Should Google, Facebook, Amazon, Apple Be Broken Up?

If all you have is a hammer, every problem looks like a nail. So it is with a list of problems at Facebook, Google, Apple or Amazon that, it is said, only antitrust action to "break them up" can fix.

Privacy, algorithms, "tying a new service to an existing service" and promotion of a general climate of innovation are valid issues to debate and consider. But none of those issues is necessarily a problem that antitrust action can fix, sustainably.

If network effects exist (and everybody agrees they do exist), then bigness cannot be helped. Over time, firms that best supply consumer demand will get big, and become more profitable, than all other firms without requisite scale.

So here's the question: Can we repeal the “laws” of economics that suggest scale economics and network effects often matter for internet-based firms?

A network effect (also called network externality or demand-side economies of scale by economists) occurs when the value of any specific product or service grows with the number of people using it.

So here is the problem in a nutshell: an industry where network effects exist will always favor larger networks. Small networks simply will not have sustainable profit potential; large networks almost always will have large profit potential.

That is why many believe “platforms” are so important. Platforms are simply examples of nearly-ubiquitous scale. A market so competitive that no single provider has requisite will, over time, reform itself into one or two scale providers who are able to take advantage of the network effect.

source: Evergreen

In a  winner takes all market the best performers are able to capture a very large share of the rewards, and the remaining competitors are left with very little. That is an example of network effect.

Our “problem” is that the internet itself--and the competition it enables--seems to create such winners.

In fact, winner take all markets seem quite common across industries affected by the internet.

The percentage of total revenue at publicly-traded U.S. corporations earned by the top 100 firms was 53 percent in 1995, for example, growing to 84 percent over the next two decades.

In other words, scale seems to matter more than it used to, when price transparency, logistical systems and other barriers prevented more-robust competition.

source: Consultancy

Are there problems with Google or Facebook’s practices around privacy and algorithms? Yes. Can those problems be resolved without antitrust? Probably.

But as calls to break up Google, Facebook Apple and Amazon are  growing more numerous, it is fair to consider a couple of contentious assertions, among them the notion that our traditional understanding of antitrust law is outmoded.

Specifically, even if “consumer protection” has been the rationale for past efforts to reign in monopoly, now “competitor protection” essentially is urged as the new standard.

To be clear, competitor success is the mechanism for consumer welfare benefits, so it is not crazy to say antitrust action is required to promote and protect consumer welfare.

But the proponents of new antitrust action (breaking up Google, Facebook, Apple and Amazon) focus on “social or political” impact of bigness rather than “economic impact” of bigness.

But some will argue that such social or political criteria are not the appropriate reasons to apply serious economic remedies.

But that has to be argument, after all, as even the new antitrust partisans admit “Google's dominance of the web-search market has no direct effect on consumer prices; we consumers get to use its service for free.”

So why take action? Not for such economic reasons. “The lack of competition in search means that Google has enormous power over what we see and access on the internet, and critics have charged repeatedly that it's used that power to favor its own services.”

So the new antitrust advocates are using the “media concentration” argument (“protect many voices”) argument for dismantling companies, not consumer harm.

That is important. It means the rationale for potential antitrust action is, in fact, not direct consumer harm but “competitor protection.”

Antitrust advocates admit that “Facebook's dominance of the social-networking market doesn't affect the price consumers pay; like Google, it offers its service for free.” So consumer harm cannot be demonstrated.

“But from the widespread dissemination of fake news to the leaking of profile data on likely more than a billion users, there are big problems related to Facebook's enormous size.”

Yes, there are issues--and important issues indeed--to be solved here. But antitrust does not solve them.

The “big is bad” proponents have to deal with scale economies, which is why bigness has happened across the application and internet ecosystem in the first place. Simply, in industry segments where value grows with the size of the network, bigness is an inevitable foundation for economic success.

If we “break up” the firms with scale, all the new contenders will simply continue competing until, again, some new provider with the requisite scale emerges. Scale means both lower costs, higher revenues and higher profits. That is just the way scale economics (network effects) work.

One can agree or disagree on what we are trying to accomplish with antitrust protections.

Some argue it is about “protecting smaller suppliers in the market,” “promoting innovation by breaking up big dominant firms,” or some other objective explicitly aiming to help new firms and small firms take market share from a few big firms.

