Cable A la Carte and Economic Efficiency

  

          In preparing updates to the loose leaf treatise All About Cable and Broadband, I reviewed the FCC’s latest report on cable television prices.  See  http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-12-377A1.doc.  The Commission reports that cable operators consistently raise rates well in excess of the Consumer Price Index, a broader measure of prices.  On the other hand the per channel cost per month has declined slightly in light of expanding inventories of channels offered in each program tier.   So bundling enhances the value proposition, or does it?

         Looking at the FCC’s report and my Comcast bill, I could not help but think about a la carte pricing.  Cable operators and content suppliers hate this option and have refused to pursue it even though cable networks have the addressability and other technological features able to provide it economically. One can appreciate why: who would give up a guaranteed payment from each subscriber, regardless of their interest and viewership, in exchange for perhaps higher payments from the smaller number of viewers actually interested in watching a particular channel?  Most cable and satellite subscribers opt for a handful of program sources with little regard for most offered channels.

         Of course it would support both consumers’ specific content demand and economic efficiency to offer al a carte, but who will emphasize this point?  On the contrary sponsored economists come up with transparently bogus rationales ostensibly proving that a bundle is both cost-effective and efficient.  So cable subscription enhances my welfare and offers a better deal when the operator lards the tier with shopping channels and when proven brands, such as HBO and Discovery expand their number of channel options?  Hardly.

        A la carte would provide consumers the opportunity to customize the number and type of channels.   But just as allowing consumers to pick and pay for selected tracks in a music recording, a la carte would reduce cable operator and programmer revenues.  Pull out all the channels you never watch and then divide that number by your ever increasing monthly video bill.   That represents your true cost per channel.
         

Hot Potato Routing and Real or Imagined Congestion

            Several years ago when the Internet was beginning to grow, the matter of fair sharing of traffic loads arose.  Because ISPs did not or could closely meter traffic as they can now, the possibly arose that some ISPs could hand off traffic to other carriers without detection and penalty.  The term hot potato routing refers to the deliberate off loading of traffic onto another carrier’s network.  The burdened carriers resented such “free riding” and emphasized that the hot potato routing carrier could not guarantee quality of service having handed off traffic to other carriers.

            With the passage of time and the onset of real or claimed congestion, the hot potato resenting carriers have become hot potato routers themselves.  Wireless carriers want to sell—make that give away—femtocells ostensibly so that subscribers can get better in-building signal penetration.  This positive outcome occurs, because the carrier has had subscribers install mini-cellular radio towers on premises.  But what kind of backhauling does the femtocell use?  Some operate on cellular frequencies in effect retransmitting wireless signals.  But others inject what would have been more wireless traffic into the Internet cloud via the wireless subscriber’s DSL or cable modem broadband connection.  This is hot potato routing masquerading as signal enhancement.  In reality the wireless carrier suffers less congestion and the need to cell split and install additional towers if it can offload traffic to other carriers. 

Another example: Wireless carriers don’t mind—make that are happy when—subscribers substitute wi-fi minutes of use for cellular minutes of use.  These very same carriers used to require equipment manufacturers to disable wi-fi access via cellular phones, so that subscribers had to use network minutes.  With real or imagined congestion cellular carriers can reduce capital expenditures in more plant by offloading traffic onto another carrier’s network. 

Bear in mind that such offloading often does not trigger a charge for the hot potato routing (traffic originating) carrier.  While incumbent carriers, such a Verizon and AT&T, vigorously complain about free-riding VoIP operators, which find ways to inject traffic onto their networks without compensation, Verizon and AT&T do the same thing.  Of course they can claim the need to do so results from the FCC’s inability to reallocate spectrum, or from unanticipated data service demand.  What better way to shift the blame to the FCC or those pesky, gluttonous customers?

I appreciate that ongoing high capex harms carriers’ profits, but U.S. wireless carriers do not seem to be suffering at least in terms of Average Revenue per User (“ARPU”).  These carriers have some of the highest ARPUs globally, and the elimination of unmetered and unlimited data plans promises even higher ARPUs going forward. 

Skimping on capital expenditures accrues short term benefits, but it may foreclose longer term gains.  If wireless carriers make the investment in 4G bandwidth and switching capacity, they can encourage subscribers to treat smartphones as the functional equivalent of wired computers.  Additionally they can exploit technological and marketplace convergence that promote an IP-centric network serving an ever expanding aggregate demand for information, communications and entertainment (“ICE”) services.  But the incumbent players dither: they threaten to become innovative and aggressive competitors, but back off.  Cable operators realize the need to offer a wireless component in their bundle of services, but instead want to sell their spectrum to incumbent wireless carriers.  Wireline incumbent carriers, such as Verizon, toy with the idea of offering video content, instead of serving as the conduit for the content managed and produced by others.  But this week we hear that Verizon would rather partner with Netflix than compete.

Who wants to devote sleepless afternoons competing, investing and innovating?

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.

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.

The Law and Policy of Telecommunications and Plumbing

      I used to revel in the interdisciplinarity of my chosen research, teaching and outreach agenda.  Throughout my career I thought it a blessing to work with and generally understand the lexicon of economics, engineering, law, business etc.  At various times I have felt blessed to work across disciplines rather than bore deep into one—possible narrow and constraining—subject area.

