Results tagged “handset exclusivity”

May 28, 2010 4:30 AM

Wireless Competition Report: The "Ugly"

Before I talk about some else's "ugly"--I'll 'fess up and say that last post was dry as dirt.  You know what's worse?  "The Ugly" isn't going to be any less ugly! 

So, let's just move through it.  The "ugly" part of the Wireless Competition Report is the adjacent market analyses--the "downstream" and "upstream" markets information.  While some of this data--meticulously compiled as it was--is . . . well . . . interesting, but its relevance to the state of competition in the mobile wireless services market is questionable.

Simply put, the adjacent market analyses were superfluous, almost by definition. Why?  Because, strictly speaking, the statutory language that mandates the preparation of the Report requires the FCC to report on the state of the mobile services market and the service providers that comprise that market--period.  This means that the market for which Congress seeks information on is the market to be isolated.  Congress did not require the Commission to Report on "downstream" markets, or any other ancillary markets.  

"Downstream" Markets

Strictly speaking, the "downstream" markets for devices, operating systems, and mobile applications seem almost too integrated with wireless service to be considered "downstream" in the production/distribution chain.  This is because it is not possible to receive any wireless mobile service without some sort of device.  Semantics aside, though, the Commission's data seems consistent with healthy competition in the wireless market--that is to say that output of handsets is increasing by number of manufacturers (which have doubled from 8 to 16 in the past 3 years), Report, 300, and the prices of handsets and smart phones have decreased dramatically in the past 3 years, Report 310.  

But, the chicken-egg problem still exists, with respect to being able to make any inferences regarding the state of mobile wireless service competition based on the "downstream" market data.  The largest carriers offer consumers the greatest choice of handset and smart phone models.  Report, 308, Chart 43.  However, one cannot say what this information means vis--vis the competition for mobile wireless services.  Do the largest carriers have the most customers because they offer the most handsets?  Or, can the carriers with the largest number of customers offer the greatest choice in handsets because they have diverse enough customer bases to support the most diverse number of handset models?  Is there another, more anticompetitive, theory to explain the relationship between "downstream" market devices and mobile wireless service competition?  We don't know.  No correlation between handsets and service competition is ever offered.  This is the "ugly."  Informative?  Sure.  Probative?  Of what?  Not clear.

"Upstream" Markets
The "upstream" market section of the Report suffers from the same problem--the difficulty of drawing a correlation between mobile wireless service competition and the "input" markets of spectrum, access to tower sites, network equipment costs, and backhaul costs.  As noted in one of the previous posts, I did "kind of" like the effort to look at inputs. . . at first . . . until I thought about it more.  On deeper consideration, it seems unlikely--given the economies of scale and scope that characterize wireless mobile networks--that this exercise is ever likely to produce any information that would not be potentially misleading.  Rather, it would seem that the large economies of scale and scope in the wireless network services market would simply indicate that (other things being equal) the carriers that serve the largest number of users (either directly, or through MVNOs) will have the lowest costs per user.

Also, the Report failed to describe to what degree, if any, these costs were competitively significant.  In other words, to some degree or another, all carriers must deal with the "role of spectrum", obtaining tower space, network equipment, and backhaul from their cell sites or other points of aggregation.  It was unclear from the Report whether any carriers face input costs that cannot be overcome by superior competitive performance.

Role of Spectrum.  Here the Commission posits that some firms (the first movers on cellular spectrum in the 1980's, and the winners of the 700 MHz auction) have better spectrum than others, in that it is cheaper to build out--due to its superior propagation properties.  However, the Commission also notes that this "lower build-out cost" spectrum costs more to buy than the more expensive to build-out, higher frequencies. Report, 271.  This seems like the classic "operating leverage" concern confronting all firms in all industries. 

A higher initial fixed cost, can frequently yield very high profits--past a given output level.  Conversely, a lower initial cost of entry is often associated with higher variable costs.  Neither is necessarily best.  For example, many MVNOs probably outperformed many facilities-based networks over the past few years.  Will MVNOs, with their low cost of entry and high variable costs, always outperform the same facilities-based carriers?  Who knows?

Other Infrastructure Costs.  Costs associated with tower site acquisition, and associated network equipment, seem to favor the firms with the largest established customer bases.  This is because it costs less to incrementally add sites than it is to build a network starting with a low customer base.  Again, while this suggests that the wireless mobile market is characterized by high fixed costs, it does not explain whether "newer" entrants--with less investment in legacy network design, equipment, and reliance on traditional forms of backhaul (copper DS1s and DS3s)--are able to compensate for these higher costs of initial entry with greater capacity, lower operating costs for a given number of subscribers, and greater revenue opportunities (for example, through offering higher-speed broadband services through newer network design). 

