Award Winning Blog

Wednesday, December 10, 2014

7+ Examples Where Consumers Don’t Call the Shots

            There are plenty of examples where the marketplace’s invisible hand does not seem to favor consumers.  As much as I want to believe unconditionally in the power of the marketplace, there are too many powerful examples where consumers lack sovereignty.  Here are 7+ examples in the information, communications and entertainment marketplace:

1)         Take it or Leave It Contracts that Include Binding Arbitration Clauses 

            Perhaps you can show me a wireless contract that does not require subscribers to give up their day in court if a carrier cheats them.  There are too many instances where a wireless carrier imposes an unjustified charge, or demands payments for one.  Where is the marketplace punishment when this occurs?  There is none, because consumers cannot vote with their feet and migrate to an alternative service provider that allows subscribers a judicial forum.  Every major carrier in the U.S. has received a sizeable fine from the FCC for unlawful and bogus charges, but I don’t want to rely on a regulatory remedy that could evaporate, or apply only if the politics are right.

2)         The Supreme Court’s Aversion to Class Action Law Suits

                I support tort reform that seeks to eliminate frivolous law suits, but another powerful remedy has evaporated when telecom ventures cheat.  Class action law suits make it possible to remedy a problem that collectively add up to millions of dollars, are not worth the bother for any one victim to sue—assuming they still have that option.

            For example, Verizon collected a cool $52 million in unauthorized data access charges in $1.99 increments.  An individual subscriber could not recover the overcharges given the cost of litigation, or even arbitration.  Verizon continued the practice for over four years, before the FCC made the company stop.

3)         Walled Gardens

            I appreciate that most of us are content to treat the millions of wireless apps as more than enough options.  However, compare what Apple allows versus what the complete and unwalled Internet has to offer.  With the rising importance of wireless data access, some content and app creators already have opted to concentrate on App Store availability in lieu of plain old web access.  A lot of time, money and effort goes in creating different versions of the same content accessible by handsets using different operating systems.

4)         Internet Access From a 7 Inch Screen

            Consumers readily accept an inferior web experience for the opportunity to access it via a mobile device.  Okay, the market has functioned and allocated resources accordingly.  In some places in the world, wireless constitutes the first and only medium that offers an affordable and available option.  Still I lament that consumers may have access to fewer and fewer options via 20 inch, fixed screens.

5)         Throttling

            I find it hard to understand why a wireless carrier would deliberately degrade service to a “power user.”  Why not send them a fruit basket and new service options?  Carriers want the option of upselling, but also to punish users, even ones who have acquired so-called unlimited service.

6)         Tiering When Extra Usage Costs Little

            Unmetered, All You Can Eat (“AYCE”) service is economically inefficient when it stimulates “excessive” consumption and triggers cross-subsidies from low volume users to high volume users.  This can occur when everyone pays the same price, or there are negative consequences resulting from excess use, e.g., the need to build more electric power plants.

            Internet access may have different characteristics, particularly if carriers can provide additional units of service without significant additional cost.  Absent congestion, a broadband service provider incurs little cost if it allows subscribers to binge watch Netflix.  That’s why fixed, wireline broadband consumers have AYCE access, or sizeable monthly data allowances in the 100s of Gigabyte range.

            It probably makes economic sense for wired broadband carriers to tier service based on bit transmission speed, but perhaps not on the basis of download volumes.

7)         Video Access Constraints

            Yes the marketplace has made significant accommodations of consumers’ impatience with access constraints.  Video on demand and television everywhere provides alternatives to “appointment television.”   However do not fool yourself into thinking the consumer can demand unlimited access, anytime, anywhere, via any device and in any presentation format.  There are legitimate copyright and content windowing constraints, and there are plenty of questionable ones.

            Why can’t cable subscribers select content on an a la carte basis?  It surely is technically feasible and while the savings depend on the 10-15 channels most consumers would choose, the absence of this options is telling.  ESPN and other very high cost networks understand that they and their cable partners can generate far more revenues by forcing every subscriber to pay for a bundle of channels than by charging even higher rates (above the $6-$7 a month for ESPN) from the smaller base of voluntary subscribers.

