Swinging for the Fence or Hitting Singles?—How AT&T and Verizon Further Consolidated the Wireless Marketplace While Most Weren’t Looking

       Before anyone claims victory for the consumer in AT&T’s abandonment of its “swinging for the fence” gambit to buy T-Mobile’s market share and spectrum, consider what did not make many headlines this week.  Both AT&T and Verizon substantially shored up their spectrum stocks with major deals with Qualcomm and several cable companies respectively.

       Solid hits for both carriers: not homeruns, but very strategic singles and doubles. 

      What results from these deals?  Well on the positive side the two major carriers have more spectrum to satisfy consumer demand.  On the negative side this spectrum initially was acquired by companies that offered the prospect for more competition.  The competition will not occur, so the incumbents have even less downward rate pressure and the incentive to innovate.

      No one has convinced me that the wireless marketplace in the United States has too many carriers and too much competition.  Quite the contrary.  But no carrier wants to compete with two “too big to fail” giants who have the customer base and spectrum to make quite costly competitive market entry, or even competition by existing carriers.  These barriers to entry solidify incumbent market dominance, something the FCC could have prevented if it had reserved spectrum for new carriers and nondominant existing carriers. 

      This would not “promote competition for competition’s sake.”  Instead it would enable sustainable competition to flourish in much the same way that airport authorities do not allow one or two airlines to capture all the landing slots.  Airport authorities have learned the hard way that allowing one carrier to dominate results in higher prices.  While price sensitive customers can vote with their dollars and take alternative transport, or drive to another airport, wireless subscribers have limited options. 

      Might a further consolidation of spectrum—the functional equivalent of landing slots—result in higher prices in the “robustly competitive” U.S. wireless marketplace?

Too Big to Fail Wireless Carriers

   
           Few would dispute that spectrum has played a key role in making it possible for AT&T and Verizon to acquire scale economies. These carriers, their trade association and sponsored researchers are very adept at reminding us how scale can translate into a win/win situation for the carrier and its consumers.  I readily acknowledge that if you have a super-size demand for wireless service, U.S. wireless carriers can offer you the lowest per unit rates in the world.  Of course this all you can eat pricing model does not apply to data of course which now has caps to prevent spectrum hogging. 

            But there is a down side: in their quest for scale, the big two carriers can make ever stronger arguments that they are too big to fair with failure defined as not having enough spectrum to satisfy demand the carriers stimulated.  So even if AT&T did not have the spectrum, tower sites and switching capability to handle all the I-phone data traffic in some locations, it’s the FCC’s fault that AT&T did not have enough spectrum to satisfy demand.

            So with the demise of the AT&T acquisition of T-Mobile expect to hear AT&T continue to whine about a spectrum failure.  And expect the FCC to accommodate the big two wireless carriers’ spectrum need even if in doing so the Commission contributes to further market consolidation.

            I wonder what might have happened if the FCC had retained a spectrum cap.  Might more carriers—and even specialized carriers—have entered the marketplace?  How about the prospect of a data only carrier with less total spectrum available to it, but more spectrum allocated for data service?  The U.K. opted to reserve new spectrum for market entrants. 

            It will interesting to see whether in the United Kingdom too big to fail major carriers whine, or have to compete more vigorously as a result.

It’s Still THE Phone Company—Verizon Cuts Off Essential Long Distance Access to My 85 Year Old Mother!!!

            In the no good deed goes unpunished, consider this classic phone company hassle.

           

            I’m currently in Norfolk, Virginia to check in on my ailing Mom.  I also checked her phone bill and noticed she was paying for a bogus $2.49 broadband modem maintenance fee and $5 more than a bundled local phone plus broadband rate.  So I called Verizon.

            First I learned of a classic “Bait and switch.”  The bundled local phone plus broadband rate does not work for any wireline phone subscription, despite language on the Verizon web site implying that any local phone rate so qualifies.  Okay, so I find out that even with the now higher local wireline service rate my Mom would save about $5 by bundling and now qualifying for lower a broadband service rate.  I authorize the switch.

