Results tagged “Verizon”

June 30, 2016 4:45 PM

The FCC's Special Access Special Delivery

Earlier this week, I had a post explaining just how far afield the Tariff Investigations Order portion of the FCC's special access, now "business data services" ("BDS"), Tariff Investigations Order and Further Notice of Proposed Rulemaking ("FNPRM") strayed from rational decision-making.  Unfortunately, since Chairman Tom Wheeler has taken the helm of the FCC, irregular departures from reasoned--and, more importantly, fair--decision-making have become the norm for this proceeding.  

Procedurally Fair?

Yesterday, AT&T posted a statement on its public policy blog once again drawing attention to the lack of procedural due process with which AT&T believes the FCC has conducted its BDS inquiry.  AT&T's Senior Vice President--Federal Regulatory, Bob Quinn provided a detailed description of the Commission's latest procedural irregularity: the Commission's introduction into the record of this 228 page filing containing previously-unseen revisions/critiques/analyses of the work of the FCC's 3d party economic expert--on the same day that public comments were due. AT&T concludes that,  

the [FCC's] lack of due process only reinforces that this agency is driving to reach a pre-ordained outcome.

See, AT&T Public Policy Blog.  AT&T's statement was its second this year (previously here).

AT&T's charges deserve more attention than "ordinary" criticisms of adversely-affected parties, because not only do AT&T's complaints refer to procedural fairness (not whether the FCC agrees with AT&T), and its previous complaint about this issue came 2 months before the company suffered an adverse decision.  Finally, AT&T's concerns--that the Commission is driving toward a pre-ordained outcome--seem to be supported  by independent events (from those cited by AT&T) taking place in the FNPRM proceeding this week.

The INCOMPAS-Verizon Proposal Advances

As mentioned in a previous post, on April 7th, INCOMPAS (the CLEC trade association) and Verizon started combining their BDS regulatory advocacy.  Chairman Wheeler lauded the proposal immediately, as did the most politically influential lobbying/interest group here, and the FCC prominently mentioned the proposal in the first paragraph of its pending FNPRM. See Order/FNPRM at para. 159.
 
Earlier this week, on June 27th, INCOMPAS and Verizon sent in another joint letter  ("INCOMPAS-Verizon June 27th Letter")--elaborating on the parties' previous "compromise" proposal.  Chairman Wheeler seems unlikely to share Adam Smith's skepticism that,

[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Thus, we can expect the Commission to take direction from this second, more specific, appeal for greater regulation.

Despite Contradicting the FCC's Own "Findings"

The INCOMPAS-Verizon proposal clearly has traction with the Chairman's Office, at a minimum.  This is in no way more apparent than in the fact that the principle point of the letter would require the Commission to immediately renounce one of the "key findings" in its FNPRM--yet, the parties feel no obligation to address, or explain, this apparent inconsistency with the market realities, as seen by the Commission.

In its FNPRM, the FCC lists as one of its "key geographic market findings" the observation that,

[p]otential competition is important, that is, nearby suppliers can constrain BDS prices. For example, we find that fiber-based competitive supply within at least half a mile generally has a material effect on prices of BDS with bandwidths of 50 Mbps or less, even in the presence of nearby UNE-based and HFC-based competition.

See Order/FNPRM at para 161.  In other words, the FCC observes that many areas of the country exhibit competitive characteristics, notwithstanding the number of actual competitors offering service in these census blocks.  Instead, the Commission observes, the presence of a potential competitor within a half mile of a building will constrain the prices of every other competitor actually serving the building--even for the smallest capacities of bandwidth (50 Mbps and below).

Compare, however, the "compromise" offered by INCOMPAS and Verizon that,

we agree that all Business Data Services at or below a specified threshold should be deemed non-competitive in all census blocks. We agree that the specified threshold should be no lower than 50 Mbps.
See, INCOMPAS-VZ June 27th Letter at p. 2 (point 2).  And, in case you're wondering what a "non-competitive" designation means, the parties "support ex ante price regulation for all Business Data Services deemed non-competitive." Id. (point 6).  

Thus, while the FCC makes a "key finding" that prices are constrained--even at the lowest capacity levels--without regulation in many parts of the country (notwithstanding the number of actual competitors selling service in these areas), INCOMPAS and Verizon urge the Commission to adopt a nationwide presumption that the opposite is true.  Given the apparent influence of these parties with this Commission (and the undisputed clout of those supporting this compromise), I'd be willing to bet that the Commission ends up believing the advocacy of INCOMPAS and Verizon over "its own lyin' eyes."

***

It's easy to dismiss the protestations of parties that don't prevail in a Commission matter as "sour grapes."  But, it's harder to ignore complaints--before a party has even lost--that they won't get a fair chance to be heard, then the integrity of the system is called into question and we should all be interested.  Finally, concerns about the FCC moving toward a pre-ordained outcome are worse still when any casual observer can notice that some parties have a map to that pre-ordained destination--and others, including the public, are just along for the ride.

