Internet commerce flourishes because of market demand not regulation

One peeve I have had with the Federal Communications Commission in past and today is its penchant to describe its role in the broadband market as a facilitator of growth and innovation.  It’s like having cousin Louie visit for a weekend, overstay his welcome, and claim that he helped to build your house.  I’ve had to ask myself if I missed something during my two decades in the regulatory game.  Where did the Commission facilitate growth in the online markets?

There are probably a number of different sources to look at.  I try to keep things simple, so I decided to take a look at what professional market watchers have seen over the past four years.  Not a formal analysis that wreaks of regression analysis and all that, but an albeit cursory review of the findings from three Morningstar reports that covered a broadband provider; an online bookseller; a media company; and an over-the-top video distributor.  Since the Commission continuously refers to the entire internet ecosystem as its unit of regulatory analysis, I figured looking at companies that play in different but connected boxes in the internet ecosystem was an allowable approach.  So here goes.

First, lets go back to a Morningstar analysis of Amazon conducted on 6 December 2010.  The analysis discusses the advantages that Amazon has over brick and mortar companies such as Barnes and Nobles and Borders.  Amazon has been able to leverage the internet to deliver books at the lowest cost point, a cost point achievable because of low overhead costs.  Amazon has also been able to leverage the internet to produce and distribute e-books which, according to Morningstar, has a compelling advantage over hardcover books.  The main reason e-books have been successful is that production and distribution costs are near, if not, zero.  This ability to keep production costs near scraping the bottom has translated into lower prices for consumers.

I read through that report looking for some acknowledgment of the Federal Communications Commission.  I saw none.  Based on this report it seems that the idea of storing books in warehouses and shipping them out to consumers as the result of receiving an order online was part of a business model developed by an engineer by the name of Jeff Bezos.  No mention of the Commission or the Communications Act.

In September 2011, Morningstar sounded kind of so-so on Netflix.  Morningstar made it clear that content owners held the upper hand with the ability to enter into shorter licensing agreements for content and repricing at a higher amount.  Morningstar also noted in 2011 that Netflix faced heightened competition from new entrants and the lack of access to higher quality content.

Fast forward three years.  Netflix has built its own house of cards where orange is the new black.  Just like the Amazon analysis, Morningstar makes no mention of how the Commission’s regulation of the internet contributed to Netflix’s business model or its decision to go outside the box and not just deliver DVDs but stream video as well.

Speaking of content, Morningstar’s July 2012 analysis of Time Warner proceeded from the premise that quality content is king and that Time Warner has been able to take a strong competitive position in content.  The quality of Time Warner’s content, according to Morningstar, increases in value because it can be consumed on multiple devices, including laptops, smartphones, and tablets in addition to televisions.

The decision to deliver it via multiple platforms via multiple devices appears to have been made by private actors with no input, appropriately, from the Commission.

And how about the broadband provider portion of the ecosystem.  The Commission, along with net neutrality advocates, has been harping on the need for robust competition in the broadband space, but according to Morningstar’s August 2012 analysis of broadband provider CenturyLink, for the company to stay competitive with cable companies it would have to invest in network enhancements that facilitate faster download and upload speeds.  Not only does CenturyLink have to compete with cable in providing broadband access, they also compete with cable to distribute video.  Their provision of fiber-to-the-tower finds them competing with not just cable companies but with other competitive local exchange carriers.  CenturyLink also competes with Amazon, Salesforce.com, and Verizon in the provision of cloud management services.

Again, nothing in Morningstar’s analysis that speaks to the Commission’s requirement or even suggestion that CenturyLink enter into these markets within the internet ecosystem.

Growth and innovation have been occurring within the internet without the Commission’s persuasion or regulation and so far the Commission has not demonstrated why applying Title II regulation could add any value to the market-driven actions taken by the firms I just discussed.

American Commitment sets the record straight on FCC’s open internet comment period

Pluralism is a magnet for influence and effective advocacy is not a “first strike and you are done” game.  The advocacy group, American Commitment, demonstrated that earlier this afternoon in a press release that describes analysis of the Federal Communications Commission’s comment period in its open internet rules docket.  According to the press release, the advocacy group won the second comment period by delivering 808,363 comments opposing any regulation of the internet.  The analysis was conducted by the Sunlight Foundation.

“We’re pleased that the Sunlight Foundation is finally confirming that American Commitment and Americans opposed to regulation of the Internet won the FCC comment period.  Better late than never,” said Phil Kerpen, president of American Commitment.  “The American people have spoken clearly in expressing their opposition to any effort by the FCC to impose regulations on the Internet.  A  Washington takeover of the Internet would be disastrous for free speech, commerce, and the future of the Internet as a sphere of innovation.”

Ironically the FCC, at least its three Democrats, appear to cite the voices of the alleged three million post-card proponents of Title II and net neutrality.  If the FCC members want to maintain their own image of balance, maybe they should acknowledge the voices that are opposed to the imposition of onerous rules on a medium that has been delivering knowledge and content via an open architecture for decades without a single tariff or contract disclosure requirement.

Competition. The FCC’s mythical anti-innovation policy

A reality often clouded in the free market narrative is the lack of specificity as to what free market means.  There is always a price of entry into markets.  Producers have to face the cost of getting their goods and services into markets for eventual sale.  Consumers have to invest the time researching available choices so that they can negotiate the best deal that enhances consumer welfare.  Exiting markets can be costly if the time ad effort made to enter a market does not result in purchase or sale. Buyers and sellers expect these barriers to entry and can plan for them.  What most impacts the freedom to enter markets are the barriers that government can impose.  Ironically one of those barriers is the requirement of competition.