            Why can’t consumers access ESPN, HBO and other premium content sources without also subscribing to cable or satellite television?  This access pre-condition constitutes what antirust experts call a tying arrangement. HBO has begun to experiment with alternatives, but until direct access becomes an option, legacy ventures can close ranks and add to consumers’ costs.

            Speaking of costs, how can both content and broadband access providers treat the monthly consumer subscription as just one revenue center?  Does one’s broadband subscription contract contain language allowing the carrier to degrade service to particular upstream content sources unless they agree to pay a surcharge?  Put differently does a broadband carrier have a duty to provide adequate service to its subscribers even if it fails to receive surcharge payments?

            Comcast officials recently claimed that Netflix deliberately caused their content downloads to degrade as a way to improve the odds that the FCC would reject the merger with Time Warner, or impose more burdensome conditions.  I know that Comcast on occasion has intentionally degraded its service, but why would Netflix, particularly given low consumers’ pain thresholds for inferior video?

            Lastly, why do subscribers have to pay the full monthly rate when compensation disputes temporarily block access to “must see” channels?  Where’s my refund?


Monday, December 8, 2014

Telecom Policy Lessons From Recent Aviation Mergers

         During this sabbatical year, I have had more opportunities for air travel. While I still marvel at the opportunity to be somewhere on the other side of the globe in a day, I cannot believe how even doubly diminished expectations are not achieved.

            Acquiring companies United, Delta and American swore how buying out a competitor would promote competition and help airlines become more financially stable so they could compete better.  Right, so they can spend up to $35,000 per business class seat and concentrate on the high margin customer even as they install cheaper, smaller and more numerous seats in economy.

            Rather than become more robust competitors it has become easier for the airlines to siphon consumer surplus by raising rates.  The survivors have less incentives to concentrate on consumer service, what with all the new opportunities to extract higher revenues, particularly from ancillary services like charging $300 for a change in an itinerary.

            Even former mavericks have come to realize that they have more to gain by joining the consensus than by offering a better value proposition.  Both Southwestern and Jet Blue have implemented some of the new fees the other carriers charge and neither typically offer the lowest fare anymore.  The smaller group of airlines can engage in consciously parallel pricing—some might call it price fixing—and get away with it, because no one wants to buck the trend of ever rising prices.

            If these mergers were supposed to make the airlines better competitors, why aren’t prices dropping, particularly in light of a 30-40% drop in fuel prices?  Most international flights from the U.S. have sizeable fuel surcharges, a term creating the impression that this billing item might drop, or evaporate if fuel prices decline.  This has not happened.  Why part with as much as $615 per trip if no other carrier reduces the surcharge?

            Fundamental economics suggests that if incumbent gouge and get too greedy, they create ever larger incentives for market entry.  Okay, where is the market entry?  It cannot happen when incumbents control all available takeoff and landing slots.  Even with low interest rates, what bank would loan millions to a startup airline boldly willing to jump high barriers to market entry?

            Of course the incumbents have every incentive to exploit their survivorship and to incur the lobbying and campaign investments necessary to sustain the status quo and their upper hand in the marketplace.  Congress is not about to force a reallocation of landing slots to market entrants any more than they would enact a law earmarking radio spectrum for competitive bidding only by non-incumbents. 
            It has become easier from incumbent airlines to pursue a strategy of reducing the value proposition of flight and to unbundle elements so that the sum of the line charges well exceeds the former single fare.  While much of this affects the economy class traveler United Airlines CEO Jeff Smisek even bragged how replacing whole cashews with pieces in business class would save the airline money without any fallout.  This miserly airline does not offer a free glass of wine in coach, even though US Airways does having previously tried to charge for water.

            Tweaks to frequent flier programs and a variety of line items, like that one sees on their cable television and wireless bills, make incumbents not much different than so-called low cost carriers.  These carriers do not look and act much different than carriers like Ryanair or Spirit. 

            So the thought has crossed my mind many times of late whether Comcast and AT&T have anything to offer other than higher stock prices from their proposed $100+ billion acquisitions.