Ev Ehrlich's Everyday Economics

Robot Insurance

The State of New Jersey is about to take a giant step into the 21^st century – on Monday, their State Senate will vote (and, I expect, pass) a bill that will eliminate the regulation of phone service that was born in the day of hand-cranked handset – the State Assembly has already moved the bill forward with a 66-7 vote and a chorus of kumbaya.

In a last stand, however, the opponents of deregulation have commissioned an analysis to support their view that it’s regulation, and not punishing competition, that keeps telephone prices where they are in New Jersey.   And that’s worth some discussion. The landline phone systems in most places around the country were built during an age of rate-base regulation.  That is, there was a time when our view was there was really only room for one phone company, and that in exchange for that company being given a monopoly franchise, it would receive a “fair” – meaning not too high and more-or-less guaranteed – return.

But, of course, that was then.  Today, rather than being a monopoly entrusted to one group of rapscallions, local phone service is a brutally competitive business that involves the legacy phone companies, cable companies, VOIP (voice over internet protocol), and, of course wireless.

Wireless!  It’s somewhere between amazing and sad that over a year before this hatchet-job pro-regulation study was released, the Center for Disease Control and Prevention issued a report showing that fully one quarter of U.S. households has cut the cord – taken the landline out of their house and gone completely wireless.  That’s more than double the share that did so five years ago, and that was over a year ago!  Moreover, one in seven, according to the same study, receives most of their calls by cell phone regardless, leaving their landline phone as an afterthought.

That’s 40 percent of the market that couldn’t give a fig for the legacy, Ma Bell phone that regulation affects.  Well, no, that’s wrong, because that “landline” phone might or might not be a legacy phone line.  For example, it might be a line delivered to the house over a cable television system.  Or it could be VoIP – for the love of gosh, you can buy VoIP for 30 bucks a year that includes caller ID, three-way calling, call forwarding, call waiting, enhanced 911, voicemail, 411 directory assistance, and live technical support.

Now, the opponents of deregulation know that mobile phones exist, or that VoIP exists, to be sure.  What do they have to say about them?  First, wireless:

Wireless plans are much more expensive than wireline services, so they do not provide a pricing constraint on landline services. Wireless coverage varies based on terrain, foliage and building structure and cannot guarantee calls made indoors.

The price of wireless doesn’t affect the use of landline?  Let’s start with this – if wireless were free, would more people leave their wireline phone for wireless?  I agree, so we’re only discussing the degree to which they compete.  To that point, let’s go back to the CDC study above – 25 percent of households have wireless but not landline.  What’s the percentage of households that don’t have wireless?  The answer is 15 percent, that’s it.  Six out of ten households have both, side by side.  How can they not compete?

And are wireless plans – as the report’s authors imply -- an expensive plaything for the bourgeoisie that has the time and inclination to fiddle with these infernal gadgets?  In fact, the CDC report says that people living in poverty or near poverty are more likely to use only wireless phones.  One-third of adults living in poverty are mobile-only, compared to 19 percent of high-income families and 20 percent of homes with a college graduate.  If regulation is helping the poor keep their landline phone, it’s not evident in the data.

Well, then, what about VoIP?  Have the pro-regulation analysts been watching those Vonage and Magic Jack television commercials?   Again, maybe not:

VoIP services provided over broadband services are not a cost-effective alternative for consumers dependent on landline services. Additionally, since VoIP services require electricity, they do not guarantee service during power outages that the legacy phone services do.

Forget buying a year’s worth of VoIP for a month’s worth of phone bill – what if there’s a black-out?  Is that the rationale for the regulatory regime – that the landline system works when the power goes off, so we have to specify prices for it?

In fact, while it gets this stuff wrong, the pro-regulation report emphasizes two important points.  The first is that New Jersey ranks number one among the states with 100 percent – not 99.9 percent – of its population having access to broadband speeds equal to or greater than 3 mps.  But if they do have that kind of access, then you’d imagine that they have both the ability and the sophistication to shop for telephony among competing alternatives, including VoIP.

And the second impressive finding was that New Jersey was, again, number one in the country with 74.4 percent of its households having access to three or more wireline service providers.  That sounds like a prima facie case of competition to me, being number one in the country and all, but it’s even more important because the report’s authors make a great deal out of how telephone prices rose in California when that state passed a deregulation five years ago.  Now I don’t know much about what happened in California, but I do know that if I keep going down the list of states with the greatest access to wireline providers that these authors provide, I’ll see that California is 35^th among the states with regard to the same measure – only one in ten Californians has access to the same three or more wireline service providers that three-quarters of Jerseyans do.  In fact, Jersey is perfectly situated to have a competitive market – it’s the most competitive market in the country by this measure, in contrast to California.  So what does one experience have to do with the other?

I think there are two embedded points in the undue and misleading noise the opposition to this phone deregulation bill has generated.  The first is that the report’s authors, and many on the sidelines, still see household telephone as a product unto itself, with its own, isolated market.  It’s not.  Your phone call is just one component of the flow of information in and out of your house, no different from an e-mail from Grandma, or a downloaded video, or an episode of Glee, or the traffic in and out of a home office.  Regulation or deregulation has almost nothing to do with the price of a landline phone.  Instead, for the companies like Comcast or Cox or ATT or Verizon, phone is an entrée into the household that allows the company to try to sell them television and broadband access.  And there are plenty of companies selling television – telcos, cable companies, Dish and DirecTV, and so on.  And there are plenty of companies trying to sell you broadband, from the telcos and cable companies to the wireless providers who are now knocking each other over to get 4G to the consumer.  The household phone is almost an afterthought – the interesting thing about it isn’t the phone, it’s the household.  The companies selling local phone into the household aren’t going to price themselves out of the relationship.  In fact, one important aspect of the Jersey deregulation bill is that it releases the phone companies from filling out forms and jumping through hoops that cable, or wireless, or VoIP competitors don’t have to mess with; for example, only phone companies have to tell the State how they addressed each service quality complaint they received.  In this environment – with 2 out of every five households viewing landline phones as either incidental or irrelevant -- what’s the rationale for that?  All it does is take hold one competitor back in this larger competition to bring information services and applications to the household.

And, last, who’s behind this report?  I don’t know who paid for it, but it was released by the AARP.  Look, I’m an old guy – I’ve been eligible for AARP membership for over a decade, but I don’t have the card yet, for fear that my wife will see it and find out I’m not as young as I told her I was.  But this kind of scare tactic reminds me of a Saturday Night Live routine I once saw about an insurance company that sold old people insurance against robot attack.  (“And when they grab you with those metals claws, you can’t break free, because they’re made of metal, and robots are strong.”)  It’s pure and simple a scare tactic. 

My old man was like that.  When medical emergencies forced him out of his apartment – he was 89, this was in 1999 – I went there to close the place up, and found he was still renting his rotary phone for two dollars a month -- he’d have bought robot insurance if they let him.  It wasn’t NYNEX’s best moment.  But now the shoe’s on the other foot.  If AARP really wants to help seniors (if that’s what I, an AARP-eligible person, am), it would help them get educated about their options in a competitive market for their business, one that offers them any and all levels of service and any and all price points, and quit trying to scare them about robots.