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April 16, 2012
New Client of the Regulatory State Expects Results

When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration's commitment to "reinvigorate antitrust enforcement," it created a new client in search of official protection and favors.

It was clear there is no way T-Mobile - which lost 802,000 contract customers in the fourth quarter - is capable of becoming a significant competitor in the near future. T-Mobile doesn't have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.

T-Mobile's parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant. In 2008, T-Mobile sat out the last major auction for spectrum the company needs.

The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S. But it must acquire additional capital and spectrum to become a viable competitor.

Unfortunately, every wireless service provider requires additional spectrum. "[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use," according to the President's Council of Economic Advisers. Congress recently gave the FCC new authority to auction more spectrum, but it failed - in the words of FCC Chairman Julius Genachowski - to "eliminate traditional FCC tools for setting terms for participation in auctions."

Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles "in the public interest." That's why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.

Continue reading "New Client of the Regulatory State Expects Results" »

December 1, 2011
FCC strikes out on AT&T + T-Mobile opportunity

AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.

The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.

In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.

This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.

The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.

The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.

Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.

What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.

The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.

This agency could use some humility, or some adult oversight.

September 6, 2011
Blocking AT&T + T-Mobile merger will not create jobs

Blocking the merger between AT&T + T-Mobile is apropos of this administration's strategy for creating jobs, according to James M. Cole, the deputy attorney general.

The view that this administration has is that through innovation and through competition, we create jobs. Mergers usually reduce jobs through the elimination of redundancies, so we see this as a move that will help protect jobs in the economy, not a move that is going in any way to reduce them.

Remarkably, someone forgot to include that in the complaint filed by the Department of Justice in the District Court for D.C. The complaint itself does not allege that the merger will cost jobs, nor does it suggest that blocking the merger would create or save jobs. As a technical matter, antitrust is not concerned with job protection, although many seek to exploit it for that and other purposes. More on why that is a bad idea in a minute.

Instead, the complaint is focused specifically on the possibility that the combined company may not longer offer T-Mobile's lower-priced data and voice plans to new customers or current customers who upgrade their service.

Yet, the complaint concedes that from a consumer's perspective, local areas may be considered relevant geographic markets for mobile wireless telecommunications services. On the other hand, enterprise and government customers require services that are national in scope, according to the complaint.

Continue reading "Blocking AT&T + T-Mobile merger will not create jobs" »

October 6, 2009
Verizon Wireless-Google partnership could trigger lawyerfest

Verizon Wireless and Google plan to

co-develop several devices based on the Android system that will be preloaded with their own applications -- plus others from third parties, a possible contender to Apple's huge iPhone application store. They will market and distribute products and services, with Verizon also contributing its nationwide distribution channels.
If the network neutrality mandates in the Markey-Eshoo bill were to become law, I don't see how VZW and GOOG could preload applications, if the applications favor certain content on the Internet when they are used. That would seem to violate the "duty" of Internet access service providers to
not block, interfere with, discriminate against, impair, or degrade the ability of any person to use an Internet access service to access, use, send, post, receive, or offer any lawful content, application, or service through the Internet.
I also wonder how VZW and GOOG could effectively market products and services utilizing VZW's wireless Internet access service without prioritization or favoritism?

Perhaps someone has thought of a clever legal argument already why they could do these things, but I'm reminded of a recent editorialwhich correctly observes that "[o]nce net neutrality is unleashed, it's hard to see how anything connected with the Internet will be safe from regulation."

VZW and GOOG's competitors won't like whatever they do. The competitors will have a captive audience at the FCC. The burden of proof will be on VZW and GOOG to justify every move.

October 3, 2009
Short life of exclusivity

Morgan Stanley analyst Kathryn Huberty believes iPhone sales could double if Apple ends its exclusive partnership with AT&T.

Huberty cites a 136 per cent increase in the iPhone's French market share after the ├╝berpopular smartphone became available from SFR and Bouygues Telecom after initially being limited to Orange.
* * * *
"In the top six iPhone markets that are still exclusive," she writes, "we believe that Apple's market share could rise to 10 percent, on average, in a multiple carrier distribution model from 4 percent today."
The FCC shouldn't follow the French example of prohibiting iPhone exclusivity. Appearances to the contrary, this isn't a regulatory success story. Regulation just happened to be in the right place at the right time.

Generally, exclusive distribution benefits novel products but handicaps established products.

Innovators pursue exclusivity so distributors and retailers can recover investments they make to promote the product and provide optimal service quality. Otherwise, these partners could be undersold by free riding competitors and the investments would end. Exclusivity means that the innovator doesn't have to bear the entire risk of a product failure.

After a successful product launch, exclusivity tends to foreclose additional sales. When the value of foreclosed sales exceeds the value of the special efforts by distribution or retail partners, the market discourages exclusivity. Huberty apparently believes the iPhone has crossed that line.

French regulators were lucky as a matter of timing. Regulation didn't boost iPhone sales in France, exclusivity was no longer particularly helpful to drive sales.

If regulation killed exclusivity prematurely, sales would have tanked. If regulators allowed exclusivity to run its course, exclusivity would disappear without government intervention.

