Rate flexibility and market power

This article over at USA Today points to one of the tensions in deregulation. Carriers, who gain pricing flexibility, will use it to maximize their competitive position and profits. In this case, it appears that the incumbents with market power are using nominal prices to motivate their customers to adopt bundles of services (such as voice, long distance, mobile and video). These bundles tend to lock consumers in to their services since it becomes much more costly to purchase these services individually. This is the same basic issue that I brought up earlier related to text message charges.

While it is hard to imagine that these services experienced large costs increases (they are software, after all), I would like to point out that the services indicated in the article are hardly essential, mainstream services. Given that, is there a need to regulate? How many "elderly and low income" families actually use these services?

Market tipping in high definition DVDs

This article over at CNET shows just how quickly market tipping can occur in a standards rivalry. As I blogged earlier, Warner's announcement to back Blu-Ray was (apparently) the defining moment. In response, Toshiba has cut the prices of stand-alone HD-DVD players; this weekend's advertisement at Best Buy was offering a "buy one, get one free" special on HD-DVD movies. This is either an inventory clearance effort or it is an attempt to change the market dynamics. I suspect the former is true.

Text Message: 15 Cents

This article "exposes" some interesting phenomena in my mind. Quoting the article:

When the big four cellular companies decided to hike the price of sending a text message, they all managed to settle on precisely the same increase. Sprint Nextelraised its price from 10 cents to 15 cents per message in 2006. AT&T quickly followed suit, as did Verizon Wireless and finally, in June 2007, T-Mobile. And now Sprint has raised its price again, to 20 cents.

Today those copycat price hikes are producing banner results for the carriers. In the most recent quarter, the Big Four's customers coughed up anywhere from 29% to 64% more for data services (that is, everything but regular phone calls) than they had the previous year. The four carriers collectively produced $17 billion in operating income on $104 billion in revenue in the first nine months of last year. The carriers say that consumers can buy a monthly package that lowers the cost of a text message. But without the huge surge in payments for data, revenue per user would have fallen at every company.

Their ability to hike prices on text messages certainly can't be explained by the companies' costs. On modern cellular networks the few hundred bits of information that make up a text message take up such a minuscule amount of capacity that they can be carried for a fraction of a cent.

The first paragraph basically points to implicit collusion in price setting. As any economist with tell you, this is one of the principal problems in oligopoly. In this case, it was evident even with four industry participants, which suggests either that the price for text messaging is quite inelastic or that this "ala carte" price doesn't reflect consumer experience. Since avid SMS-ers purchase packages, the actual price is far less, so, I believe the latter explanation dominates.

The end of the second paragraph makes little sense ... data services and SMS are quite different and appeal to different markets. It is clear, though, that non-voice services are the future for profits in this sector.

Verizon Obtains FCC Approval for TPE cable landing

While cable landing approvals are not big news -- the are approved fairly routinely, this item is notable because of the capacity it adds between China and the US (1.28 Terabits/sec). Unfortunately cost data is not included in this press release.

Telecom complaints at the FCC

The FCC regularly reports the complaints from consumers that they receive. Here is the latest report. I compiled the summary data into this graph (note that they vertical axis is logarithmic):



There was obviously something going on in January and April that stimulated complaints!

International backbone traffic

I found this article interesting. What is most useful, I think that the article presents some data. Quoting the article:

In spite of a recent industry downturn, international backbone traffic has maintained an almost unstoppable growth, around 300 percent in aggregate over the last 10 years, say specialists at TeleGeography at PTC ’08. This is ’good news’ for carriers, says Tim Stronge, VP of Research at the consultancy. But in looking at the figures around the world, he suggests that the road ahead might be a little more bumpy. “We have seen a disturbing trend, recently,” he warns.

This “disturbing trend” comes after years of traffic growth of at least 15 percent on a CAGR basis. Stronge says last year, however, there was a “fairly significant dip down to about 10 percent”. One factor was a major slowdown in traditional TDM traffic, perhaps to only 6 percent growth, a figure not seen since World War II. However, VoIP has now reached that seen for TDM—traditionally a much larger business segment—because of the much higher VoIP growth rates.

VoIP is not just settlement rate bypass, says Stronge emphatically. “[It] is becoming a mainstream technology...the USA is No. 2 VoIP recipient in the world after Mexico, even though settlement rates are very low [for TDM traffic]; China is No. 4, UK is No. 3.” [snip]

"Why is traffic finally slowing?" ... Drivers have been international trade and economic health between countries. Another has been international migration, where migrants call home frequently ... The probable key is ongoing price reductions and their impacts. [snip]

However, voice is only one part of an increasingly large picture and one that is dominated by Internet traffic almost completely. Voice, according to TeleGeography, accounts for less than 1 percent of traffic on international backbone networks. Private networks account for around 14 percent, and the Internet (principally web usage and peer to peer activity) the remaining 75 percent. In aggregate, Internet demand is consuming available capacity on key transoceanic cable systems pushing cable operators into wanting new cable projects and upgrading existing systems. On both key Atlantic and Pacific routes capacity is being consumed, says TeleGeography. Internet growth on these backbones may well be in the 60-70 percent per annum range, far above the 40 percent per annum increase in corresponding supply.

