Challenging a NYT Column Singing the Praises of Platforms and Dismissing Their Network Effects

The September 4, 2021 edition of the New York Times contains an article written by Professor Jonathan A. Knee entitled Network Effects are Overrated.  The author generally dismisses as benign, or ineffectual just about anything platform intermediaries have undertaken, despite the prevailing view that these ventures impose significant costs and benefits on consumers and society.

Professor Knee appears to dismiss the ability of platform operators to lock in subscribers and create incentives for more consumers to “get on the bandwagon.”  He also dismisses any sense that high market shares reflect a “winner take all” sweepstakes in play. Apparently, the ability to accrue scale efficiencies is not the same thing as exploiting network effects, the ability to expand the subscriber base at low incremental costs.

Professor Knee has great optimism in the ability of market entrants to capture market share and for consumers to vote with their eyes, ears, and pocketbooks and churn out of dominant platforms such as Netflix, Google, Facebook, EBay, PayPal, Uber and others.

The column curiously ignores one of the fundamental characteristics of platform intermediaries: the ability to profit from operating in a two-sided market serving both downstream consumers and upstream advertisers, data analytics firms, election meddlers, purveyors of disinformation, government surveillance agencies, and vendors.

Broadband platform intermediaries have unprecedented opportunities to get multiple bites of the apple as exemplified by Google’s ability to sell advertising, but also generate fees as the auctioneer of ad placements.  Put another way, platform intermediaries can spread fixed costs and accrue positive network effects while also generating multiple profit centers up and down a complete market “food chain.” 

Previous platform intermediaries had limited opportunities to exploit both sides of a market without jeopardizing profits.  Fior example, cable television operators and newspaper owners had to calibrate both advertising and subscription rates to maximize profits.  Attempts at gouging typically would reduce overall profits as consumers and advertisers pursued better value propositions.

Lastly, some readers of this blog may remember with fondness how Word Perfect software offered a better user experience than Microsoft Word. That notwithstanding, network effects over time forced people like me to get on the Word bandwagon, because sticking with Word Perfect guaranteed conversion and compatibility hassles.

Never underestimate the power of firms able to exploit network effects, economics of scale, and access to both sides of an integrated platform marketplace.

U.S. Passes a Key Resiliency Test, But Let’s Not Get Carried Away

            In the good news department, we have ample evidence that U.S. Internet Service Providers recently have accommodated peak demand exceeding 20%+ of normal highs.  Excellent. Old timers might recall that in the legacy telephony world, exceeding the “busy hour” evidences a properly sized network.

            Proper network sizing to handle peak demand provides empirical proof that, where available in the U.S., broadband carriers have not scrimped on capital expenditures in “sunk” plant.  I believe ISPs throughout the world strive to properly size their networks and to install current generation equipment.  The ability to do so depends on lines of credit, the cost of capital and revenue projections—not the existence or absence of any specific regulatory mandate.

            What troubles me greatly is the false extrapolations made from evidence of network resiliency.   Scholars and regulators—who should know better—extend the achievement of resiliency into “proof” or confirmation of various regulatory and economic doctrines.  An example: thanks to the elimination of network neutrality, capex has risen so that the U.S. can handle Covid-19 driven demand increase, but Europe cannot. Another one: U.S. widespread fiber optic cable deployment has achieved best in class network performance.  All sorts of self-congratulatory, “mission accomplished” blather.

            Network resiliency has no direct link to a single deregulatory initiative, nor does it confirm universal accessibility and affordability.  From my perch in rural Pennsylvania, neighborhood broadband speeds have declined somewhat, especially during the new busy hours when lots of neighbors have several simultaneous, full motion video streams going.  However, I am glad to endorse the conclusion that networks have held up, despite demand surge.

            Evidence of broadband network resiliency juxtaposes with an inconvenient truth: lots of people cannot access properly sized networks, because this essential, “mission critical” plant does not extend into their rural locales, or they cannot afford service even where available.  There are plenty of people in my community who drive near a school or library to access Wi-Fi, because they have no at home option beyond costly satellite service, or a quickly exhausted cellular data plan.  Many people make do exclusively with smartphone-delivered broadband, even though the handset screen provides an inferior interface compared to a personal computer or tablet with keyboard.

            It’s probably a real good idea to take down the “Mission Accomplished” banners.

The Myth of Broadband Investment "Disincentivization"

            Some people, who really should know better, have combined one questionable statistic with an absolutely unreasonable inference.  Ostensibly to bolster their argument that the FCC’s Open Internet Order will either enslave or impoverish carriers, sponsored researchers and one or two easily-persuaded FCC Commissioners make this unsustainable leap of faith:

            Wireline broadband providers have reduced plant investment following the FCC’s Open Internet Order.  Therefore, the entire cause of this diminution investment results from the Order.

            Might there be alternative statistics that identify where the money is going and what, if anything, has caused this sudden conservation of capital?

            First, when considering capital expenditure by companies such as Verizon, converging markets and technologies, surely require an examination of the many places money might go.  Verizon might perceive no competitive necessity to invest in wireline broadband.  Additionally the company might prioritize investments in wireless plant, as part of a major strategy to migrate from wired to wireless content distribution technologies.  Verizon is aggressively jettisoning its wireline plant and state franchises.

