Competition as the Last Resort: A BYOD Discount

           T-Mobile has further deviated from lock step wireless pricing with discounts for subscribers that bring their own devices, or buy them from the carrier.  Previously it tried, with limited success, to use Verizon and AT&T rates as a ceiling which it would price at or below.

            Now that it won’t become a part of AT&T T-Mobile has gotten serious about becoming the pricing innovator.  Being the maverick provides consumers with real price competition, true facilities-based, intramodal competition.  New price points surely would not appear in an even more concentrated wireless marketplace had the FCC bought the premise that AT&T’s acquiring T-Mobile would “promote competition.”

            True competition—having to do with out of pocket prices—has arisen.  Go figure.

 

           

Wireless Market Concentration Leads to Lower Prices?

          A recent publication in the Federal Communications Law Journal offers the counterintuitive premise that under conditions where wireless carriers operate under scarce spectrum conditions, market concentration can offer consumers lower prices than when more carriers compete.  See T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern, Wireless Competition Under Spectrum Exhaust, 65 Federeal Communications Law Journal 80 (Jan. 2013); available at: http://www.phoenix-center.org/FCLJSpectrumExhaust.pdf.

         The authors state that they “demonstrate that under a binding spectrum constraint, a market characterized by few firms (rather than a large number of firms) is more likely to produce lower prices and possibly increase sector investment and employment.”  That conclusion does not seem right to me, particularly in light of my personal—call it empirical—experience.  When I vote with my dollars under conditions of resource scarcity, whether caused by government or marketplace conditions, I have to pay more, not less.

            Consider commercial aviation, a marketplace constrained by airport landing slots, required spacing in the air and now reduced air traffic controllers thanks to sequestration.  Many major airports have allocated all available landing slots, just as wireless carriers may near spectrum exhaustion.  So what happens in a market where one or two carriers dominate?  The Wall Street Journal, of all sources, provides an answer that makes sense to me:

 

Some big-city air routes have been hit with punishing price increases of 40% and 50%, and other well-traveled paths likely face big fare hikes in the future. It's the fallout from airline mergers, and the planned combination of American Airlines and US Airways could bring a new round of hefty fare increases. When two competitors combine to dominate prime routes, those markets tend to bear the brunt of higher prices. (Wall Street Journal, Where Airfares Are Taking Off (April 10, 2013); available at: http://online.wsj.com/article/SB10001424127887324010704578414813368268482.html.

            I’m sure my friends at the Phoenix Center could deftly explain why commercial aviation does not provide an appropriate comparison to wireless carriage.  They’d also refute any premise that the financial sponsors of the Phoenix Center, which may just include certain large wireless carriers, had anything to do with their motivation to come up with their premise and find an academic publisher to document it.  I’ll have to take them at their word, in part because I lack the math skills to understand their Cournot model.   But—and this is a big one—I’m not convinced that AT&T and Verizon would lack the motivation and ability to raise prices should they further bolster their market dominance.

 

 

The FCC’s Role in the Two Plus Two Wireless Market

           The U.S. national wireless market cleaves between AT&T/Verizon, with a combined 70% market share, and Sprint/T-Mobile, barely able to afford essential next generation network spectrum.  How did AT&T and Verizon become so dominant?  A lot has to do with deep pockets and the ability to make the necessary capital expenditures for growth.  Hats off to these carriers for taking the risk.

            But as much as AT&T and Verizon desire recognition, they had a silent partner who facilitated a powerful first mover advantage: the Federal Communications Commission.  The FCC created a “wireline set aside” back in 1981 granting 40 MHz of free spectrum to incumbent telephone companies.  Of course these carriers took the risk to invest in a new mobile wireless radio technology, but how could they lose having received one of the most expensive components free of charge?  Additionally the FCC granted them a tremendous market entry headstart as second carrier market entry could occur only after a comparative hearing often among a dozen or more applicants.

           AT&T and Verizon have successfully leveraged their first mover advantages and they will not let anything or anyone prevent them from capturing great rents.  Not even the FCC.

            So if and when the FCC considers whether to confer any sort of new spectrum access opportunity for lesser carriers—as recommended by the U.S. Department of Justice—expect AT&T and Verizon to scream bloody murder.  What was good for their goose is not okay for the lesser ganders now.

What Charlie Ergen’s Rational Exuberance Means for Consumers

            In the latest of an unbroken chain of disinformation from the Wall Street Journal, columnist Holman W. Jenkins, Jr. today implies that a Dish Network acquisition of Sprint offers more proof that there’s nothing but sunshine in the broadband and wireless marketplace.  According to Mr. Jenkins, anyone having a “woe is us refrain” ignores the robustness of facilities-based competition and how the network neutrality issue is a solution seeking a problem.

            Not so fast Mr. Jenkins.  There is another meme to yours that your publisher won’t allow and you cannot fathom: Dish Network, like AT&T, Comcast and all actual or prospective acquiring companies have commercial objectives that mostly involve enhancing shareholder value, goosing stock options, locking up spectrum and buying out competitors than promoting competition or ensuring fairness and transparency.  There is nothing wrong, noble or charitable about Mr. Ergen’s gambit: just like Comcast, he sees the need to find a hedge and alternative to his core satellite services.  Just in case consumers lose their appetite for a forced bundle of content tiers, delivered via Mr. Ergen’s satellites or Comcast’s cables, incumbents like Dish need to identify new profit centers.  For both Comcast it involved bolstering control over content, not just its distribution.  For Dish it requires a return to earth-based content distribution technologies in addition to—hopefully not in lieu of—the satellite option.

