Incumbents’ Incentives and Disincentives to Invest in Existing and Next Generation Networks

            Recently anti-network neutrality researchers and advocates have made an assertion that does not make sense to me.  First, they claim incumbent carriers have substantially curbed capital expenditures in plant.  Then they attribute the decline as largely resulting from the FCC’s Open Internet Order.

            Such work would not pass muster under peer review, nor does it pass an informal “smell test.” On the latter screen, why would both AT&T and Verizon make multi-billion dollar investments in legacy content distribution (DirecTV) and content (AOL) if they did not think they could use access to a far larger set of consumers as a way to provide more service bundles?  Put more simply: why would a legacy carrier skimp on its infrastructure after having paid handsomely for content that needs distribution to consumers?

            AT&T touts the DirecTV acquisition as making it possible to offer a “quad-play” bundle of video, wired broadband, wireless broadband and voice; see: http://www.att.com/gen/general?pid=18235#fbid=jUSgILGxbqx. Verizon sees AOL as providing a way to diversify into content and improve its web advertising service skills.

            Even as certain stakeholder want regulators, legislators and judges to think an open Internet would shut the investment tap, they also want to tout how much more plant investment we have vis a vis other nations and regions.  Who needs a universal service subsidy mechanism when we lead the world in 4G and fiber deployment?  Recently Verizon announced an expedited schedule for 5G research and development. See http://www.fiercewireless.com/tech/story/verizon-test-5g-2016/2015-09-08.

            As a professor, I have the luxury of time to review everything I possibly can.  I make an effort to maintain an open mind on each and every subject.  I pay a high premium for not having “cast my lot” with one or the other camp and for having an independent (if unreliable) point of view.

            So if you don’t care to rely on my unsponsored perspective on the matter of whether incumbents suddenly have stopped investing in the future consider this from a clearly right of center source, the Financial Times:

            “AT&T is a big spender, investing more in infrastructure in the first half of this year than any other corporation in the US. Over the past five years it has ploughed nearly $140bn into its network, and it plans to spend a further $21bn this year and more still in 2016.

           “‘I fundamentally believe if you are not a number one or two investor in this industry, you get left behind,’ Mr Stephenson recently told analysts.’”  See David Crow, Telecoms: Showtime for AT&T, FINANCIAL TIMES (October 15, 2015); available at: http://www.ft.com/intl/cms/s/0/70c15980-7321-11e5-a129-3fcc4f641d98.html#axzz3p1qj8qH3.

The Myth of Broadband Investment "Disincentivization"

            Some people, who really should know better, have combined one questionable statistic with an absolutely unreasonable inference.  Ostensibly to bolster their argument that the FCC’s Open Internet Order will either enslave or impoverish carriers, sponsored researchers and one or two easily-persuaded FCC Commissioners make this unsustainable leap of faith:

            Wireline broadband providers have reduced plant investment following the FCC’s Open Internet Order.  Therefore, the entire cause of this diminution investment results from the Order.

            Might there be alternative statistics that identify where the money is going and what, if anything, has caused this sudden conservation of capital?

            First, when considering capital expenditure by companies such as Verizon, converging markets and technologies, surely require an examination of the many places money might go.  Verizon might perceive no competitive necessity to invest in wireline broadband.  Additionally the company might prioritize investments in wireless plant, as part of a major strategy to migrate from wired to wireless content distribution technologies.  Verizon is aggressively jettisoning its wireline plant and state franchises.

            Speaking of content, didn’t Verizon recently come up with a cool $4.4. billion to buy AOL whose major assets are content-based?  Would Verizon skimp on all content distribution technology after having just made a significant investment in content?  Didn’t AT&T just get conditional approval to spend over $45 billion to acquire DirecTV, whose major asset combines access to content and broadband distribution of it?

            On the issue of incentive to invest, just today I read how Verizon already wants to commit substantial funds for next generation, 5G wireless broadband distribution technology. See http://www.verizon.com/about/news/verizon-sets-roadmap-5g-technology-us-field-trials-start-2016.  Bear in mind that Verizon Wireless operates under the Title II, common carrier, telecommunications service provider “public utility” regulatory model that some consider such an investment buzz kill.  Verizon seems to well tolerate this regulatory burden and still manage to invest billion in plant.

            It bears repeating time after time: competitive necessity constitutes the major catalyst for capital expenditures, including next generation network plant. 

            Verizon knows it has to enhance the value proposition for wireless broadband.  And it surely knows the lack of competition means it does not have to extend its FiOS plant, or rush to add funds to wireline technologies about which it does not care.

Verizon’s “Free” Mobile Streaming Service and the Many Questions About Sponsored Data

           When one of the two mega-wireless carriers in the U.S. announces a mobile streaming service, the FCC soon will have to confront head on what carriers can and cannot do by way of advertiser supported data consumption. 

           At first impression, what’s not to like about Verizon’s Go90 gambit? See http://www.nytimes.com/2015/09/08/business/media/verizon-to-offer-free-mobile-tv-with-an-eye-on-millennials.html?emc=eta1&_r=0. The smartphone surely has the capability of offering a competitive alternative to other screens in the video marketplace including television sets and PC monitors.  If a third party wants to subsidize my consumption of “must see” video, well thank you very much!  I am a classic free rider likely to consume the video content without necessarily paying for the advertised products and services. 

           In class I regularly make references to beer, one of the essential food groups for my students.  Most get the economic concept of free ridership when I explain how much I enjoy the Clydesdale advertisements for AB Inbev Budweiser, without having to buy the beer.

            Free rider opportunities notwithstanding, there is a closer question whether sponsored data constitutes permissible price discrimination.  Bear in mind that carriers like Verizon and Comcast can absorb the cost of content carriage, or receive advertising revenues making it possible for consumers to watch content without seeing their often skimpy data allocation evaporate.  Netflix has not banked on competitors having the same zero cost of content delivery.

            So would Netflix have a legitimate (and lawful) complaint about how sponsored data violates the FCC’s Open Internet Order?  In the Internet Service Provider tilting the competitive marketplace for information, communications and entertainment (“ICE”) by taking the cost of content carriage out of the consumer’s cost calculation?

