Missing the Burning Forest for the Trees-Verizon Throttles California Fire Fighters at the Worst Possible Time, But Few Get the Lesson

            Verizon’s so-called customer care staff made a grievous mistake when they ignored pleas to override automated software that throttled California fire fighters’ broadband connections.  See https://www.sccgov.org/sites/opa/newsroom/Pages/netneutralitylitigation.aspx?utm_campaign=Newsletters&utm_source=sendgrid&utm_medium=email.  Understandably, network neutrality advocates jumped at the opportunity to provide another example of unintended bad consequences from the abandonment of open Internet regulatory safeguards.  Similarly, network neutrality opponents properly chided the company, but again championed a mostly unregulated Internet subject to the consumer protections available from the Federal Trade Commission.

            Both sides miss the main lesson from this unfortunate situation: broadband networks have become such important infrastructure that it makes absolutely no sense now to suggest that industry self-regulation will remedy anything and everything, except for the occasional privacy and data security issues which the FTC can handle.

            Broadband networks, particularly first and last mile access, are essential to effective firefighting as it is for so many other areas of commerce, self-fulfillment, democracy, governance, etc.  Common carriage status would recognize this importance.  Bear in mind that such a legal status does not require ventures to operate as monopolies, to have market power, or to operate essential facilities.  Landlords, hotel owners, competitive airlines and even wireless carriers, currently operate as common carriers.  Do not for a second buy the bogus assertion that such status disincentivizes investment and blunts profitability.  Also, no one can credibly claim that common carrier oversight is “legacy” “utility” regulation, unjustified in this currently competitive environment. Landlords, hotel owners, bus lines, car rental companies, airlines, cable television systems, wireless carriers and a host of other ventures currently comply with nondiscrimination and other common carrier requirements.

            On the other hand, even common carriers can engage in price discrimination.  Verizon most certainly did not violate common carriage law and policy, or the FCC’s 2015 network neutrality rules, by offering different tiers of service (bit rate, allowable monthly data consumption) at different price points.

            That Verizon could have dithered for even one hour on the matter of waiving data rates for fight fighters provides a clear example that too much is at stake to rely solely on the level of common sense and good business judgment of first responding customer service representatives.  The FCC and the California Public Service Commission should have had jurisdiction and the will to act immediately. 

            Who can dispute this outcome?

Grievous Defects in the AT&T-Time Warner Court Decision

            A preliminary reading of the District Court decision (available at: http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf leaves me with despair and several unanswered questions.  I am not an antitrust law expert, nor do I have a Ph.D. in antitrust economics.  On the other hand, I offer unsponsored, non-doctrinal common sense.

            The Judge places great emphasis on the pro-consumer benefits of a vertical merger.  On several occasions, he states that the merger will accrue $352 million in cost savings to the combined company (p. 67) now able to eliminate one of two content price markups: 1) Time Warner’s profit margin in licensing content to AT&T as content distributor and 2) AT&T’s profit margin in delivering content to subscribers.  Economists term this benefit the Elimination of Double Marginalization (“EDM”).

            This makes sense intuitively, but specifically as to the video entertainment market, how much—if any-- of this $352 million flows downstream to cable/DBS subscribers?  This is a question for which empirical data does exist.  The Judge excoriates the Justice Department and its expert witnesses for failing to provide conclusive and persuasive evidence of consumer harm, largely because it has to be predictive.  But insofar as the flow through of vertical integration’s efficiency gains and EDM, empirical evidence provides a clear answer.

            Year after year, the FCC’s reports that video content prices rise, well in excess of a broader measure of consumer prices. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, MM Docket No. 92-266, Report On Cable Industry Prices (rel. Feb. 8, 2018),; available at https://apps.fcc.gov/edocs_public/attachmatch/DA-18-128A1.docx.  Over the five years ending January 1, 2016, the price of expanded basic service rose, on average, by 4.4% percent annually with the average price per channel (price divided by the number of channels offered with expanded basic service) increasing 2.1% percent to 47 cents per channel, even with the proliferation of unwanted channels in an enhanced basic programming tier.  The FCC again reported the anomalous statistic that monthly rates in communities, deemed not to have effective competition, had service rates below those charged in locales meeting an effective competition test.  The Commission reported that cable operators have substantially increased charges to recoup broadcast signal retransmission costs with a 33.9% percent rise from 2014 to 2015.  So much for robust competition.