            Dish sees Sprint primarily as a source of terrestrial spectrum, perhaps for the same content it now distributes via satellite.  There is nothing in a Dish acquisition that bolsters the “reality” of broadband competition, or refutes concerns about the incentive and ability of network operators to favor affiliates.  Dish may revitalize Sprint, but the deal does not create new competitors, new competition, or more spectrum. 

            Mr. Jenkins exuberantly sees a rosy future when competitors buy each other out and collaborate in ways that foreclose even the prospect for facilities-based competition.

Rebooting with a Shout Out to Comcast

            Having taking time away from Telefrieden I have seen how blogs often have much to offer than the short web links available from Twitter and Facebook entries.  On the other hand blog take much more time and effort to get right, and I have lost confidence that they matter much.  There’s just so much noise everywhere and so little truth.

            But truth telling—or at least my sense of it—enervates.  It’s quite difficult trying to set the record straight.  I have found myself too much the winge, so as I reboot I’ll try to offer snapshots of the future rather than a reiteration of the often miserable present.

            Toward that end I’ve got to praise Comcast for finding a way to convert (minor pun)  terminal adapter leasing from a necessary evil into a profit center.  Comcast recently received FCC authority to encrypt the basic tier thereby reducing the number of truck rolls and piracy.  The FCC required Comcast to make available digital to analog converters, but did not specify the commercial terms for their lease. Comcast offered two free of charge for a few months and then slipped in a $1.99 rental fee.

            I’m not sure how much the little Pace converters cost, but I’ll hazard to guess that Comcast will make money on a $1.99 lease.  So very smart and capitalist of Comcast.  But in doing so the company has all but encouraged me to rediscover off air, broadcast television free of the cable, at least for the supplemental television sets widely distributed in many homes.  

            The possibility exists that Comcast has contributed to consumers’ doubts about the value position of cable, particularly when companies like Comcast have no interest in cable ready, true two-way sets, operating without company-leased and controlled boxes.  If I cannot justify a set top box, or converter lease for the third and fourth televisions in the house, I may reassess the lease and subscription for the first two sets.  At least I know how to retrofit for the old standby of off air television reception.  Hats off to Comcast for the nudge.

 

Research Questions About Terminating the PSTN

      Incumbent carrier initiatives to eliminate the PSTN and their carrier of last resort responsibilities may constitute on of the key evolving policy initiatives going forward. Here are some research questions worthy of investigation:

If consumers must migrate from POTS to a NGN (IP-centric) replacement, what are the net consequences in terms of consumers’ out of pocket costs, as well as network QOS, availability, reliability and  scalability? 

Can wireless networks accommodate the complete off loading of wireline traffic?  Would this offloading exacerbate spectrum  scarcity?

If incumbents continue to rely on wireline plant, e.g., U-verse, do they gain deregulation without conferring much upside consumer benefits?   For example most carriers offer unmetered (All You Can Eat") wireline service  at about $20 a month, but metered wireless service costs 2 or 3 times as much.
 

How would deregulation create incentives for carriers to migrate from copper to fiber media?

As many incumbents have eschewed POTS universal service funding, will they similarly avoid broadband subsidies tied to open network access requirements?

Will the migration remedy the digital divide, including areas with limited or no wireless service?

Adventures in Cloud Computing (Part One)

What are the odds that the following 3 travel misadventures would occur on the same day?

1)     The National Car rental web site again tell me that my credit cards on account have expired.  Of course they haven't and a phone agent confirms this, but that doesn't help me modify an existing rez.

2)     A special reservaiton web site for a Hilton conference hotel generates a confirmation code that Hilton can't read and process.  I never receive confirmation and end up booking two reservations I can't see.  But of course Hilton debits my credit card twice.  Calls to India prove fruitless.

3)      My last four United code share flights with Lufthansa and Swiss never generate miles with United Mileage Plus.  I risk getting drummed out of the Economy Plus seating area.

         Are the travel gods telling me something?

Terminating the PSTN

            A month or so ago Telecommunications Policy published my article entitled The Mixed Blessing of a Deregulatory Endpoint for the Public Switched Telephone Network.  At the time of publication I did not have the insights and clarity of purpose provided by AT&T’s bold initiative to couple a substantial increase in capital expenditure with the elimination of regulation. See http://www.att.com/Common/about_us/files/pdf/fcc_filing.pdf.

           AT&T couches its proposal as the progressive and timely replacement of copper-based telephone technology (Time Division Multiplexing) with a wireless-friendly and Internet-based standard.  Of course we should applaud new “sunk” investment in infrastructure and yes an Internet Protocol standard efficiently promotes technological and marketplace convergence.  But as I stated in the article there is more to this initiative than AT&T benevolence and competitive necessity.

            It has become clear to me that AT&T seeks to leverage “spade ready,” “job creating” investment for the following financial benefits:

1)         elimination of hundreds of thousands of jobs many of which are currently filled by union employees;

2)         billions of dollars in avoided tax liability generated by the coupling of new capital investment and the write off of most copper and obsolete switch assets that have artificially elevated values which, over the years, have rewarded AT&T and other incumbent wireline incumbents with excessive rates of return and universal service subsidies; and

3)         the replacement of common carrier regulated telecommunications services with a blend of mostly unregulated information services with a few residual telecommunications   services, such as basic wireless voice treated as common carriage, but subject to “streamlined” regulation.

           The quid pro quo that AT&T proposes surely will come across as reasonable if not generous to the uninformed and the purposefully ignorant legislator.  To be clear AT&T must upgrade its network in recognition that basic voice revenues—wireline and wireless—will decline substantially.  Why not leverage such necessary investment in exchange for a Christmas wish list of deregulatory—make that unregulatory—goals?

