Tales of the Sausage Factory

What We Learn From the VZ-Frontier Deal

Verizon is selling 5 million access lines to Frontier. I expect the deal will go through — after all, a dominant carrier is getting smaller, there is no place where VZ and Frontier compete, etc., etc. What makes the deal interesting is what it tells us about the problem of relying on ILEC/Cable competition to drive broadband. Briefly, (a) we will be perpetually without fiber in a lot of places if we are going to wait for cable and ILECs to meet our needs; and (b) the real problem for is not just the high cost of deployment, but the need to show high rates of return to keep Wall St. happy. It is this latter that will keep telecom policy a very unhappy and complicated place unless we get out of our usual silos and start thinking about some holistic solutions.

More below . . . .

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Tales of the Sausage Factory

Why Do Competitive Markets Keep Misbehaving? The Curious Case Of Cellular Txt Msging.

Been meaning to get to this for awhile now, which is why the links are so old.

It has long been an article of faith among the worshipers of the Gods of the Marketplace that once you achieve “competition” (generally described as at least one more possible new entrant, but certainly where multiple providers exist) you eliminate regulation, because a competitive marketplace gives consumers what they want — like high fuel efficiency standards and a secure financial system. Thus, for the 30 or so years, we have more and more framed the debate in telecom and media policy around whether or not we have “enough” competition rather than about the benefits or drawbacks of any actual policy. Unsurprisingly, you can always argue that we have “enough” competition (or that competition is about to emerge) and thus side step the whole question of the actual state of reality and what reality we might prefer.

Enter the curious case of cellular telephony. I’ll take the case of text messaging, although the same argument applies in varying degrees to other aspects of the wireless market like network attachments and ring tones. As Randall Stross wrote in the NY Times at the end of December, the cost charged to consumers for txt messaging has absolutely nothing whatsoever to do with the actual cost of the service. Yet — as we are constantly reminded — the cell phone market has four national players and numerous regional players. This makes it squindoodles more competitive than, say, the broadband market in most places in the country where you can generally get two somewhat comparable services (cable and DSL) and a whole bunch of also rans that folks like to claim are competition.

Text messaging is so overpriced compared to cost that last year Senator Herb Kohl, Chair of the Senate Antitrust Subcommittee, has sent a letter to AT&T, VZ, T-Mobile, and Sprint (more details here)asking ‘Ello, ‘ello, ‘ello and what’s all this ‘ere, then? — you’re nicked!’ (no, I have no idea why Kohl sounds like a British Bobby from 50 years ago — ask him). As Kohl noted in his letter, the consistent ridiculously high prices for SMS txt messaging “is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace.”

Short answer: it is utterly consistent with the nature of the wireless market. But — and here’s the shocker — real world markets are often much, much more complicated than the followers of the Gods of the Marketplace like to believe. Cell phone companies charge outrageous prices for text messaging (and other services like ring tones) not because they conspire with one another, or even because they engage in conscious parallelism. Nor do they do so because they must as a result of actual costs. They do so because — to use that classic phrase — it is what the market will bear, and the structure of the market ensures there is no benefit to any cellular carrier to offer text msging plans at anything approaching cost plus reasonable profit.

In economic terms, this is an oligopoly. Washington regulators treat oligopolies as if they were the same as competitive markets, unless one can show evidence of actual collusion — in which case it becomes a question of price fixing. But in reality, it doesn’t always work out that way. Even absent collusion, the ability of players to engage in strategic planing can negate the anticipated benefits of competition. Applying this framework to the CMRS market, and the question of the price of text messaging goes from suspicious riddle to entirely predictable. Whether you regard this as a reasonable outcome or not has nothing to do with “competition” or “market failure” and everything to do with whether we make a policy choice to care about it or not.

(Much) longer answer below . . . .

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Tales of the Sausage Factory

Commission Meeting Happens! Begins With Gifts To Verizon and AT&T . . . .

