Comcast Logic: A New Broadcast TV Fee

       Comcast’s most recent rate increase adds a new line item to the bill: a Broadcast TV Fee.  In the company’s typical doublespeak, this charge works to “identify some of the rising costs of retransmitting broadcast television signals.” 

        Some, but apparently not much.  Comcast magnanimously pulls out the initial $1.50 Broadcast TV Fee from its Limited Basic service fee, reducing the figure to $15.75.  The majority of the channels on Limited Basic represent broadcast channels, so the Broadcast TV Fee is not really reflecting much of the total costs.

        Could it be Comcast thinks consumers are so stupid that they cannot add the new Broadcast TV Fee with increases in other service tiers to calculate actual cost increases?  Given the lack of interest and aptitude in math maybe the company can fool consumers into thinking the company hasn’t just raised rates by about 10% what with 4% or so allocable to those greedy broadcasters like Comcast's NBC.

Rent Seeking Across Party Lines

            Over many years, telecommunications and Internet policymaking have become politicized often with clear cut Democratic and Republican viewpoints.  Votes by the FCC Commissioners increasingly split 3-2 along party lines.   How can this be?

             Perhaps the politicization stems from higher stakes in FCC votes which in turn have stimulated greater interest in the outcome.  But politicization stands as a cause if and only if a specific political party clearly holds one perspective largely opposite that of the other party.  Don’t both parties support competition? They do, but a dichotomy might arise if the Democrats readily welcome government initiatives to promote competition and the Republicans consider competition most potent when government opts out.

           
            At first blush the role of government can support a Democratic/Republican dichotomy, but it does not always play out.  Teddy Roosevelt made it his mission to bust up monopolies and this Republican “tradition” extended into the early 1970s when the Nixon Administration filed suit against the AT&T monopoly.  Democratic FCC Commissioners regularly vote in favor of market concentrating, competition reducing horizontal mergers

 

             So maybe the blame lies with unprincipled and apolitical rent-seeking.  Stakeholders keen on working less hard and earning greater returns will resort to any political, legal and economic ideology and philosophy to support the desired outcome.  It is quite fine when the FCC granted incumbent wireline telephone free spectrum for mobile services, but now denying these carriers the opportunity to bid for any and all spectrum is an abomination.
 

             Let’s not underestimate the power of sponsored research where esteemed scholars grab lots of dollars for embracing a specific ideology and explaining how it serves the public interest.  In a matter of days the very same economist might rail against the Herfindahl Hirschman Index (“HHI”) of market concentration as flawed and not predictive of anything.  But when presented with an assignment and a generous retainer to show how robustly competitive a market is, that economist might quickly invoke the HHI to “prove” how competition can exist in a concentrated marketplace.
 

            Rents seeking crosses all party lines.

Tracking New Models and Conflicts in Web Interconnection and Delivery

            You might have an interest in my work to understand the diversification of web interconnection and content delivery models, largely driven by the substantial increase in streaming video and the proliferation of Content Delivery Networks.  ISPs have devised many new deviations from the traditional peering/transiting dichotomy including: use of Internet Exchange Points by Tier-2 ISPs, paid peering, CDN surcharges, equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets/ Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers.

            Some retail ISPs also want to increase to three the number of payers for last mile content delivery.  Currently end users pay monthly Internet access subscriptions and directly interconnecting, upstream carriers pay when traffic for delivery well exceeds what the retail ISP can or will hand off for upstream carriage.  The targeted third revenue source does not directly interconnect, but constitutes a major source of content, e.g., Netflix.

            I’m working on a paper that examine existing and likely future interconnection disputes with an eye toward identifying where conflicts will arise and whether commercial negotiations can reach closure on a timely basis.  Here’s a link to slide pack summarizing the paper:
http://www.personal.psu.edu/rmf5/New%20Models%20and%20Conflicts%20in%20the%20Interconnection%20and%20Delivery%20of%20Internet-mediated%20Content.ppt.

