Tuesday, April 10, 2012

Pricing Power and the Lack of Competition in Broadband and Video

            Readers of this blog may have inferred that I am sick and tired of bogus claims made by many telecom operators that competition forces sleepless afternoons.  Year over year I receive biannual rate increases from my cable operator and in the last two years the notices include double digit percentage increases for broadband.  The FCC has not gotten around to noticing that broadband regularly becomes more expensive, perhaps offset by increases in bit rate.  Ironically the FCC’s assessment of video competition notes that markets with robust DBS competition actually have higher rates than areas lacking such “competition.”  Of course the FCC and the operators explain that the higher rates represent greater value in light of the many more channels available to subscribers.  Just how much greater utility does one get from having access to many channels that offer nothing of interest and certainly go unwatched?

            Moore’s Law tracks a regular reduction in cost as capacity increases.  Certainly computing power and basic telecommunications transmission costs decline consistent with Moore’s Law.  The Law never applied to content, and one can understand double digit rate increases in light of uncontrolled gouging by sports programmers and the ability of Multichannel Video Programming Operators like Disney to force bundling of must see channels with less desirable ones, e.g., ESPN and ABC versus ABC Family (formerly the Christian Broadcast Network).

            Cable operators regularly tie desirable programming with undesirable content with large program tiers.  They also compel bundling by offering “discounts.”   Until recently I could get the combination of basic cable and discounted broadband for about the same price as undiscounted, stand alone broadband.

            Now Verizon has embraced compulsory tying or bundling.  The company must have pricing power in broadband or some weird marketing strategy in thinking that it will make more money by refusing to offer standalone DSL service.  Soon prospective Verizon customers can acquire DSL service if and only if they also subscribe to the company’s wireline telephone service.  This is bundling a desired service with something many subscribers no longer want or need, just like cable service tiering.

            Incumbent ventures can force bundling or tied services only if they have pricing power, i.e., the ability to raise prices and increase revenues without suffering significant reductions in subscribership.  Verizon forces consumers to subscribe to wireline telephone service subscriptions as a precondition for a DSL subscription.  Apparently the broadband marketplace in the U.S. is so UNCOMPETIVE than carriers can force or compel subscription bundles. 

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