            The switch over provides access to 3 custom calling features like Caller ID.  But the switch inexplicably eliminated the presubscriptions to my Mom’s intra-LATA and inter-LATA long distance carrier.  Gee how inconvenient; how anticompetitive.  The Verizon rep never got the training—or thought to mention—that the upgrade in service somehow implicates long distance presubscriptions.  Of course the logical and practical way would have been to maintain the status quo.  That’s not the Verizon way.  And remarkably the Verizon rep. did not even try to sell Verizon long distance in addition to the soon to be discontinued, but heavily promoted DirecTV and the vastly profitable $4.95 a month wireline maintenance fee.

            So despite taking service for scores of years, my Mother’s upgrade order somehow is treated by Verizon as though she has just begun to take service.  But the Verizon rep does not ask about presubscription and the default position must be “made no long distance carrier selection.”  Therefore my Mother has special local dialing features she won’t use and now cannot make possibly critical long distance calls to family living away from Norfolk. 

Way to go Verizon.  You have put my Mother at some risk, but I don’t live in Norfolk and am scheduled to leave tomorrow.

            What do I learn from this incredible hassle.  Verizon has yet to evolve from the Bellhead, bureaucracy that it has always been.  The repair arm of the company apparently cannot talk to the ordering and billing department.  No one takes ownership of the problem and no one is going to make any effort to resolve the problem, or mitigate the hassle.

            So from this transaction I see Verizon staff as either undertrained or cavalier about following the protocol for handling service UPGRADES from existing customers.  Maybe this shows that Verizon simply does not care about its wireline business with its apparently low margins and needy customers.  It just so happens that my Mother relies on wireline service exclusively; she couldn’t make a wireless call even if she had service.  So Verizon matter of factly disables her lifeline to the rest of the world.

            I will file a formal complaint with the FCC, but I surely cannot expect that bureaucracy to do any better by my Mother and me.

Wireless Carriers’ Ambivalence Toward Wi-Fi

            Perhaps you share my frustration when wireless carriers and their sponsored researchers tell us how benevolent they are: tirelessly competing to enhance the value proposition for consumers.

             Really?  Corporations seek to maximize profits and enhance shareholder value.  That is what they are supposed to do, plain and simple.

             Consider wireless carriers’ position on Wi-Fi and for that matter: any unlicensed spectrum. 

             First approach: Wi-Fi is bad, very bad.  How can the FCC expect lay people to serve as good stewards of the spectrum?  We need professionals.

             Second approach: Wi-Fi is still bad, so bad that we have to disable Wi-Fi access in cellphones or alternatively prevent certain Wi-Fi activated applications from working, such as Skype.  Carrier motivation: prevent subscribers from substituting services that do not debit minutes, or which provide cheaper (if not free) alternatives to carrier toll services.

             Current approach: Wi-Fi is great.  It helps us manage completely unanticipated growth in demand for voice and data service.  It lets us offload traffic onto another carrier’s network. Can we sell you a femtocell? Don't let this get out: it solidifies our bottleneck control as increasing numbers of terminals and devices in the home or office, connected by Wi-Fi, still have to travel through our lines.

             Clearly wireless carriers’ change in attitude toward Wi-Fi represents a refinement in their thinking about a technology.  What once was a threat now becomes an enabler and maintainer of the status quo.  The change in position has everything to do with carriers’ economic gain and nothing to do with carrier benevolence toward consumers and competition.

How Can U.S. Wireless Carriers Have the World’s Highest ARPUs and Some of the Lowest Rates?

          U.S. wireless carriers, their trade associations and sponsored researchers do not want widespread understanding that the U.S. market generates the highest average revenue per user (“ARPU”) returns in the world. “Verizon Wireless, NTT DOCOMO, AT&T, Softbank and KDDI reported highest wireless data revenues among other global top 10.”  B.P. Tawari, Beyond 4G Blog Site, New Report : Global Wireless Data Update Q1,2010 (Aug. 4, 2010); available at: http://www.beyond4g.org/new-report-global-wireless-data-update-q12010.  Leading ARPUs range in the 35-40%.