           Only in this purposefully ignorant and politicized environment can AT&T and other incumbents condition essential and commercially necessary change with regulatory changes that eliminate still needed safeguards.  Do we honestly think the migration from wireline service, backed up by carrier of last resort duties, to wireless service, with no geographical service mandates and rate oversight, will have no adverse impact of the current price, quality of service, availability, reliability, consumer protection and the public interest safeguards available to wireline consumers?  Didn’t AT&T claim that chronic spectrum shortages would prevent it from providing reliable service, or what that a red herring (or lie) to support its acquisition of T-Mobile?

            More fundamentally, does a change in baseline technology and medium eliminate the need for government oversight?  Exactly what does this shift do to the level of marketplace competition in basic and enhanced services?

Summary of the FCC's Elimination of the Bar on Exclusive Program Access Contracts

           In a unanimous decision, the FCC has decided not to extend its program access rules beyond the scheduled October 5, 2012 sunset date. [1] The Commission believes that the marketplace for video content has become sufficiently competitive to obviate the need for an absolute ban on exclusive contracts for satellite cable programming or satellite broadcast programming between any cable operator and any cable-affiliated programming vendor in areas served by a cable operator.  Congress enactment the rule in the 1992 “when cable operators served more than 95 percent of all multichannel video subscribers and were affiliated with over half of all national cable networks.” [2]

            To guard against the possibility of ongoing harm resulting from any individual exclusive access contract, particularly in regional markets and for specific types of content like sports, the FCC will consider complaints on a case-by-case process. [3] The Commission will retain a rebuttable presumption that an exclusive contract involving a cable-affiliated Regional Sports Network (“RSN”) has the purpose or effect prohibited in Section 628(b) of the 1992 Act [4] that established the ban based on the assumption that the FCC needed to preserve and protect competition and diversity in the distribution of video programming.  The Commission noted that additional safeguards exist in its conditional grant of authority for Comcast to merge with NBC/Universal. [5] Additionally the Commission stated that it will require program suppliers to honor the full term of existing supply contracts and access complaints can include claims of discriminatory treatment where a supplier provides access to one or more distributors, but not to others.  Lastly the FCC stated its intention to continuing monitoring the video programming access marketplace to ensure that “the expiration of the exclusive contract prohibition, combined with future changes in the competitive landscape, result in harm to consumers or competition . . ..” [6] 

            In the Further Notice of Proposed Rulemaking in MB Docket No. 12-68, the FCC proposed specific rebuttable presumptions about exclusive RSN access contracts.  The Commission sought comments on whether to establish a rebuttable presumption that an exclusive contract for a cable-affiliated RSN, regardless of whether it is terrestrially delivered or satellite-delivered, is an “unfair act” under Section 628(b) of the 1992 Cable Act as well as a rebuttable presumption that a complainant challenging an exclusive contract involving a cable-affiliated RSN is entitled to a standstill of an existing programming contract during the pendency of a complaint.  Additionally the Commission proposed to treat as rebuttable presumptions with respect to the “unfair act” element and/or the “significant hindrance” element of a Section 628(b) claim challenging an exclusive contract involving a cable-affiliated “national sports network” and a rebuttable presumption that, once a complainant succeeds in demonstrating that an exclusive contract involving a cable-affiliated network violates one or more provisions in Section 628 of the 1992 Cable Act. 

            The FCC’s decision not to maintain a bar on exclusive program access contracts represents a conclusion that the video programming marketplace evidences greater competition and less domination by vertically integrated companies, such as Comcast, that have ownership interests in both video program creation and distribution.  The Commission acknowledges that “the record here shows a mixed picture, indicating that vertically integrated cable programmers may still have an incentive to enter into exclusive contracts for satellite-delivered programming in many markets.” [7] 

            However, “the record evidence indicates that the cable industry’s share of MVPD subscribers nationwide has continued to decrease, from 67 percent in 2007 to 57.4 percent today, which indicates that vertically integrated cable operators as a whole – and considered solely on a national basis – have a reduced incentive to enter into exclusive contracts, compared to 2007.” [8]  On the other hand, the Commission noted that vertically integrated cable operators have maintained, or increased their market share in certain specific certain Designated Market Areas (“DMAs”).  Previously the Commission had determined that market shares in the range of 67-78 percent provided sufficient incentive and ability to use exclusive programming contracts as a way to maximize profitability.  The Commission noted that major multiple system operators, such as Comcast and Time Warner Cable, have pursued a clustering strategy in many DMAs accruing market share in excess of 70 percent. [9] Notwithstanding such concentration of control in many major metropolitan areas, the Commission has confidence in its ad hoc, complaint driven process in lieu of an absolute bar on exclusive program access contracts:

Because the record before us indicates that there may be certain region-specific circumstances where vertically integrated cable operators may have an incentive to withhold satellite-delivered programming from competitors, we believe that a case-by-case approach authorized under other provisions of the Act – rather than a preemptive ban on exclusive contracts – will adequately address competitively harmful conduct in a more targeted, less burdensome manner.  We disagree with commenters to the extent they imply that Congress intended the prohibition to expire only once vertically integrated cable operators no longer have any incentive to enter into exclusive contracts.  Such an interpretation contradicts Congress’s recognition that exclusive contracts do not always harm competition and can have procompetitive benefits in some cases.  [10] 

---

[1]           Revision of the Commission’s Program Access Rules, Report and Order in MB Docket Nos. 12-68, 07-18, 05-192, Further Notice of Proposed Rulemaking in MB Docket No. 12-68 Order on Reconsideration in MB Docket No. 07-29, FCC 12-123 (rel. Oct. 5, 2012); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-12-123A1.doc.

