Is Google a Monopolist?

Whenever antitrust action is considered, officials have to define the relevant market. Is cable TV a separate market from mobile or fixed telecommunications? That would have been a simple determination in the past. Is Facebook in a different market than carrier text messaging? Is Google in a different market than Comcast? Is Netflix in the same market as AT&T or Disney?

These days, none of those determinations is absolutely clear. Even once the relevant “market” has been defined, there are other questions: is market share a proxy for market power? To what degree?

And if market power exists, what reasonable market structures can be sustained that allow for both competition and investment? Such questions have dominated telecom regulator thinking for decades, in creating policy for mobile services.

Now questions are raised about whether Google, Facebook and a few others might have become so dominant they are able to leverage their power to stifle the development of new competitors, raising antitrust concerns. Some of those concerns are discussed in a paper by John Yun, Associate Professor of Law and Director of Economic Education, Global Antitrust Institute, Antonin Scalia Law School, George Mason University, and former Acting Deputy Assistant Director, Bureau of Economics, Antitrust Division, United States Federal Trade Commission.

“In many countries including the U.S., within general search, Google has the highest market share, which is not the same thing as market power,” says Yun. “The question is whether or not general search is a relevant product market for both users and advertisers.”

There are obvious questions, including Google’s ability to steer search results to itself, rather than pointing users to third party sites.

source: John Yun

Still, the first issue is defining the market. Is the relevant product market “general online search?” And, if so, do users actually “multi-home,” or switch between Google and other search engines even when conducting general search queries? If so, to what degree is that done?

Or does the relevant market also include specialized search engines? It could be that when conducting vertical or specialized searches, Google is not so dominant. On the other hand, “having a high overall market share in general search is more an indicator of superior quality across multiple categories of search rather than being an indicator of a lack of user choice or an inability to switch to competing sites,” Yun notes.

Further, are other advertising platforms effective substitutes for general search engines? When consumers are looking for products to buy, general search has functional substitutes, such as use of Amazon, eBay and other specialized sites, for example, or even exposure to display advertising.  In that sense, display advertising is a substitute for search, for example.

The point, Yun argues, is that Google’s general search market share “is not the same thing as market power.”

“The core antitrust allegation against Google’s search engine is that it engages in search bias—that is, Google prominently and undeservingly displays its own specialized search services to the detriment of not only rival specialized search engines,” Yun says.

There is an inherent tension for any two-sided platform based on advertising or commerce revenues: it must balance the values of users on one side of the transaction and advertisers on the other. Users want the “best quality results.” Advertisers and sellers want the greatest amount of exposure, actions and therefore sales. Google and all other search platforms always have to maintain a balance.

Up to a point, emphasizing “best results” can grow usage, and therefore help the business model (advertiser revenues grow), even if it does not especially highlight “commercial” search results.  

Conversely, too great an emphasis on highlighting “commercial results” can drive users to other platforms, harming both Google’s revenue model and results gained by its advertiser partners.  “Users place value on high quality results while advertisers place value on users and ad clicks, and their return on investment,” Yun notes.

In principle, search rankings on any page, and especially the first returned results page, always matter. The algorithms for displaying results also matter, and there is always some discretion.

A search engine such as Google can undertake design changes that affect search result placements. Emphasizing user-friendly “best results” algorithms will decrease ad click-through rates. But such algorithms also can increase the user base, and is rational.

Search engines also can choose to boost click-through rates by moving commercial results higher on the page. That boosts ad click-through rates (and therefore advertiser happiness) at the expense of user satisfaction with the search engine.

But the point is that changes in the algorithms are not, in and of themselves, evidence of abusive market power.

On the other hand, algorithms might also reduce traffic flowing to third-party sites. And that is a separate issue antitrust regulators have to consider. But even that is a complicated empirical issue.

If Google gets many more users, all other things equal, traffic flowing to third-party sites will increase, even if algorithms steer more traffic to Google sites.

“At the heart of the antitrust claim is the notion that Google not only competes, to a degree, with vertical search sites for both users and advertisers but is a significant source of traffic to these sites as well,” says Yun. “The question is whether Google is effectively foreclosing vertical competitors or raising rival’s costs in a manner that also results in harm to competition.”

If Google is driving traffic away from rivals and to itself because its product has been improved, this is the type of competition that competition laws are intended to promote, Yun says.  Alternatively, if Google implements a change that substantially reduces traffic to a group of vertical sites without a corresponding increase in user quality, then this can raise concerns.