Everett Ehrlich, Jeffrey A. Eisenach, and Wayne A. Leighton provide further explanation in a recent paper why exclusivity helped the iPhone.

Promotion and service quality are especially important for new entrants offering new products, and the iPhone was an especially complex case, requiring extensive coordination between manufacturing, software, network and retail activities. Accordingly, contrary to what may be popular perception, Apple sought out an exclusive distributor for the phone -- not the other way around -- and ultimately chose AT&T. As detailed by Hahn, Litan and Singer, Apple's demands included maintaining strict control over the applications that would run on the iPhone, controlling branding, and working directly with customers on maintenance and service issues. Ultimately, of course, Apple's strategy worked: Its de novo entry into the wireless handset business was one of the most successful product launches in U.S. history, with more than one million iPhones sold in 74 days. (footnotes omitted.)
The Rural Cellular Association is urging the FCC to prohibit handset exclusivity arrangements. But Apple doesn't need the FCC to tell it when exclusivity is no longer in Apple's economic interest. Apple is capable of figuring that out for itself, and iPhone exclusivity will be terminated when it does. Meanwhile, it would be good for the economy if innovators can continue to make use of exclusivity for legitimate purposes.

Exclusivity drives innovation. Once demand is established, producers have every incentive to cut prices to expand sales of a successful product.

September 30, 2009
Anarchy beats regulation

The Economist's special report on mobile phone service in developing countries notes that in Africa cellphone service has been more successful in war torn countries than in nations who practice heavy regulation.

There is clear evidence that liberalisation drives adoption (see chart 3). The most vivid illustration comes from a comparison between two African countries: Ethiopia and Somalia. Ethiopia is one of the few remaining countries where mobile telecoms remains a government-run monopoly. By the end of 2008 the country had a "mobile teledensity" of 3.5% (ie, 3.5 mobile phones per 100 people), compared with 40% for Africa as a whole. By contrast, in war-torn Somalia, a similarly poor country with no functioning government and a completely unregulated telecoms market, more than a dozen operators have sprung up to meet demand, and mobile teledensity is 7.9%. Even warlords want their phones to work, notes Mr Ibrahim, so they leave networks alone: Celtel launched its networks in Sierra Leone and the Democratic Republic of Congo during civil wars, and both prospered. (chart omitted.)
Admittedly Ethiopia and Somalia are on opposite extremes of the regulatory spectrum. Does the 40% average African teledensity owe more to the quality of regulation in other nations or to regulatory restraint and the absence of civil war? This question is not addressed in the report. However, there is ample evidence from all over the world that free markets are more efficient than regulated markets.

September 28, 2009
Mobile money

The Economist has a great special report on mobile phone service in developing countries.

For one thing, "mobile money" is transforming the lives of ordinary people in areas with poorly-developed banking systems.

... a new opportunity beckons: mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash.
Mobile money could also transform the lives of many people in the developed world who are without bank accounts, haunted by poor credit scores or would just appreciate a convenient alternative and more competition in the financial services sector.

But it look's like we'll have to wait a while.

Given all of its benefits, why is mobile money not more widespread? Its progress has been impeded by banks, which fear that mobile operators will eat their lunch, and by regulators, who worry that mobile-money schemes will be abused by fraudsters and money-launderers.

August 19, 2009
Legacy regulation killed Google Voice

Reacting to Apple's decision to not allow Google Voice for the iPhone, Wall Street Journal guest columnist Andy Kessler complains,

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that--see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So Kessler proposes a "national data plan."

Before we get to that, Kessler complains that margins in AT&T's cellphone unit are an "embarrassingly" high 25%. He doesn't point out that AT&T's combined profit margin -- taking into account all products and services -- is only 9.66%.

AT&T is actually earning less now than it was legally entitled to earn when fully regulated -- 9.66% versus 11.75%.

Don't fall for the myth that AT&T killed Google Voice.

The truth is regulators are quietly expropriating wireless profits to hold prices for regulated services like plain old telephone service artificially low.

This has always been how the game is played. Regulation has kept prices for basic phone service at or near the bare cost providers incur to offer the service, forcing providers to chase profits elsewhere.

In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It's called the "carrier of last resort" obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.

This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.

Kessler offers one solution, but before we get to that, I've got a simpler one.

The solution is to give providers full freedom to set prices and choose their own technology. Yes, I mean freedom to raise prices for basic phone service so cellphones don't have to subsidize it, because cellphone providers who are affiliated with landline units could afford to lower their prices.

Don't lose me here: Cellphone providers would lower their prices, because every time prices fall subscribers consume more minutes of use.

Kessler favors a more convoluted plan, which I will admit is more practical politically than my own:

  • End phone exclusivity. Any device should work on any network. Data flows freely.
This is stupid. There may be instances where exclusivity promotes innovation, and others where it might not.

For example, a wireless provider might be willing to negotiate its customary profit margin, compromise the level of control it normally exercises over product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in its network or back office systems to fully exploit the product's innovative features.

A bright line rule would kill both good and bad exclusivity.

  • Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other.
As Kessler notes, Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. The fact is, our rulers in Washington, D.C., fifty state capitals and thousands of city halls view wireless as a giant taxing opportunity.