April 13, 2016 11:10 AM

Has Verizon Pulled a "Costanza?"

One of my favorite episodes of the TV comedy series "Seinfeld" is called "The Opposite," in which George Costanza reflects on his life, and realizes it is the opposite of what he hoped it would be.  At the diner, George tells his friends "that every decision I've ever made, in my entire life, has been wrong."  His best friend, Jerry, suggests "[i]f every instinct you have is wrong, then the opposite would have to be right."  (quotes from IMDB, episode 5.21)  By the end of the episode, after consistently "doing the opposite" of what he would normally do, George's life has corrected itself: he is dating a beautiful woman, has his dream job with the New York Yankees, and is able to move out of his parents' house. 


                                       Verizon Training Video

The episode starts with the universal human emotion of regret, and then humorously illustrates common logical fallacies, which are presented as both problem ("every decision I've ever made has been wrong") and solution ("the opposite would have to be right").  And, even though both problem and solution are products of fallacious reasoning . . . hijinks ensue--and problems resolve.  But, certainly, no one would actually take this seriously--especially not one of the largest companies in the country--would they?  

If its Public Policy Blog is reflective of its corporate mindset, Verizon--based on a couple of recent posts--appears to be willing to give George's zany solution a try.  But, are they really "doing the opposite," or have they just changed--as competition forces all firms to do?

A Net-Neutrality Flip?

First, on March 21st, Verizon in the context of net neutrality decides to "make clear what Verizon stands for and what kind of policies we support, regardless of the outcome of [the pending Open Internet Order appeal]."  And, as it turns out, the rules/policies that Verizon thinks "are fair, even-handed, good for consumers and essential for us and others to thrive going forward" . . . are pretty much the same rules the Commission adopted in its first Open Internet Order in 2010.  In other words, Verizon now endorses the very rules that were vacated as the result of the D.C. Circuit's decision in . . . Verizon v. FCC.    

Clearly, Verizon was seized with regret over an appeal it now realizes it could have lived with, but traded for worse rules, and is now "doing the opposite," right?  At first glance, it would seem to be the case, but, the blog is quick to explain that this is not a simple case of human regret (or any other human emotion) finding its way into Verizon's corporate offices.  

Rather, according to Verizon, it is not the same company it was five years ago, when it appealed the FCC's 2010 Open Internet Order.  In the intervening time period, Verizon notes, it has "invested billions in businesses that depend on the ability to reach customers over the networks and platforms of others."  Indeed, since 2013, Verizon has built its Digital Media, content and ad delivery, business through the acquisitions of EdgeCast, upLynk, Intel's OnCue ad delivery platform, and AOL.  

Thus, Verizon's net neutrality position is not really an example of it doing "the opposite" (though, of course, it would have saved itself and everyone else a lot of hassle and expense had it just recognized this before it appealed the 2010 Open Internet Order).  But this isn't Verizon's only, or even best, example of "doing the opposite" in the last month alone.

Verizon's Special Access "Compromise"

Last week Verizon decided to "up" the "opposite," and suggested--along with Chip Pickering, head of INCOMPAS (the rival carrier association formerly known as CompTel)--that the FCC should probably go ahead and regulate "new networks" along with the old special access circuits still subject to FCC regulation.  Verizon has long fought against any regulation of its data transmission services and has already received FCC forbearance and been selling its packet, Ethernet, and SONET optical services without regulation for almost 10 years, so this is a clear Costanza-esque flip-flop, right?

Let's take a closer look at the letter that Verizon and INCOMPAS jointly sent the FCC.  The letter asks the FCC to: 1) immediately, make all dedicated services--regardless of technology--"subject to Title II of the Communications Act, including Sections 201 and 202;" 2) seek comment on a permanent regulatory framework, which would include ex ante price regulation in "relevant markets" where competition is "insufficient."

When looking at whether Verizon is really "doing the opposite," it helps to keep in mind the "not the same Verizon" caveat.  In addition to Verizon's recent digital media investments, the company has been divesting itself of its wireline (telephone + ISP + TV) properties for years, and at an accelerating pace in the wake of the FCC's reclassification of Internet access services.  Similarly, based on Verizon's pending XO Communications acquisition, and its reported interest in Yahoo!, Verizon may well see INCOMPAS as more of a future trade association, and less of a regulatory opponent, these days.  

Until the terms "relevant market" and "insufficient competition" are defined, it's difficult to say how much of Verizon's future revenues are likely to be affected.  Given the Chairman's immediate endorsement of the "compromise," it's doubtful that Verizon is worried about having too much of its future revenues tied up by the regulation it's endorsing.  On the other hand, if you are a cable company--or a telecom carrier with some unique routes--Verizon's "compromise" seems more like the good, old-fashioned, Washington-style compromise . . . of someone else's opportunities.   