      I grow increasingly worried that I have made a major career blunder by not fitting into one of the traditional academic or applied units.  Just now the American Association of Law Schools seems to wonder whether I qualify as a law school educator.  I have two academic appointments at Penn State—in the College of Communications and the Dickinson School of Law.  Rather than evidence a wider and laudable wingspan, I run the risk of being branded an impostor!

      Just what have I done in 32 years of professional and academic work in telecommunications?  To some I bore down in the tedium of plumbing.  My College of Communications affiliation leads some to think I teach most of the football team at Penn State.  At weak moments I characterize my career as one-third adult day care provider, one-third talk show host and one-third educator.

     Apparently the educator part appears woefully inferior to the stature accorded pure bred professors, particularly ones at law and business schools. Regrettably when I sought to make the move from practicing law to teaching it, few schools had fellowships and other ways to make the transition.  I jumped at the chance to teach at a College of Communications.  In this forum I had to convince the mandarins that a law review publication was every bit as rigorous as a peer-reviewed publication in the communications field.

    So in achieving legitimacy in communications, I apparently am illegitimate in law.  I hope readers of my work don’t feel this way,  but I’ll understand.

New pub: Assessing the need for More Incentives to Stimulate Next Generation Investment

    I loath the conversion of nouns into verbs, such as party and incentivize.  Perhaps this  picadillo prompted my latest publication in Vol. 7 of I/S: A Journal of Law and Policy for the Information Society.

    Here's the abstract:

     Incumbent carriers often vilify the regulatory process as a drain on efficiency and an unnecessary burden in light of robust marketplace competition.  Some claim that regulation creates disincentives for investing in expensive next generation networks (“NGNs”), and even accepting subsidies for broadband development if the carrier must provide access to competitors. Without fully assessing the necessity to do so legislators, regulators and judges have accepted the premise that government must create incentives for NGN investment. Incumbent carriers in particular have seized upon the concept of uncertainty as a justification for refraining from making necessary infrastructure investments, despite the onset of declining revenues and market shares in core services. 

     In the worst case scenario, incumbent carriers secure unwarranted and premature deregulation, despite an ongoing need for governments to guard against anticompetitive practices and to promote sustainable competition.  Governments also risk providing direct financial subsidies, or creating a regulatory mechanism for indirect subsidies, to stimulate infrastructure investment when no such catalyst is necessary in light of competitive necessity.  Once a subsidy mechanism is in place, government may not easily “wean” carriers off such artificial compensation.  In rare instances government may find some key carriers unwilling to accept subsidies and in turn disinclined to pursue expedited NGN development, as is currently occurring in the U.S., because incumbent carriers do not want to provide interconnection and access to competitors, a legal duty these carriers must bear when operating as common carrier providers of telecommunications networks, but which does not apply when these carriers offer information services which include broadband.

     This paper will examine how incumbent carriers in the United States have gamed the incentive creation process for maximum market distortion and competitive advantage.  The paper suggests that the U.S. government has rewarded incumbents with artificially lower risk, insulation from competition, and partial underwriting of technology projects that these carriers would have to undertake unilaterally.   The paper also examines the FCC’s recently released National Broadband Plan with an eye toward assessing whether the Commission has properly balanced incentive creation with competitive necessity.  The paper provides recommendations on how governments can calibrate the incentive creation process for maximum consumer benefit instead of individual carrier gain.

Lessons From the Deregulation and Re-regulation of Broadcast Volume

            In 2010 Congress enacted and the President signed into law the Commercial Advertisement Loudness Mitigation Act whose requirements become enforceable now.  CALM reverses the FCC’s deregulation of commercial volume resulting in ever louder ads.  Broadcasters, cable television operators and satellite broadcasters must ensure that commercials and program content sound the same.

            In this time of extreme partisanship it’s remarkable to see representatives of both parties responding to constituents fed up with loud commercials, and disinclined to make do with frequent adjustments to the volume control on their remote controls.  Seems the unregulated marketplace for commercial volume led to an upward spiral, unmitigated by any notion of marketplace self-regulation.  I guess a libertarian would suggest that consumers could and should vote with their ears by changing the channel.

            Congress reached a better solution: regulation in the face of the inability of broadcasters to resist the temptation to offer advertisers a sneaky opportunity to “cut through the clutter” by raising the volume of their spots.  Of course the advantage proved short term when more and more commercials got louder and louder.

            The message here: sometimes society needs an adult in the room to prevent childish and potentially harmful behavior.  Left to their own devices broadcasters had no problem pumping up the volume to uncomfortable levels.  Even Congress rejected cavalier suggestions that consumers should bear the burden of self-help by changing channels, or turning down the volume.

            So how many jobs were lost in this market intervention?

It's Still the Phone Company (cont.)

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

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

            Think again.

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

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

Swinging for the Fence or Hitting Singles?—How AT&T and Verizon Further Consolidated the Wireless Marketplace While Most Weren’t Looking

       Before anyone claims victory for the consumer in AT&T’s abandonment of its “swinging for the fence” gambit to buy T-Mobile’s market share and spectrum, consider what did not make many headlines this week.  Both AT&T and Verizon substantially shored up their spectrum stocks with major deals with Qualcomm and several cable companies respectively.