Backhaul.  It is, likewise, unclear to what degree backhaul costs effect competition in the mobile wireless industry, or the degree to which wireless demand affects competition in the backhaul market.  The Commission notes that "traditional" copper backhaul is quickly losing ground to fiber-based backhaul.  Report, 294.  However, the Commission also suggests that "unaffiliated" (with an incumbent LEC) wireless carriers may be at a disadvantage to "affiliated" wireless carriers, due to the costs of special access backhaul (traditionally provided by the incumbent LEC).  Report, 295-296.  On the other hand, given that the largest two wireless networks are also the largest purchasers of "other" incumbent LEC backhaul, it would be helpful to know whether these two carriers have a greater incentive/propensity to differentiate their costs by devoting more "spend" to out-of-region competitive fiber providers--thus promoting backhaul competition. 

Another problem with the "backhaul" section is that it never attempts to quantify backhaul costs in absolute terms, or as a percentage of annual costs or revenues.  The only reference it makes is to a study in Verizon Wireless' NOI Comments, stating that backhaul was expected to increase from a $3 billion market now (2008 total mobile wireless revenues-$150 billion (Report, 201)) to an $8-10 billion market in the next 5 years).  Report, 296, n.785.  Assuming an industry cost of backhaul at $3 billion, this would put backhaul costs at slightly less than advertising costs, at around $3.4 billion for the most recent year.  Report, 128. 

It might be the case that backhaul costs, and the other "upstream" input costs discussed in the Report, are a competitive concern, but the Commission didn't support this rhetoric with data.  Again, misleading, and, therefore a little "ugly" . . . . 
July 28, 2009 1:37 PM

The Tao of Consumer Welfare and Handset Exclusivity

Why the "Tao" of consumer welfare and handset exclusivity?  Why not the "Zen" of consumer welfare and the art of handset exclusivity?  Well, here's why:  Bruce Lee (no relation) entitled his book "The Tao of Jeet Kune Do" ("Jeet Kune Do was the name Bruce Lee gave to his sui generis martial art), and Bruce Lee was voted by Time Magazine as one of the most influential people of the 20th century. Plus, I also saw a show a few months back on the History Channel called "How Bruce Lee Changed the World."  Enough said. So, who am I to pick a different term to describe seeking to distill the essence of a subject to its fundamental, essential, definitive principles? 

Said differently, in this particular post we want to focus on the under-appreciated, misunderstood, is of how "exclusive" agreements between wireless handset manufacturers and wireless service providers affect consumer welfare. But, to do so, we must properly consider the question, and what is not the question. The chief complaint of the chief complainers is that not every consumer has access to the "exclusive" of their choice.  This is just another way of saying that not every consumer has access to the service provider of their choice. This is not a trivial concern, or a concern to be brushed off and ignored by policymakers; however, contrary to how this issue has been characterized, this is a spectrum scarcity issue, and NOT a competition issue.

So, to clarify, this post is about the tao of the practice of wireless "exclusives" and how this practice relates to consumer welfare.  I explained it in a previous post, but, alas, the tao was buried in an ineffective attempt at a comedy monologue.

So, what is the answer?  What is the fundamental "is" of how "exclusives" affect consumer welfare?  Well, if you missed it, here it is: each party to the "exclusive" arrangement has an incentive to bargain hard to get the other firm to offer prices at lower than competitive prices, because each party is selling a complementary product (service or handset)--the profit on which is maximized by getting the other partner to offer its piece of the package at an inefficiently low price. 

Continue reading The Tao of Consumer Welfare and Handset Exclusivity
May 21, 2009 10:35 PM

Has Handset Exclusivity Created Smart Phone Promiscuity?

Business people, technical people, and government people all have their inexplicable, annoying, or simply confounding catchphrases.  Most either bear no semblance to the ordinary, direct conversational words we use, and some even have the opposite meaning from their everyday context. 

Sometimes they aren't even real words--like "incent", or the really annoying "incentivize"--both of which are attempts to turn what was once solely the noun "incentive" into a verb, without "plagiarizing" more grammatically-correct words like "encourage", "motivate", or "inspire."

Other times the words are real words, but they are put together, or used, out of their ordinary context in a way that allows business people to "own" the words for the purpose of creating a slick, cool rap.  Consider one of many potential examples.  Around the turn of the century, businessmen in the "money business" (sometimes called "investors"), started using the term "space" instead of the previously (and still) correct word "market." 

And sometimes, otherwise smart people carelessly use words and phrases in exactly the opposite ways from which these idioms developed their original meaning.  For example, how many times have you heard someone use the term "split the baby" when they really mean "split the difference?"  "Splitting the baby" may be a fair solution, but it does not refer to a compromise.  Rather, it refers to a winner-take-all outcome.   Recall from the origins of the idiom--King Solomon's technique for deciding the claims of two women over the same child--that no baby was in any way divided. So where does all this meandering lead? 


Continue reading Has Handset Exclusivity Created Smart Phone Promiscuity?