Mistakes, Mistruths and Outright Lies in the Assessment of Broadband Competition

           Readers of the May 13, 2015 edition of the Wall Street Journal got a triple dose of snark and questionable journalism.  On back to back pages, this major publication informed us that U.S. “broadband is a competitive market and becoming more so as fixed and wireless converge.”  Holman W. Jenkins, Jr. suggests that we ignore any rebuttal or contarary reports from the “know-nothings in Washington.”  See http://www.wsj.com/articles/why-aol-matters-again-1431471920.

            On the next page, the editorial writers of the Journal contradict Mr. Jenkins on Verizon’s motivation for wanting to acquire AOL.  Instead of pursuing new profit centers through vertical integration, such as advertising platforms, Verizon has to acquire AOL due to competitive necessity: “A company with a stranglehold on the connection to the customer wouldn’t need to buy AOL.”  See http://www.wsj.com/articles/the-aol-telltale-1431472741.  The editors see broadband competition and the Internet as “hypercompetitive.”

            The Wall Street Journal has led a campaign to convince legislators, judges, consumers and others that the broadband Internet access marketplace operates with such robust and  sustainable competition that any government oversight is inappropriate, if not illegal. 

            This conclusion is simply not true unless one intentionally ignores basic economics, antitrust law and common sense.  To conclude that the U.S. broadband marketplace is competitive one must include any source of access to the Internet, regardless of bandwidth, transmission speed (bitrate) and cost.  Instead of many instances where consumers, such as myself, count one and only one available broadband supplier, broadband competition true believers see seven or more suppliers.

            True believers see what economists term cross-elasticity where it surely does not exist.  They treat as “options” Internet access technologies that consumers do not consider equivalents. So for true believers, it is reasonable to include Digital Subscriber Line and perhaps even conventional dial up access, even though 1.5 Megabits per second service and surely 5.6 kilobit per second service does not cut it for the kinds of services broadband subscribers expect to access via their links.  DSL might barely provide a single, tolerable link to Netflix, but not if two members of a single household seek access at the same time.

            True believers in broadband competition readily add four or more terrestrial wireless carriers and at least one satellite option to the invemtory.  Yes 4G wireless can provide broadband access at sufficient high speeds, but a competitive analysis requires consideration of cost.  Many 4G subscribers gladly pay for wireless data plans, but the willingness to pay ends when a free or lower cost option is available. With data plans limiting subscribers to a miserly 1 or 2 Gigabytes per month, subscribers understandably migrate to their wired broadband service accessible with a wireless Wi-Fi router. Wireline broadband offers a monthly data allowance of 250 Gigabytes or more.  

            A back of the envelop calculation shows a wireless broadband rate of approximately $20 a Gigabyte and even more for a satellite option, factoring in equipment costs.  Wireline access costing as low as 12 cents a Gigabyte, based on monthly consumption of the full allotment.  The statistical compilation gets tricky here based on one’s agenda.  Sponsored researchers can show that Americans have the lowest cellphone rates in the world as least for voice and texting, by using 1000s of minutes and 1000s of texts per month.  So in fairness the 12 cent rate for wired broadband access could rise to about a $1 per Gigabyte if a broadband subscriber used far less than the total amount available.

            Wall Street Journal editorial writers and columnists ignore the reality of what consumers consider truly competitive broadband options.  Few consumers think “Two Buck Chuck” wine from Trader Joe’s competes with one hundred dollar Grand Cru even though both are wine products. Some might even consume both on different occasions, but doing so does not make the two product competitive alternatives.

            So at the end of reading the two pages, this loyal subscriber to the Journal wonders did they make a simple mistake or two or three, offer a little misinformation to make a bigger point, or lie through their teeth?

Verizon and the Mixed Prospects of Vertical Integration

          Verizon will invest $4.4 billion to acquire AOL; see http://www.nytimes.com/2015/05/13/business/dealbook/verizon-to-buy-aol-for-4-4-billion.html?emc=edit_na_20150512.

            At first blush, this makes plenty of sense: Verizon has lots of retrained earnings and the ability to borrow billions; the company does not want to rely solely on wireless; and moving up the vertical food chain into content helps the company diversify and augment its home grown content.

 

            Okay so far, but we should not forget the billions lost in value when Time Warner, another content distribution carrier, tried to extract the value in AOL.  So what’s different this time?  Bear in mind that a few years after divestiture from AT&T, Verizon experimented with self-generated content and failed miserably.

            On the other hand, Comcast has successfully integrated content distribution with content generation.  The company acquired NBC-Universal and has ownership interests in many cable programming networks.

            Is there a way to predict a company’s prospects for a vertically integrating acquisition?

            I can think of two factors: the willingness of the acquiring company to encourage management of the acquired company to stay and more broadly whether the acquiring company can broaden its perspective.  Verizon need to expand its telephony (Bellhead) management skills to include content and alternative distribution channel management (Cablehead/Nethead).  Telephone company management skills will not suffice.

 

            You can teach an old dog new tricks, but Verizon would be wise to bring in several new breeds.

Circuit-Switched Telephony Metadata

          The Second Circuit Court of Appeals has determined that the acquisition and storage of all wireline and wireless telephone traffic does not comply with applicable laws covering national security.  See ACLU v. Clapper, available at: http://www.ca2.uscourts.gov/decisions/isysquery/773a98db-d41d-4db8-95aa-182f994923b5/1/doc/14-42_complete_opn.pdf.

            You might consider reading the section defining metadata as applied to telephone calls, particularly in the context of now knowing that the National Security Agency and/ or other government entities capture such information for each and every call, international and domestic. Former Vice President Dick Cheney and others take comfort in the fact that telephone metadata does not include a recording of the call.  However, this fact provides little comfort if a larger number of citizens—and voters—understand what is captured and cataloged.

            In current circuit-switched telephony, carriers set up a temporary, dedicated pathway between call originator and recipient.  Metadata data identifies the telephone company switching facilities used to create a complete link. Put another way, because the location of telephone switching facilities are known—and do not move—telephony metadata provides an accurate report on the location of callers and call recipients.

            The Second Circuit did not address the Constitutional (First Amendment and Fourth Amendment) implications of such data gathering. Had the court done so, it quite likely would have held that government has no lawful authority to track who associates with whom, absent probable cause that one or both telephone users have, or soon will commit a crime.

            A metadata capture program for every call captures information that violates the privacy expectation of citizens as well as their right to associate with anyone free of government cataloging. 

            Would citizens tolerate a government program that compiles the name and address of each letter writer and letter recipient?  Such information may be necessary for the Postal Service to route and delivery letters.  Additionally this information is quasi-public in the sense that it lies on the envelope and not inside it.  But who would support a massive investment of time and money for a government program to record such metadata?

 

Hi-Fi, Wi-Fi and Fi Wordplay

             Readers of a certain age probably know the full words to the acronyms in this blog edition.  Hi-Fi refers to high fidelity and the stereo receivers and amplifiers of the 1960s that reproduced music with greater frequency range.  Wi-Fi refers to wireless fidelity, possibly a stretched play on words using the Hi-Fi concept to cover wireless broadband access.  The mostly male, engineers that served on various 802.11 Institute of Electrical and Electronics Engineers standards groups must have had a chuckle.

            Along comes Fi from Google: we move from high, to wireless to a new brand of wireless.

            Okay, some of us get the wordplay.