       Solid hits for both carriers: not homeruns, but very strategic singles and doubles. 

      What results from these deals?  Well on the positive side the two major carriers have more spectrum to satisfy consumer demand.  On the negative side this spectrum initially was acquired by companies that offered the prospect for more competition.  The competition will not occur, so the incumbents have even less downward rate pressure and the incentive to innovate.

      No one has convinced me that the wireless marketplace in the United States has too many carriers and too much competition.  Quite the contrary.  But no carrier wants to compete with two “too big to fail” giants who have the customer base and spectrum to make quite costly competitive market entry, or even competition by existing carriers.  These barriers to entry solidify incumbent market dominance, something the FCC could have prevented if it had reserved spectrum for new carriers and nondominant existing carriers. 

      This would not “promote competition for competition’s sake.”  Instead it would enable sustainable competition to flourish in much the same way that airport authorities do not allow one or two airlines to capture all the landing slots.  Airport authorities have learned the hard way that allowing one carrier to dominate results in higher prices.  While price sensitive customers can vote with their dollars and take alternative transport, or drive to another airport, wireless subscribers have limited options. 

      Might a further consolidation of spectrum—the functional equivalent of landing slots—result in higher prices in the “robustly competitive” U.S. wireless marketplace?

Too Big to Fail Wireless Carriers

   
           Few would dispute that spectrum has played a key role in making it possible for AT&T and Verizon to acquire scale economies. These carriers, their trade association and sponsored researchers are very adept at reminding us how scale can translate into a win/win situation for the carrier and its consumers.  I readily acknowledge that if you have a super-size demand for wireless service, U.S. wireless carriers can offer you the lowest per unit rates in the world.  Of course this all you can eat pricing model does not apply to data of course which now has caps to prevent spectrum hogging. 

            But there is a down side: in their quest for scale, the big two carriers can make ever stronger arguments that they are too big to fair with failure defined as not having enough spectrum to satisfy demand the carriers stimulated.  So even if AT&T did not have the spectrum, tower sites and switching capability to handle all the I-phone data traffic in some locations, it’s the FCC’s fault that AT&T did not have enough spectrum to satisfy demand.

            So with the demise of the AT&T acquisition of T-Mobile expect to hear AT&T continue to whine about a spectrum failure.  And expect the FCC to accommodate the big two wireless carriers’ spectrum need even if in doing so the Commission contributes to further market consolidation.

            I wonder what might have happened if the FCC had retained a spectrum cap.  Might more carriers—and even specialized carriers—have entered the marketplace?  How about the prospect of a data only carrier with less total spectrum available to it, but more spectrum allocated for data service?  The U.K. opted to reserve new spectrum for market entrants. 

            It will interesting to see whether in the United Kingdom too big to fail major carriers whine, or have to compete more vigorously as a result.

It’s Still THE Phone Company—Verizon Cuts Off Essential Long Distance Access to My 85 Year Old Mother!!!

            In the no good deed goes unpunished, consider this classic phone company hassle.

           

            I’m currently in Norfolk, Virginia to check in on my ailing Mom.  I also checked her phone bill and noticed she was paying for a bogus $2.49 broadband modem maintenance fee and $5 more than a bundled local phone plus broadband rate.  So I called Verizon.

            First I learned of a classic “Bait and switch.”  The bundled local phone plus broadband rate does not work for any wireline phone subscription, despite language on the Verizon web site implying that any local phone rate so qualifies.  Okay, so I find out that even with the now higher local wireline service rate my Mom would save about $5 by bundling and now qualifying for lower a broadband service rate.  I authorize the switch.

            The switch over provides access to 3 custom calling features like Caller ID.  But the switch inexplicably eliminated the presubscriptions to my Mom’s intra-LATA and inter-LATA long distance carrier.  Gee how inconvenient; how anticompetitive.  The Verizon rep never got the training—or thought to mention—that the upgrade in service somehow implicates long distance presubscriptions.  Of course the logical and practical way would have been to maintain the status quo.  That’s not the Verizon way.  And remarkably the Verizon rep. did not even try to sell Verizon long distance in addition to the soon to be discontinued, but heavily promoted DirecTV and the vastly profitable $4.95 a month wireline maintenance fee.

            So despite taking service for scores of years, my Mother’s upgrade order somehow is treated by Verizon as though she has just begun to take service.  But the Verizon rep does not ask about presubscription and the default position must be “made no long distance carrier selection.”  Therefore my Mother has special local dialing features she won’t use and now cannot make possibly critical long distance calls to family living away from Norfolk. 

Way to go Verizon.  You have put my Mother at some risk, but I don’t live in Norfolk and am scheduled to leave tomorrow.

            What do I learn from this incredible hassle.  Verizon has yet to evolve from the Bellhead, bureaucracy that it has always been.  The repair arm of the company apparently cannot talk to the ordering and billing department.  No one takes ownership of the problem and no one is going to make any effort to resolve the problem, or mitigate the hassle.