            Speaking of content, didn’t Verizon recently come up with a cool $4.4. billion to buy AOL whose major assets are content-based?  Would Verizon skimp on all content distribution technology after having just made a significant investment in content?  Didn’t AT&T just get conditional approval to spend over $45 billion to acquire DirecTV, whose major asset combines access to content and broadband distribution of it?

            On the issue of incentive to invest, just today I read how Verizon already wants to commit substantial funds for next generation, 5G wireless broadband distribution technology. See http://www.verizon.com/about/news/verizon-sets-roadmap-5g-technology-us-field-trials-start-2016.  Bear in mind that Verizon Wireless operates under the Title II, common carrier, telecommunications service provider “public utility” regulatory model that some consider such an investment buzz kill.  Verizon seems to well tolerate this regulatory burden and still manage to invest billion in plant.

            It bears repeating time after time: competitive necessity constitutes the major catalyst for capital expenditures, including next generation network plant. 

            Verizon knows it has to enhance the value proposition for wireless broadband.  And it surely knows the lack of competition means it does not have to extend its FiOS plant, or rush to add funds to wireline technologies about which it does not care.

If You Like the Airlines’ Consolidation, You Might Love an Even More Concentrated Broadband and Cable Marketplace

          With several cable television operations in play, perhaps we should consider what’s behind the urge to consolidate?  Bear in mind that the broadband and cable television business already is quite profitable and concentrated, a key difference with the U.S. airline industry that lacked profits and high concentration before its flurry of mergers.

            The answer: more concentration makes it easier for the survivors to avoid sleepless afternoons innovating, competing and enhancing the value proposition for consumers.  It is that simple: with fewer major players, the odds decline substantially that a maverick will buck the incentive to match the terms and conditions set by the major operators.  Why offer something faster, better, smarter, cheaper and more innovative in lieu of operating within the price, service and customer care umbrella established by the top one or two operators?

           Consider the consequences on innovation and competition If AT&T has succeeded in acquiring TMobile.  Does anyone (including Wall Street Journal editorial writers) believe consumers would enjoy the benefits of data rollovers, cheaper rates, lower roaming fees and the option to bring their own devices?

            In a concentrated industry, operators have great incentives to match each other’s rates and service. That’s what consumers get from the spate of recent airline mergers.  Even the industry maverick Southwest has “gotten with the program” on fares and many of the highly lucrative extra fees. Call it collusion, consensus, or conscious parallelism: the airlines offer roughly the same fares and fees?  Can you recall a highly advertised sale in the last year?

            I don’t see much upside to consumers in having a stronger number two cable and broadband provider.  Recall that Comcast executives emphasized how their company does not compete with Time Warner Cable.  Comcast’s logic was that if it didn’t compete with Time Warner, then there shouldn’t be any problems in acquiring their market share.  So how would a larger number two cable and broadband operator become a more aggressive competitor of Comcast?

           Extreme concentration of one old media market (cable) and one new media market (broadband) has little impact beyond further enriching managers and stockholders.  With extreme barriers to market entry concentration does not stimulate new competition.

 

            Highly concentrated media markets make it easier for the creation of platforms and bottlenecks through which a substantial portion of video content must travel.  On the buy side, an even larger content distributor might extract greater concessions from content providers.  Maybe size and scale matters, but the risk lies in creating a near monopsony marketplace where only a handful of players compete for content.  Also what incentive does New Charter have in passing program acquisition savings to subscribers?  The airlines haven't had to share a 40% drop in fuel costs.

 

            On the delivery side, what good will result when two companies control nearly 30% of the distribution grid for actual broadband consumption?  I emphasize current broadband usage and not potential competitors who offer a broadband option, albeit one that costs vastly more on a per Megabyte basis (terrestrial and satellite broadband).

            Lastly this deal combines companies that join Comcast at the absolute bottom in terms of customer service.  Ask any 10 cable subscribers if they have had a billing or service hassle and 9 or more will answer yes.  So how would a merger improve service when the companies involved already have determined they don’t have to improve customer care?

2.5 Blunders in an Otherwise Flawless Comcast Charm Offensive

       Comcast has executed a near perfect strategy to convince the Justice Department, FCC and public that the merger with Time Warner has great benefits.  The game plan shows mostly great finesse, coming for a company much reviled by subscribers and the general public alike.  Hat’s off to Comcast’s extension of its program to sell cheap computers and offer $10 a month broadband subscriptions to people qualifying for subsidized school lunches.

       However, the company has not achieved perfection.  Set out below are 2.5 mistakes that the company could have easily avoided.

 

1)          A Temporary Improvement in Customer Service and Tactics

            For years Comcast has deliberately scrimped on customer service both in terms of truck rolls and interaction with subscribers via telephone or online.  The company appears to have trained staff to eschew accommodations that result in less money.  Comcast seems to think that it wins when subscribers settle for less than they thought they should have received by way of a refund.  The company has generated ample ill will by what comes across as greed.

            In light of Comcast’s incredibly poor ranking, even a minor improvement would come across as both significant and well intentioned.  Apparently the company has done nothing even when it should display its best behavior.  Recording of worst case treatment have particularly significant impact right now and what has Comcast done?  All I’ve seen are press releases much like the scripts I get from United Airlines when they screw up and have no intention explaining why, or resolving to do better.  See United Airline Form Letter Response to Complaint

 

            Comcast cannot afford to make saccharine and disingenuous “apologies” when their customer service reps execute a strategy designed to deny responsibility and refuse to make necessary financial accommodations.