Mission Critical Bits and Pay to Play Net Bias

             The proliferation of video content options via the Internet raises questions about what ISPs can and should do to offer “better than best efforts” to enhance quality of service.  Is this an opportunity for “pay to play” extortion, or welcomed quality of service discrimination?  One might assert the lack of a need for service prioritization in light of the absence of network congestion, but as bandwidth intensive, video demand increases does this conclusion make sense?

            Video content often qualifies as “mission critical bits” whose delivery must arrive on time, or the streaming content freezes and evaporates.  For example, Netflix and its subscribers expect each and every link to work with sufficient switching, routing and transmission capacity to deliver packets on a timely basis.  Few Netflix subscribers would stick with the company if suddenly full motion video streams became slide shows of random frames. 

            Increasingly ISPs want to secure surcharge payments from companies like Netflix to guarantee timely packet delivery.  So on top of the double-sided market where ISPs already receive payments from end users and upstream carriers, such as Content Distribution Networks, a third revenue stream should flow further upstream from content providers like Netflix.  Is this being greedy, particularly in light of what ISPs markets to subscribers?  Bear in mind that traditionally both peering and transit agreements involved directly interconnecting carriers, not ones further upstream or downstream.

            Broadband end users expect their $50-75 monthly subscriptions to cover the cost of access without a surcharge to them and others for the privilege of accessing full motion video sites.  ISPs already have the option of charging more for high volume users.  ISPs: send “broadband hogs” fruit packets and a higher bill, not throttled service.  ISPs also tier service based on bit transmission speed.  Are they entitled to more compensation from the sources of content that motivate broadband subscriptions in the first place?

News Flash: Airlines Discover Wireless Profit Center; Forget About Harm to Cockpit Communications

After years of claims that in-cabin wireless use would risk calamity, the airlines now want the public to believe any wireless access regulation--and the failure to make timely deregulation-- results from government inflexibility and inertia.  Why the change of strategy? 

The airlines want to "monetize" wireless access making it another profit center along with checked baggage and snacks.  But to fully do so they need to undo several decades of claims that wireless handset use would cause--or at least risk--harmful interference with air traffic control communications and other essential avionics.

    The restrictive FAA/FCC regulations resulted from active airline participation with a different rent seeking strategy.  The airlines' motivation did not solely stem from concern about consumer welfare.  Instead they wanted to protect their Airfone monopoly deal with GTE and later BellAtlantic/Verizon.
 

    Over time wireless has migrated from voice/text only to a vast array of data and applications.  The airlines now need to refute the avionics harm rationale they vigorously advocated in the first place.  True to form, sponsored engineers and now economists are retained to claim the need for immediate deregulation of "job killing" regulations.  These researchers join with more clearly defined stakeholders to vilify regulatory inertia, etc. 
 

    So now the avionics harm risk does not exist, if it ever did.  Smartphones always have had the ability to reduce transmission power to the lowest wattage needed making it highly unlikely that in cabin interference could result.  Also the airlines now have a transmission routing scheme, albeit overly costly, that eliminates the avionics risk by locating the necessary higher wattage link to an outside the cabin antenna for ground tower, or satellite access.

    My takeaway from this case study: it's easy to blame government regulators as inflexible.  But the political process forces these regulators to accommodate well-financed stakeholders like the airlines.  Belatedly the airlines have come to understand that wireless can become a lucrative, new revenue center.  So they launch a "public interest" campaign to persuade the FAA/FCC to remove now unnecessary, inefficient and costly regulations they helped create.  Sadly the true public interest has suffered for the decades of unnecessary handset restrictions.
 

    Also consider this irony: back on earth the wireless carriers have spent billions convincing Congress and the FCC that subscribers should not have certain access freedoms, including the "right" to unblock a fully paid for handset.  The wireless carriers claim that subscribers have no legal right to use a handset to access a competitor even if the subscriber no longer is bound  by a service agreement and even after the carrier has recouped any handset subsidy it offered the subscriber.  Some subscribers have resorted to "illegal" self-help strategies instead of asserting their right of ownership.

    I marvel at how wireless carriers can regulate and constrict individual economic freedoms, including the right to control fully owned property like handsets, including ones bought on an installment basis during a two year subscription term.  The FCC has a longstanding Carterfone policy that would prohibit such consumer restraints on corded handsets.  Sadly the FCC has bought bogus concerns about radio spectrum harm raised by the wireless carriers who benefit from the restrictions they impose in subscription agreements.

