Residents in greater Philadelphia overpaid Comcast more than $875 million dollars, thanks to the cable company’s alleged anti-competitive practice of building regional cable clusters that scare would-be competitors away.

Those are the primary allegations in a 2003 class action case brought against the country’s largest cable operator — a lawsuit Comcast has appealed, so far unsuccessfully.  A three-judge panel of the 3rd Circuit on Tuesday delivered the latest blow to the cable company, denying Comcast’s efforts to get the case thrown out.

At issue is the cable industry’s practice of acquiring and trading cable systems with each another to create regional “clusters,” — large geographic areas all served by the same cable provider — and what that practice does to cable pricing.  All the rage in the late 1990s and early 2000s, cable clustering largely put an end to multiple cable systems serving individual cities.  In the 1980s and 90s, it was not uncommon to find up to four different cable systems serving different sections of a community.  Philadelphia was no different, served by more than a half-dozen cable operators in the greater metropolitan region and surrounding counties.

In the late 1990s, the Court noted Comcast launched a major shopping spree to consolidate the entire area around one cable provider: Comcast.  The lawsuit claims subscribers have paid the price ever since.

Comcast’s Cable Swaps and Acquisitions

• April 1998: Comcast acquires 27,000 Marcus Cable customers in Harrington, Delaware, which is part of the Philadelphia Designated Market Area (DMA);
• June 1999: Comcast acquires 79,000 Greater Philadelphia Cablevision customers in the city of Philadelphia;
• January 2000: Comcast acquires 1.1 million Lenfest Communications customers in Berks, Bucks, Chester, Delaware, and Montgomery counties in Pennsylvania, and New Castle County in Delaware;
• January 2000: Comcast acquires 212,000 Garden State Cablevision customers in Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, and Salem counties in New Jersey, which is part of the Philadelphia DMA;
• December 2000: Comcast acquires 770,000 AT&T Cable customers in Eastern Pennsylvania (Berks and Bucks counties) and New Jersey, in return for trading 700,000 Comcast customers in Chicago with AT&T (Comcast would later win them back by acquiring AT&T Cable itself);
• January 2001: Comcast acquires 464,000 subscribers in Philadelphia and nearby communities in New Jersey in a subscriber trade with Adelphia Communications Corp., wherein Comcast obtained cable systems and approximately 464,000 subscribers located primarily in the Philadelphia area and adjacent New Jersey areas.  In return, Comcast turns over its subscribers in Palm Beach, Florida and Los Angeles, California to Adelphia.
• April 2001: Comcast wins another 595,000 subscribers in the region in a trade with AT&T Cable;
• August 2006: Adelphia implodes and cable companies including Time Warner Cable and Comcast pick over what’s left.  Comcast manages to pick up another 41,000 former Adelphia customers that were originally headed to Time Warner in yet another subscriber swap;
• August 2007: Comcast acquires Patriot Media and its 81,000 New Jersey customers located within the Philadelphia DMA.

When the acquisitions and transfers were complete, Comcast managed to build a major empire in southeastern Pennsylvania.  In 1998, the company had just a 23.9 percent market share in the Philadelphia DMA.  Comcast managed to control 77.8 percent of the market by 2002.  Despite competition from satellite television and one struggling cable competitor — RCN, Comcast still controlled nearly 70 percent of the market as late as 2007.

Who Pays for the Shopping Spree?  Comcast Customers, Say Plaintiffs

Six Comcast customers upset with the relentless rate increases that came with Comcast’s acquisitions joined forces and filed suit against Comcast in 2003.  The plaintiffs charged Comcast with anti-competitive business practices and violations of the Sherman Act for building a monopoly presence in the market that also helped keep competitors at bay.

One plaintiff’s expert was able to calculate what he called “a conservative estimate” of how much Comcast has effectively overcharged customers in Philadelphia by preventing effective competition: $875,576,662.

That figure was hotly disputed in Comcast’s court appeal, but last Tuesday the Court rejected Comcast’s arguments.  In fact, the Court found merit in the formula used to arrive at the amount of overcharging Comcast has allegedly engaged in — in Philadelphia alone.  Comcast’s argument that customers enjoy lower pricing through promotions and other special pricing arrangements fell apart when the Court learned at least 80 percent of Comcast subscribers pay regular “list prices” for service, and the expert who created the ‘wallet damage‘ formula had taken that special pricing into account.

