Academic Entrepreneurism and Rent Seeking

            While perhaps few in number, professors like me execute on their capitalist beliefs.  I am glad to augment my sparse teaching salary with consulting work.  Just as corporations seek to enhance shareholder value I will maximize my rents, particularly for distasteful work such as serving as an expert witness for a case that should never reach a court room.

            But unlike many ventures in the telecom sector, like AT&T Wireless, I am upfront about my work: I can be rented, but not bought.  Similarly I may not maximize my earnings, because non-quantifiable matters like reputation in the community matters to me.  I have passed up on work that I simply cannot support.  I am upfront with prospective and actual clients.

            The same cannot be said for a client like AT&T which uses dollars to subvert scholars into shills.  AT&T has invested millions of dollars on academics and consultants who will help legitimize the acquisition of T-Mobile as a wise, noble and cheaper effort to expedite wireless market penetration in rural locales.

            In truth AT&T has come to realize two basic realities:

1)         It is cheaper to buy out competition than to compete with a larger set of competitors; and

2)         It is cheaper to support mergers and other deregulatory campaigns with lawyers, lobbyists and consultants than to work harder in the marketplace.

            AT&T can enhance shareholder value and improve the odds than stock options remain “above water” by buying market share.  If a venture has to compete less it logically follows that a greater return on investment may result.  Why devote sleepless afternoon competing when readily available and comparatively cheap advocates can help frame a merger in terms of promoting competition and narrowing the digital divide?

            What’s remarkable is the reality that this sham would not possibly pass the smell test of fair minded people, but for a relentless campaign to legitimize outrageous propositions.

Buffets and Texting

            With AT&T’s elimination of moderate texting options, e.g., 1000 a month for $10, one either pays an extortionate 20 cents a text, or joins the buffet crowd with all you can eat pricing of $20 a month, $30 for up to five lines.  So in the U.S. the same wireless carrier offers one of the world’s highest texting rates at the very same time at it offers “best in class” pricing.  It depends on subscribers’ appetites and whether they add a texting “rate plan.”

            The AT&T “streamlining” of text plans forces subscribers to make a decision that AT&T predicts will generate more revenues.  In light of the fact that texting generates little if any incremental costs, AT&T can accommodate even more texting before congestion occurs.  But just like athletic club memberships, all you can texting eventually means most subscribers—to the exclusion of teenagers—taper down their consumption over time.   Just how many months can one text 2000 times or more?  For anyone who failed to reach 1000 a month, they now have to meet or exceed 2000 to capture the same utility as the price point will increase to $20 a month.

            Clever AT&T, but does this carrier’s management want to show pricing power at the same time it vigorously claims how competitive the market operates?  And just how long will it take Verizon to increase its texting rates?

Synchronized Rate Increases in DVD Rentals and Wireless Service

            On the heels of Netflix’s rate increase for hard copy DVD access, Redbox has responded with an increase of 15-20% in selected markets, so far; see http://www.homemediamagazine.com/redbox/redbox-expands-higher-dvd-rental-pricing-tests-24784.

            What this tells me is that Netflix provides a price floor for movie rentals.  When Netflix raising the floor, ventures offering a lower price can easily raise their price to the higher, new floor.   Redbox and Netflix have not coordinated on price, nor have they conspired to fix prices.  However, one venture’s unilateral action to raise prices results in almost immediate increases by a so-called competitor.  In the antitrust/competition policy vernacular this is called conscious parallelism.

            We see conscious parallelism at gas stations all the time.  And not matter how much AT&T protests to the opposite, we see the same behavior in U.S. wireless service.  Netflix and Redbox have implicitly decided not to make price the key differentiator when means of access will suffice, i.e., driving to a Redbox kiosk versus receiving a DVD in the mail.

            Similarly U.S. wireless carriers have implicitly decided not to emphasize price competition when differentiation in terms of handsets and advertising will suffice.  The carriers vigorously claim how tirelessly they have to compete for our business.  But price is not the key differentiator. 

            If the carriers go too far in this strategy they in effect make the argument that a cellular minute of use is fungible, i.e., indistinguishable regardless which carrier provides service.  In a market with fungible products and services, AT&T Wireless can hardly make a credible argument that acquiring T Mobile’s market share will further enhance the value proposition and special worth of an AT&T Wireless minute of service.

George Will Vilifies Liberals for Liking a Telephone Monopoly

           Over the years George Will, writers at the New Yorker and the Economist and John Le Carre have motivated me to increase my vocabulary.  So it brings sadness for me to read how George Will, despite his command of the spoken word has resorted to sheer nonsense perhaps to punch up his work.

            Mr. Will thinks “liberals mourn the passing of the days when there was one phone company, three car companies, three television networks, an airline cartel, and big labor and big business were cozy with big government.” See http://m.cjonline.com/opinion/2011-07-30/george-will-libertarian-fix.

            First, I have not seen a liberal/conservative dichotomy on matters of monopolies and cartels.  Second, the majority of telecom mergers, which would take us closer to a cozy oligopoly or monopoly, are goosed by rent seekers of all political persuasions.  I dare say the proponents of most telecom mergers are Republican, but such party affiliation means nothing when opportunities exist to acquire market share. 

            Is George Will suggesting that liberals do not want to see major elements of the economy spending sleepless afternoons competing?  Alas even George Will has amped up the snark and hyperbole.

            From my vantage point party affiliation and even political ideology matters little when opportunities to work less hard arise.  If anything political parties and individuals show little of the consistency Mr. Will infers.  Recall that liberal Jimmy Carter initiated deregulation of the airlines.  And the Justice Department of a former President by the name of Richard Nixon brought an antitrust suit that resulted in AT&T’s divestiture.

The Academics’ Blessing and Curse

            One of the true joys available to academics is having the time to stay current on the literature.  Particularly during the summer I read many law review articles, FCC and court decisions, books and sponsored research.  I’m rethinking the wisdom in devoting time to separate the plausible from absolute falsity in sponsored research.  I get so agitated and motivated to fire up a rebuttal to set the record straight.  And just who will find about such work, much less read it?

            Of course a rather obscure academic like me has little chance of getting much of a forum.  I don’t have a deep pocketed benefactor underwriting a campaign to get my work prominently displayed, cited, quoted and believed.  All I can offer to anyone who finds out about me is a fair minded assessment of the situation with an eye toward finding facts and detecting falsity.  So when three prominent researchers tell the world how competitive the wireless marketplace is I have to read their work.