Some Brief Comments on Terminating the PSTN

NPR's All Things Considered covered the PSTN termination story including some words from me: http://www.npr.org/blogs/alltechconsidered/2013/11/18/246001725/have-we-reached-the-end-of-the-landline.

Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.

Self-serving Self-regulation

            In most transactions, my instincts favor market-driven outcomes.  Typically fair outcomes result when stakeholders act on competition-induced incentives.  But when and how do apparently competitive playing fields clearly tilted in favor of sellers?  Put another way, under what circumstances can and will competitors collude and agree not to spend sleepless afternoons competing?

            I often examine the wireless marketplace for lessons.  I part company with the party line that the U.S. marketplace is “vigorously competitive.”  Yes there are aspects of competition, but on closer examination virtually all of the pricing and service initiatives come from Sprint and T-Mobile when they decide not to join a single, consensus party line on service terms and conditions established by Verizon and AT&T.  For years all 4 of the top 4 national carriers offered pretty much the same rates and enforced the same rules.  Some of these rules imposed more significant restrictions on subscribers than anything the FCC would consider imposing.     Sure some of these restrictions might have technological justifications, e.g., spectrum scarcity and congestion concerns.  But most of them worked to lock in subscribers, raise the cost of service and restrain consumer sovereignty.  I cannot think of any legitimate reason a wireless carrier would have in prohibiting any of the so-called Carterfone freedoms available to wireline service subscribers including the right to use any FCC-certified handset, for any available service. 

            Restrictions on handset use and pricing decisions—embraced and enforced by all four national carriers—collectively accrued benefits.  For a single carrier to deviate from the deliberately shared consensus it would have to calculate what market share and revenues it might acquire offset by the likelihood that a relaxation would reduce revenues.  Consider a recent initiative by TMobile to offer a flat 20 cent per minute foreign roaming charge instead of country specific rates that can exceed $1.00 a minute.  One can see the sweet deal so-called competitors can achieve by implicitly agreeing not to deviate from extortionate roaming rates.  But if a market is “robustly competitive” how can obviously rip off rates persist in the marketplace?  Even after factoring the cost of date base interrogations and backhaul no one can justify as cost-based foreign roaming charges that exceed conventional domestic rates by 1000s of percentage points.

            So there exist instances where competitive, self-regulating ventures can agree not to compete.  TMobile becomes the maverick, party pooper, perhaps now that it realizes that the big payday of a merger will not happen.  But so many sponsored researchers swore that the merger would “enhance competition” and “serve consumers” no doubt enhanced by trip digit roaming margins.

The Dubious Rule of Three

            Some economists have asserted that markets can remain competitive even when mergers and consolidation reduces the number of major players to three.  Advocates for DOJ and FCC approval of the AT&T-TMobile merger invoked this “Rule.” I have expressed misgivings about economists establishing rules and treating them as unimpeachable.  Is three the optimal number that balances efficiency and scale on one hand and the potential for noncompetitiveness and consumer harm on the other hand?

            Perhaps three ventures can continue to compete robustly, particularly if one of the three refrains from the clear incentives to match prices and go easy on innovation.  AT&T and Verizon may compete on advertising, yet they seem to refrain from aggressive pricing.  Have you ever seen a wireless service sale?  From my perspective if AT&T had acquired TMobile consumers would suffer as the remaining Big Three would control about 90% of the market and have even less incentives to deviate from the profit maximizing consensus on rates, terms, and conditions for both handset and service.

            Now that TMobile has to stay in the marketplace the company has embraced the role of maverick and refused to go along with the consensus, a practice antitrust economists term “conscious parallelism.”  TMobile actually competes with the Big Two by offering lower prices, particularly for consumers who bring their own device (“BYOD”) thereby eliminating the need for a carrier subsidy.  The company offers lower rates—not just month-to-month service for BYOD subscribers.  In doing so TMobile has generated some clarity on the actual cost of those “free” handsets. 

