Award Winning Blog

Tuesday, April 7, 2015

Rethinking Efficiency in Size and Vertical Integration

       My Wharton education in economics has led me to assume that large firm can exploit greater economies of scale and scope.  Similarly vertically integrated firms—operating up and down an industry “food chain” can accrue operational efficiencies.

       Theory conflicts with my frequent—and less than satisfactory—encounters with large firms.  In the last two weeks I have travelled extensively and regularly have encountered instances where large firms clearly and intentionally scrimp on customer service, management of web sites and possible maintenance of aircraft.

        Over my 22 years at Penn State, one out of three or four airplane departures from and to my little down has triggered a delay, or cancellation.  On two recent occasions, staff at United Express’s Commuteair, took over 90 minutes to attempt a light bulb repair.  They achieved success in one instance and gave up in the other.  Mainline United cannot seem to get its old or new inflight entertainment systems to work: the audio jacks break, or the new Wi-Fi system doesn’t work.  On an 8 hour flight from Frankfort to Washington, Dulles a light bulb turned on and off repeatedly for the duration of trip.  Minor inconveniences, but what do all these screw up say about United’s commitment to maintenance big and small?

            Bigness, or perhaps the lack of competition also encourages companies to cut corners and to chisel.  I am convinced that so many Comcast customers viscerally hate the company, because of the perception that Comcast conscientiously tries to extract maximum revenues in sneaky and clever ways; just examine the ever increasing line items in their bills.
            Comcast is no alone in this race to the bottom. While buying hotel space on Hotwire, using a non-U.S. site, the company snuck in trip insurance without even offering customers the opportunity to choose no.  The U.S. site requires customers to opt out rather than opt in, but the European and Asian site simply includes the charge. Try getting Hotwire to respond to emails. Company reps simply cut and paste scripts that do not respond to the problem and of course do not offer a refund.  I was told to contact the insurance company, even though it was Hotwire that triggered the charge in the first place.  While abroad I was supposed to call Hotwire, so I did.  Of course no live person was available to take my call.
            On an on it goes leading me to think that more and more companies can reduce the value proposition of their service without loss of market share.  This has prompted me to rethink my leeriness about the FCC’s reclassification of Internet access. 

            Might companies like Comcast see a financial gain in reducing quality of service as a means to nudge—if not push—end users and upstream content providers to more expensive “better than best efforts” traffic carriage?

1 comment:

InfoStack said...

At a micro or industry level people should begin to realize that edge access ISPs have too much stranded capex/opex in their vertically integrated business models that only have partial and incomplete demand perspective/reach. I am puzzled why more don't understand this by simply looking at sessions (originating and terminating on the network) and the nature of demand.

At a macro level, we need more analysis on the theory of networks. Only then would we understand the necessity of settlements between actors (networks) serving as price signals for incentives and disincentives. In addition to coordinating end-to-end investment (like rapid IPv6 adoption and not 20+ years to achieve 15% penetration) settlements appropriately set would share ecosystem value. Of course everyone by now knows that value disproportionately accrues to the center and top of networks (or inter-network ecosystems) while costs are disproportionately born by the bottom and the edge.

Taking both together and understanding that all institutions are being disrupted by digital forces leads us to question the notion of vertical integration in general for any company as well as the importance of "network effect" on the internal workings of the corporation. In fact, instead of viewing employees as fungible assets, they should be viewed as important ecosystem elements to which value should be conveyed (and not just to shareholders).