         U.S. carriers prefer to emphasize that they offer some of the lowest rates globally.  The carriers conclude that if market forces necessitate having to offer low rates, then the wireless marketplace must be fiercely competitive, notwithstanding best in class ARPUs.

       How these carriers generate massive ARPUs while also offering low rates?  Answer: All You Can Eat Pricing (“AYCE”) for extremely high volume customers with extremely high margin rates for low volume customers. It is easy for a wireless carrier to claim per minute voice and per text rates are extremely low, even if in fact most customers do not come close to using all of their allotted minutes of use and texts.  With all you can eat buffet pricing, wireless carriers can claim incredibly small margins for serving the households that, for example, generates several thousand text messages monthly.  For customers unwilling to pay the $20 monthly rate, wireless carriers can charge 20 cents a text for a service that costs less than one tenth of a cent to deliver.

          Wireless carriers want to eliminate AYCE pricing particularly for data service.  But in doing so they risk a clearer understanding of just how profitable and uncompetitive they are.

 

A Wireless Duopoly?

Recently Cox Communications announced its departure from the wireless telecommunications.  Similarly some speculate whether T-Mobile can survive if its merger with AT&T does not happen.  What does it mean when an incumbent carrier exits a market, with doubts about the ongoing viability of one of the Big Four national carriers? There are too many carriers and a market shake out must reduce competition?  The Big Two carriers (AT&T and Verizon) have engaged in lawful and questionable tactics to “corner the market.”?  Something else?

If a hyper-competitive market migrates to a less competitive balance of two carriers, two things appear clear: 1) a duopoly has evolved making ludicrous to claim self-regulation will foreclose anticompetitive conduct; and 2) market failure has occurred, unless consumers somehow do not suffer from haivng a choice of two facilities-based carriers and a few resellers.

If the Big Two have captured the market, then it becomes necessary to identify what lawful, questionable and unlawful tactics they have pursued.  In the lawful department, the Big Two have invested the money to build superior networks.  They have captured the competitive benefits of positive network externalities: offering not to debit minutes of use for intranetwork use.  Additionally they have exploited economies of scale.

             In the questionable department the Big Two have exploited exclusive handset deals and the first mover advantage of having received free spectrum from the FCC while other carriers had to compete in a comparative hearing, or hope for success in a ping pong ball selection.  While they appear not to have colluded in a “smoke-filled room,” these carriers offer nearly identical rate plans, what antitrust law considers conscious parallelism.

At the very least the FCC should aggressively work to promote market entry so that the facilities-based wireless market does not end up being more concentrated than commercial aviation.

           

Businessweek Can't Distinguish Bits From Bytes

The Nov. 21-27, 2011 edition of Bloomberg Businessweek incorrectly inserts the word bytes for bits in not one, but two articles (on Indian and U.S. broadband).  Big mistake: bytes typically measure downloaded and uploaded content/file size, e.g., a 2 megabyte movie trailer; bits measure transmission speed, e.g., 2 megabits per second.  Using both concepts: broadband subscribers want a fast bit rate speed so they can download large megabyte files in a short time period.

I'm particurlarly sensitive to this misconception, because many of my students make the same mistake as Businessweek. I have too many folks struggling to understand basic concepts like broadband, bandwidth, channel, bit rate, throughput, etc.  Here's a link to the course syllabus: http://www.personal.psu.edu/faculty/r/m/rmf5/Comm492%20Fall%202011.doc


Bits and bytes are similar concepts as 8 bits correspond to 1 byte.  In application we use bits and bytes differently.  Businessweek noted the problem of slow bit rates in India and the U.S., but by using the bytes measure the magazine did not make sense.  U.S. ISPs do not typically offer 15 megabytes per second service, i.e., 120 megabits per second.  The discounted broadband service offered by cable television companies to low income subscribers will deliver 1 megabit per second not 8 megabits (or 1 megabyte).  Indian broadband subscribers would not complain about getting 256 kilobyte per second service as they would 256 kilobits per second service.