Wireless providers are recovering the $70-plus billion they deposited into the U.S. Treasury right now from each and every one of us in the form of artificially high prices for cellphone service.

Let unlicensed devices operate in the "white spaces," then refund the $70-plus billion so new and existing carriers can compete on quality of service rather than on artificial cost disparities.

  • End municipal exclusivity deals for cable companies ... A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
Congress invalidated exclusive cable franchises in 1984, and most states have recently streamlined the video franchising process so new entrants can obtain statewide franchises instead of negotiating individually with thousands of local franchising authorities.

Kessler's certainly accurate that competition between telephone and cable providers brings de facto network neutrality and open access. We have that competition already. In 2008, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.

  • Encourage faster and faster data connections to our homes and phones. It should more than double every two years.
One way to encourage it is to make it clear up front that investors will be allowed to earn a profit -- that's unclear now due to the possibility of extensive new regulation which would lead to bureaucratic control of broadband networks and bandwidth rationing.

The other way to encourage it is to subsidize it to make up for the harmful effects of taxes and regulation.

If we accept the idea there are too many vested interests to permit meaningful reform of legacy telephone regulation, then we are forced to look for ways to treat the various symptoms.

But the advent of wireless and VoIP technology mean that legacy phone service is unsustainable and will die unless politicians are going to treat it like GM because it provides employment for thousands of unionized workers.

There is still time for the politicians to simply let go of it and let it adapt.

June 29, 2009
'Special access' shouldn't be fixed

George S. Ford and Lawrence J. Spiwak at the Phoenix Center conclude in a new paper that government intervention is not warranted in the market for special access services purchased by businesses and institutions (which I discussed most recently here).

They note that the rates of return a prominent study estimated AT&T, Qwest and Verizon are currently earning either are similar to or less than the rates of return these companies used to earn when the market was fully regulated.

NRRI bases this analysis on ARMIS rates of return, a perplexing approach once one calculates ARMIS rates of return from the period in which all special access services were price regulated. In 1999, for example, the average rate of return for special access computed using ARMIS data was 32% for Qwest, 37% for AT&T, and only 4.5% for Verizon. For Qwest and AT&T, the returns under complete price regulation are not much different than the "adjusted" returns computed in the NRRI Study. The conclusion, then, is the pricing flexibility has had no effect. For Verizon, its rate of return prior to the Pricing Flexibility Order was substantially lower than the other Bell companies and even below any reasonable estimate of the firm's cost of capital. One interpretation, then, is that a more deregulatory approach has provided for more reasonable returns on investment for the firm. (footnote omitted.)
There is always a high risk well-intentioned regulators will fall victim to lobbyists or simply guess wrong. Ford and Spiwak point out that in the current environment the risk is heightened due to the impairment of credit markets.
In the current financial and economic crisis, [the] costs and risks of regulation are even more pronounced, particularly with regard to rate regulation. At the most basic level, one cost of rate regulation is the risk that regulators will establish an incorrect rate. If regulators set a rate too high, then they might redirect investment inefficiently and also whittle away any prospective welfare gains by that intervention. If regulators set a rate too low, then investment will be squelched and entry will be deterred. It is important to note that not only would investment by incumbents be squelched and deterred, but that investment by entrants might be similarly affected. With fixed and sunk costs, regulatory-mandated reductions in prices or profits may very well dissuade new entrants from offering service.

The risk of a regulator setting a rate incorrectly is particularly acute in the current environment, because any form of rate regulation requires the regulator to examine and establish a cost of capital. In a normal rate case, a regulator can obtain reasonably valid estimates of the cost of capital by observing borrowing and equity costs for other firms exhibiting "comparable" risk characteristics.

But today, the Federal Reserve Board of Governors and the Department of the Treasury have concluded that the financial markets are currently so dysfunctional that the public authorities must step in and recapitalize banks, large insurers, and so on. Future taxpayers are being used as a source of capital-of-last-resort for many of these institutions, a process that is necessarily distorting the standard methods in which a regulator may establish a cost-of capital for the industry. Stated simply, if it is true that even economically worthwhile projects are now unable to obtain funding under any conditions, what is the true cost of capital? Once credit is being rationed, the risks of establishing an incorrect rate for a service are very high, and policymakers ought to take this into account when reviewing proposals for immediate regulation of special access rates, at least until the financial markets return to normalcy. (footnotes omitted.)

The paper confirms that re-regulating the special access market would be both unnecessary and highly risky.

Related post: "Don't believe 'special access' hype" (6-23-2009).

June 23, 2009
Don't believe 'special access' hype

A new coalition, NoChokePoints, has been formed to lobby Congress and the Federal Communications Commission to further regulate the prices that incumbent telephone companies (Regional Bell Operating Companies or Incumbent Local Exchange Carriers) can charge for special access services purchased by businesses and institutions. Special access circuits are dedicated, private lines. For example, Sprint purchases special access circuits to connect its cell towers to its backbone.