The plaintiffs suggest that had Comcast not engaged in system clustering, one or more of the area’s cable systems might have decided to compete against the other cable systems.  In that scenario, customers might have been able to choose from Comcast, Lenfest Communications, Marcus Cable, and/or Patriot Cable for cable service, resulting in increased price competition.  While there have been instances of traditional cable operators overbuilding into each other’s territories, those instances have been rare — a point Comcast made in an effort to have the case tossed out.  Comcast’s case is that the majority of Americans are served by a single cable provider, but that’s not a problem because the industry faces increasing competition from satellite TV providers and, as of late, large phone companies.

But the Court found the reason for this lack of competition could be, as plaintiffs argue, the successful outcome of the alleged anti-competitive, cable system-clustering strategy.

As an example, a railway monopoly from 100 years ago could claim it isn’t economical for more than one railroad to serve a particular community, but that isn’t a problem because other forms of transportation exist to move goods and people.  That argument would be based on a market reality created by the railway industry, which routinely bought out the competition through withering price wars, cross-subsidized by higher prices in other monopoly markets. The end effect was a shrinking number of competitive markets, increasing profits (and prices), and a strong deterrent for would-be competitors to enter the business.

A similar case has been brought by the plaintiffs struggling with high cable bills.  In their eyes, cable customers paid for the Monopoly game board on which cable properties were traded or sold.  When the shopping spree was complete, higher rates were the result, indefinitely.

The Case of RCN — Programming Denied

Most traditional cable companies do not compete in areas already served by another cable company.  It’s a tradition some liken to a cartel, where companies carve up territories and enjoy the market benefits afforded by a lack of competition.  But this model is also considered standard operating procedure by Wall Street and other private investors, who fear all-0ut price wars cutting revenues and destroying value and profits.  But there are some companies whose entire mission is to challenge this economic model: the cable overbuilders.  The business plan of the cable overbuilder is to challenge the status quo and deliver service where cable TV already exists and do so profitably.

One such overbuilder is RCN Corporation, which delivers competitive cable service in Boston, Washington, D.C., New York City, Chicago, and parts of the Lehigh Valley.  RCN began operations in 1996 in Boston, just before the cable industry’s quest for clusters went into hyper-drive.  Their plans to compete have been challenged by the ever-increasing concentration in the cable-TV marketplace ever since, and the company has had a particularly tough time attracting subscribers in the Philadelphia area.  Much of RCN’s service area these days is limited to multi-dwelling units like high-rise condos and apartments, where wiring costs are lower.

One of the most effective ways to keep customers from switching to a competitor is to develop or maintain exclusive programming rights.  If a Comcast customer discovered his favorite sporting events could only be seen with a Comcast subscription, that could be a deal-breaker for signing up with RCN.  Before the 1992 Cable Act, the cable industry which owned and controlled a number of popular cable networks refused to sell those channels to would-be competitors (or charged unreasonable prices for access).

When this lawsuit was filed in 2003, RCN found itself locked out of Comcast’s SportsNet, just one of several regional sports networks that cable operators withheld from satellite and cable competitors.  That’s because the 1992 Cable Act included a loophole: it applied only to networks distributed on satellite.  Several regional sports channels were not on satellite, so they could, and were, legally withheld from competitors like RCN.  That loophole was finally closed by the FCC last summer.  But for more than a decade, RCN had to convince sports fans to sign up for a competing service that didn’t have one of the most popular sports channels on the lineup.

Satellite competitors DirecTV and DISH Network were in the same boat, and the legal case recognizes the impact: satellite TV competition in Philadelphia has a below-average percentage of the market, when compared to other cities.

Plaintiffs argued RCN never had fair access to programming, leaving them to compete with one hand tied behind their back.  Even worse, they allege Comcast compelled local contractors into non-compete contracts agreeing not to work for any Comcast competitor, and signing customers up to unusually long contract terms with hefty cancellation penalties in RCN service areas.

All of these accusations were deemed credible by the Court, much to the objection of Comcast, which argued RCN was in serious financial distress and would never be a strongly viable competitor in Philadelphia.  Last week’s Court decision found that ironic, accepting that RCN’s present condition could be, as plaintiffs allege, the result of the anti-competitive, unfair business practices Comcast is charged with.

The evidence on the record “demonstrates that Comcast’s alleged clustering conduct indeed could have reduced competition, raised barriers to market entry [by other competitors] … and resulted in higher cable prices to all of its subscribers in the Philadelphia Designated Market Area,” the court ruled.

