Ev Ehrlich's Everyday Economics

18Aug/11Off

A Kick to the Head

I’ve written before about “cage match competition” in the broadband space – “space” seems like a better word than “industry” – in which the companies that deliver some part of the integrated broadband experience compete with each other like wrestlers in a cage match, forming and reforming alliances and engaging in head-to-head confrontations on the fly.

Well, this week, the fans who paid to see the match got their money’s worth, when Google, which seemed to be busy locking up Facebook looking for a surprise take-down in a clash over the fuzzy boundary between social media and search, suddenly disengaged and delivered a roundhouse kick to Apple’s head in devices by spending $12.5 billion – in cash, thanks – to acquire Motorola’s handset company. It’s a classic example of life in the broadband cage.

And from this swift and sudden change in tactics, I take away three points.

The first is that the “cage match” model of competition is real, and that policy makers and industry analysts need to get with the program when thinking about the broadband space. This isn’t some treadmill sprint between Hydrox and Oreo or Coke and
Pepsi or boxers and briefs – it’s something far more complex and, despite its stylistic differences, something that delivers all the benefits of “classic” Coke-Pepsi competition and more. Much more, if you look at the margins on soft drinks.

The second point is that wireless is the future. Again, nothing new here, but when Google’s CEO, Eric Schmidt, tells you that Google is a “mobile first” company, or when Larry Page, Google’s Romulus, says on the front page of the New York Times that
“even if I have a computer next to me, I’ll still be on my mobile device,” it’s time to stop thinking about whether wireless competes with wireline, and start thinking about what the future of wireline is going to be in the face of burgeoning innovation in wireless.

And the third point I take away is that, as Jolson used to say, “you ain’t seen nothin’ yet.” (Although Jolson said in blackface, which gives you pause about what he was about to show you.) Specifically, Apple has plenty of money – more than our country, as it turns out – and plenty of opportunities to respond to Google. In fact, let me telegraph my punch – if AT&T doesn’t get T-Mobile, Apple could. And if T-Mobile isn’t available, Apple may well look to Sprint or another wireless infrastructure provider and create a true “walled garden” global wireless system that levers Apples amazing iDevices, and that would lay the idea that competitive” must mean “open” in its grave.

(I have a fourth point, too. It’s that when a presidential candidate calls monetary policy “treasonous,” and discusses how the Fed chairman would be dealt with “pretty ugly” down in a state where only recently a man was dragged three miles off the back of a truck to his death in a hate crime, there’s something very, very wrong, and it’s not monetary policy.)

Let’s start with the news. In 2007, Google set forth upon this planet Android, its operating system for mobile phones, and made it
“open,” meaning any manufacturer could use it to support their handset or device. To date, 39 manufacturers (per Google) have done so, among them companies such as Samsung, HTC, and other manufacturers, who have climbed aboard Android and survived the Apple flood. But Google’s announcement turns his dynamic by ninety degrees – rather than encouraging these Android-enables anufacturers, Google’s new step-child, Motorola, will now compete with them. Larry Page’s press release (which ominously welcomes “Motorolans” to the family of “Googlers” – who’s writing this stuff, Gene Roddenberry?) says that Android will remain “open,” meaning that HTC, LG, and the other 36 manufacturers who are not Motorola can continue to use Android and will be treated fairly, which sounds the right thing to say, but which still is like saying that you’ll get a fair shot at Little League playing time, even if you’re at the same position as the coach’s kid. Like most successful alien invasions, Google’s incursion into devices may seem harmless at first for the indigenous population, but that’s rarely how the movie ends.

Here, again, I drink from the bittersweet wine of age and experience. Back at Unisys twenty years ago, we pushed UNIX as the “open” alternative to IBM and Microsoft operating systems, but everyone knew that UNIX was owned by AT&T, and they laughed us off the field. Android, like UNIX, is open and proprietary, and the contradictions again may come home to roost.

Time out – there’s also this: there are also patents in the mix. Motorola has 17,000 patents, although given the mess we confront in patent policy – what with “strategic” and “defensive” patenting contorting the system – 17,000 patents begs inquiry as much as
does 73 home runs. But having these patents strengthens Android’s position against challenge, and that’s got some old-fashioned value to it.

Back to the point. In fact, there were three points, and the first was the cage match. We used to think of competition as being like a sprint – Oreo and Hydrox, Pepsi and Coke, that sort of thing – fast, straight-forward, and one-dimensional. But the broadband space – or eco-system, or sector -- I’m not what term is both “technically” accurate in the province of economic argot and still conveys the dimensionality of the thing – isn’t about that. It’s a space in which a consumer integrates signal, services, devices, content, and applications, and no one makes the whole slate. So the providers of all of these “pieces” of the broadband experience have to compete to be the “platform” on which the others rest.

The best way to understand this is to go back to when it wasn’t the case. Earlier in the Internet’s development, the signal provider held sway. Handheld devices were pretty standard, and the signal provider subsidized them to attract users to their networks. Applications for the device were few and rare. The device was an ornament on the carrier tree.

What changed? What changed was that signal providers innovated like crazy, making signal better and more reliable and cutting its effective price rapidly – charging you hamburger prices for filet mignon. They raced into fiber and new cable technologies and through 3G into 4Gin wireless, all the time adding signal strength and reliability, and facilitating a dramatic expansion in the capabilities of the devices. Once the iPhone arrived, devices turned the model on its head – where devices were once an attachment to the network, the network increasingly became the stage on which the device did spectacular things. And as devices grew in power and sophistication, an entire new industry in applications emerged, competing with the devices that spawned them much as the devices competed with the service providers that allowed the device guys to exist in the first place.

So now, rather than an edifice built on the signal of Internet providers, the broadband experience is arranged, as a pivotal paper by
my friend Jonathan Sallet has it, as a “value circle” in which, signal, devices, content, and applications all compete to be the
organizing framework for the consumer’s experience. While each of these were once “layers” built on the platform of the network, now each is a platform in its own right – each competes to be the part of the experience to which the consumer bears allegiance, whether it’s “Verizon has the best signal,” or “the iPhone is better than all the others,” or “Google organizes the Web for me,” or “I’m on the Internet so I can use Facebook” (or the aptly named Twitter). Each is competing for a larger slice of the “pie” of value the consumer assigns to the integrated broadband experience. In fact, a few months ago I posted a note on Eric Schmidt’s comment that there were really four companies that were exploiting this “platform strategy” very well – Google, Apple, Facebook, and Amazon. Leave the nuances to the side for a moment -- what’s conspicuous about his comment is that the signal providers who were once the gateway to Webworld don’t even appear on the list. Ten years ago, there was much wringing of hands about the “cable-telco” duopoly. Now, the CEO of perhaps the most important platform that rests on the broadband Internet – Google – doesn’t regard them as worth a mention when he sizes up the future of broadband competition.

But this “platform” competition is working the way competition should, and then some. Innovation in signal leads to better devices, which leads to more applications, which leads to better devices to deliver the applications, which leads to better signal to attract the users of devices. It’s happening right in front of you. Google is a ‘search company,” right? Lives off advertising that accompanies searches, right? The algorithm is the “Coca Cola secret formula of the new millennium.

Well, no. Google has now made clear, even if Android itself didn’t, or its dalliance with spectrum auctions didn’t, or its cutting-edge high speed networks in isolated places didn’t, that it is much more. It wants to be the entity that organizes your total broadband experience, both wired and wireless, to be the “platform” on which you put your network, your devices, your applications, your content, and everything else. It competes with Facebook, with Apple, with AT&T, with Amazon – with every other platform seeking the same objective. Which is the point of this latest move in the cage match.

So that’s the first point – the nature of competition in the broadband space has changed. And the second point is more of the same – it’s time to recognize that not only do wireless and wireline compete, but that wireless may have the upper hand in that competition.

This isn’t news to people thinking through how they want to manage their broadband connection, trying to figure out the difference between their iPad and their laptop and their desktop. It’s not news to the growing number of people who have “cut the cord” and use only mobile telephony. But it is news to the Federal Communications Commission, which is still trying to figure
out if wireline and wireless compete for voice. Yes, voice. A year ago, in a case involving Qwest, the FCC confessed that:

The increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless service may materially constrain the price of residential wireline voice service.

And remember, this is for phone calls, not for data-based services. But in no less than the next sentence, the FCC continues, “the record here does not enable us to make such a finding…

But everywhere else, the finding is being demonstrated in real terms, real time. My favorite indicator, sports websites, confirms this – mlb.com recently reported that over half its hits last month came from mobile, and landline, users. A recent Nielsen study shows that 74 percent of smart phone users, and 78 percent of tablet users, watch video apps at home, even if they’re next to their TV. To some, that seems like playing with a flight simulator in a cockpit, or a great birthday card my wife got for a friend that had a picture of an old lady sitting in a rocking chair holding two Wii controllers in front of her with the caption “Wii Knitting.”

Your mobile phone doesn’t deliver as good a signal as your landline, but you use it anyway when both are in reach. Your mobile data device will do the same. I could play Scrabble with you at my desk station any time I wanted to, but I’ll pay for the privilege if I can hold a device in my lap. Google owns a big piece of desktop space, but its plans are for mobile, because mobile is the future. I’m not sure how wired and wireless divide the future, but before I ask the question “Does wireless compete with landline?,” I’d ask “what are the landline uses that wireless can’t replace?”

And the third point is that the cage match continues, and the most amazing moves, holds, and throws await us. Back to Apple, which has a Treasury with more in it than the GDP of Chile or the Phillipines. They have gone from a device and application – the iPod and iTunes -- to devices that extend themselves beyond the individual application, like the iPhone and iPad. They made AT&T their cost-sharing partner in their effort to launch and teach consumers about the device, but are now so important in the device world that Google is prepared to spend $12 billion to buy the ability to do what others are willing to do already – that is, make really cool Android phones.

Google’s response to Apple was to be “open,” but as the Motorola purchase implies, “open” isn’t working. People like “open” – it sounds so, well…open – but they don’t necessarily buy it at the store. Apple is winning by being “closed” – by being the shepherd and steward of everything that comes within its orbit.