*        *        *

In his more lucid, less politically-driven, first days on the job, Chairman Wheeler noted that every previous "network revolution" changed the world dramatically, and counseled that "we should not, therefore, be surprised when today's network revolution hurls new realities at us with an ever-increasing velocity."  When the velocity of new realities forces a rational economic actor to change positions as dramatically as a TV sitcom actor, it's safe to assume that the industry forcing those new realities is not subject to anything but competitive market forces.  So, why is it so hard for Chairman Wheeler to accept that the last thing a dynamically evolving "revolution" needs is more regulation?

May 20, 2015 6:01 PM

Bundle This! Broadband ISPs v. Big Media Content

Recently, we showed how the broadband market is more competitive than the FCC wants to admit, and we've explained why the Big Media companies have a much greater profit incentive (than ISPs) to see the continuation of the (largely artificial) separation of content delivery into two businesses (subscription TV and broadband Internet access).  But, the fact is that broadband Internet access does compete with pay-TV video; the FCC's just wrong about whose side ISPs are on.

Channel Bundling:  Consumers (and ISPs/MVPDs) Hate It

Nielsen reports that consumers are buying more channels than ever, yet watch the same number that they always have.  The reason: big content companies require MVPDs to buy, and resell, all their channels ("the Bundle") in order to get the few channels that their customers want.  The Bundle is so important to media companies that they all use the same restrictive distribution contracts to protect it.  

Buzzfeed collected an excellent compendium of quotes about the Bundle late last year.  If you click on the article, you'll see that the only ISP/MVPD defending the Bundle was Comcast (who also produces a significant amount of content).  Consumers--and their retailers, MVPDs/ISPs--don't like the Bundle.

Cablevision v. Viacom

In 2013, Cablevision filed an antitrust case against Viacom over Viacom's requirement that Cablevision buy, and carry, a package of its least-watched channels in order to be able to buy any of its most-watched channels. See Cablevision statement and Complaint (redacted version).   Cablevision's antitrust claim is that the companies' 2012 distribution contract is an illegal tying agreement under Section 1 of the Sherman Act.  

Cablevision says that, in order to get access to the 8 Viacom channels it needs to be able to offer, Viacom requires it to purchase (and carry) 14 other channels that Cablevision's customers don't want.  The "standalone" price of the 8 channels Cablevision wanted to buy was set high enough to subsume Cablevision's entire programming budget; thus, it's only option was to buy all 22 channels. Complaint ¶ 8, ¶ 28.  

Cablevision argues that the capacity it must dedicate to the 14 channels it does not want prevent it from competitively differentiating itself by purchasing better content from Viacom's competitors.  As Cablevision explains, its channel capacity is finite;

Cablevision can devote only a portion of its available capacity to channels because Cablevision also offers other bandwidth intensive services (including high-speed Internet access). Cablevision would not reallocate bandwidth from these other services, which consumers increasingly demand, to carry more channels.

Complaint ¶ 27.
 
Tying agreements are "per se" illegal under the antitrust laws.  This means that a plaintiff does not have to demonstrate that the agreement actually had the effect of reducing competition in any market.  Instead, the plaintiff need only demonstrate the existence of the agreement, that plaintiff was economically "coerced" to buy the tied product, and that it suffered damages as a result. 

Accordingly, last June, a federal district court in Manhattan denied Viacom's motion to dismiss, finding that Cablevision had sufficiently plead a plausible violation of the antitrust laws.  Cablevision's claim has moved on to discovery, but its ultimate success is far from guaranteed.  However, regardless of Cablevision's ultimate success, it would be a mistake to assume that the converse claim--if Viacom were seeking strict enforcement of all contractual provisions--would be any easier to prove.   

Verizon's Skinny Bundles 

Perhaps this was Verizon's insight, when it announced its new "Custom TV" offers last month, allowing customers to choose their own "customized" channel package that includes more channels they want, and less of those they do not want.  For the basic price, Verizon's Custom TV customers get a general selection of popular cable news/entertainment channels, and can choose 2 (out of 7) channel groupings ("skinny bundles"), organized by topic/genre.  Customers can add other skinny bundles for $10/bundle/month. 

The reaction from the content owners was predictably swift, and angry.  Disney, Fox, and NBC were quick to condemn what they perceived as Verizon's reckless disregard for the Bundle.  Disney quickly sued Verizon for breach of contract. 

Is Verizon Breaching It's Contracts?

Verizon has said repeatedly that it is not breaking its contracts with programmers.  Therefore, we have to believe that Verizon is buying all the channels for all the customers it is required to pay for; even if that means every customer.  This seems likely, because, while the Custom TV promotion may "break the Bundle," some say it won't save you a bundle. 