            Recently I am told that significant market entry stands as a major reason to conclude how competitive the wireless marketplace is.  The authors identify the following carriers as proof positive that the Big Four national carriers, with 92% market share, face a robustly competitive market: Clearwire, Leap, MetroPCS, LightSquared and the super regional carriers like U.S. Cellular, Cellular South, and Atlantic Tele‐Network.

            At first blush I thought that the claim of spectrum scarcity must be bogus what with all of these presumably new carriers. But examine the list closely and first ask which of these carriers acquired new spectrum and new licenses say in the last four years.  Answer: two,; Clearwire and Lightsquared.  Then ask which of these two new carriers provide commercial service right now?  Answer: one, Clearwire.  Finally ask whether Clearwire offers a competitive alternative to what commercial mobile radio service operators offer?  Answer: It depends.  If you are looking for a Clearwire smartphone to make and receive both telephone and Internet calls, Clearwire does not deliver.  Clearwire works primarily with lap top computers equipped with a USB dongle providing a wireless tether.

            Of course the authors of this particular sponsored research know this.  But what’s wrong with interpreting the facts a tad differently?  For me the answer is: a lot!  But even with a largely free summer it is absolutely foolish of me to attempt to set the record straight when the process all but guarantees that my work will get ignored.

Wireless Cost Per Minute and Consumer Behavior

           It has become a largely unquestioned “fact” that U.S. wireless consumers enjoy remarkably low per minute costs rivaling what the poor in Africa and Southeast Asia pay.  Sponsored researchers recently chided the FCC for failing to state unequivocally how effectively competitive the U.S. wireless market is, largely by reciting the low cost mantra, counting carriers and heralding evidence of market entry.  See, e.g.,  Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 2011); available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1880964.

            The low cost claim can be validated by certain assumptions, most notably that subscribers consume all or nearly all available minutes of use per month.  So one way to goose the cost statistics would be simply to take the maximum available minutes of use, e.g., 450, 700 or 1200—remarkably identical for the Big Four national carriers—and divide it by the monthly subscription rate, conveniently forgetting to add the extra 20-30% in fees, taxes, surcharges and pass throughs.   A slightly more valid analysis would use some national consumption average rather than the maximum allotment.

            So if you come close to the allocated maximum minutes of use, or if you take the carriers at their word and robustly consume on an all you can talk, text or surf basis, you certainly have low per unit costs.  It makes absolute financial sense to get on a texting rate plan at $10 a month—no make that $20 a month, raised in lock step by the Big Four—if you have nimble thumbs and one or more teens in your household.  U.S. carriers don’t need sponsored researchers to tout lowest global texting rates when the average teen makes over 3300 a month.  

Rather than prove the U.S. wireless marketplace is robustly or even effectively competitive, such uncalibrated calculations of cost do nothing more than confirm certain rather obvious facts about consumer behavior.  When presented with a large basket of minutes, or better yet a buffet-style, unmetered service, many consumers push their consumption to maximize the perceived value.  When I consume a buffet meal—especially those grand affairs at hotels—I consume well past a normal level of satiety.  Call it wasteful, unhealthy and an encouragement of “overconsumption.”  Call it unfair, particularly to people with small appetites who must subsidize their gluttonous, big appetite counterparts.  But recognize that the low per minute rate results less from competition and more from a pricing strategy shared by all carriers offering post-paid plans. 

Becuase the majority of U.S. wireless subscribers have post-paid plans with unlimited or large baskets of minutes, researchers can tout low per unit costs only if monthly consumption is high.  Users of metered service are far more attentive to their usage and their cost per minute cannot drop simply by talking and texting more. 

The availability of low cost per minute wireless rates in the U.S. for subscribers with large baskets of minutes or unlimited use says little about whether competitive necessity forces low rates.  Nor does it “prove” a market driven need to price rates low. 

Number Counting as a Measurement of Wireless Competition

           Advocates for deregulation often use a simple measure as the primary basis for claiming a particular marketplace operates competitively.  They count the number of operators, both facilities-based and resellers.  So if there are four wireless carriers in most of America, it stands to reason that the market operates competitively, right?

            In reality, we need a little more than number counting.  Do these ventures offer different services, at different prices?  One could count into the hundreds the number of gas stations in a locality, but these ventures offer fungible (substitutable) products typically at the same price. Gas rises or falls in my community when the price setter, a major regional chain, decides to act.  Every other gas station operator follows as “price takers.”  Are they competing?  Certainly not on price.

            There surely are four major wireless carriers in most U.S. cities, but they rarely compete on price.  Shiny new handsets, yes, but the price points of the four carriers remain almost lock step the same.  When has any carrier announce a sale?  Why do all four carriers have the same minutes of use baskets, starting at 450 minutes? What discount can one get if they eschew a subsidized handset?  The little price competition that exists comes from T. Mobile and Sprint, one of which may evaporate soon.

            Of course ventures can compete on factors other than price, but an analysis of the wireless marketplace requires more than a glib reference to the number of operators.  The FCC’s last two wireless competition reports (see http://wireless.fcc.gov/index.htm?job=cmrs_reports) try to make a more nuanced, granular and sophisticated analysis.  Stakeholders who want you to believe the wireless marketplace is “robustly” competitive scoff at such an exercise.

Interconnection Incentives—The Commercial Aviation Example

            One would think airlines affiliated in one of the three major alliances would have a keen interest in interconnecting their reservation and other networks.    But even these motivated carriers come up short, largely because interconnection means more than the physical joining of lines.  Interconnection in commercial aviation requires affiliated airlines to use the same software, or at least devise ways for different software to become more compatible.

            It happens less than you’d think.

            On several international trips my itineraries have required a change of plane and airline, all of which are affiliated in the Star Alliance.  On a code share, where United Airlines operated the aircraft, but All Nippon Airways may have ticketed the flight, United all but disavowed the fact that I was an upcoming passenger.  No access to seating charts, buck passing to ANA for any questions or issues, lower frequent flier miles, etc.  Of course ANA did not have access to the reservation, because it was on a United aircraft, so around and around I went.  On a few flights Lufthansa was convinced my wife and I were blind and repeated efforts to claim sight failed.