            So from this transaction I see Verizon staff as either undertrained or cavalier about following the protocol for handling service UPGRADES from existing customers.  Maybe this shows that Verizon simply does not care about its wireline business with its apparently low margins and needy customers.  It just so happens that my Mother relies on wireline service exclusively; she couldn’t make a wireless call even if she had service.  So Verizon matter of factly disables her lifeline to the rest of the world.

            I will file a formal complaint with the FCC, but I surely cannot expect that bureaucracy to do any better by my Mother and me.

Wireless Carriers’ Ambivalence Toward Wi-Fi

            Perhaps you share my frustration when wireless carriers and their sponsored researchers tell us how benevolent they are: tirelessly competing to enhance the value proposition for consumers.

             Really?  Corporations seek to maximize profits and enhance shareholder value.  That is what they are supposed to do, plain and simple.

             Consider wireless carriers’ position on Wi-Fi and for that matter: any unlicensed spectrum. 

             First approach: Wi-Fi is bad, very bad.  How can the FCC expect lay people to serve as good stewards of the spectrum?  We need professionals.

             Second approach: Wi-Fi is still bad, so bad that we have to disable Wi-Fi access in cellphones or alternatively prevent certain Wi-Fi activated applications from working, such as Skype.  Carrier motivation: prevent subscribers from substituting services that do not debit minutes, or which provide cheaper (if not free) alternatives to carrier toll services.

             Current approach: Wi-Fi is great.  It helps us manage completely unanticipated growth in demand for voice and data service.  It lets us offload traffic onto another carrier’s network. Can we sell you a femtocell? Don't let this get out: it solidifies our bottleneck control as increasing numbers of terminals and devices in the home or office, connected by Wi-Fi, still have to travel through our lines.

             Clearly wireless carriers’ change in attitude toward Wi-Fi represents a refinement in their thinking about a technology.  What once was a threat now becomes an enabler and maintainer of the status quo.  The change in position has everything to do with carriers’ economic gain and nothing to do with carrier benevolence toward consumers and competition.

How Can U.S. Wireless Carriers Have the World’s Highest ARPUs and Some of the Lowest Rates?

          U.S. wireless carriers, their trade associations and sponsored researchers do not want widespread understanding that the U.S. market generates the highest average revenue per user (“ARPU”) returns in the world. “Verizon Wireless, NTT DOCOMO, AT&T, Softbank and KDDI reported highest wireless data revenues among other global top 10.”  B.P. Tawari, Beyond 4G Blog Site, New Report : Global Wireless Data Update Q1,2010 (Aug. 4, 2010); available at: http://www.beyond4g.org/new-report-global-wireless-data-update-q12010.  Leading ARPUs range in the 35-40%.

         U.S. carriers prefer to emphasize that they offer some of the lowest rates globally.  The carriers conclude that if market forces necessitate having to offer low rates, then the wireless marketplace must be fiercely competitive, notwithstanding best in class ARPUs.

       How these carriers generate massive ARPUs while also offering low rates?  Answer: All You Can Eat Pricing (“AYCE”) for extremely high volume customers with extremely high margin rates for low volume customers. It is easy for a wireless carrier to claim per minute voice and per text rates are extremely low, even if in fact most customers do not come close to using all of their allotted minutes of use and texts.  With all you can eat buffet pricing, wireless carriers can claim incredibly small margins for serving the households that, for example, generates several thousand text messages monthly.  For customers unwilling to pay the $20 monthly rate, wireless carriers can charge 20 cents a text for a service that costs less than one tenth of a cent to deliver.

          Wireless carriers want to eliminate AYCE pricing particularly for data service.  But in doing so they risk a clearer understanding of just how profitable and uncompetitive they are.

 

A Wireless Duopoly?

Recently Cox Communications announced its departure from the wireless telecommunications.  Similarly some speculate whether T-Mobile can survive if its merger with AT&T does not happen.  What does it mean when an incumbent carrier exits a market, with doubts about the ongoing viability of one of the Big Four national carriers? There are too many carriers and a market shake out must reduce competition?  The Big Two carriers (AT&T and Verizon) have engaged in lawful and questionable tactics to “corner the market.”?  Something else?

If a hyper-competitive market migrates to a less competitive balance of two carriers, two things appear clear: 1) a duopoly has evolved making ludicrous to claim self-regulation will foreclose anticompetitive conduct; and 2) market failure has occurred, unless consumers somehow do not suffer from haivng a choice of two facilities-based carriers and a few resellers.

If the Big Two have captured the market, then it becomes necessary to identify what lawful, questionable and unlawful tactics they have pursued.  In the lawful department, the Big Two have invested the money to build superior networks.  They have captured the competitive benefits of positive network externalities: offering not to debit minutes of use for intranetwork use.  Additionally they have exploited economies of scale.

             In the questionable department the Big Two have exploited exclusive handset deals and the first mover advantage of having received free spectrum from the FCC while other carriers had to compete in a comparative hearing, or hope for success in a ping pong ball selection.  While they appear not to have colluded in a “smoke-filled room,” these carriers offer nearly identical rate plans, what antitrust law considers conscious parallelism.

At the very least the FCC should aggressively work to promote market entry so that the facilities-based wireless market does not end up being more concentrated than commercial aviation.