According to a coalition spokeswoman,

Huge companies like Verizon and AT&T control the broadband lines of almost every business in the United States. The virtually unchallenged, exclusive control of these lines costs businesses and consumers more than $10 billion annually and generates a profit margin of more than 100 percent for the controlling phone companies, according to their own data provided to the FCC. This hidden broadband tax results in enormous losses for consumers and the economy, and this country cannot afford it; especially now.
An analysis prepared by Peter Bluhm with Dr. Robert Loube under contract with the National Association of Regulatory Commissioners (NARUC) disputes this conclusion.

NARUC represents both state utility commissioners who are pro-business as well as state utility commissioners who are hostile toward regulated utilities. NARUC is not supporting the incumbent network providers on the issue of special access regulation. According to Bluhm and Loube,

Buyers have criticized the FCC's current regulatory regime because it has apparently allowed excessive earnings. For their part, the RBOCs contend that the ARMIS figures are virtually meaningless. We agree with the RBOCs ....

Before 2000, special access investment was categorized by what is called "direct assignment." The purpose was to assign 100% of investment for interstate special access to the interstate jurisdiction and 100% of investment for intrastate special access to the state jurisdiction. In practice, direct assignment required carriers to perform studies on how their networks were used ....

In 2001, the FCC "froze" separations categories and factors for large companies. At that point, large carriers stopped performing direct assignment studies ....

During [the ensuing] period, carriers greatly increased their sales of interstate special access, and all of that revenue was assigned to interstate. As a result, interstate special access revenues increase every year, but not interstate special access costs. This imbalance has inflated ARMIS special access earnings reports and made them unreliable. (emphasis added.)

Likewise, a paper by Harold Ware, Christian Dippon and William Taylor at NERA Economic Consulting concludes,
accounting profits generated from [ARMIS] data bear no relationship with economic profits and cannot serve any useful purpose in determining whether pricing flexibility has generated excessive rates of return.
In an effort to get to the bottom of this, Bluhm and Loube estimated the current actual cost and found that the carriers are probably earning substantially less than ARMIS indicates. Instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.

The revised percentages are still more than a regulated utility would be allowed to earn. However, there are at least two points to consider.

First, absent cost studies there is no way to know how much the network providers are earning. According to Ware, Dippon and Taylor,

allocations and adjustments can produce wildly different results depending on what factors are used. This is why economists and regulators have long rejected use of cost allocations such as those in the ARMIS data. It is also why [Bluhm and Loube's] conclusions regarding profits for special access should be summarily rejected.
Incidentally, Ware, Dippon and Taylor predict that the potential benefits of additional special access regulation are not worth the "potentially large costs."

They point out that if different adjustments are chosen, the return on investment could be even lower.

For another, competitors are entering the market and they are capturing market share. Bluhm and Loube concede that

Cable television and fixed wireless have low entry and exit costs where their networks are currently established, and each can provide substitutable dedicated services to many customers. Overall, these competitors are still acting on the fringes of special access markets, but they have larger roles in some locations and their market shares appear to be growing. Fixed wireless may hold a large market share in five years, particularly if WiMAX proves reliable and if these carriers can attract sufficient capital to expand. These newer technologies may be poised to become major competitors and are increasingly constraining ILEC behavior, but they have not yet grown beyond fringe competitors in most markets.
Maybe these competitors are still "acting on the fringes" because profit margins afforded by the market aren't fat enough.

If AT&T, Qwest and Verizon are earning excess profits, cable and fixed wireless competitors will be able to undercut their prices and capture market share. The higher the profits, the faster the entry.

What would happen if Congress or the FCC decided to intervene? If regulation pushed special access prices lower, that would reduce the revenue investors could expect to earn from new competitive facilities. If investment won't be profitable, it won't be made.

NoChokePoints includes telecommunications providers Sprint, BT (British Telecom) and tw telecom among its members.

These competitors would not be pushing to cap the special access prices charged by incumbent network providers if they wanted to profitably invest in competing facilities. They would want incumbent providers to charge high prices so they could charge lower prices and still make a profit.

The logical conclusion is that competitors don't want to invest in new facilities. They simply want to cut costs. (Sprint, which has partnered with Clearwire and is exploring a combination with Level 3, is hedging its bets.)

A desire to cut costs rather than assume investment risks is not surprising.

But the coalition claims that additional special access regulation will create jobs.

Policymakers need to consider whether they want to help companies who don't want to invest save jobs at the expense of their suppliers, or whether it would be better to maintain incentives for investment. Investment will create sustainable jobs.

Cost cutting will simply lead to more layoffs, here or there.

The message for Congress is: (1) the "controlling phone companies" are not earning margins in excess of 100%, according to any credible observer; (2) determining what the exact margin really is would require cost studies which are expensive, time consuming and would probably lead to litigation and (3) if prices do exceed reasonable costs it will be profitable for competitors to invest in new facilities which will create needed jobs.

For more information, a recent column I wrote about proposals to expand special access regulation can be found here.

June 19, 2009
Exclusivity inspired Smart Phones

Small cellphone operators want Congress or the Federal Communications Commission to prohibit larger carriers from becoming exclusive providers of popular handsets, like the Apple iPhone (AT&T), Blackberry Storm (Verizon Wireless), Palm Pre (Sprint) and Samsung Behold (T-Mobile).