[2]           Id. at ¶1.

[3]           “.In addition to allowing us to assess any harm to competition resulting from an exclusive contract, this case-by-case approach will also allow us to consider the potentially procompetitive benefits of exclusive contracts in individual cases, such as promoting investment in new programming, particularly local programming, and permitting MVPDs to differentiate their service offerings.” Id. at ¶2.

[4]               47 U.S.C. § 548 (2010) codified at 47 C.F.R. § 76.1002.

[5]           [A]pproximately 30 satellite-delivered, cable-affiliated, national networks (accounting for 30 percent of all such networks) and 14 satellite-delivered, cable-affiliated, RSNs (accounting for over 40 percent of all such RSNs) are subject to program access merger conditions adopted in the Comcast/NBCU Order until January 2018.  These conditions require Comcast/NBCU to make these networks available to competitors, even after the expiration of the exclusive contract prohibition.” Id. at 4.

[6]           Id. at 4.

[7]           Id. at 17.

[8]           Id.

[9]           “The Commission has, in past orders, observed that clustering may increase a cable operator’s incentive to enter into exclusive contracts for regional programming.  In the 2007 Extension Order, the Commission noted that Comcast passed more than 70 percent of television households in 30 Designated Market Areas (DMAs) and TWC passed more than 70 percent of television households in 23 DMAs.[9]  Based on the 2011 data provided by the cable operators, Comcast now passes more than 70 percent of television households in [REDACTED] DMAs and TWC passes more than 70 percent of television households in [REDACTED] DMAs.  Id. at 19.

[10]          Id. at 21.

How the FCC’s 8th Broadband Report Became a Referendum on the Marketplace

           Only in this hyper-partisan environment can an FCC report become a stalking horse for libertarianism and antipathy to limited government efforts to stimulate broadband supply and demand. The Report (available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-12-90A1.doc) offers a well-researched and appropriately granular analysis of broadband market penetration in the United States.  It provides ample evidence of progress, but candidly acknowledges that a significant portion of rural America, populated by 19 million people, have no broadband access and are unlikely to have the privilege without government developmental support.   Perhaps this Report has triggered such vigorous opposition, because several years ago a previous Report had a “mission accomplished” theme based on a toting up of even slow speed broadband options that were considered available to all within a zip code area even if only one subscriber existed.

            The Report has triggered vigorous dissent from the two Republican Commissioners, sponsored researchers and libertarian leaning publications by stating what I thought was obvious: there are plenty of areas in America where marketplace forces work against the offering of any affordable broadband access option, particularly wire-based services. I will go so far as to use two words that apparently cannot be uttered: market failure.  

            Broadband wireline options from carriers such as Verizon and AT&T do not even serve many urban and suburban locales.  These carriers are hell bent to jettison their rural customers and the obligation to service as carriers of last resort offering telephone service.  They have doubled down on wireless and do not seem to care about declining DSL subscribership and the need to migrate to faster transmission speed services outside the metered and more expensive wireless option. Smaller carriers do want to provide broadband services and generally have expressed support for FCC efforts to extend universal service subsidies.

            Some time ago both Democratic and Republican Commissioners at the FCC typically would thank the staff for doing such a comprehensive and conscientious job in preparing a Congressionally-mandated Report.  They would consider factors such as the public interest as their foremost concern, not whether they could accrue brownie points for their party and its ideology.  FCC Commissioners of both parties gladly supported extraordinary and admittedly too generous and inefficient universal service programs.  These initiatives included “rate integration” that required carriers to average in the higher costs of providing telephone service in non-continental United States locales, e.g., Alaska, Hawaii, Puerto Rico and the Virgin Islands.  No one balked at providing “free” satellite earth stations to Pacific island residents whose governments have an affiliation with the United States, e.g., The Federated States of Micronesia.  Nobody invoked Ann Rand to suggest that rural residents should suffer any cost disadvantage for the various upside opportunities from living in the hinterland.

            Now a Report to Congress somehow has all sorts of underlying messages.  By truthfully answering a question posed by Congress that more work needs to be done to achieve ubiquitous and affordable broadband, the FCC apparently is foreshadowing a broad agenda to preempt the marketplace.   See Larry Downes, How the FCC sees Broadband's 95% Success as 100% Failure, Forbes (June 23, 2012); available at: http://www.forbes.com/sites/larrydownes/2012/08/23/how-the-fcc-sees-broadbands-95-success-as-100-failure/.  And what kind of preemption would there be?  Most subsidies flow directly to the carriers!  But instead of acknowledging that carriers stand to benefit financially from such subsidies, opponents of candor strive to see some hidden agenda, including an effort by the FCC to impose network neutrality—if not the public utility, common carrier regime—on broadband.  

            At an unprecedented rate, the entire telecommunications policy ecosystem has become so politicized as to ignore the first principle of serving the national interest.  Instead we have warring parties arguing over whether and how government is subverting market forces that time and again work against making service available absent government efforts to stimulate supply and demand.

           

Testing the Negraponte Flip

           Several years ago MIT Professor Nicholas Negraponte suggested that many current wireless services could be more efficiently provided via wires and vice versa.  Certainly he was onto something when we have duplication via both media, e.g., television broadcasting and cable television.  But does it make sense to suggest that most wireless services can efficiently and more cheaply substitute for wireline services?

