Ev Ehrlich's Everyday Economics

3Nov/11Off

Where Have I Been?

With apologies to Sid Caesar, it’s a good question. It’s been some while – isn’t a great euphemism for two months? – since my last entry. Readers who know me know I’ve been preoccupied with other work (principally, baseball) and interests (principally, baseball -- Game Six! Are you kidding me? Wow!) Readers who don’t know me will have to take the other group’s word for it. But I’m bored, broke, and back, and tanned, rested, and ready (and tall, tanned, and talented – no, those were the Temptations), and ready, willing and able. On with the show.

Two months! And what a pair of months they’ve been – Steve Jobs died even as the first new iPhones are being shipped, Europe floundering (and foundering – they’re different, but for this list, both work), jobs legislation floundering, the deficit-reducing Wise Man Committee floundering, Jon Corzine floundering (Karma’s a bitch, isn’t it?), and Gadhafi found in a sewage drain (Karma, the Sequel). Don’t think I wasn’t sorely tested to comment on any and all of these events, or that I won’t when I get around to them.

But let’s start not with world affairs. Let’s start with the focus implied by today’s title – where I’ve been. One place was speaking at the House Rayburn Building two weeks ago, at an event hosted by Internet savant, Google scourge, and chairman of Netcompetition.org , Scott Cleland,along with my economist friend and colleague, and antipodal doppelganger, Jeff Eisenach.

The panel was on competition in broadband space, which gave me the opportunity to talk about my favorite explanation of how competition works in that constellation of products and services – the wrestling cage match. That is, all of the product and service providers in that space – whether fiber, cable, or wireless access providers, device manufacturers, content providers, service providers, social networks –the whole lot of them – are in an ongoing contest in which they form and reform alliances, adversarial relationships, vendor-client relationships, and other forms of conflict and co-operation, with the end result being a sector that innovates and serves consumers like crazy. I’ve written about it on this site a few times, most notably here. But here was a chance to speak about it.

I’m posting my talk here, and you can also see Scott and Jeff’s presentations and the question period that followed. Much of that question period was dominated by audience concerns about the prospective merger of AT&T and T-Mobile. It’s a good example of an issue that would concern you, if you never thought about the cage match. That is, at one level, you can argue that the market is more “competitive” with four major suppliers rather than three because – and here is the analysis that supports this view – “four” is a larger number than “three.”

But this view is trouble by three different arguments. The first is that T-Mobile is doomed – it’s not going to survive as a competitor. Its owners – principally its German government – aren’t that interested in competing here, and it already lags behind ATT, Verizon, and Sprint here. So T-Mobile faces the fate of a building that collapses because no one takes care of it – “constructive demolition.” In contract, ATT can use T-Mobile’s resources – including its spectrum – to improve its service. Arguing that we’re better with “four” rather than “three,” as I’ll say in the video, is like saying we need a fourth for bridge, but that one of the players is a zombie.

Second, T-Mobile already makes no difference in the market. I’m often told that T-Mobile underprices the other competitors. Well, sure it does – it offers less. But more importantly, T-Mobile’s pricing doesn’t affect what Verizon, Sprint, and ATT does – if T-Mobile were to drop their prices, the other three would hardly care – they’re already being underpriced by T-Mobile and don’t respond. But T-Mobile’s prices, in contrast, are determined by what the other three major providers charge – T-Mobile observes those prices, and then slips in underneath them. Opponents depict them as one of the dog’s “four” legs, but they’re really the tail.

And, finally, and most importantly, there’s the real nature of competition – the cage match. T-Mobile will never compete with the other three wireless providers more than does Apple, Facebook, Google, and the other components of the total value proposition created by the broadband experience. When the signal providers such as ATT improve their product, the device manufacturers turn that added capability into new services and usurp the value that’s created. Or, in the real world, the signal provides invest in 4G, make signal terrific, and Apple responds by building voice-recognition into the 4S phone. Because that voice-recognition is not built into the phone – when you ask Siri a question, it doesn’t turn to a microprocessor or memory device in your phone. It beams the question up into the cloud, where Apple’s mega-processing power addresses it and beams back a response. It’s the strength and quality of the wireless connection to the cloud that makes Siri possible. Voice recognition has been there for a while – think of all the businesses that use it – but putting it in a mobile device is a wireless connection trick, not some Merlin-esque innovation by a gnome in the bowels of Apple. Meaning that as companies such as ATT and Verizon improve their product, Apple rides it and incorporates the new functionality into devices, and earns the rewards. The problem is not that there’s not enough competition in signal – the problem is that signal is in a dicey competitive position vis-a-vis devices and services. They are on a treadmill – if they don’t innovate, consumers will abandon them, but when they do, other competitors in the broadband cage match skim off the value they create.

That’s, in part, where I’ve been.

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