           

Businessweek Can't Distinguish Bits From Bytes

The Nov. 21-27, 2011 edition of Bloomberg Businessweek incorrectly inserts the word bytes for bits in not one, but two articles (on Indian and U.S. broadband).  Big mistake: bytes typically measure downloaded and uploaded content/file size, e.g., a 2 megabyte movie trailer; bits measure transmission speed, e.g., 2 megabits per second.  Using both concepts: broadband subscribers want a fast bit rate speed so they can download large megabyte files in a short time period.

I'm particurlarly sensitive to this misconception, because many of my students make the same mistake as Businessweek. I have too many folks struggling to understand basic concepts like broadband, bandwidth, channel, bit rate, throughput, etc.  Here's a link to the course syllabus: http://www.personal.psu.edu/faculty/r/m/rmf5/Comm492%20Fall%202011.doc


Bits and bytes are similar concepts as 8 bits correspond to 1 byte.  In application we use bits and bytes differently.  Businessweek noted the problem of slow bit rates in India and the U.S., but by using the bytes measure the magazine did not make sense.  U.S. ISPs do not typically offer 15 megabytes per second service, i.e., 120 megabits per second.  The discounted broadband service offered by cable television companies to low income subscribers will deliver 1 megabit per second not 8 megabits (or 1 megabyte).  Indian broadband subscribers would not complain about getting 256 kilobyte per second service as they would 256 kilobits per second service.

Holiday Reading Part Two

Here's a work in progress that considers the middle ground in the network neutrality debate: Do Conduit Neutrality Mandates Promote or Hinder Trust in Internet-Mediated Transactions?.

The abstract for the paper:

As the Internet evolves and matures, Internet Service Providers (“ISPs”) have begun to create increasingly diversified business models for serving downstream end users and upstream content providers. Increasing subscriber demand for broadband connections necessitates efforts to identify and serve new profit centers and to differentiate retail and wholesale users on the basis of subscriber bandwidth requirements and other customer-specific demand characteristics. ISPs have identified new strategies to differentiate their offerings on the basis of price, quality of service, transmission speeds, permissible amount of capacity uploaded and downloaded, legitimate network management objectives and the demand for customer-specified network features.

Advocates for limiting price and service discrimination contend that absent a “network neutrality” mandate, ISPs will discriminate in ways that harm competitors by favoring corporate affiliates and selected third parties. Network neutrality supporters claim that ISPs have both the incentive and ability to engage in harmful discrimination, typically characterized by ISPs as necessary network management, or a legitimate response to the specific requirements of a customer.

This paper will consider ISP conduit neutrality in the context of whether and how legislatures and national regulatory authorities can enhance trust and network reliability. The paper assesses how network management techniques can offer both quality of service improvements and deliberately inferior service. Because technological innovations provide the ability to build trust in Internet-mediated transactions, the paper will identify legislative and regulatory strategies that promote network management that enhances cloud computing, electronic commerce and other transactions without according ISPs unconditional opportunities also to harm competition and consumers.

Holiday Reading Part One

In the event you tire of television and run out of written material have I got something for you.  Here's a short piece on IPTV entitled The Opportunities and Threats from Next Generation Television: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1954779

Here's the abstract:

The combination of digitization, converging technologies and new business plans has diversified the terms, conditions and options available for consumer access to content. Access opportunities have migrated from producer- or intermediary-specified schedules, i.e., “appointment television,” to a largely consumer specified environment, i.e., “television anytime, anywhere.” As well the means by which consumers access content has shifted from one-way, downstream, to a two-way process whereby consumers can issue upstream commands for access via different receiving devices, subject to commercial constraints such as copyright digital rights management.

This diversification of access opportunities makes it possible for consumers to access more content, and as well to consume the same content via different devices. Content originally available only via a television set - the first screen - now can be received via second and third screens, computer monitors and smartphones respectively. Consumers of content currently have three major types of access options: 1) a direct so-called peer-to-peer link for real time or file-based content; 2) an indirect link through an intermediary who establishes access rules and limitations, but does not intervene in each session; and 3) an indirect link through an intermediary that actively manages access every time.

As content access opportunities have diversified, so too has the nature and type of available content. The proliferation of content and ways to access it present incumbent producers with both new opportunities and threats. Creators of expensive and compelling content may identify additional display windows and new ways to receive payment. Similarly intermediaries, such as cable television operators, can enhance the value proposition of their service and retain subscribers who now have technological opportunities to access identical or similarly expensive and compelling content outside traditional distribution channels.

Content creators and distributors face new threats to their business models, because the proliferating options for consumer access provide more ways to pirate content and to “disintermediate” and eliminate intermediaries. Try as they may content creators and distributors cannot foreclose consumer “self-help” strategies, including using broadband connections to access content “over the top” of incumbent intermediaries such as cable television operators.

This paper will examine the ways by which incumbent content producers and distributors have responded to new consumer access opportunities. This examination considers the incentives of incumbents to deny, restrict and prevent alternative access opportunities, or to embrace changed models. The paper also will consider the impact new access devices and options have on incentives to create and innovate.