            It looks like we may see that experiment as U.S. wireline carriers appear ready to rely solely on wireless options.  Whether by design or their refusal to invest in wireline improvement, incumbent telephone companies in the U.S. have experienced a significant decline in plain old telephone service revenues.  This quarter these carriers have faced a net decline in DSL subscribership.  The top two carriers, AT&T and Verizon, appear willing to divest themselves of rural service territories and to reduce or stop capital expenditures in fiber and fiber/copper broadband.

            Many of us have accepted the rationale that local loop-based broadband constitutes a transitional technology.  But I thought the transition led to fiber primarily.  Now it appears that  both AT&T and Verizon have confidence in a wireless only future. 

            Surely 4^th generation, LTE wireless can provide attractive transmission speeds compared to wireline, but can these technologies handle the volume of demand we can expect if the marketplace has only a cable modem and wireless options?  Have the incumbents done the math and figured that they are better off with offering only broadband services in the $50-100 a month range instead of having available something slower and far cheaper, e.g., DSL available for less than $20 a month?

Where Are the AccuWeather Satellites?

            In my home town of State College, Pennsylvania a major private weather venture operates.  The company, AccuWeather,  takes raw data freely supplied by the National Weather Service and reformulates it for profit.  Newspapers including the Wall Street Journal pay for the value added graphics and packaging performed by the company.

            Passing by AccuWeather’s offices you can see dozens of satellite dishes pointed upward to space.  Yet the company does not own and operate a single satellite.  The federal government bore the complete cost of this vital infrastructure investment.  AccuWeather points its earth stations to these government satellites, collects the data and repackages it.  Such a deal.  

            In this day, I’m sure plenty of people would consider government involvement in weather forecasting unnecessary, job killing and a threat to private enterprise.  But do they really think a company like AccuWeather, or a consortium of ventures, would invest the billions in the construction, launch, insurance, tracking and management of the weather satellites?  

            I endorse the superior outcomes available from private enterprise and entrepreneurship.  But let us not dismiss the role of government as technology incubator, anchor tenant of new services and investor of last resort in essential infrastructure.  Yes it’s quite likely the Internet could have been invented free of any government stewardship and early investment.  Private enterprises and society benefitted by the Internet’s early arrival thanks to taxpayers.       

New Publication--The Mixed Blessing of a Deregulatory Endpoint for the Public Switched Telephone Network

        Telecommunications Policy soon will publish my paper entitled The Mixed Blessing of a Deregulatory Endpoint for the Public Switched Telephone Network

        Here's the abstract:

            Receiving authority from a National Regulatory Authority to dismantle the wireline public switched telephone network (“PSTN”) will deliver a mixture of financial benefits and costs to incumbent carriers.  Even if these carriers continue to provide basic telephone services via wireless facilities or the Internet, they will benefit from the likely substantial relaxation of common carriage duties, no longer having to serve as the carrier of last resort and having the opportunity to decide where and what services they will provide going forward.  On the other hand, incumbent carriers may have underestimated the substantial financial and marketplace advantages they also will lose in the deregulatory process.

            Incumbent carriers often obscure or dismiss as insignificant the substantial privileges and benefits accruing from their status as telecommunications service providers.  Common carrier responsibilities include duties to interconnect with other carriers, provide service on transparent and nondiscriminatory terms and offer some low margin services.  But this legal status also guarantees wireline local exchange carriers in many nations access to annual universal service funding, zero or low cost access to rights of way and radio spectrum, accelerated depreciation and other tax benefits, the ability to vertically integrate throughout the “food chain” of telecommunications services and dominant status in the administration of telephone numbers, standard setting and other policy issues.  Incumbents will strive to capture deregulatory benefits while retaining the many benefits previously reserved for common carriers.

        This paper will identify the potential problems resulting from the decision by the United States Federal Communications Commission (“FCC”) to grant authority for telecommunications service providers to discontinue PSTN services.  The paper also will consider whether in the absence of common carrier duties, carriers providing telephone services, including Voice over the Internet Protocol (“VoIP”), voluntarily will agree to interconnect their networks.  The paper will examine Internet peering and other types of network interconnection with an eye toward assessing whether a largely unregulated marketplace can ensure ubiquitous access to PSTN replacement services. 

        The paper concludes that private carrier interconnection models and information service regulatory oversight may not solve all disputes, or foreclose price discrimination for functionally the same type of service.   Recent Internet interconnection and television program carriage disputes involving major players such as Comcast, Level 3, Fox and Cablevision, point to the possibility of increasingly contentious negotiations that could result in balkanized telecommunications networks with reversed or reduced progress in achieving universal service goals.  The paper also concludes that rural access to VoIP and other voice communications services could end up costing significantly more than what urban residents pay, an efficient, but politically risky outcome.

The Wireless Duopoly?

   The July 9, 2012 edition of the Wall Street Journal (Winners' Circle R6) identifies some of the most successful money managers for the year so far.  Included is James Wong of Payden Value Leaders.  Mr. Wong is long on Verizon and AT&T and offers this insight:

    "The beauty of the business [of AT&T and Verizon] is that it's an oligopoly."  But a robustly competitive one for sure.

What’s Wrong With Some Types of Sponsored Research?

          
           In various blog entries and publications I have expressed or implied my disapproval of certain kinds of sponsored research.  An author of such research recently chided me for using the term in this blog, because it can create an inappropriate tone perhaps implying illegitimacy of the work on its face.  The author suggested that branding my unsponsored research as ideological would cast a similarly inappropriate and unfair tone.