            Let’s consider a previous blockbuster vertical merger: Comcast’s acquisition of NBC-Universal.  Did Comcast reduce its rates to reflect EDM and operational synergies?  More broadly, why hasn’t Comcast reduced its rates in response to cord shaving, cord cutting and significantly greater churn?

            The Judge mistakenly assumes that the combined AT&T-Time Warner will pass through at some—if not all (see p. 69)-- of the EDM savings, but Comcast did not do so after it acquired access to a large inventory of cable networks.  Simply put, the Judge erred in thinking that the AT&T-Time Warner acquisition financially benefits consumers in a speedy and measurable way.  When pressed to identify consumer benefits of NBC-Universal acquisition, Comcast senior managers admitted that cost savings and rate reductions for subscribers were not likely.

            The Judge also did not accept any element of the Government’s assertion that a combined AT&T-Time Warner would have heightened negotiation leverage with competing content aggregators and distributors.  Again, common sense and empirical evidence challenge his confident—bordering on arrogant—conclusions.

            Just look historically at the content licensing process and identify who blinks first in the negotiation process, particularly when a blackout has occurred.  Time after time, content distributors cave, largely as “must see” television appears on the horizon.  No DBS or cable operator will hang tough once the NFL regular season starts.  Content providers have the upper hand in negotiations and who among us will pay $50 a month for a package of channels lacking CNN, TBS, TNT and other Time Warner networks?

            There are several instances where vertically integrated ventures evidence self-serving, anticompetitive behavior.  Consider this example: Comcast inserted its wholly owned Golf Channel in the enhanced basic programming tier, but relegated the unaffiliated Tennis Channel to a most expensive sport tier.   The FCC’s Administrative Law Judge determined that Comcast’s tiering decision was motivated in part by a strategy to harm a competitor.  On appeal to the FCC Commissioners, the decision was reversed.  One can readily smell a rat here, but even without politics and partisanship, the FCC staff would have been hard pressed to prove anticompetitive intent.  There always plausible deniability—that Comcast determined its subscribers like golf more than tennis, or any of a number of plausibly legitimate business motivations.

            Let us also consider a scenario where AT&T does not use its leverage, or does not have the upper hand.   Content carriage fees will increase, probably well in excess of a general measure of consumer prices.  Some non-AT&T video content subscribers will consider reducing or eliminating their cable/DBS monthly rates.  They will seek the alternatives including AT&T’s U-verse and DirecTV as well as the options the company offers via its broadband wireless, cellular radio service and “over the top” options available to broadband wired subscribers.  A significant percentage of churning video subscribers will migrate to an AT&T option, so in at least some scenarios AT&T enjoys a “win-win” proposition: 1) it can maintain or raise profit margins for still loyal subscribers and 2) it can capture new market share with churning subscribers of competitors who do not want to pay higher rates, even if they do not reflect greater AT&T leverage, post-merger.

            I’ll stop for the time being with a prediction: consumer video content costs will rise well in excess of general inflation measures and this decision will lead to an even more concentrated industry having less incentives to enhance consumer welfare and compete on price.

           

Regulation by Contractual Fine Print

            Advocates for telecommunications deregulation work themselves into a lather when thinking about how government regulation kills jobs and robs stakeholders of the incentive to invest and innovate.  Sponsored researchers provide cover with selective analysis of data and its quite bogus extrapolation.  For example, even as incumbent carriers like Verizon and AT&T spend billions on content and future technologies, like 5G, to deliver it, the carriers and their consulting advocates attribute regulation as severely dampening any reason to invest in new plant.

            Let me get this straight.  Incumbents have no reason to keep their business alive and fresh with cutting edge technologies, because regulators will prevent them from reaping the fruits of their labor by forcing network sharing and imposing network neutrality requirements? 

            Does this pass smell test?  Why would Verizon spend over $4 billion to buy Yahoo and its considerable inventory of content and customer base if the carrier business was being starved of funds to increase transmission speed and capacity? 