            The point here is that even when carriers have motivations to cooperate and interconnect, incompatible operating software and protocols gum up the works.  So when unwilling and uncooperative parties have to interconnect imagine how many issues can arise that frustrate consumers.

            Despite efforts to emasculate and dilute the meaning of common carriage, both airlines and telecommunications service providers still have duties to cooperate.  Airlines—even those in separate alliances—generally have to accept baggage and passengers that may have originated or will terminate on another carrier.  Telecommunications generally have to accept traffic from other carriers.  But with and without incentives to cooperate bad things happen.  Without a referee consumers may end up short changes and some grand long term marketplace remedy seems far, far away.

The Busy Hour Peak and All Other Times

          Regulators often confront stakeholders keen on changing the rules of economics to secure a competitive advantage.  Currently in Canada the CRTC has under consideration an incumbent carrier proposal that would mandate metered service even for wholesale rates.  Incumbent carriers try to make metered service come across as more efficient and fair.

            On its face metered service makes sense: who wants to subsidize a heavy user?  But whether a subsidy exists depends on such factors as the cost of service, what the carrier charges and whether the heavy users/potential subsidized users cause the carrier to invest in new plant capacity.  Put another way the incremental cost to provide even a heavy user one additional unit of capacity trends toward zero unless and until providing that incremental additional unit forces the carrier to make new capacity investments. 

            Consider a parallel between an Internet minute of use and water contained in a reservoir created by a dam.  Unused Internet packet delivery capacity is similar to unused water that eventually flows out of the reservoir downstream. For Internet switching and routing foregone usage occurs instantaneously on a regular basis, while the water in a lake or reservoir appears to stay there even as water flows out also on a regular basis.

            It appears quite clear that when carriers hanker for usage based pricing they want to competitively disadvantage resellers.  Would these very same carriers completely abandon the offering of unmetered “private lines” to end users?

Netflix Tests Subscribers Price Elasticity and Loyalty

            Before the proliferation of video content, consumers tolerated “least objectionable programming” as the major broadcast networks worked to amass the largest possible audience..  Cable television and the now the Internet show how narrowcasting can accrue ample profits.  So far Netflix has had the opportunity to provide subscribers with mass market (and mega-budget) blockbusters as well as content toward the end of a very long tail.

            Whether motivated by a significant increase in content costs, or a foolish strategy to press its perceived “must have” content role, Netflix will increase rates as much as 60%.  The company wants to migrate subscribers to its online service, despite the fact that this service is comparatively inferior both in terms of access to blockbusters and long tail content.  I think Netflix has overplayed its hand, but its tactics will provide another opportunity to see just how price sensitive consumers are in the video content marketplace.

            When television viewers had few choices they tolerated mediocre, mass market content.  Given choices consumers have fragmented the market in exchange for the obligation to pay more.  Virtually overnight, Netflix forces subscribers to reconsider both the value proposition of a general subscription to diverse video content as well as the incrementally greater value of access to an even larger inventory of postal delivered content. 

            I’m abandoning my subscription in its entirety and returning to Redbox and that somewhat dismissed strategy of “surfing the web.” I found myself tolerating less than ideal movies ostensibly to justify the current rental rates, particularly for streaming content.  Netflix has encouraged me to pay Redbox on its pay per view basis, and to renew my search for Web serendipity.  In other words this subscriber is quite price sensitive and has no tolerance for a 60% rate hike.  My verdict: a way too clever company forgot the old adage that bulls and bears can make money in markets, but pigs get slaughtered.

Fair International Comparisons of Broadband Penetration

As one who has criticized the FCC for shoddy, results-driven decision making and data collection, I think the Commission deserves credit when it plays it straight.  The Commission does a quite good job in a recent Report that compiles data comparing U.S. broadband penetration with that occurring in other nations.  See See International Comparison Requirements Pursuant to the Broadband Data Improvement Act, International Broadband Data Report, IB Docket No. 10-171, Second Report, DA 11-732 (rel. May 20, 2011); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-11-732A1.doc. 

            The FCC provides more helpful comparisons, including consideration of service prices and delivered versus advertised delivery speeds.  The international comparison largely corroborates statistics compiled by the Organization for Economic Co-Operation and Development (“OECD”) showing that the U.S. ranks high in wireless broadband and cable modem wireline service, but mediocre in DSL broadband service. “Based on OECD data, the United States ranks ninth for mobile broadband adoption on a per capita basis, and 12th for fixed (e.g., DSL or cable) broadband on a per household basis.  U.S. fixed broadband adoption lags behind such countries as South Korea, the United Kingdom, Canada, and Germany, but exceeds adoption rates in Japan and the EU average.  This Report also compares data on average actual download speeds reported by a sample of consumers in a number of U.S. and foreign cities and finds that some large European and Asian cities exhibit a significant edge over comparable U.S. cities in reported download speeds, though reported speeds for some other international cities are roughly comparable to speeds in many U.S. cities.”   

$1000 vs. $6.84 Million

     The California Public Utilities Commission has scheduled a series of workshops to explore the consequences of AT&T Wireless’ acquisition of T-Mobile.  I have received an invitation to participate, but my professorial travel budget cannot defray the $1000 or so it would cost.  Contrast that expense with reports that AT&T spent $ 6.48 million in the last three months on lobbying.  See http://www.fiercewireless.com/story/ctia-att-boost-lobbying-spending-q1/2011-07-01.

     Had I participated I would have made the following points.

     AT&T Wireless and T-Mobile want this deal, because they believe it will enhance shareholder value in their respective parent companies.  AT&T acquires more market share the easy way without much enhancement to its value proposition to consumers.  T-Mobile customers get the opportunity to make and receive “free” calls on the AT&T network, but on service plans offered in an even less competitive market.

     AT&T Wireless eliminates a competitor, and acquires T-Mobile’s spectrum, towers and other assets.  For its part T-Mobile gets to cash out of its U.S. investment having lost confidence that the company can compete with the AT&T and Verizon who over time have boosted their market share and consolidated control over the wireless market, including a strong negotiating posture with handset manufacturers.