Comcast: A Competitive Marketplace Begins And Ends Only at Home

One of the most-disputed elements in the case is determining how much, if any, damage was done to consumers in the greater Philadelphia area.  Much of the plaintiffs’ case rests on pricing anomalies found in the Philadelphia region, where customers are alleged to be paying significantly higher prices for cable service and not enjoying a significant amount of competition.  To build that case, lawyers measured cable rates and available competitors in the various counties in and around the city of Philadelphia.

This is also critical for determining the size of the “class” in the class action lawsuit.  The larger the class, the greater risk of significant damages if the court rules against the cable company (or if the case reaches a settlement.)  Plaintiffs claim their case should include all cable television customers who subscribe or subscribed at any time since December 1, 1999, to the present to video programming services (other than solely to basic cable services) from Comcast, or any of its subsidiaries or affiliates in Comcast‘s Philadelphia cluster.

They specifically defined the cluster as “areas covered by Comcast‘s cable franchises, or any of its subsidiaries or affiliates, located in the following counties: Berks, Bucks, Chester, Delaware, Montgomery and Philadelphia, Pennsylvania; Kent and New Castle, Delaware; and Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer and Salem, New Jersey.”

Comcast counters the geographic market is exactly the size of one, single household.  They argue that subscribers can only choose among video providers serving that customer’s specific home, so what cable competition exists in other counties or communities isn’t relevant.

The side effect of such an argument would be the end of a class action case, since the class size would be reduced from a number in the millions to just one, requiring every impacted consumer to file their own case.

The three judge panel was wholly unimpressed with Comcast’s argument, throwing it out and allowing the case to proceed.

When Time Warner Cable introduced its SignatureHome service, the company claimed it wanted to deliver a comprehensive experience to its most premium-customers.  But oddly, the best broadband speeds, phone service, and digital cable TV lineup from the cable company didn’t include any premium movie channels.

“I was ready to sign up for SignatureHome, but I assumed it included major premium channels, and it didn’t,” says Stop the Cap! reader Liam in Los Angeles.  “I thought it would be a real money-saver but I would rather have the premium channels than their phone service, which I don’t actually use as I depend on my cellphone.”

Scott elected for a cheaper promotional bundle foregoing phone service and the fastest Internet speeds, choosing to stick with Road Runner Turbo service.

“Powerboost on their Turbo product is more than enough for me and I don’t need faster upload speed — if SignatureHome included the premiums I would have taken it,” he says.

Now Time Warner has introduced an addition to their super-deluxe package — SignatureHome Premium View, which bundles HBO, Showtime, Cinemax, The Movie Channel and Moviepass with everything else on offer for $30 more a month — $229.99.  The package excludes Starz!, a premium movie channel Time Warner has barely promoted over the years.

With many markets increasing prices to as high as $15 for channels like HBO, getting five premium networks for just under $30 isn’t a bad deal, assuming you watch them and benefit from SignatureHome‘s other features.

“When my promotion expires, I’ll consider this new option,” Scott says.  “Yes, I realize $230 for cable service should really be an outrage, but the way the company is pricing services these days, the more you bundle, the less you ultimately pay compared to trying to build your own package of services.”

That may be exactly the point.  For customers who rely on Time Warner for phone, broadband, and cable-TV, SignatureHome can be a reasonable value if you crave the company’s highest 50/5Mbps broadband speeds.  Building a comparable bundle on your own is much more expensive.  Now the same is true for premium movie channels, which run between $11-15 a month each a-la-carte.

[flv width=”534″ height=”320″]http://www.phillipdampier.com/video/NY1 Signature Home Arrives 12-9-10.mp4[/flv]

NY1, Time Warner Cable’s 24 hour news channel in New York City, talked about the introduction of SignatureHome last December.  (2 minutes)

Some proponents for AT&T U-verse suggest people will quickly get used to AT&T's metal cabinets.

A coalition of neighborhoods opposed to the installation of more than 700 4-foot tall metal cabinets across the city of San Francisco have filed suit against AT&T in Superior Court demanding the city follow its own environmental codes and conduct an environmental impact assessment.

The suit comes in response to last month’s close 6-5 vote by the Board of Supervisors permitting AT&T to install up to 726 boxes on the public-right-of-way — typically street corners and sidewalks — to support expansion of its U-verse television, broadband, and phone service.

San Francisco Beautiful, San Francisco Tomorrow, the Potrero Boosters Neighborhood Association, the Dogpatch Neighborhood Association, and the Duboce Triangle Neighborhood Association are all parties to the lawsuit filed Wednesday, which calls the boxes graffiti targets, a safety problem for traffic and pedestrians, and just plain ugly.

