AT&T/T-Mobile Merger: Less Competition, Higher Prices

I was dismayed to learn that AT&T is trying to buy T-Mobile for a whopping $39 billion.

AT&T can use the extra towers to improve reception in very crowded metropolitan areas, but the decrease in competition and likely resulting increase in price is a big problem.

People who sell a product charge what the market will bear, but if the market isn’t fully competitive—if customers have few options to take their money elsewhere—then customers can’t punish high prices or poor service, and providers charge more for less.

The wireless market is already not competitive for two important reasons. First, providers lock in customers with a combination of contract law and technology. They claim contracts and handset locks are necessary to recoup the costs of subsidized handsets, but why don’t they all charge less for month-to-month service on unsubsidized handsets? (T-Mobile is still alone in offering such a discount.)

Second, the industry is already an oligopoly, with so few major competitors that they already have the power some power to charge inflated prices. The standard measure of an industry’s competitiveness is the Herfindahl–Hirschman Index, or HHI.

To calculate an HHI, you take the square of the percentage of each firm’s market share. A firm with 20% share adds 400 points (20 x 20) to the HHI. According to Department of Justice antitrust guidelines (which, unfortunately, the DoJ and FTC have stopped following), if the HHI is over 1,000,  the market is moderately concentrated—that is, not fully competitive. If the HHI is over 1,800, the market is highly concentrated and thus non-competitive. If a market is already over 1,000, then any merger raising the HHI by 100 points or more is presumptively a problem for competition.

To see how bad things are already, and how much worse they would be after the proposed merger, we should calculate the HHI for the wireless industry, both before and after. First, here are the ComScore market shares for each carrier as of March 2010:

Table 1: Market Concentration in the Wireless Industry, March 2010

Carrier Share, % Share Percentage, Squared
Verizon 31.1% 967
AT&T 25.2% 635
Sprint 12.0% 144
T-Mobile 12.0% 144
Tracfone 5.1% 26
Totals 85.4% 1916

 

This is what a noncompetitive oligopoly market looks like. We already see this in a lot of important ways—suboptimal cell service, attrocious customer service, stubbornly high prices, and charges that are often exponentially larger than the marginal cost.

The prices for text messaging in particular are a great example of “price gouging” and illustrate the industry’s tacit collusion (pdf). The cost for the network provider of handling a text message is virtually zero, since the messages are small enough to fit into the “control channel,” or the tiny bit of data that your phone and cell network are exchanging even when you’re not talking or using mobile data.

In a truly competitive wireless market, a customer would drop a provider who charges up to $20/month for something that’s actually nearly free to provide. Imagine if McDonalds sold hamburgers at their current prices but charged $0.20 for each french fry—or $20 for all the fries you can eat. Potatoes are cheap, so we’d be offended and take our money elsewhere, because the fast food market is highly competitive.

In mobile telephony, however, there almost is no “elsewhere” to take our money, especially if you need reliable nationwide coverage. The number of players is small enough, and customers are locked in enough, that there is little opportunity to punish this price gouging.  (Thankfully, free messaging-over-data via services such as Google Voice allow customers some opportunity for arbitrage, but expensive data plans and technological know-how limit this opportunity to to the most economically and technologically well-positioned customers.)

So the bad news of an uncompetitive market is already here. Now, let’s see what the market might look like after an AT&T/T-Mobile merger. Here’s that table, assuming that all T-Mobile customers stay with AT&T (and most will have to for some time, thanks to their two year contracts):

Table 2: Approximate Market Concentration Following AT&T/T-Mobile Merger

Carrier Share, % Share Percentage, Squared
AT&T plus T-Mobile 37.2% 1384
Verizon 31.1% 967
Sprint 12.0% 144
Tracfone 5.1% 26
Totals 85.4% 2521

 

A substantial number of T-Mobile customers will switch to Verizon or Sprint, but the HHI would still be in the mid-2000’s, and no scenario makes this market more competitive than today’s market. In short, customers and regulators should be worried.

Now imagine what happens when it’s specifically T-Mobile that goes away. They have long been the cheapest option, offering the worst service among the big four in exchange for much cheaper prices. They’re the only company that has experimented with discounted pricing for month-to-month customers. Inexplicably, they’re still the only major US carrier to deploy UMA, which allows voice calling over wifi. (I’d love to use my Verizon minutes to make and receive calls over my home wifi router; instead, I’m forced to take the chance that I’ll drop yet another call in my first-floor apartment. Can you hear me now?)