Holiday Reading Part Two

Here's a work in progress that considers the middle ground in the network neutrality debate: Do Conduit Neutrality Mandates Promote or Hinder Trust in Internet-Mediated Transactions?.

The abstract for the paper:

As the Internet evolves and matures, Internet Service Providers (“ISPs”) have begun to create increasingly diversified business models for serving downstream end users and upstream content providers. Increasing subscriber demand for broadband connections necessitates efforts to identify and serve new profit centers and to differentiate retail and wholesale users on the basis of subscriber bandwidth requirements and other customer-specific demand characteristics. ISPs have identified new strategies to differentiate their offerings on the basis of price, quality of service, transmission speeds, permissible amount of capacity uploaded and downloaded, legitimate network management objectives and the demand for customer-specified network features.

Advocates for limiting price and service discrimination contend that absent a “network neutrality” mandate, ISPs will discriminate in ways that harm competitors by favoring corporate affiliates and selected third parties. Network neutrality supporters claim that ISPs have both the incentive and ability to engage in harmful discrimination, typically characterized by ISPs as necessary network management, or a legitimate response to the specific requirements of a customer.

This paper will consider ISP conduit neutrality in the context of whether and how legislatures and national regulatory authorities can enhance trust and network reliability. The paper assesses how network management techniques can offer both quality of service improvements and deliberately inferior service. Because technological innovations provide the ability to build trust in Internet-mediated transactions, the paper will identify legislative and regulatory strategies that promote network management that enhances cloud computing, electronic commerce and other transactions without according ISPs unconditional opportunities also to harm competition and consumers.

Holiday Reading Part One

In the event you tire of television and run out of written material have I got something for you.  Here's a short piece on IPTV entitled The Opportunities and Threats from Next Generation Television: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1954779

Here's the abstract:

The combination of digitization, converging technologies and new business plans has diversified the terms, conditions and options available for consumer access to content. Access opportunities have migrated from producer- or intermediary-specified schedules, i.e., “appointment television,” to a largely consumer specified environment, i.e., “television anytime, anywhere.” As well the means by which consumers access content has shifted from one-way, downstream, to a two-way process whereby consumers can issue upstream commands for access via different receiving devices, subject to commercial constraints such as copyright digital rights management.

This diversification of access opportunities makes it possible for consumers to access more content, and as well to consume the same content via different devices. Content originally available only via a television set - the first screen - now can be received via second and third screens, computer monitors and smartphones respectively. Consumers of content currently have three major types of access options: 1) a direct so-called peer-to-peer link for real time or file-based content; 2) an indirect link through an intermediary who establishes access rules and limitations, but does not intervene in each session; and 3) an indirect link through an intermediary that actively manages access every time.

As content access opportunities have diversified, so too has the nature and type of available content. The proliferation of content and ways to access it present incumbent producers with both new opportunities and threats. Creators of expensive and compelling content may identify additional display windows and new ways to receive payment. Similarly intermediaries, such as cable television operators, can enhance the value proposition of their service and retain subscribers who now have technological opportunities to access identical or similarly expensive and compelling content outside traditional distribution channels.

Content creators and distributors face new threats to their business models, because the proliferating options for consumer access provide more ways to pirate content and to “disintermediate” and eliminate intermediaries. Try as they may content creators and distributors cannot foreclose consumer “self-help” strategies, including using broadband connections to access content “over the top” of incumbent intermediaries such as cable television operators.

This paper will examine the ways by which incumbent content producers and distributors have responded to new consumer access opportunities. This examination considers the incentives of incumbents to deny, restrict and prevent alternative access opportunities, or to embrace changed models. The paper also will consider the impact new access devices and options have on incentives to create and innovate.