So it would be logical for Apple to buy T-Mobile, or Sprint, or perhaps Clearwire, or perhaps the seeds (or is it remnants, or
shards) of hedge fund manager Phil Falcone’s planned network, and turn it into a network dedicated to Apple devices. Oh, I suppose you could run your Blackberry on it, just as you can run your Windows on your iMac, but why bother? It’s Wii Knitting.

A network engineered to Apple’s device specifications and tailored to run its apps – your iPhone and iPad and all the content and applications and services that follow them on iNet! The heck with open – it makes a great slogan, but customers don’t want it so much as they want a quality experience. In fact, the only reason why we have “open” is because customers demand it – that’s why the Internet is “open” but you don’t get E.D.-fixing, Nigerian lost money partner nonsense on your cell phone. Moreover, a “closed” Apple network would put more competitive pressure on other carriers – both landline and wireless – as any new, “open” network would. “Open” doesn’t mean competitive. Making customers happy means competitive, and an “iNet” – forgive me, company that already has that name -- could make many customers very happy.

Will it happen? Maybe not. Could it happen? No question. And do the circumstances exist that would allow it to be considered? Yes, because in the broadband cage match, Apple already competes with network infrastructure providers, device manufacturers, application developers, and content providers, just as Google does. Google’s Motorola buy ups the ante, putting new life into Eric Schmidt’s vision of “platform” companies that with each other across alleged boundaries in the broadband space. As the FCC dithers over what “competition” is and “neutrality” critics bemoan the absence of competition in broadband, competition is happening all around them.

 

9Aug/11Off

Substandard and Poorer

Markets are a loop – they take all the information out there that somehow relates to economic outcomes – “the cloud” before "the cloud” – and turn it into a torrent of individual decisions made by individual people, which in turn creates more information and more and new decisions. Given the massive scale of this undertaking, rules, institutions, and habits develop.

One of those is rating agencies, which quickly takes us to Standard and Poor’s downgrade of U.S. government securities. Rating agencies began in response to the blizzard of securities offered by railroads in the second half of the 19th century. There were many of them, many weren’t legit, and information about them moved at the speed of book. So a guy named Henry V. Poor started providing information about them in an annual volume. His efforts turned into the first rating agency.

Our ability to process information has burgeoned since then, but the amount of information to process has more than kept pace, which maintains the need to have an entity such as the one Poor began. Of course, the central contradiction of the agencies is obvious -- if you’re a company or an institution that wants to sell a security to investors, and those investors want to know how you’re rated, then you pay the agency to rate you, which means the rating agency has to deliver a judgment on someone that’s giving them money.

We now all get that this contradiction lay at the root of the 2007-08 mortgage crisis – banks brought lousy mortgages to the rating agencies, paid them, and got AAA ratings for them. The agencies, to some extent, can point to the information the banks gave them, but the bottom line is they hid behind this veil and acted corruptly, and their actions were part of the sweep of events that led to the crash. Were they solely responsible? No. To some extent, many market participants knew what was going on, but as Citigroup’s CEO, Chuck Prince, famously said before the crash, “As long as the music is playing, you’ve got to get up and dance,” and the rating agencies had the first tenor seat on the bandstand. Their malfeasance was hardly unprecedented – it was almost a clone of the accounting and auditing scandals of earlier in the decade, when companies (such as Enron) paid auditors (Arthur Andersen) to bless their books. To tie the point up, I don’t think there’s a way around this central contradiction of paying guys to decide if you’re honest (or valuable) or not. Investors need to be responsible for their own decisions but, once again, there’s just too much to know, and you’re going to need agents to filter the information for you. You just have to shoot one in the town square every so often to capture the attention of all the others.

Which takes us to Standard and Poor’s downgrading of U.S. government debt, from AAA to AA+. (When I first heard this news, somewhere between my thirteenth and twenty-second thought was, “Gee, there must now be some corporations with a better chance of paying their debts than has the U.S. government,” since they’re still AAA. And there are – specifically, four of them -- Automatic Data Processing, ExxonMobil, Johnson and Johnson, and Microsoft.)

Standard and Poor’s has taken a lot of heat for the downgrade, much of it deserved. They got some of their numbers wrong and they bungled the resulting release in their haste to release the downgrade at an appropriate time (Friday afternoon, after the stock market had closed – although the idea that the stock market “closes” is a misnomer – for the weekend, giving people time to process. (Which they did, and decided to go apeshit on Monday morning, but we’ll return to that.) Frankly, I think S&P’s weakest link is that David Beers, the head of their sovereign rating division, sounds like a less amusing version of Jim Backus’s
character on Gilligan’s Island. Someone needs to media-train this guy.

Ezra Klein, a very good economics writer in the Washington Post, goes after S&P today, taking them to task for the math errors they made in developing their position, essentially adopting the Administration’s line. I agree with everything he has to
say except his conclusion and their implications. S&P was right to downgrade the U.S. as an issuer (and remember, a shift from AAA to AA+ is a shift from “cosmic certainty” to “mortal lock”), and it did so for the right reasons.

When Henry Poor put out books about the financial performance of railroads, they filled a void. Ratings agencies still fill a void – there’s still too much information for investors to process, and despite the almost infinite supply, they need more, not less. Companies don’t tell you everything about themselves, only what the law requires, even the good ones, like ExxonMobil and
ADP. Ferreting out the truth from the companies’ releases takes work and adds value when done correctly.

But there’s nothing secret or unknown about the government (except in Greece, where Goldman Sachs taught the government how to manipulate its finances so its public sector borrowing could be hidden from the world – how come no one was shot in the town square on that one?). When S&P delivers a view that the U.S. government is now marginally less likely to repay everything it owes, it’s basing that on what you know and I know and they know. Which is why the outraged parties in
Washington are socked – shocked -- that S&P would take the two plus two that everybody knows and announce that
it’s four.

I’ve heard S&P criticized for making a “political judgment” about the prospects for meaningful debt reduction. Your point being…? It’s a more overtly political judgment than that made about companies, but that’s because the government is obliged to hash out its business in full view of the (disbelieving) world. If the public could turn on their televisions and watch live broadcasts of the Board of Directors meetings of ExxonMobil or ADP, they might – I mean, I don’t know, but they might – see arguments as obtuse and counterproductive over dividend policy or management succession as the budget debate we saw in the past few weeks.
When you think about the government honoring its obligations on any front – repaying government debt, paying your Social Security, funding Medicare (although these last two stretch the idea of “obligation,” but don’t compromise my point) – don’t you look at C-SPAN and think “I’m screwed?” What the hell is wrong with somebody forming a judgment about the country’s future based on how its political leaders behave?

And let’s leave aside for a moment the scene that will soon ensue when the politicians who criticized the rating agencies for yielding to the muscle of the mortgage issuers start to muscle the agencies for downgrading them. Oh, you’ve got to love the irony.

And there is then the argument that S&P is taking an inherently political position by saying, in essence, that action on the budget isn’t credible unless it includes action on entitlements and revenue. No, that’s not a political position – that’s reality. Let me go further. The budget debate comes down to this – do you want Medicare and how are you going to pay for it? There’s plenty more to the budget than that, but if we resolved that one question, we’d be most of the way home. Because Medicare accounts for the lion’s share if not all of long-term expenditure growth and if you want it, you’ll have to find some way to increase the revenue coming in to pay for it. To his credit, Paul Ryan answered the question – I’m willing to get rid of Medicare and give people a check, to the extent we can afford a check. It turned out that his answer was unpopular, but at least we got an answer. Getting a workable answer to that question will be hard because of the legacy of lies and slander that accompanied the debate over health care reform and that will make it impossible to discuss in an adult fashion restructuring the health care market. But that doesn’t change the reality that the atrocious budget deal arrived at just before we hit the default precipice did everything but answer the central question.

For an instant, earlier in the year, I thought the Administration had found a new route to “the question.” When they were talking about “winning the future,” around the State of the Union, I thought we were going to see them propose trimming Social Security and Medicare so there would be resources left to invest in infrastructure, energy and environment goals, universal broadband, education, NIH and other health spending, and so on. They would argue that “winning the future” was the number one priority, and everything that happened next was about achieving it – even if that meant cutting Medicare and Social Security to fit.

Well, that lasted about ten minutes – the future got dropped like a bad habit. Instead, we got the budget deal, and a deep commitment to keep the economy from growing through the rest of the President’s term. Moreover, the budget deal buries a sleeper in the “wise man” committee that will come back with a budget plan that gets an up-or-down vote. S&P is betting that the wise men won’t answer “the question” – that is, address the Big Daddy of entitlements and reform the tax system. If they’re right, and the wise men get nowhere, S&P is going to look pretty good. (And the argument that they will be right is that if the “wise men” don’t reach consensus, there’s an across-the-board sequester of spending, which many would prefer to a more comprehensive deal.) On the other hand, if a comprehensive deal emerges, they might well have to backtrack. But they made their judgment and will now find out if it was a good one.

Arguing that assessing the prospects for repaying government debt is “political” is like arguing that rating the debt of General Motors is based on about knowing something about cars. Duh. And if either the Administration or their Republican counterparts don’t like the political judgment, let them address it on its own terms. Tell us why we should see the recent circus and walk away inspired that we’re capable of making the difficult choices that we expect everybody else – Greece, Ireland, Spain, and so on – to make.

The Administration might quietly welcome the downgrade, since it substantiates their view that a budget deal must have revenue and entitlement components. Complaints about “politics” from the other side, however, may be more heartfelt. When you get down to it, the Republican side of this argument has not been about cutting deficits – it’s been about dismantling the public sector. The showpiece of their position – the Balanced Budget Amendment – not only demands that the budget be balanced come war, depression, or asteroids crashing into St. Louis, but that federal spending be capped at 18 percent of GDP. In essence, this means cut spending now and never let it expand or, to answer the central question, no Medicare (or Paul Ryan’s
substitute check), let alone the federal investments in education, health, infrastructure, and the like that predicate growth. It’s not a plan to reduce borrowing, it’s a plan to gut the public sector and sever people’s relationships to it. The downgrade we received from S&P is nothing compared to the downgrade of our future inherent in this approach – it’s a plan to make our economic future substandard and poorer.