John E. Rooney, President and CEO of United States Cellular Corp., testified at a Senate Commerce Committee hearing this week:

These arrangements harm consumers in rural areas and decrease competition nationwide and do not enhance innovation.
Let's examine these arguments.

Rural Consumers

Rooney bemoans the fact that

many rural residents of Alaska, Arizona, Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Utah, West Virginia and Wyoming are not served by AT&T network facilities
while Victor H. "Hu" Meena, President and CEO if Cellular South, Inc., claims that
Vast portions of America -- including all or part of Alaska, Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire New Mexico, Oregon, Vermont, Washington, West Virginia and Wisconsin -- are not served by any of the largest carriers, so Americans in these areas are prohibited from acquiring the newest and most innovative devices.
There are advantages and disadvantages no matter where one chooses to live. The fact that someplace is without a particular amenity traditionally hasn't justified limiting the ability of private entities to exercise their own judgment as to parties with whom they will deal. While I am fortunate to have the opportunity to own an iPhone, I don't get to live in a pristine rural setting with a wide open outdoors, low housing costs, etc.

It should be noted that however many rural Americans are unserved by any of the largest carriers, these customers are no threat to United States Cellular Corp. or Cellular South. The threat comes from customers who have the option to switch carriers in pursuit of better devices, and I get the impression there are more of these customers than Rooney and Meena are letting on. According to Rooney,

the Big Four's control over the most advanced, attractive handsets has made it significantly harder for smaller carriers to attract and retain subscribers, and to effectively compete in rural areas, even with federal universal service support. (emphasis added.)
Meena says,
Cellular South and other regional and rural carriers have competed with the largest carriers for years based on network quality, network coverage and price. These are all factors that are within our control ... However, our ability to compete is compromised because the largest carriers lock up devices in exclusivity agreements. Put simply, regional and rural carriers cannot gain access to the latest, cutting-edge devices which gives large carriers a key competitive advantage. Focus groups of customers who have left Cellular South for the largest carriers repeatedly say that they are buying the device, not the network, and certainly not the company. (emphasis added.)
A competitor who can offer something you or I can't is a frequent hazard of doing business.

Competition and Innovation

The cellphone market is wildly competitive. More than 95 percent of the U.S. population lives in census blocks with at least three competing carriers, according to the FCC. And no carrier has a market share exceeding 27 percent.

The cellphone industry was deregulated by a Democratic Congress -- with Al Gore's tie-breaking Senate vote -- and signed into law by President Clinton in 1993.

It was an unregulated market in which handset exclusivity was permitted that Apple sought to transform; undoubtedly at least part of the appeal was the fact Apple would be permitted to earn a commensurate profit if consumers liked its product. "There can be no growth without the investment that is inspired and financed by profit," as John F. Kennedy said.

Rooney offers no evidence in support of his contention that exclusivity decreases competition nationwide. Instead, he entreats policymakers to shift the burden of proof with the statement "There is no evidence showing that these practices create significant pro-competitive benefits."

Similarly, he claims exclusivity arrangements "do not enhance innovation"; again, he offers no support for this view -- which is untrue.

The iPhone set a transformative new standard for wireless handsets and attracted millions of new subscribers for AT&T. All other handset manufacturers and network operators have been racing to catch up. Before the iPhone, we had awkward devices of limited utility. Now the industry is competing to offer Smart Phones, or "teleputers" as envisioned by George Gilder. It is obvious these developments are a tremendous benefit for consumers. Most consumers will benefit immediately; all consumers will benefit in time.

Rooney and Meena are asking policymakers to reset the basis of competition away from something many consumers apparently value highly (cool devices) back to something that once defined competition in the wireless segment but which these consumers now take for granted (network quality, network coverage and price).

In other words, these executives are asking for protection.

If policymakers proceed down this path, they will be protecting competitors, not competition. There's a danger where that will lead, as Peter J. Wallison notes

Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.
Voters Get This

On a related note, a Wall Street Journal/NBC poll this week notes that nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama's decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The poll also found that Mr. Obama's overall job approval and personal ratings have dropped among independent voters from nearly two-to-one approval to closely divided.

A Pew Poll earlier this month confirmed that independent voters tend to have conservative views about government and regulation, and more liberal views regarding the hot-button social issues, national security and religion.

Democrats deserve much credit for the success of the wireless industry. It's ironic some of them want to reverse course.

November 7, 2008
Events overtaking net neutrality

The conventional Beltway wisdom would be that net neutrality legislation should have a real chance now with the election of President-Elect Obama and strengthened Democratic majorities in the Senate and House.

But there are two recent developments which make the case for net neutrality regulation less compelling.

Free Airwaves

The Federal Communications Commission approved the use of unlicensed wireless devices to operate in broadcast television spectrum on a secondary basis at locations where that spectrum is open, i.e., the television "white spaces."

In other words, a vast amount of spectrum will soon be available to provide broadband data and other services, and the spectrum will be free.

George Mason University Professor Thomas W. Hazlett notes that

[S]ome 250 million mobile subscribers in the US paid about $140 billion to make 2 trillion minutes' worth of phone calls in 2007, accessing just 190MHz of radio spectrum. The digital TV band, in contrast, is allocated some 294MHz--and it's more productive bandwidth. Tapping into this mother lode would unleash powerful waves of rivalry and innovation.
Most of the television spectrum is either unused or isn't used efficiently. FCC Chairman Kevin Martin expects that devices using the spectrum could be on the market within a year to 18 months.

