Award Winning Blog

Friday, December 21, 2018

Top Ten Irreverent Predictions for 2019 (Part Two)

6) Tough love and interventions won’t cure our 
         social network addictions.

Just now, Facebook has experienced yet another disclosure of unsavory business practices that contradict its preferred persona as a trustworthy steward of valuable and private data.  Yet again, the company did exactly what it stated it would not do.  In response to the disclosure, Facebook senior management uses a “no harm, no foul” defense.

Despite ample evidence that the company willfully breaks things like the truth and transparency, the vast majority of subscribers will not abandon Facebook.  This company appears invincible and not subject to creative destruction of their business plan by new ventures.  Facebook has the financial resources to buy insurgent firms and has so exploited scale and networking externalities apparently making it irreplaceable.  

Don’t buy the argument that dominant firms are one click away from obscurity. 

Do not expect the companies like Facebook to turn over a new leaf, because their existing business plan works incredibly well: extract maximum value about of consumer data and mouth words about self-regulation and respect for the subscriber.

7) Consumer surplus from two-sided markets 
declines further.

Social networks and other broadband intermediaries can offer lots of desirable “free” services.  These platform operators can decide which market side to demand compensation and regularly calibrate who gets subsidized access.  This process can benefit consumers.  For example, credit card users like cash rebates and “free” airline miles.  It appears that consumers get something for nothing.

Think again.  Even in the credit card, bricks and mortar world, vendors have to recoup the 1-5% swipe fees they pay for processing credit card purchases.  In the Internet ecosystem, platform subscribers surely pay to subscribe to services.  Big data has value and intermediaries have mastered the ability to collect, collate, and sell consumer data.

Data mining does more than make sure dog owners do not receive cat food commercials.  The process makes it ever more likely that vendors can “size up” a prospective buyer and know the price a specific customer will agree to pay.  So-called surge pricing calculates, with great precision, the current state of supply and demand.  Uber customers like having the opportunity to pay less than the fixed tariffs of taxi companies.  Not so much when dynamic pricing far exceeds the cab fare.

8) Fresh water economics trumps the salt water version.

Antitrust economists increasingly adhere to vastly different philosophies and market assumptions based on which academic “school” of thought they embrace.  Curiously, coastal universities have a majority of scholars inclined to support some degree of judicial and regulatory intervention to remedy marketplace flaws and to pursue equity goals.  Scholars located in interior locales appear more inclined to trust an unfettered marketplace to serve consumers.

For several decades, antitrust courts have embraced the interior, fresh water school of thought originally championed by academics at the University of Chicago.  This Chicago School orientation supports a libertarian view that government and courts should not intervene if near term consumer benefits accrue.  

Several of the assumptions made by Chicago School economists appear questionable in the Internet ecosystem.  For example, Amazon continues to forgo profits in the quest for expanded shelf-space of products and services.  Chicago School adherents would not expect any venture to eschew profit maximization based on the view that it might not have future opportunities to recoup predatory, or long term promotional prices.

It has become increasingly clear that a short-term emphasis on downstream benefits to consumers from platforms ignore both near term and future harms upstream.  Platform operators like Uber can change prices quickly and extract maximum returns, despite having made negligible investment in physical assets like cars. Social networks like Facebook accrue billions in advertising without having to make any significant investment in self-generated content. 

I question the value proposition touted by many platform operators, but not many others apparently agree with me.  I suspect that consumer welfare actually suffers from judicial adoption of Chicago School doctrine, but a new policy and philosophical regime does not appear likely in the near term.

9) Information, Communications and Entertainment 
markets further concentrate.

While the occasional article notes a vast increase in market concentration, few legislators or antitrust courts seem bothered.  I think they should be, particularly when a sober, clear thinking publication like The Economist detects considerable harm to both consumers and competition.

It appears that sponsored researchers, spin doctors and lobbyists collectively remain effective in their pitch that mergers accrue ample public service dividends.  The merged company—like TMobile-Sprint__will become a “more effective competitor.  What does that mean?   Will consumers benefit from lower prices, more options and greater innovation? How are three 5G wireless networks better than 4 networks?

Consider the recent consolidations in pharmaceuticals and commercial aviation.  I do not see less as more.  Big Pharma, acquires insurgent firms, exploits patent loopholes to prevent market entry of generic options and raises prices by thousands of percentage points.  Big Aviation devotes sleepless afternoon improving their business class seats while imposing ever more draconian rules and fees on economy customers.

How can companies reduce the value position of their goods and services while simultaneously raising prices?  

10) Restoring Internet Freedom translates into lots of costly 
“free” enhancements.

FCC Chairman Pai’s Internet deregulatory bandwagon continues its merry way, most recently declaring wireless messaging as an information service even when the service travels via conventional telephone networks and appears as letters and numbers.  On the other hand, Chairman Pai’s beneficiaries correctly note that the world has not stopped spinning on its axis and that consumers definitely like services that appear to cost zero, as in zero rated video that does not debit a still limited data plan.

The possibility exists that Chairman Pai has not restored Internet freedom, but merely facilitated the opportunity for carriers to operate biased networks that harm individuals and society. Beneficiaries of better than best efforts routing and service subsidies welcome such flexibility.  However, First Amendment freedoms decline when a wireless carrier can refuse to carry content, or throttle it when in its sole judgment the content is deemed inappropriate, or competitively harmful.