Other MVPDs have also said that Verizon may be within its rights under the contracts.  Cox Communications told Fierce Cable that its agreements typically require the MVPD to buy and deliver channels to 85% of MVPD customers.  If the bundles are as valuable to consumers as Disney seems to think, then it's possible that 85% of Verizon's customers are buying ESPN.  Still, Disney isn't betting on it.

Will a Court Enforce the Bundle?

The news reports  have said that Disney is suing Verizon for breach of contract, and is seeking money damages and an injunction.  I haven't seen Disney's complaint (a public version has not yet been filed), but I'm guessing that the injunction would be to prevent Verizon from continuing to sell channel packages that don't conform to the parties' contract. 

If Disney is really dead set on preserving the Bundle, or preventing a jailbreak among its distributors, it's going to have to convince a court to order Verizon to 1) transmit content to at least some customers who have said they don't want it, and/or 2) limit customers' ability to decline unwanted content.  This is a real longshot. 

Courts are very reluctant to award specific performance if money damages will adequately compensate the aggrieved party.  Furthermore, courts are reluctant to grant any remedy that would result in "economic waste."  If I'm right about the relief Disney wants, it might as well have listed "economic waste" in its prayer for relief.   

If Verizon has breached its contracts with Disney, Disney will get money damages for any measurable loss it has suffered.  But, an important part of the Bundle is the deadweight loss that channel bundling imposes on MVPDs, and their subscribers, and the protection from competition that it affords programmers. Unless a court finds it worth rescuing, this part of the Bundle may well be gone; and that's a good thing.   

*     *     *

Every time a piece of the Bundle breaks off, consumers benefit and programmers get closer to having to compete on price as well as quality.  The fact that Cablevision and Verizon have been motivated to take up for consumers--and take on the Bundle--is another example of the competitive performance of the broadband Internet market.  Still, it's a good thing the FCC was spent the same time drafting more pervasive regulations for ISPs--so they wouldn't favor the Bundle . . . just in case? 
 
April 8, 2014 3:06 PM

The Comcast-Time Warner Cable Merger and TV Quality Broadband Deployment

In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not than by what it is.  So, we know that the merger is not going to result in any significant efficiencies, because it's not going to reduce consumer prices for cable (even an unconstrained monopoly reduces prices when costs decline).

We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete.  TWC's CEO says, "[w]hether you're talking about broadband or video, we don't compete with one another."  Comcast's CFO goes as far to state, "[w]e don't compete in one single zip code."  

Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory of Comcast and TWC is not relevant (because, you know, they don't compete)?

Product Market Definition

The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES).  The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES at C and D.

Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.

Consider that, among multi-channel video providers, cable companies lost 1.7 million customers in 2013.  But, AT&T and Verizon added 1.5 million MPVD subscribers last year.  The Leichtman numbers show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers.  Very high percentages (according to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers.  The Leichtman data confirm this for Comcast and TWC, as well.

Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix.   In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES, at C.2(b).

Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market.  Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses.  For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.

Geographic Market Definition

If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable.  Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.

What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon.  For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.  

Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory.  This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).

Market Shares

To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers as a proxy, in order to allow us to get some ballpark market share numbers.

merger table_smaller.pngSo, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3.

Competitive Effects

The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming.  Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and  "linear," of linear programming to broadband and online video competitors.

Comcast RSN Map w caption.pngThis last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.  

How do we know the significance of real-time sports programming to the value of the broadband Internet?  Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks

If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry.  But, commenters on the political left and right have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition.  Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.



April 17, 2013 5:13 PM

The DoJ's FCC Alley-Oop

At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.  

The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy).  Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots."  Now I know.

The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use."  

If You're Not Low, You Must Be High

The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings.  The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.  

By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing distinguishing the leaders from the laggards in wireless market share.  The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.  

The DoJ warns that this trend should be expected to continue into the next spectrum auction as well.  Why the next auction?  Because the next auction is for LOW frequency spectrum, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile.   

A Low-Down Dirty Shame

If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon.  But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right?  Either way . . . it's cool, says DoJ.   

You see what they're doing here?  First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input.  Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.

Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place.  You see?  The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output.  This is because they know that their competitors cannot increase output to steal customers from the input-favored firms.  Stick to the basic format, and this argument always works. Cool, huh?  

If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal.  But, if DoJ's argument is that transparent, and that malleable, why are they using it now?  

The FCC Lobs . . . And DoJ Dunks!

First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts.  If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.

Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's.  After all, they didn't get to be the two largest companies by not using their "first mover" spectrum.  So, what about all the other low frequency spectrum?