Hazlett laments that since 90 percent of consumers subscribe to cable service the broadcasters really don't need their assigned frequencies, and suggests that if digital TV frequencies were auctioned off taxpayers could be compensated to the tune of $120 billion. This is a good point. But, as an alternative, the government could also come back later and tax the unlicensed uses of the spectrum. Either way, the money would be collected from the same consumers who are also the taxpayers.

The value of auctions lies in preventing politicians and bureaucrats from awarding spectrum to their friends and relatives or from picking winners and losers, not in sucking money from the private sector. Here, the spectrum is being awarded not to profit-making entities who hired the most gifted lobbyists, but to the public at large.

The real significance of the FCC's decision is consumers who are dissatisfied with the broadband services provided by telephone, cable and cell phone companies or satellite providers will soon have even more options. This fact undermines the case for net neutrality regulation, which is premised on the false notion that most consumers of broadband services are captives of a single phone company and/or a single cable provider. Absent the validity of this false rationale, regulation which tells broadband providers who can use their networks and at what prices is an unjustified restraint on the free speech rights of broadband providers.

Harvard Law Professor Laurence H. Tribe, a First Amendment scholar, addressed the question: "Can broadband providers be forced to act as common carriers"? at a 2007 conference sponsored by the Progress & Freedom Foundation. He concluded that the Supreme Court decision in Hurley v. Irish-American Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995) is the decision which "would probably apply here."

In that case, the the Supreme Court upheld the decision of the event's organizers to exclude GLBG from marching in the parade. The Court ruled that a parade is not merely a conduit for the speech of participants.

Alternatively, another Supreme Court precedent which might be applicable is Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994), which obligated cable operators to retransmit the signals of local broadcasters. But I agree with Tribe that this is less likely because cable franchises at the time conferred what the Supreme Court believed were a "monopolistic opportunity [for the cable operators] to shut out some speakers." This is no longer true. Although the opportunity to exclude certain speakers still exists, cable operators are not monopoly providers. Telephone, cell phone and satellite providers -- and unimagined services utilizing unlicensed white spaces -- offer similar services. Disappointed speakers can seek other platforms.

Therefore, the FCC decision permitting unlicensed uses of television white spaces significantly improves the possibility that net neutrality legislation would be struck down by the courts as unconstitutional.

Verizon Wireless + Google vs. Microsoft

Another recent development are the talks Verizon Wireless is having with Google and Microsoft (see this and this), who are competing for the privilege of having their search bar featured as the default search feature on Verizon Wireless handsets. If Verizon Wireless features a default search bar, subscribers who want to use a competitive search service would have to navigate to the competitor's web site. A lot of times consumers don't bother to do that. Google has claimed in the past that when default search bars are available, they are the starting point for 30 to 50 percent of a user's searches.

Only one search provider gets to be Verizon Wireless's search partner. One search provider gets to sit at the end of a fast lane; the others don't.

"Fast lane" may not be a perfect metaphor, because traffic may not actually be prioritized across the network; but from a consumer perspective there are fewer clicks and the search may seem faster overall. Fast lane is the favorite metaphor of net neutrality proponents, and I suspect it provides a clue as to why Google became such an enthusiastic supporter.

Google is making a massive investment in data centers to deliver faster results, including one in the home state of Sen. Ron Wyden (D-OR), and wanted to make sure its competitors couldn't easily and cheaply duplicate that investment with the help of broadband providers. According to this source,

Google has found that for search engines, every millisecond longer it takes to give users their results leads to lower satisfaction. So the speed of light ends up being a constraint, and the company wants to put significant processing power close to all of its users.
A former Google executive is quoted as saying "Google wants to raise the barriers to entry by competitors by making the baseline service very expensive."

The purpose of net neutrality regulation is to ensure "equal treatment" for all consumers and businesses. Sen. Wyden, sponsor of one of the earliest net neutrality proposals, reportedly explained he "didn't oppose companies offering different speeds of service at different prices, a practice already undertaken by several major Internet providers, provided that content is treated equally within each level of service."

If Wyden's bill had become law, Verizon Wireless wouldn't be able to provide Microsoft or Yahoo faster access than it offers Google -- even if they need it and are willing to pay for it but Google doesn't and isn't.

Perhaps net neutrality regulation could be drafted more fairly -- like allowing broadband providers to build a fast lane, but guaranteeing that anyone could pay an identical fee for the same fast access. This would mean that broadband providers couldn't build fast lanes unless they could build them big enough to accommodate anyone who might seek to use them. The likely outcome is the fast lanes wouldn't get built at all.

There may be yet other ways a net neutrality regulation could be structured, but they would all create uncertainty, complexity and pitfalls for broadband providers.

Google has been a major proponent and -- one suspects -- has provided significant support for the enactment of net neutrality regulation. That the company is now bidding against Microsoft for the right to share some portion of its colossal advertising revenue with Verizon Wireless may indicate that Google thinks it has found a more acceptable way to limit the ability of its competitors to easily and cheaply duplicate its investment in data centers, that it is no longer banking on net neutrality becoming law, or both.