22Jul/11Off

A Tip of the Cap

There’s an editorial in today’s New York Times called “To Cap, Or Not” and you have to wonder who writes this stuff.

In a nutshell, this money line in the editorial is this: wireline usage data caps warrant a close look by federal regulators.

Let’s start at a high altitude. Some wireline providers impose a cap on the amount of data a user can pull down, but more common is a “pay for what you eat” approach. The Times editorial, in fact, mentions an AT&T plan to charge users $10 for each 50 gigabytes of use over a 250 gigabyte limit.

Well, what do they imagine? That everybody pays one price and then can use all they want? Is there anything on Earth that works that way? The wireline broadband network is finite, even if growing rapidly, and allowing each user to consume as much bandwidth as they want is recipe for a congestion disaster on the network. And, of course, the Times’ concerns about charging users for what they use comes on the heels of their concerns about charging websites a premium price for premium service. So there’s the Internet in the mind of the Times’ editorial writers: users should be able to use as much of it as they want, regardless of capacity, and when their free use of it on the margin creates congestion or otherwise overloads the system, everybody should suffer equally. In short, encourage congestion and disallow any attempt to ration it or relieve it. Just when you thought we’d escaped the Tragedy of the Commons!

What is it about the Internet that makes people forget what they used to know about economics? It’s almost as if people think it happens like magic, and that human rules don’t apply. I’m sure there are some people at the Times who chuckle about how out of touch Ted Stevens was when said the Internet “was not a big truck. It’s a series of tubes.” But is their view any more sophisticated? They seem to think the Internet is some magic mojo wire that appeared out of nowhere and is free, and that once you set it up, it effortlessly runs itself.

For example, the Times says that “adding capacity is cheaper than putting up a network, and becoming cheaper all the time.” So apparently the Times thinks that if there is contagion, then the ISP simply ought to make the investment in expanding capacity without any hope of compensation. I mean, that’s what they’re saying – they’re wary of pay-for-what-you-use, but want providers to provide more as if users were willing to pay for the additional capacity.

The Times then concedes that there is contagion, but argues that “peak demand is the problem. But caps make no allowance for this.” Fine, how would you make such an allowance? When there’s an emergency drought, for example, water districts announce curbs on “non-essential” uses, like lawn watering. But when Comcast tried that – by cutting back on Bit Torrent use, since it was predominantly for file sharing, which is the lawn watering of broadband traffic – the FCC took it to court and the Times supported them. Or, we can do what Con Ed is doing right now in New York City – I was there yesterday, and there was a notice in the elevator of the building I was in telling people there to curb use and be ready for brown-outs. Can you imagine a notice appearing – where? on your screen? – telling you to please do your broadband stuff later? Or “rolling blackouts” of service?

And then there’s what utilities at the cutting edge are doing – smart metering and using peak-load pricing. My electric bill tells me how much juice I use during peak and off-peak hours, and it’s no sweat to run the dishwasher or washing machine before I go to sleep. I mean, I’m an American. But does the
Times want smart metering on broadband hook-ups? Time of day use? Do people want a pop-up on their screen (I don’t know if that’s possible, so don’t get on me if it’s not) or an app in their tool bar telling them what the cost of a gig is at that moment? Let alone the fascistic optics of a pop-up telling you it’s time to use less information….

But the real issue on the Times’ (collective) mind is probably competition. It keeps coming around to that. For example, the Times says that some users have a choice between a cable and a telco, but others “have no choice at all. Caps should not just be a way for Internet providers to extract monopoly rents.”

Sure, but… For one, broadband is becoming a market in which wireline and wireless actively compete, even more so as wireless speeds catch up to their competitors. Second, the market power of ISPs is checked in part by device, content, and other service providers who together comprise the integrated package of broadband services, as I’ve argued before. But even more important, if providers have monopoly power as the Times fears, they’re already using it, one presumes; they don’t need the pretext of use caps to exercise it.

The Times then ponders whether AT&T has a conflict because its U-Verse product offers television and other entertainments that compete with Netflix. The Times admits that Netflix on its little old lonesome “hogs” – their word, not mine – 30 percent of peak Internet traffic in North America. So U-Verse does not appear to be a major competitive problem for Netflix – I doubt anybody at Netflix is staying up at night worrying about U-Verse. Moreover, the cost and congestion effect of an AT&T, internally-sourced, entertainment stream is likely going to be less than that of a Netflix package brought to the network backbone by Level 3, distributed over the network, and delivered to the local loop. And let’s remember that we have a century of anti-trust law that prohibits predatory behavior. If AT&T is acting in a predatory manner, use it.

There’s an ongoing technological race between the ability of the broadband network to carry more stuff and the development of more bit-intense stuff for them to carry. Consumers have been the beneficiaries of that race. But those benefits are won at the expense of the ongoing tension between usage and network capacity. Paying for what you use is the solution – it’s one that’s worked in every market on Earth. The Times is worried about caps, but if they have a better answer, we’d tip our cap to them.

18Jul/11Off

ConocoPhillips

First, I’ve got a new post on Huffington Post – I know Arianna will be sending me a check when the transactions closes – and you can read it here.

Now, let’s start with this article about what’s going on at ConocoPhillips. No, wait, let’s stop there for a second – don’t you love the company names you get after mergers? You know, combinations of the names of the participants that get slammed together like those run-on German nouns -- like OLTimeWarner, or PriceWaterhouseCoopers. It’s like the kids in my neighborhood who have hyphenated names. Many of the kids with these portmanteau-like monikers were in the Bethesda-Chevy Chase Baseball league in which I spent six years coaching; they’d come to the plate with their names strewn over their shoulders from labrum to labrum, and I don’t mean guys with legit scapula bridges, like Doug Mientkiewicz or Jason Isringhausen, or Jared Saltamacchia. I’m talking about Michael Horowitz-Murphy, or Brian Reynolds-Benedetti, guys whose unis were more autobiography than athletic garment. I used to wonder, as I’m sure many of you did, what would happen if these guys one day had children with a hyphenated-named partner , which world leave them with the choices of, 1) a four-component name, like Horowitz-Murphy-Reynolds-Benedetti, 2) dispensing with one of their original names, and thereby defeating the whole purpose of the enterprise (at least I see it), or 3) an acronym! -- the aforementioned Horowitz, et. al. progeny could be renamed Homurebe, for example.

Well, whatever.
OK, back to ConocoPhillips, and the good news is that they’re not going to merge with ExxonMobil. In fact, they’re going to break themselves up – not into Conoco and Phillips, the component parts that constitute the merged entity, but into one company that explores for and produces oil, and another than refines it into products and distributes and sells it.

Over ten years ago, I was the speaker at a conclave of energy industry executives, investors, and other interested parties hosted by a leading private equity firm which I will not embarrass by naming. I did a great job, in that virtually nothing I said would happen in the oil market happened, particularly when I provided to them this astonishing prediction – that the rationales for the vertically-integrated oil “majors” – the Seven Sisters, Exxon, Mobil, BP, Shell, Chevron, Texaco, and Gulf -- had disappeared, and we would soon see dis-integration of the integrated majors into separate companies focused on exploration, refining, and maybe marketing.

I wish I could somehow convey to you the sea of confused expressions that greeted me. But there was a general consensus that my thinking made as much sense as if I had said “Alligator riboflavin besmirched Herkimer unicycle.” Yet now, a decade later, thanks to vision of ConocoPhillips CEO Jim Mulva, it’s coming true.

Why is this happening now? At one level, the more interesting question is why hasn’t it happened already? The different activities involved in an integrated oil company involve dramatically different skills. Exploration is about geology, accumulated experience, and now, the use of technology. Computers can now go way beyond the old, analog techniques of seismic refraction to map underground geological structure and find the sedimentary traps in which hydrocarbons accumulate. They make the information needed for exploration cheaper, deeper, and more accurate. (But, seismic refraction has left behind a legacy for us – the underground vibrations that provided the data from this technique led to better reel-to-reel, magnetic tape recording, which in turn improved studio music recording – the ability of the Beatles to work in four-track and make records such as Rubber Soul, Revolver¸and Sgt. Pepper was
an off-shoot of the search for oil by way of Ampex. In fact, it’s not really conjectural that the need for better analogue recording devices for oil exploration ultimately led to the recording equipment that allowed Flatt and Scruggs to record The Ballad of Jed Clampett. I’m told that the amazing Bela Fleck plays
banjo on the version used in the subsequent, eponymous movie, but whoever made a lousy movie out of a magnificent gem like the original Beverly Hillbillies can rot in hell, Fleck or no Fleck.)

And exploration has nothing, and progressively less than nothing, to do with refining. Aside from its basis in chemical engineering, refining is evermore an exercise in regulatory compliance – the most successful refiners are those who best manage he regulatory challenges of effluents, lead, flare gasses, and so on. And then there’s marketing, which requires the logistical ability to move product to where it’s needed and to establish brand differentiation once it gets there.

How did these things all come together under the same aegis? The answer derives from a central fact of the oil industry that is quickly becoming a fiction – oil was cheap, and its supply was concentrated in the Middle East. Middle East oil still dominates the world market, but not as it once did, and the cost of lifting it is no longer the determinant of the world price – if it was, we’d be back in the days of $3 barrels. At that time, “exploration and production”
meant being an Aramco partner and gradually exploring for an planning extensions of the major Middle Eastern oilfields.

Refining in this world was an annoying inconvenience on the way to market. But by controlling refining capacity, the majors had the ability to control and plan the flow of oil from its extraction to its final destination – no need for buffer stocks at refineries, no need for co-ordination with independent refineries, no need to worry about seasonal changes in product mix – gasoline in summer, distillate in winter, and so on. Oil majors controlled all of these stages much the same way that automobile producers made all their own parts – because that was the cheapest an easiest way to orchestrate all the moving pieces.

