Whining All the Way to the Bank

            AT&T Chairman and Chief Executive Randall Stephenson complained yesterday that the FCC’s failure to approve AT&T’s acquisition of T-Mobile has resulted in a 30% data rate increase.  He implies that AT&T would not have raised prices if it had sufficient spectrum like that available by acquiring T-Mobile.  See http://topics.wsj.com/person/s/randall-stephenson/504.

             Does this pass your smell test?  Whatever happened to charging what the market would bear?  Mr. Stephenson is no doubt smarting from his failed strategy to drive out a competitor and
“rationalize” the wireless marketplace so that the survivors (eventually AT&T and Verizon controlling over 90% of the market) could raise rates even higher.  I should note that he lost many millions in a salary reduction and lost bonuses.

            So it comes as no surprise that Mr. Stephenson would resort to voodoo economics and fuzzy math.  A fair and realistic assessment of the wireless marketplace should start with considering whether there is a real scarcity in spectrum and not something that the carriers could manage if they conscientiously used compression and other spectrum conservation techniques.  Additionally we should appreciate that the T-Mobile acquisition would not have increased the aggregate amount of available spectrum, just that available to AT&T.  As well we should know that AT&T and Verizon have yet to activate spectrum they acquired for over $16 billion when the FCC made UHF television bandwidth available in the conversion from analog to digital television.   Just now Mr. Stephenson whines about a spectrum scarcity even as companies like Clear, Sprint and T-Mobile cannot exploit their access to such a scarce commodity. If these companies fail, it will show how regulatory policies have ruined the benefits of facilities-based competition in exchange for supporting scale and “too big to fail” megacarriers.

            Mr. Stephenson appears to want to reframe economic principles to support the premise that an industry consolidation would better serve consumers than the current marketplace comprised of four major carriers.  By analogy Mr. Stephenson’s logic would support further airline consolidation which empirically has resulted in higher rates, more crowded planes, less competition, declining use of large aircraft and reduced service to many localities.   So just how does industry consolidation or “rationalization” help consumers?  

            This is all about reducing consumer surplus, such as unmetered service, low rates and declining average revenue per user and raising carrier profits.  Mr. Stephenson takes us for fools.

Reintermediation—How Cable Incumbents Close Ranks with New Media

            The Internet has empowered consumers by eliminating middlemen that no longer add value.  I use the following key words to assess when and how direct access helps me: faster, better, smarter, cheaper and more convenient.  For example, one might want to browse in a bookstore—coffee in hand—or one might want to download an e-book in the fastest time, at the lowest price and from a remote and possibly mobile location.

            Cable television operators surely must appreciate that many consumers question what value they add, particularly when their analog technologies managed to deliver a picture far worse than one a digital signal that had travelled over 44,000 miles up to and down from a satellite.  Television riding over the top of an existing broadband link was supposed to be the killer application that would disintermediate costly and not value enhancing cable.  Think again.    You cannot underestimate the ability of cable operators to close ranks with their content affiliates, especially when cable management can offer greater revenues.  Why would ESPN give up a revenue stream coming from just about every cable subscriber in exchange for one than might generate higher margins from a much smaller subscriber base?

            So perhaps it should not come as too great a surprise that content providers are abandoning advertiser-supported Internet-delivered television, such as Hulu, no doubt encouraged by their incumbent cable partners.  I call this reintermediation where an existing distribution channel gets regenerated and re-entrenched, despite the potential for technological innovations to render the channel unnecessary.

            Incumbent cable operators will provide access to content via new media, if and only if we maintain our cable subscription.  So we get conditional “television everywhere” access in exchange for maintaining our old school cable subscriptions and abandoning new Internet-delivery options that could have offered consumers faster, better, smarter, cheaper and more convenient content access options.  These new media also could have offered advertisers and content providers a better value proposition over time.

            Consider the advertiser and content providers keen on attracting a larger audience.  Historically they have feared that new technologies would fragment audiences and provide opportunities to acquire content at lower prices.  Broadcasters, movie studios and movie theater operators initially considered cable an evil—if not illegal—siphon of audiences and revenues.  Over time it became clear that cable could expand geographical reach and audience numbers, while also creating new and profitable content distribution windows.   

            Now it appears that today’s content producers are willing to deny new media access, apparently because the sure thing status quo appears less risky and possibly more rewarding than embracing a larger and more diverse set of distribution options.  Maybe, but recall that the recording industry tried to stifle ala carte, per track access to content without success.  Is it different this time, because incumbent have greater control over their “must see” content?