The word, “competition”, gets thrown around ad nauseum by members of the Federal Communications Commission.  It’s never defined which allows the speaker of the word to use it with the authority of a witch doctor, conjuring up images of doing the right thing for grandma and apple pie.  Per the text books, competition is short hand for “competitive markets” which means that you have multiple firms selling a similar product at some point where the marginal cost to produce the item is equated to the price.  Firms in a competitive market, in theory at least, aren’t paying much attention to what the other guy is doing but simply responding to the price signals they receive from consumers.  In reality, this doesn’t happen in either the broadband access or internet content markets and the FCC should stop pushing a policy that says that competition should be the case.

First, the broadband access market.  There are multiple firms, wired and wireless, that are providing broadband access.  For example, Comcast and Verizon provide me with broadband access to the internet and if I wanted to really go all out I could invite AT&T into the house to provide me with DSL service.  I have choice as a consumer and my choices try to distinguish themselves everyday by advertising their service speeds and prices.  The Commission continues talking about competition for broadband access but they appear to forget how capital intensive deploying new networks can be and that the barrier of cost is probably playing the most significant role in keeping potential new carriers out of a market.

In the content/information markets, it may be a bit clearer why competition”on the edge.”  In a piece in The Economist, Peter Thiel, a co-founder of PayPal, is cited as referring to competition as an indicator of failure; that success comes from providing a unique solution and monopolies, not competitive firms, are the ones occupying a once ignored space and providing a unique service.  ”A clever startup does not try to compete directly with an incumbent.  It picks a seemingly unimportant market which it can monopolise.”  Their monopoly position, according to Mr. Thiel, drives the innovation necessary for creating a unique product.

If competition, according to Peter Theil, is a relic of history that does not drive innovation, then why does the Commission push the narrative, especially with examples that abound of online startups, i.e. Facebook, Google, Amazon, that consistently bring new services while monopolising their core services?  It is probably because it goes against the grain of over a century of precedent that says abuse of dominant power is bad and that every monopoly must be automatically assumed to do or potentially do some serious abusing.  It would be political suicide for the Commission to think that far outside the box.

To me it’s economic suicide to keep innovators on the edge so constrained by the myth that competition leads to innovation.

Can the FCC afford a public utility tax on an emerging mobile payments industry

The Economist last month published an article describing how consumers can use social media like Twitter and Facebook and mobile apps like Snapcash to send payments to businesses or other consumers.  The Person-to-Person or P2P market is expected to reach $5 billion this year and grow approximately 26% per year to reach $17 billion by the end of 2019.

Although mobile payments has been around in Kenya since 2007, what’s changing, according to The Economist, is that mobile payment services are getting easier and faster to use.  As new business models for mobile payments evolve the issue of monetizing those models raises its head.  Some platforms charge a fee for completing mobile payments.  Other platforms introduce premium services that they can probably charge a fee for but some platforms will remain free of fee charges to consumers, at least in a non-Title II world.

Why did I add a qualifier?  Because with Title II regulation, which would treat broadband internet access providers like old school common carriers, consumers may find their broadband services subject to a number of additional fees that may make consumers think twice about adopting and using broadband access.

According to a study by Hal Singer and Robert Litan, the average annual increase in state and local fees for wireline and wireless broadband access services will be $67 and $72, respectively.  The annual increase in federal fees will be approximately $17.  Messrs. Singer and Litan estimate that consumers will pay approximately an additional $15 billion in fees.  As Messrs. Singer and Litan correctly point out, broadband internet access providers won’t eat the federal, state, and local taxes or franchise and gross receipts taxes they are assessed.  They will, as they do with good old fashioned telecommunications services pass these taxes on to consumers.

That’s $15 billion in lost personal consumption expenditures going down the black hole of government coffers and not being circulated in the general economy.

Can consumer welfare afford a Title II reclassification by the Federal Communications Commission?  I don’t think so.

The FCC, Title II advocates clearly ignore the reality of market competition

Posted December 9th, 2014 in Broadband, Federal Communications Commission by Alton Drew

Yesterday, Morningstar reported on the ding to corporate profits mobile broadband carrier Verizon is experiencing due in large part to price warfare in the wireless markets.  Here is a snippet of what Morningstar reported:

“The nation’s largest wireless carrier warned late Monday that its profits are coming under pressure at the end of the year as it rolls out discounts in an effort to win customers. The carrier also said more of its customers were leaving for other carriers this quarter than in the last quarter or last year amid heavy promotions from rivals.

Verizon Communications Inc.’s shares fell more than 1% to $48.35 in after-hours trading.

The company has long been able to charge a premium for wireless service, in large part thanks to its reputation for having a strong network. The comments, however, show that discounts and other deals from rivals T-Mobile US Inc., Sprint Corp. and AT&T Inc. are taking a toll.”

This morning a number of telecommunications market indices were reporting declining values, albeit not necessarily from the price war but as a result of overall negative outlook on the global economy and a flight to Treasury securities and other debt instruments.  That doesn’t negate what is happening in particular in the telecommunications markets.

Given the organic reaction to real competition in the wireless market, the last thing the Federal Communications Commission should do is threaten to contaminate the markets with regulatory pesticide.