The initial OPEC shocks of 1973-74 changed the management philosophy of the Middle East fields, but not the lay of the land. By asserting their control over their own resources, the Saudi, Kuwaiti, and other Middle Eastern royal families substituted their (lower) rate of time preference for the (higher) preferences of the western oil companies – oil in the ground meant more to them than to the companies. The Western companies were happy to lift and sell all the Middle Eastern oil they could. But the royals saw extraction as a portfolio decision – why lift oil that might command a better price tomorrow, and why produce more revenue than the nation’s development effort could productively use? The resulting higher price of oil certainly gave added impetus to expanding Prudhoe Bay and Mexico’s Gulf fields, but the integrated majors still had access to the ace of trump.

Now, several decades later, Middle Eastern oil is locally controlled and its rents accrue to locals. And the industry now depends on complements to Middle Eastern oil, and those complements are increasingly found in remote locations and deep water. Exploration activity is more productive thanks to remarkable technology, but it takes more activity to find oil, and the oil that is found is characteristically in smaller concentrations. Moreover, as deepwater Horizon -- a rig that must have gotten its name for precisely these reasons, that it was positioned at the horizon of deepwater exploration
and production – no sin of hubris there – demonstrated, production is now far more complex than running the Saudi tap. Being good at both E&P and refining is like being good at painting and roller skating, or math and yoga – if you are, it’s almost an accident.

So the value chain has changed. Cheap and easy oil production meant that marketing was the throttle – you produced and refined so you could control the
flow to market. But now, the gating item is exploration; with oil seemingly perched near $100 for the foreseeable future, finding it is the trick. And if
you know how, refining it and selling it will follow.

And ConocoPhillips is coming to terms with this new set of realities. Moreover, since exploration and production is a higher risk venture than refining – I mean, ultimately, who the hell knows where you’re going to find a big pool of oil in the ground? – it commands a higher return. Refining is less risky, even if just as technical, and therefore more of a commoditized activity. And marketing is now the tail of the dog – does anyone doubt there will be fewer gallons of gasoline sold in the developed world ten years from now? The growth is in the rapidly growing economies of Asia and elsewhere, where it’s a more
competitive environment.

Moreover, every company that goes this route makes it easier for all the others, because each dis-integration creates a larger independent refining sector, which makes it easier for other integrated majors to imagine taking the plunge. The press reports of Conoco’s mitosis were quickly followed by the news that BP might soon follow suit. And from a risk management perspective, following Deepwater Horizon, they’d be wise to do so – their job is to focus
their risk management, not to spread it over a diverse set of activities. BP showed the world that being a production company is harder than it looks – one hopes they’ve learned that lesson themselves.

In the end, all of this activity is a symptom of the post-industrial era, in which scale is less important that specialization. In information technology, in
pharmaceuticals, in automobiles, and a host of other industries, the idea that scale – and in particular, vertical integration -- is the secret to competitive
success is being disproved. The press of competition forces firms to decide where their bets will be places. Information networks allow firms to disintegrate
and use zero-cost information to coordinate activities once orchestrated by internal pyramids.

ConocoPhillips’ decision reflects these changes. And before the story ends, all of integrated oil majors will be faced with the same circumstances, and will travel the same route. They will all break themselves up by stages. Refining will turn into a low-margin engineering service, and exploration a high-risk, high-reward enterprise where innovators will rule over the well-capitalized giants. It might take some time to get there, but time is only Nature’s way of making sure that everything doesn’t happen at once.

 

28Jun/11Off

The FCC’s 15th Annual Report on Mobile Wireless Competition

The FCC just released their fifteenth annual report on mobile wireless competition. It does everything -- describes burgeoning data traffic, talks about how 80 percent of the population has access to three or more carriers, talks about how the industry invests $20-$25 billion every year -- but answer the question “Is the wireless market competitive?”

In a way, it’s better that way. Unless you think through what it means for the mobile broadband market to be “competitive,” you can run yourself into a lot of trouble. For example, Douglas Holtz-Eakin, a conservative economist I know, like, and respect (even if he’s often wrong), recently was taken over the falls in a blog entry by Brad DeLong, a liberal economist I know, like, and respect (who’s more often right), in the following interchange, which Brad graciously entitled “Has Douglas Holtz-Eakin Completely Lost His Mind?”

Holtz-Eakin was advocating for the AT&T-YT-Mobile merger in the National Review (I’m untroubled by the merger, but am troubled by the National Review), and in so doing said this:

The DOJ’s “Horizontal Merger Guidelines” lay out a formula (the Hirschman-Herfindahl Index) for determining the state of competition and whether a monopoly exists. In this index, a value of 10,000 denotes a complete monopoly, while a value of zero indicates infinite competition. In the case of 1970s-era Ma Bell, the HH index was almost 8,000 (one of many reasons it was eventually split up by regulators). This merger, if successful, wouldn’t result in an index value even half as high as Ma Bell’s, especially when taking into account the varied Internet and local options for communications.

To which DeLong replied:

I mean, you can argue that the Herfindahl index is irrelevant because competition is moving very fast as technology changes and we actually want dynamic creative-destruction oligopolies here. But you cannot argue that 4000 is not an extraordinarily high Herfindahl index, can you?

And Brad’s right. Arguing that the post-merger mobile wireless market is “only half” as monopolistic as Ma Bell is like arguing that Muammar Gaddafi is only half as fascistic as Adolf Hitler or half as nuts as Idi Amin. It’s not really that strong a pitch.

At the same time, today’s mobile broadband market is infinitely more competitive than the Ma Bell regime, which was the Schumpeterian equivalent
of North Korea. So to reconcile its market structure (which is obviously dominated by a handful of firms) and its dynamic performance, we need a different theory of competition.

And I think that can be done. I’ve argued on various posts here that competition in the broadband market takes the form of a three-dimensional cage match, in which service providers, device manufacturers, application developers, and content providers compete for the attention and loyalty of
consumers, each attempting to be the “portal” through which the consumer enters the broadband world and assembles its various components.

Signal, devices, applications, and content are at once complements and substitutes. They complement each other in use, but they substitute for each other in terms of dividing up the total value created by their integration. Let me try a stripped down version of this argument on you, using an example that comes from my colleague Jeff Eisenach. I hope he doesn’t mind my appropriating it.

Let’s say that people go to bars for three things – they drink beer, eat pretzels, and listen to music. (They also go to fulfill their biological destiny, but this is a family-values analysis.) The bar puts these components together for the consumer in an attempt to win her or his allegiance.

Let’s say that one of these three components of the “bar experience” is the subject of an innovation. Maybe they serve a new kind of beer that makes you good-looking (although all beer does that after a while, I suppose), or come up with the most delicious pretzel ever invented, or decide to book The Strokes on Friday night instead of Tex Nebraska and the Turdblossoms.

I mean, do I even have to finish the analogy? If something like that happens in one of the components of the “bar experience,” then the value of the other two declines. The Piels distributor shows up one day with his kegs and the bar owner tells him, “I’m paying too much for Piels. I have these great new
pretzels and the Strokes are coming in, so frankly, I’m not all that interested in your beer – I can pretty much serve any old beer I come across, what with these pretzels and my new house band.”

Well, what’s the Piels guy going to do? He’s got a truck full of beer, it’s got to go somewhere. He relents, and lowers his price.

Of course, we live in a more dynamic world than that of this parable. For example, the Piels distributor might figure out that he’s going to have to deliver a better beer if he’s going to survive in a world where beer has been reduced to an incidental in the pretzel-and-band value model. Perhaps he does, which redistributes value back to him, and forces the pretzel guys to go back to the drawing board and the barkeeper to fire the Strokes and bring in Lady Gaga. In fact, each of the components of the “bar experience” is driven, in this model, to innovate and improve, if only to be the “hook” that brings people into bars. Pretzels and bands, in this world, compete with the beer as surely as other beers do.

Because that’s how “cage match competition” works – whether in the bar business or the broadband business. The pretzel innovators and the Strokes and the bar owner act – as if led by an invisible hand – in a way that competes with the beer distributor even though they’re not beer distributors themselves. Just like the service providers, handset manufacturers, application developers, and content poducers, the brewers, bakers, musicians, and bar owner are all in the cage, forming and reforming alliances, competing and cooperating at once. Maybe the beer distributor comes up with a pan to incorporate pretzels into his value proposition – buy my beer and you can have these innovative pretzels. Or, as AT&T said, “Use my network and you can use the iPhone.” Perhaps the pretzel guys will offer the Srokes as a house band for bars that make a commitment to their pretzels. Or, perhaps handset manufacturers will
attract applications developers to their patform. But the struggle in the cage match continues, with alliances and strategies completely forming and reforming – an ongoing, multi-dimensional competition between brewers, bakers, bands, and bars, just as between service, devices, applications, and
content.

Here’s what got me to thinking about this. In paragraph 154 of the report, the FCC says this:

(While Apple maintains rigid control over iPhone applications…) “Google’s Android operating system is made available free of charge to handset manufacturers and wireless service providers, and is available on multiple devices and multiple service providers. As a result, many service providers and device manufacturers have designed customized versions of the Android platform for their products. Some commentators have noted that, because
of this, it is difficult for third-party application developers to design and test products for use on a fragmented platform can vary by device and network.

Well, boo hoo! Don’t they get it? The proliferation of different platforms – Android, RIM, Apple, whatever else – is the reason why we have a cage match in the first place. It guarantees that there will always be this competitive tension among the different platforms, the systems that deliver them, and the applications and content they carry.

This back door whining about how hard it is to develop applications for different systems is, of course, another attempt by somebody over there to keep the dead horse of net neutrality on the track. Neutrality advocates have long argued that, technological difficulties notwithstanding, all devices should be interoperable – no exclusive deals, like AT&T’s with Apple.

But if you understand the cage match, that’s recipe for disaster. If you had total interoperability, you would end up with one dominant competitor in devices – let’s call them….uh, give me a minute…Apple. Imagine that government regulation required Apple to connect the iPhone to every network. Once they had established their dominance over devices, they would have a chokehold on all of mobile broadband. Want to offer service? Better pay our toll. Want to create an app? We’ll tell you the terms. It would be like letting Andre the Giant into a cage match with my daughter and her roommates.