2)         Not Carrying Narrow Niche Networks Even in a Costly and Obscure Tier

 
            Comcast comes across as imperial and arrogant in its response to the RFD Network’s complaints about non-carriage.  The company should have given RFD what I call The Tennis Channel Treatment: carrying the channel on a more expensive tier with fewer subscribers than the cheaper and more highly viewed tier where Comcast places its Golf Channel.

              Clearly Comcast has bandwidth available to carry RFD and ample funds to pay the few cents per subscriber the network would qualify to receive.  Instead a company official, who should know better, accused RFD of driving “a wedge between Comcast and rural viewers as a means to promote your own business interests is unfair and grossly inaccurate.” See http://www.nytimes.com/2014/08/24/business/media/rural-tv-chief-takes-2-by-4-to-cable-merger.html?_r=0.

 

            RFD surely is a niche market play, but much like many of the niche channels Comcast carries.  RFD probably has more clout than many niche networks in view of its targeted rural audience.  Comcast’s decision to cut carriage in New Mexico and Colorado provides a snapshot of how the company can make or break a network.  Consumers have every reason to fear Comcast’s power as gatekeeper.

.5         Comcast’s "Vigorous" Support for Network Neutrality

 

            I give Comcast a half demerit for its new found support for network neutrality.  Wasn’t this the company that successfully sued the FCC on its creation of network neutrality rules?  Well that was then and now embracing neutrality—for a fixed time period no doubt—comes across as noble.  I think it comes across as an expedient strategy to win support for its merger, but this blog surely can’t match full page ads in major newspapers.

Scale and the Comcast-TWC Acquisition

           Former FCC Chairman Reed Hundt hosts The Digital Show on Business Radio 24/7-- Business Talk from Wharton, channel 111 on Sirius/XM satellite radio.  He invites major thinkers on telecom and Internet issues to chat Mondays from 5-7 p.m. in the Eastern time zone.

            On March 10^th, the program featured prominent buy side analyst Craig Moffett, Comcast E.V.P. David Cohen, Free Press Policy Director Matt Wood and yours truly.  I wish Sirius/XM archived the program, because you would hear the points for and against the Comcast-TWC acquisition in an understandable and comprehensible forum.

 

            Each presenter made his arguments effectively. Mr. Cohen offered the view that the acquisition is not such a big deal, particularly in light of the fact that Comcast and TWC “don’t compete,” while Comcast operates in a fiercely competitive marketplace for both video content and Internet access.

            Clearly Comcast does not operate as a charity, but Mr. Cohen recognized the duty to make the case for the deal based on some articulation of how the public benefits, or at least is “not threatened.” He emphasized that Comcast needs to acquire even greater scale to operate effectively and to provide consumers with the best quality of service, a robust research and development budget and a wealth of next generation services, including a new state of the art set top box.  He did not mention the prospect for lower prices even though larger scale may support the company’s ability to extract lower content prices and better Internet peering terms, in the same manner as Walmart. 

            Chairman Hundt used the phrase “balloon squeezing” to provide a visual reference for the enhanced ability of the company to reduce its costs even as smaller ventures incur higher prices for access to the same content and Internet network links.

            Mr. Cohen provided clarity on why the company wants to acquire greater market share in the video and broadband marketplace.  The merged company would serve about 30 million cable television and broadband households. In broadband, the company’s market share will likely grow significantly in light of the fact that Digital Subscriber Line service cannot increase bit transmission speeds to satisfy growing demand for video downloading.  Additionally, AT&T and Verizon have largely refrained from investing more funds to expand their high speed, digital fiber or hybrid copper/fiber networks.  So Comcast can only improve its ability to extract even higher payments from retail subscribers, particularly broadband users likely to face lower downloading allowances and more expensive tiers of service.  The company also can extract additional peering and transiting payments from upstream ISPs and content providers as evidenced by the recent paid peering deal with Netflix.  Also the company has greater “balloon squeezing” leverage with content providers, far greater than even Google.  That megafirm won’t have anything near the scale of Comcast even with an expanded footprint of 37 or so metropolitan areas.

            Case closed?  Matt Wood offered a fine rebuttal and the case for the FCC and Department of Justice to reject the deal.  The scale argument and the lack of competition among Comcast and TWC stand as two major elements why the issue of bigness is threatening to consumers and to a robustly competitive marketplace.  Standing as a toll bridge or bottleneck  operator between consumers and content sources, Comcast would have even greater leverage to extract higher charges without having to enhance the value proposition on either side.

            My concern focused on what happens when Comcast can buy out a significant player in the cable and broadband marketplace.  The fact that operators like Comcast and TWC have implicitly agreed not to compete (a mutual non-aggression pact) does not mean that their combination will lack impact.  Without TWC, cable and broadband companies have even less incentives to innovate and to sharpen their pricing pencils.

            Consider the wireless marketplace with a company like T-Mobile and one where AT&T acquired the company.  In the former, consumers benefit by having the fourth among equals forced—perhaps kicking and screaming— to compete aggressively.  In just a few weeks T-Mobile departed from conscious parallelism—simply duplicating the price points and service terms of AT&T and Verizon—to becoming an innovator.  The company has made a huge impact with lower rates for consumers who bring their own devices, roam internationally and want to change carriers in fewer than every two years.