     Like it or not the acquiring company bears a burden of proving that the venture serves the public interest, or more realistically causes little harm.  AT&T bears this obligation, because the company voluntarily has chosen to operate a business that uses spectrum—auctioned and freely granted—and provides service as a type of public utility known as a common carrier.  Rather than confiscate private assets, federal and state governments have lawful authority to require common carriers to operate in the public interest including duties to provide service on fair terms and conditions, not always set by an unfettered marketplace.

     AT&T has spent billions writing scripts for stakeholders and decision makers identifying all the anticipated public benefits accruing from the deal.  The company claims that the acquisition will expedite wireless broadband to rural areas, solve spectrum shortages caused by the failure of the FCC to reallocate more of this essential resource for commercial mobile services and overall enhance (or at least not harm) competition.  AT&T has experienced no difficulty in paying for the services of academics--some friends and colleagues of mine--to assert these benefits, albeit with very little science and empirical proof.

     Rather than join the queue and supplement a fund for my kids’ college educations I have undertaken the role of challenging the conventional wisdom among stakeholders and the FCC.  I want the FCC and state public utility commissions to collect empirical evidence about the consequences of this and other acquisitions.  Armed with that kind of material decision makers have a better chance at assessing what will change, or stay the same.  In a market already dominated by four  national carriers serving more than 90% of all subscribers in the U.S., regulators have to confirm that this deal will not trigger such consolidation as to accord AT&T Wireless and Verizon duopoly power.

     When two ventures share about 80% of the market there is great risk that they can affect the price, terms and conditions on which consumers access both wireless service and the devices that access service.  As the smart phone will become the third and dominant screen for information, communications and entertainment (“ICE”) regulators have to stand vigilant against allowing ventures to pursue transactions that make it easier for them to compete and innovate less.

     Already the U.S. wireless marketplace shows signs of lackluster competition and innovation.  A prospective customer would find little difference in the price points and service terms offered by the four national carriers.  These carriers have a reputation for imposing restrictions on service including what subscribers can do with their smartphones.  By locking consumers into a two year service contract, with significant early termination fees, wireless carriers reduce customer churn, but also stifle the flexibility and versatility of handsets.  Rather than becoming the equivalent of a wireless computer—as they are in most nations—handsets in the U.S. are locked by carriers who disable features installed by handset manufacturers and limit what subscribers can do with their handsets.

     Throughout my professional and academic career I have examined many out of the headline aspects of the telecommunications marketplace with an eye toward determining whether and how carriers compete.  Increasingly the terms and conditions by which carriers interconnect their networks affect the value consumers can accrue from access as well as the commercial viability of specific carriers.  AT&T Wireless and Verizon clearly understand that they can leverage market power to extract financial and operational concessions, or to bolster their dominance. 
     For example the FCC has stated that these two carriers have refrained from executing data roaming agreements with independent carriers largely because the absence of such an agreement creates a major and growing incentive for consumers to take service from a nationwide carrier.  So a common carrier providing both telecommunications and information services can leverage its unregulated, non-common carrier status to assert the right not to interconnect with other carriers.

     AT&T also has a strategy to disadvantage competitors who need wireline services to “backhaul” wireless voice and data traffic.  In light of the absence of robust competition for these so-called middle mile and special access services, companies such as AT&T and Verizon can price service at rates several multiples above other more competitive services.  For wireless carriers lacking a wireline corporate affiliate having an extensive national middle mile and backhaul network, incumbent carriers which combine both types of networks achieve a market boost in two ways: 1) the scale economies of having an integrated wireless and wireline network; and 2) the ability to demand extraordinarily profitable middle mile and backhaul rates.     
     Until quite recently the FCC summarily concluded that all telecommunications service markets were sufficiently competitive as to eliminate the need for regulatory scrutiny to prevent price squeezes and other anticompetitive practices where a carrier, such as AT&T can competitively disadvantage a competitor by offering retail rates below the wholesale or special access rate charged competing carriers.

     AT&T Wireless’ proposed acquisition comes at a time when incumbent carriers have launched an unprecedented campaign to convince legislators, judges and the public that regulation costs jobs, stifles innovation and handicaps competition.  I see this well funded initiative as causing just the opposition.  Has there ever been a merger or acquisition that did  not trigger a reduction in employment, at least in the short term, as one of the positive enhancements to efficiency?  What handset manufacturer will risk the displeasure of two customers representing 80% of market by offering handset innovations and features that these two carriers do not want subscribers to have.  Bear in mind that AT&T Wireless and Verizon initially disabled and later conditioned what subscribers could do with wi-fi access.  The carriers relented possibly because they realized that rather than adversely impact revenues, wi-fi access offloads traffic onto other networks, rather than tax the ability of their wireless network to handle growing demand.

      Lastly how competitive can a market be when four carriers have a 90% market share and the proposed acquisition would vest the top two carriers with an 80% share?  Consider this deal in the context of the commercial aviation business in the U.S.   How would consumers and the Justice Department respond if American Airlines, the number two air carrier, proposed to merge with Delta, the number four carrier having recently merged with Northwest?  Unlike aviation where all carriers have to negotiate runway access with an unaffiliated venture, in the wireless business a single carrier can control the runway, air craft, air traffic control and the commercial terms for transferring customers and their baggage.

     The AT&T acquisition of T-Mobile raises a variety of questions the companies simply do not want authorities to ask and answer.

AT&T Aquisition of T-Mobile Will Cure the Common Cold!

Give AT&T Wireless credit for enlisting widespread support for its proposed acquisition of T-Mobile.  Disparate players including the Communications Workers of America union, Wall Street and its Journal, and various e-commerce vendors support the deal.  With or without a provided script from AT&T, these endorsers see the merger as expediting progress (however defined) and making AT&T a better competitor of Verizon.  The CWA curiously projects the merger as creating lots of new jobs, despite the fact that a merger typically achieves “operational efficiency” through consolidation, e.g., fewer advertising agency contracts and bricks and mortar stores.

So let me get this straight: AT&T will have the ability to do things that it cannot do now even with the deal requiring the company to pony up a substantial amount of cash that otherwise might have been allocated for new towers and service improvement.  AT&T will expedite wireless broadband deployment in rural areas, despite the fact that there is no spectrum scarcity in these areas and nothing currently prevents AT&T from using its ample, existing rural spectrum to provide improved service. In rural areas the company need only divide existing cell contours by installing new towers and cell sites.

