Ev Ehrlich's Everyday Economics

17Feb/129

Senator Kohl’s Hearing

Everybody loves a good Congressional hearing – whether it’s Joseph Welch asking Joe McCarthy if he had no decency, or Sam Irvin explaining the 4th Amendment – that the rain may enter, and the storm may enter, but the King of England cannot enter.

A hearing scheduled for later this month will not be quite so dramatic, but is nonetheless worth noting. It is a review of a cross-marketing agreement between Verizon Wireless and cable firms including Comcast, Time Warner Cable, and Bright House, to be held on the 23rd by the Senate Anti-Trust Subcommittee, under Senator Herb Kohl.

The anti-trust subcommittee is charged with investigating he state of competition in the economy. But to do that job, it needs to know what competition is – which is why this hearing is worthy of our attention. Because this will give us a chance to find out whether the Congress can recognize competition when it sees it, which brings us back to the broadband industries and the idea of “cage match” competition.

I’ve explained this idea before. It comes down to this; 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.

But that’s not how things work. The broadband space is occupied a wide group of companies that are competing to be the entity that integrates your broadband experience. We know the starting points for these competitors: Verizon and the cable companies bring you a mojo wire to the home; AT&T, Verizon, Sprint, and others do the same using magic waves; Google, Facebook, and others help you find things or people; Apple makes devices that let it happen; Amazon sells you stuff; Netflix amasses content.

But those are only their starting points, not a workable definition of who these companies are, what they want to be, or where they end up. In the “cage match,” these starting points give rise to an endless series of moves in which the players alternatively cooperate and compete, forming and reforming alliances and entering each other’s markets in an effort to be the last man standing in the cage. Thus, Google gives handset device
makers open access to its Android phone system in an effort to team up against Apple, then suddenly turns on them by buying Motorola’s handset operation and making it the de facto favorite child among Android-based mobile devices. Or Netflix cuts deals with the major content-producing studios to channel their wares to consumers, then announces that it’s going to compete with them by producing its own, HBO-like, content. Or Amazon becomes a power in cloud. Or Apple turns its dominance over your phone into dominance over your living room with AppleTV – now, just a box, but how long before it’s a flat panel that can be controlled by your iPhone? (And if you haven’t considered it, don’t worry, Google has – today’s Financial Times notes that Google is beginning a six month test of a device that would stream content within the home and give Google “a central position in digital home entertainment.”

And what too many observers miss is that this competition is as vigorous and as pro-consumer, to the say the least, as is the conventional
view of competition – a sprint between static good producers, whether Coke and Pepsi or Oreo and Hydrox. It’s given us the incredible wave of innovation in connectivity, devices, applications, and services that we all enjoy but all don’t associate with the fact that only competition produces this kind of innovation. When Apple comes out with a new device, it forces the signal providers to improve their game in order to provide the capacity to make the device work – consumers want to talk to Seri, and a carrier will be damned if they can’t provide the signal strength to make it happen. Alternatively, when the signal providers improve their signal, it allows devices and applications to improve and to appropriate the value better signal creates. And the presence of each limits the pricing of all the others, as the consumer is really only interested in what the integrated package of all of these costs; too high a price for mobile access, for example, means fewer iPhones sold, and backlash from Apple, which is probably even more effective than backlash from Apple’s individual consumers.

So Senator Kohl’s subcommittee, if it’s going to review the competitiveness of the broadband sector – or ecosystem, or constellation, or whatever you want to call it -- has this fundamental conundrum to consider. If the constellation of broadband industries, from signal to device to service to content, is not competitive enough, then how do we explain the burgeoning power, functionality, and outright pleasure we derive from the interaction of these elements?

This view of competition and its benefits is of direct relevance to the events that set this forthcoming hearing in motion. On December 2 last year, Verizon and a group of cable companies announced an agreement that did two things. First, it let Verizon buy a bunch of spectrum that the cable companies weren’t using. And, second, it created a marketing arrangement in which the cable companies would resell Verizon wireless services and vice versa.

If the subcommittee is unhappy with the spectrum component of the deal, it should look to the FCC and spectrum policy. While there have been a good number of lofty policy statements, we are yet to arrive at a system in which unused spectrum can be reallocated among users through markets. As a result, companies are making deals such as this one – or AT&T’s proposed acquisition of T-Mobile – that are driven in large part by acquiring the spectrum asset. It’s unfathomable that underutilized spectrum is still sitting in the hands of television broadcasters, for example, when their bread and butter is no longer over-the-air telecast but carriage on the nation’s cable systems.

But it’s the second part of the Verizon/cable deal that’s attracting the subcommittee’s attention. Their concern, echoed by advocacy groups, is that a wireless operator and a cable operator reselling each other’s products is anti-competitive.

Well, first, let’s congratulate the subcommittee for starting with the assumption that wireline and wireless compete with each other. That puts them squarely ahead of the FCC and the advocacy groups, which insist that the two are separate, despite the growth of tablets, Kindles, and other wireless devices and of “cutting the cord” either through mobile telephony or “over the top” (OTT) television.

But if the subcommittee is worried about collusion – or at least the absence of competition – between Verizon and the cable companies, then what do they make of last week’s announcement by Verizon and RedBox, in which these two companies will create a video streaming service that will compete with Netflix? In fact, this new arrangement does far more than compete with Netflix – it means that Verizon is lining itself up with OTT television delivery, which is a frontal assault on not only the cable companies it’s supposed to be colluding with in the marketing venture, but with Verizon’s FiOS-based cable delivery system itself.

That’s the point about cage match competition. Verizon cooperates with the cable group in one agreement, then gets in its face with the next. It’s the entire pattern that needs to be considered, not any one component of it. Ultimately, it comes down to this – who’s going to enable you
to experience content on broadband devices? And when I say “content,” I mean entertainment. Sure, there’s telemedicine, digital education, the smart grid, digital democracy, but for the average household, entertainment and amusement are the key. Television was going to enlighten us about the world around us, too, and it wasn’t too long before it was belittled as a “vast wasteland.”

Who’s going to bring you a world of entertainment over the broadband system, both wired and wireless? Some observers think this comes down to a competition between telcos and cable, which is like saying that the appliances in your kitchen will all be provided by your local utility, since that’s where the electricity they require comes from. The reality is that the competition to bring you a new era in entertainment and, more generally, content, is a race among contestants with many different starting positions. Google and Facebook will help you find it, Amazon wants to sell it to you, Verizon, AT&T, Comcast, and the other cable companies want to bring it to you, Apple wants to sell you devices that let you enjoy it, Netflix wants to store and organize it for you. And don’t forget the people who actually produce the content, whether it’s NBC or MTV or
the NFL – the billions spent building fiber networks or developing brilliant handheld devices look meager without them. All of these contestants are competing to find the model that lets them coordinate the consumer’s appetite for entertainment content. And superimposed over this multidimensional cage match is the question of whether the medium for this competition will be hard-wired, with its spectacular ability to convey bits, or wireless, with its highly-valued mobility and rapidly advancing speed.

So you can pick the kind of competition you want. Coke versus Pepsi got us New Coke, and Oreos versus Hydrox got us double-crème Oreos.
The cage match is transforming life while generating new products, growth, and employment (one study this week estimates that applications built for mobile phones and other devices, and for Facebook have already created 466,000 jobs since 2007. One day you may watch Verizon-based streaming television on a Google device that gets signal from an Amazon cloud-based server – each company, driven by competition for the consumer’s allegiance, performing a role completely unassociated with its “starting point.” So which is the real, successful, form of
competition? That’s the question the subcommittee ought to answer.

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