The New Economics of Metering

            The old school view for metering emphasized efficiency and resource management.  Without a meter tied to variable payment, subscribers would “overconsume” and waste resources.  Carriers ignored the metering option to stimulate experimentation especially for new services.  For example, Internet access subscriptions initially were offered on an All You Can Eat (“AYCE”) basis.  Even now cable television operates offer AYCE, largely because the business model involves a broadcast function (one-to-many) and the carrier incurs no greater costs with increased consumption.

            Internet carriers have applied conventional metering economics in migrating data subscribers from AYCE to monthly download caps.  Wireless carriers never offered AYCE, but they have agreed not to debit minutes of use for on-network voice calling.  This feature promoted positive networking externalities: a network accrues greater utility for users as more subscribers join the network.

            Some wireless carriers now want to abandon metering for voice services, not because the economics of metering has changed, but because of changes in consumer behavior.  Carriers can tout a generous new unmetered voice service, even as several tiers of usage merge into one option, offered at a higher price for many.  Because consumers are spending more time and money on data plans, wireless carriers have to find ways to retain voice service revenues.  One way would be to take a page from cable television operators and require subscription to a basic (now AYCE) voice plan, as a precondition to getting a data plan.  In cable if you want access to higher-tiered content, you must first subscribe to the basic tier.

            As they eliminate baskets of minutes in exchange for an AYCE plan, wireless carriers prevent subscribers from downgrading their voice plans to cheaper and smaller usage allotments, closer to actual (and declining) usage.  Wireless carriers now can offer AYCE on the valid assumption that few subscribers will overconsume. 

It's Still the Phone Company (cont.)

            During the holiday lag, what better time for Verizon Wireless to sneak in a multi-million dollar revenue enhancement, called a convenience fee for the privilege of using a credit card to pay a bill.  If the airlines, cable television operators and wireless carriers previously could insert special bill line items, then why not use holiday distraction to inject another revenue “enhancement”?

            I’m sure some well-paid, self-congratulating MBA calculated millions for something that did not suddenly cost Verizon more.  Haven’t consumers become inured to bogus ala carte line items?  I must be one of the few who won’t do business—if I can afford to do so—with a venture that pads it bills with fees for what used to be called overhead.  Several national car repair companies impose a 10%  “shop fee” on top of everything else.  Who’s going to notice another line item in a cellphone bill that already contains one half dozen?

            Think again.

            With a little extra time on our hands, social networkers can generate the kind of publicity Verizon thought would not occur, what with better things to do during the holiday season.  These very same executives also thought no one would notice a $52 million overcharge for inadvertent data sessions caused by an ill-placed handset button.  Recall that Verizon managed to forestall any consequence for over fours years!

            I’ll leave to others commentary on the power of social networking.  I’ll just list this event as one more indication that you can add wireless to phone company, but you still have a phone company.  Verizon management must have thought that they could get cover when all the other carriers would quickly follow Verizon’s lead and add the $2 convenience fee.  Who knows which carrier doubled the ten cent per text fee?  No penalty when ever carrier adds insult to injury?  The other wireless carriers must have read the angry tweets before following Verizon’s lead.

Synchronized Rate Increases in DVD Rentals and Wireless Service

            On the heels of Netflix’s rate increase for hard copy DVD access, Redbox has responded with an increase of 15-20% in selected markets, so far; see http://www.homemediamagazine.com/redbox/redbox-expands-higher-dvd-rental-pricing-tests-24784.

            What this tells me is that Netflix provides a price floor for movie rentals.  When Netflix raising the floor, ventures offering a lower price can easily raise their price to the higher, new floor.   Redbox and Netflix have not coordinated on price, nor have they conspired to fix prices.  However, one venture’s unilateral action to raise prices results in almost immediate increases by a so-called competitor.  In the antitrust/competition policy vernacular this is called conscious parallelism.

            We see conscious parallelism at gas stations all the time.  And not matter how much AT&T protests to the opposite, we see the same behavior in U.S. wireless service.  Netflix and Redbox have implicitly decided not to make price the key differentiator when means of access will suffice, i.e., driving to a Redbox kiosk versus receiving a DVD in the mail.

            Similarly U.S. wireless carriers have implicitly decided not to emphasize price competition when differentiation in terms of handsets and advertising will suffice.  The carriers vigorously claim how tirelessly they have to compete for our business.  But price is not the key differentiator. 

            If the carriers go too far in this strategy they in effect make the argument that a cellular minute of use is fungible, i.e., indistinguishable regardless which carrier provides service.  In a market with fungible products and services, AT&T Wireless can hardly make a credible argument that acquiring T Mobile’s market share will further enhance the value proposition and special worth of an AT&T Wireless minute of service.

AT&T-T Mobile One Merger Too Many?

So AT&T wants to acquire T-Mobile's market share concentrating the wireless marketplace so that 3 carriers control over 90% of the market.  Would anyone buy the bogus argument that No. 2 Delta Airline's acqusition of No. 4 American would "promote competition"?  Does anyone notice that mergers are job killing?  Does the FCC and the Justice Department have the courage to say no? 

Bear in mind the FCC rarely refuses to approve with conditions market concentrating mergers.  For wireless the FCC has abandoned spectrum caps and making new spectrum available only to new market bidders.

I predict that months from now the FCC will find a way to frame this merger as something really great for consumers.  Bogus!

The Verizon Wireless Data Rip Off—A Case Study

            For over three years, without unilateral amends by the company, or intervention by the FCC, Verizon Wireless, has profited handsomely when subscribers push a wrong button on their handsets and unintentionally access the Internet.  15 million subscribers initiated data sessions generating over $90 million in revenues for Verizon.  The revenue number is so high, because many handsets offer one button Internet access and even a few seconds of access generated a $1.99 fee as data users, lacking a monthly plan, trigger a per Megabyte fee regardless of whether only a few bytes got transmitted.  See Data Fee Mystery. 

