Municipal Broadband: Competition or Investment, Choose One

Regulation of communications services often poses a cruel and difficult choice, namely choosing between competition or investment. In fact, that is the explicit context of policymaking in the European Community and North America, for example.

In the EC, after decades of fostering policies leading to robust competition, policymakers now are focusing on methods of obtaining more of the other sort of good, namely robust investment in next generation networks.

In the U.S market, policymakers rapidly shifted to policies designed to encourage investment in next generation networks, at the expense of policies that deliberately encouraged competition.

Such trade-offs are a difficult but real constraint on all policymaking in the next generation networks arena, including that of local access and high speed access services.

The rationale for municipal broadband is that it provides social and economic good for the community, unobtainable from private providers. Occasionally, the argument is that doing so also will lead to more competition.

That is unlikely to be a stable long-term result. In the capital-intensive fixed networks business, there are huge constraints on sustainability.

Consider rural markets, where we routinely subsidize service, as there literally is no viable way for a private provider to create and sustain a business. “High cost subsidies” are precisely a recognition that, in fact, there is no private market business case for fixed network communications, in some markets.

Markets where municipal high speed access services are feasible often also are markets where existing private suppliers face the most-daunting business cases. That leads to underinvestment and also the attractiveness of municipal broadband.

One unlikely long term outcome is an increase in competition, though.

“Municipal systems regularly obtain 60 percent market share and remove a major anchor tenant (the government) from private networks, thereby weakening the economic case for private investment in upgrades, Ford notes.

In any market with two current suppliers, a third entrant grabbing 60 percent market share (installed base, actually) will drive one of the other existing competitors from the market.

In the near term, consumers might well benefit from a new entrant offering gigabit speeds in a market where none of the other providers is willing to supply more than 40 Mbps to 50 Mbps, if that. In the long term, that disparity will result in a new market share pattern that continues to support only two providers, as there is not enough profit left when two fixed network providers compete for 40 percent of the potential customer opportunity.

Generally speaking, with today’s economics, a fixed network services supplier probably requires share of about a third of potential customers to stay in business, long term.

That is ultimately unlikely, if one provider gains 60 percent share.  In the long run, the number of firms that can profitably serve a market “is what it is,” so eventually either the municipal entrant will fail or a private provider will exit or materially reduce its investments.

That is likely to be particularly true in the toughest markets, where incentives for private providers are most difficult.

Many would argue that municipalities should have the right  to create and operate their own high speed access business. But many also might argue that doing so is generally not the best use of municipal financial resources.

It is not that a municipal broadband network fails to deliver social benefits, but that it generally does so inefficiently.

One of the obvious justifications for municipal broadband is that it boosts economic development. That generally is the argument made for local government spending on sports arenas as well.

Skeptics might argue that such investments do not so much “create” economic activity as shift it from one existing area to another.

In other words, it is possible to argue both that broadband is economically important, and also that, on a net basis, such effort shift activity from one geographic area to another. For such reasons, state efforts to attract companies to move from elsewhere result in zero net gain, though helping one area at the expense of another.

As Ford argues, “most of the economic gains attributed to municipal broadband systems are based on economic migration rather than economic development.”

Municipal broadband networks should not be illegal, but most often should be deployed as a last resort, argues  Dr. George S. Ford, Phoenix Center for Advanced Legal and Public Policy Studies chief economist.

Many supporters of municipal broadband networks would agree, the difference perhaps being the evaluation of “last resort” necessity, and the inability of private actors to supply remedies.

Municipal broadband is in almost all scenarios subsidized entry, according to Dr. George S. Ford, Phoenix Center for Advanced Legal and Public Policy Studies chief economist.

“In Chattanooga-Tennessee, for example, the city’s system received a federal grant equal to about $2,000 per subscriber, while in Bristol-Virginia the subsidies received from various sources equaled about $7,000 per subscriber,” says Ford.  “Many if not most proponents of municipal broadband acknowledge that without subsidization, municipal broadband is a non-starter.”

The point is that municipal broadband provides social benefits, but at a relatively low level in most instances.

