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.