The paper concludes that content creators and incumbent distributors, such as cable television operators, face increasingly divergent incentives. The former incur the risk of greater piracy, but also new opportunities to profit from expanding distribution platforms. The latter face the risk of declining subscribership unless they accept the inevitability of expanded content access options that circumvent the traditionally locked-down, largely one-way distribution model. Most cable television operators recognize the need to relax content access restrictions, but these operators have not similarly responded by expanding their efforts to innovate and diversify their supply of content.

The paper provides evidence that the growth of cable television networks has plateaud at the very time consumers can access an ever expanding inventory of new content alternatives. The paper concludes that cable television operators risk significant subscriber defections, or migration to cheaper service tiers absent an increase in the number of new networks and content access options.

Being a Busy Academic

            Sorry for the lack of blog entries.  So much to do, despite the general impression that academics lead a cushy life. In the last few weeks I’ve finalized a number of upcoming presentations, articles and teaching materials.  I got to serve as a moderator for a high powered panel on Smarter Lives presented at the International Telecommunication Union’s World Telecom  Forum even in Geneva; see http://forum.world2011.itu.int/sessions/f07-smarter-lives.

            And of course I try to stay on top of current events.  Some observations:

            In the “it’s all how you frame the matter,” note that Red Box seeks to exploit Netflix’s 60% price increase with a small 20% increase of its own.  What two dimes among friends?  This from a company that charges 8.9% to count your loose change.

            The wireless industry “voluntarily” will offer bill shock prevention through multi-faceted warnings.  Would these publicly minded good corporate citizens have been so magnanimous if the FCC had not stated its willingness to step in to remedy market failure? 

            Where was Verizon’s Wireless’ good corporate citizenship when for several years the company wrongfully took in $52 million from 15 million subscribers who triggered data charges without having a data plan?  Bear in mind that had the FCC not intervened subscribers would have had no real avenue for redress, even for many who inadvertently pushed a button quite close to the right one.  Verizon could have insisted that each and every subscriber pursue costly and mandatory arbitration.  With the inability to join a class action law suit, Verizon subscribers would have lost the entire $52 million to a “job killing” and probably deliberate gouging strategy.        

            With all the talk about crony capitalism why don’t the Tea and Republican Parties rail against the many instances where incumbents avoided expenses that later market entrants had to pay.  Does anyone remember the “wireline set-aside”?  At the onset of cellphone service, the FCC tilted the competitive playing field by giving away spectrum to incumbent wireline carriers?  Was this necessary to “incentive” investment?

A Fair Estimate of Network Neutrality Costs and Benefits

           Opponents of network Neutrality allege that imposing such regulation will result in lost jobs and value.  An example of losses is evidenced by the fact that when the FCC imposed open access requirements for reallocated, choice 700 MHz spectrum this segment generated less than half the proceeds (measured on a per capita, per MegaHertz) basis than other blocs lacking the open access requirement.  See Gerald R. Faulhaber and David J. Farber's 2010 paper The Open Internet: A Customer-Centric Framework and Randolph J. May and Seth L. Cooper, New FCC Regulations Reduce Investment and Hinder Job Creation, available at: http://freestatefoundation.org/images/New_FCC_Regulations_Reduce_Investment_and_Hinder_Job_Creation_091311.pdf.

            The authors of the above material imply that the open access requirement by itself triggered the loss, apparently not offset by any gain.  The analysis provides a quantifiable cost, easily inferred as a result of the FCC’s regulatory intervention. 

            Surely a more nuanced and less results-driven analysis is necessary here. 

            While not easily quantifiable, might there be some upside social gain in requiring an Internet Service Provider (“ISP”) not to discriminate?  Pro network neutrality advocates believe that the Internet has generated massive social benefits, at least some of which accrues from the ability of new ventures—many with limited financial resources—to secure access through the Internet cloud without upfront payments to any and all ISPs for last mile delivery to consumers.  Attributing zero social gain from open access comes across as both wrong and a deliberate attempt to overstate the net loss from open access rules.

            Additionally the analysis assumes absolute equal value in the 700 MHz A, B and C blocs, absent different regulatory requirements.  However, there is no such absolute parity between these three blocs of spectrum.  The blocs have different numbers of assigned licenses based on the geographical size of the service area covered per license.  Also the C block assigns a larger amount of spectrum 34 MHz versus 14 MHz for the A and B block.  See http://wireless.fcc.gov/auctions/data/bandplans/700MHzBandPlan.pdf.  It seems quite plausible that the cost per MegaHertz, per capita (“per pop” in the vernacular) should be lower if the auction bid is spread over a larger bandwidth.

            In this fractious and mean spirited time, it has become all too easy to provide “irrefutable” quantitative evidence how government rules burden operators and harm the national economy.  Numbers don’t lie, right?  Of course they do when the calculation forces a false return.

Are Resellers Competitive Saviors, or Lower Than Pond Scum?

            The conventional wisdom of most facilities-based carriers is that resellers wrongly extract revenues, particularly if government mandates the transaction.  Incumbent carriers complained long and hard about having to unbundle their network and lease capacity to Competitive Local Exchange Carriers (“CLECs”).  Incumbents convinced courts and the FCC that CLECs would never wean themselves off the easy money available in resale, and that resale was a wrongful taking.