In many ways, the analysis presents the sort of “trade off” dilemmas many national telecom regulators have faced. It often, if not always, is the case that competition and investment are rival outcomes: more of one means less of the other.

As Ford argues, “the economics indicate that subsidized municipal broadband is incapable of increasing competition, if competition is measured as the number of firms offering service in a given area.”

Nor are municipal ISP operations necessarily free of the sort of predatory dynamics antitrust laws are designed to remedy.

“Subsidized municipal entry is prone to be predatory,” Ford argues. “Municipalities operating broadband networks are not, as the Supreme Court observed, acting only ‘to serve the public weal.’”

“Instead, the municipal entrant seeks to capture market share from private sector providers,” says Ford. “As such, if one discusses municipal broadband in the context of competition, the asymmetric subsidized entry of a municipal system is better characterized as anticompetitive in nature.”

“Economic theory suggests that the mere threat of municipal entry can reduce private sector investment,” Ford adds.

T-Mobile US Upgrades its VoLTE Service

T-Mobile US says its new “Enhanced Voice Services” (EVS) will improve voice call reliability in areas of weaker signal, while providing voice quality even higher than HD Voice.

EVS works whether on Wi-Fi and the T-Mobile LTE network, providing audio quality benefits when customers are talking to other parties that do not have EVS-compatible devices.

EVS appears to use a different and new codec than T-Mobile US orginially introduced to support Voice over LTE services.

The LG G5  is EVS-capable right out of the box. The Samsung Galaxy S7 and S7 edge support EVS through a software update happening the week of April 3, 2016.

EVS also should be available on seven T-Mobile smartphones by the end of 2016.

Will Marginal Cost Pricing Kill the Telecom Business?

Marginal cost pricing is an important principle in many markets, including some parts of the telecom business, from time to time.

Products that are "services," and perishable, are particularly important settings for such pricing. Airline seats and hotel room stays provide clear examples.

Seats or rooms not sold are highly "perishable." They cannot ever be sold as a flight leaves or a day passes.

Whether marginal cost pricing is “good” for traditional telecom services suppliers is a good question, as the marginal cost of supplying one more megabyte of Internet access, voice or text messaging might well be very close to zero.

Such “near zero pricing” is pretty much what we see with major VoIP services such as Skype. Whether the traditional telecom business can survive such pricing is a big question.

That is hard to square with the capital intensity of building any big network, which mandates a cost quite a lot higher than “zero.”

In principle, marginal cost pricing assumes that a seller recoups the cost of selling the incremental units in the short term and recovers sunk cost eventually. The growing question is how to eventually recover all the capital invested in next generation networks.

Indeed, some already argue that tier one telcos do not recover their cost of capital, perhaps an indication that marginal cost pricing is dangerous to the long term health of the industry. .

Of course, it is easy to see why marginal cost pricing has developed. It is enabled to a greater degree by Internet mechanisms.

As a rule, any industry touched by Internet distribution tends to see a trimming of supplier profit margins. In fact, that is an important strategy for digital disruptors, where the strategy literally is to destroy profit margins in a traditional business, gaining share and then dominating the new business, with permanently lower profit margins, and possible lower gross revenues.

That is the theory that underpins the pursuit of “zero billion dollar markets.” One sense of the word is that big markets get created when whole new industries are founded. But one other use is more ominous for incumbents.

That is reliance on marginal cost pricing to literally “destroy” the pricing regime in an existing market, allowing a new competitor with radically lower cost structure to displace the current leaders. That is the essence of the phrase “analog dollars, digital dimes and mobile pennies.”

It is a rational strategy for a new provider to attack a market with much-lower prices, shrinking markets but gaining leadership in the process.

Also, there is a third meaning of the term: any market not large enough for a provider to maintain a direct sales force. Paradoxically, opportunities for channel partners could grow as product categories contract, though that trend will conflict with the effort to market using mass market channels.

Overall, over the top apps--one clear manifestation of the Internet impact--boost usage, but attack profit margins. Telcos sell more data capacity, but lose value and revenue in their traditional revenue streams.