This deal probably will happen, with a blend of AT&T “voluntary concessions” and the inability or unwillingness of decision makers to subject assertions both pro and con to rigorous analysis.  It is far easier for the FCC to forecast or project possible positive or negative consequences triggered by the acquisition than to quantify likely outcomes.  So long as stakeholders can make bold assertions, without having to provide anything substantive and scientific to support them, the FCC can largely pick and choose what assertions will support the Commission’s ultimate decision.  

The FCC does not have to explain just how the deal will or will not reduce, or increase employment and competition.  If you examine the dozens of deals examined by the FCC, you would not see heavy math, or deep science.  The Commission largely reiterates what the stakeholders claim without much critical analysis.

So in this anxious time, an acquisition that certainly will further concentrate the wireless industry miraculously will increase employment in the sector, solve the digital divide, promote competition and cure the common cold.  Who needs answers to why AT&T Wireless requires the assets of an ineffectual competitor to achieve progress it cannot now accrue?  And why wonder about a deal that simply reallocates spectrum to a company that already has ample existing spectrum in the 700 MHz band not yet used?

Internet in a Suitcase Abroad, But What About Pennsylvania?

The New York Times has a front page article on U.S. governmental efforts to support democracy via stealthy data networking in strive torn areas abroad.  See http://www.nytimes.com/2011/06/12/world/12internet.html.

So the good guys might have ways to get the message out when the bad guys erect fire walls, or disable incumbent networks.  What’s not to like about such empowering technologies?

But the prospect of broadband in warring regions throughout the world got me thinking about broadband access in my home town, centrally located in the middle of nowhere—State College, PA, home of Penn State University.  Ironically those freedom loving patriots probably have better wireless access than I have.  Worse yet a certain incumbent carrier—threatened by the prospect of taxpayer underwritten, or tax favored municipal wireless networks—managed to convince the easily lobbied Pennsylvania legislature to grant it a right of first refusal on any wireless network with the exception of Philadelphia.  So whatever momentum might evolve to support citizen empowering wireless broadband has the cloud of litigation whether the right exists to even try to build a wireless network.

In Afghanistan and elsewhere shadow wireless networks pop up with U.S. governmental support.  But here in Pennsylvania a cloud of another sort frustrates wireless development thanks to an incumbent carrier claiming but not necessarily exercising “dibs” on wireless networking.  

Creative Lawyering

            Believe it or not you can enhance your lobbying and legal practice before the FCC with the use of creative thinking.  No fooling.  Let me provide you with an example.

            Say you’re a major wireless carrier that for five or more years has unlawfully generated $52 million in false billing for data sessions that did not trigger any downloads and usually occurred because of a poorly designed handset button.  Finally the FCC acts and orders a refund.  The pragmatist wing might accept a fine and use the episode to exemplify how responsive and  public-minded the company is.

            But the creative wing might try this strategy.  The FCC’s information service classification offers the carrier a deregulated “safe harbor” for wireless broadband data access.  The Comcast case supports the conclusion that the FCC has no jurisdiction to regulate the wireless carrier’s data services, including overbilling.  $52 million could mean the difference between a minor bonus and a really nice Christmas.  Hang tough management.  The FCC can’t lay a hand on us!  Just as we’re appealing the FCC’s attempt to impose common carrier roaming access for data service, so should we refuse to pay any fine or enter into a Consent Decree on the matter of data access billing irregularities.  The FCC has no jurisdiction over information service like wireless Internet access.

            It gets even better when someone suggests that ripped off subscribers simply will sue in state court.  Here’s the double dutch dose of creativity: we respond that subscribers must comply with mandatory arbitration which is going to cost more than what subscribers individually lost.  Thank you Supreme Court.  And if that somehow does not work we argue that the FCC has preempted the states from asserting jurisdiction, because data access is wire and radio.  If the FCC has opted not to regulate and to impose a duty to deal fairly with subscribers, then states (and for that matter courts hearing antitrust claims) have no basis to upset the FCC’s decision making.

            Is this a great country or what?

           

A Right Way, A Wrong Way and the . . .

Back in my home town of Norfolk, Virginia one quickly learned that the Navy—a dominant presence—had its own rules.  The Navy Way was not right or wrong.  So when I get frustrated or confused I often attribute it to simply not knowing all the applicable rules.

I unintentionally downloaded and launched Microsoft’s Internet 9 web browser and quickly noticed that the list of frequently viewed web sites appear not on the left side, but on the right.  How many weeks will it take me to adjust to the new Rule?

Why the change?  Because Microsoft and its managers can make arbitrary decisions without much concern for user inconvenience. The Microsoft Way tends to create three steps where one or two previously worked.  Of course the Microsoft Way provides users the opportunity to shift favorites to the left side of the screen, but maybe you guessed that they revert to the right the next time you launch Internet Explorer.

The Microsoft Way predominates in the word processing market, much to the chagrin of people like me who found Wordperfect superior.  Today—on deadline or course—Microsoft Word suddenly lost its ability to count and number footnotes.  Yes, some academics face and meet deadlines and no, this glitch was not the product of operator error.  The Microsoft Way apparently does not change numbering until one accepts all changes when using the editing review process.  Of course I did not have that process in operation.  So the footnote editing process took three times as long as it otherwise would.

There’s an FCC Way as well, and it seems to work regardless of which political party controls the Whitehouse.  Top managers at the Commission determine whether people like are “with us, or against us” and whether outsiders have enough juice to make problems.  It comes across as a siege mentality, but cross one of these gatekeepers or fail the significance test and your calls and emails don’t get answered.  Apparently my work on regulatory reform, critiques of FCC decisions, and occasional work with certain out of grace public interest groups make responding to my infrequent calls and emails unnecessary.  Or maybe I am unworthy of a callback in light of my insignificance.  Or maybe I simply lack the gravitas worthy of a response. 

In any event my queries, offers to provide insights, volunteering to join an advisory group and even a free copy of my latest book trigger no response.  This frustrates me and creates every incentive for me to give up and accept my insignificance.  I’d like to think if I ever filled one of their positions I’d do the right thing and return their call.