The U.S. Federal Trade Commission has said that “while some of Google’s rivals may have lost sales due to an improvement in Google’s product, these types of adverse effects on particular competitors from vigorous rivalry are a common byproduct of ‘competition on the merits’ and the competitive process that the law encourages.”

“Monopolization and vertical contracting cases typically hinge on whether a firm has excluded competitors from the market in a way that did not benefit consumers or reduce costs,” economist Marc Rysman has said.

The bottom line is that U.S. antitrust have concluded that Google did not act in an anti-competitive way in the past. Circumstances can change, of course.

Will T-Mobile US Compete for Fixed Network ISP Accounts?

One of the biggest problems all of us have with business and life is getting transitions right, especially big disruptive transitions. Consider only the matter of consumer internet access; its retail cost, its value, speed and market structure.

To summarize, some critics complain (and always do) that consumer services are too slow, too expensive and are offered in markets that are not competitive enough.

Leaving aside for the moment that much of that is a judgment call, the rate of improvement, the cost per bit metrics (value), price that is inflation-adjusted and as a percentage of household income metrics are not out of line for any developed market, and are far better than in most developing markets.

And competition is going to intensify. Leave aside the coming future competition from constellations of low earth orbit satellites or more exotic delivery platforms (balloons or unmanned aerial vehicles).

In the near term, 5G is going to be used by mobile service providers to attack fixed network internet service providers, in some cases using 5G fixed access, in other cases simply by supporting mobile substitution.

Verizon has been the biggest, most aggressive proponent of using 5G in fixed mode to provide major new competition out of region to AT&T, Comcast and Charter Communications.

But T-Mobile US now says it expects to be a significant player in providing major new competition for internet access services provided by fixed network providers as well, if its merger with Sprint is approved. In truth, T-Mobile US is likely to do so even if the merger with Sprint is not approved.

Some might argue the purchase of video platform Layer3 works for T-Mobile US no matter what happens with the Sprint merger, as a way to provide “up the stack” video services, and also as an anchor feature for fixed internet access bundle.

“I don't think people have really thought through what's going to come,” says Mike Sievert, T-Mobile US COO, a prediction predicated on a Sprint merger with T-Mobile US.

T-Mobile US apparently expects to gain, by 2024, close to 10 million customers that formerly would have been served a fixed network. The company believes perhaps 75 percent to 80 percent of those accounts will be in metro areas, with 20 percent to 25 percent of them in rural America, Sievert says, when available speeds range from 150 Mbps to 450 Mbps or more, in some areas.

“What people haven't really connected to until recently is that with the new T-Mobile, by 2021, two thirds of the country will have greater than 100 megabit speed, so if you think about in the context of broadband, by 2024, it will be 90 percent,” he argues.

“in the underserved rural America segment, when you get out to 2024, we'll have 74 percent of them covered with greater than 10 megs, but with home CP and our in-broadband distribution opportunity that we see, you'll have 84 percent that can get greater than 25 megabits,”Sievert says.

We will have to wait and see what happens with the proposed Sprint merger, and what T-Mobile US decides to do if the merger fails. If approved, we get a new fixed network internet access competitor, in many U.S. markets, on top of what Verizon will provide. .

Let us assume that Verizon and T-Mobile US are going to be fierce and successful competitors, at scale.

That is going to reshape the fixed network internet access market in a fundamental way, removing the duopoly of “telco and cable” in markets that represent the bulk of potential customers. Where the fixed network duopoly exists, it might often be a market with four terrestrial providers and two satellite providers, with some markets where smaller independents also operate.

That is going to disrupt business models for all incumbents, terrestrial or satellite. As four to six providers is likely an unstable situation, the eventual number of leading providers is likely to eventually stabilize at some number greater than two and less than six. Mergers are possible, but antitrust concerns will exist, for any combinations of existing providers.

Still, it is hard to ignore the profound implications of full-on mobile substitution for fixed network internet access. The fixed network duopoly seems unsustainable, in some number of markets, in the near term.

In the medium term, mobile or wireless substitution is possible on a broader scale. We are gong to have to redo our spreadsheets on internet access market shares, average revenue per account and profit margins.

Telecom is Going to Resemble the Grocery or Retail Industry, in Key Respects

It appears retail communications services increasingly will resemble the retail business in becoming a place where customers buy a number of different types of services, with varying gross revenue and profit margin profiles. That is not a new trend, but will become much more the case in the 5G era.

The reason is that 5G is key to incremental revenue growth opportunities that, almost by definition, include services with very-low revenue profiles, some with moderate revenue implications ($10 to $40 a month per service) and some with high revenue per service.