The question therefore remains: will marginal cost pricing eventually destroy the economics of the tier one telco business, unless telcos massively replace “access” revenues priced that way with big new revenue sources not priced at marginal cost, or at least not requiring huge sunk investments before revenue can be earned.

That is the argument about why Verizon’s FiOS investment is problematic.

Will Netflix Price Increase Lead to a Little Churn, or a Lot?

Consumers cannot always be relied upon to behave as they say they will. They often do what they say they will not and fail to do what they say they will do. The old joke about “do you watch public broadcasting?” Provides an example.

The percentage of people who say they do so rarely matches the Nielsen and other viewing data.

That has business implications. Some would argue that “consumer opinions” therefore are not a reliable predictor of ultimate behavior. Few companies ever were as as committed to that principle as Apple under Steve Jobs.

"We do no market research. We don't hire consultants,” Jobs said. That perhaps highly unusual attitude was motivated by the idea that consumers cannot give you reliable feedback about products they never have seen and used.

In other cases, such as consumer opinions about linear video service, even when there arguably are alternatives, far fewer consumers switch providers than say they will switch.

One sees the same pattern in consumer mobile service, as expressed dissatisfaction is much higher than actual churn behavior. Often, attitudes do not match behavior.

We might see a similar development as price increases for Netflix standard streaming plans of $2 per month are coming in May 2016.

About 17 million consumers will see the price hikes analysts at UBS have estimated.

Predictably, 41 percent of respondents to a UBS survey said they would accept no price increase for Netflix. Recall that similar questions about price increases for linear TV have shown opposition to paying “any increase at all” for the service as high as 68 percent of respondents, UBS notes.

Despite those attitudes, linear TV subscription costs have been rising three percent to five percent annually every year, while only about one percent of consumers actually desert.

Steaming service churn, however, is normally quite high in “normal” times. Some researchers have found annual churn for Hulu Plus to near 50 percent annually. Netflix, on the other hand, has relatively low churn, perhaps 10 percent annually.

source: Parks Associates

Will churn rates climb, at least initially? Probably. The issue is by how much.

UBS estimates three to four percent of customers facing the $2 a month increase will cancel service.

One reason: Netflix costs nine cents per hour of viewing. Linear video costs 30 cents per hour, according to UBS.

Smartphones Now the Top Content Download Device

The smartphone has displaced the PC as the dominant device for the download and consumption of content, a new study by Limelight Networks suggests.

On a zero to four scale, with lower scores representing more-frequent activity, the mobile phone is the device used most often, followed by the PC, and then the tablet.

source: Limelight Networks

Beyond operating system updates, consumers are leaning mostly toward entertainment: new apps (33 percent), videogames (18 percent), and movies and TV shows (13 percent).

The bulk of downloading occurs at night. So content downloading has the same “prime time” as does television viewing: 6 p.m. to midnight.

More than 40 percent of that activity involves movies and TV shows, while 35 percent download video games and music.

Smartphones Now the Top Content Download Device

The smartphone has displaced the PC as the dominant device for the download and consumption of content, a new study by Limelight Networks suggests.

On a zero to four scale, with lower scores representing more-frequent activity, the mobile phone is the device used most often, followed by the PC, and then the tablet.

source: Limelight Networks

Beyond operating system updates, consumers are leaning mostly toward entertainment: new apps (33 percent), videogames (18 percent), and movies and TV shows (13 percent).

The bulk of downloading occurs at night. So content downloading has the same “prime time” as does television viewing: 6 p.m. to midnight.

More than 40 percent of that activity involves movies and TV shows, while 35 percent download video games and music.

Investment in Internet Requires Incentives for Investment, ITU Official Says

source: ITU

It sometimes is helpful to remember that serious investment in Internet access infrastructure hinges in large part on incentives for providers to do so. Access to spectrum, reasonable but not burdensome regulations, lower taxes and fees are key enablers in many cases.

An overall regulatory approach that recognizes the dependence of investment on regulation also can make a difference.