            With its acquisition of TWC, the odds decline even further for a maverick innovator to offer a better value proposition for consumers, e.g., the opportunity to pick and choose networks on an a la carte basis instead of a large “enhanced basic” tier of channels.  Who would evidence “best practices” when doing so results in sleepless afternoons competing and the potential for being targeted by Comcast for balloon squeezing?

            Matt Wood made a series of convincing arguments that most consumers will suffer from the deal, but I would not bet against conditional approval in this politicized, pay to play environment.

A Free Pass for Comcast to Acquire Time Warner, Because They Don't Compete With Each Other?

            Two rationales supporting the Comcast acquisition of Time Warner don’t make sense to me. 

First Comcast touts the existence of Netflix, Hulu and Google as ample evidence that content competition exists.  Of course the two sources of content mentioned reach end users primarily via last mile broadband providers like Comcast.  Goggle Fiber serves three metropolitan areas and is nothing more than a test and demonstration project that Gigabit fiber is commercially and technically viable. 

Would Comcast meddle with Netflix traffic, say to tilt the competitive playing field in favor of Comcast’s pay per view options?   Why would it, particularly if in a two-sided market total revenues might decline if Comcast were to retard broadband demand?  So Comcast would have no incentive to throttle traffic and otherwise mess with the traffic of content competitors who need its network to reach end users.

Does this rationale pass the smell test?  Was Comcast merely “experimenting” with network management techniques when it previously meddled with peer-to-peer traffic?  Why are retail broadband carriers demanding surcharge payments from Netflix on top of the transit payments they receive from Content Distribution Networks like Level 3, plus the end user subscriptions that have three digit margins? 

Absent a four year network neutrality commitment as part of its acquisition of NBC, profit maximizing Comcast surely would try to squeeze every last dollar, particularly from competitors who need its downstream delivery.  Remember what Ann and Gordon told us: “Greed is good.”

Second, Comcast asserts that because it does not compete with Time Warner, no one should worry about lost competition and consumer welfare.  Would not a more concentrated cable television market have even less likelihood that some operator somewhere would experiment with new pricing models, e.g., offering ala carte channel access in lieu of bloated channel bundles? Isn’t it easier for Comcast to reduce the broadband value proposition by capping download allotments and upselling higher amounts, or agreeing not to debit the now single digit Gigabyte allotment in exchange for a surcharge paid by content sources?  Note that AT&T Wireless announced such a "toll free data” option just a few weeks ago.

Bottom line: Comcast may not compete with Time Warner, but a bigger Comcast makes it more likely that the company can claw back consumer welfare gains and reduce the value proposition of both cable television and broadband subscriptions without significant customer churn.

How the FCC’s 8th Broadband Report Became a Referendum on the Marketplace

           Only in this hyper-partisan environment can an FCC report become a stalking horse for libertarianism and antipathy to limited government efforts to stimulate broadband supply and demand. The Report (available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-12-90A1.doc) offers a well-researched and appropriately granular analysis of broadband market penetration in the United States.  It provides ample evidence of progress, but candidly acknowledges that a significant portion of rural America, populated by 19 million people, have no broadband access and are unlikely to have the privilege without government developmental support.   Perhaps this Report has triggered such vigorous opposition, because several years ago a previous Report had a “mission accomplished” theme based on a toting up of even slow speed broadband options that were considered available to all within a zip code area even if only one subscriber existed.

            The Report has triggered vigorous dissent from the two Republican Commissioners, sponsored researchers and libertarian leaning publications by stating what I thought was obvious: there are plenty of areas in America where marketplace forces work against the offering of any affordable broadband access option, particularly wire-based services. I will go so far as to use two words that apparently cannot be uttered: market failure.  

            Broadband wireline options from carriers such as Verizon and AT&T do not even serve many urban and suburban locales.  These carriers are hell bent to jettison their rural customers and the obligation to service as carriers of last resort offering telephone service.  They have doubled down on wireless and do not seem to care about declining DSL subscribership and the need to migrate to faster transmission speed services outside the metered and more expensive wireless option. Smaller carriers do want to provide broadband services and generally have expressed support for FCC efforts to extend universal service subsidies.

            Some time ago both Democratic and Republican Commissioners at the FCC typically would thank the staff for doing such a comprehensive and conscientious job in preparing a Congressionally-mandated Report.  They would consider factors such as the public interest as their foremost concern, not whether they could accrue brownie points for their party and its ideology.  FCC Commissioners of both parties gladly supported extraordinary and admittedly too generous and inefficient universal service programs.  These initiatives included “rate integration” that required carriers to average in the higher costs of providing telephone service in non-continental United States locales, e.g., Alaska, Hawaii, Puerto Rico and the Virgin Islands.  No one balked at providing “free” satellite earth stations to Pacific island residents whose governments have an affiliation with the United States, e.g., The Federated States of Micronesia.  Nobody invoked Ann Rand to suggest that rural residents should suffer any cost disadvantage for the various upside opportunities from living in the hinterland.

            Now a Report to Congress somehow has all sorts of underlying messages.  By truthfully answering a question posed by Congress that more work needs to be done to achieve ubiquitous and affordable broadband, the FCC apparently is foreshadowing a broad agenda to preempt the marketplace.   See Larry Downes, How the FCC sees Broadband's 95% Success as 100% Failure, Forbes (June 23, 2012); available at: http://www.forbes.com/sites/larrydownes/2012/08/23/how-the-fcc-sees-broadbands-95-success-as-100-failure/.  And what kind of preemption would there be?  Most subsidies flow directly to the carriers!  But instead of acknowledging that carriers stand to benefit financially from such subsidies, opponents of candor strive to see some hidden agenda, including an effort by the FCC to impose network neutrality—if not the public utility, common carrier regime—on broadband.  

