Posts Tagged New York Times

It’s Time to Modernize Communications Policy

Before Washingtonians could fully digest the election results in early November, there was a mild tremor in the tele-cosmos that could have a significant impact on broadband deployment and hence the U.S. economy. AT&T announced that it planned to upgrade its copper network to an IP-based technology and replace some rural lines with wireless connections. It also petitioned the Federal Communications Commission to commence a proceeding in which market trials would be conducted to determine the policy implications associated with its IP transition. According to one consumer advocate, the news was the “single most important development in telecom since passage of the Telecommunications Act of 1996.”

To understand why, one needs a bit of history. A century ago, voice services were provided by a single firm (also named AT&T) based on a social compact struck in 1913 that has lost its relevance due the advance of technology. In exchange for monopoly privileges, AT&T submitted (over the course of the next decade) to rate regulation and a universal service obligation. And the compact delivered on universality: By the early 1980s, over 90 percent of American households had basic telephone service.

But a funny thing happened since the technological era of the Commodore 64 and the Walkman. Our nation was rewired for a second time by cable plant, a third time by wireless networks, and a fourth time by satellite networks. By 2012, high-speed Internet over a cable connection—which supports voice as one of several IP-based applications—was available to 93 percent of U.S. households. By 2010, 99.8 percent of the U.S. population was covered by at least one wireless voice network. And in September 2012, Dish Network launched a nationwide satellite broadband service, targeting customers in rural areas that are underserved with a $40 per month offer that supports, among other IP-based applications, voice services.

Competitive entry puts telecom regulators in a pickle. Anyone following the recent spat between D.C. taxi drivers and Uber services, or the decade-old spat between cable operators and telco-based video providers, understands that when regulators can no longer provider monopoly protection to an incumbent, their basis for imposing monopoly-related fees or obligations washes away. Why should I pay you for the privilege of driving a cab in your city, the taxi driver asks, when my competitor is free from such obligations?

When it comes to voice services, the regulatory obligation that is now under scrutiny is the duty to provide universal telephone service over the old copper network. Based on the original social compact, that duty falls uniquely (and thus perversely) on the telcos. Cable, wireless and satellite providers are free to provide voice service (or not) over the network of their choosing, and they are free to pick and choose which homes to serve. In contrast, telcos must operate two networks at once—an outdated, copper-based legacy network that provides service to a shrinking customer base and a modern, IP-based network that supports data, video, and voice applications.

To understand how onerous these rules are, consider the decision of Google, a recent entrant to the broadband space, not to offer voice service as part of its Google Fiber offering in Kansas City. After studying state and federal regulations for voice services, the vice president of Google Access Services concluded: “We looked at doing that [VoIP]. The cost of actually delivering telephone services is almost nothing. However, in the United States, there are all of these special rules that apply.” It makes little sense to have the telcos abide by those same rules when cable operators and wireless providers (typically five in a city) are direct competitors for voice services.

If supporting two separate networks imposed trivial costs on the telcos, then consumers would be held harmless. Alas, telcos invest a significant amount of resources to maintain the legacy network. One study by the Columbia Institute for Tele-Informations estimated that nearly half of telcos’ capital expenditures are tied up in this rut. Freed from these obligations, telcos could deploy these resources to higher value services, including expanding the reach of their IP-based networks. Broadband consumers, particular those living in areas served by a single wireline provider of broadband services, would benefit from the enhanced competition with cable operators.

There appears to be a growing consensus on the need for reform. Indeed, Public Knowledge, a consumer advocacy group typically adverse to the telcos, acknowledged that the petition for deregulation “raises a valid point of concern if the rules for the [legacy] to IP [conversion] apply only to it and other Local Exchange Carriers (LECs) upgrading their networks.”

Of course, there are still voices who advocate continued monopoly-era obligations, regardless of how many distinct technologies cover or nearly cover the entire nation for voice service. A recent op-ed in the New York Times fantastically asserted the existence of a telco-cable “cartel.” These incessant calls for a public-utility-style approach are outliers in the policy arena, as rational voices from both the left and right seem to be coalescing around the proper idea for how to transition to the modern telecom era.

Although the elections were polarizing for many policy matters, at least broadband policy seems to be bringing folks to the middle for constructive debate and problem solving. It’s time to bring communications policy into alignment with the modern era.

