Cable Companies Love to Compete, Right?

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Although Comcast's announcement that it is preparing to launch a Netflix competitor may be a step forward for online video competition, it also highlights the dirty little secret about cable companies – they do everything they can to avoid competing with one another.

A number of years ago, the nation's largest cable companies essentially carved up the country into non-overlapping territories. At the time, there was at least a semi-plausible economic argument in support of this. Cable is something of a natural monopoly, and once your competitor has run wire in a certain territory it is rarely economically rational to try and build a second network to compete. (This is a complex issue subject to many caveats but, in general, it shows why “facilities-based” competition is so hard to achieve.)

However, now that we live in a time where video can be delivered over the internet to everyone, that territorial division makes less and less sense. After all, Comcast may not be interested in running wires into Time Warner's territory, but there are plenty of Time Warner customers who might be interested in buying internet-delivered video service from Comcast. Cable companies have rights to distribute huge numbers of videos and TV shows. The fact that none of them have even attempted to bundle those movies and shows into an online service and tried to poach “rival” cable company customers is somewhat suspect.

While it may be true today that many of those rights are contractually tied to the cable company's territorial footprint, those contracts are not engraved in stone, never to be renegotiated. There is no reason to let past business models shape future development long after the underlying logic has exited the scene. Another example of this is the fact that network television is distributed by way of a series of regional subcontractors – affiliates – long after the technical limitations that originally forced the creation of that model were overcome. The legacy of that model is a series of blackouts when cable operators fight with the only station allowed to distribute a network in a given area.

TV Everywhere, the cable industry's attempt to avoid true reform and competition in the form of AllVid, also avoids direct competition. If you are a Time Warner customer you can get online access to videos with your Time Warner subscription, but you cannot call up Comcast and ask them to make you an offer on the same bundle.

This brings us to back Comcast's announcement today. It is great that Comcast is giving customers another way to access video (although it will be interesting to see if this video counts against its 250 GB/month data cap  the way competitor Netflix does). However, it is strange that Comcast is only making it available to people within its existing footprint. Millions of people live in Comcast's territory, but millions more live beyond it. If Comcast is going to bother rolling out this service, there does not seem to be a good reason to limit potential customers.

Of course, there is a bad reason to limit potential customers. Despite strong entrants like Netflix and Amazon, and more traditional competitors like FiOS and satellite, cable providers remain remarkably dominant within their own service areas. The only other entrants that could really compete would be other cable companies. Up until now, the economics of network congestion has largely avoided that. However, it is looking increasingly like cable companies are all trying to avoid being the one that fires the first shot and spoils it for the rest of them.

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