            I part with my network neutrality true believers on this issue, because not all price and quality of service discrimination violates the Communications Act of 1934.  The practice has to be “unfair” and the discrimination has to be “harmful.”  I can envision plenty of instances where sponsored data enhances consumer welfare, particularly free riders distributed throughout the range of incomes.

           

 

The Impact of Regulation on Broadband Investment

           Several sponsored researchers have floated the notion that network neutrality and Title II common carrier regulation constitute the major reason why U.S. broadband carriers apparently have reduced capital expenditure in new and replacement physical plant.  Does this pass the smell test?  Is there any empirical data proving causality?  Would these allegation pass muster under appropriate peer review?

           Let’s get one principle straight: capex in most industries primarily correlates with competitive necessity and the life cycle of sunk investments.  In the U.S., wireless cellular radio companies bear the burden of streamlined Title II common carrier regulation.  Such regulation has not dissuaded these carriers from sinking billion in spectrum auctions and in plant investment.  The FCC swears that broadband access providers will encounter even less regulatory oversight than wireless carriers.

           Similarly, a year over year analysis of capex might have little to do by way of regulation impact on the incentive to invest and much more on whether and when a carrier needs to invest in new, or replacement infrastructure. Ventures with very high plant investments typically also have capacity that comes online or offline in very large increments.  For example, a satellite company like Intelsat, Dish, Sirius-XM and DirecTV will show a significantly higher plant investment in years when it has to replace an in-orbit and soon to be deactivated satellite.  Variability in capex has nothing to do with whether regulation ebbs and flows in terms of severity, or burden.

          I will concede that telecommunications management may tinker with capex as political leverage for less regulation.  AT&T CEO Randall L. Stephenson has said as much, but do you really think he would ration capex if it would render his company and its services comparatively inferior to what other wireless carriers offer?

          Telecommunications carriers and their sponsored researchers also like to trot out “regulatory uncertainty” as a capex disincentive.  In the same breath, they also like to claim regulation operates as an unconstitutional “taking” of their property and the capex they previously made.  Newsflash: regulation in telecommunications constitutes a cost of business that incumbents and prospective market entrants alike have to take into consideration.

          Bottom line: regulation and uncertainty about the future of regulation has limited impact on capex decision making.  If a carrier can make do with less investment it will do so.  Right now most airlines are replacing kerosene guzzlers with more efficient and cheaper models.  They might also “right size” inventory with smaller aircraft.  Such a reduction in overall passenger capacity and in investment responds to marketplace conditions not whether aviation regulators have become more aggressive.  The same concept applies to telecommunications.

Loving Wi-Fi to Death—Wireless Carriers Want to Commercialize Unlicensed Spectrum?

            Once upon a time, wireless carriers in the U.S. intentionally disabled handsets they sold/leased to prevent subscribers from using Wi-Fi in lieu of licensed and metered spectrum.  Time passes and demand for wireless spectrum skyrockets.  Apparently Verizon and other wireless carriers now so need more spectrum that they have unlicensed Wi-Fi spectrum in their sights.  All to better serve consumers, of course.

            Can you see the irony here?  Rather than compete on price, wireless carriers used to emphasize quality of service, availability and signal strength.  They spent millions on advertising explaining the superiority of their networks and billions in acquiring licensed spectrum.  Now they seem to have come upon a strategy that uses spectrum that they cannot control and must share with home Wi-Fi users apparently with no diminution in service, or congestion.  No “tragedy of the commons” overconsumption, because the wireless carriers will have techniques to avoid interference—apparently without having to identify vacant spectrum before using it.

            If licensed wireless carriers had their way, there would be no unlicensed spectrum for voice and Internet access.  You should read their filings over the years explaining the catastrophic consequences of noncommercial, private and unlicensed spectrum use.  These carriers wanted to charge for Wi-Fi service.  Failing that gambit, they want to expropriate unlicensed spectrum and convert it from noncommercial private use to commercial, for profit use.  What a deal!  Is this country great, or what?

            Verizon et al will try to explain how access to Wi-Fi is essential, right now!  Of course they will try to frame the Wi-Fi option as having nothing to do with saving money, or  not having to invest in more spectrum.

            Carriers no longer seem concerned about offloading traffic and free riding on the broadband and wireless spectrum of others.  This practice used to be derisively termed “hot potato routing.”  Now it’s a clever and greedy gambit to avoid paying their fair share for the bandwidth and spectrum they use.

Comcast Upselling Cable Modems

            Despite its commitment to improving its customer service, Comcast keeps writing and robocalling me  with an offer I can refuse.  In a rather alarmist tone, Comcast wants subscribers to infer that their modem soon will no longer work.

            At some future date Comcast may refuse to provide broadband service to modems using the Data Over Cable Service Interface Specification 2.0.  Right now Comcast wants to migrate “bring your own modem” subscribers to the rental camp now charged $10 a month.

            Comcast does not want you to know that the new rented modem will not provide any faster service unless you subscriber to a triple digit, high end service tier. 

            My Motorola DOCSIS 2.0 compliant modem works just fine and it cost me a princely $5 at a garage sale.  Comcast knows what modem subscribers use.  You have to call a customer service representative to activate service and he or she may try to dissuade you from using your own modem and surely will try to upsell you other services.  The company also knows that a DOCSIS 3.0 modem will not provide any faster bit transmission speed to me.

            In other words, Comcast is using a rather cheeky sales tactic.  It’s much like the current television advertisement suggesting that every adult get an expensive shingles inoculation, because the virus “is already inside you.”

            Caveat emptor.

Nokia Mapping and the In-Car Billboard

            BMW Audi AG and Daimler will pay about $3.1 billion for Nokia’s mapping assets; see http://www.wsj.com/articles/bmw-daimler-audi-agree-to-buy-nokias-here-maps-business-1438580698.  While press accounts emphasize mapping as a necessary component for self-driving cars, I see a more immediate goal: creating new revenue streams.

            In-car mapping converts the now common video screen into an ever changing billboard. 