            At an unprecedented rate, the entire telecommunications policy ecosystem has become so politicized as to ignore the first principle of serving the national interest.  Instead we have warring parties arguing over whether and how government is subverting market forces that time and again work against making service available absent government efforts to stimulate supply and demand.

           

Testing the Negraponte Flip

           Several years ago MIT Professor Nicholas Negraponte suggested that many current wireless services could be more efficiently provided via wires and vice versa.  Certainly he was onto something when we have duplication via both media, e.g., television broadcasting and cable television.  But does it make sense to suggest that most wireless services can efficiently and more cheaply substitute for wireline services?

            It looks like we may see that experiment as U.S. wireline carriers appear ready to rely solely on wireless options.  Whether by design or their refusal to invest in wireline improvement, incumbent telephone companies in the U.S. have experienced a significant decline in plain old telephone service revenues.  This quarter these carriers have faced a net decline in DSL subscribership.  The top two carriers, AT&T and Verizon, appear willing to divest themselves of rural service territories and to reduce or stop capital expenditures in fiber and fiber/copper broadband.

            Many of us have accepted the rationale that local loop-based broadband constitutes a transitional technology.  But I thought the transition led to fiber primarily.  Now it appears that  both AT&T and Verizon have confidence in a wireless only future. 

            Surely 4^th generation, LTE wireless can provide attractive transmission speeds compared to wireline, but can these technologies handle the volume of demand we can expect if the marketplace has only a cable modem and wireless options?  Have the incumbents done the math and figured that they are better off with offering only broadband services in the $50-100 a month range instead of having available something slower and far cheaper, e.g., DSL available for less than $20 a month?

Metered Broadband and the Bellhead Way

       Leave it to the telephone companies to come up with a way to defeat success.  Rather than work to make smartphones the third screen alternative to television sets and computer monitors for video and data, 3 of the 4 national wireless carriers want to strap on a meter.  Ostensively to discipline “bandwidth hogs” wireless carriers have eliminated unmetered service giving new meaning to the word unlimited  and handicapping ways for smartphones to become more than a handset for telephone calls and texting.

       Smartphones can provide users a Swiss Army knife array of features and services, provided the phone companies play along.  At first they did considering unlimited texting and data plans a way to increase revenues.  To promote use the companies offered “unlimited” “all you can eat plans” like that offered by wireline telephone companies and cable television operators.  The carriers reduced churn and had a mostly content and stable consumer base who appreciated knowing their “all in” cost of service.  Until recently both wireline and wireless broadband operators understood that additional downloading Internet content did not adversely affect revenues even as it rewarded curious “web surfers” who did not have to worry about the cost of additional use.

       Now wireless companies have to consider solutions to congestion problems largely because of successful marketing.  Consumers have embraced the wireless revolution, no doubt baited with subsidized smartphones and meterless service.  While the carriers quickly blame the FCC and a spectrum shortage, they did not fully appreciate the stimulus effect of “free” handsets and unmetered service.  Unwilling or unable to ramp up capacity, the carriers have switched to rationing by price.

       The wireless carrier are quick to trot out impressive scholars to justify metering based on a simple rationale that most resources require metering to prevent waste and subsidies flowing from low volume users to high volume users.  But if pressed these very same scholars might acknowledge that metering matters only when the risk of congestion exists: when demand for the last few kilobytes of data downloading causes the network to fail, or service to degrade.

       Wireless carriers have a congestion problem in some cities.  Rather than understand this as an embarrassment of riches, they consider high demand a nuisance.  The carriers can remedy this nuisance with the spectrum they have already acquired, but not yet activated.  As well these carriers can accrue major benefits for themselves and their subscribers by considering congestion evidence that they are making progress in achieving parity for the smartphone screen.  Don’t the wireless companies want  their subscribers to consider smartphones mobile computers and television receivers? 

       Perhaps not.  This out of the box thinking would require Bellhead telephone executives to conside ra longer term future where technological convergence makes it possible for telephone companies to serve as players in all sorts of information, communications and entertainment markets.  These companies see the revenues and profits they leave for others to capture and want their “fair share.”  But rather than work to enhance the value proposition of their wireless conduit and thereby solidify their control over what consumers may consider a preferred medium, Bellhead management thinks only about short term problems.  When wireline subscribers were “tying up” dialup lines for hours of narrowband telephone lines, the carriers did not see the solution as new and more expensive broadband services.  Now these very same companies want to shake down app creators with downloading surcharges and retail broadband subscribers with throttled service or higher fees.

       History repeats with short term thinking that frustrates consumers with ticking meters and places a premium on not having to compete and innovate until the last minute.  In the short term the wireless carriers will leverage scarcity to favor their own content and corporate affiliations, raising new questions about network neutrality.  Verizon recently announced a wireless movie streaming service that surely will work well despite the congestion problem.  Will Verizon expedite and favor its “mission critical” movie bits, leaving Netflix traffic to languish?  Will Verizon offer not to debit its movie traffic from subscribers’ monthly downloading quota, even as heavy Netflix users may soon find their habit triggers new surcharges?  Suddenly congestion and scarcity become vehicles for wireless carriers to tilt the competitive playing field in their favor and forestall the need to embrace change.