"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008.  The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services.  And, according to no less venerable a source than Wikipedia, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers.  So, why is the DoJ insinuating otherwise?

Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum.  So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.

Lebron dunk.jpgDoJ . . . with no regard for human life!

So, do you think any Senators called out William Baer on this at the oversight hearing yesterday?  According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum.  You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
May 17, 2012 3:23 PM

U.S. Mobile Data: More Bricks, Less Straw

As punishment for requesting their freedom, the Egyptian Pharaoh told the Israelite slaves that they had to maintain their quota of bricks, but with less of an essential input: straw.  The burden of meeting demand with less resources applies as well in today's mobile services marketplace.  Wireless carriers face demands for greater bandwidth to support growing mobile data services but, for the intermediate term, cannot expect additional spectrum capacity--it's essential input--on either a firm-specific or industry-wide basis.  

It's unanimous: no matter who you talk to about wireless data, everyone agrees that "more bricks, less straw" is the unavoidable policy.  Thus, as wireless data demand continues to show no sign of abating, wireless service providers will simply have to make do with less than optimal spectrum capacity. So if we're stuck in a "more bandwidth demand, less capacity supply" world, how do we solve the problem of how to ration capacity?  

Who Needs Spectrum When You Can Upgrade Your Capacity?

So what's a wireless operator to do?  Well, for starters, you upgrade existing capacity like crazy by constantly deploying the most efficient technology.  But this isn't cheap.  Since wireless data exploded in 2007 with the iPhone, AT&T alone has gone through a 3G upgrade, an HSPA upgrade, an HSPA+ upgrade, and, more recently, is in the midst of an upgrade to LTE.  

Other companies have accelerated their own pace of upgrades as well.  From December '06 (right before the iPhone launch) through December '11 (when most firms still have a long way to go to realize full LTE deployment) industry capex has increased by almost 50%, according to CTIA (the actual numbers are in a report that I can't afford, so take my word for it).  But, even these improvements won't keep up with surging demand.

With No Spectrum Relief In Sight, Do You Play The Price Card?

Given the limited options for rationing capacity another, though unpopular, move is to raise prices.  Over the last several months we've seen AT&T raise data prices, after realizing that the government was not--anytime soon--going to allow AT&T to efficiently augment its own capacity.  Verizon quickly followed suit.  For now, Sprint appears to be content to let its shareholders shoulder the costs of increased wireless data demand.  But to be sure, increased demand without increased supply does create network strain--regardless of who pays.

Last week, at the CTIA Conference, Chairman Genachowski maintained/reasoned/disputed that the failure of the AT&T and T-Mobile merger last year had anything to do with AT&T's decision to raise prices.  Yet, the Chairman knows better, as he has been a leading prophet of the spectrum shortage.    

How to Recover Costs of Spectrum-less Capacity Expansion?

Given the costs of constantly upgrading capacity, how does a carrier manage excess data demand?  As I indicated above, raising prices sounds like a simple solution, but must account for the fact that big data users are contract customers.  That's how smartphones, and data plans become affordable, and predictable.  

You see, the problem with raising prices for wireless data is that you can really only raise prices to the marginal customer (i.e., the person who's not your customer yet).  Crazy, right?  "Raising prices" is a statement of frustration and designed to curb consumption.  Carriers are telling prospective customers that the network is nearing capacity and use of the remaining capacity will cost you. This is a horrible situation--who wants to be the (unpopular Redskins owner) Dan Snyder of wireless data?

If Sophisticated Buyers Want to Subsidize Consumers, Let Them!

Carriers know that raising prices for mobile data, or throttling data speeds to the largest users of mobile data, is no way to treat your biggest fans.  But with the popularity of mobile device applications, which constantly stream information to and from the customer's phone, customers can unintentionally (and unnecessarily) stress capacity.  Applications can distort data consumption in a way that even the most conscientious web surfers cannot offset.

So, earlier this year, at a conference in Barcelona, an AT&T executive suggested that maybe some applications providers would want to buy capacity in bulk in order to assure their customers that using the desired app wouldn't cause the customer to exceed their usage cap, or become subject to throttling.  Not a bad idea, right?  I mean the applications developer knows how much bandwidth their customers use, and they have a lot more buying power than the consumer.  

Given the public's embrace of mobile data, and the cost of continually augmenting capacity, especially for firms with sub-optimal spectrum allocations, one would think the "public interest" would support options that allow customers to still enjoy wireless data, but at a lower cost/consumption threshold.  One would think . . . .

But Don't Tell Public Knowledge!

The AT&T suggestion seemed harmless enough, but the reaction from the self-proclaimed public interest group Public Knowledge was alarmingly critical.  Then again, this is the same group that published a paper arguing that all wireless carriers should provide flat-rated mobile data service.  The irony, of course, is that flat-rated price structures cannot be profitable unless the majority of users pay for more data than they consume.