Others will argue antitrust is about protecting consumer welfare first and foremost. Where consumer welfare is harmed, then antitrust remedies might make sense, and those remedies always involve limiting the dominance of leaders in any market.

But harm to consumer welfare remains the key test, and that is true even where network effects, scale economies and network externalities exist. And that harm still has to be demonstrated in tangible ways related to excess or “monopoly” profits (economic rent).

If we have issues with privacy or algorithms, those can, and should, be dealt with. But if economic harm, requiring antitrust action, cannot be demonstrated, that is the wrong solution to the wrong problem.

Who Are the Key Telco Competitors?

Industry competitors normally pay money to track their market share versus their "real" competitors. The problem is that, in rapidly-changing and porous new markets, the legacy competitors--even when they are the most benchmarked firms--are not the strategic competitors.

These days, many service providers would say that "Google" or other app providers are their key competitors, even as they continue to benchmark against others in their "narrow" markets (mobile market share, or fixed network video or internet access).

The biggest single change in the internet value chain between 2005 and 2010, for example, was the shift of revenue from telcos to Apple, Microsoft and Google. Telecom providers lost 12 percent of profit, while Apple, Microsoft and Google gained 11 percent.

source: McKinsey

Nevertheless, the strategic issue is diminishing relevance. The "access to the internet" and associated service provider functions simply represent less value in the internet ecosystem, compared to apps, devices and platforms.

But sometimes, the traditional "narrow market definition" competitors really contribute to value loss.

In any ecosystem, one segment’s revenue is another segment’s cost. So when Reliance Jio says it saved consumers $10 billion in a single year, that also means the mobile and telecom industry lost $10 billion in annual revenue.

You would be hard pressed to name any single other competitor that has had that immediate impact and value destruction, in a single year.

You might say that is an example of Reliance Jio literally destroying the older telecom model and recreating it with new leadership and price points.

Tactically, Reliance Jio (a traditional competitor in the mobile or telecom market) has had the greatest impact. Strategically, app, device or platform providers will erode the most value, longer term.

source: GSMA

That impact on the Indian telecom market illustrates a key trend of competition and markets in the internet age: disruptors can emerge as leaders in older markets by literally destroying the existing markets. If you look at the impact of voice over internet protocols and over-the-top messaging, that impact is clear.

The legacy markets are shrinking, in terms of revenue, as usage skyrockets, with new leaders displace former providers. In many cases, the new leaders have business models other than service revenue, so use of the apps is provided for free.

Reliance Jio’s disruptive attack has destroyed $10 billion worth of annual service provider revenue, with consumers being the beneficiaries. That is a now-familiar pattern in the internet era. Consumers benefit, but most suppliers do not, as profit gets ripped out of most value chains and rearranged.

The range of threats are both tactical (narrowly-defined competition from other service providers) and strategic (shift of value and revenue from access to apps, devices, platforms).

New Communications Services Index Highlights Big Industry Changes

In September 2018, the  Standard and Poors Dow Jones Indices will broaden and reconfigure the “Telecommunication Services” sector to include some media and tech stocks, creating a new sector called Communications Services.

In some sense, the reorganization reflects the fact that consolidation has collapsed the former telecom index to overweighting to just three firms, too few, in other words, to constitute an index.

The change also reflects the mashup of the formerly-separate access services business with the content business. In addition to AT&T, Verizon and CenturyLink, the new index will include advertisers, broadcasters, cable and satellite providers, publishers, movie and entertainment companies and interactive home entertainment services.

In a broad sense, the change also shows the sweeping impact of new technology, deregulation and competition. Media, advertising, content and telecom have become so intertwined that Verizon and AT&T are both “communications” and “advertising and media” firms.

For the first time, firms such as Google and Facebook will be in the same index as AT&T and Verizon. So will the cable TV companies and Netflix.

Netflix, on the other hand, is both a content creator, packager and service provider. Amazon is a device manufacturer, video services provider, retailer and technology services provider.

In a narrower sense, the new index potentially will change price-earnings ratios, blending the low-P/E media firms with the average P/E telcos and the high P/E digital content firms.

