January 2008

Companies, People, Ideas
The People Vs. Comcast
Evan Hessel and Dorothy Pomerantz 01.28.08, 12:00 AM ET

Brian Roberts excels at turning power over his customers into profits for his shareholders. Now that power is slipping from his grasp.

When Ralph Roberts ran his first cable television system, in tiny Tupelo, Miss., he became something of a local hero. In 1963 the birth of HBO was still a decade off, but for Tupelites, frustrated by having over-the-air episodes of the The Jack Benny Program and Gunsmoke ruined by static, Roberts’ service was a godsend. Would-be subscribers chased his installers’ trucks down the street, begging for the chance to pay $5 a month for a clear, reliable picture.

Forty-five years later Brian Roberts has replaced his father at the helm of Comcast, and resentment has replaced gratitude in their customers’ hearts.

The younger Roberts tightly restricts what his subscribers can and cannot do. Like other cable chiefs, Roberts insists his customers buy TV channels in bulk, not individually. He led a behind-the-scenes battle to prevent cable subscribers from getting their hands on souped-up set-top boxes designed by other companies. And Comcast recently began interfering with customers’ use of Internet peer-to-peer programs.

In each case regulators, competitors and customers screamed in protest. Federal Communications Commission Chairman Kevin Martin has tried to force Comcast to offer viewers more flexibility in choosing which channels they buy. The head of the Consumer Electronics Association likens Roberts’ behavior to Henry viii’s. One 75-year-old customer grew so livid that she walked into a Comcast office and started smashing computers with a hammer.

And yet all that fury has changed nothing. Comcast made $1.7 billion on $23 billion in revenue during the first nine months of 2007, up 14% and 28%. The business of getting video to American homes remains a cozy oligopoly, with power firmly in the hands of the network owners. Consumers choose among nearly identical plans from one cable outfit, two satellite systems and, in a few markets, the phone company.

But rebellion is afoot. With stunning speed, the Internet is emerging as an alternative for the mass distribution of television and movies. The Net promises to upend the cable industry, stripping power from Roberts and handing it to his customers.

Huge companies–Level 3, Walt Disney, VeriSign–have started “content delivery networks” dedicated to one thing: delivering smooth and reliable digital video over the Net. In the past year this unfettered competition has slashed the cost of delivering an hourlong TV episode by half, to roughly 15 cents. Established bit-delivery companies such as Akamai and LimeLight could soon cut prices to keep pace.

All four broadcast networks now stream most of their shows free online. Many cable channels have followed suit. A few viewers, such as Nashville resident Christy Nicholson, have responded by canceling their Comcast television service. Nicholson now uses iTunes and Hulu, the online venture from NBC and Fox, to watch Monkand 30 Rock. “I’m not willing to pay what Comcast charges to get the channels I would want,” says Nicholson, a 27-year-old online retail entrepreneur.

Of course, Nicholson and people like her still have to purchase their high-speed Internet connections, often from the cable company. But this shift from selling programming to selling mere transmission cannot be good for the cable industry. The more cable looks like a utility the closer it gets to price wars or, worse, price regulation by the government.

Roberts declines to be interviewed, but he has been upbeat about the future of cable. Asked about Internet video at an investor conference in May, he responded with breezy optimism: “It is not even on the radar of possibility–at this time.”

Brian Roberts was born to Ralph and Suzanne Roberts in 1959. Looking to provide a better life for his young family, Ralph got out of the belt business and into the nascent cable business. The elder Roberts bought up dozens of small cable systems and hired his son out of college in 1981.

The younger Roberts first distinguished himself in 1995 when his industry appointed the then 35-year-old to preside over its main lobbying group. Roberts persuaded Congress to deregulate cable prices, setting the stage for a decade of wild growth and making the young executive a hero to his compatriots.

But in exchange for price deregulation, Congress demanded that cable companies let customers buy set-top boxes from any electronics outfit. Cable operators had always blocked other companies’ equipment from connecting to their networks. Cable guys make good money renting set-tops and like to control the onscreen program guides.

Somehow that demand never turned to much action on the cable industry’s part. Roberts resorted to 11 years of foot-dragging. He and his lobbyists repeatedly assured the FCC they supported greater consumer choice in set-tops while simultaneously citing a series of technical reasons for keeping cable networks closed. “It is the longest example of an industry trying to diddle the government in history. It was unconscionable,” says Gary Shapiro, head of the Consumer Electronics Association. 

Roberts was equally successful in opposing regulatory efforts to force cable companies to sell channels à la carte. Last year FCC Chairman Martin made unbundled cable service one of his chief goals. Roberts refused to budge, arguing that the traditional system of selling channels in tiers has provided diverse programming for consumers and saves them money. Martin’s efforts to goad Congress into action are stalled.

Now Roberts faces the biggest threat to Comcast’s power yet. New technology is already beginning to do what competitors and regulators never could: weaken Roberts’ ability to control how his customers watch TV. 

So far the number of cable cord cutters is too small to measure. Still, Web viewing is clearly catching on, thanks to increasing picture quality and faster downloads. In a recent Nielsen survey 39% of 18- to 34-year-olds reported they watched at least one full episode online in the past three months. Web TV makes canceling pricey cable service ever more appealing. A Comcast customer paying $100 per month for Internet and digital television service could save $60 per month by tossing the latter. She would, however, miss most of the shows on Comcast’s basic cable tier, on channels like the Food Network and Oxygen that don’t regularly stream their shows online.

But these days consumer-shackling communications networks can be busted open overnight. In November mighty Google announced plans for an “open” cell phone with software controlled by users. Within a month the big cellular network operators accustomed to restricting what users could do with their phones meekly agreed to void their old restrictions.

Now Google, Apple or another Silicon Valley insurgent could do the same thing in television, building a box that can grab video from both cable and the Web. Google won’t comment on its plans, but it recently hired a veteran set-top box software designer.

Under P2P Fire, Comcast Builds Legal, Technological Defenses