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.

 

Introducing the iTelescreen!

Still from a recent Apple launch

In his iconic novel “1984”, George Orwell envisioned omnipresent “telescreens” in every home, business and on every street that could be monitored by the government.  These screens were especially powerful because the subject never knew when the screen was being monitored or if, in fact, monitoring ever occurred.  One had to live as though one were watched at all times.

As is often the case, truth seems to lie somewhere between the totalitarianism of Orwell’s “1984” and the hedonistic consumer dystopia of Huxley’s “Brave New World.” As two recent stories point out, our actual telescreens cost hundreds of dollars and have designer labels.

The useful GPS technology that allows us to navigate our way through city streets also allows government agencies to track our movements.  Not in theory, but in practice.  A recent story notes that agencies have made rampant use of cellphones to track the physical movements and identities of individuals.  As long as we are not up to any wrongdoing, who cares?  Except that the definition of “wrongdoing” is a tricky one.  One Alabama sheriff used the technology to track his daughter’s whereabouts when she stayed out too late.  Even more unsettling is the story of Michigan police who used the technology to note the identities of protesters at a labor union rally.  And these are just the abuses that had been reported thus far.

Having taken part in many marches and protests during the Bush years, I observed that police utilized cameras as weapons of intimidation, recording the faces of each and every protester for purposes that remain unknown.  Did they do this to create a record or merely the belief that such a record might exist?  Was their object to record identities, prevent illegal activity or to intimidate peaceful protesters?  In any event, it seems that these tactics have moved from digital cameras to mobile telephony.  So while tools like Twitter and text messaging have been used by protesters around the world to organize and mobilize, mobile telephony may be just as useful for officials to monitor protest and “chill” dissent.  

 Meanwhile, do you know that little camera that sits on top of your computer screen or laptop–the one that may be pointed at you right now?  How do you know that nobody can see you through it?  If that seems silly, then you should read this story from CBS News about a high school sophomore who was spied on in his home by his school using the webcam in a school issued laptop.  In this case, the danger is that this technology is not only exploitable by overeager officials, but by child predators either within the school system or who may hack into the school’s system.  That is, it might not only be Big Brother who is watching, but Big Pervert.  The FBI is investigating the incident, but it is unclear if they are looking for wrongdoing or pointers.  

 When a Philadelphia mainline school district starts taking pages from the playbook of Orwell’s Oceania, privacy advocates and consumers should take note.  With mobile computing on the rise, hundreds of millions of Americans are using objects that may be used to track their movements and to view their lives.  As cameras and GPS systems become more prominent in these devices, there is every reason to suspect that our personal devices may not be as personal as they seem.

Tiered Broadband Pricing and the Myth of the Internet Flood

Over at Public Knowledge, Robb Topolski has written an inspirational post, ISPs Behaving Badly, which criticizes Time Warner’s trial runs at tiered pricing.

I’m not opposed to tiered pricing in principle, though TW appears to have handled it rather badly, and it still fails to solve the root problem of weak competition in the wireline ISP market. Also, I’m skeptical that it’s necessary–rather than a way for TW to keep maintenance costs down and prices up in a market where consumers have few other options.

I really appreciate Topolski taking on the ever-invoked myth that the internet is about to become so choked up as to become unreliable. This is the threat that the “Internet Tubes” will get full, invoked by then-Senator, now-convict Ted Stevens was threatening all the way back in 2006.

Basically, this threat is still a bogeyman and looks to be so indefinitely. Last year, Telegeography concluded, “Internet traffic is growing fast, but capacity is keeping pace.”

Further, DSL Reports debunks the “exaflood myth” in their typical sharply opinionated style.

For a more detached, scholarly view of internet traffic, see the Minnesota Internet Traffic Studies (MINTS) site. Chief investigator Andrew Odlyzko and company are doing great work here. He also suggests that, if anything, the rate of growth in wireline broadband traffic is decreasing. The most recent MINTS post cites a Cogent estimate of 30% growth in internet traffic in Q4 2008 versus 2007.

Last February, Odlyzko argued that, at least as far as the network industries are concerned internet growth may be too slow. This was even based on higher estimates of growth; Odlyzko’s estimate at the time was that internet traffic grows at about 50% per year.

The key is that the cost of managing a network declines by about one third per year. Even exaflood believer Lawrence G. Roberts adopts the latter estimate, following Moore’s law.

If the cost of managing network traffic next year will be roughly 2/3 of this year’s per-bit price, and total traffic is around 3/2 of this year’s total, network providers spend about the same year-over-year for network maintenance (2/3 * 3/2 = 1) and thus make the same profit per subscriber.

Of course, it’s very un-sexy to tell your stockholders that per-subscriber profits will be the same as last year, especially considering the ever-decreasing potential for new subscribers in a broadband market that is approaching saturation.

Thus, dare I suggest: Maybe the exaflood threat is actually about broadband providers leveraging their way into a new business model–whether the Tony Soprano business model of “Charge Google,” or the wireless carriers’ model of tiered pricing.

To draw a comparison with the wireless industry is instructive; even when wireless data transmission is more than doubling every year, wireless carriers keep charging lower prices for better service and rolling out every more reasonably priced all-you-can-everything plans.

Where there’s even modest (and far from ideal) competition, customers come out far better than in the duopoly-at-best home broadband market.

But then again, maybe “global traffic will exceed the Internet’s capacity as soon as this year.” That is, if you listen to Phil Kerpen’s commentary at Forbes–from January 2007.

Congress Investigating High Cost of Txt Msgs

Here’s a great article by the Times exposing how text messages are incredibly overpriced and discussing one Senator’s investigation into the subject.