Milo Hanke, past president of San Francisco Beautiful, accuses the city of ignoring its own rules to give a green light to AT&T.

“We really don’t want to sue, but we are left with no choice when the city refuses to uphold its own environment codes and is about to give away our sidewalks for the benefit of a private company without objective review,” Hanke told the San Francisco Chronicle.

Long time observers of city politics are frankly surprised AT&T won permission for the controversial boxes.

“It wasn’t that long ago that something like this would have been stopped dead in its tracks in [one] environmental review [after another],” said KCBS-TV reporter Phil Matier.  “But this year, whether it’s a change in the tone for business or for jobs it actually got the six votes needed, and that is going to be interesting as this plays out in an election year in San Francisco.”

Lane Kasselman, an AT&T spokesman countered: “This is about choice and competition for San Francisco residents. It’s about new, better technology that enhances peoples’ lives. AT&T thanks the San Francisco Board of Supervisors for supporting the deployment of U-verse throughout San Francisco. We’ve already started construction and are working as quickly as possible to bring next generation IP network services to every block and household that wants it.”

But Hanke thinks the city has gone too far for the benefit of AT&T at the expense of local residents.

“This is a private enterprise with a benefit to private parties,” Hanke told KCBS.  “Why should the public be subsidizing a Dallas-based corporation, and having to look at these ugly boxes in the process.”

Sean Elsbernd, who serves on San Francisco’s Board of Supervisors personally thinks the boxes are a great idea, suggesting Comcast needs competition.

“I have a suspicion that four or five months after they are in, people aren’t going to notice them anymore,” Elsebernd said.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/KCBS San Francisco Groups Sue ATT 8-24-11.mp4[/flv]

KCBS in San Francisco covers the continuing controversy over AT&T’s 4-foot tall utility boxes and the lawsuit designed to stop or delay their installation.  (3 minutes)

[flv]http://www.phillipdampier.com/video/KBAK Bakersfield Homeowner fights utility project in her front yard 5-27-10.flv[/flv]

KBAK in Bakersfield shows what happened when AT&T brought their lawn refrigerator-sized boxes to that city in the spring of 2010 — one woman woke up and found AT&T crews tearing up her yard, without any notice, as part of a major construction project.  (3 minutes)

Cornell University students pay an average of $37,000 a year (before housing, student fees, and other expenses) to attend one of America’s most prestigious universities.  When they arrive on-campus, it doesn’t take long to learn the college has one of the nastiest Internet Overcharging schemes around for students deemed to be using “too much Internet.”

For years, Cornell limited students to less than 20 gigabytes of Internet usage per month, only recently increasing the monthly allowance to 50GB this summer.  Cornell’s overlimit fee starts at $1.50 per gigabyte, billed in megabyte increments.  Now some students are pushing back, launching a petition drive to banish the usage limits that curtail usage and punish the 10 percent of students who exceed their allowance.

Christina Lara, originally from Fair Lawn, N.J., started the petition which has attracted nearly 300 signatures over the past few weeks.

“Cornell students, along with students across the world, rely on the Internet to pursue their academics, independent research, and leisure activity,” Lara writes. “We should not be subjected to charges for our Internet usage, particularly because our curriculums mandate we use the Internet. Despite this, Cornell University continues to adopt NUBB (Network Usage-Based Billing), which charges students for exceeding the 50 gigabyte per month ‘allowance.'”

Lara incurred bills as high as $90 a month in overlimit fees last year, thanks to regular use of Netflix and Skype for online video chats with friends and family back home.

Internet fees for on-campus housing are included in the mandatory student services fee.  Although Time Warner Cable has a presence on campus, most residence halls don’t appear to be able to obtain service from the potential competitor, which sells unlimited Internet access in the southern tier region of New York where Cornell is located.  Instead, Cornell students on campus rely on the university’s wireless and Ethernet broadband network, and DirecTV or the university’s own cable TV system for television.

Lara

The apparent lack of competition makes charging excess-use fees for Internet usage easy, critics of the fees charge.

“It’s much easier if you live off-campus or in one of the apartment complexes students favor,” says Neal, one of our readers in the Ithaca area who used to attend Cornell.  “The only complication is getting access to the University’s Intranet, which is much easier if you are using their network.”

Neal says Verizon delivers landline DSL to off-campus housing, but not on-campus.  Because the service maxes out at 7Mbps, most who have other options sign up for Time Warner Cable’s broadband service instead.