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Are Wireless Data Prices in the United States Too High?

The New York Times just ran a provocative story titled “Americans Paying More for LTE Service,” suggesting that prices charged by U.S. wireless operators for access to their new 4G networks are triple what they would be were our wireless markets more competitive. In support of this claim, they compare the price per gigabyte charged by Verizon Wireless for its bundled voice-data plan ($7.50) to the “European average” LTE price for data-only plans ($2.50), as calculated by the consultancy Wireless Intelligence. Time to call in the trust busters? Hardly.

As any first-year economic student understands, prices are determined by supply and demand conditions.  When performing international price comparisons, one should account for these differences before proclaiming that U.S. consumers spend “too much” on a particular service. Of course, it is much easier to generate readership (and hence advertising dollars) with fantastic claims that our wireless markets are not competitive.

Let’s start with differences in demand that could affect the value of wireless data services and thus relative prices. While it makes sense for The Economist to compute a Big Mac Index for a product that is basically the same wherever it is sold, price comparisons of services that are highly differentiated across countries are less revealing. And the quality of wireless LTE networks varies significantly. Verizon’s LTE network covered two-thirds of the U.S. population in April 2012. In contrast, the geographic coverage of European carriers’ LTE networks is anemic, prompting the European Commissioner Neelie Kroes to proclaim this month that the absence of LTE across the continent was proving to be a major problem in Europe. No wonder it is hard to get Europeans to pay dearly for LTE services!

Turning to the supply-side of the equation, while the surface area of the U.S. LTE “coverage blanket” is relatively larger, the European coverage blanket is thicker than ours. U.S. wireless carriers don’t have as much spectrum, the key ingredient in delivering wireless service, as their European counterparts. As pointed out by wireless analyst Roger Entner, U.S. carriers have only one-third of the spectrum available in Italy (on a MHz-per-million-subscribers basis), and one-fifth of the spectrum as France, Germany, and the UK. Given this relative scarcity of spectrum, U.S. carriers must prevent overuse of their LTE networks through the price mechanism—else their data networks would be worthless. As more spectrum comes online, basic economic theory predicts that U.S. data prices will fall.

The staggered LTE offerings by U.S. carriers are another factor affecting the supply-side of the equation. As the New York Times article notes, Verizon was the first to market LTE in the United States in December 2010. AT&T, Sprint, and T-Mobile unveiled LTE offerings at a later date and are playing catch up. To compete for LTE customers, these latecomers are undercutting Verizon, which in turn, will lead to lower prices. By offering unlimited LTE data plans, Sprint charges $0 on a per-gigabyte basis at the margin. T-Mobile also offers an “Unlimited Nationwide 4G” plan at $90 per month (including unlimited voice minutes) that sets the marginal price on a per-gigabyte basis to zero. Although AT&T does not offer unlimited data plans, one can compute the “imputed” price per gigabyte for its bundled voice-data plans by subtracting the price of a comparable unlimited voice plan and then dividing by the gigabytes permitted. The result? A lower price per gigabyte than the European average. (Interested readers can email me for the math.)

Thus, even if you think U.S. wireless data prices are “too high” today, the competitive process should be given more than one year to work its magic. Consider the competition for wireless voice services, which has played out over a decade. According to Merrill Lynch, the United States enjoyed a lower price for voice services on a per-minute-of-use basis ($0.03) than France ($0.10), Germany ($0.08), or the UK ($0.08) in the fourth quarter of 2011. How can the New York Times say, on the one hand, that these European countries serve as a competitive benchmark for wireless data services in the United States, but that the prices for voice services in these same countries should be ignored? Are we to mimic European policies with respect to data services and shun their policies with respect to voice services?

The lesson here is that what’s happening to European prices for wireless voice, wireless data, healthcare, or any differentiated product for that matter depends on several things, none of which is controlled for when making these simplistic international price comparisons. I know, I know. We need to sell Internet advertising. Can you imagine the headline: “Difference-in-difference regression shows that U.S. data prices are just right?”