Mercatus Center Panel on Wireless Competition

The Mercatus Center, based at George Mason University, hosted a panel on the state of wireless competition in the U.S. and how the FCC frames the issue in its annual reports to Congress.  See http://mercatus.org/events/fccs-wireless-competition-report-preview.  Here's a link to my presentation slides:

click on the first link under Recent Conference Presentations: http://www.personal.psu.edu/users/r/m/rmf5/

New Publication: A Nuanced Assessment of Network Neutrality

     The Penn State Law Review, 115 Penn St. L. Rev. 49 (2010), has published my article entitled Assessing the Merits of Network Neutrality Obligations at Low, Medium and High Operating Layers.  It's available at: http://tinyurl.com/3h3xwah.

Here's the abstract:

     The often contentious network neutrality debate typically cleaves along an absolute for, or against dichotomy.  Where one stands on the issue often depends on the degree of confidence in the ability of marketplace forces to promote self-regulation and remedies to acute problems.  Such a macroscopic perspective promotes a large difference of opinion with plenty of opportunities for public disparagement of the opposition.  This orientation largely forecloses a more nuanced analysis that could consider the need for government intervention based on different layers of the network infrastructure used to provide Internet connections.
     Whether the Internet requires some degree of government oversight, dispute resolution and stewardship requires serious consideration rather than sloganeering and dueling advocacy web pages.  An essential element for such analysis breaks down the Internet into at least three layers having different characteristics that can affect the arguments for, or against the enforcement of network neutrality rules.  The physical layer provides the infrastructure needed to establish a basic communications link between two or more parties.  Ridding on top of this basic bitstream transmission conduit are communications protocols and standards like the Transmission Control Protocol that manage the routers that select networks to carry traffic and the Internet Protocol that establishes a globally used addressing system.  Farther atop the physical layer and the layers that set up and process transmissions are the content, applications and software that provide various end-user services,
     This paper will consider the network neutrality debate in the context of these three different layered components of the Internet.  The paper will show that compelling arguments for enforceable network neutrality rules are strongest at the low layer, contestible at the middle layer and unnecessary at the high layer.  Such a layer-based view of network neutrality explains that the need for government involvement depends on which part of the Internet’s networking infrastructure one examines.  The need for government safeguards varies by layer, because the current and future degree of robust competition and effective self-regulation varies.
     For one comfortable with government involvement and network neutrality rules, the paper will challenge the need for such oversight in the competitive marketplace for Internet-mediated content, applications and software.  For others uncomfortable with any government involvement, the paper will identify instances where market failure, or the lack of actual or sustainable competition necessitate government oversight to ensure fair dealing by a limited number of operators providing Internet access.  In the middle layers, where Internet Service Providers use protocols and technologies to manage their networks, but possibly also to favor corporate affiliates and certain third party providers of content, the paper suggests the need for a government referee authorized to resolve disputes and to examine causes of congestion and service interruptions.  
     The paper also considers the problems in having a single set of network neutrality requirements that fail to apply different public interest safeguards for vertically integrated ventures that operate in all three operating layers.  The paper recommends layer-specific network neutrality analysis and rulemaking.

Compulsory Data Roaming: The FCC Imposes a Duty to Deal

     The FCC’s recent Second Report and Order on data roaming obligations of facilities-based wireless carriers (see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-52A1.doc) requires interconnection backed up with the power to resolve formal complaints if commercially driven negotiations fail.  The two Republican Commissioners dissented from the order based on the view that the FCC lacks jurisdiction to compel information service providers to interconnect.  The Democratic majority relies primarily on the view that Title III confers broad regulatory power over any venture using licensed spectrum, not just radio and television broadcasters.

     This order shows the FCC at its creative best.  The authors of the order manage to replace the failed Title I, ancillary jurisdiction rationale with an expansive interpretation of Title III, while avoiding the inconvenient fact that the Commission treats wireless broadband and data services as information services not subject to Title II oversight.  In this order the Commission creates a non common carrier duty to deal, i.e., wireless carriers must interconnect their data networks and provide access to roaming data service subscribers who take service from another unaffiliated carrier.

     Only AT&T and Verizon opposed the FCC’s efforts to remedy a market failure resulting from insufficient competitive necessity for the two major carriers voluntarily to offer reciprocal data roaming agreements.   The FCC correctly identified a problem that could prevent consumers from relying on their smartphones as mobile computers, but the Commission’s rationale may not pass muster with a reviewing court. 

     The FCC appears to impose a duty to deal on carriers based primarily on their use of spectrum and the Commission’s broad mandate to service the public interest.  By concentrating on Title III and the broad mandate in Section 706 of the Telecommunications Act of 1996 to promote Internet access, the Commission hopes it can impose a conventional common carrier interconnection obligation even in the absence of explicit statutory authority.  Because Title II cannot apply directly to data roaming, the FCC frames the interconnection obligation as a “spectrum usage condition” (¶66) and not a common carrier obligation.  The Commission presumes that this characterization makes it possible to maneuver around the limitation contained in Section 332 that limits the application of streamlined Title II common carrier obligations only to voice services that connect with conventional wireline telephone networks.   The Commission summarily states that it does not have to make the determination whether and how Sec. 332 applies, if more broadly all or other sections within Title III applies.

     The FCC attempts to differentiate compulsory data roaming interconnection from common carriage, by emphasizing that wireless carriers will not apply single, tariffed terms and conditions.  So in the Commission’s creative interpretation, a common carrier obligation does not exist when a carrier is compelled to negotiate on an individualized, carrier-specific manner. But surely the Commission has created a duty to deal and common carriage means only that a carrier must offer nondiscriminatory terms and conditions to one or more “similarly situated” users.  In other words the common carrier duty to provide service to all people “indifferently” can result in a tariff or contract serving just one user or carrier, because no other user or carrier has similar usage requirements.  For example, the fact that the United States government might have specific and large requirements unmatched by other users does not by itself convert service from Title II regulated common carriage to private carriage.

     The FCC’s dilemma results from the misguided decision to apply the deregulated “safe harbor” information service classification to any and all types of wired and wireless Internet access.  It seemed good at the time: a hands off the Internet commitment.  The Commisison had to construct creative distinctions between offering and providing telecommunications and between a standalone and identifiable telecommunications service and a telecommunications that becomes so integrated into an information service as to be inseparable.  Of course wireless carriers use telecommunications to link subscribers’ smartphones to a wireless data network via telecommunications.  But in the FCC’s mindset, a venture can qualify for complete deregulation if the Commission can identify an information service.  That’s how the FCC made it possible to reclassify Digital Subscriber Line service as non common carriage and that’s also how the Commission made it possible to convert wireless telephone companies into information service providers.