Google and the spectrum auctions

I found this article in Forbes interesting. Quoting the article:

A Google win could also spark a hiring spree in the mobile sector. The company has zero experience building and operating a network, and would need to bring on folks who do.

Investments in wireless technologies could rise as well. "You'll see a flood of investment capital come back to the wireless market," Ellison says. "The mobile operators are a barrier to innovation. They move really, really slowly."

[snip]

Still, analysts say there are good reasons for Google not to win. The costs involved in acquiring the spectrum, and building and operating a wireless network, are sky-high. The starting bid for the spectrum is $4.6 billion, and analysts predict it will sell for more than that. All told, the entire cost of a new network could reach $15 billion--and take a few years to build.

Plus, profit margins for wireless service are extremely low. "As a Google shareholder, you'd have to question a wireless network, which doesn't have the same margins as [online] advertising," says Forrester Research analyst Charles Golvin.

Mathias speculated that Google can lose and still win. For instance, the company might drive up the spectrum price and then drop out of the auction. Another company could win it and possibly take on enormous debt, which could give Google great bargaining power later on. "This is a game; make no mistake," Mathias say. "There are all kinds [of ways] of getting what you want without winning anything and spending money."

ISPs and content filtering

I found this item interesting ... apparently some ISPs are seeing a role for themselves in managing pirated content. Interesting idea, but is it really feasible? Can ISPs really check for illicit content on a large scale on their networks?

Comcast and the "new" open cable platform

Earlier this week, I wrote about cable's "Tru2way" announcement. So, here is a bit more on this.

Continuing on the theme I began developing late last year, this announcement suggests that cable TV operators are beginning to dis-integrate their networks, separating services from platform. So, will CATV move to an "open" (wholesale) platform on which multiple "retail" services will be provided from multiple providers? Is this another instance of "functional/structural separation"?

Mobile trends for 2008?

You might enjoy reading this article in Silicon.com (via BusinessWeek). The trends are (quoting the article):

1. The big squeeze, operators cosying up and a push on data
   
2. Device convergence -- the rise of the multimedia handset
   
3. Mobile 2.0 -- user-generated content, social networking, location-based services…
   
4. Femtocells -- a cost-cutting, data services driver -- or not?
   
5. Disruption -- not just the Google factor…
   

Read the article for the gory details.

Do you think these will be the five predominant trends for the coming year?

US Telecom revenues by source

You might find this graph interesting, which was derived from data reported on FCC Form 499-A. I think it shows what we have all been experiencing ... declining wireline and increasing wireless. The data are in $US millions and the y axis is logarithmic. I do not believe that these are in constant dollars.


Note the decline in payphone revenues, wireline, and toll revenues and the increase in revenues for companies classified as wireline competitors (my words, not the FCC's) and, of course wireless providers. This data has wireless providers' revenues exceeding wireline ... I think that is because it is aggregated data.

Game Over: Blu-Ray seems to have won

This story over at TechCrunch points to the end of HD-DVD in the format wars. From the point of view of standards rivalry, what event(s) "tipped" the scales in favor of Blu-Ray? Warner's decision was clearly the precipitating event, but what was it that caused Warner to make this decision? Technical features of Blu-Ray? Sponsorship (via side payments)?

According to this article over at Forbes, the content industry is more interested in a standard, regardless of which. Their concern is the market for digital media.

I think the speculation that this may be hollow victory is more interesting ... quoting the Forbes article:

But Sony can't afford to spend too long drinking the champagne. The real news isn't that HD-DVD's future looks grim. It's that if Blu-Ray's backers can finish off HD-DVD quickly, Blu-Ray might have one.

With Apple, Amazon.com, NetFlix and Microsoft pushing downloadable movies and cable and phone companies peddling a plethora of on-demand, high-definition content, the day is coming when the stacks of plain vanilla DVDs that clutter many home entertainment centers will go the way of the CD collection.

JVC even introduced a flat-screen television at the International Consumer Electronics Show that allows users to simply pop in one of Apple's iPods to watch video content--threatening to turn the slim media players into an alternative to digital video discs. And Panasonic is building iPod docks into its home theater systems alongside an integrated Blu-Ray player.