            I should clarify that I understand there to be two types of sponsored research: 1) financial support granted for a research proposal with no expectation that the output will support an already established outcome; and 2) financial support granted with the expressed or implied understanding that the output will support a sponsor-desired outcome.  In the former researchers are free to find the truth, but in the latter the primary goal is to support an outcome regardless of whether the output is true.  Sponsored researchers engaged in the latter will claim that the receipt of financial support in no way influenced the outcome of their work.  It just so happens that the findings and conclusions coincide with what the sponsor had in mind.

            I consider results-driven sponsored research as questionable, because the research does not pose and try to answer research questions without preconceived, desired outcomes.  Such research would not pass must with blind peer review where an expert, unknown to the authors and not knowing who the authors are, assesses the work product.  Peer review does not challenge the author’s ideology and preconceived notions, but instead assesses whether research findings are reproducible and plausible.

            Much of the sponsored research on telecommunications and Internet issues are financed with an eye toward influencing the policy making process.  But instead of being presented as advocacy documents, they are presented as pure research perhaps because such labeling confers greater credibility to the work product.  I have no problem with stakeholders funding advocacy documents that no one would confuse with research, particularly work having no desired outcomes.

            I have great problems with stakeholders using research to support a preordained outcome, particularly when the fact finder, e.g., the FCC, may be all too willing to treat the work product as pure research and heavily rely on it when making policies. 

Consider the recent instance where the large pharmaceutical firm Glaxo submitted research to support a drug’s safety, but later acknowledged that it removed findings that called into question the drug’s efficacy and safety.  Should Glaxo have the option of sponsoring research based on the view that the FDA would have the resources to conduct its own research, or at least to identify instances where the Glaxo research would not pass muster with peer review?  Should Glaxo have the option of deleting and not submitting any part of research that would hamper its goal of securing FDA approval?

            In any event I do not want to come across as a better researcher simply because I limit the types of financial support and grants I seek. I only assert that I do not have to deliver a particular work product.  I have the freedom to challenge the conventional wisdom and to identify instances where stakeholders are misrepresenting the truth as I understand it.

  Of course reasonable people can disagree on the truth. 

Questions Sponsored Wireless Competition Researchers Don’t Ask

          The Federal Communications Law Journal recently published a comprehensive assessment of the U.S. wireless marketplace with an eye toward challenging the FCC’s qualified concerns about the adequacy of competition.  See Gerald R. Faulhaber, Robert W. Hahn and Hal. J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports, 64 FED. COMM. L. J. 319 (2012) available at: http://www.law.indiana.edu/fclj/pubs/v64/no2/Vol.64-2_2012-Mar_Art.-03_Faulhaber.pdf.

        The authors have produced high quality sponsored research and I appreciate their disclosure of AT&T’s financial underwriting.  You’d be surprised about the surfeit of undisclosed results driven research sponsored by a major stakeholder.  These authors go so far as to ask “Are we missing something?” 

            I’ll take it on good faith that they are sincere in wanting to confirm what they consider obvious—that the U.S. wireless marketplace is robustly competitive, innovative and not so concentrated as to warrant antitrust concerns.  So even if they are overconfident—as many economists surely are—and disinclined to consider the questions from someone like me I’ll pose five of the many I have anyway.

1)         You substantially rely on downward prices in the wireless marketplace to support your robust competition finding. How much of the decline results from competition as opposed to the nature of the wireless business which has substantial sunk costs and low incremental costs?  For good measure as the wireless marketplace has matured don’t businesses have to “sharpen their pencil” to attract late adopters?

2)         Speaking of pricing, you and others place heavy emphasis on a calculated per minute of use rate.   One can calculate for the U.S. globally lowest per minute cost based on globally highest usage.  But what about subscribers who have no need or interest in talking for even 450 minutes a month, or who don’t want to send several thousand texts per month?  Their per unit rates are much higher, especially the occasional user who does not see the need for an unlimited $20-30 a month texting plan, but who questions how a carrier can justify charging 20 cents a text for something that uses the built-in polling system carriers use to track operating handsets.

          If you are one of those snarky types, you might read the above paragraph and ask “is there a question here?” Yes; I’ll rephrase it:  Wouldn’t your evidence of declining cost be less substantial if you did not apply a single average and instead considered an average for each of several tiers of available minutes?  For example, in my unsponsored ignorance I would have tried to calculate the average actual monthly usage for subscribers in each of the tiers that currently exist, e.g., 450, 900, unlimited for AT&T Wireless.

3)      You may not have noticed this but all wireless carriers seem to have the same basic price points for the same type of service.  Your Appendix 1 shows an example of this: the 4 national carriers all offer 450-500 monthly voice minutes for $39.99 plus fees.  Are all the wireless carriers price takers having no carrier-specific efficiencies?  Antitrust specialists might infer something they call “conscious parallelism.”  How is that not happening in the U.S. wireless marketplace?

4)     Your paper shows declines in Average Revenue Per User (“ARPU”) as additional evidence of a robustly competitive market, yet you don’t acknowledge that the figures (and much higher ones I have found) range near the top globally.  I appreciate that high usage, stimulated by large baskets and by unlimited All You Can Eat plans, generate higher monthly revenues.  However you don’t separate ARPUs by type of user.  What do you think of Craig Moffett’s research that reports significantly higher ARPUs for smartphone users with minor declines in the last few years?  In a June 25, 2012 report this prominent Wall Street buy side analyst at Bernstein Research estimates AT&T’s first quarter 2012 ARPUs for 3 categories: $80.44 a month for postpaid smartphone users down 4.4% year over year, $42.34 for non-smartphone post paid users and  $64.46 average for all postpaid users.

           Do you think ARPUs will continue to decline when more subscribers add data plans?