            Well before consumers have “autonomous driving” options, the dashboard screen will convert position determination and mapping into location-specific advertising. These ads will provide new revenue streams for car manufacturers who can take a page out of Google’s playbook.

            In addition to non-revenue services, such as calculating alternative routes to avoid congestion, in-car mapping can link captive consumers keen on finding immediate commercial opportunities like finding the closest gas stations and battery chargers.

            Car manufacturers see the need to diversify and move outside their comfort zone. On many prior occasions, they haven’t fared well, or sold prematurely as occurred when GM spun off Hughes/DirecTV.

            Drivers need to keep their eyes on the road and so do car manufacturers.

Best Available Screen Challenges to the Wireless Lovefest

              With growing momentum, wireline incumbent carriers have achieved general consensus that copper-based technologies should reach end of life, the sooner the better.  The incumbents emphasize how wireless can satisfy consumers’ desire for tetherlessness, free to roam and motor without loss of voice and data connectivity.

            So far so good.  We should not dismiss clear comparative disadvantages in a wireless replacement, but who wants to stand in the way of “progress?”

 

            Nevertheless, you might want to join me in assessing the consequences of a wireless-only environment, particularly for a future marketplace that combines voice and data services.  We might welcome the added versatility of voice access via a single handset anytime and anywhere.  But what about the incumbents’ less visible campaign to make wireless the predominant and likely only option, particularly in many rural locations lacking access to fiber optic, or hybrid copper/fiber, broadband services.  If wireless voice evaporates, so would wireline Digital Subscriber Line data service and any other type of data delivery via now “abandoned” telephone company copper.

            A compulsory migration to wireless data services presents a far less attractive value proposition.  We might tolerate mobile video access via a small screen, but how would you feel if a larger, higher resolution screen was available?  Do incumbents really want to force consumers to abandon the best available screen at home, the high definition and soon to be ultra-high definition television set, so that the meter can continue to run on small screen wireless devices?

            I assume that consumers would rather watch video content on the largest screen available with the best resolution.  I also assume that wireless data subscriptions will continue to offer metered access to rather skimpy amounts of monthly data downloading and streaming at rates far in excess of wireline options on a per downloaded gigabyte basis.  One more assumption: just as wireless subscribers migrate to home Wi-Fi options to avoid running up the meter, future wireless broadband subscribers will not tolerate being bound to a wireless-only option that could result in triple digit monthly bills.

            Please correct me if I have wrongly assessed the copper retirement scenario.  I see a quite viable—if unstoppable—glide path toward a mostly wireless voice marketplace.  I’m not sure whether cable television operators really care much about offering wired voice telephony.  

            What I have problems envisioning is a wireless data marketplace that denies consumers options for using the best available video display screen, the opportunity to replace vastly more expensive wireless streaming with unlicensed options like Wi-Fi and substantial narrowing in the cost of broadband access between wired and wireless options.  Are incumbent telephone companies unintentionally bolstering the prospects for a non-mobile broadband monopoly controlled by cable television operators, or does 5G wireless make unmetered broadband a distinct possibility?

Verizon's Copper-Free Diet and the Poorly Educated Consumer

          The frustration, confusion and anger of an elderly friend showed the upcoming public relations debacle awaiting Verizon and other incumbent carriers in their expedited rush to eliminate copper-based services.  From my experience Verizon’s employees—particularly ones on the wireless side—have no clue on how to minimize the harm.

           My friend should be the kind of customer Verizon should cherish.  She’s a triple play subscriber with a triple digit monthly bill.  She accrues no benefit in subscribing to both wireline and wireless Verizon services, because the company has a bizarre policy of completely separating the business dealings of the two ventures, except for offering a single bill. She’s paying Verizon wireless for unlimited long distance even as she has plenty of anytime, anywhere wireless minutes.  She’s satisfied with Digital Subscriber Line “broadband” transmission speed.

            My friend’s satisfaction came to a quick halt when she went shopping for a new wireless handset.  She wanted to use the same shiny, cutting edge smartphone, because that’s the device her children use.  For that privilege, she had to abandon a low cost wireline/wireless service combination.  Okay so far: having access to a 4G smartphone has its costs.

            Despite repeated assertions that Verizon Wireless employees do not receive commission’s my friend’s salesperson routinely inserted a 2 Gigabyte data plan.  No examination of my friend’s data use.  To add insult to injury, the sales person convinced my friend that she should use a “wireless solution” to her in-home, voice telephone requirements. 

            Might there be a spiff, kickback or other gratuity for salespeople spearheading the migration from copper to wireless, or fiber?

            In any event, the Verizon Wireless employee conveniently failed to mention that my friend would have to buy a special version of old school cordless telephones to access a wireless router that the company would provide “free of charge.”  This router handles in-house voice calls using 2.5G cellular spectrum thereby guaranteeing that the new, allegedly cheaper voice service could not be used for data applications.

            Convenient or not, the Verizon Wireless employee also failed to mention that in migrating to the wireless solution, my friend could no longer access the Internet using her DSL connection. Of course she could use her cutting edge 4G smartphone to access the Internet cloud at speeds far in excess of wireline DSL, but get this Verizon, some people do not want an Internet experience viewed from a small, smartphone screen.  My friend still wants broadband access using a personal computer: quaint, but possibly essential for an older person with declining vision.

            To her complete dismay, my friend found out that she no longer had Internet access and that the new black box provided by Verizon Wireless did not work with any of her existing phones still plugged into the existing RG-11 jack.  Obviously this is not what she bargained.

             Verizon added insult to injury by skimping on telephone-based customer service.  Repeated called got disconnected, probably because the representative realized the call would take too long to resolve in light of severe expectations on the number of calls handled per hour.

             I got involved and accompanied my friend to the local Verizon Wireless store.  The place has an uncanny similarity to a car dealership.  The company uses multiple salespeople and a hand off process that sure looks like a way to “tenderize” the customer and beat them into submission so that the last representative can lard on insurance, extra features and accessories, of course accruing no commission, spiff, or kickback.