And that’s the story of the FCC’s Annual Mobile Wireless Competition Report. It’s got lots of good data, lots of charts, and not much of an idea about what “competition” means. But it’s not alone – neither do the advocates who want it to wade into a morass of Internet regulation.

 

11Jun/11Off

The Usual Bet

When I first joined Unisys – this is probably September, 1988 – I found myself in a discussion leading to a disagreement with our Chairman over where currency values were going. It went something like this: We agreed the dollar had been propped up during the summer and would drop against the yen. The Chairman thought it was in for a beating. I disagreed, and thought that policy would defend it and stabilize it. After all, one of us had been Treasury Secretary and the other was a schmuck who had just arrived from Washington. We agreed to disagree and commemorated our disagreement by betting whether the dollar would fall below 120 yen before Christmas – the winner would give the other a cigar.

By Thanksgiving, my wife, who is a resourceful and talented woman but whose grasp of currency goes as far as the ATM, knew where to find foreign exchange markets in the Philadelphia Enquirer. And the dollar got as low as – I’m not making this up – 120.4. Sure enough, on the day before Christmas, the Chairman called me into his office, awarded me one of the lovely Dunhills in his humidor, and told me, “I was right, but it’s a matter of when.”

I tell this story partly because it was a great personal triumph but mostly because when a guy starts in to alibin’, he ought to come clean, and that’s what I’m doing. In several previous posts, I’ve expressed my optimism that the economy was poised for recovery, and that a backlog of hiring created the possibility of a “jobful” recovery. On January 30, 2010 – that’s 17 months ago – I posted a piece here called “Jobs Are On the Way,” in which I announced:

Lincoln one told a story about an ancient King who asked his wise men to write a sentence that would be true regardless of time and place. Their answer was: “This, too, shall pass.” The economists who predict no growth, no jobs, no nothing need to go back to that sentence. Yes, the economy has been abused by tax cuts, wars fought but not paid for, and a financial free-for-all in the housing market. But it’s about to come back. Jobs are on the way.

Was that well-written, or what? And, it turns out, wrong. Or, as the Chairman said, it’s a matter of when. I can retell the economic history of the intervening 17 months and tell you why I was wrong, but I’d only remind myself of what Will Rogers: An economist’s guess is liable to be as good
as anybody else’s.

I’m wearing this hairshirt and standing in the snow at Canossa because I need to settle my accounts before I deliver this opinion:

The guys who want to cut spending dramatically are about to tank the economy.

The economy appears to be slowing down. The number of jobs created last month, according to the BLS establishment survey, was frighteningly low, even when you accept that the survey has a downward cyclical bias. Housing prices have resumed their decline and further undermined households’ sense of stability. Demand is not strong enough to justify expansion of employment and continued weakness in structures – starting with residences – is undoing much of the improvement in other investment. State and local governments add drag.

The Fed’s quantitative easing program – QE2 – under which it would add $600 billion in liquidity to the economy – created some optimism back in
November, as well as criticism that Fed had lost, in order, its independence, the battle against inflation, and its mind. The first and third outcomes suffer from an absence of hard evidence, but the second has proved to demonstrably false. Beyond a food and energy price blip, underlying inflation is still at around 1 percent, below the Fed’s target. Bernanke says he’s not going to have a QE3, but what the hell else is he supposed to say?

So we’re left with this quandary – the economy is slowing down, and inflation is tame if not submissive. But the consensus position across the political system – from Speaker Boehner to the White House and through most of the Democratic majority in the Senate – is to cut spending dramatically.

Yes, the nation has a substantial debt – back to that later. But the debt is not going to be repaid without tortuous pain unless the economy can resume growing and creating income and employment.

We have two alternatives to achieve this goal. The first is the position found in a letter signed by 150 economists that Speaker Boehner recently presented to President Obama. Some are first-rate economists, others aren’t. But a position should be judged on its own merits, even if some of the people who hold it have said one loony thing or another elsewhere. And the position can be summarized by this squib from the Speaker’s office, noting that the economists in question call for immediate spending cuts to boost our economy and help create a better environment for job creation in America.

So, according to this view, the reason why the economy hasn’t created sustained growth and employment is that there’s too much government spending. The letter makes that clear:

Excessive government spending and borrowing is playing a central role in our economy’s ongoing struggle to create private-sector jobs – crowding out private investment, sowing uncertainty among small businesses, and eroding confidence that is critical to job growth. To help create a better envionment for job creation in America, we must reverse this spending binge as quickly as possible and free our economy from the burdens of excessive regulation, over-taxation, and runaway spending.

As The Emperor says at every occasion to Salieri and Mozart, “Well, there it is.” Too much spending is crowding out investment – there’s no money left for equipment, structures, and the rest, because the Feds are gobbling it all up. This, in turn, leaves business owners wondering what the hell is going on, which leads to uncertainty and loss of confidence. Then there’s the stuff about excessive regulation, but let’s at least agree that’s not a budget issue, before we consider whether what they mean by excessive is Dodd-Frank, cap-and-trade for greenhouse gasses, the health insurance reforms of last year (“government-run health care”), and whatever else.

Is federal borrowing choking off the economy? To me, there’s a simple litmus test – the interest rate. If the government is borrowing and money stays cheap, it’s hard to argue that its borrowing is the source of the problem; were we to see interest rates rising, then we’d have evidence that government borrowing was bidding away the supply of savings from other uses and we’d have to wonder why we were doing it.

Here’s a picture of the rate of interest on the ten year Treasury bond since 1992. From 1992 through 2003, the rate is declining on trend; first, because of the progress towards balancing the budget under President Clinton, who was that fateful combination of both lucky and good. He was good in that he took action against deficits, including higher taxes, despite Gingrichian – or Gingrinchian? – prophesies that he would trigger a recession. (I wonder to whom Newt gave the cigar when he lost the bet.) When Clinton departs, Bush gives away the surplus, but 9/11 coincides with a substantial market correction and the economy weakens, allowing the interest rate on the ten-year Treasury bond to fall further.

From 2004 through 2006, the economy is starting to grow again, so the bond yield takes a modest upward path, until the first housing quakes start to hit in 2007 and those investors who can get out – deleverage – do so. But by January of 2009, the yield has dropped to 2.884 – it had been over 6 in the middle of the decade and still around 5.0 in 2006, the last year the housing market spent on this planet before departing for points unknown.

Now let’s look at the last two years, close up. The Obama stimulus pushes the rate up in 2009, and keeps it there, a perfect barometer of expectations, until April of 2010, when the Eurzone falls apart and financial markets are thrown into the kind of uncertainty and eroded confidence that the 150 letter-signers fear. The rate, like the heart monitor of an emergency room patient, drops to 2.40 in early October of 2010, very close to the 2.30 it reached in January 2009, when the situation was darkest.

The Federal Reserve then stepped in, sensing the danger, and announced its program of quantitative easing – buying up assets from the banking system to put new cash into the economy. (It was advised to do so by many, including this sign, seen at the Jon Stewart March For Sanity rally that November.)

The announcement of this program, “QE2,” leads the nation’s pulse to rise, partly because they expect inflation to be set off by these asset purchases – although it hasn’t and they haven’t – but mostly because investors expect some response in the economy. By February the yield is up to 3.75 and there are signs of recovery, but these fail to take root and the recovery falls back, culminating in the recent jobs report and the news that household consumption of goods fell sizably in March and was flat in April after several months of growth. Thus, by this week, the rate has fallen back to 3.0 percent.

The collapse of bond yields gives the lie to the position taken by the 150 of the Speaker’s economist pen pals. Government spending isn’t crowding out investment, it’s substituting for it. Inflation isn’t rising, it’s at worst stationary, and possible falling now that raw materials prices may have crested. If fear of intrusive regulation is driving these numbers, then perceptions of their intrusiveness seem to be
changing regularly.

And yet, the Speaker and his allies have won the political battle to cut spending now, reminding us that nothing can match the power of an idea whose time has come, even if the idea stinks.

There’s an alternative view. It argues that while corporations and banks have been stabilized and more (as in the almost $2 trillion of cash sitting on corporate balance sheets ), households are the lagging element in the recovery. Companies are willing to invest and – for equipment and software – are already doing so at modest rates – but absent households having the wherewithal to buy goods, why invest and hire to make more of them? If there weren’t a burgeoning federal deficit, a direct stimulus would clearly be in order. The complication arises in reconciling the two.

Markets aren’t worried about the U.S. government finding enough quarters in the sofa to manage its debts – they’re worried that Greece may not have such a sofa, but not us. They are worried that, down the line, the U.S.’s costly promises to subsidize seniors’ medical care and (to a lesser extent) provide them with pensions, will break the bank. A foresighted political system would have addressed this, but ours lies just behind Iceland’s during the winter solstice. If Paul Ryan was “bold” and deserves “credit,” it’s for recognizing that this is the real problem, even if his “solution” -- to turn Medicare into a voucher program – was more meant to enfeeble the state than to provide the elderly with health care coverage. (Imagine the oldest person in your family trying to find health insurance they can afford. Now imagine 100 million of them trying. Next.)

So here’s the plan.

1. The federal budget should be designed to produce a deficit no larger than this year’s on a cyclically-adjusted basis based on its long-term trend growth rate. That is, freeze the level of the deficit, agreeing that it can go no higher, unless the economy grows below its long-term trend (of about 2.6 percent). On the other hand, if the economy grows faster than that, require some retrenchment (which to some extent is guaranteed if there’s less paid out for unemployment benefits and the like).

2. Address the root of the household consumption problem – the residential mortgage market. The feds should break up Fannie Mae and sell the pieces – or perhaps distribute them, once the true value of what they hold is considered – to a number of entities greater than the fingers on one hand. These “little Fannies” should be allowed to refinance existing mortgages at their face value – regardless of housing market prices – at a federal financing window for anyone who has made their mortgage payment for the last 24 consecutive months, at the least up to the level of existing “conforming” mortgages.