T-Mobile offers several unique features in the otherwise troublesome wireless market, and AT&T is unlikely to keep many if any of them. Ma Bell just wants the customers, towers, and spectrum. If they wanted to sport UMA or cheaper pricing, they could have offered them years ago.

The current cell market is already highly concentrated, so we get service that is overpriced, with limited features and a quality of service that does not justify what we pay. If federal regulators allow AT&T to buy T-Mobile—which, unfortunately, is practically a given—the market will be even less competitive.

This merger means less choice and still-higher prices for something like the service we’ve long since been promised. If you have a lot of stock in the telecom industry, however, it’s a big win.

 

lessig on institutional corruption

Professor Lessig is presenting on Institutional Corruption today at the Kennedy School as his first public appearance at Harvard since his return a few months ago.

Professor Lessig likes to introduce three ideas to frame his talk today: 1) influence, 2) independence and 3) responsibility.

Relying on his framework of the four modalities of control that he used in Code, Professor Lessig explains how the law, markets, norms and architecture together exert influence, and that depending on your policy objectives, these four forces can be complementing or conflicting. He suggests that together they form an “economy of influence” that we need to understand if we want to make effective policy.

He continues to explain “independence”, in the sense that something is not dependent on something. Independence matters, because it means that you try to find the right answer for the right reason, as opposed to doing so for a wrong reason you might be dependent on.

Independence, however, does not mean dependence from everything. Lessig reframes independence as a “proper dependence”. In legal terms, it means that a judge depends on the law for her judgment. So independence is about defining proper dependence, and limiting improper dependence.

Responsibility is the third concept Lessig goes into. He tells us about a case he represented in 2006: Hardwicke vs ABS. It was a case that focused on a series of events concerning child abuse, all perpetrated by a single person. The question that was raised: Who is responsible? Lessig makes the argument that responsibility does not lie with the individual, that this individual has no power to reform, and that this is pathological. Instead, he makes the case that responsibility in this case is all the people who knew about the wrongdoings, but refused to pick up the phone. Nevertheless, the focus of the law was on the one pathological person. Lessig suggests it is more productive to focus responsibility on those who have the power to make changes, instead of those are pathological and are not in a position to reform. He notes it is ironic that the one person who is least likely to reform is held responsible, while the one entity who could do something about it, was immune.

He raises another example of “responsibility” gone awry. He cites Al Gore and his book “The Assault on Reason”, and lambasts its narrow perception of responsibility. It focuses on former president Bush, arguably the man least likely to reform, and instead forgets those who could have done something about it, suggesting that they also have been critically responsible.

His argument is one of “institutional corruption”. What it is not: what happened with Blagojevitch; it is not bribery, not “just politics”, not any violation of existing rules. Instead, institutional corruption is “a certain kind of influence situated within an economy of influence that has a certain effect, either it 1) weakens the effectiveness of the institution or 2) weakens public trust for the institution.

He explains the system of institutional corruption using the White House. Referring to Robert Kaiser’s book “So Damn Much Money”, he argues how the story of the government has dramatically changed in the past fifteen years and how the engine of this change has been the growth of the lobbying industry. He illustrates this with numbers: Lobbyists pay with cash which members use as support for their campaigns. The cost of campaigns have exploded over the years, and subsequently, members have become dependent on lobbyists for cash – he cites that lobbyists make up 30-70% of campaign budgets! This is not new, he carefully explains, but citing Kaiser again, what is new is the scale of this practice has gotten out of hand. Members /need/ and take /much more/, becoming /dependent/ on those who supply. This is only during the tenure, but institutional corruption also needs to be understood as something after tenure: 50% of senators translate their senate tenure into a career as lobbyist, while 42% of the house do the same. This suggests a business model, focused on life after government, that perpetuates itself, and influential people who end up becoming dependent on this system surviving, both during and after their time in Congress.