The notion of "more bricks, less straw" is, for regulators and service providers, an unfortunate and dystopic reality.  Uniquely, Public Knowledge seems to relish the "more megabytes, less capacity" future with a fondness that can't help but be compared with how the ancient Egyptian brick consumers' lobby must have felt . . . right before the brick supply crashed.

August 23, 2011 9:54 AM

Sprint's Gambit

Virtually from the announcement of the AT&T/T-Mobile merger, both Sprint's advocacy and Sprint's ultimate goal in its opposition to the merger (blocking the merger outright) have been a puzzle to me.  Specifically, Sprint's categorical opposition to the merger makes me wonder: "why the opposition?" and "what are they really looking for here?"
 
Sprint's superficial, substantive arguments against the merger are a fairly generic, typical "Guidelines" style analysis from a consumer welfare (rather than Sprint-specific) perspective.  Coming from a competitor, these arguments invite suspicion. 
 
In fact, the Supreme Court has been extremely skeptical of competitors seeking to block mergers on the grounds that "competition" will suffer as a result of the merger.  See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977)(rejecting antitrust standing of competitors seeking to block an acquisition on the basis that it would concentrate the market, and leave the post-merger firm with lower costs, creating a potential threat to plaintiff competitors).  

Regardless, it makes little difference whether Sprint's opposition is motivated more by self-interest than the public interest.  However, Sprint has been quite clear in its advocacy before the FCC and the Congress that the objective of its advocacy is to see the proposed transaction blocked.

The Puzzling Perplexity of Sprint's Advocacy Goals

If Sprint's preferred outcome is for the proposed transaction to be completely blocked, then we have to ask, how does this outcome maximize Sprint's self-interest?  This is the question that is so vexing to me.  After all, if a market becomes more concentrated, and leads to price increases and less innovation, one would expect that the last party to complain would be a competitor remaining in the post-merger market.

It seems obvious that Sprint will only benefit from higher retail prices.  Less innovation, as well, would have its rewards in terms of reduced capex pressure, and reduced pressure to constantly roll out new bandwidth-gobbling devices. These are real benefits, so why does Sprint want the merger blocked (vs. "conditioned")? 

The Gambit

A true "gambit" requires that a player sacrifice something of value to gain a greater strategic advantage.  In this gambit, there are at least two very obvious sacrifices that Sprint is willing to accept from the outset.

The first sacrifice is that Sprint will not seek merger conditions, because (according to Sprint) there are no conditions that could mitigate the consumer harms created by this merger.  This is a "real" sacrifice, because Sprint could have reasonably expected to extract some valuable concessions.

The other sacrifice is much more significant, but has gone completely ignored by the industry insiders and press.  The fact is that Sprint, through its advocacy, has disqualified itself from acquiring T-Mobile.  So Sprint is not seeking to disqualify AT&T from acquiring T-Mobile, so that it may subsequently acquire T-Mobile for a lower price.

This sacrifice is an unequivocal and inseparable part of its economic analysis of the merger.  As Sprint explains, the current proposed merger allegedly increases the HHI by 700 points, based on market share numbers listed.  On the other hand, a Sprint/T-Mobile merger would move the same "highly concentrated" baseline HHI up by 500 points.  See Table 4 ("postpaid only" column) in the economics declaration in Sprint's Petition to Deny (p. 257 of 377).

It is, therefore, quite clear that Sprint's analysis--if accepted by the government  as a basis to block the merger--would also disqualify Sprint and Verizon as subsequent bidders for T-Mobile, thus "cementing" the "national wireless market" (if you buy this definition) as a 3 firm market. Why do I say 3 carriers when we are left still with 4 "national" providers?  Because in that world, T-Mobile is fundamentally crippled from a competitive standpoint and that, in essence, is the big win.

The Gambit Payoff

Consider the advantages to Sprint of a capacity-constrained 3 firm oligopoly market structure.

1)  Customer Share/Acquisition. Constructively, T-Mobile will be an island, cut off from ready access to capital from its parent, Deutsche Telecom.  Without a "true" 4G network, T-Mobile will gradually lose customers to other carriers in the market.  Many would argue that Sprint is the next best substitute for T-Mobile, so Sprint may gain disproportionately from T-Mobile customer defections. 

2)  Accelerated Growth in Data Services.  Let's assume that Sprint (rationally) believes the fact that AT&T is very data capacity constrained.  If the government successfully blocks AT&T's proposed acquisition of T-Mobile, the remaining three 4G carriers (remember, under the Sprint theory we virtually ignore other competitors like Metro PCS who may have 4G networks, too) have no real means to acquire additional spectrum capacity. 

The number one provider of wireless data service--AT&T--will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a "shortage" situation, where it must set prices not to maximize profits, vis--vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.
 