3. This wave of refinancings would give households more confidence and certainty, and would create income in the form of lower mortgage payments. The government’s exposure would be defined unambiguously, penalties for fraud would be clear and enforceable (fool me twice, shame on me), and the resulting assets would be held by the “little Fannies” and secondary markets in pre-determined proportions.

4. The two years imagined here would give fiscal policy a chance to reset itself, particularly since they would include the 2012 election, which would allow the public to speak about taxes, Medicare, Social Security, and other forms of spending and tax expenditures. My guess is that we will not have a debt default this summer because both parties want to have this issue dominate the 2012 election, even if one of them is proven wrong. The election would give us a direction about taxes – not just whether to raise rates and on whom – but the nature of the system itself. Should be shift it from income to consumption in various forms? Should we continue to have a separate tax on corporations as opposed to the people who own them? What do we do with the proliferation of tax deals – from IRAs to home mortgage interest to special treatment of oil and gas – that load so much burden on the tax code? Once we agree as to form, we can discuss the progressivity of the burden. I like progressivity. Others don’t. I’m right and they’re wrong, of course, but at some point we’ll have to agree.

5. Finally, social security and Medicare wage taxes paid by employers should be waived for net new hires over those next two years, but within the budget framework suggested above.

There are some other things I’d like to see as well – a national infrastructure bank, for example, but right now they seem secondary. The question is a larger one – where are we headed? Laying out a direction like this is a fool’s errand, so at least I’m qualified. But this kind of discussion presumes that we all share the same goal –reviving the economy and triggering new employment. I can tell you why this program will work – it crates stimulus, takes minimal risks, provides some certainty in the short term as can be provided regarding debt, and doesn’t slash demand at a critical moment.

I don’t think the 150 letter-writers can do the same. Their argument, it strikes me, boils down to “cut spending and slash demand,” and while that might not seem smart, it will deliver the economy and the people who inhabit it into a state of grace and ease their furrowed brows. If interest rates were high or rising, they could point to that as evidence. But they’re low and falling, suggesting that the problem is not as they define it.

Or, an alternative is that the letter-writers, from such dignified guys as Mike Boskin or Doug Holtz-Eakin down to the guys who think Obama’s a Marxist, really don’t share that goal. They see the moment as a chance to make government smaller, which is what they want more than a recovery or a growing economy, certainly for the next few years. Dramatic cuts in spending now would give you the former, but reduce the chances of the latter. And, I think they know it. They're prepared to let the economy tank in the short-term if it means that the state will be helped to wither and the President be defeated in 2012.

I’ll bet you a cigar.

3Jun/11Off

The Gang of Four

My friend Steve Rogers, the greatest pitcher in Expos/Nats history (158 wins of which 37 were shutouts and a lifetime 3.17 ERA), once warned me that the most serious arm injuries he ever experienced were the ones he incurred patting himself on the back. But after my post of several weeks ago on the nature of competition in the broadband market, I’m going to have to accept the risk of injury is part of the game and get out there and pitch.

Back on May 12, I said:

We used to think of competition as being like a sprint – Coke and Pepsi, Oreo and Hydrox racing to a finish line. But Microsoft, Google, Apple, Comcast,
Motorola, Facebook, Amazon, Clearwire, Verizon and the like (but, unfortunately, not T-Mobile) are not on a track – they’re in a cage match, in which alliances and partnerships continually form and reform with the goal of being the last contestant standing – the entity that “brings the entire broadband experience together” for the consumer.

Well, as if he wanted to agree with me as emphatically as possible, Eric Schmidt, the CEO of Google and perhaps the toughest guy in the cage – the biggest, meanest father-raper sitting on the bench -- gave this interview last week.

And in it, in response to a question about “a new platform war emerging.” Schmidt says something important:

If you look at the industry as a whole, there are four companies emerging that are exploiting “platform strategies” very well…Google…Apple, Amazon, and Facebook.

Or, as the article reporting the interview calls them, the “Gang of Four.” What defines a platform strategy? A couple of things, to listen to Schmidt describe it. One is a consumer orientation, a second is ubiquity (global presence), and a third is excellence in one aspect of the Internet experience – whether Google search, Apple gadgetry, Amazon retailing, or Facebook social connectivity. And the crowning piece of the definition is that the product becomes a platform for other value services – that Facebook becomes an e-mail service, and Google’s new “+1” feature becomes Facebook, and Apple’s Kindle becomes a stalking horse for an alternative to Apple phones, and Apple phones become a platform for an entire new apps industry in which the others take part, and so on down the line.

In fact, when Schmidt was asked who the “next” member of this Gang was (why shouldn’t the Gang Of Four have five members? Consider the Big Ten) and whether it was Microsoft – remember Microsoft? – Schmidt said, no, Microsoft was an “enterprise” company. Which means what? That they sell to businesses? Well, yes, but my copy of Office, my Xbox (Ok, that’s literary license – I don’t have an Xbox), and perhaps my phone one day speak to the contrary. No, the explanation must be that Microsoft isn’t involved in the competition in which the Gang of Four is involved – the struggle to be the consumer’s gateway to the broadband Internet, to organize and intermediate the consumer’s broadband experience.

In fact, Schmidt specifically casts out Microsoft and says that the next members of the Gang would be PayPal and Twitter.

OK, PayPal, I can see that – if Apple is gadgets and Amazon is the bazaar and Google is search and Facebook is digital Main Street, then PayPal is currency. I did a piece on NPR about thirteen years ago – I’d link to it but many of my greatest radio moments seem to have been erased by NPR, probably because I was too conservative -- to the effect that American Express ought to get on the stick and buy EBay and PayPal before it’s too late. Jeez, I nailed that one on the head! Can you imagine where they’d be if they’d done that, seamlessly migrating people from their cards to PayPal, integrating the two, making EBay a PayPal/AMEX playground?

But I digress. PayPal, sure, they could become the digital currency of the next epoch, although Schmidt is probably being strategic in mentioning them. But Twitter? Something that Aston Kutcher uses to share his pensees, or the medium of choice for meandering Congressmen who post underdressed pictures of themselves? They’re a prospective champion of the cage match? Can you imagine being Microsoft, the Standard Oil of the desktop computer, and being told by Eric Schmidt – a guy from Novell, for Chrissakes – that you’re really not relevant to where the digital world is going, that you can stand aside and let Twitter get past the competitive rope line and onto the Club dance floor while you and your antiquated rear end sit out in the cold? Whatever happened to respect? I’m Microsoft! I used to be somebody! I was the subject of an antitrust investigation before your co-chairmen had their first beer!

Sorry, old timer. Personally, I think Microsoft might yet get somewhere in the phone business. But their company, essentially, makes computers work, and making computers work seems a good deal less important today than getting them connected to the broadband network, and when the “Cloud” arrives, computers will look like the Princess Phone of the new millennium – lovely to look at, but not all that interesting when you get right down to it. Twitter, on the other hand, may today just be a way to find out if the Korean taco truck will be in my neighborhood at lunch time, but it may yet be the platform – Schmidt’s word -- that people use to buy and listen and chat, and mail and search – or more generally, “find out” – and therefore be the winner of the cage match for who gets to intermediate the entire broadband experience.

Intermeditation! In fact, Schmidt all but says that’s what it’s all about, albeit in another context. He remarks at one point in the interview that music is fundamental to Google’s growth and …well, wait, let’s stop right there. Music is fundamental to Google’s growth? What the hell is that? Music has never had anything to do with Google’s growth. In fact, I’ll bet Larry and Sergey are terrible dancers. Ah, but music is important to Apple’s growth, and therefore it’s a must for Google, because that’s the nature of the cage match.

But back to disintermediation. As Schmidt says, You have this disintermediation possibility, of people by-passing studios and going directly to digital rights.

Or, as he meant to say, We’ll make the studios dance to our tune, just as we will the signal providers, and the device manufacturers, and the rest of them. Because we’re here to intermediate every aspect of the broadband experience.

And I don’t mean that pejoratively – that’s what platform competition – the cage match -- is all about. It’s about becoming the frame in which the consumer/user places the rest of the broadband experience. And that’s the real competition in the broadband market. Signal carriers created these new competitors by virtue of the fast and affordable networks they created, and now they have to keep up with them. Content producers thought they would meet their customer on the network, but now find that a new class of platform megafirms are the entryway to the consumer’s frame of reference.

That’s the real nature of competition in the broadband world today – a cage match among firms that offer connectivity, devices, applications, content, and
more. Each tries to intermediate the others, each tries to capture the lion’s share of the value of the integrated broadband proposition. Schmidt gets it, and the rest of us need to as well.

30May/11Off

Video Killed the Radio Star

Remember that song? It was recorded by a band called the Buggles and it was (ironically, in the true sense) the first song aired on MTV when the video channel began killing radio on August 1, 1981. I remember when it was first released, as it challenged for a brief moment my then- (and now-) contention that there was nothing aside from Elvis Costello that I wanted to isten to that was recorded after 1971 or so, except for people who made ecords before 1971 or so. But fortunately, I decided that aside from te cute hook, it didn’t really challenge my prejudices, and I could go on dsmissing the work of an entire generation without concern.

This brief insight into a tortured soul aside, the song came to mind when I read an amazing article in the Washington Post last week. It reported on a study by the broadband analytics firm Sandvine concluding that Netflix accounts for 30 percent of all broadband traffic during peak hours, and that Netflix, together with Google’s YouTube and other on-line video services account for 46 percent – almost half – of peak Internet broadband use, and that they’ll account for 55 to 60 percent of all traffic by the end of this year.

It was an amazing article for two reasons. The first reason is it confirms that video has burgeoned on the broadband Internet, so much so that it already accounts for half of traffic. Now, to some extent, that’s circular, because video is such a bandwidth hog that whenever users are streaming the most probably will turn out to be the peak period of broadband use. But it also makes clear that broadband itself is becoming more ubiquitous and more powerful at rates we didn’t anticipate at the beginning of this decade. I’m sure many of the critics of the pace of broadband adoption – or the folks who advocate that Internet infrastructure providers share their investment with whomever comes along, or that advocated a national fiber network paid for by the federal government -- go home and watch high-def videos or use amazing apps on the 4G devices and never stop to consider the contradiction.