             Two hours later, I achieved a remedy, albeit a still costly one.  It was remarkable to see that the Verizon Wireless representative experienced the same recordings and runaround as my friend.  A wireless call triggered a wireless Verizon customer service agent even though the local Verizon Wireless employee used a wireline Verizon toll free number.  The local employee had to resort to a wireline telephone to get through to Verizon wireline.

             How ironic (copper/iron pun intended).

             The lessons learned:

 1)         Verizon is one of those “too big to fail” ventures that screws up customer care, even if arguably it invests more in the process than a company like Comcast;

 2)         Verizon is using far too aggressive tactics to nudge and push wireline customers onto wireless options, particularly in areas lacking FiOS;

 

3)         Verizon Wireless has so many walk-in customers—even in the little town of State College, Pennsylvania—that sale people forget their scripts and checklists.  The emphasis is on speeding up the transaction and not assessing the customer’s requirements, and understanding about the battery backup limitations and the need to buy new phones, etc.; and

 4)         Consumer interest in having the latest and greatest smartphone can lead of costly and unneeded service arrangements; and

 5)         Consumers surely must prepare for the high pressure, time is of the essence decision making that still locks most into a 2 year service agreement.

AT&T-DirecTV and the Benefit of Multiple Requests

            AT&T appears likely to secure all required governmental approvals of its $48.5 billion acquisition of DirecTV.  AT&T has made multiple requests for acquisition authority of late and the odds of multiple “mother may Is” seems to work here.  The company couldn’t get the needed authority to buy out TMobile and the wireless consumers are far better off in having a maverick innovator among the 4 carriers that pretty much control the nation’s wireless infrastructure.  Most analysts think a merger of AT&T and DirecTV won’t matter much.

            AT&T can make plausible arguments that the merged venture will not harm competition, or consumers even as it provides desirable diversification opportunities for both companies.  The FCC and Justice Department will have to emphasize this prospect rather than dwell of the snarky and unnecessary threats by CEO Randall Stephenson that AT&T won’t invest in next generation network infrastructure because of burdensome network neutrality obligations and general notions of regulatory uncertainty.  See Washington Post, AT&T is putting its fiber deployment on ice over net neutrality — for now (Nov. 12, 2014)

available at: https://www.washingtonpost.com/blogs/the-switch/wp/2014/11/12/att-is-putting-its-fiber-deployment-on-ice-over-net-neutrality-for-now/.

            So AT&T has ample retained earnings and borrowing options to shell out $48.5 to buy out a content competitor, but the marketplace is too risky to invest in plant?  Apparently it makes financial sense to buy market share and diversify content distribution technologies rather than extend the geographical market coverage of AT&T’s hybrid fiber optic/copper U-verse network.

            AT&T is neither a maverick, nor an innovator.  Its interest in DirecTV may evidence backward, or status-quo thinking.  In the worst case, AT&T will have bought a venture whose one service will decline in value and market share over the next few years. If cord cutting and shaving picks up momentum in the wired cable television environment, won’t subscriber churn increase for the satellite alternative to cable?  Or will exclusive rights to some NFL football games pay for the deal?

            Does it make sense to double down on an incumbent medium, rather than emphasize new media opportunities?  The managers at AT&T appear keen on hedging their bets by embracing old media even as technological and market convergence point elsewhere.

AT&T Wireless Risks Having to Pay $100 Million in Tuition on Contract Law

          The FCC has issued a Notice of Apparent Liability to AT&T Wireless with a $100 million “forfeiture” for throttling service to subscribers still having “unlimited” service plans.  See http://www.wsj.com/articles/fcc-to-fine-at-t-100-million-for-capping-unlimited-data-plans-1434557988; https://www.fcc.gov/document/att-mobility-faces-100m-fine-misleading-consumers-0.

           The FCC applies the transparency requirements contained in its 2010 and 2015 Open Internet Orders that passed muster with appellate court review. 

            Ironically, AT&T could have avoided the fine if it strategically blended service contracts with FCC filed tariffs.  Historically, tariff filing requirements have been vilified as harmful to competition, innovation and carrier flexibility.  The FCC has mandated detariffing of many services including wireline and wireless long distance services on the assumption that carriers will self-regulate in a competitive market.

           Apparently even in competitive markets, carriers can risk a bait and switch gambit.

           If only AT&T had a tariff filing option.  It could have inserted language deep in the boilerplate of a tariff to accord it near total flexibility to throttle whenever it wanted.

           The campaign of AT&T and other incumbent carriers to eliminate tariffing has an impact AT&T apparently has failed to evaluate fully. By seeking to replace tariffs with contracts, AT&T now has to comply with issues such as fair notice, proper definition of words like unlimited and congestion, consumer protection and unfair trade practices.  A very old legal precedent, known as the Filed Rate Doctrine, allows common carriers to insert language in tariffs that subvert, conflict with and change the terms and conditions of a negotiated contract.  In effect AT&T could have baited and switched if it could still file a tariff. 

            The tariff would have trumped anything offered orally, or by written agreement. Even today, under certain circumstances, incumbent carriers still like what tariffs offer.  For example, Verizon still has a web page that seems to like tariffing.  The company states that: “Tariffs have historically served as the basis for creating binding rights and obligations between carriers and their customers for telecom services.” See http://www.verizonenterprise.com/us/publications/service_guide/detariffing_f_a_q/.

           But of course who wants a fair balance of rights and obligations between carriers and consumers?  With binding arbitration clauses and major limits of the certification of class action law suits, carriers increasingly can behave poorly, dare I say cheat customers, without penalty.  Occasionally the FCC and FTC step in, and the offending carrier pays a minor fine.

           Possibly a $100 million dollar fine will motivate AT&T to appeal the FCC’s order.  If so AT&T, as the author of a “take it or leave it” contract of adhesion, will bear the burden of proving that unlimited does not mean what people commonly assume the word to mean.

TMobile-Dish--Not So Strange Bedfellows

          Another day another 64 billion dollar market consolidation.  Well at least this one has some entertainment value and I don’t refer to the video content on Dish. 

