Category Archives: Information Economics

Updates to the Media Page

We’ve added about a dozen new posts to the Media Page on my website, reflecting a sampling of articles, media quotes, and radio appearances from the last few months. These include several pieces for CNET News.com and Forbes, as well as links to appearances on NPR’s “Science Friday” (debating Sen. Al Franken on privacy law) and “Marketplace.”

I continue to be called on to help business leaders understand the confusing and dangerous new interest that national, state and local governments are taking in the “management” of the digital economy. I’ve been speaking most recently about Apple’s iPhone privacy flap (which turned out to have nothing to do with privacy), the AT&T/T-Mobile merger, and pending legislation in Congress aimed at curbing online piracy of movies and trademarked goods, the so-called “Protect IP” Act.

Next week, I’ll be making my tenth visit this year to Washington to meet with Congressional staffers and other policy makers to discuss these and other worrisome developments. Increasingly, my role seems to be as an unofficial representative of Silicon Valley helping regulators see the potential damage to innovation from ill-considered laws.

Of course I continue my long-standing work with companies working to introduce new products and services that exploit digital technology. The introduction of “killer apps” only gets faster with time, and more than ten years since the publication of my first book, I’m deeply flattered to hear from entrepreneurs who tell me the book still works as a manual for success in the digital age.

For AT&T/T-Mobile merger, Sprint throws in regulatory kitchen sink

For CNET this morning, I write about the latest tempest in the AT&T/T-Mobile USA merger teapot: cellular backhaul or “special access” as its known in the industry.

Like a child sitting on Santa’s lap at the mall, Sprint CEO Dan Hesse included backhaul in his wish list of conditions he’d like to see attached to the deal. Yesterday, Public Knowledge duly confirmed that yes, backhaul is a “multiplier” problem for the deal.

(Sprint says they would like the deal blocked, but that is mere posturing. What they really want is to use the FCC’s bloated and unprincipled merger review process to sneak in as many private concessions for themselves as they can get. And who can blame them for trying? More on that in a moment.)

For those who don’t know, backhaul is the process of moving cellular traffic (voice and data) to other high-speed networks (traditionally landline copper but now including cable, fiber, microwave and local Ethernet) to transport them to their ultimate destination. As mobile use increases, of course, the necessity of reliable, high-speed backhaul to keep overall performance up becomes more critical than ever.

Let’s work backwards:

1. The merger has no impact whatsoever on backhaul. PK’s Harold Feld told The Hill that “One measure of just and reasonable is comparing similarly situated customers. So AT&T has to at least be reasonably consistent in pricing. That means T-Mobile benefits to some degree from any pricing concessions that Sprint can negotiate, and vice versa. And if AT&T is too unreasonable to either one, or both, having two similarly situated companies complain to the FCC and produce evidence that AT&T is being unreasonable makes a stronger case than having just one company.”

Except that T-Mobile is not a customer. T-Mobile, like Sprint’s own subsidiary Clearwire, does not buy backhaul from AT&T or Verizon or any other landline infrastructure provider, relying instead on alternate backhaul technologies including microwave and Ethernet. T-Mobile doesn’t sell backhaul, and it doesn’t buy it from landline providers. So whatever part of the backhaul market AT&T holds today will be exactly the same the day after the merger. All Sprint loses is another company who could theoretically join it in complaining about AT&T’s rates to the FCC–except that T-Mobile doesn’t care about AT&T’s rates, because T-Mobile doesn’t buy from AT&T.

2. Sprint has only itself to blame if it’s too reliant on others for backhaul – The backhaul market, like many aspects of the communications industry (e.g., peering arrangements), is notoriously secret. No one really knows who is paying how much to whom for what–and those that do know are prohibited from disclosing.

But we do know that landline and cable companies have been investing billions over the last decade to upgrade, update, and extent their infrastructure. And we know that Sprint has not made a similar investment in landline infrastructure, putting its money in its wireless network. Which means that Sprint has known all along that it would remain reliant on its competitors for backhaul. The company made a strategic choice to lease rather than to build, knowing that while the FCC no longer regulates backhaul rates, the agency is there to keep prices in check. The merger doesn’t change that reality one iota.

Sprint says it pays “very very high” prices for backhaul from AT&T and Verizon, and that the backhaul business is exceptionally profitable. That sounds like a great opportunity, if it’s true, for someone else to enter the market. And indeed, dozens of companies large (Comcast) and small (local Ethernet) have entered the market. (Comcast projects $1 billion in its backhaul revenue in the near future.) Just not Sprint. Why should the FCC bail them out of what may have been a series of bad business decisions?