     Had the Commission shown some restraint in its zeal to deregulate it would not have to erect clever and largely unsustainable statutory interpretations to resurrect limited, but essential consumer safeguards.

News Flash!—FCC Identifies Market Failures in Wireless Marketplace

     The FCC’s recent Second Report and Order on data roaming obligations of facilities-based operators (see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-52A1.doc) offers two fascinating insights, only one of which will receive much attention.  Scholars and practitioners alike will concentrate on the FCC’s use of Title III spectrum management as the basis for mandating data roaming negotiations, backed up by formal complaint resolution.  Analysts will marvel at how the Commission has managed to impose an interconnection regime without convincingly addressing how information service providers lawfully bear such duties.  Additionally the Commission  does not fully explain how the duty to negotiate on commercially reasonable terms and conditions does not constitute common carriage and a “duty to deal.”   

     In a future blog I will address these issues, but now will consider another matter unlikely to get coverage.  This document is very, very important, because the FCC clearly identifies instances where the nature and type of wireless competition is inadequate to guarantee data roaming agreements between the major national carriers, such as AT&T and Verizon, and just about any other carrier.   Only AT&T and Verizon opposed a data roaming obligation,  because, as noted by the Commission, these carriers have refused to deal (¶24) and market consolidation “has reduced the number of potential roaming partners for some of the smaller, regional and rural providers” while also reducing the need for AT&T and Verizon to secure reciprocal roaming agreements (¶27).
     Such candor coming from an agency that never saw a wireless merger it could not approve and has never disputed industry claims how tirelessly they have to compete.  So if the wireless marketplace is so vigorously competitive would it not stand to reason that AT&T and Verizon would have to offer nationwide data roaming so that their data coverage maps show ubiquitous access?   If this market operated competitively would not AT&T and Verizon conclude that they should offer smaller carriers reciprocal access, even if doing so offers greater opportunities for little carriers to offer a competitive national data access service.

     It appears that the FCC acknowledges a market failure existing for a category of service that will become increasingly important.  If as advertized smartphones have become the functional equivalent of a wireless computer, then carriers have to offer near ubiquitous broadband access.  A deliberate strategy of denying interconnection by AT&T and Verizon, which the FCC identifies as occurring, constitutes an intentional tactic to exploit their market power and to further differentiate their services as superior. 
     We can dispute whether these two carriers have a compulsory duty to deal—as common carriers, or licensed spectrum users-- but one fact is indisputable: the need for the FCC to compel interconnection means that no market-driven incentive exists for AT&T and Verizon to offer interconnection reciprocity.  The FCC had to intervene, because the so-called competitive wireless marketplace would not prevent two dominant carriers from exploiting their dominance to achieve anticompetitive goals.

Panadora Investigation

Marketplace Morning offers a few secs. of my thoughts on Pandora mobile apps investigation: http://lb.vg/BX67C.

Nice to receive a call at 6:45 am not involving a calamity.

Explaining Wireless Spectrum Woes

     Yet again The Wall Street Journal, in an editorial and op-ed piece, uses snarkiness and mischaracterizations to refute legitimate concerns about AT&T’s acquisition of T-Mobile.  See Wall Street Journal, Review & Outlook, More Spectrum, Please--AT&T bids $39 billion to get around FCC bottlenecks, A14  (March 23, 2011); Holman W. Jenkins, Jr. AT&T’s Big Bet on Spectrum Folly, A13 (March 23, 2011).  These pieces reframe the issue from a question about market concentration into an endorsement of AT&T’s valiant “self-help” efforts to find adequate spectrum for consumers.  They glibly ignore or dismiss the proper focus on how the deal would affect consumers, competition, innovation, employment and service prices. 

     The Journal dismisses as hackneyed Gigi Sohn’s conclusion that allowing two or three ventures to control over 92% of the market reduces competition and choice, raises prices, reduces innovation and results in fewer jobs. See PBS News Hour, How Will Consumers Fare in T-Mobile, AT&T Merger? (March 22, 2011); available at: http://www.pbs.org/newshour/bb/business/jan-june11/wireless_03-22.html

     Once upon a time even the Republican Party of Teddy Roosevelt acted to prevent marketplace distortion caused by monopoly “trusts.” When a market lacks robust competition few operators do not have to spend sleepless afternoons innovating and striving to operate more efficiently.  Wireless carriers in the U.S. generate some of the world’s higher Average Revenue Per User.  These carriers do this by offering users large baskets of minutes to use making it possible to operate with vast profits and for the Journal to tout how consumers enjoy some of the lowest rates.  One can chisel down the per minute cost of service and the per text rate with high volume usage.  But such usage triggers spectrum and other infrastructure problems for which the carriers and the Journal blame the FCC.

     The truth is far more complex than simply demeaning the FCC and claiming this agency “micromanages” the marketplace.  Spectrum scarcity exists largely because other agencies of the U.S. government—primarily the defense, intelligence and homeland security agencies—hoard over 50 percent.  The second most important factor results from who makes spectrum decisions and how they do it.  Because spectrum crosses national borders, nations have to share and coordinate use.  The International Telecommunication Union, a specialized agency of the United Nations, allocates blocks of spectrum and specifies what uses are appropriate.  National regulatory authorities, like the FCC, in turn allocate spectrum largely consistent with the ITU-forged consensus. 

     Spectrum management decisions can rely on outdated assumptions about the ability of users not to interfere with each other.  For example, the ITU still has spectrum allocations that specify primary uses exclusively for land, sea or airborne use.  Technological innovations now make it possible to use a handheld device in all three locations.  But for the time being all involved government agencies, including the Departments of Commerce, Defense and State, accept the consensus even as they try to persuade nations to accept more flexible spectrum use.

     Spectrum scarcity is a real and constraining factor for wireless carriers.  But AT&T and its cheerleaders, simply use this factor, to prevent the close scrutiny needed to ensure robust competition.

