What Happens in a Competitive Market When the "High Cost" Supplier Loses Lots of Customers?

The thing about leverage is that it works both ways. What helps accelerate business results on the way up also accelerates a decline. Dell, for example, benefited for a long time by using a "build to order" strategy that limited cash tied up in inventory and also created cash "float" when its retail customers paid Dell before Dell paid its suppliers. 

While the company was growing fast, Dell was getting paid to make products faster than it is paying to make them. All that goes in reverse when sales slow. Now Dell is seeing the process in reverse. Lower retail sales mean less cash is coming in the front door, while supplier payments for older and larger orders are going out the back door. 

You might argue a similar process is at work in the fixed network telecom business. Incumbent telcos are losing customers, market share and gross revenue to cable companies and competitive suppliers including competitive local exchange carriers, for example. 

And that means fixed costs are spread over a smaller base of customers. You know what that means: incumbents will have to find new services to sell, or must raise prices on the remaining customers to cover the overhead. 

The process is most clear in the voice business, where telcos once had 90 percent or higher share of consumer and small business voice accounts, and now have perhaps 60 percent to 40 percent. All other things being equal, that means the sunk costs and overhead supporting the voice network have to be spread over a smaller base of customers. 

The other problem is that nobody ever argues that incumbent telcos are the "low cost providers" in any market. Since, in a competitive market, over the long term, the low cost provider generally wins, that poses another layer of trouble. Not only are fixed costs going to become a problem, but incumbent telcos also face institutional barriers to reducing those costs. 

Mobile, cable and CLEC contestants, for example, generally operate with non-union work forces and generally have leaner work force structures (fewer employees per $100,000 of revenue)  as well. 

Thus begins a vicious cycle. Telcos raise prices to cover overhead. Higher prices drive customers off the network. That means overhead per remaining customer gets higher. So prices have to be increased, which causes more customers to flee, and so on. To be sure, all other things are not equal. Telcos are creating new products to replace lost revenue. 

But you see the problem: large fixed costs are a real problem for any business that starts to shrink. 

High fixed costs are a potentially devastating problem for competitors who start with the disadvantage of the highest cost structure in a market, with the heaviest regulatory burdens and price controls. 

For Banks and Payment Processors, the Task is "Avoiding Zero"

In the start-up business, there is an aphorism that suggests the most important thing for a start-up team is to "avoid zero," a way of warning teams that, no matter what, the first objective is not so much to execute fully on the original plan, but avoid wiping out the investment by failing completely.

In more established businesses under attack by disruptive competitors, the task is somewhat similarly to "avoid zero" in the sense of the underlying revenue model withering to "near zero" levels. 

That might not be a huge concern for most in the payment processing business, but the danger of downward pressure is obvious. And most observers would agree the pressure will have some effect. 

One of the most logical competitive positioning statements a company can offer a merchant is "lower transaction fees." And even though many would argue there is precious little wiggle room on that score, some contestants already are offering to attack the payment transaction fees in a major way. 

LevelUp, for example, is trying to beat competitors by jumping straight to a zero-percent charge for processing a transaction.

Though it used to charge businesses two percent per transaction, LevelUp has decided to "eat" the transaction fee, LevelUp still will have to pay its partner payment networks their customary fees. So how is LevelUp looking to modify its revenue model?

Basically, instead of charging for transactions, LevelUp will instead try to create revenue through special campaigns operated on behalf of its merchants. For instance, a local retailer could offer $2 off a $10 item for anyone using LevelUp. The customer would pay $8, and LevelUp would take 35 cents per dollar from the campaign. 

That proposition isn't riskless, either. But if successful, LevelUp would start to create pressure within the ecosystem for lower transaction fees, at the very least. 

FCC Approves Verizon Purchase of Cable AWS Spectrum

The U.S. Federal Communications Commission has approved a modified plan for transferring spectrum from a consortium of cable operators to Verizon, and though not strictly related, a set of agency agreements whereby the cable companies and Verizon can resell each other’s services.

The approval also clears the way for spectrum transfers to T-Mobile USA and and an exchange of spectrum between Leap Wireless and Verizon as well.

The decision was expected, once the cable companies and Verizon agreed to limit the terms of the agency agreements and any systems developed between the cable operators and Verizon as a result of their collaboration for a limited number of years.

