Ev Ehrlich's Everyday Economics


Senator Kohl, Competition, and Public Knowledge

Last week, I posted a note about forthcoming hearings under the auspices of the Senator Herb Kohl’s Anti-Trust Subcommittee regarding Verizon wireless’s new cross-marketing deal with a group of cable companies, in which the two will cross-market their services while Verizon buys unused spectrum from the cable guys.

First, I made a mistake in that post. I said the hearings would take place on February 23rd. I misposted – they’re going to take place after February 23rd, a period of time that includes time immemorial, but may prove to be soon.

Aside from that correction, I stand by last week’s remarks, in particular the idea that these hearings will be important because they’ll tell us whether the Senate can spot competition when it sees it. Specifically:

“…many observers see broadband space as a series of ”stovepipe” or staccato markets – firms specialize and compete in providing signal, or in manufacturing devices or their operating systems, or in social media or other applications, and their competition is narrowly limited to that segment.”

The problem, in part, is that advocates look at the broadband sector and they see telephones, particularly since they both involve communicating and, more importantly, are subject to the dictates of the FCC. And the old Ma Bell system and the broadband Internet are easy to confuse, as one delivered a monochromatic, static dial tone and the other is a platform for a competition among a burgeoning number of devices and services that are changing every day life, so if you’re not careful – or observant – you might find yourself thinking about broadband and the Internet in
“telephone” terms – counting the wires to the home, or presuming that whoever provides signal provides everything that is somehow related to that signal,which is like arguing that the electric company is going to monopolize hair driers and refrigerators.

In an effort to demonstrate these fallacies, John Bergmayer, a senior staff attorney at the advocacy group Public Knowledge, last week editorialized that the FCC and whoever else is listening should nix the Verizon-cable deal, because it would be anti-competitive. I’d make three points about what Bergmayer has to say. The first is that his argument is garbled – it switches course almost in mid-sentence – particularly
on whether an Ethernet connection and an LTE connection compete. The second is that he doesn’t get that the broadband sector, in practice, is more than a series of “stovepipe” or staccato markets…to reuse the quote I excerpted a few paragraphs ago. And third, and perhaps most Important, is that what he contemplates, or seems to contemplate, as a solution is to turn broadband into -- you guessed it – the old Ma Bell system; after all, when he looked at broadband, he was seeing Ma Bell and the FCC, right?

Let’s start at the top. Bergmayer laments the death of “facilities based competition,” meaning there are too few options for getting signal from where it starts to your device (or as they say in agricultural economics, from “moo to you”). Well, there’s cable, and in some places fiber, and in others DSL conveyed by the old phone lines, although everyone understands it’s not as good as the first two (as Bergmayer says, “the physics
doesn’t allow it.” And then, of course, there’s wireless, which is flooding your home with evermore powerful signal, as do “4G’ technologies such as LTE, which are not as fast as a cable or fiber hook-up, but are now as fast or faster than the DSL that Bergmayer regards as inadequate. (And can I count the prospect of being able to move from WiFi island to WiFi island as these appear with growing frequency? Probably not in Bertgmayer's book.)

Not so fast. Because wireless should be disregarded when we assess how you get signal, says Bergmayer. Why? For one, it’s not fast enough – he says, although it’s obviously gaining rapidly on wireline options and for large parts of the population, works perfectly well. In fact, advocates always disparage mobile technologies until they have to admit they got it wrong – check out this piece from 2004 when the Consumer
Federation said that mobile hasn’t eroded “Bell market shares” and VOIP is “nascent at best” before the first paragraph ends.

But the more damning evidence is that, as Bergmayer says:

If mobile wireless was a substitute for wired we'd see large numbers of people dropping one for the other. But people who can afford it tend to have both. It's fair to note that wireless has substituted for wired telephones for millions of people, but this is a fairly low-bandwidth application--there are no hopes in the near future for a mobile broadband wireless service that affordably matches all of he performance characteristics of cable or fiber and can sustain the same sort
of use.


OK, let’s parse that. Sure, we now all agree that mobile and landline telephony compete -- but as wireless via 4G becomes more powerful, should we expect this competition to spread? No, and to prove it, “people who can afford it tend to have both.” Yes, and people who can afford it have two cars, even two houses, hell, I have a friend with two tuxedos – I mean, isn’t that the height of something, two tuxedos? – but the cars and the houses and the tuxedos compete. Having both tells us that 1) they’re relatively cheap, and 2) they allow the user to mix and match the services
she’s consuming. So are wireline and wireless the “never the twain shall meet” affair that Bergmayer posits, or are they evolving competitors whose competition is continually moving up the ladder of more highly-valued tasks?

In fact, isn’t Bergmayer’s entire essay self-contradictory in this regard? If wireline and wireless don’t compete, as he asserts, then who gives a rodent’s behind whether Verizon wireless and a bunch of cable companies are cross-selling services? In Bergmayer’s world, that’s like going to the tailor and being able to get your hair cut or your oil changed. I saluted Senator Kohl – a great Senator and a great Brewers fan -- he owns a piece of the Club as well as the NBA Bucks – last week for being able to recognize what Bergmayer doesn’t – that the only reason to think about the Verizon-cable deal in the first place is because they compete.