Another worry, according to Robin Harris, an analyst with the Data Mobility Group, is that Blu-Ray adoption will be slow because few people will notice the difference between formats, since many players can neatly "up-convert" DVDs for high-definition sets. As a result, few will opt to replace their entire DVD libraries, as many did with the earlier generation of videotapes. "So is this going to be a pyrrhic victory for Sony? I think that there's a fair chance that it will be," Harris says.

Cable TV standardization

Some months ago, I had written this article regarding cable, set top boxes, and standards. So, when Forbes posted this item. According to the article:

Facing pressure from regulators, the cable TV industry plans to make good on a promise to standardize its technology and open the door to televisions and other gadgets that don't need cable boxes to receive video-on-demand programs and other interactive services.

An industry initiative, to be renamed "tru2way" after a decade in the works, is expected to allow electronics manufacturers to make TVs and other gear that will work regardless of cable provider. By making devices compatible, the standard also could encourage the development of new services and features that rely on two-way communication over the cable network.

Note that Engadget and CED are framing this as merely a rebranding of "OpenCable". Comcast CEO Brian Roberts is claiming that there is more to it (from the Forbes article):

Our business model has changed completely, from a closed, proprietary model to an open architecture that will work across cable companies - not just across Comcast. That was a Herculean job to accomplish.

Suppose we took Roberts' view at face value. Is it reasonable to imagine the industry model evolving from a vertically integrated "customer experience" to a "platform-based" one? That is, is it reasonable to imagine that the initial innovation in an industry would require a high degree of control, so that specific investments in physical infrastructure could be coupled with specific investments in "software"?

In fact, we have seen this initially in telephony:

• The introduction of automatic switching had to be closely coupled with end user devices.
• The transitition to a "common battery" for handsets (from locally powered devices) also had to be closely coordinated. It is interesting that we seem to be gradually transititioning back to the locally powered paradigm, but that's another story.

Are we seeing this in wireless as well, with Verizon announcing the opening of their wireless network?

Update on the Fairpoint case

I thought you might be interested in an update of this item, posted earlier. As Forbes reported today, the Maine PUC approved Fairpoint's acquisition of Verizon's lines in its state. Recall that Vermont did not approve this.

Questions about appropriate regulation or inappropriate micromanagement aside, I think this case provides an interesting window into the machinations necessary in telecom for commercial transactions such as this. These kinds of processes are not required in other industries and adds to the "friction" of these markets, which leads to economic inefficiency. Quoting the article:

The deal also requires approval from Vermont and New Hampshire regulators. On Dec. 21, Vermont's Public Service Board rejected the deal but invited the company to submit a revised application. New Hampshire's PUC staff recommended against the initial proposal, but it is also willing to consider a revised deal.

The deal is subject to review by the Federal Communications Commission.

Maine's PUC attached several conditions to its approval. The commission suggested reducing FairPoint's debt to Verizon by $100 million by scaling back fees FairPoint will pay to lease equipment from Verizon Communications.

Verizon general counsel Don Boecke dismissed that approach as "pretty much a nonstarter," but left the door open to an alternative. FairPoint Chief Executive Officer Gene Johnson then told the PUC a number of options that would have the same financial impact were available.

Some of those include reducing dividends, selling noncore assets, selling more stock and suspending dividends if necessary, he said.

Other conditions ordered by the PUC included having FairPoint develop and implement a policy protecting customers' privacy, and not having the other two states' regulators materially change FairPoint's financial condition.

Johnson said he did not see the latter condition as a problem, saying he believes the agreement approved in Maine will serve as a "roadmap" in New Hampshire and Vermont.

Update (2008-1-15): The FCC approved this transaction (see the order for details):

In accordance with the terms of sections 214(a) and 310(d), we must determine whether the Applicants have demonstrated that the proposed transactions would serve the public interest, convenience, and necessity. Based on the record before us, we find that the transaction meets this standard. We conclude that it is unlikely the merger will result in any anticompetitive effects or other public interest harms. Specifically, the Applicants do not compete in any of the relevant local exchanges. Moreover, after consummation of the transaction, the Applicants will compete for large business and long distance customers. The transaction also is likely to produce public interest benefits, including the accelerated deployment of broadband throughout the region.

Note that the FCC's analysis is motivated by a different set of concerns than the states' ... the latter group is interested (at least on paper) in the viability of Fairpoint after the transaction. This difference can be seen in Commissioner Copps's dissent.

British mobile operators 3 and T-Mobile UK share network elements

I have gotten interested in the potential reorganization of the mobile telephone industry ... not necessarily because of Google's potential market entry, but because of actual events (see this and this). This article from the NY Times adds additional evidence.

The question is, are we on the cusp of a sea change in the mobile industry? If the industry does split into wholesale/retail components, what are the implications for telecom policy? Would this make the interest in "structural" or "functional" separation more intense?