            Consumers now have a choice between paying higher monthly rates for a two year term to pay handsomely for a subsidized handset, or to buy/lease the handset so that the monthly service rate drops, because it only covers wireless service.  That’s what I call competition, something that would not have occurred if the Rule of Three had applied.

Insights on How Many Economists Operate

In the last few months I’ve participated in two debates with economists and have been dressed down by one of the rock stars in the academy.  While I know many cordial economists I have met far too many that lack basic civility and tact.  Perhaps they respond to incentives that favor aggressiveness over compromise and rich financial sponsorship over unbiased search for the truth.

            While I am painting with a broad brush I see far too many economists with the following characteristics:

1)         They receive ample financial sponsorship that supports results-driven research and advocacy.

2)         They may not disclose their sponsorship.  If they do, they still will insist that outcomes supportive of their sponsor are incidental.

3)         They make up their own rules.  As a lawyer I have to work within case precedent and the rule of law.  Economists can create rules that become legitimate by use and the aforementioned financial sponsorship, e.g., the Efficient Components Pricing Rule.

4)         They place a premium of aggressiveness and snarkiness.

5)         They personalize and attack when the merits do not favor their position.  In one debate an economist did not address the merits of my arguments, but instead emphasized that “Professor Frieden and his ilk” are bad for America, etc.

6)         They revile laws that don’t make economic sense, but freely engage in the practice of law without a license.

7)         They are better at math than most people and consider this as confirmation of their superior intelligence.

8)         They consider themselves the smartest people in the room and let you know it.

9)         They often create papers that recite the obvious, or advocate something counter-intuitive that they can "prove" with math; and

10)       They have freedom to assume anything to provide any solution.  How does an economist get out of a hole?  He or she assumes a ladder.

A Senior Economist Calls My Comments “Stupid”

            I’m just back from a conference in Perth Australia where a major economics professor from a northeastern university headlined.  After his presentation he stuck around perhaps allocating a small portion of his considerable intelligence to following a later discussion.  A colleague of mine presented a paper comparing wireless policies and market performance of carriers in the U.S. and E.U.  He noted that U.S. carriers have some of the highest average return per user, but also some of the lowest rates on a per unit basis.  He also noted that the U.S. market has less concentration than many other E.U. markets using the Herfindahl Hirschman Index (“HHI”).

            Using the traditional peer review process I mentioned that the HHI score used in the paper was low compared to more recent measures that include additional acquisitions by Verizon and AT&T.  I also noted that high volume, plan-based consumers can benefit from world class low rates, but low volume users do not.  I made an analogy to the pricy breakfast buffet at my hotel.  People like me with a healthy appetite enjoy low cost per gram, but my wife incurs a high unit cost as she consumes less.

            Professor x chimed in with the stupid criticism based on his view that the HHI is not worthy of use and the availability of prepaid plans that do not lock in subscribers.  I didn’t know what a touchy, third rail topic the HHI is, particularly to researchers sponsored by incumbents keen of making acquisitions while also insisting on how competitive the wireless marketplace is.  The Professor noted that 17% of wireless consumers in the U.S. don’t have a plan, but he never got around to acknowledging that these per call and per text users pay far higher rates than the world class levels incurred by consumers who make thousands of text messages monthly.

            So the smartest guy in the room offers a clear snapshot of how to act like an ugly American bully in nation adverse to tall poppies.  30+ years as a scholar in both academic and applied telecommunications issues and Dr. Big Shot dismisses my contrary evidence as stupidity.  Not smart.

Jane Heller Frieden Eulogy July 11, 2013

   My mother recently died of complications from Alzheimer's disease.  She played a huge role in helping to shape who I am.  I would like to share with you my eulogy.

Jane Heller Frieden Eulogy July 11, 2013

          Thanks to all of you for coming today.  My sister, Nancy, brother Andy and I have many people to thank including our cousin Debbie Kaplan for hosting us today, the many care givers at Beth Shalom and Eldercare, especially Sabrina Williams, the “family” law firm of Faggert and Frieden and our friends who have offered humor and support, especially Mary Ann Wegstrom who alerted us to my Mother’s illness.  I also want to acknowledge Nancy’s work in helping to manage my Mother’s care and finances over many years.  Last but not least, I want to express my gratitude to my wife Katie for her kindness and generous spirit. 