            My, how times have changed.  AT&T now rhapsodizes about how wireless resellers promote competition.  There even is a nifty new acronym for wireless resale that adds gravitas: Mobile Virtual Network Operators (“NVNO”).

            Unlike their wired counterparts wireless resellers apparently serve a useful purpose, including apparently providing support for a massive $39 billion horizontal merger.  How can this be?

            First, it is important to note that wireline resale was mandated by the Telecommunications of 1996 and not something incumbent, facilities-based carriers did on their own.  Such compulsory network sharing can come across as government mandated cooperation with a rival.  But please understand that this obligation comes with the territory: telecommunications service providers, as common carriers, do have to interconnect their facilities even with competitors.  In exchange for this concession, these very same operators get public utility rights and privileges that in the wireless arena included free spectrum and a first mover, first to market opportunity.   As well all facilities-based wireless carriers benefit from below market access to rights of way and tower sites.  On balance having to facilitate a resale marketplace strikes me as a minor burden. 

            Voluntary resale shows that at least in the case of wireless facilitating this market does not harm facilities-based carriers and does not result in cannibalism.  No facilities-based carrier would permit a resale margin to exist if it did not contribute to the bottom line.  The fact that resale exists also calls into question whether facilities-based carriers face a spectrum squeeze: why provide spectrum access to a competitor if you need all of the spectrum you have and then some?

            On the matter of contributing to competition it is important to note that voluntary resale remains solely at the discretion of the facilities-based carrier. The FCC no longer mandates resale for incumbent wireless carriers, even though they nominally remain common carriers.  If resale suddenly would result in cannibalism, or create a spectrum crunch, this competition-enhancing option would evaporate overnight.

Academic Entrepreneurism and Rent Seeking

            While perhaps few in number, professors like me execute on their capitalist beliefs.  I am glad to augment my sparse teaching salary with consulting work.  Just as corporations seek to enhance shareholder value I will maximize my rents, particularly for distasteful work such as serving as an expert witness for a case that should never reach a court room.

            But unlike many ventures in the telecom sector, like AT&T Wireless, I am upfront about my work: I can be rented, but not bought.  Similarly I may not maximize my earnings, because non-quantifiable matters like reputation in the community matters to me.  I have passed up on work that I simply cannot support.  I am upfront with prospective and actual clients.

            The same cannot be said for a client like AT&T which uses dollars to subvert scholars into shills.  AT&T has invested millions of dollars on academics and consultants who will help legitimize the acquisition of T-Mobile as a wise, noble and cheaper effort to expedite wireless market penetration in rural locales.

            In truth AT&T has come to realize two basic realities:

1)         It is cheaper to buy out competition than to compete with a larger set of competitors; and

2)         It is cheaper to support mergers and other deregulatory campaigns with lawyers, lobbyists and consultants than to work harder in the marketplace.

            AT&T can enhance shareholder value and improve the odds than stock options remain “above water” by buying market share.  If a venture has to compete less it logically follows that a greater return on investment may result.  Why devote sleepless afternoon competing when readily available and comparatively cheap advocates can help frame a merger in terms of promoting competition and narrowing the digital divide?

            What’s remarkable is the reality that this sham would not possibly pass the smell test of fair minded people, but for a relentless campaign to legitimize outrageous propositions.

Buffets and Texting

            With AT&T’s elimination of moderate texting options, e.g., 1000 a month for $10, one either pays an extortionate 20 cents a text, or joins the buffet crowd with all you can eat pricing of $20 a month, $30 for up to five lines.  So in the U.S. the same wireless carrier offers one of the world’s highest texting rates at the very same time at it offers “best in class” pricing.  It depends on subscribers’ appetites and whether they add a texting “rate plan.”

            The AT&T “streamlining” of text plans forces subscribers to make a decision that AT&T predicts will generate more revenues.  In light of the fact that texting generates little if any incremental costs, AT&T can accommodate even more texting before congestion occurs.  But just like athletic club memberships, all you can texting eventually means most subscribers—to the exclusion of teenagers—taper down their consumption over time.   Just how many months can one text 2000 times or more?  For anyone who failed to reach 1000 a month, they now have to meet or exceed 2000 to capture the same utility as the price point will increase to $20 a month.

            Clever AT&T, but does this carrier’s management want to show pricing power at the same time it vigorously claims how competitive the market operates?  And just how long will it take Verizon to increase its texting rates?

Synchronized Rate Increases in DVD Rentals and Wireless Service

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

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

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

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

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

George Will Vilifies Liberals for Liking a Telephone Monopoly

           Over the years George Will, writers at the New Yorker and the Economist and John Le Carre have motivated me to increase my vocabulary.  So it brings sadness for me to read how George Will, despite his command of the spoken word has resorted to sheer nonsense perhaps to punch up his work.

            Mr. Will thinks “liberals mourn the passing of the days when there was one phone company, three car companies, three television networks, an airline cartel, and big labor and big business were cozy with big government.” See http://m.cjonline.com/opinion/2011-07-30/george-will-libertarian-fix.

            First, I have not seen a liberal/conservative dichotomy on matters of monopolies and cartels.  Second, the majority of telecom mergers, which would take us closer to a cozy oligopoly or monopoly, are goosed by rent seekers of all political persuasions.  I dare say the proponents of most telecom mergers are Republican, but such party affiliation means nothing when opportunities exist to acquire market share. 

