The Wireless Market Is Seriously Messed Up When Every Incentive Is Anti-Consumer.

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AT&T reported their second quarter results today. According to this analysis, AT&T achieved better profitability by (a) dramatically limiting their broadband service; (b) discouraging consumers from upgrading their devices; and (c) figuring out new charges for consumers to enhance overall profit per customer.

I get that firms are supposed to maximize profit. But when every single incentive to profit maximization relies on providing less service for more money and discouraging people from using your service, something is seriously messed up. This is doubly true when usual trend in information technology is to drive prices down. And, more tellingly, it creates a real concern if we are relying on market incentives to ensure that providers do things like build out networks and provide us with better service and lower prices.

I’m not claiming AT&T is being nefarious. I’m just saying something appears seriously messed up about the whole industry structure. Given the critical importance of this particular industry to our national economy, it would be particularly useful if we had a better understanding of why this is so messed up and — jus maybe — what policies would fix it. For example, if the enormous subsidies paid for iPhones and other smart phones is an issue, wouldn’t it make sense to sever the handset market from the network? If the problem is that network upgrades are expensive to meet demand for wireless capacity, then how are we going to get networks built out?

I’d be happy to concede the issue on metred pricing, except that there doesn’t seem to be any actual relationship between the price metering and the cost of provisioning. The idea of metering is that I want to provide you with more capacity because that way I make more profit. If this were bananas, I would have a fairly direct incentive to grow more bananas so I can sell more bananas. But AT&T doesn’t want to charge me for more bandwidth, which would arguably give it incentive to build better systems and sell me ever more capacity. It wants to sell me limited capacity and then stop, presumably so it can capture some imaginary and unspecified revenue on the the other side of the platform. That creates a fairly unfriendly incentive to create scarcity and avoid investment in the network.

Which brings me back to my original point. There is something seriously wrong in a market when every single incentive is anticonsumer, and when providers can act on these anticonsumer incentives with no consequences. If nothing else, can we at least stop pretending that “the market” is going to somehow look out for consumers, despite every provider incentive to the contrary?

Stay tuned . . . .

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2 Comments

  1. Matthew G. Saroff
    July 24, 2012 at 6:50 pm

    You have heard what Verizon is doing, where they are sabotaging their own DSL in order to screw consumers:

    Back in April you’ll recall that Verizon stopped selling standalone DSL, taking us back to the stone age of broadband when users were forced to bundle a costly landline they no longer want. That move was just one part of a broader tactical shift by Verizon aimed at completely re-configuring the American broadband landscape — potentially for the worse. With FiOS expansion frozen and most of the company’s focus on fixed and mobile LTE services with sky-high overages, Verizon has all-but declared that the 35-45% of their entire customer footprint that will be left on DSL is essentially expendable. Those users are consciously being driven to LTE and cable competitors as part of one of the largest shifts in power and technology this industry has even seen.

    There’s numerous reasons for wanting their DSL services to die off, including the fact that newer LTE technology is cheaper to deploy in rural areas and easier to keep upgraded. But one of the larger driving forces is that Verizon is eager to eliminate unions from their equation, given that Verizon Wireless is non union. None of this is theory; in fact it has been made very clear by Verizon executives.

    “Every place we have FiOS, we are going to kill the copper,” Verizon CEO Lowell McAdam recently told attendees of an investor conference. “We are going to just take it out of service. Areas that are more rural and more sparsely populated, we have got LTE built that will handle all of those services and so we are going to cut the copper off there.”

    In other words, Verizon will cut off copper in FiOS markets first (which makes sense given the lower maintenance costs of fiber). They’ll then leave users in DSL-only markets un-upgraded, forcing them to buy a costly landline so that remaining on Verizon DSL becomes less attractive. Those customers will flee to the same cable companies Verizon just signed a massive new partnership with, with Verizon planning to sell those users more expensive LTE connection later. Verizon will continue to “compete” in FiOS areas for now, if you call winking and nodding when it’s time to raise prices competition.

    The reason for this is very straightforward, incumbent carriers, Verizon, AT&T, etc., do not derive their revenues from providing a better product or a better value, they do so by rent seeking behavior, where they use regulatory arbitrage and near monopoly status to extract money.

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