In fact, some believe the Communications Services index will jump from the prior 10.4 P/E formerly held by AT&T, Verizon and CenturyLink (plus other smaller telcos), to perhaps 17.5 as digital content companies including Netflix, TripAdvisor Inc. Alphabet and Facebook.

source: Business Insider

On a broader philosophical level, the new index suggests the danger of regulating the formerly-distinct industries of media, advertising, applications, information technology and communications providers too narrowly.

The new Communications Services index suggests they now are interrelated, competing segments of a single new industry. Many practical questions will have to be addressed, as a result.

Broadly, we now see a mashup of former “common carrier” firms that were highly-regulated, with media, content and application and data processing firms that were unregulated, or covered under the U.S. Constitution’s First Amendment protection from government interference and control.

So one practical issue is whether the single new industry has the freedom of media, apps, content and computing, or is more regulated, even going so far as to use common carrier frameworks that are unconstitutional.

My own thinking is that more freedom, not less, for all the contestants, will work better than less freedom for all.

How Much Cost Can Muni Broadband Cut Out of the Business?

Supporters of municipal broadband services always cite the high cost and low quality of telco or cable TV internet access services as the rationale for building competitive networks. Perhaps one key question is how much room big municipal networks might have to actually cut prices.

So far, virtually all of the independent municipal broadband efforts have taken place in smaller markets where one or both of the incumbent providers appear to be capital-starved, or have chosen not to invest more in access speed, as a deliberate business policy.

One can criticize such strategies, but sometimes, in a declining market, all a business leader can do is harvest returns until some disposition of the assets is made. That was the case for telecom giant AT&T, when it faced a long-term decline in long distance revenues that were the core of its business.

Other smaller telcos have tried cutting some costs (small firms typically have little overhead to trim), launching growth initiatives (outside region business-focused services being most common) or selling assets entirely. Sometimes all three happen, in sequence (cut costs, invest in new lines of business, but then when that does not work, sell the asset).

So one big issue for proposed municipal broadband networks in tier-one U.S. cities is whether enough cost can be cut from the business to make the business model work.

In other words, can a large municipal broadband network operate at costs so much lower than a telco or cable TV company that end user prices are far lower?

So far, it does not appear that major savings, if any, are possible on actual construction of a fiber-to-home network.

source: Fiber for San Francisco Initiative

A consultant studying the cost of building a municipal broadband network for San Francisco concluded that the actual network would cost $2,050 per passing. That is arguably typical for a large urban network, so it is hard to see any potential end user savings based on lower network cost.

But that is just the cost of the network. To activate a customer, more than that much is required, per customer.

source: Fiber for San Francisco Initiative

The bottom line is that the proposed San Francisco network would not have lower construction costs than any private operator building a fiber to home network in the city.

The other areas where a cost delta might be obtained are marketing and operating costs. In principle, small ISPs, in selected smaller markets, might be able to operate with lower overhead, lower marketing cost and other fulfillment costs.

In the U.S. market, mobile subscriber acquisition costs might run between $350 and $500 per new account. Some believe a municipal broadband network might spend just $200 per subscriber in marketing costs, for example.

Acquisition costs often are higher in the declining subscription TV business price discounts and promotions frequently are offered.

So if a municipal network in a tier-one city was to offer a price advantage, it would be because its own operating and marketing costs were substantially lower than incurred by telco or cable competitors.

The consultants believe the proposed network would be sustainable at consumer prices of $51 a month (with a range between $26 and $67 a month) and business access costs of about $73 a month (with a range of $38 to $97 a month).

Those figures are roughly in line with what some small ISPs have been offering, but below the level of other municipal networks with less scale. The proposed municipal network for Fort Collins, Colo. projects $70 per month retail fees for gigabit consumer internet access, and $50 a month for access at 50 Mbps.

At least one study suggests such networks do offer lower prices, at least in terms of posted tariffs. It is not clear whether the typical plans chosen by most customers actually mean that the typical buyer in such markets saves money, though that is a logical assumption. There is little incentive for a customer to buy from a municipal provider rather than a commercial provider unless there is a price savings, a value advantage, or both.

Some might argue that another issue is financial risk, in the form of borrowing by entities to build and operate such networks. That might be a substantial issue, for a big network in a major city.