          Given the pernicious nature of Alzheimer’s disease, which increasingly burdened my Mother for almost ten years, I have had the opportunity to observe and reflect on the many phases of her life.  This offers rare perspective, because one can easily typecast and frame a parent’s role in just one category: Mom, or Dad.  Looking at the span of my Mother’s life, there were episodes as student, apprentice teacher, wife and partner, accomplished Professor, dedicated community volunteer, late blooming pilot, genealogist and victim of dementia.  One can easily overemphasize that last phase, but the ones that preceded it offer a better measure of her life.

          My Mother embraced life and the many tasks expected of her and others she gladly embraced. She was a wonderful match to my gregarious Dad.  My Father exemplified the word raconteur, the Man about town, but alongside him—keeping stride—was Mom.  The two of them traveled the world and danced throughout the years.  I have a fond memory of the two of them taking to the dance floor after a weekend hairdressing clinic my Father organized.  In the late sixties he offered hair cutting workshops to his beauty and barber shop customers, each ending with a meal and dancing.  In these days of Internet-mediated, “social networking” one can hardly envision such personal, high touch events, but they were cutting a rug.

          I distinctly recall how my parents blended traditional and almost revolutionary elements in their relationship.  My Father had the gift of gab, but my Mother could put him in his place if he overstepped.  She started her flight training at the tender age of 52, when my Father and I traveled to Australia to find opals.  She had no intentions of passively awaiting his return.

          My Mother pursued lifelong learning and became an accomplished art educator.  I recall with pride the number of times she would acquire an impromptu tour group as she explained the nature and history of art objects at several museums.  Like my Father, she tried to establish a personal relationship with everyone, especially her students, some of whom achieved a greater appreciation not just for art, but for learning and living a purposeful life.

          My Mother gladly would have continued an active and vigorous life in retirement had she not contracted Alzheimer’s disease.  Step by step, she declined, giving up the computer and the Internet which had brought so much joy and tasteless jokes.  In time she had to retire from a variety of community service responsibilities including the Chrysler Museum, the battleship Wisconsin, Meals on Wheels and Make a Wish Foundation to name a few.  Her frequent phone calls to me stopped.

          This unrelenting disease robbed her of so much, but remarkably it also provided us a perhaps a clearer picture of her core self—unvarnished and uncensored.  Until near the end, she expressed so much joy with uncontrollable laughter.  Chocolate, Katie’s and my Corgi Noo-Noo, and music from the 40’s brought unmistakable pleasure.  Even as she lost her shortterm memory, she could remember the lyrics to War-time songs.  She couldn’t remember Noo-Noo’s breed, or my name, but she could recite the lyrics and perform the dance moves to Al Dexter’s 1943 hit “Pistol Packing Mama.”

          Today we grieve the loss of a truly renaissance person, who delivered on the goals of “giving back to the community” and living a purposeful life.  Both Jane and Joe Frieden remind us to “seize the day”: carpe diem, because we simply do not know when and how our days fade to black.

           

Content Provider Wireless Subsidies

            Wireless subscribers face the cross-currents of access to an ever increasing inventory of full motion video content at the same time as wireless carriers have forced them to subscribe to a metered service with a monthly cap on downloads, including streaming video.  Content providers, such as ESPN, are exploring the prospect of subsidizing wireless carrier transmission charges to abate the prospect of overages, or throttled service. 

            Smart move on ESPN’s part to enhance the value proposition of its increasingly expensive product.  ESPN may have read the tea leaves and become convinced that it better do something to stem the tide of cord cutters disinclined to pay for dozens of channels, including its expanding bundle of channels, combined by cable companies into a content tier nearing or exceeding $100 a month.  Additionally ESPN understands that if it expects cable subscribers to pay at least $5.00 a month for its content, then it better respond to their expectation of having access anytime, anywhere, via any device and in multiple formats.  Today’s video consumer has no tolerance for the old school “appointment television” model where the content provider and its distributor established the terms and conditions for one time access on a particular channel at a particular time.

