Vanguard Saves Millions By Requiring Most Clients to Print Out Statements

 The money crunchers at Vanguard Investments recently changed their rules to make their mailing of hard copy documents an expensive option.  Previously, one could avoid a $25 fee for each account (I have four) by investing over $1 million, until VG raised the figure to $5 million.

This change in customer care has nothing to do about the environment. VG really, really wants to avoid the substantial cost in printing and mailing documents.  Just unbundle that task from the concept of service and, tah dah, VG saves millions.  In doing so, they also tick off just about every one of their customers. 

VG obviously has no clue about the expense and hassle in home-based document printing.  As a retiree, I have no convenient way to print lengthy documents at the expense of an employer.  My HP inkjet printer guzzles ink, and HP makes every effort--including likely illegal ones--to prevent the use of reused cartridges.

Contrast VG's sneaky and ham-handed environmentalism, with what Fidelity and T. Rowe Price do. They gladly send statements pre-punched for easy insertion into a loose leaf binder.  

This process may seem old school, but maybe Fidelity and T. Rowe Price know something about investor behavior that VG wants to ignore: investors like hard copies of their statements and they also like to compare performance by referencing different monthly statements.

Try toggling monthly statements on line and you might see the benefit in having hard copies.  

Vanguard has increased my printing duties substantially.  Would it be over reacting to take my business elsewhere?

Raising Consumer Rates with Sneaky Unbundling

           With talk about how a la carte pricing of video can reduce consumer costs, I offer a rebuttal.  First video consumers should understand that if they select the most expensive networks, such as ESPN (at about $6.04 a month), they may not see a significantly lower out of pocket cost despite the sizeable reduction in available channels.

            But there is a more important factor that most consumers and the media do not understand.  Ventures like Comcast can reduce or eliminate their financial harm in subscriber “cord shaving” by increasing billing line items and by raising the cost of a “naked” broadband subscription having no additional video service.

            Despite having to be on its best behavior as the FCC considers the proposal to acquire Time Warner, Comcast inserted a new line item ostensibly to help recover its cost of retransmitting broadcast television channels.  Of course basic cable rates already cover this costs, because broadcast signals constitute the vast majority of the available channels in this tier.  In my market Comcast just DOUBLED the rate even though it surely did not incur a doubling of its costs.

            Comcast also increases the broadband subscription price when customers don’t also take a video service.

 

            By inserting various billing line items, Comcast and other cable companies want consumers to think the costs are a mere pass through.  Many are not a tax or government imposed fee and in a competitive marketplace a venture might have to absorb such costs.

            The most egregious example of billing line item abuse comes from the electric utility serving central Pennsylvania.  West Penn Power charges me for a smart meter I do not yet have.  But the most obnoxious charge is a “Consumer Education Charge” which the company defines as “a monthly charge for ongoing consumer education concerning your bill, shopping for electricity, energy efficiency and conservation.” It’s annual $6 tuition charge for something they probably don’t want me to know about in the first place.  So why not charge consumer for having to tell them about electricity conservation. 

          Clever!

The Costs and Benefits of Bundled Information, Communications and Entertainment (“ICE”) Services

            Companies such as Comcast and AT&T use the benefits of bundling as one of the rationales supporting their proposed megamergers.  Have you considered the alleged benefits and offset them with applicable costs?  Didn’t think so.

            It seems that consumers like the bundling concept, perhaps because they perceive savings, or even freebies when they surely do not exist.  Consider the bundling of wireless handsets with service.  Ask most consumers and they blithely report how they got a “free” handset.  Not exactly.

            They get to use a handset on an installment sales basis: during their compulsory two year service commitment, with hefty early termination penalties, consumers not only reimburse carriers for the “free” handset, but pay well beyond the actual cost of the device.  The bundled handset plus service rate substantially exceeds the carrying cost of the handset and the cost of providing the wireless service.  Each and every wireless carrier mandated bundling until TMobile offered a cheaper “bring you own handset” plan after it could not enjoy the fat and happy life of selling out to AT&T.

            The triple play and quadruple play offered now and in the future combines desirable and less desirable services just as cable television program tiering blends desired networks and channels you might never watch. The triple play bundles voice, Internet access and video.  Packaging voice regularly triggers a double payment if you have both wireless and wireline service. With wireless packages now offering “free and unlimited” voice and text, you do not need a cable or wireline telephone option, but that gets bundled in with the video and data that you want.