3. The real problem is merger review – As the two Republican FCC Commissioners said at the time of the Comcast-NBC Universal merger and its 200 pages of largely unrelated conditions, the FCC’s “regulation by merger” habit has grown life-threatening for the industries it regulates. Despite having nothing to do with the merger, and despite pure rent-seeking by Sprint to cut its backhaul costs in the name of antitrust, it seems possible that–sure, why not?–backhaul rate regulation concessions will be added to what will surely be the mother of all condition lists. (For AT&T, not Verizon or anyone else–at least not until their next merger review)

That is, when the FCC finally gets around to approving the deal. (The agency maintains a 180-day review deadline, but also grants itself the power to stop the clock anytime it likes. That’s how XM-Sirius took sixteen months, for example.)

The dangers of regulation by merger condition are obvious and getting worse. The merged entity is often crippled in its ability to operate for years after the merger, with each condition overseen by the FCC (and/or DOJ and/or FTC). Different companies offering similar products and services live by different sets of regulations, some of which exceed what the agencies could have legally done had they simply regulated everyone under their Congressional powers. The net result does nothing to improve competition in the relevant market. Quite the opposite.

Inviting competitors like Sprint to add to the list of unrelated conditions its Christmas list of kickbacks, sweetheart deals, tribute and plenary indulgences only makes a bad problem worse. Looking beyond the AT&T/T-Mobile merger, Sprint of all companies should know that…and know better.

What the Protect IP Act says about the current state of the Internet content wars

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.

 

FCC's Data Roaming Order: Trouble, Right here…

For Forbes.com this morning, I take a close look at last month’s controversial FCC order requiring facilities-based wireless carriers to negotiate data roaming agreements with other carriers.

There are business, technical, and legal reasons why the order stands on unsteady ground, which the article looks at in detail.

The order, by encouraging artificial competition in nationwide mobile broadband, could also undermine arguments against AT&T’s merger with T-Mobile USA.

How so?  If every regional, local, or rural carrier can offer their customers access to the nationwide coverage of Verizon, AT&T, or Sprint, on terms overseen for “commercial reasonableness” by the FCC, what’s the risk of combining AT&T and T-Mobile’s infrastructure.  Indeed, doing so would create stronger nationwide 3G and 4G networks for other carriers to use.  It’s actually pro-competitive, and a pragmatic solution to spectrum exhaustion.

The bigger question is why the FCC seems so determined to get into the business of regulating the Internet economy, when Congress has so clearly and consistently told them to stay out of it.

(The results of that wise foresight speak for themselves:  compare the health of digital life to the health of, say, wireline telephone and over-the-air TV broadcasters, which the FCC has long-regulated to within an inch of their lives, or less.)

With its historic client base rapidly disappearing, the FCC, like any good business, is looking for new markets and new clients.  But like Harold Hill, the flim-flam artist featured in Meredith Wilson’s classic “The Music Man,” it doesn’t know the territory.

Shut out of market for digital regulation by Congress (underscored repeatedly by the courts), the agency has no expertise in dealing with the business or technical dynamics of the Internet.  To paraphrase Wilson, the market is looking for mandolin picks, but the FCC keeps selling big trombones.

The result is trouble, my friends.  Right here.

The iPhone flap and the anatomy of a privacy panic

I’ve written a long article this morning for CNET (See “Privacy panic debate:  Whose data is it?”) on the discovery of the iPhone location tracking file and the utterly predictable panic response that followed.  Its life-cycle follows precisely the crisis model Adam Thierer has so frequently and eloquently traced, most recently at the Technology Liberation Front.

In particular, the CNET article takes a close and serious look at Richard Thaler’s column in Saturday’s New York Times, “Show us the data.  (It’s ours, after all.)” Thaler uses the iPhone scare as occassion to propose a regulatory fix to the “problem” of users being unable to access in “computer-friendly form” copies of the information “collected on” them by merchants. 

That information, Thaler assumes, is a discreet kind of property and must, since it refers to customer behavior, be the sole property of the customer, “lent” to the merchant and reclaimable at any time.

Information can certainly be treated as if it were property, and often is under law.  Personally, I don’t find the property metaphor to be the most useful in dealing with intangibles, but if you’re going to go there you need to understand the economics of how information behaves in ways very different to physical property.  (See my chapter on the subject in “The Next Digital Decade.”)

Thaler’s “proposed rule” is wrong on the facts (he doesn’t seem to know how cell phone bills really look, and he certainly doesn’t understand how supermarket club cards operate–and these are his leading examples of the “problem”), wrong on the law, and even wrong on the business and economics.  (Other than that, it’s a pretty good article!)