He goes on to give example after example of institutional corruption. He mentions the important work done by maplight.org that tracks money in politics, who have shown that members who voted to gut a bill had 3x times the contribution from lobbyists than those who voted against. Simply put, policies get bent to those who pay. He cites a study by Alexander, Scholz and Mazza measuring rates of return for lobbying expenditures, who conclude that ROI is a whopping 22,000%! He again cites Kaiser, who suggests that lobbying is a $9-12 billion industry.

Why does this matter? It matters if it
1) weakens effectiveness of institution or
2) weakens public trust of institution

In the first case, he argues how lobbying can shift policy. He cites a study by Hall and Deardorff “Lobbying as Legislative Subsidy” on how the work of congresspersons shift as a result of lobbying. Imagine you’re a congressperson and you see it as your goal to work on two issues: one is to stop piracy, the other is to help mums on welfare. The line of lobbyists that will happily help you with stopping piracy is long, whereas not so many will help you with the latter – so work of the congressperson shifts, and thus work of Congress shifts.

Lessig suggests it also bends policies. Does money really not change results? Citing the Sonny Bono case of October 27, 1998, he shows how in copyright lobbying power had a powerful influence in getting the copyright term extended for another twenty years. Does this advance the public good? A clear no. Lessig backs this up by telling how in the challenge at the Supreme Court, an impressive line-up of Nobel Prize winning economists, including Milton Friedman, supported this and that it would be a “no brainer” to sign the support that copyright extension did not advance the public good. But he concludes that there were “no brains” in the House. An easy case of institutional corruption. There are two explanations: Either they are idiots, or they are guided by something other than reason. He suggests of course it’s the latter. It is not misunderstanding that explains these cases.

Lessig continues to explain how corruption can be seen as weakening public trust. He tells us about how the head of the committee in charge of deciding the future of healthcare is getting $4 million from the healthcare industry. Or how a congressperson ended up opposing the public option even though the majority of his constituency supports it. The idea is not that there might be a direct link between the money and the vote, but that if you take money to do something that is against the public interest, people will automatically make that link, and this weakens public trust. If you don’t take money and you go against the popular vote, that won’t reek of corruption.

Lessig goes on to discuss different fields: medicine and the healthcare industry, citing research by Drummond Rennie from UCSF that shows how there is an overwhelming bias in favor of sponsor’s company drugs. How there are 2.5 doctors to 1 detailer (a detailer being someone who is like a lobbyist for the pharmaceuticals, promoting the drugs to doctors, often giving “gifts”). How the budget for detailing tripled in the past ten years.

Lessig asks us: how can we find out whether these claims are true? Do detailing practices either weaken the effectiveness of medicine, or weaken the public trust for it? What would it take to know?

There is also the issue of “the structure of fact finding” that Lessig suggests is corrupt. Again, he argues we need to understand whether this is a process by which results are affected or trust is weakened. He cites how sponsor funded research can cause delay, and mentions the case of “popcorn lung”.

Lessig makes a strong case that we need more than intuition. That we need a framework or metric to know for sure. Because we all have ideological commitments, that we need to escape this in order to have a proper understanding of corruption. This is, in short, the aim of his new project: The Lab. It should be a neutral ground with a framework that determines whether and when institutional corruption exists, to develop remedies for institutional corruption when it exists. He sees the initial work having three dimensions: 1) data – necessary to describe influence and track its change; 2) perception of institutional corruption and understand how it has changed;
and 3) causation – what can we say about what causes what in these contexts in alleged corruption. Having this information, we can then design remedies.

making sure the world continues to be listened to

Most of you perhaps don’t know that I am writing my dissertation about Global Voices. But this is an incredible group of people who make sure that parts of the world that otherwise gets ignored in the mainstream media get their voices heard.

They are currently looking for donations that will help them sustain the incredible valuable and good work they do. I ended up donating $77 dollar – why $77? It’s my birth year. It’s a small sum with a symbolic value that I hope will encourage others to chip in as well.

Why should you donate?

Donating to Global Voices helps tell them that they are doing a good job. The value here is symbolic, rather than material. This is not unimportant – they would never have gotten so big if most of their work was not ‘free’, free as in volunteer labor. Getting appreciation for the volunteer work you do is incredibly important. Viviana Zelizer has called this the crowding-in effect of money on volunteer work.