5)        I’m confused about your views on spectrum and its impact on the wireless marketplace.  The conventional wisdom is that wireless carriers simply don’t have enough spectrum available, the product of government regulation and I’ll add the spectrum management and allocation process of the International Telecommunication Union.  But I got the sense from your paper that there is at least enough spectrum to support 5 or more facilities-based, robustly competitive carriers in most markets. So do you think there’s enough spectrum to support competition and more might promote greater competition, or would access to more spectrum simply help incumbents erect greater barriers to market entry by new competitors? 

        By the way, don’t you think you overstated the impact of the non-national carriers?  Clear’s data service is so far limited to personal computers with dongles, not smartphones.  Neither Sprint, T-Mobile or the super regionals have had much success offering an attractive alternative to the positive networking externalities that accrue when more and more subscribers pick the same network and when most developers offer their next killer app solely on the platform support by AT&T and Verizon.

         I’m sure you can easily answer and dismiss my questions, but with all due respect I see the wireless marketplace from a much different perspective.  I see the carriers basking in the limelight and exploiting the networking externalities of handset manufacturers, content creators and applications developers.  I don’t see them devoting sleepless afternoons competing.

       In the marketplace of ideas and consulting you surely win, perhaps because there doesn’t seem to be anyone interested in sponsoring research that answers the kinds of questions posed here.

           

Yale JOLT Article on Internet Access Regulation

     The Yale Journal on Law and Technology has recently published my article entitled Rationales for and Against Regulatory Involvement in Resolving Internet Interconnection Disputes (14 Yale J.L. & Tech 266 (2012); available at: http://yjolt.org/rationales-and-against-regulatory-involvement-resolving-internet-interconnection-disputes.
     Here's the abstract:

      This Article will examine the terms and conditions under which Internet Service Providers (“ISPs”) switch and route traffic for each of several links between a source of content and consumers. The Article concludes that the Federal Communications Commission (“FCC”) may lack direct statutory authority even to resolve disputes based on its determination that Internet access constitutes an unregulated information service.  Additionally the FCC may appropriately forebear from regulating, because sufficient competition favors industry self-regulation.

       Despite substantial reasons not to intervene, the FCC nevertheless might have to clarify its understanding of what subscribers of retail ISP services can expect to receive. Under truth in billing and other consumer safeguards the Commission might require ISPs to explain what an Internet subscription guarantees not only in terms of transmission speed and downloading capacity, but also what subscribers can expect their ISPs to do when receiving content requiring downstream   termination.

      The Article concludes that both customers of content services, such as Netflix, and retail ISP subscribers expect their service providers to guarantee delivery of movies and all sorts of Internet traffic respectively. For physical delivery of DVDs Netflix must pay the U.S. Postal Service and for delivery of streaming bits Netflix must pay one or more ISPs. But for Internet traffic involving two or more ISPs, the Article examines whether other retail ISPs providing last mile delivery of content violate their service commitments to subscribers by demanding additional payment from upstream carriers.

Galley Proof Available for New Law Review Article

                The Brooklyn Law Review soon will publish From Bad to Worst: Assessing the Long Term Consequences of Four Controversial FCC Decisions. Email me if you'd like a copy.

          Here's the abstract:

          Far too many major decisions of the Federal Communications Commission (“FCC”) rely on flawed assumptions about the current and future telecommunications marketplace.  If the FCC incorrectly overstates the current state of competition, it risks exacerbating its mistake going forward if actual competition proves unsustainable, or lackluster.  In many key decisions the FCC cited robust competition in current and future markets as the basis for decisions that relax restrictions on incumbents, abandon strategies for promoting competition, or apply statutory definitions of services that trigger limited government oversight.  The Commission ignores the secondary and tertiary consequences of decisions that deprive it of the jurisdiction and flexibility necessary to respond to technological and marketplace changes. 

          Rather than promote competition, the FCC has exacerbated the trend toward concentration of ownership generated by technological innovations that promote bundling of  previously stand alone services.  Ventures diversify and expand to accrue scale economies and to exploit new opportunities to serve adjacent markets. Rather than make sure that this trend does not lead to oligopolistic behavior, the FCC have removed increasingly essential regulatory safeguards designed to curb market power without robbing ventures of opportunities to operate efficiently.  Intentionally or not the FCC contributes to market concentration even as it abandons lawful techniques and policies to monitor and remedy marketplace abuses.

          The FCC’s deregulatory decisions operate in one direction—the elimination of regulatory safeguards—without any option or vehicle for reasserting safeguards should assumptions prove wrong, or circumstances change in ways necessitating public interest safeguards.  For example, the Commission’s decision to classify Internet access technologies as information services appears to eliminate entirely the ability to respond to anticompetitive practices of Internet Service Providers.  So when Comcast or other carriers deliberately disrupt subscribers’ traffic in the absence of legitimate network management needs, the FCC has no statutory authority to impose safeguards.  Worse yet the decision to treat basic bit transmission as an information service severely restricts the Commission’s ability to impose safeguards on services that combine Internet access with software, to provide the functional equivalent of a telecommunications service, e.g., Voice over the Internet Protocol (“VoIP”).  The FCC decision to apply the information service classification to all Internet access technologies means that the Commission has abandoned any direct statutory authority and must resort to questionable ancillary jurisdiction to impose even light-handed regulatory safeguards.

          Other instances of unintended consequences from overly optimistic findings and assumptions about marketplace competition include removal of caps on the total spectrum a single wireless carrier can control, premature abandonment of local loop unbundling requirements and conclusions that incumbent carriers have no duty to deal with market entrants even when the incumbent opts to offer retail rates below the so-called market-driven wholesale rate charged competitors.  For each of these decisions the FCC compounded its initial mistakes by foreclosing the option of making necessary and lawful future modifications.

