I have been doing some analysis of Verizon’s latest move in the VZ/SpectrumCo transaction, the announcement VZ will engage in a series of AWS spectrum swaps with T-Mobile. Between this and Verizon’s commitment to sell off its Lower 700 MHz A&B block licenses, I am almost happy — except for that whole cartel thing with the major cable companies. But if we ignored the cartel thing, this deal now becomes the rare bird that actually enhances both Verizon’s position in the market and that of a prospective competitor. This is not quite a triumph for Coasian market efficiency, since it took the threat of agency action to nudge Verizon in the ‘right’ direction. I also need to point out that when we start out with a fairly dismal market structure, it does not take much to improve things. Giving spectrum to T-Mo is good, but it does not address all the competition problems created by our unfortunate means of distributing spectrum, which still ends up concentrating it in the hands of a very small number (i.e. 2) of companies. So ‘happy’ is a relative term.
As a result, the transaction needs a few minor conditions to make it complete: a data roaming condition to keep competition afloat (and in case the data roaming rule does not hold up in court) and accelerated build out/use or share to ensure rural communities see a 4G network before the end of the decade, but otherwise this looks pretty good (even with AT&T likely to snarf all the Lower 700 MHz B block licenses). Mind you, it reenforces the need to get interoperability and special access reform done if we want to see real competition — but we have rulemaking proceedings on those.
Unfortunately, there is that whole “cartel” thing with the major cable operators. And despite all the positive aspects of this transaction as now configured, they cannot outweigh the negative of creating an anti-competitive cartel at the center of our communications infrastructure. But let me set that aside for the moment to focus on the spectrum side of things.
More below . . . .
Acts of the Apostles
Tales of the Sausage Factory
The Wireless Market Is Seriously Messed Up When Every Incentive Is Anti-Consumer.
AT&T reported their second quarter results today. According to this analysis, AT&T achieved better profitability by (a) dramatically limiting their broadband service; (b) discouraging consumers from upgrading their devices; and (c) figuring out new charges for consumers to enhance overall profit per customer.
I get that firms are supposed to maximize profit. But when every single incentive to profit maximization relies on providing less service for more money and discouraging people from using your service, something is seriously messed up. This is doubly true when usual trend in information technology is to drive prices down. And, more tellingly, it creates a real concern if we are relying on market incentives to ensure that providers do things like build out networks and provide us with better service and lower prices.
I’m not claiming AT&T is being nefarious. I’m just saying something appears seriously messed up about the whole industry structure. Given the critical importance of this particular industry to our national economy, it would be particularly useful if we had a better understanding of why this is so messed up and — jus maybe — what policies would fix it. For example, if the enormous subsidies paid for iPhones and other smart phones is an issue, wouldn’t it make sense to sever the handset market from the network? If the problem is that network upgrades are expensive to meet demand for wireless capacity, then how are we going to get networks built out?
I’d be happy to concede the issue on metred pricing, except that there doesn’t seem to be any actual relationship between the price metering and the cost of provisioning. The idea of metering is that I want to provide you with more capacity because that way I make more profit. If this were bananas, I would have a fairly direct incentive to grow more bananas so I can sell more bananas. But AT&T doesn’t want to charge me for more bandwidth, which would arguably give it incentive to build better systems and sell me ever more capacity. It wants to sell me limited capacity and then stop, presumably so it can capture some imaginary and unspecified revenue on the the other side of the platform. That creates a fairly unfriendly incentive to create scarcity and avoid investment in the network.
Which brings me back to my original point. There is something seriously wrong in a market when every single incentive is anticonsumer, and when providers can act on these anticonsumer incentives with no consequences. If nothing else, can we at least stop pretending that “the market” is going to somehow look out for consumers, despite every provider incentive to the contrary?
Stay tuned . . . .