Verizon will purchase spectrum in the Advanced Wireless Services band from Comcast, Time Warner Cable, Cox Communications and Bright House Networks, while selling some of its spectrum to competitors T-Mobile USA and Leap Wireless.

The FCC's approval forbids Verizon from reselling cable products and services where Verizon FiOS service already exists, principally. The U.S. Department of Justice earlier had demanded those same concessions as part of its clearance of the deal on antitrust grounds.

FCC to Study New Definitions for "Broadband"

The FCC now is preparing to consider a wide range of standards and definitions for broadband that likely will change the "speed" definitions, perhaps adding quality and pricing metrics for the first time, as well as standards for mobile and satellite broadband.

There is little question that the U.S. broadband situation is “rapidly evolving,” as the Federal Communications Commission notes. Also, the 2010 National Broadband Plan recommended that the Commission “review and reset” its benchmarks every few years. 

In 2010, the Commission raised the minimum speed threshold for broadband to a 4 Mbps downstream, 1 Mbps upstream service. And it appears likely the FCC will do so again by the time of its next report in 2013.

The FCC now wants to consider raising the speeds used to define the minimum levels for “broadband,” adding latency and usage cap benchmarks, at least for fixed terrestrial broadband service.

But the Commission also logically now wants input on whether to add specific benchmarks for satellite and mobile broadband, which have become more important, for purposes of analysis, over time.

The FCC also might assess bandwidth based on the number of users in a household, the number of devices or apps expected to be used in homes.

Where streaming high definition TV, video conferencing, or online gaming, 6 to 15 Mbps could be required as a minimum, the Commission seems to suggest.

The 2010 National Broadband Plan recommended that the Commission set a goal of 100
million U.S. homes having affordable access to actual download speeds of at least 100 Mbps and actual upload speeds of at least 50 Mbps by 2020. The FCC wants imput on whether the Commission should identify multiple speed tiers  to assess the country’s progress.

The FCC might also consider whether “affordability” goals should be added, as well, including such criteria as service prices.

In the technical realm, the Commission is looking at whether latency should be considered as an additional threshold for broadband, possibly adopting a 100-millisecond latency threshold for fixed services.

If mobile broadband data is collected, the FCC also will have to decide what speed benchmarks make sense, as well as setting latency requirements for mobile broadband.

The FCC even wants to include Wi-Fi hotspots in its analysis, including private in-home or in-building networks as well as public hotspots, in assessing mobile broadband deployment and availability. All of the changes, if adopted, would create a more complete and nuanced view of the actual status of broadband deployment, if arguably a bit more subjective as well.

Percentage of Tablets Sold with Native 3G/4G Capability Declines 12%

In the second quarter of 2012, the majority of tablet shipments were Wi-Fi-only. In the second quarter of 2012, less than 27 percent of new shipments included a mobile broadband (3G/4G) modem module, down 12 percent from the second quarter of 2012, ABI Research says.

In the April to June quarter of 2012, tablet shipments reached nearly 25 million units,  with total shipments growing 36 percent quarter-over-quarter and 77 percent year-over-year.

Apple iPad shipments represented nearly 69 percent of worldwide volumes, ABI Research says. Samsung had 8.1 percent and ASUS shipped four percent, while RIM shipped one percent.

Worldwide shipments of media tablets are expected to exceed 100 million units in 2012.

FCC Suspends Special Access Rules, Uncertainty Grows

The Federal Communications Commission has concluded that its 1999 rules on market-based special access rates "have not worked," so the FCC is suspending its rules. At stake are special access revenues of incumbent LECs of about $16 billion annually, and also business costs for rival suppliers who lease such circuits to connect their own customers.

At stake is the market cost to a competitive supplier to gain access to high-bandwidth circuits serving customers who cannot be reached by any single supplier's own network. But the markets have changed, and some would say dramatically, over the intervening years.

What remains uncertain, as the FCC collects new data, is the impact of new supply side changes such as circuits sold by cable companies, for which no mandatory access to competitors is required, or other facilities-based suppliers that might be able to supply DS-1 type circuits, for example. As always, the definition of "the market" and "the suppliers" will be important.

Businesses might well be able to buy high capacity circuits from cable operators, who do not have to allow third parties access to those services. The issue is whether services for business customers, or costs of doing business for competitive local exchange carriers, is the policy objective.

