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

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 . . . .