“It’s cheaper on a promotion and much faster, and it’s still unlimited,” Neal says. “Hasbrouck, Maplewood and Thurston Court were the only residential buildings that offered the chance for Time Warner Cable on-campus, and only if the wiring was already in place.”

Neal notes many apartment complexes off campus have contracts with Time Warner Cable, which means cable TV and basic broadband are included in your monthly rent.  Some Cornell students who live on or near campus try to make do with a slower, but generally free option — the Red Rover Wi-Fi network administered by the University.  Others reserve the highest usage activities for computers inside university academic buildings, where the limits come off.

Lara complains Ithaca, and the southern tier in general, is hardly an entertainment hotbed, making the Internet more important than ever for leisure activities.

Time Warner Cable provides the rest of Ithaca with unlimited Internet.

“If Cornell was situated in a major metropolitan area with a vast nightlife that could accommodate the interests of most, if not all, our undergraduates, then many Cornellians wouldn’t be so inclined to stay in their rooms and get on the Internet,” Lara says. “But that’s not the case. Cornell’s Greek life dominates the social scene, making ‘nightlife’ a dividing factor in the community.”

Tracy Mitrano, Cornell’s director of information-technology policy, told The Chronicle the vast majority of students will never hit the cap, and those that do cannot be charged more than $1,000 a month in overlimit fees, regardless of use.  Those that do exceed the limit typically find a monthly bill for “overuse” amounting to $30.

“The approach that Cornell uses offers transparency and choice,” said Mitrano. She noted that Cornell provides students with clear information regarding their network usage by alerting them by e-mail when they are about to hit the limit and by setting specific rates for overuse fees.

“The choice seems to be using the university network or moving off-campus to buy Verizon or Time Warner Cable broadband to avoid the usage cap,” counters Neal. “I am not sure their ‘choice’ argument flies if students don’t have the option of signing up for Road Runner in their rooms on their own, bypassing the Internet Overcharging altogether.”

Both Neal and Gregory A. Jackson, vice president of Educause, seem to be reaching consensus on whether or not universities should be charging students for Internet separately from room and board.  Jackson notes it is a discussion being held at an increasing number of universities.  Neal thinks having a wide open access policy to deliver competition could solve this problem in short order, and students should make the decision where to spend their broadband funds themselves.

“If Cornell’s IT bureaucracy faced unlimited-access competition from Verizon and Time Warner Cable, do you think they’d still have a 50GB usage cap, considering only a small percentage of their captive customers exceeded it,” Neal asks.  “Of course not.”

[Thanks to PreventCAPS for the story idea.]

Rumors are swirling Sprint will begin selling Apple’s iconic iPhone this October, bringing the number of carriers supporting the wildly popular phone to three.  Sprint shares soared 10 percent on the news.  But while Sprint customers and shareholders are celebrating the potential imminent arrival of iPhone, launching the phone on the Sprint network is no simple matter, especially for the last remaining carrier delivering truly unlimited data.

On the Plus Side

Apple’s iPhone has become a must-have for a significant number of consumers.  They won’t leave the phone behind to switch carriers, not even for Verizon Wireless, until they introduced the phone earlier this year.  Now Sprint can win its own share of iPhone devotees.

Sprint’s iPhone promotions could draw customers away from larger carriers, especially enticed by Sprint’s worry-free unlimited data plan that has become extinct at other wireless companies.

The iPhone locks customers into new two-year contracts with Sprint, helpful security at a time when AT&T threatens to further consolidate the wireless industry in its efforts to acquire T-Mobile.

On the Down Side

Sprint’s phone subsidy expenses will skyrocket with Apple’s iPhone, which commands the highest subsidies in the industry.  Analysts suspect AT&T currently shells out up to $425 for iPhone 4 and $375 for iPhone 3GS.  Then AT&T sells the phone to consumers for $200 or less, making the subsidy back over the life of the two year contract.  That hits AT&T’s cash on hand hard.  For Sprint, regularly accused by Wall Street of spending too much on customer promotions, it will only increase those costs.  Sprint pays less than $150 for its top of the line Evo phones in comparison.

One guarantee the iPhone always delivers: Lots of data hungry users.  The introduction of the iPhone may ultimately threaten Sprint’s unlimited usage experience because of demand placed on an already burdened 3G network.  There is also no guarantee the first Sprint iPhone will support Sprint’s 4G network.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/KMBC Kansas City Sprint May Sell iPhone in October 8-24-11.mp4[/flv]

KMBC in Kansas City talked with customers looking forward to Sprint’s iPhone.  Sprint is a major employer in Kansas City.  (2 minutes)