Monopoly power tightens grip on US economy

This week, Charter Communications announced plans to buy Time Warner Cable as well as the much smaller Bright House Networks. These actions illustrate the increasingly sclerotic condition of the American economy.

Instead of enjoying the benefits of competition, America suffers from ever more concentrated ownership of vital, privately owned infrastructure. This deal, if approved by regulators, would make this problem even worse.

In 1980 we had 37 large railroads; we now have seven. Rules that once limited broadcast chains to a handful of stations now allow massive concentration of ownership with a predictable narrowing of perspectives. At the same time the Federal Energy Regulatory Commission turns a blind eye to records in its own files showing egregious price gouging by monopoly oil and gas pipelines.

There is nothing business owners hate more than competition because profits are harder to earn and margins are thinner. But competition is essential to well-functioning markets. As Adam Smith’s “The Wealth of Nations” taught us 239 years ago, “the freer and more general the competition” the greater the public benefits, while “to widen the market and to narrow the competition, is always the interest of the dealers.”

Less competition means higher prices and vastly greater wealth for those who can exert oligopoly or monopoly control over an industry. These companies then use their enhanced economic power to lobby and donate their way to government rules that ease their already modest tax burdens, drive down wages and further reduce consumer rights.

If the Federal Communications Commission lets the cable deal go through, then Charter will control almost 30 percent of broadband Internet service.  The company would enjoy the benefits of operating as a monopoly or part of a duopoly, free to charge much higher prices than a competitive market would allow.

For Charter shareholders this is a great deal. It is especially good for John Malone, the controlling shareholder whose wealth has allowed him to become the largest private landowner in the United States.

Malone, who ranks 56th on the Forbes 400 list of richest Americans, is a remarkable wealth builder. But his brilliant insights and unparalleled boldness as a telecommunications entrepreneur alone did not make him rich. Juicing his profits were government policies that tilted the economic rules in favor of his monopolies and against consumers.

Many of the largest fortunes in America derive from government rules creating and sustaining monopolies. And when perpetual rights are conveyed to private interests those fortunes are passed down to younger family members who owe their wealth to inheritance, not hard work or merit.

Consider the value of the perpetual rights of way for oil and natural gas pipelines. Five of the first 100 people on the latest Forbes 400 list are pipeline billionaires. Four are inheritors, three of whom play no role in the business except collecting dividends, while one has a board position to watch over the family fortune. 

One pipeline entrepreneur, Richard Kinder, owes much of his $12 billion fortune to government rules. One rule his company lobbied for required customers to pay his pipelines, in addition to monopoly profits, an extra 54 – 75 percent to cover corporate income taxes even though his pipelines were exempt. (Kinder Morgan changed its structure last year so it will no longer get to pocket the income taxes collected from customers. However, the company said it does not expect to owe any income taxes for about a decade. Should it owe taxes in the future, it could switch back to the old arrangement.)

While Charter would control almost 30 percent of broadband Internet service in the country, only half of the 48 million homes and businesses its wires pass are customers.

This low penetration rate is not surprising, given the prices Charter charges. Charter’s presentation for shareholders reveals it average customer pays $125 each month for services customers in countries with smarter infrastructure policies, like France, Japan and South Korea can purchase for about half as much.

Charter, which shed more than $8 billion of debt in bankruptcy proceedings six years ago, is now considered a well-managed company, so it is likely to improve the abysmal service that many Time Warner Cable customers complain about. Malone pays his executives and managers well and in return demands top performance, including minimizing customer complaints.

But improved customer service is not the core problem. America is far behind the rest of the world in the speed, price and geographic reach of its Internet. That is surprising given that America invented the Internet, which grew from a taxpayer-funded project to help scientists doing military research transfer files to each another.

Monopolies are generally bad: They charge high prices, avoid investments in quality improvements and run roughshod over customers. Worse are unregulated monopolies, which abound now that government neglects its duty to act as a proxy for the competitive market by overseeing their prices and operations. But even worse than this are monopolies that control such an important infrastructure as cyberspace.

We need to bring an end to Internet monopolies. One way to do it is by new rules that promote robust competition. I doubt that will work because Internet access is a commodity business. A Charter byte is the same as a Comcast, Bright House, Time Warner or any other byte.

What we should debate, rather, is whether a service model would better serve America. A service model is based not on maximizing profit, but maximizing the speed, quality and reliability of service. You can see the service model at work through municipal broadband in cities such as Lafayette, Louisiana, Chattanooga, Tennessee, and Glasgow, Kentucky. They charge less and offer faster broadband than customers can get in cities with monopoly or duopoly for-profit Internet service providers.

We should debate the proposed Charter deal to further concentrate ownership of access to the Internet not in terms of its shareholders or even the status quo, but in terms of how can Americans achieve the kind of low-cost, high-speed Internet that people take for granted from Seoul, South Korea, to Riga, Latvia.