            Two of the most colorful players in the telecom industry get to make nice.  If the deal proceeds, it will be interesting to see how two difficult, others would say mercurial, players (Charlie Ergen of Dish and John Legere of TMobile) mesh.

 

            One should have skepticism about the deal, not due to regulatory and antitrust constraints.  It seems that Mr. Ergen hails from the John Malone school of negotiation where the deal doesn’t get done unless and until every less unit of value gets squeezed out.

            The big, multi-billion dollar question for the deal in whether and how the massive warehoused Dish spectrum can provide mobile, convergent services including voice, video and smartphone apps.  This issue combines spectrum propagation questions with device issues.

            How would Dish spectrum compare with far lower frequencies used for current smartphone services?  Will major wireless handset manufacturers support new product lines for use on Dish frequencies?

            Stay tuned.

FCC Chairman Tom Wheeler, the Wall Street Journal and the Secondary Meaning of Incontinent

          Today the Wall Street Journal reached a new nadir of snark and journalist irresponsibility.  In one op ed, Holman W. Jenkins, Jr. misrepresented the nature of FCC broadband oversight as “monopoly regulation,” and implied that Chairman Wheeler is a liar and Obama pawn. See http://www.wsj.com/articles/washington-makes-a-broadband-hash-1432682871.

            Additionally, Mr. Jenkins accused Chairman Wheeler of incontinence, which I now know has a secondary meaning of lacking in moderation or self-control; unceasing or unrestrained.  So Mr. Jenkins wasn’t making a medical diagnosis. Okay, but I know an (begin encryption) ick pray when I see one.

 

            This kind of op-editorial is shameful. 

 

            If the FCC is engaging in monopoly broadband regulation, how can there be multiple broadband operators who want to merge?  Bear in mind that these merging ventures will take pains to explain the robust competitiveness and non-monopolistic nature of the broadband market.  Mr. Jenkins must be referring to price, or rate of return regulation, but guess what Mr. (begin encryption) Ace in the Hole?  The FCC expressly doesn’t reserve the option of doing either.

 

            So Mr. Jenkins doesn’t believe the FCC or Mr. Wheeler.  Perhaps you should have similar skepticism about Mr. Jenkins’s verisimilitude.

If You Like the Airlines’ Consolidation, You Might Love an Even More Concentrated Broadband and Cable Marketplace

          With several cable television operations in play, perhaps we should consider what’s behind the urge to consolidate?  Bear in mind that the broadband and cable television business already is quite profitable and concentrated, a key difference with the U.S. airline industry that lacked profits and high concentration before its flurry of mergers.

            The answer: more concentration makes it easier for the survivors to avoid sleepless afternoons innovating, competing and enhancing the value proposition for consumers.  It is that simple: with fewer major players, the odds decline substantially that a maverick will buck the incentive to match the terms and conditions set by the major operators.  Why offer something faster, better, smarter, cheaper and more innovative in lieu of operating within the price, service and customer care umbrella established by the top one or two operators?

           Consider the consequences on innovation and competition If AT&T has succeeded in acquiring TMobile.  Does anyone (including Wall Street Journal editorial writers) believe consumers would enjoy the benefits of data rollovers, cheaper rates, lower roaming fees and the option to bring their own devices?

            In a concentrated industry, operators have great incentives to match each other’s rates and service. That’s what consumers get from the spate of recent airline mergers.  Even the industry maverick Southwest has “gotten with the program” on fares and many of the highly lucrative extra fees. Call it collusion, consensus, or conscious parallelism: the airlines offer roughly the same fares and fees?  Can you recall a highly advertised sale in the last year?

            I don’t see much upside to consumers in having a stronger number two cable and broadband provider.  Recall that Comcast executives emphasized how their company does not compete with Time Warner Cable.  Comcast’s logic was that if it didn’t compete with Time Warner, then there shouldn’t be any problems in acquiring their market share.  So how would a larger number two cable and broadband operator become a more aggressive competitor of Comcast?

           Extreme concentration of one old media market (cable) and one new media market (broadband) has little impact beyond further enriching managers and stockholders.  With extreme barriers to market entry concentration does not stimulate new competition.

 

            Highly concentrated media markets make it easier for the creation of platforms and bottlenecks through which a substantial portion of video content must travel.  On the buy side, an even larger content distributor might extract greater concessions from content providers.  Maybe size and scale matters, but the risk lies in creating a near monopsony marketplace where only a handful of players compete for content.  Also what incentive does New Charter have in passing program acquisition savings to subscribers?  The airlines haven't had to share a 40% drop in fuel costs.

 

            On the delivery side, what good will result when two companies control nearly 30% of the distribution grid for actual broadband consumption?  I emphasize current broadband usage and not potential competitors who offer a broadband option, albeit one that costs vastly more on a per Megabyte basis (terrestrial and satellite broadband).

            Lastly this deal combines companies that join Comcast at the absolute bottom in terms of customer service.  Ask any 10 cable subscribers if they have had a billing or service hassle and 9 or more will answer yes.  So how would a merger improve service when the companies involved already have determined they don’t have to improve customer care?

Mistakes, Mistruths and Outright Lies in the Assessment of Broadband Competition

           Readers of the May 13, 2015 edition of the Wall Street Journal got a triple dose of snark and questionable journalism.  On back to back pages, this major publication informed us that U.S. “broadband is a competitive market and becoming more so as fixed and wireless converge.”  Holman W. Jenkins, Jr. suggests that we ignore any rebuttal or contarary reports from the “know-nothings in Washington.”  See http://www.wsj.com/articles/why-aol-matters-again-1431471920.

            On the next page, the editorial writers of the Journal contradict Mr. Jenkins on Verizon’s motivation for wanting to acquire AOL.  Instead of pursuing new profit centers through vertical integration, such as advertising platforms, Verizon has to acquire AOL due to competitive necessity: “A company with a stranglehold on the connection to the customer wouldn’t need to buy AOL.”  See http://www.wsj.com/articles/the-aol-telltale-1431472741.  The editors see broadband competition and the Internet as “hypercompetitive.”