Matching that growing gross revenue and profit margin picture is a more-complicated channel (distribution) picture. Many of the truly-new services have platform implications and requirements, vertical market distribution and product functionality profiles. By definition, that also means the marketing strategies must match the vertical use cases and customer bases.

That is going to make the grocery store a relevant analogy for perhaps the first time. For a mass market grocery, apparel or other consumer goods distributor, each category of products has a distinct gross revenue and ARPU profile, which is one reason grocers are adding products in the “ready to eat” category (delicatessen, for example, or in-store meals). That also is the thinking behind “store brands,” which tend to produce higher profit per unit than external brands.

At convenience stores, margins can range from a low of one percent up to 35 percent for various products.

source: Delek

So though it might seem far fetched, profit margins for various products sold by telecom firms and internet service providers are going to show more divergence. Also, many of the new revenue opportunities will be “enterprise” sales, not the consumer distribution pattern relying on mass media advertising and retail stores.

Some of the sales will go “direct to consumer,” using internal resources. In many other cases, partner retail sales entities or even asset ownership will be needed to sell products to businesses or consumers. In many other cases original equipment manufacturer (OEM) strategies wil make sense.

Overall, sales channels and methods are going to become far more complicated.

source: A. Saghaeian

As that diversification happens, each product line, and products within a line, will tend to develop more-unique gross margin profiles, but also varying cost structures.

source: Pw

U.S. Internet Access Speeds are Growing Fast, and Will Grow Faster

Major U.S. “cable TV and telephone” service providers (fixed network suppliers) can be divided into two groups: firms that might realistically consider expanding their service territories, and those that likely would not, or cannot, consider it.

For regulatory reasons, AT&T, Charter and Comcast likely would face antitrust opposition if they wanted to expand their fixed network footprints. CenturyLink likely does not wish to do so, and Frontier cannot afford to do so.  

Only Verizon has a glaring need to “catch up” with its major competitors, in terms of fixed network coverage, and likely would not face antitrust scrutiny. That explains the out of market expansion Verizon now plans, using fixed wireless as the access platform.

Comcast could in 2016 reach 110 million U.S. homes. Charter could reach 101 million homes. AT&T reached 122.5 million U.S. homes. Verizon could reach just 55.2 million homes. CenturyLink reached just 49.2 million homes; Frontier Communications only 32.6 million.

The big immediate wild card is 5G, which should, over the next several years, expand the number of providers able to supply 25 Mbps or faster service, for most of the U.S. population, using some form of 5G platform. In early 2018, 20 percent of U.S. homes are mobile-only for internet access.  

The point is that, over the next several years, access competition is going to change dramatically, with the number of suppliers selling 25 Mbps or faster internet access service growing by perhaps two to three in most markets (Sprint, T-Mobile or a combined company; plus either AT&T or Verizon in most areas as “new” suppliers).

That assumption is based on attacks by Sprint, T-Mobile US and Verizon in AT&T legacy markets; Sprint, T-Mobile US and AT&T in Verizon areas, and all of the above in CenturyLink and Frontier markets.

Also, both Viasat and HughesNet sell satellite-based internet access at minimum speeds of 25 Mbps nationwide, as well. And by 2018, speeds had climbed well above 2016 levels, for many of the largest U.S. ISPs, more than doubling over two years.

source: PCmag.com

source: PCmag.com

Competition, service quality and price are rarely what all observers would prefer, but competition and service quality (and possibly price) are going to change radically in the 5G era, when widespread mobile substitution for fixed internet services will be a realistic alternative for the first time.

No, service is rarely as fast, as cheap, and competitive, as some would prefer. But the history of internet access in the U.S. and most other markets is rapidly-falling costs (or cost per bit, if you prefer), faster speeds and more-capable competitors.

Why SD-WAN Matters

With the caveats that I do not primarily cover core networks or enterprise communications, I would still argue that importance of software-defined wide area networks (SD-WANs) is not that the market is so large, comparatively speaking, or even that SD-WAN eventually will displace legacy networking platforms.

Strategically, all core networks are evolving towards virtualization, which means all core networks will define, create and support virtual private networks as a basic assumption.

In other words, all WANs eventually become virtual private networks.

There are some related advantages for service providers, ranging from the possibility of offering differentiated classes of service as a core feature of such networks, to allowing more-efficient use of networks, to reducing operating cost and capital investment.

Customers might gain from ability to buy customized network features that match user core business models (whether there are requirements for latency, quality of service or bandwidth.