            Bundling may save you money, but you really should price out the individual and desired service elements and compare their total cost with that of a bundled option.  At the very least claims of technological convergence, corporate synergies and efficiencies are overstated.  Most ventures would rather you not subscribe only to “naked” broadband and cobble together the voice (VoIP), video (IPTV) and data services you want.

Unbundling in Canada

It appears that the incumbent wireline carriers in Canda use the same strategy as incumbent carriers in the U.S., i.e., play the investment disincentive card by threatening to delay or abandon infrastructure investment, coupled with a Constitutional claim of property confiscation. The current economic crisis supports an additional adverse impact to employment gambit. See Telecom TV, Can't share. Won't share. Bell Canada has hissy fit (March 18, 2009); available at: http://web20.telecomtv.com/pages/?newsid=44661&id=e9381817-0593-417a-8639-c4c53e2a2a10.

I marvel at how quickly incumbent carriers play the property confiscation argument even as they got billions of dollars in free rights of way. Do these former public utilities have any public interest obligations--no matter how market countervailing--in light of their free access to public and often private property?

The Front and Back End of a Two Year Wireless Subscription

In the United States just about everyone trades off typical consumer rights and handset freedoms in exchange for “ownership” of a subsidized handset. Of course the handset is neither free, nor fully owned. In exchange for the a subsidy cellphone service subscribers agree to an intricate installment sales contract that limits what they can do with the handset.

But what happens after the two years run? Well the typical subscriber renews service and gets a new handset installment sales contract. He or she has no real alternative, because the cellphone oligopoly in lock step have foreclosed a market for used handsets and by offering no savings to subscribers who make do with their existing handset.

FCC Chairman Martin wants to show what a consumer advocate he is by tackling financial penalties for early termination. He wants consumers to have an opportunity to opt out of a contract within the first billing cycle. Fine. But the real consumer affront is the tacit collusion among cellphone companies not to compete on price, particularly for low end subscribers who do not want or need a subsidized handset and a two year service commitment.

Unlike just about everywhere else the United States does not have a robust and competitive wireless prepaid, calling card marketplace. The handful of Mobile Virtual Network Operators offer similar and not terribly attractive rates, primarily for youth and ethnic markets. I do not fit those demographics, but no carrier wants to offer lower rates to subscribers more than likely to accept a two year lock in.

Am I some kind marketplace orphan, or have the wireless carriers engaged in anticompetitive conduct?

Confiscation of ILEC Property?

The Telecommunications Act of 1996 ordered incumbent local exchange carriers to unbundle their networks as one of their common carrier interconnection responsibilities. Specifically Section 251 establishes “the duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and section 252. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service.”

Incumbent carriers have claimed that the FCC’s implementation of this requirement resulted in a taking or confiscation of their property. In a previous post I reported that the Supreme Court validated the general implementation plan of the FCC even as lower courts rejected specific elements of the plan.

I’m trying to delve more deeply into whether and how an interconnection responsibility of a telecommunications common carrier might violate their property rights. An argument could be made if the interconnecting carrier ended up having to invest in more facilities to accommodate the aggregate demands of carriers requesting interconnection using unbundled network elements. Likewise an argument could be made that interconnection foreclosed other more profitable undertakings, a type of opportunity cost.

But neither worst case scenario ever occurred. Using the FCC’s statistics, at the high point of having to accommodate competitive local exchange carrier unbundling requirements the incumbent carriers had to release 13.5% of their lines to competitors. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270133A1.pdf, Table 4. The most recent figure is 9.3%.

Bear in mind the incumbent carriers received compensation for leasing lines. They dispute the rate of compensation, because pricing using forward looking, replacement costs or the long run incremental cost falls below—possibly well below—what the incumbent carrier would demand in commercial negotiations or what it would file as a tariff rate at the FCC.

Accepting the argument that unbundled network elements were provided at less than fully compensatory rates, the incumbent carriers surely had ample capacity to satisfy a lawful mandate while also seeking higher profits from their own retail and wholesale customers.

How could allocating no more than 13.5% of inventory, available at compulsorily "promotional" rates, constitute a taking?

Separating Cellular Service From Handsets

You may know that Skype has proposed the unbundling of cellular service from the sale of handsets; see http://svartifoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518909730. The FCC started the wireline equivalent of this in 1968, so why has it not occurred in the wireless arena?

One would think market separation as an option would serve the public interest and save money for consumers and possibly cellular operators as well. If you don't need the latest and greatest handset you could pick up a perfectly good handset for a couple of dollars. The cellular operator could activate service perhaps at a lower monthly rate and certainly without a 1-2 year lock-in period, becuase customer acquisition costs would near zero. There would be no handset to subsidize. But of course the handset provides the means (and justification) for the lock-in in the first place.