            Let’s consider the dead weight social loss in regulation.  I’ll readily admit that uncalibrated and unwarranted government oversight can harm consumers and competition.  Incumbents do not want you to know this, but they welcome regulation that imposes a disproportionate burden on competitors and creates barriers to market entry by prospective competitors.

            Incumbents also do not want you to know that their service contracts—and the regulated tariffs that preceded them—impose far worse costs on consumers than anything the FCC could impose.  Regulation by contractual fine print refers to the anticompetitive and consumer harming language carriers sneak into their terms of service.

            Here are some examples:

            Unlimited data does not mean unmetered and boundless downloading opportunities. Fine print in service terms, like that offered on a “take it or leave basis” by TMobile, offer metered service and severe penalties for exceeding a cap on so-called unlimited data service.  Should a subscriber exceed a data threshold, then the carrier downgrades network performance to a rate incapable of transmitting most data applications.

            How many commercial ventures can deliberately ruin their service with an eye toward forcing customers to upgrade to a more expensive tier?  Pretty risky proposition, but wireless carriers can get away with this strategy.

            Here’s another example: AT&T and other carriers, as well as content providers, like Yahoo, reserve the option of scanning anything you do and say online, mining it, collating it and marketing it. For ventures like Yahoo and social network like Facebook, subscribers accrue value in exchange for abandoning most privacy protection.  But in the case of carriers like AT&T, the scanning and marketing of subscriber usage data does not result in the offer of discounted service.  Just the opposite.  AT&T and other carriers floated a trial balloon of offering to eschew some customer snooping in exchange for additional monthly compensation.  Such a deal!  Customer can pay for somewhat better privacy, but the default is abdication of virtually all privacy.

            Another example is compulsory arbitration on terms set by the carrier using a venture hard wired to favor the carrier in light of the business it generates for the arbitrator.

            Consumers face a non-negotiable service terms severely tilted in favor of the carrier that writes the contract.  Even a brief scan of these agreements would show terms that reduce, regulate, limit, minimize and dilute consumer bargaining power.  Subscribers cannot simple churn out from one carrier to another one offering better terms, because these so-called robust competitors have nearly identical terms and conditions.

            So who’s the regulatory beast these days?

Set Top Box Competition: What’s Not to Like?

            Only in this pay to play, partisan world could two out of three FCC Commissioners rise in opposition to an overdue initiative to save consumers billions of dollars.  Cable and DBS companies will join the opponents along with sponsored researchers who will trot out all sorts of bogus rationales.

            I’ll start by using two words to dismiss what appears to be the first gambit rationalizing a monopoly set top box marketplace.  The narrative goes something like this: “Why fix something that isn’t broken?  Just look at those so-called Tivo boxes.  Have you seen their prices?

            My response in two words: umbrella pricing.  Tivo charges what the market will bear, and in an artificially uncompetitive market it can use the outrageous set top box rental box rates to establish an equally outrageous sale price.

            If the FCC removes the government-sanctioned near monopoly, then cable, DBS and set top box manufacturers simply will have to sharpen their pencils and offer consumers a far better value proposition.

            Competition opponents will bolster their arguments for maintenance of the status quo by framing the FCC initiative as overbearing and unnecessary regulation.  How is it not deregulation when government eliminate previous rules that fostered a monopoly making it possible for above market set top rental and sale prices?

            This long overdue deregulatory effort reminds me of the adage about the stock market where bulls make money, and bears make money, but pigs get slaughtered.  Premium television companies have gouged consumers for years on a device that has become bundled with service.  Technological initiatives, which made it possible to offer more channels and compress more signals, also eliminated the ability of consumers to buy “cable ready” television sets useable without a set top box.  So the box has become a necessary device and pay TV operators get the privilege of charging a monopoly price, because they have no incentive to achieve progress on an open interface for competitive boxes that can provide both upstream navigation functions and downstream piracy prevention. 

            Cable operators have a lame, hassle-filled option available that they make every effort to obscure: the cable card.  Join the crowd if you have never heard of this option, one that typically requires an appointment with the “Cable Guy” to plug the card in, at considerable expense for the premises visit.

            The lack of set top box competition runs counter to a 60 year Carterfone precedent favoring the right of consumers to attach technically compatible devices like telephones, cable modems and wireless routers.  Incumbents do not want a free consumer option as they lust over the rental fees they cannot charge. 