In a larger sense, we move closer to the ideal next-generation network we have been talking about--and moving towards--for several decades: a network that can supply not only bandwidth but features on demand, dynamically.

source: Nokia Networks

Top Global Tech Execs "Favorite Apps" are Highly Fragmented

One hears quite a lot these days about monopolies enjoyed by app firms such as Google, Facebook or Amazon, with many calling for antitrust action. So it might come as quite a surprise that top global technology executives have highly-fragmented "favorite app" profiles, with scores generally in low single digits, even for the "favorites."

In other words, as concentrated as consumer use appears to be, at least some consumers (top technology execs) show no comparable concentration of "favorites," though of course that does not answer the question of the amount of usage the favorite apps get.

Top tech executives globally have highly-fragmented sets of “favorite apps,” at least when asked to name them, unaided. Use of LinkedIn in India, at 11 percent, is the highest reported mention of a “favorite app.” Globally, LinkedIn is tops at four percent.

In China, Baidu gets seven percent mentions. In Japan, Gmail gets seven percent, while BBC is tops at eight percent. In the U.S. market, Amazon is highest at five percent.

survey of 850 global technology executives suggests.

source: KPMG

Walmart Weighs New Video Streaming Service

A possible Walmart video streaming service aimed at rural and Middle America viewers is something of a “Fox News” strategy, aimed at a large segment of the potential audience whose cultural, religious and social views are distinct from those of urban viewers in big cities on the east and west coasts.

It is a risky thought. The U.S. online video subscription market is nearing saturation, so growth would have to come from taking market share. It will be an expensive proposition if Walmart produces some original programming. As Amazon Prime seems to have found, it is hard to create audience-attracting original programming.

Aiming for a cost that is less than Netflix or Amazon Prime, it is not yet clear whether the service would license content solely, or mostly; nor is it yet clear whether the service would include some original content.

Even if “free two-day shipping” is the main reason people subscribe to Amazon Prime, consumers still indicate that the video service is “very important.” Walmart obviously will try and leverage the stickiness of subscription video to reinforce its own retail strategy, which increasingly relies on online distribution.

source: Strategy Analytics

On the other hand, Amazon Prime is starting to generate significant direct revenue, even if the video service is a way to boost value for the Prime membership overall. Lots of consumers arguably join Prime just for the shipping benefits, with the online video a way of justifying the subscription’s value.

source: CB Insights

Also, there is evidence that online video viewers shop more using online services. That is another potential value for Walmart: it positions itself to grab a bigger share of active online shopping users.

So the point is that a potential Walmart streaming service provides a mix of value, including direct revenue, a potential boost for its online retailing business and a chance to create a new advertising and promotion vehicle.

source: Compete

In some ways that mix of value is true even for AT&T, whose DirectTV Now service primarily aims to generate direct subscription revenue, but also creates bundling opportunities for the rest of AT&T's subscription businesses, as well as an advertising opportunity.

source: Beyond Devices

App and Platform Providers Move into Health

It arguably is easier to “move up the stack” when a business already operates at the platform, app or device level. And that could be the case for Alphabet, Amazon, Apple and Microsoft as they seek to create new roles for themselves in the health business.

Alphabet wants to leveraging its extensive cloud platform and data analytics capabilities in the health area, including health records, for example.

source: Business Insider

Amazon is moving towards distribution of  medical supplies and pharmaceuticals. Alexa could become an in-home health concierge.

Apple logically sees itself as a medical device supplier. Microsoft operates Microsoft Health.   

Ridesharing Might Increase Traffic, But Public Transit is Failing, Anyway

Nobody knows whether ridesharing services increase traffic, decrease it, or have no effect. It is likely all three scenarios are possible, depending on geography. In parts of the country that are relatively dense, with highly developed public transportation, ridesharing might increase traffic, if it shifts ridership from public transportation.

This is a relevant trend for mobile service providers since such networks are expected to play a growing role supporting autonomous vehicles that might replace much of the human-driven ridesharing supply.

Some now argue that ridesharing services increase traffic. Others will point out that passengers are shifting away from use of public transportation is falling anyway, for obvious reasons: jobs and the places people live are more scattered than in the past.

In many U.S. cities, buses and light rail simply are not flexible and convenient enough to move people where they need to go.

That is why ridership of public transit has been falling. U.S. transit ridership in March 2018 was 5.9 percent below March 2017, according to the latest data published by the Federal Transit Administration.

In fact, use of public transif seems to have been falling for three years.

Ridership declined in all of the nation’s 38 largest urban areas (and the 39th, Providence, gained only 0.1 percent new riders). Transit systems in Austin, Boston, Charlotte, Cleveland, Miami, Milwaukee, Philadelphia, San Diego, and Tampa-St. Petersburg all suffered double-digit declines, with Austin losing 19.5 percent and Charlotte 15.4 percent despite being two of the fastest growing urban areas in the nation.