            The Wall Street Journal has led a campaign to convince legislators, judges, consumers and others that the broadband Internet access marketplace operates with such robust and  sustainable competition that any government oversight is inappropriate, if not illegal. 

            This conclusion is simply not true unless one intentionally ignores basic economics, antitrust law and common sense.  To conclude that the U.S. broadband marketplace is competitive one must include any source of access to the Internet, regardless of bandwidth, transmission speed (bitrate) and cost.  Instead of many instances where consumers, such as myself, count one and only one available broadband supplier, broadband competition true believers see seven or more suppliers.

            True believers see what economists term cross-elasticity where it surely does not exist.  They treat as “options” Internet access technologies that consumers do not consider equivalents. So for true believers, it is reasonable to include Digital Subscriber Line and perhaps even conventional dial up access, even though 1.5 Megabits per second service and surely 5.6 kilobit per second service does not cut it for the kinds of services broadband subscribers expect to access via their links.  DSL might barely provide a single, tolerable link to Netflix, but not if two members of a single household seek access at the same time.

            True believers in broadband competition readily add four or more terrestrial wireless carriers and at least one satellite option to the invemtory.  Yes 4G wireless can provide broadband access at sufficient high speeds, but a competitive analysis requires consideration of cost.  Many 4G subscribers gladly pay for wireless data plans, but the willingness to pay ends when a free or lower cost option is available. With data plans limiting subscribers to a miserly 1 or 2 Gigabytes per month, subscribers understandably migrate to their wired broadband service accessible with a wireless Wi-Fi router. Wireline broadband offers a monthly data allowance of 250 Gigabytes or more.  

            A back of the envelop calculation shows a wireless broadband rate of approximately $20 a Gigabyte and even more for a satellite option, factoring in equipment costs.  Wireline access costing as low as 12 cents a Gigabyte, based on monthly consumption of the full allotment.  The statistical compilation gets tricky here based on one’s agenda.  Sponsored researchers can show that Americans have the lowest cellphone rates in the world as least for voice and texting, by using 1000s of minutes and 1000s of texts per month.  So in fairness the 12 cent rate for wired broadband access could rise to about a $1 per Gigabyte if a broadband subscriber used far less than the total amount available.

            Wall Street Journal editorial writers and columnists ignore the reality of what consumers consider truly competitive broadband options.  Few consumers think “Two Buck Chuck” wine from Trader Joe’s competes with one hundred dollar Grand Cru even though both are wine products. Some might even consume both on different occasions, but doing so does not make the two product competitive alternatives.

            So at the end of reading the two pages, this loyal subscriber to the Journal wonders did they make a simple mistake or two or three, offer a little misinformation to make a bigger point, or lie through their teeth?

Verizon and the Mixed Prospects of Vertical Integration

          Verizon will invest $4.4 billion to acquire AOL; see http://www.nytimes.com/2015/05/13/business/dealbook/verizon-to-buy-aol-for-4-4-billion.html?emc=edit_na_20150512.

            At first blush, this makes plenty of sense: Verizon has lots of retrained earnings and the ability to borrow billions; the company does not want to rely solely on wireless; and moving up the vertical food chain into content helps the company diversify and augment its home grown content.

 

            Okay so far, but we should not forget the billions lost in value when Time Warner, another content distribution carrier, tried to extract the value in AOL.  So what’s different this time?  Bear in mind that a few years after divestiture from AT&T, Verizon experimented with self-generated content and failed miserably.

            On the other hand, Comcast has successfully integrated content distribution with content generation.  The company acquired NBC-Universal and has ownership interests in many cable programming networks.

            Is there a way to predict a company’s prospects for a vertically integrating acquisition?

            I can think of two factors: the willingness of the acquiring company to encourage management of the acquired company to stay and more broadly whether the acquiring company can broaden its perspective.  Verizon need to expand its telephony (Bellhead) management skills to include content and alternative distribution channel management (Cablehead/Nethead).  Telephone company management skills will not suffice.

 

            You can teach an old dog new tricks, but Verizon would be wise to bring in several new breeds.

Circuit-Switched Telephony Metadata

          The Second Circuit Court of Appeals has determined that the acquisition and storage of all wireline and wireless telephone traffic does not comply with applicable laws covering national security.  See ACLU v. Clapper, available at: http://www.ca2.uscourts.gov/decisions/isysquery/773a98db-d41d-4db8-95aa-182f994923b5/1/doc/14-42_complete_opn.pdf.

            You might consider reading the section defining metadata as applied to telephone calls, particularly in the context of now knowing that the National Security Agency and/ or other government entities capture such information for each and every call, international and domestic. Former Vice President Dick Cheney and others take comfort in the fact that telephone metadata does not include a recording of the call.  However, this fact provides little comfort if a larger number of citizens—and voters—understand what is captured and cataloged.

            In current circuit-switched telephony, carriers set up a temporary, dedicated pathway between call originator and recipient.  Metadata data identifies the telephone company switching facilities used to create a complete link. Put another way, because the location of telephone switching facilities are known—and do not move—telephony metadata provides an accurate report on the location of callers and call recipients.

            The Second Circuit did not address the Constitutional (First Amendment and Fourth Amendment) implications of such data gathering. Had the court done so, it quite likely would have held that government has no lawful authority to track who associates with whom, absent probable cause that one or both telephone users have, or soon will commit a crime.

            A metadata capture program for every call captures information that violates the privacy expectation of citizens as well as their right to associate with anyone free of government cataloging. 

            Would citizens tolerate a government program that compiles the name and address of each letter writer and letter recipient?  Such information may be necessary for the Postal Service to route and delivery letters.  Additionally this information is quasi-public in the sense that it lies on the envelope and not inside it.  But who would support a massive investment of time and money for a government program to record such metadata?

 

Hi-Fi, Wi-Fi and Fi Wordplay

             Readers of a certain age probably know the full words to the acronyms in this blog edition.  Hi-Fi refers to high fidelity and the stereo receivers and amplifiers of the 1960s that reproduced music with greater frequency range.  Wi-Fi refers to wireless fidelity, possibly a stretched play on words using the Hi-Fi concept to cover wireless broadband access.  The mostly male, engineers that served on various 802.11 Institute of Electrical and Electronics Engineers standards groups must have had a chuckle.