            This paper will examine the consequences of the FCC’s wishful thinking about the viability of current competition and the sustainability of competition going forward.  The paper concludes that flawed fact finding and market projections have adverse initial consequences, but even worst future impact. In response to vigorous lobbying by incumbents, impatient law makers and jurists and deregulatory bias the FCC has contributed to the development of a telecommunications industry structure that appears less competitive, innovative and responsive than what occurs in many other countries.
      

Billing Line Items in Telecom and Other Industries

          In a previous blog entry, I questioned why wireless carriers allow sharing of voice minutes with no additional charge for multiple handsets, but new data sharing plans add surcharges for each additional device.  Subscribers incur no recurring fees for multiple device access to voice minutes even though carriers incur higher signaling costs when additional devices are on, even if they are not being used.  Carriers similarly incur such costs for smartphones, and I have seen no evidence that the costs are higher for data than voice.

            So why the difference?  As best I can determine the answer is that consumers have become inured to billing line item expansion.  We see it everywhere: airfares, mortgages, car purchases and even car repair.  I will not do business with auto repair facilities that tack on an additional 10% “shop fee” to the bill, but I seem to stand alone.

            What ever happened to companies having to absorb overhead?  Instead we get nickled and dimed by additional line items that make no sense: “adjusted dealer markup,” “shipping and handling,” “dealer prep,” “regulatory fee,” etc.

            Wireless carriers can charge for multiple device access, because they can praddle on about how multiple devices increase signaling and polling costs.  The carriers had to absorb such overhead for voice, perhaps because of a real or perceived need to enhance the value proposition of their service.  As the Internet diversifies and offers ever increasing options and utility, wireless carriers can capture greater profits simply by providing the essential first and last link.

            Bottom line: wireless carriers are in an increasingly better position to raise monthly subscription costs while reducing the amount of handset subsidies.

About That Second, Third and Fourth Wireless “Attachment”

            There is some good news about the decision by Verizon Wireless to offer shared monthly data plans.  But there could be a lot more if the FCC applied its Carterfone policy.  That policy gave consumers the power to decide what and how many devices to attach to a network connection.  If Carterfone applied, consumers could use multiple devices to access a network subscription, albeit perhaps not at the same time.  Because wireless handsets each have a separate identity, Verizon and soon every other carrier will offer the shared data plan option, albeit at much higher prices factoring in the surcharges for using more than one wireless device.

            Readers over the age of 40 may recall that there was a time when the wireline telephone company totally controlled what devices could connect to the network.  The Bell System had a monopoly on “authorized” handsets and prevented even a used, secondary market for Bell telephones.  Subscribers feared that the Bell System would know whether a non-Bell vintage telephone was in use, when more than one phone was attached.  Carterfone liberated the marketplace for both new and used handsets.

            It is a remarkable time that the Carterfone policy somehow can be converted into “job killing government regulation.”  The policy promotes consumer sovereignty, but in this bizarre time it gets framed as something bad because it requires government to do something.  And what does government do?  It removes the ability of companies to establish bogus regulations designed to preserve a monopoly and maximize profits.  In retrospect it appears crazy that Bell System managers could argue that anytnon-Western Electric telephone could harm the network (and something they called “systemic integrity”) as well as risk the lives of telephone company personnel.  But that strategy lasted for years and preserved incredible profit margins for AT&T.

            History repeats itself.  Verizon surely cannot make a credible argument that allowing multiple devices to share a download basket of capacity triggers greater costs for the company.  Bear in mind that every wireless carrier provides shared access to a basket of voice minutes.  So how is data any different?  It isn’t. 

The lack of Carterfone enforcement means that wireless carriers can create a bogus, new “cost element.”  Because these carriers copy each other (some would say collude), expect every wireless carrier to create a new billing line item for that second, third and fourth device sharing a single monthly throughput allowance.

The New Economics of Metering

            The old school view for metering emphasized efficiency and resource management.  Without a meter tied to variable payment, subscribers would “overconsume” and waste resources.  Carriers ignored the metering option to stimulate experimentation especially for new services.  For example, Internet access subscriptions initially were offered on an All You Can Eat (“AYCE”) basis.  Even now cable television operates offer AYCE, largely because the business model involves a broadcast function (one-to-many) and the carrier incurs no greater costs with increased consumption.

            Internet carriers have applied conventional metering economics in migrating data subscribers from AYCE to monthly download caps.  Wireless carriers never offered AYCE, but they have agreed not to debit minutes of use for on-network voice calling.  This feature promoted positive networking externalities: a network accrues greater utility for users as more subscribers join the network.

            Some wireless carriers now want to abandon metering for voice services, not because the economics of metering has changed, but because of changes in consumer behavior.  Carriers can tout a generous new unmetered voice service, even as several tiers of usage merge into one option, offered at a higher price for many.  Because consumers are spending more time and money on data plans, wireless carriers have to find ways to retain voice service revenues.  One way would be to take a page from cable television operators and require subscription to a basic (now AYCE) voice plan, as a precondition to getting a data plan.  In cable if you want access to higher-tiered content, you must first subscribe to the basic tier.

            As they eliminate baskets of minutes in exchange for an AYCE plan, wireless carriers prevent subscribers from downgrading their voice plans to cheaper and smaller usage allotments, closer to actual (and declining) usage.  Wireless carriers now can offer AYCE on the valid assumption that few subscribers will overconsume.