One historic limitation of cable networks was their initial concentration on residential areas. Over the last couple of decades, though, business customers have become more important, and cable operators now are aggressively selling services to business customers, including business grade high speed access services operating up to 100 Mbps.

It is true there are not mandatory access requirements for cable operators. But neither is it true that telco bandwidth now is the only alternative, especially outside the densest areas of business customer concentration.

In the "Pricing Flexibility Order," the Commission adopted rules intended to allow price capped service providers to show that certain parts of the country were sufficiently  competitive to warrant pricing flexibility for special access services.  

But the FCC does not believe its rules have worked as expected, "likely resulting in both over- and under- regulation of special access in parts of the country." But some will argue that the FCC's suspension of its rules likely will result in the re-imposition of price controls.

Originally, the FCC expected rather more robust market entry by new competitors, starting in the areas of highest business demand, and then gradually extending elsewhere throughout a metro area.

The FCC says "recent data indicates that competitors have a strong tendency to enter in concentrated areas of high business demand, and have not expanded beyond those
areas despite the passage of more than a decade." In other words, competitive providers have tended to cluster their investments in the areas where potential customer density was highest, and have tended to underplay investments elsewhere.

A reasonable person might say that is about what a rational supplier might do, if the financial return was too low, and the risk too high, in the outlying areas. "Incumbent LECs generally concede that competitors have focused on areas in which demand  for special access services is very concentrated," the FCC says.

"Demand for special access services is highly concentrated in a relatively small number of dense urban wire centers and ex-urban wire centers containing office parks and other campus environments," the FCC says.

Verizon told the FCC that more than 80 percent of demand is generated in eight percent of its wire centers, allowing new competitors to address a large portion of demand through targeted investments.

SBC, for example, states that a large percentage of its demand for DS1 and DS3 services
runs within 1,000 feet, or about three city blocks, of existing alternative fiber. The implication is that competitive local exchange carriers could extend their networks if they wanted. CLECs tend to say that is untrue, in large part because the incumbents make such expansion unduly expensive.

But CLECs also argue that there are other important barriers to entry, including the delays in or
impossibility of securing municipal franchise agreements, rights-of-way agreements, building access agreements, and building and zoning permits.

In 2006, the U.S.  Government Accountability Office (“GAO”) analyzed 16 metropolitan areas in which the Commission  had granted pricing flexibility and found that facilities-based competitors served fewer than six percent of  buildings with at least a DS1-level of demand.

But a rational executive also would note that it virtually never makes financial sense for a CLEC to build its own facilities to serve even a confirmed customer with that level of demand.

The point, CLECs argue, is that there perhaps "never" will be a business case for extending CLEC facilities much beyond their current state.

TW Telecom relied on data supplied by Verizon in arguing that, between 1996 and 2004, non-incumbent LEC channel termination buildout to commercial buildings increased from 24,000 buildings to  approximately 31,467 buildings (a change of 7,467), in contrast to the “millions of buildings served by  incumbent LEC fiber.

In 2005, WilTel estimated that competitors had deployed to 25,000 buildings,  whereas Sprint asserted in 2007 that only 22,000 buildings had competing connections.

Moreover, TW  Telecom has argued that competitors serve only three to five percent of
commercial buildings nationwide.

Proponents of special access price regulation rely on three central arguments to support a retreat to strict price regulation. Such proponents argue that markets for special access are unduly concentrated, rates of return are very high and prices are lower in more heavily regulated markets than in markets with the most pricing flexibility.  

Economists at the Phoenix Center for Advanced Legal & Economic Public Policy
Studies argue that those assertions are not correct, but additionally do not prove the presence of undue market power. The Phoenix Center further argues that much hinges on the definition of "a market."

55% Say They Order Restaurant Food Using an Online or Mobile App at Least Monthly

More than half of the respondents in a national survey said they use an online or mobile application to order food from a restaurant on at least a monthly basis.

Splick-it, a Colorado-based food ordering services provider, queried 7,122 American consumers for the survey. The sample included 70 percent of respondents between 20 and 40.

Only 25 percent of respondents said they never use online or mobile food ordering services, while a combined 21 percent reported using those services on a daily or weekly basis.