But the second amazing thing about the article is that the Post appears to have no idea about the significance of this milestone. Because the Post’s reporting focused on how cable and telecom companies were going to start billing broadband users according to how much data those users pull down.

Well, duh. Of course the service providers are going to have to charge users according to how much they use, although I can guarantee you that same outraged souls somewhere are going to complain that broadband infrastructure providers have the audacity to charges users by how much they use (abridging their access to information!) instead of turning their systems into some kind of all-you-can-eat free data buffet. But that’s not the point.

The point is that we can’t afford any longer to nurture the dream that everything on the Internet must travel on the same terms and conditions as everything else or, as the dreamers call it, net “neutrality.” Because the spread of video makes clear that we can’t, and that we shouldn’t. Some traffic is incidental to the system’s operation. But other traffic is the equivalent of an eighteen-wheeler on a farm-to-market road, clogging all other traffic and imposing costs on every other vehicle.

And the drivers of these broadband big rigs aren’t the valiant entrepreneurs and the “little guy” that some advocates of “neutrality” claim they’re fighting for. They’re Netflix and Google (YouTube), who are getting a free ride paid for by the rest of us when they congest the network and impose costs on all other users.

And the free riders know it. Netflix, as I mentioned in a post last December, entered into a deal with one of the companies that makes up the Internet backbone called Level 3. Companies such as Level 3, Orange, Comcast, British Telecom and others have arrangements called “peering,” in which traffic jumps from their systems to each other’s on its way to the final user, so long as that two-way flow is roughly in balance. Level 3 is in other businesses, though, such as being a CDN – a content distribution network, an entity that takes a website’s content to the backbone, where it finds its way to the final
user. And they cut a deal with Netflix under which they would take Netflix’s movie streams to the backbone for distribution to users.

But when Level 3 showed up at Comcast’s backbone system (not its “last mile” system, the one that takes signal to your house – Comcast would have to lose its mind to deny its customers access to the Netflix product) with a massive flow of Netflix films, Comcast told them they’d have to buy more ports to the Comcast backbone network – the volume of traffic Netflix represents went way beyond the normal proportions of two-way traffic that “peering” covers.

Level 3, rather than deal with reality, went to the Federal Communications Commission and complained that Comcast’s refusal to carry as much Netflix signal as Level 3 provided was a violation of the FCC’s principle of “net neutrality,” and wanted Comcast to be forced to carry it. So now, it turns out that what they wanted to force Comcast to carry – in the name of “net neutrality” and an “open internet” – is at least a part of what makes up 30 percent of Internet traffic.

The Washington Post may not get it, but that’s the real meaning of the burgeoning use of video on the Internet. It’s a challenge to the doctrine that the content is small and the networks are big, and that the networks can be told the terms on which they can carry signals without any loss to themselves or their users. It shows that there are big Websites that want to ride the “neutrality” slogan into a world in which they offload their costs on to everyone else.

And the most outrageous part of the whole thing is the sophistry of the “neutrality” camp. I think most of the advocates of neutrality aren’t out beating the drum because they think it would be good for the world if Netflix and YouTube can eat up the system’s bandwidth without paying a fair price for it. That thought probably never occurred to them.

But the reality is they’re being played for dupes. An amazing column in USATODAY recently claimed that “neutrality” was about “the big guy versus the little guy.” But the “little guy” they claim to have in mind turns out to Netflix, or YouTube, or the other sources of cholesterol in the Internet’s broadband arteries.

Maybe some of the advocates willing to say this kind of stuff will think twice now that we have a clearer idea of what traffic the Internet carries, and before video kills again.

16May/11Off

Demolition Derby

I live in a leafy post-war suburb outside D.C. that was first populated by the G.I. Bill Generation, who gave it an intimate, neighborly feel. But as the G.I. Bill Generation aged, the neighborhood started to experience a schism of sorts, as the original settlers wanted to preserve the place as they knew it, a goal that often conflicted with the reality of change. The defining episode in this conflict occurred when an architect wanted to buy an abandoned sandwich shop on MacArthur Boulevard and turn it into an office and showroom. And since no one had maintained this place for a while, many of us thought he had a great idea. But, as part of the deal, the architect wanted to enlarge the carport behind the shop to accommodate a couple of vans, and the militant neighborhood orginalists raised holy hell about it – they would only approve a plan that kept the property as it is – well, as it was, particularly as they remembered it. The architect cut his losses and walked away. (P.S. A second architect bought it and, now chastened, the local elders allowed him to build the carport. Now the preservationists are giving him grief because he wants to install solar panels. Really.)

And I recall a lawyer-neighbor telling me that the preservationists had never heard of the legal doctrine of “constructive demolition,” which means that if a property has been abandoned and falls apart, you can finish what Nature started and tear it down. “And once they get that determination from the County, they’ll be able to put up a row of townhouses that will be a lot more unsightly than a few vans on a carport,” he said grimly.

I’m reminded of this (probably unduly long) story by the opposition to the merger of ATT and T-Mobile. Because much of the opposition has the character of the elderly retirees who wanted to preserve an abandoned building in its original, if untenable, form. They’re very focused on whether the mobile phone market has three players or four, and think that preventing the combination of T-Mobile and AT&T will meaningfully influence the level of “competition.”

There’s a legitimate process of anti-trust review to be applied here by the Justice Department, but let’s reduce the problem to a thought experiment. Some folks argue that the national mobile market isn’t competitive right now – in fact, the FCC recently didn’t quite say it wasn’t competitive, but demurred from saying that it was.

But if it wasn’t competitive, then how did T-Mobile end up with a declining market share and a (relatively) stagnant product offering in the first place? Didn’t it get the memo about how the four major providers were colluding to raise prices and restrict supply? The only explanation for how T-Mobile ended
up by the wayside is that they were outcompeted, meaning that competition has driven prices and product quality past the point where the fourth largest provider can’t survive on its own.

And if that’s the case, then what’s the competitive loss if it’s taken over by AT&T? T-Mobile obviously doesn’t constrain anybody’s behavior – it’s in bad shape, has a smaller footprint than its competitors, doesn’t offer the Fourth Generation products and services that its competitors do, and if you talk to its
customers, the best thing they can say for it is that it offers “great customer service,” meaning its customers appear to require a lot of service.

There are other issues involved in the merger – conspicuously, the chronic shortage of spectrum that makes T-Mobile, which has some, attractive to
AT&T, which wants more. The FCC has big plans to find more spectrum, but “plan” is a word we use for what hasn’t happened yet. But more on that some
other time.

To my thinking, the real risk here is not that an anti-trust review ixnays the merger, although if my thought experiment is the criterion, that would be a mistake. The real, hidden, danger is that the advocates for more intrusive regulation of the Internet will see the merger as an opportunity to saddle up some of their pet hobby horses and take them for a ride.

To wit, here’s a reaction to the merger proposal from Nilay Patel, an editor of Engadget, from which I’ll quote at length:

…the current state of the US wireless market sucks. It sucks hard. AT&T is straight-up lying when it says that there's "fierce" and "intense" competition in the wireless market. …and the FCC and DOJ have the opportunity to blow it up by attaching significant conditions to merger approval.

And man, does the wireless industry ever need some big-time blowing up. AT&T points to the explosion of Android and the iPhone as evidence that the wireless industry is competitive, but I see that only as evidence that Google and Apple are big enough to be competitive regardless of the knee-deep carrier bullshit they're forced to wade through en route to the consumer…Mobile is exploding in spite of the carriers, not because of them. Let's fix it.

So, what am I proposing? Two very simple rules:

• First, that the FCC impose the same open-access requirement on the newly merged AT&T as were imposed on Verizon's 700MHz spectrum purchase. That means AT&T would have to allow any device and any application to use its network, just as Verizon has to with its LTE network. You might recognize this riff -- it's a little something called net neutrality.

• Second, that the FCC require AT&T's 700MHz LTE devices to be interoperable with Verizon's 700MHz LTE devices. This would allow a consumer to take their phone and switch carriers just by swapping a SIM card. There are technological hurdles to making this happen, but it's key -- allowing consumers to easily jump ship will force the carriers to actually compete for their dollars.

 

Hey, buddy -- you kiss your Mom with that mouth? Regardless, let’s start with the claim that Google and Apple (and RIM, and Motorola, and Amazon, and whomever else) are so big they had to wade through…let’s call it the obstacles posed by Verizon, AT&T, Sprint, T-Mobile, and the other carriers. As I see it, Google, Apple, and whoever else have the carriers dancing to a tune played on a handheld device. In fact, AT&T, which won the first round of the iPhone sweepstakes, ended up substantially upgrading its network and accelerating its progress to 4G to keep its iCustomers iHappy.

So the result was what you’d expect from competition – more investment, better service, a better customer experience. The wave of new devices certainly
contributed to the – dare I say it? – intense competition among AT&T, Sprint, and Verizon to roll out more capable, better 4G phones. Rather than wading through a cow pasture, the device and applications providers are forcing the carriers to improve, which in turn is forcing the device guys to innovate as the networks’ capabilities grow. Witness, iPad, Xoom, and the rest of the devices that did not exist until the carriers invested in the speed and signal strength to support them.

But Patel’s most frightening statement is not his Through the Looking Glass view of how the wireless eco-system works. It’s his willingness to overlook the imaginary merger danger in exchange for two policy prescriptions – his radical quids for a nonsensical quo.

The first is “a little something called net neutrality,” which is a “little something” the way the Beatles were “four clever moptops” and the Von Hindenburg Disaster was “a delay at the airport.” Under Patel’s doctrine, network providers would have to accept all applications and devices, whether they were not engineered for the network, or lacked security features and invited spamming, or were band-width chewing videos that didn’t pay for the congestion they caused, or whatever else. The network, contrary to Patel’s implication, is not a series of “dumb slurries” that can take crushed coal powder one day and a fine claret with good nose and body the next. They’re complex and nuanced networks that require management, and some of the choices Patel derides – like what goes on them – are management issues, not editorializing or discrimination. Do you want the phone in your pocket to bring you a few dozen marketing calls a day, like the phone on your wall does?