The paper concludes that content creators and incumbent distributors, such as cable television operators, face increasingly divergent incentives. The former incur the risk of greater piracy, but also new opportunities to profit from expanding distribution platforms. The latter face the risk of declining subscribership unless they accept the inevitability of expanded content access options that circumvent the traditionally locked-down, largely one-way distribution model. Most cable television operators recognize the need to relax content access restrictions, but these operators have not similarly responded by expanding their efforts to innovate and diversify their supply of content.

The paper provides evidence that the growth of cable television networks has plateaud at the very time consumers can access an ever expanding inventory of new content alternatives. The paper concludes that cable television operators risk significant subscriber defections, or migration to cheaper service tiers absent an increase in the number of new networks and content access options.

Being a Busy Academic

            Sorry for the lack of blog entries.  So much to do, despite the general impression that academics lead a cushy life. In the last few weeks I’ve finalized a number of upcoming presentations, articles and teaching materials.  I got to serve as a moderator for a high powered panel on Smarter Lives presented at the International Telecommunication Union’s World Telecom  Forum even in Geneva; see http://forum.world2011.itu.int/sessions/f07-smarter-lives.

            And of course I try to stay on top of current events.  Some observations:

            In the “it’s all how you frame the matter,” note that Red Box seeks to exploit Netflix’s 60% price increase with a small 20% increase of its own.  What two dimes among friends?  This from a company that charges 8.9% to count your loose change.

            The wireless industry “voluntarily” will offer bill shock prevention through multi-faceted warnings.  Would these publicly minded good corporate citizens have been so magnanimous if the FCC had not stated its willingness to step in to remedy market failure? 

            Where was Verizon’s Wireless’ good corporate citizenship when for several years the company wrongfully took in $52 million from 15 million subscribers who triggered data charges without having a data plan?  Bear in mind that had the FCC not intervened subscribers would have had no real avenue for redress, even for many who inadvertently pushed a button quite close to the right one.  Verizon could have insisted that each and every subscriber pursue costly and mandatory arbitration.  With the inability to join a class action law suit, Verizon subscribers would have lost the entire $52 million to a “job killing” and probably deliberate gouging strategy.        

            With all the talk about crony capitalism why don’t the Tea and Republican Parties rail against the many instances where incumbents avoided expenses that later market entrants had to pay.  Does anyone remember the “wireline set-aside”?  At the onset of cellphone service, the FCC tilted the competitive playing field by giving away spectrum to incumbent wireline carriers?  Was this necessary to “incentive” investment?

A Fair Estimate of Network Neutrality Costs and Benefits

           Opponents of network Neutrality allege that imposing such regulation will result in lost jobs and value.  An example of losses is evidenced by the fact that when the FCC imposed open access requirements for reallocated, choice 700 MHz spectrum this segment generated less than half the proceeds (measured on a per capita, per MegaHertz) basis than other blocs lacking the open access requirement.  See Gerald R. Faulhaber and David J. Farber's 2010 paper The Open Internet: A Customer-Centric Framework and Randolph J. May and Seth L. Cooper, New FCC Regulations Reduce Investment and Hinder Job Creation, available at: http://freestatefoundation.org/images/New_FCC_Regulations_Reduce_Investment_and_Hinder_Job_Creation_091311.pdf.

            The authors of the above material imply that the open access requirement by itself triggered the loss, apparently not offset by any gain.  The analysis provides a quantifiable cost, easily inferred as a result of the FCC’s regulatory intervention. 

            Surely a more nuanced and less results-driven analysis is necessary here. 

            While not easily quantifiable, might there be some upside social gain in requiring an Internet Service Provider (“ISP”) not to discriminate?  Pro network neutrality advocates believe that the Internet has generated massive social benefits, at least some of which accrues from the ability of new ventures—many with limited financial resources—to secure access through the Internet cloud without upfront payments to any and all ISPs for last mile delivery to consumers.  Attributing zero social gain from open access comes across as both wrong and a deliberate attempt to overstate the net loss from open access rules.