            Along comes Fi from Google: we move from high, to wireless to a new brand of wireless.

            Okay, some of us get the wordplay.

Will Skinny Bundles Reduce Your Video Bill?

            Consumers have tolerated years of bloated video programming tiers with annual rate increases well in excess of the generate inflation rate. They have not had any options largely because no intermediary wanted to tick off a key programming source.

            Seemingly overnight, intermediaries have begun to offer smaller and presumably cheaper bundles of programming.  If we’ve reached a tipping point, perhaps intermediaries have grown bolder in light of programmer experiments with disintermediation, the elimination of an intermediary heretofore able to impose a markup for little value enhancement.  HBO, CBS, Netflix, Major League Baseball and others now offer a viewing option requiring a broadband subscription without also requiring a pay television subscription.

            Will these new skinny bundles offer consumers a cheaper and better value proposition? Don’t bank on it.

            Savings, if they occur, will flow to consumers that eschew all sports content networks and refrain from the most costly non-sports networks.  So if the following content providers offer you “must see” video, a skinny bundle probably won’t save you money: any and all ESPN channels, any Regional Sports Network, TNT, Disney, Fox News, NFL, USA and TBS.

            Programmers, new packagers like Hulu and incumbent distributors know how to blend must see and never see video.  Those undesirable channels do not add much by way of cost and get added, largely because content producers like to expand their “shelf space” with ancillary channels.

            A skinny bundle likely will not have must see content in inventory, or will require supplemental payments.  No one has announced a true a la carte single network purchase option, instead offering smaller, additional tiered, themed content like sports, children’s programming, lifestyle, etc. as Verizon has proposed.

            Bottom line: even if you might make do with 7 -15 channels, others in your household typically won’t make do with the same ones you like, or the skinny bundle inventory.

5 Reasons Why Consumers Hate Comcast

     Comcast suffers from an unintended, but surely predictable consequence of its corporate strategies.  The company makes itself an easy target for scorn by taking every opportunity to maximize revenues.  Of course publicly traded companies have to maximize shareholder value.  But Comcast ignores the usual adjunct of trying to be a good citizen and not coming across as too clever and greedy.

     Set out below are 5 reasons while subscribers, in particular, personify and vilify the company.

1)         Deliberately skimping on customer service

 

     I simply cannot find one Comcast subscriber who lacks a story about shoddy treatment by the company.  It’s that simple: Comcast assumes that it does not have to invest in customer care.  For so many years, the company has been able to raise rates well in excess of statistical measures of price increases, even after normalizing for expanding numbers of channels.  Such assumed inelastic demand tilts the assumed negotiating leverage in favor of Comcast.

 

2)         Bait and Switch

     Like many companies, Comcast offers “promotional” short term inducements for new subscribers.  Unlike most companies, Comcast does not remind you when the “actual” rates kick in.  Subscribers who receive a 100% rate increase are not happy with the company, but Comcast knows that most won’t cut the cord. 

3)         Sneaky Ever Expanding Billing Line Items

     Comcast appears to have a strategy of raising subscribers’ out of pocket payments with new billing line items.  Perhaps Comcast wants subscribers to think the government is responsible for the new charges.  Perhaps the company thinks subscribers will ignore a higher out of pocket cost by discounting the new fees, or passively accepting them just as we do with car rental line items.

           

     Recently Comcast inserted a new charge ostensibly to help the company defray the cost of carrying local broadcast signals.  Why a new charge when the company already charges for basic tier service and has a lengthy history of having to pay for carriage rights?  Comcast wants to highlight how such retransmission consent payments have increased.  Of course the company wins on both sides of this outcome: its NBC stations receive the payments and Comcast can now secure a dedicated line item to help defray this expense.  Bear in mind that the company’s charge has no relationship to the number of local stations carried, or the rate of increase in retransmission costs.

 

     Additionally Comcast has executed a strategy that makes it difficult or impossible for subscribers to avoid having to rent devices such as cable cards, modems, converters and set top boxes.  The company earns over $1 billion annually in equipment rentals.  With such a large revenue stream, Comcast predictably takes ever effort to prevent subscribers from using their own devices.  The company does not cooperate with consumer electronics manufacturers and has made it near impossible for subscribers to use a non-Comcast set top box and Comcast supplied CableCard.  Extra points for requiring that a Comcast technician install the Card, only after a few or more calls to customer service.

 

     Subscribers can save $10 a month simply by installing their own cable modem.  Of course it will take some calls to Comcast to register the device and yet again poor customer service awaits.

 4)         Lackluster Compliance with Legislative and Regulatory Mandates

     The FCC has fined Comcast for failing to comply with requirements the company offered, or the FCC mandated when approving prior mergers and acquisitions.  Comcast deliberately failed to place the Bloomberg business news network on a channel near the company’s CNBC network, despite having agreed to do this.  Just slipped their mind.

     Similarly the company directed its customer service agents not to mention that subscribers have the option of buying broadband access only.  Extra points for charging more for broadband if a subscriber does not also pay for cable.

     The company also has a penchant for making lemonade out of regulatory lemons.  For example, Comcast wants everyone to know how much it has embraced network neutrality, going so far as to extend it to Time Warner properties.  Never mind that the company opposed the FCC at every step, litigated the issue and triggered the campaign for network neutrality by lying to the FCC about whether Comcast used tactics to block BitTorent traffic.

5)         Intracorporate Favoritism

     Comcast and its sponsored researchers want to convince Congress and the FCC how a vertically integrated company can operate more efficiently and presumably better serve consumers.  Sometimes this makes sense, but let us not forget that the largest reduction in shareholder value resulted when two companies sought such synergy through vertical integration.  The two companies: Time Warner and America Online.

 

     A cheeky example of Comcast family treatment lies in the place of the Golf Channel on the basic tier and the Tennis Channel on a more expensive and less viewed sports programming tier.  Was this decision the product of disciplined financial analysis, or did the company opt to showcase its owed networks while handicapping unaffiliated ones?