Once AT&T is forced to implement "congestion pricing", it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can't acquire spectrum either).  The only party that "wins" in this scenario is the firm with the largest excess capacity--Sprint--which through its and Clearwire's holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon. See FCC's 15th Wireless Competition Report, at Table 28 (Sprint/Clearwire has a weighted avg. of 184.4 MHz of spectrum vs. a combined weighted avg. of 173 MHz for AT&T and Verizon Wireless combined)
 
3)  Peace of Mind.  Can you ever really put a price on it?  With a tight 3 firm oligopoly, characterized by high barriers to entry, Sprint no longer has to "watch its back" as the undisputed "national" value brand.

The Beautiful Genius of Sprint's Gambit

Sprint's analysis virtually ensures a 3 firm oligopoly going forward, because every potential bidder with the experience and financial capacity to acquire T-Mobile is eliminated.  T-Mobile lacks the resources to build out a 4G network, and no other carriers have the kind of money they would need to buy T-Mobile, at their present size, and then upgrade T-Mobile's network to being 4G capable.  Finally, if T-Mobile has to continue as an independent carrier, their only realistic alternative for offering "national" 4G services is through . . . Sprint's majority-owned wholesale carrier, Clearwire.  This is a brilliant gambit.
 
August 4, 2011 7:28 PM

What the Price Cap LECs Saw, and What They Need to See

Last Friday--after months of intense negotiation, compromise, and an exhaustive re-calculation of the Mayan Calendar--the six largest "price cap" LECs submitted a comprehensive USF/Intercarrier Compensation reform plan to the FCC ("the Plan").  [Note: you really only need to read "Attachment 1"--the rest just provides legal and economic support for the FCC to adopt the Plan.]  

Under the Plan, the only economic incentive to keep the PSTN alive will disappear on July 1, 2017.  On that date, the Plan--and the Prophecy--require that Price Cap LECs shall be required to make money just like any other business: by efficiently selling services to customers who voluntarily decide to purchase these services.  

This Plan, if adopted by the Commission, will serve to streamline intercarrier compensation, while more efficiently promoting the goal of universal access to broadband, as well as voice, services.  At first, all of this will sound kind of scary to many of you.  

Therefore, let me assure some of you that arbitrage will still be around for 6 more years, and the Plan only requires the end of subsidies as they currently exist.  The Plan is by no means a "Doomsday Prophecy", but merely a gateway to the implementation of simpler, more efficient, and more transparent, subsidy recovery mechanisms.  

Let's look at how the Plan would affect two large, PSTN-dependent industries, if adopted today:

VoIP Providers:

    1) Positive:  allows for recovery of all VoIP-originated or terminated "toll" calls at interstate access rates for the next two years!  That's a crazy incentive to upgrade to more efficient technology ASAP.  As a LEC, you don't have to maintain "big iron" to get big bucks.  There will also be a strong short term benefit to interconnected VoIP providers.  No more haggling with big LECs who only want to pay you $.0007/min, and there's a big difference between $.05 and $.0007.  For the next 6 years--albeit at descending rates--carriers serving end-users of VoIP service will be able to collect larger revenue streams than they are generally being paid today.

    2) Negative:  costs to over-the-top VoIP providers will increase, as may wholesale costs of transmission to interconnected VoIP providers (if purchased from a third party backbone operator--because as the costs collected from other carriers goes down, customer costs will increase; even in the wholesale world).

Wireless Carriers:  Stone cold positive.  No negatives here at all.  Wireless providers get a quick transition from intrastate access rates (which are usually much higher than interstate) to the much lower interstate rates, and decreasing rates over time.  It is notable that most of the Price Cap LECs in the Plan, DO NOT have wireless affiliates.

Regulatory "Underbrush" Grows on Both Sides of the Fence

All of the price cap LEC's supporting the Plan have waxed eloquent at one time or another about the need for the FCC to eliminate its outdated regulations a/k/a "regulatory underbrush."  The Price Cap LEC's Plan accomplishes a lot of these goals, but keep in mind, "regulatory underbrush" grew on both sides of the fence. 

The same byzantine, opaque, universal service system also resulted in cost recovery mechanisms in the form of "services" that are no where to be found in the modern, competitive services offered by cable companies, and wireless carriers.  For example, in a competitive market that didn't start as a regulated monopoly with the goal of keeping "basic" service rates low, would any of these things really emerge as "services" that customers would buy?    

    --"unlisted" phone numbers;

    --"foreign exchange" service (in wireless, you can port a NY number to a TX carrier, but LEC voice providers still make you pay to "port" your landline number a mile away);

    --"hunt groups" (say a customer has one number for its business, but the customer actually buys 10 lines to make sure calls are always answered--the automatic process of "hunting" (finding an open line attached to the main number)--is sold as a separate service);

    --phone handset "rentals":  there have got to be some people still renting that bakelite phone for 3 bucks a month;

    --inside wiring "protection";

    --selling common PSTN "vertical" switch features, like caller ID, a la carte;

    --charging extra for "touch tone" dialing (still happens).