            Additionally the analysis assumes absolute equal value in the 700 MHz A, B and C blocs, absent different regulatory requirements.  However, there is no such absolute parity between these three blocs of spectrum.  The blocs have different numbers of assigned licenses based on the geographical size of the service area covered per license.  Also the C block assigns a larger amount of spectrum 34 MHz versus 14 MHz for the A and B block.  See http://wireless.fcc.gov/auctions/data/bandplans/700MHzBandPlan.pdf.  It seems quite plausible that the cost per MegaHertz, per capita (“per pop” in the vernacular) should be lower if the auction bid is spread over a larger bandwidth.

            In this fractious and mean spirited time, it has become all too easy to provide “irrefutable” quantitative evidence how government rules burden operators and harm the national economy.  Numbers don’t lie, right?  Of course they do when the calculation forces a false return.

Are Resellers Competitive Saviors, or Lower Than Pond Scum?

            The conventional wisdom of most facilities-based carriers is that resellers wrongly extract revenues, particularly if government mandates the transaction.  Incumbent carriers complained long and hard about having to unbundle their network and lease capacity to Competitive Local Exchange Carriers (“CLECs”).  Incumbents convinced courts and the FCC that CLECs would never wean themselves off the easy money available in resale, and that resale was a wrongful taking.

            My, how times have changed.  AT&T now rhapsodizes about how wireless resellers promote competition.  There even is a nifty new acronym for wireless resale that adds gravitas: Mobile Virtual Network Operators (“NVNO”).

            Unlike their wired counterparts wireless resellers apparently serve a useful purpose, including apparently providing support for a massive $39 billion horizontal merger.  How can this be?

            First, it is important to note that wireline resale was mandated by the Telecommunications of 1996 and not something incumbent, facilities-based carriers did on their own.  Such compulsory network sharing can come across as government mandated cooperation with a rival.  But please understand that this obligation comes with the territory: telecommunications service providers, as common carriers, do have to interconnect their facilities even with competitors.  In exchange for this concession, these very same operators get public utility rights and privileges that in the wireless arena included free spectrum and a first mover, first to market opportunity.   As well all facilities-based wireless carriers benefit from below market access to rights of way and tower sites.  On balance having to facilitate a resale marketplace strikes me as a minor burden. 

            Voluntary resale shows that at least in the case of wireless facilitating this market does not harm facilities-based carriers and does not result in cannibalism.  No facilities-based carrier would permit a resale margin to exist if it did not contribute to the bottom line.  The fact that resale exists also calls into question whether facilities-based carriers face a spectrum squeeze: why provide spectrum access to a competitor if you need all of the spectrum you have and then some?

            On the matter of contributing to competition it is important to note that voluntary resale remains solely at the discretion of the facilities-based carrier. The FCC no longer mandates resale for incumbent wireless carriers, even though they nominally remain common carriers.  If resale suddenly would result in cannibalism, or create a spectrum crunch, this competition-enhancing option would evaporate overnight.

Academic Entrepreneurism and Rent Seeking

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

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

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

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

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

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

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

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

Buffets and Texting

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

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

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

Synchronized Rate Increases in DVD Rentals and Wireless Service

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

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

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

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

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

George Will Vilifies Liberals for Liking a Telephone Monopoly

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

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

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

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

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

The Academics’ Blessing and Curse

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

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

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

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

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

Wireless Cost Per Minute and Consumer Behavior

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

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

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

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

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

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

Number Counting as a Measurement of Wireless Competition

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

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

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

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

Interconnection Incentives—The Commercial Aviation Example

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

            It happens less than you’d think.

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

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

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

The Busy Hour Peak and All Other Times

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

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

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

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

Netflix Tests Subscribers Price Elasticity and Loyalty

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

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

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

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

Fair International Comparisons of Broadband Penetration

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

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

$1000 vs. $6.84 Million

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

     Had I participated I would have made the following points.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Internet in a Suitcase Abroad, But What About Pennsylvania?

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

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

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

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