            Consumers should think of an ecosystem where they have to pay a monthly rate to carriers for the privilege of attaching a modem, router and telephone.  We do not standard for such extortion, but even now inertia and ignorance of the ripoff allows cable operators to charge $10 a month for a cable modem that costs less than $50.  Bear in mind that unlike wireless handsets, consumers use the same cable modems and wireless routers for years. 

            Incumbents also will try to characterize the set top box as so complex in functionality that there could not possibly be a common interface usable by companies like Roku, Apple, Google and any television set manufacturer.  Nonsense.  Of course cable operators have never gotten around to finding a way for television sets to have “true two way” access to security and program guides, but their nonfeasance does not make the task undoable.

            In a nutshell: set top box competition does what I would have expected Republican regulators to applaud--competition unfettered by regulations that created a fake monopoly that has extracted billions from consumers.

Verizon's Copper-Free Diet and the Poorly Educated Consumer

          The frustration, confusion and anger of an elderly friend showed the upcoming public relations debacle awaiting Verizon and other incumbent carriers in their expedited rush to eliminate copper-based services.  From my experience Verizon’s employees—particularly ones on the wireless side—have no clue on how to minimize the harm.

           My friend should be the kind of customer Verizon should cherish.  She’s a triple play subscriber with a triple digit monthly bill.  She accrues no benefit in subscribing to both wireline and wireless Verizon services, because the company has a bizarre policy of completely separating the business dealings of the two ventures, except for offering a single bill. She’s paying Verizon wireless for unlimited long distance even as she has plenty of anytime, anywhere wireless minutes.  She’s satisfied with Digital Subscriber Line “broadband” transmission speed.

            My friend’s satisfaction came to a quick halt when she went shopping for a new wireless handset.  She wanted to use the same shiny, cutting edge smartphone, because that’s the device her children use.  For that privilege, she had to abandon a low cost wireline/wireless service combination.  Okay so far: having access to a 4G smartphone has its costs.

            Despite repeated assertions that Verizon Wireless employees do not receive commission’s my friend’s salesperson routinely inserted a 2 Gigabyte data plan.  No examination of my friend’s data use.  To add insult to injury, the sales person convinced my friend that she should use a “wireless solution” to her in-home, voice telephone requirements. 

            Might there be a spiff, kickback or other gratuity for salespeople spearheading the migration from copper to wireless, or fiber?

            In any event, the Verizon Wireless employee conveniently failed to mention that my friend would have to buy a special version of old school cordless telephones to access a wireless router that the company would provide “free of charge.”  This router handles in-house voice calls using 2.5G cellular spectrum thereby guaranteeing that the new, allegedly cheaper voice service could not be used for data applications.

            Convenient or not, the Verizon Wireless employee also failed to mention that in migrating to the wireless solution, my friend could no longer access the Internet using her DSL connection. Of course she could use her cutting edge 4G smartphone to access the Internet cloud at speeds far in excess of wireline DSL, but get this Verizon, some people do not want an Internet experience viewed from a small, smartphone screen.  My friend still wants broadband access using a personal computer: quaint, but possibly essential for an older person with declining vision.

            To her complete dismay, my friend found out that she no longer had Internet access and that the new black box provided by Verizon Wireless did not work with any of her existing phones still plugged into the existing RG-11 jack.  Obviously this is not what she bargained.

             Verizon added insult to injury by skimping on telephone-based customer service.  Repeated called got disconnected, probably because the representative realized the call would take too long to resolve in light of severe expectations on the number of calls handled per hour.

             I got involved and accompanied my friend to the local Verizon Wireless store.  The place has an uncanny similarity to a car dealership.  The company uses multiple salespeople and a hand off process that sure looks like a way to “tenderize” the customer and beat them into submission so that the last representative can lard on insurance, extra features and accessories, of course accruing no commission, spiff, or kickback.

             Two hours later, I achieved a remedy, albeit a still costly one.  It was remarkable to see that the Verizon Wireless representative experienced the same recordings and runaround as my friend.  A wireless call triggered a wireless Verizon customer service agent even though the local Verizon Wireless employee used a wireline Verizon toll free number.  The local employee had to resort to a wireline telephone to get through to Verizon wireline.