But, paradoxically, remember that the neutrality camp came to their view because they thought – or at least asserted – the wireless market was not sufficiently competitive and that consumers wanted all this “openness” but were being denied it. After all, the advocates knew better than the market. Well,
Verizon agreed to some stipulations when it bought the 700 MHz of spectrum in for reasons known to them -- they call it the "Open Development Initiative." So if Patel and the neutrality guys are right, then AT&T ought to be emulating the Verizon deal just to maintain their competitive position. Advocating that AT&T sign on to the same regulatory dictates is a tacit admission that consumers don’t care about what the neutrality types wanted at all, that the VZ stipulations were just a hoop the neutrality guys wanted the company to jump through just like the old-timers in my neighborhood wanted the architect to skip the carport, even if nobody really cared and the carport ended up getting built anyway.

And the second demand Patel makes takes us further into hyperspace. There are certainly some “technical hurdles” to making all networks interoperable for devices – asking that is like trading a player from the Red Wings to the Pistons and asking him to play for his new team without taking his skates off. Besides, it goes back to the first point – having different devices on different networks has forced both the networks and the devices to get much better, very quickly. Only the oldest among us will remember what life was like back in, say, 2005, before “smartphones” and apps were a multi-billion industry, before
mobile download speeds of 5-12 megabits, before the Chevy Volt and Lady Gaga and Michael Jackson and Liz Taylor walked among us, before the Expos left
Montreal.

All that stuff happened – well, except the Nats and Lady Gaga and so on – because there was no mandated interoperability. If everything was “plug and play” (ignoring the inconvenient “technological hurdles”), then we could have had Apple, with its interoperable iPhone and iPad, monopolizing the device market, and running a toll booth for every new application trying to reach the market. Why would AT&T, Sprint, or Verizon bust their chops upgrading their networks just so Apple could cream skim the entire mobile broadband eco-system? Universal interoperability would have been a competitive debacle, even if it sounds like a no-brainer at a distance.

So if we’re going to review ATT/T-Mobile, let’s review it. Will it lead to predatory pricing? Do AT&T’s claims that it will be better able to expand its roadband network have merit? Will T-Mobile be missed? Those are all questions worth answering

But confusing the merger question with the need for “neutrality” is wrong – and disingenuous. Schumpeter called the ongoing process of innovation “creative destruction.” That’s a better fate for T-Mobile than using it as a pretext for an unwarranted regulatory regime, or letting the company descend into
“constructive demolition.”

12May/11Off

The Cage Match

I keep wanting to write about the merger of AT&T and T-Mobile, I really do – not because it’s so important, but because it’s really so unimportant. Sure, there are a few critics who think that T-Mobile’s disappearance will make a significant difference in a market from which competition has already made them (T-Mobile, but also the critics, I guess) irrelevant. But every time I get it together to draft something, something more interesting happens.

Back on March 24, I was about to hold forth on the merger when something far more important indetermining the future of communications happened – the release of the iPad 2. But as I planned to update and post the T&T-Mobile piece this week, time and tide decided to stop waiting for me and an even more important event overwhelmed me once again – the acquisition of Skype by Microsoft. Because long after T-Mobile’s cellular network is gone and forgotten, the Microsoft/Skype combination will influence what happens in broadband.

Why is Microsoft willing to pay so much -- $8.5 billion -- for Skype, a product that’s yet to turn a profit? For a start, because it fits in so many places. Mcrosoft has a very nice teleconferencing product, but a growing number of businesses are using Skype for teleconferencing, and it’s better to compete against yourself than let others compete against you and win. Integrating Skype into Office and Outlook not only meets this objective, but keeps Office and
Outlook alive in a world in which you can get Open Office or other substitutes or the price of asking, and in which the “cloud” will soon bring you computing
on demand, which could make products such as Office expensive and pointless.

Skype would also fit in with Microsoft’s Xbox game products, which have never seen and don’t intend to soon, but I know that talking to someone while you’re blowing their avatar’s head off has to be more fun than simply blowing their avatar’s head off without the trash talk. $8.5 billion dollars so
some pimply kid can say “Gotcha, Dude!” Heaven help us all.

Then there’s the mobile market. The dramatic improvement in the major wireless networks means that mbile phones can increasingly handle Chester Gould’s pioneering vision of two-way, real-time video calls. And despite its advantages of money, name brand, money, money, engineering talent, and money, Microsoft continues to be a second-tier player in the mobile market. The Wall Street Journal says today that Google's Android operating
system has 35 percent of the U.S. market, with Blackberry at 27 percent and Apple, at just over a quarter. Microsoft is at 7.5 percent and dropping. Small wonder that Microsoft has recently thrown its lot in with Finnish handset manufacturer Nokia, which once dominated the device market, back when devices were simpler. To me, it’s a great match – Microsoft has some good ideas about what handheld devices could do, but it can’t make the product cheaply or attractively enough to crack the market, while Nokia can make things just fine, but needs a better operating system to teach its old dogs new tricks. And if you throw Skype into this mix, then Microsoft suddenly looks like a threat in the mobile market, instead of a something between a sad commentary and a joke.

Then there are the other markets to which Skype bridges. Skype is a video service – it just happens that the videos it sends are pictures of people talking to
you. Netflix is a video service – it just happens that the videos it sends to your devices - -the same devices as pick up Skype – don’t talk back when you talk to them. Skype is a social network – it just happens that instead of poking people or posting stuff on their pages that will embarrass you even more than that tattoo for the rest of your life, it calls them. Facebook is a social network, too – Skype could do whatever Facebook does if they wanted to write the code, but its strategy is to focus on one part of your relationship with your ‘friends,” contacts,” or whatever you want to call other people – talking to them. Facebook could have bought Skype just as easily and built it into its pages. Ebay’s a social network, too – heck, to their credit, they realized they were in the
same people-to-people business as Skype back in 2005, when they bought Skype for $2.6 billion. (And then sold it a few years later, leaving behind only fond memories and a $1.4 billion accounting charge – unlike love, accounting means you have to say you’re sorry.)

Is a pattern starting to emerge? First, Microsoft wants Skype because of its wireline business – making its Office, Outlook, and other old school computing
products more attractive. Then it wants to enhance its presence in the mobile market and revive its operating system in wireless. Then it wants to prepare to do battle with the social networks and peer-to-peer applications. Then it wants to be able to move videos and other content across a range of platforms and devices. Then it wants to enhance its gaming. What does it all add up to?

It’s all the same market! Do you get it yet? Back to ATT/T-Mobile – you’ve got some people out there wringing their hands over whether the ghost of T-Mobile makes a difference in the mobile market when, in fact, the market for wireless signal is just one facet of a meta-competition among wireline providers (telco, cable), wireless providers (whether it’s cellular or WiMax or satellite), device producers (from the iPhone to the Xoom to the Kindle to the Xbox), applications producers (like Skype), content producers (be they Facebook or Ebay or Google or Warner Brothers or NBC). They’re all in the same business and they’re all competing against each other! Because they’re all trying to be the same thing – the “systems integrator” for the consumer.
We used to think of the mobile signal providers – the Verizons and AT&Ts and Sprints and perhaps the Clearwire and some others – as Christmas trees on which the ornaments of a handset and maybe some primitive service – GPS or some such – were hung. But now, the consumer doesn’t pick the tree and
then go get the tinsel. The iPhone changed that – suddenly, the consumer picked a device and then went and got the signal that best fit it.

When I was an executive at Unisys, we had a similar moment. It was when we realized that our relationship to our customers – and it was a business client base, no one ever brought a Unisys home to run Visicalc or play Pong -- was being intermediated by the Arthur Andersens and the other technology consultants who were doing the systems integration, matching the gear and the operating systems and the software and the surrounding environment. Our
customers were suddenly telling us, “Call my agent,” which is one thing you never want to hear.

Customers are telling everyone in what the FCC calls the broadband “eco-system” to call their agent, but their agent is themselves. They’ll decide which signal, which devices, which applications, and which content they’ll bring together. And, as a result, each of these segments is linked in a meta-competition for the consumer’s allegiance. Sometimes they respond by offering the customer something new, or something their competitors do – Apple Face Time the
latter, Amazon Kindle the former-- and sometimes they fail – Google Wave, even Microsoft Bing, when you come down to it. Sometimes they try to get it through acquisition – Comcast and NBC (and therefore Hulu), Google and YouTube, now perhaps Microsoft and Skype. Hell, Google’s just announced that they’re going to build and market their own laptops. Huh? Why are they bothering? To be the point of entry into the digital, broadband world.

This is the real competition that drives the broadband space. Better devices force better signals and allow better applications; better signals permit better devices, applications, and content; better applications and content lead consumers to demand better signal and devices. And they all compete with each other to be the point of entry into this amazing “eco-system” of connectivity, devices, applications, and content. We used to think of competition as being like a sprint – Coke and Pepsi, Oreo and Hydrox racing to a finish line. But Microsoft, Google, Apple, Comcast, Motorola, Facebook, Amazon, Clearwire, Verizon and the like (but, unfortunately, not T-Mobile) are not on a track – they’re in a cage match, in which alliances and partnerships continually form and reform with the goal of being the last contestant standing – the entity that “brings the entire broadband experience together” for the consumer.

You’d think an economist would have figured this out. Some have, others are still trying to figure out what to wear to T-Mobile’s funeral. The best single statement of this new kind of competition is a great paper by Jonathan Sallet, who knows his economics from what his economist friends told him over cocktails, but has been around technology long enough to write this piece, a great place to start.

One of these days, I’m going to write about AT&T and T-Mobile. It’ll be on a slow week. But can you blame me? After all, why go to a poorly-attended funeral when you watch an exciting cage match?