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Who Competes With Google Search? Just Amazon, Apple And Facebook

The Federal Trade Commission (FTC) is in the final stages of conducting its Google investigation. As the agency contemplates whether Google is a monopolist in the ill-defined market for 29578v7-max-450x450search, they may find the competitive ground has shifted beneath their feet in just the 15 months since they began investigating. While a year or two ago, Google’s main competition in search might have been Bing and Yahoo, today it’s Apple and Amazon, and tomorrow it may be Facebook. The market is almost certainly broader than general search engines as we normally think of them.

Just last week, the New York Times ran a story explaining that Google and Amazon are “at war to become the pre-eminent online mall.” The story cited survey data from two consultancies that should give the antitrust authority pause:

  • Forrester Research found that a third of online users started their product searches on Amazon compared to 13 percent who started their search from a traditional search site; and
  • comScore found that product searches on Amazon have grown 73 percent over the last year while shopping searches on Google have been flat.

These impressive statistics suggest that Google lacks market power in a critical segment of search—namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”

One senses that the FTC has not focused much on competition from Amazon in product search, or that they even think of Amazon as a search engine. Instead, antitrust agencies around the globe have fixated on helping middlemen comparison-shopping sites such as Nextag and PriceGrabber, most of whom charge retailers for listings. Google is taking heat from comparison sites for doing the same thing because Google is perceived to be the most important source for online shoppers. That regulators are willing to breathe life into these intermediaries implies they do not recognize the platform-based competition between Google and Amazon for product searches.

Amazon is not the only behemoth that competes with Google for search. Apple’s Siri can do search and whole lot more, from helping Samuel L. Jackson design the perfect dinner to making John Malkovich laugh to helping Martin Scorsese maneuver through New York. As search evolves from links into answers, services like Siri become highly valuable. And the ITunes App Store represents the launching pad for many searches that would otherwise start on Google. A couple in Virginia that enjoys winery tours might begin their search by installing “Virginia Wine in My Pocket” or “Virginia Wineries” on their iPhone rather than search the web. In March of this year, Apple announced that more than 25 billion apps had been downloaded from its App Store by the users of the more than 315 million iPhone, iPad, and iPod touch devices worldwide. One wonders whether any of these downloads are being counted by the FTC in their calculations of Google’s market share.

And now Facebook is getting into search. At a Disrupt conference last week, Mark Zuckerberg explained that search engines are evolving into places where users go for answers, and that Facebook is uniquely positioned to compete in that market: “And when you think about it from that perspective, Facebook is pretty uniquely positioned to answer a lot of the questions that people have. So what sushi restaurants have my friends gone to in New York in the past six months and liked? . . . . These are queries that you could potentially do at Facebook if we build out this system that you just couldn’t do anywhere else.”

It may not be natural to associate Amazon (an online retailer), Apple (a device maker), and Facebook (a social media site) with search, but in the technology industry, your next competitive threat can come from anywhere. Monopoly and the kind of robust platform competition between Apple, Amazon, Google, and Facebook are mutually exclusive portraits of reality. Will the FTC turn a blind eye toward this advanced form of competition?

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Debunking the New York Times Editorial on Wireless Competition

Yesterday, the editorial page of the New York Times opined that wireless consumers needed “more protection” than that afforded by voluntary agreements by the carriers and existing regulation. The essay pointed to the “troublesome pricing practices that have flourished” in the industry, including Verizon’s alleged billing errors, as the basis for stepped up enforcement. As evidence of a lack of wireless competition, the editorial cites several indicia, none of which is persuasive.

Let’s address each indicator in turn. (For readers interested in a more rigorous analysis of wireless competition, see the recent paper I co-authored with Gerry Faulhaber and Bob Hahn, forthcoming in the Federal Communications Law Journal.)

NYT: “Most customers, locked into their contracts by high early-termination penalties, have no easy way to switch providers.”

Although many wireless contracts contain early-termination fees (ETFs), the fees generally decline as the contract nears expiration. For example, AT&T’s fee begins at $325 and declines by $10 each month. One year into the contract and the fee becomes a fancy dinner date and a movie (not including the popcorn). The editorial fails to recognize that ETFs are a substitute for handset subsidies by the carriers: Limit ETFs and those subsidies will decline. Moreover, customers who are highly adverse to ETFs can either pay the full freight of the handset under a post-paid plan or enter into a pre-paid plan (and again pay full freight). I am happy to make a commitment—the prospect of an ETF makes my commitment credible—in exchange for a big discount on the latest iPhone.