The Likely AT&T Wireless Playbook for Securing Authority to Acquire T-Mobile

     There are several tried and true tactics that AT&T Wireless can use to convince the FCC and Department of Justice to approve the company’s merger with T-Mobile notwithstanding the obvious harmful and anticompetitive consequences.  Regardless of which party controls the White House these tactics work as evidenced by the rare instance where a market concentrating telecommunications mega-merger is not approved.  AT&T will reframe the merger away from market concentration and into the realm of better serving the consumer and responding to delays in FCC regulatory reform.

1)         This merger will benefit consumers! 

            Let me get this straight: a horizontal merger buying out one of 4 major players, which control over 90% of the wireless marketplace, is good for me?  Would a merger of the 2d and 4^th airlines in the U.S. (Delta Airlines and American Airlines) benefit the consumer with lower rates, more choices, better rural options, etc.?  AT&T’s acquisition of T-Mobile’s market share and spectrum will make AT&T a better service provider.  Perhaps, but at what harm to the traditional benefits in a robustly competitive market?  Might an oligopolistic wireless market have carriers implicitly agreeing not to compete on price?  It looks like that already occurs: is it market equilibrium, or price fixing for the 4 major carriers already to offer the same price points for the same number of minutes?  Why won’t a carrier offer discounted service rates to subscribers who do not want a new subsidized handset? 

            Market consolidation typically harms consumers with fewer choices, less competitive necessity to lower prices and greater carrier inflexibility.  Yes carriers need scale and ever more spectrum, but a merger is more about buying out competition than becoming a more effective and efficient competitor.  With fewer carriers it becomes easier for the survivors—collectively, collusively or independently—to reach the same conclusions about network neutrality, service tiering and disabling features available from subscribers’ handsets.  Once AT&T fires the thousands of redundant T-Mobile employees, it can claim how precompetitive FCC regulation “kills jobs.”  Just when the FCC has to show a backbone on matters of consumer protection, the remaining 2 or 3 national wireless carriers will have the clout to persuade fringe and mainstream political factions how carriers can self-regulate.

2)         The FCC made us do it! 

            This tactic shows that the best defense is an outrageous offense.  AT&T frames the need to buyout a competitor as the product of FCC regulatory decisions that deprived the company of enough spectrum to satisfy consumer demand.  So AT&T’s well deserved record of poor service is the FCC’s fault and not the product of selling too many subscriptions and failing to match switching and other infrastructure elements with the onslaught of Iphone subscribers.

            AT&T like wireless subscribers could use more spectrum, but the FCC has accommodated incumbent carriers from the onset of cellular service to present.  AT&T’s local carriers got free spectrum and a first mover advantage when the FCC “set aside” spectrum for wireline incumbent and required newcomers to compete in a comparative hearing.  The FCC abandoned a cap on spectrum controlled by any single carrier and will not designate any new spectrum for market entrants instead of incumbents.

            AT&T does not want the FCC or us to remember that the company first disabled the Wi-Fi features in its handsets, thereby preventing use of additional spectrum that might have made the AT&T network less congested.  AT&T later permitted conditional Wi-Fi use even as the company wanted subscribers to buy a femtocell device that would offload some of its traffic onto the Internet services of other carriers.  AT&T and Verizon recently acquired the lion’s share of newly available spectrum and with fewer competitors bidding for future spectrum the federal government will generate less from spectrum auctions.  Of course with less competition, AT&T might not have to pass through its savings with lower rates for service.  On the contrary AT&T and the surviving wireless carriers soon will abandon unmetered service plans.  Even as the company hypes smartphones as handheld computers, wireless carriers will make metered data services a profit center able to raise average revenue per subscriber (“ARPU”) already at levels few carriers in other nations come close to generating.

3)         Prominent scholars and consultants endorse the merger!

            I could have self-financed my kids’ college educations if only I had joined the ranks of “scholars for dollars.”  An impressive array of academics will write white papers, scholarly law review articles, affidavits, expert statements and other products endorsing the merger. Few will acknowledge their financial sponsor and all will claim that they came up with the ideas in the paper independently of their sponsor’s regulatory agenda.

            The murky world of rarely disclosed sponsored research will provide fire power to AT&T’s arguments how the merger makes operational and economic sense without harming the national interest, or the subscribers of AT&T and T-Mobile.  Sponsored researchers will make outlandish assertions that would not pass muster under rigorous peer review.  Nevertheless these sorts of documents will find a home in filings at the FCC and in prominent law and economic journals.  Rarely do these journals even require notification about AT&T’s sponsorship, or that of countless other Washington think tanks funded by AT&T.

4)         Our merger will achieve the same type benefits as other mega-mergers.         

    
        The FCC rarely receives a merger application it cannot conditionally approve.  AT&T surely will have to share the wealth to make the merger happen, but a company that come up with $25 billion in cash to acquire T-Mobile, surely can spend an extra few hundred million dollars to persuade Congress that the merger will serve the national interest.  I mention Congress, because the FCC and DOJ surely do not want to make the legislature unhappy, especially the individuals who chair oversight and funding hearings.

      Of course AT&T will come up with a bunch of “voluntary concessions” that will secure votes from ambivalent Commissioners.  These concessions typically add a minor cost to the acquisition and sound wonderful.  But AT&T in particular has a skill in offering something that is both limited in time and actual benefit.  We can expect to see AT&T offering all sorts of rural buildout commitments, as well as support for open and neutral access to its network.  The commitment will have conditions and exceptions that mitigate the benefit.  For example, when AT&T acquired BellSouth the FCC received a voluntary network neutrality commitment, but one limited to a few years and applicable only the DSL service line linking retail subscribers and the first AT&T switching facility.  

            A year or so from now AT&T probably will get conditional merger authority.  The future dominant means for accessing the Internet will become an unregulated conduit controlled by companies free to leverage employment and infrastructure buildouts for a free reign.

AT&T-T Mobile One Merger Too Many?

So AT&T wants to acquire T-Mobile's market share concentrating the wireless marketplace so that 3 carriers control over 90% of the market.  Would anyone buy the bogus argument that No. 2 Delta Airline's acqusition of No. 4 American would "promote competition"?  Does anyone notice that mergers are job killing?  Does the FCC and the Justice Department have the courage to say no? 

Bear in mind the FCC rarely refuses to approve with conditions market concentrating mergers.  For wireless the FCC has abandoned spectrum caps and making new spectrum available only to new market bidders.

I predict that months from now the FCC will find a way to frame this merger as something really great for consumers.  Bogus!