if their product is not used for its intended use.

Ben said...

My interpretation was that Grokster must find ways to block any sort of illegal behavior you can use their software for, and if they don't block it, then they are liable for it. Since there are millions of ways to use Windows for illegal purposes, if this new legal interpretation is extended to Microsoft, as it should be in all fairness, they will have to rewrite the entire system. Since it's ridiculous to expect Microsoft to rewrite windows for this crap, it won't happen, and this particular case will go in the dust-bin of history.

Eventually media companies will realize that they either have to adapt or die, just like companies in other sectors. I'm tired of watching the government legislate the media's revenue streams.

Mike said...

Again, I'm reminded of the Southpark episode where Britney Spears had to get the smaller private jet because people downloaded her music and she couldn't afford the bigger one she wanted. And Lars from Metalica could only get the 10 person jacuuzi instead of the 20 person hottub. It's hard to have sympathy for millionaires crying because they aren't billionaires. But they do have a right to protect their work from copyright infringement. I just hope they can find a way to do it without destroying the internet. But maybe that's their plan. Maybe they blame the internet for their poor box office sales. Maybe they think if they take away the entertainment value in the internet people will turn to Hollywood again.

Ben said...

A sci-fi author named Corey Doctorow, who also writes for, decided to experiment. He puts all his novels online for free, and even has a creative commons license on it so people can use his work for any purpose they want, so long as they aren't making money off it. The result? Lots of downloads of his books, and TONS more sales. This wouldn't work for every creative work, but it certainly shows that if the various movie and music companies were willing to adapt instead of legislating their revenue stream, they might be able to make a ton of money without suing their potential customers.