            ESPN also understands that the small bandwidth delivery payments it may opt to make will pale in comparison to the additional revenue stream generated by mobile advertising.  Multiple access platforms to ESPN content means that subscribers will have more opportunities to see ESPN content—including repeat or repurposed content—and also ESPN-carried advertising.  Also the bulk capacity ESPN may buy will not cost anything near what individual subscribers pay on a megabyte or gigabyte basis.

            So far so good, but might there be a network neutrality/open Internet regulatory problem?  An article in the Wall Street Journal  today correctly reported that the FCC has created different and less burdensome rules for wireless broadband carriers than their wireline counterparts.  One might not object to pricing experimentation with wireless carriers increasingly deviating from the same price points and service classifications.  However, the ESPN subsidy scenario does raise questions.

            Will wireless and wireline broadband carriers use the ESPN subsidy model as the basis for demanding surcharges from heavy volume content providers such as Google and Youtube?  Would the ESPN subsidy model morph into a “pay to play” shakedown targeting new ventures seeking to make a splash?  Or is this model nothing more than an extension of what Amazon currently does when you want to download a book purchase wirelessly?  Amazon looks for a zero cost wi-fi option, but failing that the company will bear, without a surcharge, the cost of cellular radio carriage to Kindles equipped to receive such signals.

            When Comcast offered not to debit downloads of its video on demand service to Xbox360 users, the company insisted that it was not discriminating against viewers via conventional computers.  Comcast asserted it routed movies to XBoxs via a specialized network somehow different than the Internet cloud it uses to deliver the very same content to personal computers and tablets.  Under the existing rules wireless carriers would not have to claim that they routed ESPN subsidized traffic over something specialized.  But what would happen if the ESPN payment guaranteed “better than best efforts” traffic routing possibility leading to a measurable and identifiable difference between the subscriber viewing experience for ESPN content versus Fox and other sources of competing content?

            Stay tuned.

Maximizing the Benefits of Future Spectrum Auctions

            Sponsored researchers already have entered the conversation about spectrum policy with a new objective of thwarting any effort to promote access by non-incumbents, or at least any carrier other than AT&T and Verizon.  These researchers will prove that denying incumbents the opportunity to acquire even more spectrum will reduce the government’s take.  I agree and empirical evidence supports this.  When the FCC imposed requirements of open access or sharing with first responders on a spectrum block, the amount bid was lower than unencumbered spectrum.

            But of course sponsored researchers want to extrapolate from this truth to many conjectures including the premise that any spectrum set aside would prevent the most efficient providers from doing more with more.  Somehow if AT&T and Verizon do not capture the lion’s share of any and all available spectrum, then both taxpayers and wireless consumers suffer.

            This premise does not pass a basic smell test.  We should appreciate that what the government takes now in spectrum auction proceeds, it loses in future tax revenues, because carriers can use their spectrum investments as offsets against income.  

            Perhaps more importantly we should consider what the two incumbents with over 70% market share can do with additional spectrum.  In the best case scenario they will put the spectrum to immediate use and abate any real scarcity.  In the worst case access to more spectrum eliminates incentives to more efficient use including the possibility of buying simply to deprive competitors of access and to preempt market entry.  Additionally incumbents possibly can “warehouse” the spectrum by not using it, but preventing other carriers from putting it to efficient and immediate use.

            Consider a commercial aviation analogy.  Let’s assume a highly congested airport can offer additional landing and takeoff slots, a result when an additional runway gets constructed, or when regulators relax a cap, or allow late night operations.  In this particular aviation market one carrier has a dominant market share, something that regularly occurs when that market represents a carrier’s hub, e.g.,  Washington Dulles for United; Philadelphia for U.S. Airways, Detroit for Delta and Dallas Fort Worth for American.  Dominant carriers have market power in their hub markets as evidenced by their ability to charge higher fares than cities with competitive commercial aviation markets. 

            These carriers will do anything to maintain their dominance including acquiring as many new landing and takeoff slots as possible.  Of course they will frame their acquisitions as serving the public interest and consumers, even if they have to use smaller aircraft—with less seat capacity—to ensure that every slot gets used.  With more available slots incumbent air carriers might determine that they will oversupply seating capacity with large planes.  But rather than pass on the opportunity to control even more access to the market, these carriers will acquire new slots at any price simply to prevent existing or prospective competition from flourishing. 