            Is George Will suggesting that liberals do not want to see major elements of the economy spending sleepless afternoons competing?  Alas even George Will has amped up the snark and hyperbole.

            From my vantage point party affiliation and even political ideology matters little when opportunities to work less hard arise.  If anything political parties and individuals show little of the consistency Mr. Will infers.  Recall that liberal Jimmy Carter initiated deregulation of the airlines.  And the Justice Department of a former President by the name of Richard Nixon brought an antitrust suit that resulted in AT&T’s divestiture.

The Academics’ Blessing and Curse

            One of the true joys available to academics is having the time to stay current on the literature.  Particularly during the summer I read many law review articles, FCC and court decisions, books and sponsored research.  I’m rethinking the wisdom in devoting time to separate the plausible from absolute falsity in sponsored research.  I get so agitated and motivated to fire up a rebuttal to set the record straight.  And just who will find about such work, much less read it?

            Of course a rather obscure academic like me has little chance of getting much of a forum.  I don’t have a deep pocketed benefactor underwriting a campaign to get my work prominently displayed, cited, quoted and believed.  All I can offer to anyone who finds out about me is a fair minded assessment of the situation with an eye toward finding facts and detecting falsity.  So when three prominent researchers tell the world how competitive the wireless marketplace is I have to read their work.

            Recently I am told that significant market entry stands as a major reason to conclude how competitive the wireless marketplace is.  The authors identify the following carriers as proof positive that the Big Four national carriers, with 92% market share, face a robustly competitive market: Clearwire, Leap, MetroPCS, LightSquared and the super regional carriers like U.S. Cellular, Cellular South, and Atlantic Tele‐Network.

            At first blush I thought that the claim of spectrum scarcity must be bogus what with all of these presumably new carriers. But examine the list closely and first ask which of these carriers acquired new spectrum and new licenses say in the last four years.  Answer: two,; Clearwire and Lightsquared.  Then ask which of these two new carriers provide commercial service right now?  Answer: one, Clearwire.  Finally ask whether Clearwire offers a competitive alternative to what commercial mobile radio service operators offer?  Answer: It depends.  If you are looking for a Clearwire smartphone to make and receive both telephone and Internet calls, Clearwire does not deliver.  Clearwire works primarily with lap top computers equipped with a USB dongle providing a wireless tether.

            Of course the authors of this particular sponsored research know this.  But what’s wrong with interpreting the facts a tad differently?  For me the answer is: a lot!  But even with a largely free summer it is absolutely foolish of me to attempt to set the record straight when the process all but guarantees that my work will get ignored.

Wireless Cost Per Minute and Consumer Behavior

           It has become a largely unquestioned “fact” that U.S. wireless consumers enjoy remarkably low per minute costs rivaling what the poor in Africa and Southeast Asia pay.  Sponsored researchers recently chided the FCC for failing to state unequivocally how effectively competitive the U.S. wireless market is, largely by reciting the low cost mantra, counting carriers and heralding evidence of market entry.  See, e.g.,  Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 2011); available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1880964.

            The low cost claim can be validated by certain assumptions, most notably that subscribers consume all or nearly all available minutes of use per month.  So one way to goose the cost statistics would be simply to take the maximum available minutes of use, e.g., 450, 700 or 1200—remarkably identical for the Big Four national carriers—and divide it by the monthly subscription rate, conveniently forgetting to add the extra 20-30% in fees, taxes, surcharges and pass throughs.   A slightly more valid analysis would use some national consumption average rather than the maximum allotment.

            So if you come close to the allocated maximum minutes of use, or if you take the carriers at their word and robustly consume on an all you can talk, text or surf basis, you certainly have low per unit costs.  It makes absolute financial sense to get on a texting rate plan at $10 a month—no make that $20 a month, raised in lock step by the Big Four—if you have nimble thumbs and one or more teens in your household.  U.S. carriers don’t need sponsored researchers to tout lowest global texting rates when the average teen makes over 3300 a month.  

Rather than prove the U.S. wireless marketplace is robustly or even effectively competitive, such uncalibrated calculations of cost do nothing more than confirm certain rather obvious facts about consumer behavior.  When presented with a large basket of minutes, or better yet a buffet-style, unmetered service, many consumers push their consumption to maximize the perceived value.  When I consume a buffet meal—especially those grand affairs at hotels—I consume well past a normal level of satiety.  Call it wasteful, unhealthy and an encouragement of “overconsumption.”  Call it unfair, particularly to people with small appetites who must subsidize their gluttonous, big appetite counterparts.  But recognize that the low per minute rate results less from competition and more from a pricing strategy shared by all carriers offering post-paid plans. 

Becuase the majority of U.S. wireless subscribers have post-paid plans with unlimited or large baskets of minutes, researchers can tout low per unit costs only if monthly consumption is high.  Users of metered service are far more attentive to their usage and their cost per minute cannot drop simply by talking and texting more. 

The availability of low cost per minute wireless rates in the U.S. for subscribers with large baskets of minutes or unlimited use says little about whether competitive necessity forces low rates.  Nor does it “prove” a market driven need to price rates low.