The bottom line is that the business model might hinge on take rates and operating costs, however. History suggests breakeven at about 33 percent take rates, a figure that seems to hold both for municipal and for-profit internet service providers.

One might argue that, in volume, FTTH materials costs have dropped over the last couple of decades, though construction arguably has risen. But even some older estimates have used far-lower materials, construction and connection costs than the proposed San Francisco municipal network consultants have used.

In fact, the cost of the network is higher by two orders of magnitude (100 times), while customer connection costs aer 10 times higher than what some believed was possible in 2003.

source: Corning

The bottom line is that a mature internet access business, with strong competitors (even if some do not believe that), will increasingly be cost-sensitive, as revenue will be challenged.

It is difficult to model precisely what weaker demand does to every ISP business model, but that is a strong possibility, going forward. At the very least, cost containment will be essential. And that, many would argue, is where the risk lies for big municipal networks.

For Small Cell Deployments, Asia Leads

Asia, because of its huge population, tends to lead in many measures of mobile, internet or telecom volume.

source: Ericsson

Asia also will lead global deployments of small cells, according to the Small Cell Forum. The Asia-Pacific region (most of the activity will be on the Asian continent) will represent nearly half of all global small cell deployments by 2025. In 2015, Asia represented about 54 percent of small cell deployments.

North American enterprises, which deployed 30 percent of small cells in 2015, will be a smaller part of the market in percentage terms in the future, as will North America in general, while European small cell deployments will have grown dramatically.

In substantial part, density explains the deployment patterns. Hyper-dense and dense areas represent the highest value for end users and access providers. Rural and less-dense areas will not have the same degree of value, as infrastructure costs will be relatively higher and financial upside more limited as well.

source: Small Cell Forum

Will Fixed Wireless Be a "Deploy at Scale" Choice for Telcos?

Up to this point, in U.S. and Canadian fixed network markets, cable TV providers have had a capex advantage over telcos. Their hybrid fiber coax networks have proven less costly to upgrade to gigabit speeds than telco networks, which often must break with copper-based access to match such speeds.

So, up to this point, the telco business decision has been whether there is a clear payback from ripping out copper access and replacing it with fiber to the home. Although fixed wireless and advanced forms of digital subscriber line are solutions in niche cases, the big choice has been to make the transition to FTTH or not.

The range of choices will change in the 5G era, as fixed wireless becomes a potential "deploy at scale" choice in instances where the FTTH business case is difficult.

The “politically correct” answer to the question of whether 5G fixed wireless competes with fiber to the home access is that “both have their place,” or are complementary. That has been the PC answer to the question of whether FTTH competes with digital subscriber line or cable modems as well.

Always, the answers have to be contextualized. The cost of each particular solution, for particular deployments, must be weighed against expected financial return, especially in competitive markets dominated by facilities-based providers.

One key element is cost per passing. The other key variables include take rates and revenue per account. At a high level, fiber to the homes least (per passing) in urban areas, most in rural areas, and somewhere in between in suburban areas.

source: ITU

The cost of a fixed wireless solution likewise varies by density: lower costs per location when connecting a high-rise apartment building or condominium; higher costs to connect individual homes. But nearly all observers would likely argue that fixed wireless should be less expensive than fiber to the home.

Cost estimates arguably are most developed for use of fixed wireless frequencies long in use, more speculative for 5G-based millimeter wave bands, as volume production and use of small cell base stations is just beginning.

But cost per passing is only one of the key business model drivers. In competitive markets, where there are two or more equally-talented and capitalized providers, the addressable market is never 100 percent of locations. Instead, two strong competitors essentially will split the market.

And that means the cost per customer is roughly double the cost per passing.

source: Siklu

In an era where one or multiple products might be sold, the average revenue per account also matters. And there, generally speaking, average revenue per account trends are clearly in the lower direction.

All of that--facilities-based competition; falling average revenue per account; cost per customer--means the cost of serving customers has to fall, even for next-generation networks that feature higher performance.

In that context, the question of “which platform” always includes a “cost to deploy” constraint. If the total customer base is limited because of competition, and average revenue per account is declining, then network cost (capex and opex) must drop.

That is why, all other things being equal, in competitive markets, the low-cost provider tends to win, when that provider has scale.

source: PwC