Lies, Damn Lies and Broadband Statistics

The FCC and NTIA have launched a broadband map that purports to give quite granular and current data about broadband accessibility.  Don't count on realistic statistics.  See Broadband Map

The casual reader won't catch the use of advertised, maximum speeds.  When, if ever, will the FCC and NTIA start to plug in real, measured speeds? 

The casual reader also may not quibble about the reported, advertised speeds.  When the site reports 50-100 megabits per second, as it does for my location, would not a reader infer a speed somewhere probably midway between the two poles?  Comcast offers a $99.99 plus, plus Extreme 50 Plan for downlink speeds "up to" 50 megabits per second.  So why not bump that platinum plan up to the NEXT rate band?  And let's forget about how many people actually subscribe to this level of service, if really available.

At first glance, the FCC and NTIA, are overstating reality.  This reminds me that there are lies, damn lies and broadband statistics.

The Pennsylvania Broadband Summit

This week's Pennsylvania Broadband Summit brought together experts with many different interests and perspectives.  See Pa. BB Summit Site.

The site contains slides I prepared on network neutrality including two case studies.

Identifying Areas in the U.S. Lacking Any Broadband Options

Despite previous proclamations of near ubiquitous broadband access in the United States, using smaller and more numerous counties instead of zip codes and considering broadband to require far greater than the previous 200 kilo bits per second floor, the FCC now acknowledges that significant numbers of Americans residing in many largely rural areas with low incomes lack any access at all. [1] The Commission now acknowledges “that broadband deployment to all Americans is not reasonable and timely. This conclusion departs from previous broadband deployment reports, which held that even though certain groups of Americans were not receiving timely access to broadband, broadband deployment ‘overall’ was reasonable and timely.” [2]


The Sixth Broadband Deployment Report confirms that a sizeable number of Americans have no broadband access whatsoever, or have access that do not meet the National Broadband Plan goal of affordable service with download speeds of at least 4 megabits per second (“Mbps”) and upload speeds of at least 1 Mbps. [3] The FCC recognized the prior 200 kilobit per second rate, in either direction, “simply is not enough bandwidth to enable a user, using current technology, ‘to originate and receive high-quality voice, data, graphics, and video telecommunications,’ as section 706 [of the Telecommunication Act of 1996] requires of such services.” [4]

Using the higher bit rate threshold the FCC estimates that 1,024 out of 3,230 counties in the United States and its territories are unserved by broadband, [5] and between approximately 14 to 24 million Americans do not have access to broadband today. [6] The Commission makes a number of candid acknowledgements:

The . . . [unserved] group appears to be disproportionately lower-income Americans and Americans who live in rural areas. The goal of the statute, and the standard against which we measure our progress, is universal broadband availability. We have not achieved this goal today, nor does it appear that we will achieve success without changes to present policies. The evidence further indicates that market forces alone are unlikely to ensure that the unserved minority of Americans will be able to obtain the benefits of broadband anytime in the near future. Therefore, if we remain on our current course, a large number of Americans likely will remain excluded from the significant benefits of broadband that most other Americans can access today. Given the ever-growing importance of broadband to our society, we are unable to conclude that broadband is being reasonably and timely deployed to all Americans in this situation. [7]

As evidenced by the ambitious goals in the National Broadband Plan, the Commission aspires to do a better job of promoting affordable and ubiquitous access going forward.

[1] Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 09-137, Sixth Broadband Deployment Report, (rel. July 20, 2010); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-129A1.pdf[hereinafter cited as Sixth Broadband Deployment Report].


[2] Id. at ¶2.

[3] See FCC, OMNIBUS BROADBAND INITIATIVE (OBI), CONNECTING AMERICA: THE NATIONAL BROADBAND PLAN, GN Docket No. 09-51 (2010) (NATIONAL BROADBAND PLAN); Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act; A National Broadband Plan for Our Future, GN Docket Nos. 09-51, 09-137, 2010 W.L. 972375 (rel. March 16, 2010). See also, National Broadband Plan, World Wide Web Site, http://www.broadband.gov/plan/.

[4] Sixth Broadband Deployment Report at ¶10.

[5] Id. at ¶22.

[6] Id. at ¶28. The Commission previously reported that about 80 million Americans either do not have access, or do not subscriber to an available broadband service.

[7] Id.

AYCE and the Third Screen

AT&T recently announced that it plans to abandon All You Can Eat (“AYCE”) unmetered data pricing substituting usage-based plans. One certainly can appreciate a strategy that eliminates cross-subsidies from light to heavy users. But consider what eliminating AYCE does to the overall conceptualization of wireless broadband.

Metering data consumption promotes efficient “non-wasteful” consumption, but that type of use is exactly what subscribers expect. Broadcast and cable television (“first screen”) consumption is not metered and the degree of financial support from advertisers is based on the amount of consumption. More consumption is better and the incremental cost to serve such additional demand is nil. Cable modem and DSL wired broadband carriers also offer AYCE to "second screen" computers, presumably because the incremental cost of an additional hour of consumption, while not zero, is either not worth metering, or the carriers appreciate the commercial and public relations benefits from providing AYCE access.