Donating to Global Voices helps them stay a bit more independent from big donors. And allow them to write about topics they think are important, as opposed to topics that will attract the biggest crowd. The question of how media organizations get funded is not a trivial one. Global Voices get funded through a combination of support from foundations, corporations and individual donations. Political economy, particularly work by scholars like Robert McChesney and Oscar Gandy to name a few, has pointed out how money shapes what media writes about, and what not. In a perfect world, media organizations would all be funded by many individual donations, so that they can maintain independence and write about topics without constraint. In reality, media organizations will often not write about topics that might offend their owners or advertisers. Also, they will write especially about topics that will get the attention of a lot of audiences in order to attract more advertisers. These are topics people might want, but not necessarily what they need. Consider how much words are devoted to Britney Spears and the iPhone, which are great topics, but they tend to drown out other regions, areas and topics.

To sum up, giving a donation is a good idea because they are great people that do important work nobody else is doing – we want to make sure they can continue to do this work as well as let them know we appreciate the work they do. Please consider making a donation.

Besides donating, there is another way to help and show your appreciation: by spreading the word. They have made some cool – and cute – badges you can use to put on your blog.

Donate to Global Voices - Help us spread the word

cross-posted from global voices, one world

media, power, and responsibility

Why are media and power always a bad combination? Whether it is the elite who is abusing the media for its own purposes (in the words of Chomsky and Herman, to ‘manufacture consent‘) or whether it is the media themselves who are powerful, often heard as in ‘the media are biased‘, the message seems clear cut: the media and power do not go together – but is it?

The notion that media often are (ab)used by the powerful goes all the way back to the origins of communication research back in the fifties when it was primarily obsessed with the effects of propaganda. The concern here is that only a particular group of people, e.g. the elite, the powerful, have access to the media and are able to set the agenda for society – if not what the public should think, then what the public should think about. This line of research carries on in the media ownership concentration literature – who owns the media has the power to allocate resources, to control editors and set the agenda. Famous (notorious) examples include Rupert Murdoch and Silvio Berlusconi. 

Then there is also concern that the media themselves are too powerful. While the media is supposed to act in the public’s interest, they often underserve certain segments of the public, such as minorities, or they slant news in favor of particular segments of the public – these are the issues of underrepresentation and misrepresentation. Not to mention the many issues the media effects research is trying to address – television violence is bad for our kids, video games make them dumb and lazy, the internet destroys their attention span, etc.

Most research seems to indicate that power and media don’t go together – bad things happen if they do. What I am wondering is – can the powerful use media for good, rather than bad? Power and media leading to bad things is a relationship of correlation, not causation. What responsibilities, obligations do the powerful have to use media for the greater good? This is a question that has been asked in democratic theory – the media should be a watchdog, should serve as a platform for the public to discuss important issues, etc. More specifically, and something I am interested in, is what kind of obligations are imposed on the media as a result of a particular power disparity – that is to say, what obligations should be imposed precisely because the media are powerful/are controlled by the powerful? 

In broadcast television, the imposition of rules that made sure political issues would be covered in a way that was honest, equitable and balanced was called the ‘fairness doctrine‘. The primary justification for imposing this (controversial) rule was that broadcast television only could carry so many channels because of spectrum scarcity. In other words, only a few limited number of channels could be broadcasted – because of the power this would give to those who control these few channels, the FCC made sure that important issues were covered in a ‘fair’ way. The fairness doctrine had many problems (partially because it wasn’t quite clear what was meant with ‘honest, equitable and balanced’ coverage) and was subsequently abolished. However, one could consider if the fairness doctrine or some kind of equivalent would still have relevance in modern days – in other words, if we’d had to ressurect this, how would it look like? Some have linked the fairness doctrine to the debates we have on network neutrality, arguing that it is in essence a fairness doctrine for the internet. 

One could thus compare the internet protocols – the rules that describe how connections on the internet are established – to rules we have for media access (besides the fairness doctrine, there have also been regulations such as the equal-time rules, specifying that broadcast stations must provide opportunity to opposing political candidates to speak).