Bottom Line:  The Price Cap LECs have a good plan to streamline regulations for "cost recovery."  But, allowing carriers to to recover costs by receiving explicit subsidies and charging a fair price for service may cause the FCC to wonder how much in costs is still recovered via distorted "services" that emerged from the antiquated regulatory regime in need of reform.  If you can think of any "cool" old, tariffed "services" that seem to have originated as a form of "cost recovery"--and are still being "sold"--please post in the comment section. 


February 24, 2011 1:27 PM

Network Transparency: Disclose No Evil?

Who's to say, what's not to say, and what's fair to say
Let's ask Dr. Dre
Dr. Dre? . . .

"Rain Man", Eminem (with Dr. Dre), 2004

The truth is that, when it comes to the "transparency" disclosure rules in the FCC's Open Internet Order (see Section 8.3, App. A, p. 88), the good Doctor could probably provide as much useful information to consumers as any network provider will be able to offer--especially with respect to mobile wireless broadband performance.  Hard to believe . . . but true.

At first glance, the "transparency" disclosure requirement seems like the most reasonable "net neutrality" rule . . . and the one most likely to actually help consumers.  In fact, the rule seemed so rational that it was the only net neutrality rule that the FCC deemed reasonable to apply to both mobile wireless and wireline broadband ISPs in equal measure.  And, who could blame the Commission?  After all, they were only following the requests of the largest manufacturers of smartphones, smartphone operating systems, and infrastructure equipment.

The Information Technology Industry Council ("ITIC"), which represents (among others) Apple, Nokia Siemens, Google, Microsoft, and RIM, even told the FCC that,

mobile wireless BBIA [broadband Internet access] service providers should be required to  comply with robust disclosure requirements similar to those that should apply to wireline BBIA service providers.  These rules should require the disclosure of sufficient information to enable consumers . . . to make informed choices regarding use of the BBIA service offered by the mobile wireless provider.

ITIC PN Comments at 8 (emphasis added).  The FCC listened, and required all broadband Internet access service providers to "disclose accurate information [regarding service performance, terms, and characteristics] sufficient for consumers to make informed choices regarding the use of such services . . . ."  Open Internet Order, App. A, p.88 (new Section 8.3 of FCC rules).

But, who's to say, what's fair to say, and what not to say?  Personally, I would've thought that information was self-evident . . . until I read a very interesting article at Ars Technica ("Ars"), comparing iPhone service performance in Chicago on the AT&T and Verizon wireless networks.

Before, I explain the significance of this article, let me explain that I am NOT taking sides for either carrier.  I know that there are tech reviews that argue for the merits of Verizon in some places, and AT&T in others--even nationwide.

The Ars test, though, got "behind the bars" and was able to discern that certain "bellweather" indicators--like number of bars, and speed tests were not always indicative of actual performance.  The results of the Ars test were that, on average--for the criteria tested (speed, large file app download, and Youtube video download)--AT&T's network out-performed Verizon's for the iPhone device.  However, if you look at the individual data sets, there is a lot of variability even on the same network within the city of Chicago.  So, depending on which areas you spend most of your time, your experience might be different than the results of the article suggest.  

Interestingly, the article observes that,

the Speedtest results may say one thing, but they don't always translate to real-world network performance. Even in the cases where the Verizon iPhone got a faster download speed than the AT&T iPhone, the AT&T app download took noticeably less time than the same app download on Verizon--in one case, where AT&T was measured via Speedtest as slower (UIC test), the download time on AT&T was almost half that of Verizon.
What can wireless consumers learn from this "real world" performance test regarding information sufficient to allow them to make informed choices about their mobile wireless broadband service?  Most importantly, that wireless networks will never have uniform performance, so--as Ars also notes, "when it comes to cell signal and quality . . . where you live and work and how the network is in your area trumps anything you'll read in any review."

This is why it's probably unreasonable for the FCC to require carriers to provide consumers with information that is likely to be misleading.  Even if the carrier believes its performance information to be generally correct, it will never be accurate for any given customer, because accurate performance information is outside of the network provider's control.

But, does this fact render the "transparency" rule completely worthless?  Well . . . maybe  . . . at least for wireless carriers.  Although it's certainly in consumers' interest to have accurate information about every aspect of their service within the network provider's control, most wireless carriers already disclose this information as part of their voluntary compliance with the CTIA Consumer Code

So, for the most valuable "disclosure" information--accurate network performance--who's to say what's fair to say, and what not to say?  For now, you might as well ask Dr. Dre . . .