The court of public opinion likes subsidizes and zero-rated access to content. Consumers may not like it when more and more anecdotal evidence shows how biased carriage distorts the truth in much the same way as bots and fake news contaminate social networks.

Top Ten Irreverent Predictions for 2019 (Part One)

1)         TMobile CEO John Legere opts for a shorter hair style and 
             develops an aversion to pink.
            At age 60, Mr. Legere never convinced me with his “maverick”

hair and clothing style.

            In 2019, he will cut his hair and ditch the biker garb, because a combined TMobile-Sprint venture will not be the disruptive competitor that TMobile truly was when it had no alternative.  The merger enhances the ability of U.S. wireless companies to charge some of the highest rates in the world.

            Expect even higher rates, bolstered profits and lots of “free” and “unlimited” services that are neither.

2)         4-1 is less than 4.

            A reality check folks: does anyone honestly think reducing the number of major U.S. wireless competitors to three will benefit consumers?  Competitive necessity and the burden of devoting sleepless afternoon innovating declines when it becomes easier to match prices set by AT&T and Verizon.  A combined Sprint-TMobile means fewer 5G towers and less pencil sharpening.

            Unfake news flash: four viable competitors are better than three.  The combined company has no greater incentives to make capital expenditures and no greater access to capital than the efforts of two separate companies.

3)         It will get even more difficult to talk to a human 
             “customer service” representative.

            Recently, a series of remarkably bad corporate screw ups have sucked massive amounts of time and spirit from yours truly.  Vanguard Investments mishandled a major roll over of a retirement account and compounded the error by having a customer service procedure designed to prevent access to someone with authority to correct mistakes. 

            There’s a right way, a wrong way and the fill in the blank company way.  Vanguard cannot convert the registration of a retirement account while maintaining the identical number of shares.  To add insult to injury, the company generated a scripted letter that blames  unspecified government regulations requiring a two-step over process that imposed a sizeable financial risk when account one gets cashed out and account two cannot get funded for days.

            At least in the Vanguard screwup, I got to talk to a human.  Experian, one of the three major credit reporting companies, makes it just about IMPOSSIBLE to talk to, or correspond with, a human.

            At the tender age of 63, I would think that Experian could have reached the conclusion that I am credit worthy.  I have a multi-decade record of timely bill payments, have hefty lines of credit, handled six figure mortgages and have an excellent current credit score. 

            Imagine my surprise and embarrassment when, at point of purchase with other purchasers in line behind me, I was denied opportunity to apply for a BestBuy credit card and receive a 10% discount for my first purchase. The reason: Experian’s incomplete report convinced a Citibank algorithm that I lacked “sufficient credit experience.”

            I think insufficient credit experience means I do not pay 24% interest rates on credit card debts and lack other kinds of debt, such as a mortgage.  In other words, I do not deserve a high end credit card, because Experian does not have enough evidence that I can manage debt, or perhaps the algorithm projected insufficient fee and interest revenues.  Apparently, being debt-free is bad, but of course Citibank would allow me to get an inferior card if I agreed to pay it a $59 annual fee.

            Does this make sense to you?  Might human intervention and common sense have remedied these problems?  Ask the algorithm.

4)         If you can “handle the truth,” listen to buy side Wall Street 
             telecom analysts.

            Being an academic, telecommunications policy researcher and writer, I consider it a worthwhile duty to seek out all points of view and even alternative facts/statistics.  I am inundated with obviously bogus assertions how a specific regulation helps or hurts Americans.  This Blog attempts to refute unbelievable assertions such as the canard that network neutrality regulation singularly caused U.S. companies to invest billions less in infrastructure.

            Listen to financial analysts, if want to know the truth about the current state of play in 5th generation wireless, the health of the broadband ecosystem and true marketplace conditions.  In a recent teleconference, an analyst advising what stocks to buy in the Internet/telecom sector, made several matter of fact statements that clearly dispute what Chairman Ajit Pai and others want us to believe:

1)         Network neutrality, or the lack of it, has limited—if any-- impact on carrier capital expenditures.  Capex ebbs and flows with the need to invest in next generation plant and that necessity trumps regulatory uncertainty, the potential for future disruptive litigation and whether carriers have duties to make their networks accessible, or not.

2)         The likely approval of the TMobile-Sprint merger will help carriers raise prices and increase Average Revenue Per User, no if, ands, or buts about it.

5)         In these uncertain times, don’t expect “unlimited” to have 
             a simple, singular meaning.

            Sadly, no court or regulatory agency (included the much touted reliance on the Federal Trade Commission) will insist that unlimited has a singular and commonly understood meaning.  Once upon a time it did: unlimited meant without limits, and no caps on usage, or throttling of bit transmission speeds. We live in a more sophisticated and complicated world now where unlimited has a new meaning: conditional and qualified use of a service.

            I readily admit that the court of public opinion likes to think that some service is unlimited and free.  There’s a suspension of disbelief and common sense when unlimited actually means that caps on usage will result in service so slow that it cannot provide reliable carriage of data.