            Okay we have an honest mistake, apparently easily made by lots of people texting in the dark and otherwise pushing the wrong number.  Verizon’s wireline venture typically provides a zero cost exit for misdialing.  For example, if you mistakenly end up at a dial a porn site, the meter does not start until after you are notified about charges for the call.  Verizon Wireless simply started the meter.

            What I find remarkable about this rip off is the “mystery” of how the charges rose to $90 million without either the company or the FCC doing something about it.  Might Verizon have grown to assume such revenues would contribute to “making its numbers”?  Might the FCC get all too easily persuaded that Verizon Wireless eventually would do the right thing?

            As a multi-decade observer of carriers and FCC behavior, I can readily attribute a cynical, but possible on point explanation to such cavalier attitudes.  So in the spirit of trying to make sense out of how this $90 million overcharge could continue for so long as an unsolvable “mystery,” I have a few rationales to suggest:

1)         FCC inaction

            The FCC has clear statutory authority (Truth in Billing laws) to investigate carrier billing anomalies and overcharges, regardless whether the carrier offers a telecommunications service, and information service, or both.  Similarly the FCC has statutory authority under Section 208 of the Communications Act to investigate complaints about carrier behavior.  Yet the Commission did nothing for three years even after having received ample notice, through consumer complaints, that unjustified data billing charges were accumulating. 

            I believe the FCC wants to serve the public interest, but often fears it cannot do the right thing if such action comes across to Congress and other stakeholders, like Verizon, as too aggressive.  Put another way without a forceful trigger the FCC cannot intervene and order refunds, or secure a Consent Decree to achieve the same outcome without the carrier’s acknowledgement of guilt. The trigger occurs when the Commission receives a sufficient number of consumer complaints, media inquiries, congressional letters and the like to outweigh carrier claims that they are “working on the problem.”  Until such time as a critical mass of complaints arrives, the Commission can defer to carrier claims that no problem exists, or that a minor billing anomaly will get fixed soon.

            Perhaps as well on a philosophical basis, the Commission is reticent to act when there are stakeholders that have framed every policy and regulatory issue in terms of whether the marketplace offers a better solution.  Applying that premise, the FCC should not intervene because consumers can vote with their feet and subscribe to another carrier that does not impose such false charges.  Alternatively, at least until so-called tort reform all but eliminates class action law suits, subscriber representatives can sue for collective refunds.

            The marketplace reliance rationale fails if all carriers offer similar handsets with Internet access buttons and similarly start the meter without providing subscribers notification that a charge will result if they stay online.  The rationale also suffers if the cost of litigation vastly exceeds the likely refund any single subscriber would win in litigation.

2)         Verizon Wireless’ Inaction

            I find it hard to believe that Verizon Wireless could have generated $90 million without ever asking why so many subscribers continuously triggered a $1.99 charge, but did not come close to using the 1 Megabyte allocation.  Perhaps Verizon lacked the metering or monitoring capability to detect such user mistakes.  If so the company could be excused from installing an intermediary web page warning that additional charges will ensue.  Again Verizon Wireline does this when for example, one calls a busy telephone number.  A recorded message offers to call you back when the line becomes available and dutifully notifies you that “an additional charge may apply.”

            I conclude that the folks at Verizon Wireless assumed they had little regulatory responsibilities to rectify the problem and that subscribers bore the obligation (“caveat emptor”—buyer beware) to detect overcharges and to invest the time and effort to dispute them.  Because $1.99 probably is too little over which to quibble, it is quite possible that Verizon Wireless management grew to expect revenues to accrue from subscriber button pushing mistakes.  In turn this revenue enhancer becomes “baked into” revenue projections.

            So for different reasons both the FCC and Verizon were willing to leave well enough alone.  But doesn’t this $90 million dollar false mystery evidence the need for a cop on the beat with a sufficiently stiff backbone to act on less than three years’ notice.

Wireless VoIP: Loss Leader or Upselling Strategy?

Verizon Wireless’ decision to allow their subscribers to access Skype (see http://about.skype.com/press/2010/02/verizon.html) raises a question about strategy. Is Verizon leveraging Skype access as an inducement for subscribers to upgrade to smartphones and commit to $30 a month data plans, has the company acknowledged that its future marketplace success lies in data and not voice services, and how will the company prevent a substantial reduction in plain old voice subscriptions priced above the $30 data plan benchmark?

Like many, I have bought the view that voice communications has become a software application that rides on top of any wireline or wireless link. As such, the downward trend line for telephony approaches zero, right? Yes, if subscribers abandon their voice minutes of use plans that start at about $45 for 450 minutes a month. But no if subscribers keep the voice plan and add the $30 or higher data plan.

There was a time when wireless carriers mandated the bundling of a voice plan for the privilege of adding a data plan. Absent such compulsory bundling, Verizon must have confidence that consumers will opt to keep the user friendly voice option. This assumption makes sense particularly if wireless carriers expect to replace unmetered, “all you can eat” data plans with several tiers of monthly throughput baskets.

Cable television operators did not have such confidence that their subscribers would add service tiers rather than cherry pick. By law cable operators must provide subscribers with some “buy through” opportunities.

With a future data dominant, but tiered service environment, users may consider it prudent to keep their voice minutes on a voice plan to conserve their available megabytes for nonvoice services. Under this scenario, efficient pricing plans trump visions of convergence and zero cost voice.