But more fundamental is Bergmayer’s refusal to leave the Ma bell world and see the broadband market as it is – a “cage match” in which
connectivity companies (both wired and wireless), device manufacturers, operating system developers, and application and service providers continually compete and partner with each other, forming and reforming relationships to capture the bulk of the value created by the integrated broadband experience – the one that brings you cloud-based applications over wireless signals to devices that did not exist in the lifetime of a child not yet in school. The world left Bergmayer’s view behind the day the iPhone was introduced and the world has never looked back. Electricity was the platform that gave rise to hair driers and refrigerators. But signal is not only the platform on which devices and applications sit, but the signal itself competes with those devices and applications for the consumer’s allegiance. Do you have an iPhone so that you can use AT&T or Frontier or Comcast – or do you have Cox or Verizon or Time Warner in order to have marvelous devices and their applications? When it comes to wagging, which is the tail and which is the dog? Let me try it this way – who’s more likely to tell the other to piss off? Any one signal provider to any one smart phone maker? Or the other way around? That is “cage match competition” – a struggle in which Verizon and AT&T, Comcast and Cox, Dish and DirecTV, Apple and Microsoft, Google and Facebook, Amazon and Twitter all compete to be the platform on which the others rest. And the result is incredible innovation, new products and services, mutual price discipline, and a burgeoning adoption rate. If this sector wasn’t competing, what would be better if it was?

And that’s the last point – so what? What if Bergmayer’s right? What do we do then? I have great sympathy for this question. My wife and I are building a retirement place in West Virginia and we have hillbilly broadband as provided by Frontier Communications, which is the official signal provider in zombie movies and coma wards. Junkies get the needle to move faster than these guys. But at least they charge what other providers
of comparable service charge because 1) there are anti-trust laws that prohibit predatory behavior on poor but deserving homeowners in remote locations and, 2) there’s always mobile. Hell, I’d love a grown-up, big-boy, long-pants, high-speed connection, but I’m in a very un-dense location that doesn’t justify much more than what I get, and it’s hard to see why policy ought to subsidize me beyond that. But Bergmayer lets us know where he’d like to go:

Broadband unbundling or open access rules like those common today overseas and the system that allowed thousands of competitive dial-up ISPs the flourish in the 1990s are examples of these sorts of policies. Rules about roaming would be another example.

Wow. “Unbundling and open access rules” mean that a company builds connection infrastructure, and then has to share that infrastructure with its competitors at prices determined in a regulatory hearing. It’s The Little Red Hen turned on its head – in which the Fox and Turkey Lurkey and the other lieabouts not only eat the bread the Hen bakes, but probably the Hen herself. And roaming rules are a variant of that – as I’ve discussed earlier, smaller and rural wireless phone companies want the FCC to let them roam and send text over the networks of their larger
competitors. For example, here’s a quote from a Sprint executive explaining why the FCC should force Verizon and AT&T to let Sprint use their networks so Sprint’s customers could roam them:

The expectation of consumers is their smart phone is going to work wherever they go. Data is not just an abstraction for onsumers now. They use it every day and rely on it more and more instead of voice.”

Meaning, in English, Sprint didn’t mill the bread or bake the bread, but now that these other companies have, they’d like a piece, thank you, and want to compete against these other companies using the other companies’ investments. If Bergmayer knew the history of the industry, he’d now that it was the presence of these regulatory restrictions that held the U.S. back from developing cutting-edge infrastructure. In the 1990s, cable was not subject to these conditions and telcos were, so you got a lot of cable investment but little telco investment. In 2003, the courts threw this business out, and the “telcos” started investing tens of billions in fiber systems. Now Bergmayer wants to bring that regime back – what do you think will happen? Who’s going to invest when your investment can be used as a hostage against you? Back in the Ma Bell era, companies’
investments were guaranteed through regulation, so you could argue that this was what they signed up for. But today the companies are betting tens of billions of their own dollars without guarantees – should we treat them as “public utilities” nonetheless?

Moreover, Bergmayer’s nostalgia for “thousands of competitive dial-up ISPs” suggests amnesia. Raise your hand if yuou want to get rid of \the connection you have now and get Covad and Earthlink back? Who cares that there were thousands of them? They all did the same thing –
nothing. They applied a technology they didn’t develop or improve, they made little in the way of investments, and the only reason they existed was because the FCC adopted the policies Bergmayer favors – they all had the right to force the phone company to sell them access to the phone companies’ infrastructure at a regulated price, and they lived like the barnacles who attach themselves to whales for their sustenance. And once innovation took place elsewhere, Bergmayer’s paragons disappeared. And that’s where Bergmayer’s ideas lead.

So the Kohl hearings really are important. Are they going to embrace this view of the world? Or are they going to lead the government towards a new understanding of broadband competition and an agenda that works – broadband infrastructure expansion and adoption (particularly in unserved neighborhoods and such important sectors as education and health), eliminating obstacles to the system (like the mis-allocation of spectrum in the hands of broadcasters), guaranteeing users’ privacy and security, and allowing the market structure of this chain of industries to reveal itself through competition, as opposed to merging fully formed from the brow of advocates.

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