            In the short run everything looks grand: the government accrues higher auction revenues than contemplated, because of the market preemption benefits reflected in a dominant carrier’s win at all costs bids.  But in the immediate term consumers suffer from higher rates available to the fortress hub carrier.  Recently even corporate flyers have complained about the consequences of hub dominance and the reduction of competition and flight options in non-hubs.  In the longer term the tax benefits to incumbents and the elimination of most competitive benefits weigh in.

            Bottom line: if the FCC seeks to maximize short term spectrum auction proceeds it will guarantee that incumbents acquire most newly available spectrum further concentrating the market and reducing the benefits of facilities-based competition.

What the Pennsylvania Liquor Control Board and Comcast Have in Common

             Pennsylvania ties with Utah for having the most restrictive access to wine and spirits.  Predictably the Pa. State Stores offer high prices and many employees manage to channel the attitude you might find at any Department of Motor Vehicles.  I particularly loath the “intruder alert” that announces entry by each individual customer.  Each store uses the same device leading me to suspect someone really connected got a sole source contract to supply all stores.

            So what does the Pa. State Stores have in common with Comcast: exclusivity and the ability to set price above market value.  Channeling the old Bell System, Comcast prevents subscriber access to a new and used (resale) market for set top boxes and even simple and inexpensive Digital Transport Adapters (“DTAs”) needed by analog television sets to display digital signals.  Subscribers must lease equipment from Comcast at unregulated rates.  Never mind the Carterfone policy that would support a competitive market.  Incumbents like Comcast have has cowed the FCC into thinking the set top box marketplace is competitive in light of the CableCard option that allows subscribers to use a Tivo box with a cable company supplied security card. And just how many digital video recorder options are out there in addition to the cable company’s set to box/DVR combo and Tivo?

            Recently I reported that Comcast now charges for DTAs, having previously offered them freely, presumably as a consumer interest bone to the FCC for agreeing to waive the requirement that consumers have access to the basic tier of content without a set top box or other device.  Comcast pulled the old bait and switch, but I tried self help: I acquired a DTA today at a church rummage sale.  Because the device has flash memory and addressability I assumed Comcast gladly would activate the DTA just like the company allowed me to use my own cable modem.

            What was I thinking?  The several Comcast representatives with whom I chatted made it clear the DTA would not get activated even if technologically the company could register the device just as it does for cable modems.  I must infer that management at Comcast did not think they could get away with forcing sole source leasing or sale of cable modems, but that is exactly what they now mandate for a far less complex and cheaper device.  There may be as many as 23 million DTAs in use, most now earning a nifty return for exclusive lessors like Comcast.

            I am sure Comcast could fine any number of scholars and experts to explain how the DTA market is either robustly competitive, or so complex that cable operators need to control their installation and monitoring.  Yeah right; just like the Bell System whose managers insisted that subscribers would harm the network and employee safety if they used their own phones.

            It took years for the FCC to reject the harm to the network gambit and the freedom to Bring Your Own Device to some wireless service results more from T-Mobile’s recent pricing strategy than the FCC’s Carterfone policy which should apply to wireless handsets no differently than wired sets.  Oh but of course there are sponsored researchers who would swear on a stack of bibles that the use of spectrum or some such reason prevents Carterfone from applying to wireless.

            Yet again consumers’ lack of digital literacy and a cowed FCC make it possible for cable operators to sole source DTAs.  At least the Pennsylvania Liquor Control Board  can invoke consumer protection and the demon in rum. 

            Anyone want a DTA cheap?

             

The Lack of Competition in Cable Television Set Top Boxes

            Recently Comcast migrated from offering 2 free digital to analog converters to offering a rental at $1.99 per month.  It got me thinking why cable operators persist in this line of business when other ancillary markets, such as wireless routers and even cable modems have competitive options.  The authors of Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes offer plenty of answers and economic theories; see http://www.phoenix-center.org/papers/CommLawConspectusSection629.pdf.