This kind of intellectual frivolity is par for the course with many academic economists.  Thaler is at the University of Chicago’s business school, and describes himself as an economist and behavioral scientist.  That means instead of throwing around calculus all day, he devises toy experiments with a few subjects–or reads the findings of other behavioral scientists who have done the same.

Not only is the article bad privacy policy, it’s bad economics.  The latter is certainly the more serious concern.  Nearly 70 years after Ronald Coase called on economists to put down the pencil and paper methods and do actual empirical research in how markets actually work, the profession has if anything become more insular.  There are exceptions, of course, but they stand out in a field of mediocrity.

Which is too bad.  We need good economists now, more than ever.

 

 

 

The AT&T – T-Mobile Merger: Beyond the Arithmetic

Following AT&T’s announcement last month of its planned acquisition of T-Mobile USA, pundits and other oddsmakers have settled in for a long tour of duty. Speculation, much of it uninformed, is already clogging the media about the chances the $39 billion deal—larger even than last year’s merger of Comcast and NBC Universal—will be approved.

Both the size of the deal and previous consolidation in the communications industry lead some analysts and advocates to doubt the transaction will or ought to survive the regulatory process.

Though the complex review process could take a year or perhaps even longer, I’m confident that the deal will go through—as it should. To see why, one need only look to previous merger reviews by the Department of Justice and the Federal Communications Commission, both of which must approve the AT&T deal.

Critics of the deal argue principally that a reduction from four national wireless carriers to three will create grave risks to competition. But Justice and the FCC have consistently rejected such simple-minded analysis. Instead, as consent decrees for several wireless mergers over the last decade–under Democratic and Republican administrations—make clear, both agencies approach the unique economic features of mobile communications with more subtle tools.

For example, both Justice and the FCC have consistently concluded that wireless markets are essentially local. Their competitive analysis—the key in reviewing horizontal mergers of this type—therefore focuses on the choices available to consumers where they buy wireless service; typically where they live, work or shop.

In today’s dynamic mobile industry, some national wireless carriers are strong in some cities or rural areas and weak or absent from others. Beyond the national carriers, lower-priced providers including MetroPCS and Cricket, as well as established regional companies including US Cellular, are strong in local markets. The Justice-FCC market analysis will consider market structure at the local level, counting all providers who are genuinely competitive.

The discussion so far about market concentration levels—measured by the Herfindahl-Hirschman Index, or HHI—ignores the more detailed analysis that the DOJ and the FCC have performed for past mergers including Sprint-Clearwire and Verizon-Alltel (both in 2008).

HHIs are commonly used as starting screens to identify markets where anti-competitive effects might result. But the two agencies have historically concluded that anti-competitive effects will occur only where concentration is especially high–at levels of the HHI well above the published estimates for the AT&T-T-Mobile deal in most markets. In particular, the focus has historically been on local markets where the merger would result in too few remaining competitors. In those markets, local divestitures have been required.

On that analysis, AT&T probably will be required to divest some consumers in some local markets, but fewer than would result from strict application of the high-level HHI screens.

The FCC must also consider potential benefits of the deal that improve the ‘‘public interest.”  Here, the agency will take into account serious capacity constraints both AT&T and T-Mobile are already experiencing on their networks. AT&T argues the merger will allow it to optimize scarce spectrum, improve network performance and quality, and accelerate deployment of nationwide mobile broadband using LTE technology, including expansion into rural areas.

The FCC and DOJ will require evidence to support these claims, of course. But assuming AT&T can back them up, they constitute strong public interest benefits.  After all, these are all goals the FCC itself established as part of last year’s National Broadband Plan. Likewise, as part of its evaluation, the DOJ will consider these and other claimed synergies as pro-competitive efficiencies produced by the merger.

Finally, that the deal is being vigorously opposed by some competitors—notably Sprint—actually helps AT&T’s case. Antitrust enforcers are understandably skeptical of claims by competitors that a merger will hurt them. Why? If a merger leads to higher prices for consumers, competitors such as Sprint would actually benefit. So when a competitor complains a merger is anticompetitive, the agencies take that as evidence the deal will in fact produce a stronger rival. And a stronger rival is good for consumers.

In the end, Justice and the FCC will have to weigh the competitive risks of further consolidation against the benefits for American consumers of improved service and accelerated deployment of nationwide mobile broadband. If history is any guide, the merger will ultimately be approved with specific conditions, including divestitures, to ensure that local competition is preserved even as national benefits are achieved.

That, of course, assumes the agencies follow their own best practices and not naysayers who can only count down from four to three. Let’s hope they do.

Reproduced with permission from Daily Report for Executives, 69 DER B-1 (Apr. 11, 2011). Copyright 2011 by The Bureau of National Affairs, Inc. (800-372-1033)