Cable Operators Shocked…Shocked I Tell You…about Verizon Marketing Practices.

I may occasionally (O.K., more than occasionally) have some snarky things to say about the free market philosophies of my opposite numbers at places like CATO and Progress & Freedom Foundation. But what distinguishes them in my mind from industry shills and sock puppets is their ideological integrity. When they want everything deregulated, they really mean it. Not so the industry and its true sock puppets, who can spin on an ideological dime without the least regard for even the vaguest notions of consistency with their previous statements.

Case in point, this FCC complaint by the cable companies against Verizon for “retention marketing.” Mind you, these are the same folks that complain whenever the FCC even thinks about interfering with the “vibrant and competitive telecommunications market,” and who protest that enforcing the laws passed by Congress to require interoperable set top boxes and set a numeric limit on the number of subscribers they can have constitutes a “vendetta.” But, as usual, consistency is not exactly a strong point for industry. As I continually remind folks, industry does what is best for its bottom line, period. And here, it means using the big bad evil FCC to slap the telcos around.

Which brings me to the point I expound upon below. Too often, the industry gets to win by making this a fight about process and “level playing field” and confusing the issue. But what we really need to care about is what our actual policy IS. If we want to encourage competition because we prefer it to regulation of monopolies, then we damn well better make sure competition actually happens, which means subjecting the incumbents with market power (at least initially) to a very different set of regulations than the new entrants. For many years after the break up of AT&T, the FCC subjected AT&T to a set of regulations designed to keep it from using its position as the dominant long-distance carrier to prevent the new entrants like MCI and Sprint from attracting customers. The FCC did not worry if that was “fair” to AT&T to have different rules that prevented exercise of market power by a dominant firm. It said “hey, we want competition! That’s about economic policy, not about being fair.”

Mind you, I don’t expect my opposite numbers to agree. But they will at least have the virtue of consistency.

More below . . . .

At issue is the question of “retention marketing.” It turns on the idea that while the phone company needs to “know” certain things in order to transfer customers to competing voice providers, it should not be able to use that knowledge to its advantage.

If I switch my voice provider from Verizon to Time Warner, I am allowed to take my existing phone number with me. We call this “number portability.” It was developed because regulators realized that if I need to go through the hassle of switching my phone number (e.g., tell all my friends I have a new phone, notify my bank, etc., etc.) I would be a lot less likely to switch. So since we wanted to encourage competition, we required phone companies to “port” numbers to competitors. Mind you, this was back in the day when regulators believed in using regulation to promote competition, rather than believing that the Competition Fairy brought competition if you deregulated hard enough. But the law is still on the books.

The problem is, that in order to port my Verizon number to Time Warner Cable VOIP, Time Warner needs to tell Verizon to hand over the number. There then follows a period of time when the number “settles” and is transferred to Time Warner. During that time, although I have already legally switched service, I am still getting Verizon phone service. Only after the number is ported to Time Warner does my phone service switch from Verizon to Time Warner.

So Verizon has a period of time when it “knows” you’ve switched because it got a request to port the number, but you haven’t actually switched yet. The question is, should Verizon get a last chance to call you up and try to keep you as a customer by offering you a better deal? Mind you, this is exactly what the cable folks (or the DBS folks, or anyone else) does when you are required to call and cancel a subscription. If you were subscribing to FIOS, and called Time Warner to cancel your cable, they would have a whole script prepared to try to keep you. But here, the knowledge that a customer is switching doesn’t come from the customer actually calling to say he or she is switching. It arises from the request to port the number, which is a technical requirement with which Time Warner must comply. So, should the phone company be able to take advantage of this information and get a chance to try to woo you back before you go through the hassle of switching (which is much easier), or must they wait until I am actually getting Time Warner service and only then try to win me back, which is a lot harder given that I already went through the hassle of switching.

Mind you the situation is even more complicated because of a dumb-ass decision by the Tenth Circuit in 1999 which found that phone companies have a First Amendment right to market to me based on information I have to give them to get service and a property interest in that information. So there is only so much the FCC can actually do to limit carriers using my personal information to market directly to me. But even so, the question remains: what does the rule require? Can Verizon market based on the number porting request? Or must it wait until after the switch.

I honestly don’t know. But that’s not my real point. My real point (beyond the usual snarkiness to industry when financial interest trumps ideological consistency) is to make a broader point about competition and competition policy. To wit, pretending (as so many folks like to do) that we have some vibrant free market out there that operates by magic and that any effort to enforce regulation to promote competition is “unfair,” “picking winners” or violates the “level playing field” of the market is utter nonsense. As I have observed before, the whole point of framing this as an argument about process and fairness is designed by industry to distract attention from the real issue — do we want real competition or not?

Because getting real competition means recognizing that telcos like Verizon have one set of markets in which they dominate, and cable cos like Time Warner have another set of markets in which they dominate. Now if you want to get all deregulatory and pit them against each other, we can do that. Let cable providers exert whatever leverage they want over programmers, but balance that by allowing telcos to leverage their voice dominance by refusing to terminate calls and refusing to port numbers. Mind you, I expect life to suck for consumers caught in the middle (as opposed to my opposite numbers, who expect the battle for consumers to yield untold benefits that are at present stifled by regulations designed to promote competition). But we could go that way.

Alternatively, we can regulate the crap out of both segments of the market to ensure that neither set of actors can exercise market power. That is certainly a complicated little dance, but it gets us back to the whole point of the exercise. If we want competition to displace regulation (a point on which I am dubious), then we damn well better take the necessary steps to actually develop competition.

Because the worst of all possible worlds is one where we do things by idiotic half-measures, completely ignoring how the issues inter-relate. To pretend that Verizon’s marketing practices exist in a vacuum, utterly indepenent of cable marketing practices and ability to leverage its own form of market power, is a recipe for disaster. Just ask the CLECs, who died the death of a thousand cuts in dozens of rulemakings that sought to provide a “fair” solution without considering how these things worked together as a whole. Ask the competing video providers, who have heard the same song about the “vibrant and competitive” video market while cable operators leverage their market power to snuff them out.

I really don’t have an interest in who wins this particular spat between Verizon and the cable cos. But I (and the rest of us) have a very real interest in the way the FCC will resolve this. Hopefully, if they tighten the ratchet on Verizon leveraging its position over here, it will do the same for cable when it comes to program access complaints.

Stay tuned . . . .