When consumers have to consider a ticking consumption meter, they likely will consume less of the Internet, so AT&T benefits by disciplining heavy users. But metering also reduces the overall utility most users will accrue. If I am mindful that video downloads will quickly exhaust my monthly downloading (throughput) allowance, I am not going to view or seek out full motion video advertisements that supplement carrier subscription revenues. What AT&T generates from additional Gigabyte downloading sales, it might lose from lower advertising revenues as subscribers use greater vigilance to conserve bandwidth.

We can applaud so-called efficient use of broadband, but “meter mindfulness” takes away some of the pleasure and serendipity the Web offers. Additionally AT&T strategy comes across as an acknowledgement that wireless Internet access cannot become the competitive and functional equivalent to wired options. Carriers cannot keep up with demand, cannot afford to accommodate heavy users’ demand, or wireless networks simply cannot scale up to accommodate heavy full motion video demand. If any one of these three conditions exists, then wireless devices do not fully operate as “third screens” in light of the carrier, bandwidth, and throughput limitations.

Google’s Broadband Projects

Chances are few U.S. readers have ever heard of something called a “test and demonstration project.” We don’t have a lot of public private partnerships here. Either the mighty marketplace stimulates private entrepreneurial juices, or the government provides subsidies often to the very carriers that did not see the payoff in using their own funds. Test and demonstration projects typically blend government and private venture participants in a project that can test the technological viability of a project and also measure the publics’ interest and willingness to pay for access to the technology.

Google’s broadband projects may provide a third model: a privately funded venture that has little expectation of profit, but which serves public and private goals. Perhaps Google’s ample retained earnings make it easier for the company to afford “lost leaders.” Likewise, Google surely gets ample free press and public relations dividends just by announcing its goodwill endeavor. Maybe Google sponsored projects will show other carriers the merits in enhancing the broadband value proposition by lowering monthly subscription rates, and/or raising delivery speeds. Surely Google does not have to prove that broadband networks can deliver 1 Gigabit per second. They exist, but not in the U.S. of course.

Google might not need to secure federal regulatory authority for any project, but the same cannot be said at the state level. In Pennsylvania, where I live, Verizon secured a right of first refusal by law. I don’t see Verizon objecting to any Google project in Pennsylvania, but I doubt whether Verizon would consider significant any “proof of concept” made by Google.

I believe incumbent carriers, such as Verizon and AT&T, do not yet consider it necessary and cost effective to enhance the value proposition in broadband. The margins are quite generous, but these carriers have more to gain and lose in wireless. Absent far greater competitive necessity --not something any Google project will generate—incumbent broadband providers can make do just fine with often duopolistic markets offering on a global comparative basis mediocre bitrates at relatively high cost.

New Book Galley Proof Edit Completed

My blogging absence has occurred largely because of teaching, consulting and book manuscript work. I am glad to report completion of the galley proof edits of my new Yale University Press book entitled: Winning the Silicon Sweepstakes--Can the U.S. Compete in Global Telecommunications?

The book asks and answers the following questions:

Why does the United States demonstrate global best practices in some information and communications technology markets, such as software and computing, but woefully lag in others, such as wireless and broadband services?

If the information revolution was supposed to “change everything,” how did more than one trillion dollars in investment largely evaporate in three years?5

How can incumbent telephone companies successfully argue the need for governments to create incentives for investment in next-generation networks and at the same time claim that the existence of robust competition eliminates the need for any other sort of government involvement?

Why have nations failed to bridge the “digital divide”6 despite having created subsidy mechanisms to invest billions annually in never-achieved solutions?7

If the ICE marketplace has become so robustly competitive, where are the usual consumer benefits of lower prices, diverse choices, and responsive customer service?

How can incumbent ventures regularly avoid the adverse consequences of failing to anticipate developing trends and serve new markets by belatedly acquiring or extinguishing most competitive threats through mergers and acquisitions?

Why have some nations, including the United States, lost their comparative and competitive advantage in ICE products and services?

Why does it look as though the next-generation Internet will be less open, less neutral, and less accessible, possibly turning the playing field into “walled gardens” of content and services offered by incumbents keen on disadvantaging newcomers offering “the next best thing”?

The book will be available in the spring.

DSL and Cable Modem Lose Over 24% Market Share in One Year??!!

In the lies, damn lies and statistics department the FCC has made another contribution. The Commisison's most current compilation of broadband market share shows wireless (satellite and cellular) acquiring over 24% from wireline cable television and telco options. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-277784A1.pdf and compare with the prior calculation: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270128A1.pdf.

How could this be? Well in reality I doubt whether many consumers would gladly pay more than double for a fraction of the bit rate available from wired options. But (and here's the snarky part) if one calculated broadband using an unrealistically low bar--say 200 kilobits per second--and if one ignores cost, then suddenly wireless options have become a major--here's the pay off--FACILITIES-BASED COMPETITOR of the cable/telco duopoly.

If only I could think and grow rich just as the FCC thinks competition exists and its statistics make it so.

In reality wireless options have their niche role wven though they offer no more than 500 or so kilobits per second. If you are on the road and have no wi-fi or wired option, then 500 kbps is better than nothing. But the FCC wants the statistics to evidence that robust competition exists in the real broadband arena (1 megabit or faster). The cable/telco duopoly is alive and well.