If Google is the successful bidder, it may have less of an incentive to provide support for net neutrality regulation. Even if Google isn't the successful bidder, the negotiations prove that there are mutually-beneficial and pro-competitive partnerships which are nevertheless discriminatory and could be outlawed by net neutrality regulation.

But these partnerships can be beneficial for consumers -- if Verizon Wireless can obtain advertising revenue it may be able to reduce wireless subscription fees. Google CEO Eric Schmidt has even suggested that your mobile phone could be free, subsidized by targeted ads.

Permitting the unlicensed use of white spaces and participating in negotiations with Verizon Wireless to feature a default search bar both had Google's full support.

These two events reduce the likelihood that net neutrality will become the permanent law of the land.

September 19, 2008
One in five households could be wireless-only

Nielsen reports that 20 million U.S. households no longer have fixed-line phone service and rely solely on cell phones. By the end of this year, one in five households could be wireless-only.

'Landline wireless substitution may just be the start,' says LeBreton. 'As wireless data networks improve and speeds become more and more competitive with broadband, some consumers may cut the Internet cord, as well, favoring wireless data cards and other access through carrier networks.'

April 8, 2008
Google's bids

Communications Daily ($) cited my recent post comparing Google's limited objectives for the 700 MHz auction with the expansive objectives it outlined to the Federal Communications Commission last summer, and it included the following reaction to my comments from Richard Whitt of Google:

Whitt said in response that Haney had misread his company's comments from last summer. "We consistently have argued that the open access license conditions adopted by the FCC would inject much-needed competition into the wireless apps and handset sectors, but would not by themselves lead to new wireless networks," he said Monday. "Only if the commission had adopted the interconnection and resale license conditions we also had suggested -- which the agency ultimately did not do -- would we have seen the potential for new facilities-based competition."

Another way to look at this is if there wasn't any potential for new facilities-based wireless competition without the interconnection and resale license conditions Google wanted, why would Google have submitted bids for the spectrum which it might have won and had to pay for?

I do agree that prior to the FCC's adoption of two of the four open platform principles Google proposed the company consistently premised its commitment to participate in the auction on the FCC adopting all four principles. I also agree Google was clear that it believed all four principles were necessary to promote competition.

Then it participated in the auction anyway.

This case may reveal how some regulators and some legislators are shrewd, have their own ideas about how to get what they want and even think they know what's in the best interest of corporations like Google.

It makes sense, as Whitt told Communications Daily, that the interconnection and resale license conditions would seem necessary to a hypothetical competitor who is a network provider. But in its Jul. 9th letter (and in the statement to Communications Daily) Google characterizes all four principles as being relevant to whether a new entrant would bid for the spectrum. For example:

Should the Commission not adopt the four open platforms requirements listed above, we believe it is doubtful that even the most determined and committed new entrant will be able to outbid an equally determined and committed incumbent wireless carrier, or consequently pave the way for second order competition.
In other words, each of the principles could be of interest to a new entrant who might bid for the spectrum. That seems logical, and the proof is Google. A new entrant who isn't a network provider -- such as Google -- might be more interested in open platforms for applications and handsets upon which its lucrative advertising plans depend. It might be worth it for Google to become a wireless broadband competitor in order to promote its highly profitable legacy business model.

Google was presenting an all-or-nothing-offer. But in Washington all-or-nothing-deals are rare. Google must have known this. Google got half of what it asked for (the typical return on investment here). And half a loaf seemed to be enough in view of the fact Google participated in the auction.

If in its prior conduct Google was saying only that it intended to ensure that the reserve price was met but it had no interest in owning the spectrum itself, that wasn't particularly clear.

Reasonable people might differ, but I think if Google never intended to win the spectrum (unless there was no way around it), and it was merely advancing its hypothesis that the four open platform conditions would summon forth hypothetical new entrants that wasn't especially clear at the time, either. Nor would it have seemed convincing to many people. Google's proposal wouldn't have acquired much momentum. The excitement was around the possibility Google would become the competitor. Google's previous Jul. 9th letter to the FCC said "Google remains keenly interested in participating in the auction" and its subsequent behavior continued to highlight that interest.

April 4, 2008
Back to spectrum giveaways

In 1993 Congress substituted auctions for the deplorable practice of giving away valuable spectrum to well-connected commercial entities.

Lawmakers who think spectrum is a valuable public resource for which the taxpayers should be compensated need to wake up for a minute. FCC rulemaking could render the remaining assets worthless, distort wireless competition and contribute to the unfortunate perception of the FCC as a candy store.

Google has made it clear that it plans to weigh in at the FCC as it determines how to re-auction the D-block from the recent 700 MHz auction, and that it wants to open the white spaces between channels 2 and 51 on the TV dial for unlicensed broadband services.

Anna-Maria Kovacs, a regulatory analyst, reported that in the recent 700 MHz auction AT&T Mobility paid an average price of $3.15 per POP in the B-block while Verizon Wireless paid 77 cents per POP in the C-block which was subject to special rules advocated by Google.