The problem seems to be that “big box” transportation does not work as well, anymore, since jobs now are more dispersed, in most cities. That is one reason some believe more flexible, smaller capacity solutions might work better.

And yes, with enough land use planning to densify urban cores one can concentrate work, but at the cost of creating unaffordable housing close to work. There is no painless solution.

One study estimates 70 percent of Uber and Lyft trips are in nine large, densely-populated metropolitan areas (Boston, Chicago, Los Angeles, Miami, New York, Philadelphia, San Francisco, Seattle and Washington DC.

Other studies reach opposite conclusions, arguing that ride sharing services can reduce traffic. One MIT study suggests multiple passengers per vehicle would have a clear effect on traffic.

  

Referred to as transportation network companies, such TNCs account for 90 percent of TNC or taxi trips in eight of the nine large, densely-populated metro areas (New York is the exception) and in other census tracts with urban population densities, the study estimates.

In suburban and rural areas, taxis serve slightly more riders than TNCs. The same is true in New York City (counting car services in the taxi category).

People with disabilities make twice as many TNC/taxi trips as non-disabled persons, but taxis account for two thirds of their TNC or taxi trips.

TNCs compete mainly with public transportation, walking and biking. About 60 percent of TNC users in large, dense cities would have taken public transportation, walked, biked or not made the trip if TNCs had not been available for the trip.

About 40 percent would have used a personal vehicle or a taxicab had TNCs not been available for the trip.

The bottom line, one study claims, is that  shared ride services such as UberPOOL, Uber Express POOL and Lyft Shared Rides, while touted as reducing traffic, in fact add mileage to city streets, at least in bigger urban areas.

Private ride TNC services (UberX, Lyft) put 2.8 new TNC vehicle miles on the road for each mile of personal driving removed, for an overall 180 percent increase in driving on city streets.

Inclusion of shared services (UberPOOL, Lyft Line) results in marginally lower mileage increases – 2.6 new TNC miles for each mile in personal autos taken off the road.

Shared rides add to traffic because most users switch from non-auto modes. But that is happening with public transportation in any case.

Customer Cloud Infrastructure Spending Grows 50%

Spending on cloud infrastructure services jumped 50 percent, year over year, in the  from second quarter of 2017, according to Synergy Research. Synergy estimates that quarterly cloud infrastructure service revenues (including IaaS, PaaS and hosted private cloud services) are now comfortably over $16 billion.

“Revenue growth at Microsoft, Google and Alibaba far surpassed overall market growth rate,” says Synergy, but Amazon maintained its dominance with 34 percent market share.

Smaller providers are losing share. Of the top 25 cloud providers, only three other companies have seen their market share increase significantly, though none of the three has yet broken through the one-percent market share threshold.

Meanwhile IBM market share has been relatively stable at around eight percent, thanks primarily to its strong leadership in hosted private cloud services.

source: Synergy Research

How Comcast and AT&T Strategies Compare

It would not be stretching an analogy to say that, in the U.S. market, Comcast and AT&T have broadly similar strategies. Both are the most clearly committed to diversifying their roles within the internet and content ecosystems, and particularly focusing on ownership of content creation assets.

In its second quarter, for example, Comcast earned about half its revenue from consumer triple-play services, its “legacy.”

In its second quarter, AT&T earned perhaps $29 billion from traditional mobile and fixed communication services, about 75 percent of total revenue.

Roughly 25 percent of revenue was contributed by the video distribution and partial results of Warner Media for the second quarter. So it speaks volumes that AT&T now says it is a “modern media company.”

One has to suppose that the goal is to shift as much as half of revenue from voice, mobile communications or even internet access to content ownership and content distribution.

It is worth noting that in the consumer services segment (exclusive of consumer mobility), about 71 percent of AT&T segment revenues now come from video entertainment, not voice or internet access.

The point is that content and related assets now are viewed as key by both Comcast and AT&T, essentially as a means to occupy different roles within the content and communications ecosystem.

And, eventually, the revenue profiles of Comcast and AT&T might not be too dissimilar. Where Comcast is diversifying away from its legacy video services position, AT&T is increasing its exposure in those areas.

Where business services and mobility are significant revenue contributors for AT&T, Comcast is growing in those segments. And where Comcast is a content creation company, so AT&T now is a content company, in part.

That fundamental "take market share from the other guy" strategy has not changed too much over the last two decades. Basically, telcos upgraded to broadband to trade market share with the cable competitors. Cable has grown by taking telco voice and internet access share in the consumer segment, and now is encroaching on business customer share.