Text messages may cost you and me $.20 per, but they cost the carriers almost nothing to send, says Srinivasan Keshav, a professor of computer science at the University of Waterloo, in Ontario. Here’s a chunk from the article:

Perhaps the costs for the wireless portion at either end are high — spectrum is finite, after all, and carriers pay dearly for the rights to use it. But text messages are not just tiny; they are also free riders, tucked into what’s called a control channel, space reserved for operation of the wireless network.

That’s why a message is so limited in length: it must not exceed the length of the message used for internal communication between tower and handset to set up a call. The channel uses space whether or not a text message is inserted.

Professor Keshav said that once a carrier invests in the centralized storage equipment — storing a terabyte now costs only $100 and is dropping — and the staff to maintain it, its costs are basically covered. “Operating costs are relatively insensitive to volume,” he said. “It doesn’t cost the carrier much more to transmit a hundred million messages than a million.”

Keshav is no radical with an agenda, either; his research has been funded by one of the four major carriers.

Senator Herb Kohl, Democrat of Wisconsin and the chairman of the Senate antitrust subcommittee, has begun an investigation, only to be effectively stonewalled by carriers.

That texting is radically overpriced relative to carrier costs has been an open secret for years. I’m glad to see Congress looking into it.

FCC Approves Unregulated Use of ‘White Spaces’ between TV Channels

In a(nother) huge election day win, yesterday the FCC deregulated the “white spaces” between TV stations, allowing technology firms and enthusiasts the right to play around in these unused channels of high-quality spectrum.

In a 5-0 decision, the Commission issued a ruling allowing anybody to transmit messages in white spaces, within fairly limits on the generation of interference. By declaring the spectrum open to unlicensed experimentation, they’ve green-lighted the development of new technologies that some describe as “wifi on steroids.”

Unsurprisingly, Google is happy, and unless you’re invested in one of the incumbent industries on Wired’s list of losers (see first link), you should be, too.

Visit today’s FCC Daily Digest, where you can see the FCC press release and the five Commissioners’ statements.

OK Go Singer’s Brilliant on Net Neutrality

I’m stoked by Damian Kulash’s New York Times opinion calling for mandated network neutrality. It’s a far more accessible, engaging piece than almost anything written on the subject, and he makes a compelling case. Kudos to him.

P.S. On a personal note, it’s been a metric year since I blogged, and for good reason. Life is crazy now, not least because my wife Tina Collins just got a 2 year fellowship at (ahem) HARVARD! So as I finish up my dissertation (still expecting to wrap it up this summer), we’re gearing up to move (her and probably me) to Cambridge. While I’m still actively applying for tenure-track jobs across the country, I’m also looking at postdocs and other work around Boston.

Expect more rage-against-the-machine blogitude once I’m resettled.

Tell the FCC: Help Protect Text Messaging

In light of Verizon’s decision to block text messages from NARAL for no reason other than their content, Public Knowledge has created an online form for submitting comments to the FCC.

This is an important telecom policy issue, and it would still be a problem if Verizon were blocking any messages due to their political content. Cell messaging is a truly common carriage service, and content-based discrimination is simply unacceptable.

FCC Hearing: Comcast Hired Seat Warmers

At yesterday’s FCC hearing into Comcast’s practice of blocking BitTorrent traffic in Cambridge, Comcast hired several dozen seat warmers to reduce the number of critics who could get into the hearing.

The hearing was held at Harvard’s Berkman Center for Internet and Society. When Catherine Bracy, the Center’s administrative manager, opened the door to the hearing at 7:15 am, “none of the 35 to 40 people waiting to get in appeared to know what the hearing’s subject matter would be,” the AP reports. She also saw a couple of the ringers sleeping in the front row during the hearing.

So far, this means that Comcast has:

*Blocked most BitTorrent traffic by adding fraudulent bits to transit streams
*Claimed that it was doing no such thing
*Once confronted with two different studies (one by the EFF, the other by the AP) proving as much, admitted that they do indeed block BT traffic
*Described its actions as “delaying” BT traffic when the goal and effect is to stop most BT transfers
*Pretended this was all no big deal
*Changed its ToS to reflect the blockade

And now, we add:

*Hired ringers to reduce public access to a hearing into these practices

Let’s hear it for Philadelphia’s own cable giant, Comcast!

(For more on the hearing, check out Berkman’s FCC hearing linkfest.)

Comcast to FCC: Why Regulate? We Have the Blogosphere

In a filing with the FCC (pdf), Comcast claims that, thanks to market competition and blogging watchdogs, there is no need for regulatory intervention to protect net neutrality.

The company’s recent discrimination against peer-to-peer traffic is the cause of the hearing. Last August, Comcast denied the charges (which were first documented on… drumroll please… a blog), but now the company has stopped fighting the clear and convincing evidence, instead changing the Terms of Service to reflect the fact that they are willfully throttling BitTorrent traffic.

Now, they claim:

Network Management is best left to the sound, good-faith judgment of the engineers and proprietors who run and own the networks and who are best able to remedy customer service issues promptly, rather than to regulation. The self-policing marketplace and blogosphere, combined with vigilant scrutiny from policymakers, provides an ample check on the reasonableness of such judgments.

There’s only one problem: whatever market pressure and public criticism can be leveled has already come to pass, and Comcast still has not changed direction. Could this have something to do with the market failure in the broadband market? After all, a duopoly is rarely the sign of a healthy market.

At least one prominent blogger and vocal Comcast critic finds the argument laughable.

On DRM-related sidenote, somebody (presumably Comcast) put a password on the PDF, preventing the wholesale one-step copying of text. Yet further evidence that the company is deeply committed to an open dialogue on net neutrality.

(Link from Lok)