But are the internet protocols by themselves enough? The internet protocols are famous for ‘not caring what kind of content they carry’ – as long as the protocols are followed. Should protocols care? The telecom providers argue the internet should care – they say it makes a difference (and a big burden on their network) whether content is video, peer to peer traffic or just text. They want to be able to prioritize some content over others. They want to be able to regulate traffic in such a way that a small number of users don’t end up hogging most of the bandwidth, or at least charge them more for it. Skeptics, and network neutrality proponents, fear that the telecom providers will abuse this power to prioritize content (“let’s make getting to the Microsoft Live search website really fast, and let’s slow down access to Google”). 

But the ability to be able to distinguish, to prioritize some content over others might not be a bad thing. We can disagree about who should be able to prioritize, on what basis – for example, many people might not want the telecom providers to be able to prioritize on the basis of profit maximization – but what about the following: Clay Shirky has helped us understand that the blogosphere follows a powerlaw – that is to say, a small number of so-called A-list blogs gets a disproportionate amount of attention.

If you are such an A-list blog, and you wield a certain power in the form of mass attention, what kind of moral obligations follow out of that kind of power?

Seattle Times Special Series Criticizes Media Policy

In a series begun yesterday, the Seattle Times is taking on the sorry state of the media industry and media policy.

Editorial Page Editor James Vesely has a brief introduction. Yesterday, they ran an opinion piece by FCC Commissioner Michael Copps. Today, it’s Penn Law School luminary Ed Baker.

Today, they also ran a scathing condemnation of the current FCC’s policy.

Can Rick Rubin Save the Music Industry?

In this weekend’s New York Times Magazine, an excellent profile of music mogul Rick Rubin suggests Sony’s recent hiring of Rubin as Columbia Records co-head just might save both the company and the music industry.

Rubin certainly seems bent on changing the music industry. He sounds like a Free Culture activist, scolding the industry for its failure to stay focused on producing quality music, decrying them as reliant on monopolistic leveraging, and seething over their use of spyware DRM.

Fantastic quotes from Rubin include:

In the past, I’ve tried to protect artists from the label, and now my job would also be to protect the label from itself. So many of the decisions at these companies are not about the music. They are shortsighted and desperate. For so long, the record industry had control. But now that monopoly has ended, they don’t know what to do. I thought it would be an interesting challenge. …

Columbia is stuck in the dark ages. I have great confidence that we will have the best record company in the industry, but the reality is, in today’s world, we might have the best dinosaur. Until a new model is agreed upon and rolling, we can be the best at the existing paradigm, but until the paradigm shifts, it’s going to be a declining business. This model is done. …

Either all the record companies will get together or the industry will fall apart and someone like Microsoft will come in and buy one of the companies at wholesale and do what needs to be done,” he said. “The future technology companies will either wait for the record companies to smarten up, or they’ll let them sink until they can buy them for 10 cents on the dollar and own the whole thing.

Of course, nobody knows for sure if this legend can save the music business. But why not hand the keys over to the man who started Def Jam Records from his NYU dorm room?

FCC Commissioners Admit Broadcast Flag Mistake

There are often times when I wish I had my trusty digital voice recorder—the one that sent Senator Ted Stevens’ “series of tubes” anti-net neutrality speech into the Internet Meme Hall of Fame. Yesterday afternoon at the annual convention for the Association for Education in Journalism and Mass Communication, the most poignant such moment came during the panel featuring the two Democratic FCC Commissioners, Michael Copps and Jonathan Adelstein.

When I asked them about the broadcast flag, both Commissioners explicitly admitted that they made a mistake by trying to impose a DRM mandate on all DTV receivers. I found this amazingly gratifying, but it was really just the finishing highlight on a great panel.

Copps and Adelstein are A+ public servants. They stand up (and stick their necks out) for the public in areas including media ownership, broadband policy, and public service obligations for broadcasters. Whenever media companies have sought to change the rules for their own enrichment, Copps and Adelstein have consistently said, “Not against the public interest.”

At the panel yesterday, they both gave interesting and insightful (albeit summary) presentations and remarkably frank answers to questions covering a range of issues.

Is the public sphere worse off without the fairness doctrine? Copps: We have to find a way to reinvigorate broadcasting with some public interest obligations, including an updated version of the fairness doctrine.

What is the FCC doing to inform the public about the DTV transition? Adelstein: “We’re way behind the 8 ball on this.” (All quotations are approximate.)