Cellular operators must have reached the conclusion that they have more to gain by locking in consumers to a 2 year service commitment, coupled with $175 early termination charges, than they lose in having to subsidize the cost of a handset. As usual there are plenty of hired scholars willing to ignore this simple fact and come up with spurious reasons why wireless unbundling is a bad idea and has no parallel to the successful wireline unbundling. For example, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.

Much of the opposition to wireless unbundling hypes the competitiveness and innovativeness of the industry and the fact that wireline unbundling occurred in a monopolized and vertically integrated environment. Fair enough, but what about the lost consumer welfare for people like me who want a month to month contract and the flexibility to vote with my feet to a better deal? If I can make do with a $5 garage sale handset, why shouldn't I get a cheaper rate plan?

BTW all cellular subscribers have paid hundreds of millions for number portability--the ability to migrate carriers while retaining an existing telephone number. The two year lock ins and the absence of a market for used handsets limits our ability to available ourselves of number portability.

Revisionism

William B. Petersen, President of Verizon Pennsylvania visited the College of Communications at Penn State where I teach. Mr. Petersen's presentation was entitled "Broadband Services Convergence: The Benefits of a 'High Fiber' Diet." No dispute there.

Mr. Petersen, an affable fellow, blamed "regulatory uncertainty" for the relative poor progress in broadband market penetration that occurred in the decade following enactment of the Telecommunications Act of 1996. While I could have noted that Verizon and other incumbents surely contributed to the uncertainty through endless litigation, I chose to question Mr. Petersen's allegation that the courts always supported the Bell point of view in such litigation.

That's not how I read the case law. Yes the courts on three occasions reversed the FCC on the scope and level of unbundling obligations. But the Supreme Court on two occasions endorsed the FCC's implementation of a Congressional mandate to promote competition. In AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 119 S.Ct. 721, 142 L.Ed.2d 835, 67 USLW 4104 (1999) the Supreme Court largely upheld the Commission's implementation of the Congressional mandate contained in Section 251 of the Telecommunications Act of 1996 as a reasonable exercise of its rulemaking authority, including its requirement that ILECs unbundle network elements and offer CLECs the opportunity to pick and choose from an ala carte menu or platform of elements. The Court also ruled that in identifying which network elements ILECs should unbundle, the Commission did not limit the set of network elements to those necessary to promote competition whose absence from the list might impair ILECs' ability to compete.

In other words the Court did not deem unconstitutional the Congressional mandate of unbundling. The Court also largely deferred to the FCC's dtermination how to price these unbundled elements. In Verizon Communications, Inc. v. FCC, 121 S.Ct. 877 (2001)
the Court rejected incumbent local exchange carrier arguments that using a theoretical, most efficient cost model, instead of actual historical costs, constituted a taking that violated the Fifth Amendment. The court noted that no party had disputed any specific rate established by the TELRIC pricing model and concluded that “[r]egulatory bodies required to set [just and reasonable] rates . . . have ample discretion to choose methodology.” Additionally the Court stated that the ’96 Act did not specifically require historical costs, particular in light of its explicit prohibition on the use of conventional “‘rate-of-return or other rate-based proceeding’ . . . which has been identified with historical cost ever since Hope Natural Gas was decided.”

Mr. Petersen appeared to dismiss these cases as nothing more than Chevron-type deferral to agency expertise, something he surely must have welcomed in the Brand-X case. These cases do more than indicate the Court's unwillingness to second guess the FCC. Federal courts have made a sport of second guessing the FCC, particularly its implementation of the '96 Act.

I read the two Supreme Court cases as a fundamental endorsement of the lawfulness of the '96 Act's model for promoting competition. The law failed in part, because the ILECs simply would not go along with the transition, instead prattling on about "confiscation" and "taking of property." Indeed Mr. Petersen hailed Korea as an example of where competition flourished, ignoring that the incumbent cooperated thanks to the heavy hand of government stewardship in that country.

The point here is that hindsight in telecom policy does not offer 20-20 vision. The laws that Verizon and other incumbents help draft did not offer the expected payoff. The litigation that Verizon and other incumbent initiated did not absolve these carriers of having to interconnect and price access elements at below market rates.

We can dispute the wisdom of a Congressional mandate for cooperation among competitors--a fundamental concept in common carrier-- and the terms for such access. But it surely comes across as revisionism of history and case precedent to claim the courts invalidated the Congressionally created scheme.