Wireless State of Play: When Good Enough is the Enemy of Greatness

I marvel at the creativeness in the opposition to policy initiatives that I believe would confer ample consumer benefits by imposing lawful interconnection and accessibility requirements. You should consider reading closely the rationales proposed by Robert Hahn, Robert Litan and Hal Singer, The Economics of 'Wireless Net Neutrality' http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111
for objecting to rules that would force wireless carriers to comply with regulations long since applied to wireline carriers with great consumer benefits.

Professor Tim Wu proposed that wireless carriers comply with rules that would force them to decouple service from the sale of handsets and to comply with network neutrality principles. See Wireless Net Neutrality: Cellular Carterfone on Mobile Networks, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027.

Opponents to the Wu proposal offer a glowing endorsement of how good the wireless infrastructure has become in the U.S. presumably because of light regulation and robust marketplace competition. Messrs Hahn, Litan and Singer would put the burden of proving market failure on Professor Wu in light of the wonderful output of self-regulation and competition. In other words regulatory safeguards, like the ones suggested by Professor Wu, are unnecessary and were applied when a vertically integrated monopolist operated.

First of all I marvel at how quickly opponents of wireless regulation ignore the still applicable common carrier requirements. Cellular carriers are subject to Title II of the Communications Act, including compulsory interconnection in a fair and nondiscriminatory manner. When 95% of all cellphones are sold at the time the cellular operator initiates service, I know there is an interconnection issue and a bundling problem. The cellular operator does not want anyone to buy a $2 phone at a garage sale, because a secondary market for handsets would prevent carriers from locking in consumers to 2 year service “commitments.” Additionally the carriers would lose any argument that they need two years of service to recoup the subsidy they paid to sell a $400 phone for much less. Yes the cellular carrier might reluctantly agree to interconnect and provide service to the used phone, but the consumer would have to pay rates as though the carrier supplied an expensive new phone.

So opponents to wireless net neutrality ignore the rents carriers capture when consumers can’t engage in a transaction that involves cellular service only. When wireline telephone service subscribers got the “right” to “own their own phone” telephone service rates dropped significantly because the carrier no longer could bundle the lease rate for the phone along with various maintenance fees.

Fair interconnection terms are needed for wireless carriers regardless of whether they are vertically integrated with a handset manufacturer and whether they operate as a monopoly. The integration allows any carrier to capture revenues well in excess of the handset subsidy. Indeed Iphone customers seem to be paying full price for the handset and cellular service rates as though a handset subsidy existed. Even in the absence of a monopoly the handful of cellphone service options available to consumers does not include lower cost bring your own handset rates.

I also take issue with the self-congratulatory assessment of the cellphone industry in the U.S. Contrary to what Messrs. Han, Litan and Singer would have you believe the U.S. does not come anywhere close to best practices in wireless in terms of throughout, cost, features, and even market penetration. The ITU ranks the U.S. at 63rd in wireless penetration. See http://www.itu.int/osg/spu/publications/digitalife/;
See also, http://www.itu.int/ITU-D/icteye/Reporting/ShowReportFrame.aspx?ReportName=/WTI/CellularSubscribersPublic&RP_intYear=2005&RP_intLanguageID=1;
High speed, broadband service is nothing like that available in Europe and Asia in terms of accessibility and price. The ITU reports that broadband access costs 49 cents per 100 kilobits per second in the U.S. versus 7 cents in Japan and 8 cents in Korea. See http://www.itu.int/osg/spu/publications/digitalife/statisticalhighlights.html.

Of course when statistics do not support the party line and display inconvenient truths, stakeholders shoot the messenger and challenge the veracity of the statistics. In the wireless arena mediocre to good performance provides the basis for rejecting initiatives that would force carriers to become better.

How Many Broadband Providers Does Your Zipcode Have?

For grins--or groans--I researched the FCC's broadband statistics to find out how many broadband providers my 16870 zip code has. Nine! See http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hzip0606.pdf

I live in a mostly suburban/rural area about six miles from Penn State University. Verizon cannot or will not offer DSL to me, but they apparently serve someone--perhaps a school or library. I can get cable modem service and the FCC must also have counted cellular even though the promised 60-80 kilobits per second does not meet the low bar of 200 kbps established by the FCC. Add satellite service so I guess it's possible that we can get to 9.

The problem with this figure is that one might infer a vigorous facilities-based competitive marketplace exists in my hinterland locale.

No way.

Insights From the National Cable Show

I had the opportunity to attend the National Cable and Telecommunications annual convention in Las Vegas. This show offers me an opportunity to kick the tires of new technology and get a sense of where the industry is headed. It also helps me replenish the cache of swag I use as door prizes in my classes at Penn State.

Here are the key take aways I got from the show:

Cable can more easily enhance its broadband platform than telcos simply by bonding about 12 MHz to the existing 6MHz (one anbalog television channel) currently allocated for broadband. I saw how cable can offer best practices 120+ megabits per second throughput using the DOCSIS 3.0 standard. This confirms what a transitional and inferior technology the telcos offers with DSL.

In a quasi-public session I swear I heard a senior officer of a major cable Multiple System Operator mention that broadband offers margins in the 98% range.

Cable managers understand full well that consumers expect to have access to compelling content anytime, anywhere and via any device. The operators expect new content access opportunities to be "additive," i.e., leading to more consumption rather than cannibalizing revenue streams.

Cable executives believe it will be easier for them to generate positive cash flow from non-video markets than it will be for telcos to master the content business.

Having not visited Las Vegas in 10+ years I enjoyed the people watching even as I marveled at the tawdriness of the place.