Broadband Carrier Quandary: Exploit Bandwidth Scarcity, or Reduce It?

            Comcast enhanced the value position of its broadband subscriptions by increasing the monthly data allowance to 1 Terrabyte (1000 Gigabytes). See http://money.cnn.com/2016/04/28/technology/comcast-data-cap/.  As an independent, unsponsored researcher, I can say “Thank You Comcast” without adverse consequences and only a bit of irony.  This company does much to displease, but ab expanded data allowance offers a winning proposition.

            Consumers win, because Comcast has opted not to create artificial scarcity with an eye toward running up subscribers bills. While one subscriber’s glut maybe another’s scarcity, 1000 Gigabytes offers a generous allowance.  Most subscribers will not have to ration their usage including actively cutting off advertisements that increasingly seem to launch despite attempts to prevent “auto play.”

            Comcast wins, because longer and stickier subscriber viewing typically generates more revenues for the company.  Comcast operates in what economists describe as a double sided market.  The company generates revenues from downstream, broadband subscribers and it also receives payments from upstream carriers, such as Content Distribution Networks, as well as content creators and distributors, such as Netflix.

            Additionally, Comcast can accommodate ever increasing demand for bandwidth quickly, efficiently and inexpensively.  The company need only reallocate a 6 MegaHertz channel from video carriage to broadband carriage.  Aljazerra America’s sign off created a candidate channel for reassignment. See http://america.aljazeera.com/articles/2016/1/13/al-jazeera-america-to-close-down.html.  Cable television networks typically now have ample bandwidth affording latitude in assigning capacity for video, data and other services.  A technology known as cable bonding makes it possible to add broadband capacity in 6 MHz increments.

            As cable companies expand broadband data rates, wireless carriers persist in rationing access with monthly allocations typically in 1-10 Gigabyte range. Wireless carriers currently do confront scarcity, particularly if many subscribers in the same vicinity try to stream video at the same time.  As well, wireless carriers do not have the same quick, easy and cheap opportunities to expand broadband bandwidth, although they can install more towers (“cell-splitting”), encourage subscribers to incorporate their wired broadband subscription with cellphone service and acquire more spectrum.

            Currently, wireless carriers appear quite adept at finding the sweet spot that balances scarcity abatement strategies with scarcity-based pricing.  These carriers have paid billions for auctioned off spectrum, but they also want to use unlicensed, free Wi-Fi spectrum to accommodate growing demand, most probably without a data rate increase.  Additionally, they can rely on the spectrum scarcity rationale to justify many tiers of service with pricing rising significantly as data rates increase.  Few current subscribers have truly unlimited data plans, because the service agreement authorizes the carriers to reduce (throttle) delivery speeds to rates that do not support video streaming.

            Wireless carriers can exploit spectrum scarcity to support a much higher per Gigabyte cost of service.  Comcast just widened this differential.

Whining All the Way to the Bank

            AT&T Chairman and Chief Executive Randall Stephenson complained yesterday that the FCC’s failure to approve AT&T’s acquisition of T-Mobile has resulted in a 30% data rate increase.  He implies that AT&T would not have raised prices if it had sufficient spectrum like that available by acquiring T-Mobile.  See http://topics.wsj.com/person/s/randall-stephenson/504.

             Does this pass your smell test?  Whatever happened to charging what the market would bear?  Mr. Stephenson is no doubt smarting from his failed strategy to drive out a competitor and
“rationalize” the wireless marketplace so that the survivors (eventually AT&T and Verizon controlling over 90% of the market) could raise rates even higher.  I should note that he lost many millions in a salary reduction and lost bonuses.

            So it comes as no surprise that Mr. Stephenson would resort to voodoo economics and fuzzy math.  A fair and realistic assessment of the wireless marketplace should start with considering whether there is a real scarcity in spectrum and not something that the carriers could manage if they conscientiously used compression and other spectrum conservation techniques.  Additionally we should appreciate that the T-Mobile acquisition would not have increased the aggregate amount of available spectrum, just that available to AT&T.  As well we should know that AT&T and Verizon have yet to activate spectrum they acquired for over $16 billion when the FCC made UHF television bandwidth available in the conversion from analog to digital television.   Just now Mr. Stephenson whines about a spectrum scarcity even as companies like Clear, Sprint and T-Mobile cannot exploit their access to such a scarce commodity. If these companies fail, it will show how regulatory policies have ruined the benefits of facilities-based competition in exchange for supporting scale and “too big to fail” megacarriers.

            Mr. Stephenson appears to want to reframe economic principles to support the premise that an industry consolidation would better serve consumers than the current marketplace comprised of four major carriers.  By analogy Mr. Stephenson’s logic would support further airline consolidation which empirically has resulted in higher rates, more crowded planes, less competition, declining use of large aircraft and reduced service to many localities.   So just how does industry consolidation or “rationalization” help consumers?  

            This is all about reducing consumer surplus, such as unmetered service, low rates and declining average revenue per user and raising carrier profits.  Mr. Stephenson takes us for fools.