O.K., we finally started at 3:50 p.m. Three items left, VZ/Alltel, New Clearwire, and White Spaces. I’ll split tdo my happy dance on his in two, so I can gripe about the suckiness of the mergers while doing my happy dance on white spaces unsullied by this market consolidation.

Details of merger suckiness below . . .

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Tales of the Sausage Factory

2:30 P.M., Still No Meeting . . . .

O.K., I hope tonight’s election results go better. Rumor is the hold up is on roaming conditions in the VZ/Alltel merger. Still, after the DOJ approved the merger with a few divestitures, there was no doubt that the FCC will roll over. The only question is whether Tate or McDowell will side with the Ds to exact some additional conditions for the benefit of the rural carriers or competitors. Hence the speculation that this involves roaming. But I still expect a vote today. You can almost hear the Verizon charatcer in the Alltel ads whispering “Soon Chad . . . .soon you will share your circle for the last time . . . . you ding dong.”

While we wait, here are some preliminary thoughts about the items.

Here’s the original agenda. The FCC dropped item 1, Universal Service/Intercarrier Compensation (USF/ICC), and voted the item on distributed television systems (DTS) and closed captioning on circulation.

Of these, the voted items were fairly non-controversial. DTS is designed to address the fact that DTV signals don’t work the same way as analog, and will allow broadcasters to maintain their audience after the conversion. The only possible pitfall was whether it would allow broadcasters to expand their footprint which would (a) eat into the available white spaces, and (b) give them yet more free spectrum goodies for no good reason. My info is that the order will emphasize that the intent is to maintain the status quo ante transition. I have no idea on the closed captioning item.

That leaves USF/ICC. USF/ICC is a huge mess of biblical proportions that causes even a hardened policy wonk like me to quail and flee the room screaming. It is famously broken, everyone hates it, but no one can agree on how to fix it. There is absolutely no right answer, and any piece of it impacts all the other pieces.

What is interesting is that this created another 4-1 revolt by the other offices against Martin. While I give Martin credit for trying to get hideously controversial stuff done, you are clearly doing something wrong if you have managed to uniformly piss off all four Commissioners to the point where they are making pointed public statements that boil down to “Kevin, you ain’t the boss of me.” It is always hard for a Chairman to get stuff done in the last months of an administration, but unless Martin and the other offices figure out a way to get along, it is going to be a very viscious and unproductive couple of months until January 21.

The delay on this meeting, which caught Martin totally by surprise, is not exactly an auspicious omen.

Stay tuned . . . .

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Tales of the Sausage Factory

Verizon Open Platform: Looks Like A Big Bid For C Block and A Shout Out To Tim Wu

Tearing myself away for a moment from the drama and bitter disappointment of today’s cable vote, we have an announcement from Verizon that it will offer an “open platform” option for its wireless services. According to the news reports, starting in 2008, VZ will publish a standard for connecting to their network, host a conference for developers, work with developers, set up a testing lab to ensure that devices meet the standard and won’t harm the network, and allow devices to connect to the network. They also promise not to interfere with any application running on the device.

They pledge to make this available on the whole network. Not “just on a portion of the network, or a piece of spectrum that may become available after 2009.” For tech support, if you are a “bring your own device,” you can call VZ to make sure your device is connected but you are otherwise on your own.

Verizon says they are doing this in response to market demand. Rumors that this is an effort to head off regulation or declares an interest in C Block are baseless speculations of undisciplined internet bloggers like yr hmbl obdn’t. But they do stress several times on this press call that this is all about the market working, just as terminating early termination fees had nothing to do with regulatory pressure, so there is obviously no need to regulate.

Maybe. But while I’m certainly glad to see Verizon come around to my way of thinking that openness is the ultimate “killer app,” I think credit is due to three other events that helped Verizon see the light on openness: Tim Wu’s incredibly important paper on wireless Carterfone last February; Kevin Martin’s decision to put an “open devices” condition on the 22-MHz “C Block” licenses in the upcoming 700 MHz auction; and the iPhone hearing last July, where Congress made it clear they didn’t like the idea of locking desirable devices to a single provider.

Why? See below . . . .

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