Now comes an admission that Google's main goal was not to win C-block licenses in the auction but to jack up the price just enough so the reserve could be met, according to the New York Times.

"Our primary goal was to trigger the openness conditions," said Richard Whitt, Google's Washington telecommunications and media counsel.
This certainly isn't consistent with the way Google presented the open access proposal to the Federal Communications Commission last summer. Google stressed that open access was for the purpose of leading to the introduction of new facilities-based providers of broadband services.
Chairman Martin has articulated the critical issues at stake in this proceeding:
The most important step we can take to provide affordable broadband to all Americans is to facilitate the deployment of a third "pipe" into the home. We need a real third broadband competitor....The upcoming auction presents the single most important opportunity for us to achieve this goal. Depending on how we structure the upcoming auction, we will either enable the emergence of a third broadband pipe -- one that would be available to rural as well as urban American -- or we will miss our biggest opportunity. Such a status quo outcome certainly would not sit well with consumer groups that have been strongly urging us to adopt rules that facilitate the ability of a "third pipe" to develop.
Further, Chairman Martin has observed that Google and other members of the Coalition for 4G in America are "the only parties that have promised to try to provide a national, wireless broadband alternative."

As Chairman Martin recognizes, the actual method of providing a broadband alternative is through a "real third broadband competitor." This means that the would-be new entrants should not be aligned with either an incumbent wireline carrier or incumbent wireless carrier. Those carriers, quite rationally, seek to extend and protect their legacy business models, and in particular not take any actions that would jeopardize existing and future revenue streams. For this reason, the appropriate public policy stance is not simply to facilitate an additional spectrum-based broadband platform, but rather to facilitate independent broadband platforms.

Obviously, the idea that an open access requirement would facilitate a third "pipe" was naïve on the part of pliant regulators.

We now have a block of spectrum owned by an incumbent with an open access requirement which aligns nicely with Google's business model. Yet it's fairly obvious that the open access requirement contributed to a substantial loss for the Treasury.

The admission by Google's counsel that winning the spectrum wasn't the company's goal and that Google submitted bids for the purpose of spiking the auction price casts doubt on the company's motivation and veracity in view of Google's previous representations to the FCC.

It may be that "everyone" attempts to "influence" the regulatory process when they can get away with it, but that doesn't make it right.

October 23, 2007
What's up, Walt?

I enjoy Walt Mossberg's Wall Street Journal personal technology reviews as much as the next person, but his latest jeremiad against U.S. mobile phone companies is way off the mark. Mossberg calls the mobile carriers "Soviet ministries" because they offer two-year service contracts, lock their phones during this contract period, and generally take a "walled garden" approach to content.

But the facts of the U.S. wireless industry are striking:

-- Ours is the most competitive wireless market in the world, with the top two players accounting for just 51.5% of subscribers. Some of us wouldn't mind if our market were more concentrated.

-- Prices have fallen some 85% since 1994, from around $.46 per minute to $.07 per minute.

-- Average minutes of use in the U.S. far exceed any other nation -- by a factor or 2x or 3x -- including the supposedly mobile-obsessed Europeans and Asians. U.S. average usage is 834 minutes per month. Europe, just 153. Our prices are much lower.

-- After lagging for a decade, the U.S. has deployed fast 3G networks ahead of the Europeans (although after the world-leading Koreans).

-- We can choose among some 700 mobile devices in the U.S., far more than any other nation.

-- Mossberg compares today's wireless landscape to the klunky-black-phone monopoly days of the 1960s where Ma Bell essentially owned your phone and did not allow other models. Do you really believe that, Walt?

-- Mobile carriers "lock" their phones because they also subsidize those phones. There's a trade-off. Consumers can choose to sign a two-year service contract in return for an inexpensive, subsidized phone. Or they can buy a phone full price, get it unlocked, and potentially take it to another carrier.

-- Apple's iPhone proves that innovation is alive and well and that partnerships -- like the Apple-AT&T deal -- work. It's the first device that brings the real open Internet to life on a mobile device. From here on, other carriers will have to give consumers the full-featured Net, too.

Mossberg should remember another thing: Wireless is hard. If you really think about it, mobile communications seems almost miraculous. It takes huge expense, planning, and engineering to make a wireless network function robustly. Wireless is a bandwidth constrained environment, where operators must tweak their networks to get every last bit-per-second-per-hertz out of their spectrum and equipment and to maximize geographic coverage with limited capital and operational expenditures. Likewise, mobile devices are small computers, which at least for now are limited in storage, MIPs, and battery power. We are improving these metrics at a furious pace, but we still must choose which applications and features to pack into these tiny packages. Any high-end technology starts as an integrated system -- all the components and interfaces must be optimized to even get the system to work. As technology matures, systems can break apart and modularize, and more third-party and plug-in components and applications become technically and economically viable. This will happen in wireless, too, but technology and economics must drive the process.

It's easy to assume wireless signals magically suffuse the ether and that I should just be able to stick any device into the air and get free phone calls and Web access. It's much harder to actually make it happen. No "Soviet ministry" ever engineered anything close to the wonderous wireless webs we all enjoy everyday.

-Bret Swanson

Dotted Divider Line

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