NYT: “And two companies — Verizon and AT&T — now control 60 percent of the market nationwide.”

According to the FCC’s 14th Annual report (Chart 1), the combined shares of AT&T and Verizon are 55 percent, not 60 percent. Setting aside that rounding error, barring evidence of coordinating pricing by AT&T and Verizon, it makes no sense to add together their respective shares when assessing market power. To the extent that market shares have any meaning, Verizon’s market share alone (and not the sum of Verizon’s and AT&T’s share) informs Verizon’s market power. The same is true for AT&T. But as demonstrated by the Faulhaber paper, market shares have no predictive power of wireless prices (and hence market power), whether across time or across geography at a given point in time.

NYT: “Take cellphone text messaging. Companies typically charge from $5 for 250 texts a month (2 cents per message) to $20 for an unlimited package. Pay-as-you-go rates can be as high as 20 cents a message. But the cost of sending a text message is about a third of a penny, according to Congressional testimony from Srinivasan Keshav, a professor at the University of Waterloo. The markup is enormous.”

Like wireless voice services, the price of text messaging is falling. According to Nielsen (2011), the effective price per text message declined from six cents to a penny from 2005 to 2010. If one cent per message is not the right price, what is? Of course, the margins on any service in a network industry with steep fixed costs will be large. But they need to be large to induce the operator to take the risk of building the network in the first instance. Moreover, savvy wireless users with a data plan can download applications that replicate the functionality of text messaging for free. A search for “SMS text messaging for free” from Apple’s App Store yields myriad hits, beginning with textPLUS, Textfree, Fake-a-Message, Text-for-Free, Text Me!, Messagey, Fake Text Free, iText, and Texter. So long as carriers allow users to install these apps, we should expect text messaging prices to decline further.

NYT: “Even the most expensive monthly wireless data plans, costing about $15 for 250 megabytes or 6 cents per megabyte, are orders of magnitude cheaper than cellphone text pricing.”

For the reasons explained above, the days of surcharges for texting appear to be numbered. As these free-texting and other applications such as Viber (free Internet-based calls) increasingly cannibalize the carriers’ basic offerings, difficult policy issues emerge, like whether the carriers should be allowed to decide which applications can be used on their systems. Limiting a carrier’s ability to exclude such applications (or even charge for them) might put upward pressure on the price of the data plan.

NYT: “It is hugely profitable for companies to segregate voice, data and text into different plans and to force customers to buy a different plan for each device, like a phone or a tablet. But, on today’s networks, segregating services makes little sense technologically. This expensive segregation would be more difficult to maintain if the market were truly competitive and consumers could easily switch from one company to another that offers a better deal.”

Setting aside the inconvenient fact that voice, data and text are different services from the perspective of customers, why not look at switching data directly to see whether customers are trapped? Churn refers to the percentage of wireless customers who depart for other carriers. Assuming that most departing customers find a new wireless home, churn data are a reasonable proxy for switching data. In the first quarter of 2011, U.S. carriers reported monthly churn rates between 1.3 (for pre-paid customers) and 4.3 percent (for post-paid customers). Ignoring customer additions, a carrier that begins the year with 10 million customers and experiences a 2 percent monthly churn ends up losing 2.15 million of those original customers (roughly 21 percent) over the year. By this measure, wireless customers are hardly locked into place.

Finally, in addition to asking the FCC to curtail ETFs on phone contracts, the editorial requests that additional spectrum be made “available to more competitors.” I interpret “more” to mean “carriers that do not rhyme with KT&T or with Spurizon.” If only there was no such thing as spectrum exhaust, the social costs of excluding AT&T and Verizon from the next auction would be trivial. But alas, as acknowledged by the FCC’s National Broadband Plan and demonstrated in a new report by Peter Rysavy, existing carriers need access to at least 500 MHz of additional spectrum to support the precipitous increase in demand for bandwidth-intensive wireless applications. Yet another new study by the Global Information Industry Center at the University of California, San Diego shows wireless demand outstripping capacity shortly. When licensing any future spectrum, the FCC must carefully balance the need to ensure quality of service for existing subscribers against the speculative benefit of adding a sixth or seventh local carrier—90 percent of the population is served by at least five carriers according to the FCC’s 15th Wireless Report—to an already competitive wireless environment.

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