             How ironic (copper/iron pun intended).

             The lessons learned:

 1)         Verizon is one of those “too big to fail” ventures that screws up customer care, even if arguably it invests more in the process than a company like Comcast;

 2)         Verizon is using far too aggressive tactics to nudge and push wireline customers onto wireless options, particularly in areas lacking FiOS;

 

3)         Verizon Wireless has so many walk-in customers—even in the little town of State College, Pennsylvania—that sale people forget their scripts and checklists.  The emphasis is on speeding up the transaction and not assessing the customer’s requirements, and understanding about the battery backup limitations and the need to buy new phones, etc.; and

 4)         Consumer interest in having the latest and greatest smartphone can lead of costly and unneeded service arrangements; and

 5)         Consumers surely must prepare for the high pressure, time is of the essence decision making that still locks most into a 2 year service agreement.

Comcast Anti-consumer Strategies

      In preparing updates to comprehensive treatise on cable television and broadband (see http://www.lawcatalog.com/product_detail.cfm?productID=15670) I have the opportunity to dig deep into current business and regulatory activity.  Recently I saw that the FCC has sanctioned Comcast for favoring two affiliated sports networks (The Golf Channel and Versus) and disfavoring an unaffiliated sport network (The Tennis Channel).  The Comcast affiliates appear on a cheaper and lower programming tier than the unaffiliated network.  The FCC did not buy that Comcast and its subscribers just happen to like golf more than tennis.

       So along comes another Comcast action that may not fully pass the smell test.  Comcast wants the FCC to allow cable television operators to encrypt all service tiers including the cheapest basic service tier containing only a few channels.  Ostensibly to make bandwidth available for new services, Comcast wants to eliminate all analog channels that just about all subscribers can receive without a set top box. Comcast also benefits by not having to send a technician to activate, terminate and change service.  But it also gets to force every subscriber to install a Comcast device that might just prevent subscribers from doing lawful things the company does not want done, e.g., using non-Comcast equipment to record, distribute and receive content.

      I suspect there is more than meets the eye on Comcast’s digital strategy. On the matter of bandwidth conservation Comcast only offers a small number of channels in the basic tier, so the newly available bandwidth is insignificant.  In most systems Comcast has ample bandwidth available and already offers HDTV options. 

      So the issue focuses on the new mini-set top box subscribers have to install.  First, channel switching will take longer.  Remarkably analog channel switching occurs instantly while digital changes take a few milliseconds.  Second, most subscribers will leave the box on 24/7 surely offsetting the carbon and cost savings Comcast accrues by not having to send as many technicians across town.  Third, Comcast now has a company-owned device standing between its network and subscribers’ televisions.  Maybe this device simply better protects Comcast from program theft.  But knowing Comcast I suspect they have created more upside benefits that will result in less opportunities for subscribers to use the content for which they have paid.

Grieving Loss of the Filed Rate Doctrine

In their quest for deregulation wireless carriers in the United States may regret one regulatory feature: the Filed Rate doctrine and more generally the power of tariffs to establish compulsory contractual terms and conditions. With tariffs carriers enjoy substantial insulation from subscriber law suits and liability for violating consumer protection safeguards. Presumably a regulator approved tariff offers such adequate consumer safeguards that other consumer protections would be unnecessary. In any event the tariff supersedes any contract or marketing promise made to seal the deal.

In the current wireless environment the carriers apply “take it or leave it” contracts with subscribers and no longer have to file tariffs. The carriers have to defend their contracts and their often suspect behavior against violations of state consumer, fair trade and other laws. The carriers now seek to remove the applicability of such laws on federal preemption grounds, i.e., that the risk of balkanized policies—50 different jurisdictions applying different laws—would so confuse and otherwise harm consumers that the FCC needs to establish one uniform set of rules.

In light of the FCC’s current lax attitude toward consumer protection federal preemption would offer wireless carriers a sweet deal: make some minor accommodation on early termination charges and receive some possibly significant degree of insulation from state consumer protection laws. What consumers save in terms of pro-rated early termination charges, the FCC will transfer that and more if wireless carriers can get away with behavior that otherwise would have them paying millions in damages for violating state law.