            According to T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern there does not seem to be any financial upside for cable operators, or marketplace harm in sole sourcing and rentals.  So are cable operators simply providing a service that no one else wants to provide?  The authors correctly note that cable operators do not manufacture such devices, but instead contract for the manufacture by unaffiliated companies.  So what’s in it for the cable operators?

            I have a few empirical observations, again generated by personal experience.  First the possibility exists that the rentals of set top boxes, converters and modems represent a unrecognized profit center.  I suspect that the Pace converter that allows cable subscribers to continue using older analog televisions costs less than the devices used to convert off air digital signals into analog.  These more sophisticated devices retail for about $40—50.  So if Comcast can rent the simpler and cheaper mini-converters for $2 a month, the company breaks even in a matter of months even though subscribers might use the device for many years. 

            As to those more expensive set top boxes the time to break even will take longer, but again the length of rental without replacement may span many years.  How many generations of set top boxes have you run through in your years of cable television subscriptions?  Bear in mind that cable operators typically offer one set top box free and then charge $5 or more per month for additional units.

            Second the possibility exists that cable operators believe that their proprietary, non-compatible set top boxes provide greater opportunities to lock in consumers and limit them only to features the cable companies and content providers are willing to offer.  Once upon a time these stakeholders did not want companies like Tivo offering digital video recording opportunities, so interconnection and technical compatibility issues provided a means to thwart and stall competitive options.

             Third, cable operators, their trade associations and their sponsored researchers have expressed opposition to extending the Carterfone policy to television.  Carterfone supports the right of consumers to attach any device that does not cause technical harm.  If applied to cable television, it would enhance consumer freedom by preventing strategies to block or limit access by devices cable operators don’t control.  From my vantage point the lack of progress in cable efforts to promote “true two-way” access by televisions without a converter box means that cable operators see upsides in mandating access only via their soul sourced devices.  Additionally with digital transmissions, subscribers must have a set top box or converter for each and every television set thereby eliminating the previous free option of using a “cable ready” set.

            Also the fact that consumers have not embraced CableCards may reflect their lack of knowing that such an option exists, possibly the product of a strategy by cable operators not to promote such an option.

            My bottom line: the lack of a competitive market for set top boxes probably reflects market failure artificially induced by cable operators.

Telephone Pedestals and the Second Amendment

            Once upon a time when telephone companies provided service via wires these companies secured free rights of way to install equipment and lines.  In many locations the companies replaced telephone poles with underground conduits.  When telephone companies needed to splice a service line to a home or business they installed a pedestal above ground.  These metal or plastic pedestals do not have a pleasing appearance even with the use of forest green coloration.  They were necessary splice points where telephone company technicians connected and disconnected service.

            Now that telephone companies want to provide anything but wireline telephone service it strikes me that they should lose the rights of way granted to them by state public utility commissions.  If a company does not provide common carrier telecommunications services, then surely it has no public utility right to take a portion of my property for their use free of charge.  Right?

            I mean if a telephone company no longer wants to serve as the carrier of last resort—or first resort for that matter—then they in effect should be deemed to have abandoned their right to secure a property interest in my land.  As information service providers, like VoIP service providers, former telephone companies no longer should have the right of eminent domain granted by states to bona fide public utilities.   It seems straightforward to me: if a common carrier opts to abandon its common carrier duties, then it should lose its rights of way over private property for lines that no longer provide common carrier services, and possibly won’t provide anything at  all.

            So when my telephone company terminates PSTN service access on my property, they can pull out their copper and by the way be sure to pull out the pedestal while you’re at it.  Oh and by the way, I don’t want to ever see you again on my property.  Going forward you would become a trespasser and I reserve all my Second Amendment rights to brandish a weapon to encourage one of your few information service contractors or employees to leave.

             Gee . . maybe the Tea Party, the National Rifle Association and I have something in common.

Competition as the Last Resort: A BYOD Discount

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

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

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

 

           

Wireless Market Concentration Leads to Lower Prices?

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

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

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

 

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

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

 

 

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

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

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

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

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

What Charlie Ergen’s Rational Exuberance Means for Consumers

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

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

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

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

Rebooting with a Shout Out to Comcast

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

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

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

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

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