Aren’t you concerned that indecency complaints are generated by a small number of dedicated activists? Copps: “I’m less concerned about the number of complaints being generated by the few than I am about the number of offenses being generated by the few.”

When do we step in to regulate the last mile bottleneck (e.g., via net neutrality), and what is the FCC doing about our nation’s lagging broadband penetration?

Copps: We’ve frittered away the opportunity to compete. According to one OECD study, our penetration is behind that of Estonia and tied with Slovenia. It’s a terrible shame we didn’t get a wholesale requirement as a condition in the 700 MHz auction, just the latest of countless lost opportunities to inject competition into the broadband marketplace.

Adelstein: we settled for half a loaf by not imposing more requirements in the 700 MHz auction. Wholesale requirements (pdf) would have been a substantial improvement.

Of course, being the copyright and DRM wonk that I am, I couldn’t let them get by without a question on the broadcast flag. I asked whether they initially supported the FCC mandate for a flag and where they stand now in light of the federal courts’ overturning of their decision.

Both Commissioners stated that they did support it, and they now regret that decision. At one level, they regret the loss of Commission authority that came with the court’s ruling.

Copps seemed particularly bothered by this erosion of authority via court precedent. He wants to promote the public interest wherever and however possible, and the ruling has effectively reduced the Commission’s regulatory toolkit. His motivation in supporting the flag was a desire to accelerate the DTV transition. (In other words, the content industry threatened to sit on the analog airwaves until they got their DRM.)

That was good, but Adelstein’s response was sumptuous. He admitted being only lukewarm about the idea in the first place. He knew that it would not make a large dent in the amount of infringement due to the analog hole and the continuing evolution of new technologies—including, I assume, those used to circumvent DRM. “The broadcast flag is like putting duct tape on a leaky boat.”

Like Copps, Adelstein also regrets the decision in light of the real loss of regulatory leeway for the Commission. His comments also imply that he now sees the wrong in the original Faustian deal of DRM-for-DTV. The whole Commission desperately wanted to get those airwaves up for auction (in part for use as a third broadband pipe); when the content industry demanded DRM on DTV receivers, the Commission delivered.

While we on the free culture side of the copyright debate knew all along that this was a bad deal for the public, it’s nice to hear two of our best public servants come around to our side.

P.S. I know I have not written much lately; humble apologies to those of our 3.5 readers who have not already deleted ShoutingLoudly from your RSS feeds. I’m working on my dissertation—a study of the politics of DRM. Proposals for a broadcast flag mandate are part of my data set. Once I have quantifiable findings, I will share some of the highlights, I promise. In the meantime, thanks for not giving up the vigil as you anxiously await our next post.

VZ installing fiber, yanking out copper

As Verizon moves forward with installing FiOS fiber optic phone/internet/TV service in (mostly wealthy, white) neighborhoods throughout the country, it is taking the time and expense to pull out copper wires.

Why spend the money? As explained on the Consumers Union blog, Hear Us Now, there are two obvious incentives. First, consumers can’t go back. Unhappy with FiOS? Want to go back to Ma Bell? Too late now!

Second, they’re required to lease their copper lines. Thus, some cities have a (nominal) choice in local phone service, and everyone can choose their long distance provider. Those regulatory schemes only apply to copper line telephone service, so pulling the copper cuts Verizon’s obligations as a common carrier.

Postal hike may crush small periodicals

When Bob McChesney personally emails everyone in his personal email address book, you know something serious is afoot, and this is no exception. Low-volume periodicals–and not large-circulation magazines–are about to be hit with a postage rate increase of as much as 30%.

Stamp Out the Rate Hike: Stop the Post Office

To help deal with rising costs, the USPS last year proposed a simple 11.7% rate hike on periodicals. This is regrettable, but fee-for-service government agencies sometimes need to raise rates.

Last month, the Postal Board of Governors ignored the simple USPS recommendation and adopted a 758-page brainchild of Time-Warner, the nation’s largest magazine publisher. Rates will go up regressively, which will drive some of the best independent media voices over the edge of bankruptcy.

To read McChesney’s email, see Siva’s post here (the only hit in Technorati thus far–ahem, ahem). Of course, I’d also recommend that you learn more and take action. Don’t forget to write a customized email; sending the form-letter email doesn’t do nearly as much good.