Friday, May 10, 2013
Wireless subscribers face the cross-currents of access to an ever increasing inventory of full motion video content at the same time as wireless carriers have forced them to subscribe to a metered service with a monthly cap on downloads, including streaming video. Content providers, such as ESPN, are exploring the prospect of subsidizing wireless carrier transmission charges to abate the prospect of overages, or throttled service.
Smart move on ESPN’s part to enhance the value proposition of its increasingly expensive product. ESPN may have read the tea leaves and become convinced that it better do something to stem the tide of cord cutters disinclined to pay for dozens of channels, including its expanding bundle of channels, combined by cable companies into a content tier nearing or exceeding $100 a month. Additionally ESPN understands that if it expects cable subscribers to pay at least $5.00 a month for its content, then it better respond to their expectation of having access anytime, anywhere, via any device and in multiple formats. Today’s video consumer has no tolerance for the old school “appointment television” model where the content provider and its distributor established the terms and conditions for one time access on a particular channel at a particular time.
ESPN also understands that the small bandwidth delivery payments it may opt to make will pale in comparison to the additional revenue stream generated by mobile advertising. Multiple access platforms to ESPN content means that subscribers will have more opportunities to see ESPN content—including repeat or repurposed content—and also ESPN-carried advertising. Also the bulk capacity ESPN may buy will not cost anything near what individual subscribers pay on a megabyte or gigabyte basis.
So far so good, but might there be a network neutrality/open Internet regulatory problem? An article in the Wall Street Journal today correctly reported that the FCC has created different and less burdensome rules for wireless broadband carriers than their wireline counterparts. One might not object to pricing experimentation with wireless carriers increasingly deviating from the same price points and service classifications. However, the ESPN subsidy scenario does raise questions.
Will wireless and wireline broadband carriers use the ESPN subsidy model as the basis for demanding surcharges from heavy volume content providers such as Google and Youtube? Would the ESPN subsidy model morph into a “pay to play” shakedown targeting new ventures seeking to make a splash? Or is this model nothing more than an extension of what Amazon currently does when you want to download a book purchase wirelessly? Amazon looks for a zero cost wi-fi option, but failing that the company will bear, without a surcharge, the cost of cellular radio carriage to Kindles equipped to receive such signals.
When Comcast offered not to debit downloads of its video on demand service to Xbox360 users, the company insisted that it was not discriminating against viewers via conventional computers. Comcast asserted it routed movies to XBoxs via a specialized network somehow different than the Internet cloud it uses to deliver the very same content to personal computers and tablets. Under the existing rules wireless carriers would not have to claim that they routed ESPN subsidized traffic over something specialized. But what would happen if the ESPN payment guaranteed “better than best efforts” traffic routing possibility leading to a measurable and identifiable difference between the subscriber viewing experience for ESPN content versus Fox and other sources of competing content?
Sponsored researchers already have entered the conversation about spectrum policy with a new objective of thwarting any effort to promote access by non-incumbents, or at least any carrier other than AT&T and Verizon. These researchers will prove that denying incumbents the opportunity to acquire even more spectrum will reduce the government’s take. I agree and empirical evidence supports this. When the FCC imposed requirements of open access or sharing with first responders on a spectrum block, the amount bid was lower than unencumbered spectrum.
But of course sponsored researchers want to extrapolate from this truth to many conjectures including the premise that any spectrum set aside would prevent the most efficient providers from doing more with more. Somehow if AT&T and Verizon do not capture the lion’s share of any and all available spectrum, then both taxpayers and wireless consumers suffer.
This premise does not pass a basic smell test. We should appreciate that what the government takes now in spectrum auction proceeds, it loses in future tax revenues, because carriers can use their spectrum investments as offsets against income.
Perhaps more importantly we should consider what the two incumbents with over 70% market share can do with additional spectrum. In the best case scenario they will put the spectrum to immediate use and abate any real scarcity. In the worst case access to more spectrum eliminates incentives to more efficient use including the possibility of buying simply to deprive competitors of access and to preempt market entry. Additionally incumbents possibly can “warehouse” the spectrum by not using it, but preventing other carriers from putting it to efficient and immediate use.
Consider a commercial aviation analogy. Let’s assume a highly congested airport can offer additional landing and takeoff slots, a result when an additional runway gets constructed, or when regulators relax a cap, or allow late night operations. In this particular aviation market one carrier has a dominant market share, something that regularly occurs when that market represents a carrier’s hub, e.g., Washington Dulles for United; Philadelphia for U.S. Airways, Detroit for Delta and Dallas Fort Worth for American. Dominant carriers have market power in their hub markets as evidenced by their ability to charge higher fares than cities with competitive commercial aviation markets.
These carriers will do anything to maintain their dominance including acquiring as many new landing and takeoff slots as possible. Of course they will frame their acquisitions as serving the public interest and consumers, even if they have to use smaller aircraft—with less seat capacity—to ensure that every slot gets used. With more available slots incumbent air carriers might determine that they will oversupply seating capacity with large planes. But rather than pass on the opportunity to control even more access to the market, these carriers will acquire new slots at any price simply to prevent existing or prospective competition from flourishing.
In the short run everything looks grand: the government accrues higher auction revenues than contemplated, because of the market preemption benefits reflected in a dominant carrier’s win at all costs bids. But in the immediate term consumers suffer from higher rates available to the fortress hub carrier. Recently even corporate flyers have complained about the consequences of hub dominance and the reduction of competition and flight options in non-hubs. In the longer term the tax benefits to incumbents and the elimination of most competitive benefits weigh in.
Bottom line: if the FCC seeks to maximize short term spectrum auction proceeds it will guarantee that incumbents acquire most newly available spectrum further concentrating the market and reducing the benefits of facilities-based competition.