Comcast uses monopoly muscle to claw back profits from cord cutters

by Steve Blum • , , , ,

Odd. He always seems to win.

Comcast’s operating profit drops by $5.50 every time a customer cancels bundled television service and goes with Internet service alone. That’s according to a story by Daniel Frankel in Fierce Wireless about some back of the envelope modelling done by Wall Street analyst Craig Moffett. His conclusion is that bundling prevents cord cutting, and I think he’s right. But another way of looking at it is that Comcast – and its mega-cable brethren – are using their monopoly control of high speed Internet service to extract significant rents – profits beyond what a competitive market would allow – from consumers.

Moffett estimates that when a customer stops buying video, Comcast loses $38 in operating profit, but immediately gets back $25 of that by raising the price of standalone Internet service and scores another $7.50 when about half of those customers upgrade to a higher speed tier, so they can still watch TV over the top.

Cable operators can price their service that way because they are typically the only source for high speed Internet service available to the average consumer. The California Public Utilities Commission’s investigation into the competitiveness – or rather, lack thereof – of the market for broadband service showed that at least half the homes in California do not have a choice between two or more wireline broadband providers offering the federal high speed minimum of 25 Mbps down and 3 Mbps up, and perhaps fewer than 30% do. In large part, that’s why the CPUC declared the consumer broadband market in California to be “highly concentrated”, which is term of art that translates to monopoly or near monopoly control.

It gets even worse as you move up the speed tiers towards 100 Mbps. AT&T and Frontier’s DSL services don’t go that high, and the only competition comes from the rare cable overbuilder or is found in the few communities where Verizon installed fiber to the home systems (which are now owned by Frontier).

It’s classic case of a monopolist separating out customers based on their willingness to pay for a product and, then raising its price to the maximum they’ll pay in each of those segments.