     The company adds insult to injury by sponsoring experts to “prove” that the company did, or could have done the necessary analysis that would show the comparatively greater popularity of golf over tennis.  An appellate court bought the analysis in large part, because the Tennis Channel could not readily prove how much more popular it would be had Comcast opted to place it on the basic tier.

Google Wireless: This Could Get Big . . . Eventually

             It appears that Google soon will launch a lower cost, metered wireless service.  See http://www.wsj.com/articles/google-set-to-unveil-wireless-service-1429660082.  The company has made an impact in data transmission infrastructure with Google Fiber, albeit only in the 8 metropolitan areas it now serves.  See https://fiber.google.com/about/.  Google may repeat its success on a slow and incremental basis.

            Bear in mind that Google Fiber offers facilities-based broadband competition.  At least initially Google will package and resale bulk wireless bandwidth from TMobile and Sprint.  Additionally most consumers will have to acquire one of the few handset types compatible with the service.

            On the other hand, Google has the patience and deep pockets needed to see this project through.  Google is not the first venture to resale wireless, or to combine cellular and Wi-Fi access to the Internet.  However it has the buying power and tolerance for financial losses sufficient to allow the venture to acquire market share slowly.

            Should Google Wireless reach a critical mass, the impact will be huge.  Consumers’ expectations could change in terms of what a wireless service should offer and what it will cost.  Currently consumers have to commit to data plans that add significant blocks of capacity, but at rates considered quite expensive relative to global averages. U.S. carriers can tout low data rates only by spreading high monthly costs over similarly high data monthly allowances.  Had AT&T gotten government authorization to acquire TMobile, no carrier or reseller would have offered subscribers the opportunity to carry forward unused capacity into the next month. 

 

            Google Wireless will offer a metered, pay as you go a la carte opinion that appeals to cost-conscious consumers.  If Google gets traction, expect more sponsored data plans to become available, provided the FCC does not consider them a violation of network neutrality policies.

Rethinking Efficiency in Size and Vertical Integration

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

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

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

            Bigness, or perhaps the lack of competition also encourages companies to cut corners and to chisel.  I am convinced that so many Comcast customers viscerally hate the company, because of the perception that Comcast conscientiously tries to extract maximum revenues in sneaky and clever ways; just examine the ever increasing line items in their bills.

 

            Comcast is no alone in this race to the bottom. While buying hotel space on Hotwire, using a non-U.S. site, the company snuck in trip insurance without even offering customers the opportunity to choose no.  The U.S. site requires customers to opt out rather than opt in, but the European and Asian site simply includes the charge. Try getting Hotwire to respond to emails. Company reps simply cut and paste scripts that do not respond to the problem and of course do not offer a refund.  I was told to contact the insurance company, even though it was Hotwire that triggered the charge in the first place.  While abroad I was supposed to call Hotwire, so I did.  Of course no live person was available to take my call.

 

            On an on it goes leading me to think that more and more companies can reduce the value proposition of their service without loss of market share.  This has prompted me to rethink my leeriness about the FCC’s reclassification of Internet access. 

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

New Video Streaming Options and Network Neutrality

           Over the last few weeks, several video streaming options have arrived.  See, e.g., http://www.nytimes.com/interactive/2015/business/media/streaming-tv-cord-cutting-guide.html?_r=0.  These new services raise two key pocketbook issues:

            1)         Can consumers reduce their total out of pocket costs by cutting, or shaving the cable television cord? and

            2)         Can incumbent broadband access providers retaliate by raising the costs of both content providers’ and end users, despite the FCC’s 2015 Open Internet Order?

            Cord Cutter/Shaver Empowerment?

            Many press accounts suggest that consumers can save money by terminating their cable subscription, or migrating to cheaper programming tiers.  If one can tolerate the loss of access to some live sporting events, from networks such as ESPN, then a significant savings accrues even factoring in a Netflix and Hulu subscription.  Cord cutting/shaving works best for consumers who can receive broadcast networks off air without having to install rooftop antennas.

            However, the cost savings equation also has to factor the cost of broadband access and the near certainty that last mile providers, like Comcast, will increase rates for “naked” broadband services, i.e., subscriptions that do not bundle video and/or telephone service with broadband access.  Despite the theoretical argument that platform operators/intermediaries controlling a doubled-sided market cannot gouge, the possibility exists that cable modem service providers can simultaneously raise broadband rates for downstream retail subscribers and extract higher prices and surcharges from upstream content distributors.

            The Specialized Network Exemption from Neutrality

            Another more ambiguous, but potentially harmful issue arises with the proliferation of streaming options: what flexibility and exemption from absolute neutrality can Internet Service Providers (“ISPs”) can achieve?

            This issue will start the process for the many ad hoc FCC "interpretations" that will occur going forward.  Predictably the Commission will have two conflicting issues in play.  On one hand, the 2015 Open Internet Order recognizes a specialized network option for traffic such as VoIP.  I believe the Commission will recognize that the low latency requirements of IPTV also qualifies for a conditional exemption from absolute neutrality.  But on the other hand, the Order explicitly states that the specialized network exemption shall not provide a loop hole for evading the overarching requirement for neutrality.

            The 2015 Open Internet Order generally prohibits paid prioritization and establishes a “no-unreasonable interference/disadvantage” standard for ISP treatment of upstream traffic, like that flowing from content sources.  This probably means that the FCC will want to make sure that specialized routing arrangements are technically necessary on quality of service grounds and not simply a construct to favor traffic of affiliates, or surcharge payers.  Sponsored data arrangements also fit into this category.

            Does an ISP simply partition generic bandwidth and call it a specialized network, or does the ISPs really and truly do something by way of dedicated, management?  Bear in mind that some way, somehow the FCC has avoided having to examine the functions and services performed by proxy server/CDN companies like Akamai.  Does an ISP simply have to show it operates like Akamai, but extends the value added, specialized features for the link downstream to end users?

            Stay tuned.