Category: Monopoly

Telco Breakup Has Hit the Mainstream

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Because it’s hit the New York Times:

Since 1974, when the Justice Department sued to break up the Ma Bell phone monopoly, Americans have been told that competition in telecommunications would produce innovation, better service and lower prices.

What we’ve witnessed instead is low-quality service and prices that are higher than a truly competitive market would bring.

After a brief fling with competition, ownership has reconcentrated into a stodgy duopoly of Bell Twins — AT&T and Verizon. Now, thanks to new government rules, each in effect has become the leader of its own cartel.

The AT&T-DirectTV and Verizon-Bright House-Cox-Comcast-TimeWarner behemoths market what are known as “quad plays”: the phone companies sell mobile services jointly with the “triple play” of Internet, telephone and television connections, which are often provided by supposedly competing cable and satellite companies. And because AT&T’s and Verizon’s own land-based services operate mostly in discrete geographic markets, each cartel rules its domain as a near monopoly.

The result of having such sweeping control of the communications terrain, naturally, is that there is little incentive for either player to lower prices, make improvements to service or significantly invest in new technologies and infrastructure. And that, in turn, leaves American consumers with a major disadvantage compared with their counterparts in the rest of the world.

On average, for instance, a triple-play package that bundles Internet, telephone and television sells for $160 a month with taxes. In France the equivalent costs just $38. For that low price the French also get long distance to 70 foreign countries, not merely one; worldwide television, not just domestic; and an Internet that’s 20 times faster uploading data and 10 times faster downloading it.

It’s not from their editorial board, it’s from former Times correspondent David Cay Johnston, whose beat is consumer protection and tax loopholes, but the fact that anyone gets space in the “Gray Lady” to suggest that deregulation will not create a telecommunications utopia is worth noting.

This Ain’t About the Free Market

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The news that BAE and EADS are in merger discussions has very little to do with the market or market efficiencies.

It’s about EADS purchasing an entry in the the US market, one which BAE purchased when it bought United Defense,  Tracor,  LMCS, LMAES, etc.

Ironically, BAE sold its 20% share in EADS about 6 years ago.

The reality is that the defense market is essentially a monopsony, with governments in general, and the US government in particular serving as a single buyer, though with this merger the other end of the dynamic is heading more towards monopoly as well.

Thus, I find the protestations by BAE management that the French and German governments must not have the ability to exert realistic shareholder rights, together they own about 45% of EADS, to ring a bit hollow:

BAE Systems has insisted it will walk away from talks with EADS unless the combined European champion in aerospace and defence was allowed to operate as a normal company without political interference.

 BAE is also insisting that the combined entity’s defence business would have to be based in the UK if the plan, news of which was leaked on Wednesday before the structure was finalised, is to go ahead.

Gee, a defense contractor must be kept free of political influence?

This deal is all about creating an entity that can manipulate the politics to its own advantage.

The insistence that the French and German governments sell out, if they didn’t they would have about a 27% stake in the merged firm, is all about the company being able to whipsaw governments with  promises, or threats, about defense jobs.

House Votes to Kill F136 Engine

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While I expect to see some continued efforts by GE, Rolls Royce, and their supporters, I think that this is the death knell for the F136 engine:

The U.S. House of Representatives today voted to kill funding the F-35 Joint Strike Fighter backup engine made by General Electric Co. and Rolls Royce Group Plc.

By a vote of 233-198, the House voted to cut $450 million for the engine from legislation funding the Pentagon for the remainder of the fiscal year ending Sept. 30.

It is the first time in more than four years of votes that the House has come out against the GE-Rolls Royce engine for the F-35, the stealth fighter made by Lockheed Martin Corp. In May, 2010, the House voted 231-193 to continue the program.

This is important for a number of reasons.

First, with this defeat on the table, the onus now falls on the supporter of the F136 to bring the engine back, which is hard.

Second, and more importantly, House Speaker John Boehner, whose district, and neighboring districts, directly benefit from the engine, could not whip the votes necessary to support the engine.

Like I said, the engine is toast.

In the long run, this is a bad thing, because leaving Pratt & Whitney as a monopoly supplier for the engine is likely to increase costs, and reduce performance, a lot down the road.

That being said, I do experience no small amount of amusement because Boehner got seriously served on this.

Obama Consensus Building: The Incumbent Oligopolies Win, We Lose

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Google and Verizon have released the details of their carve up the internet among the big players proposal:

Google Inc. and Verizon Communications Inc. on Monday called for equal treatment of most Internet traffic while at the same time saying fast-growing cellular networks and yet-to-be-developed broadband services should be exempt from such restrictions.

Google and Verizon released a proposal arguing that broadband providers shouldn’t be able to discriminate against Internet content providers. Marcelo Prince and Amy Schatz discuss. Also, Dennis Berman discusses why bond investors are giving up on recovery and jobs.

The ideas outlined in the proposal put forth by the Internet search giant and one of the largest broadband providers stand in contrast to the Federal Communications Commission’s recent proposals on “net neutrality” rules, which would prevent companies from giving preferential handling to certain types of online traffic.

In Google’s case, the proposal’s endorsements of two-tier Internet service and a hands-off approach to cellular-based Web services represent a break with many other online companies, which have argued for strict neutrality in how Internet traffic is treated. Google itself previously expressed general support for rules prohibiting discrimination among forms of Web traffic.

This is a direct consequence of the tenor and approach of Barack Obama. It is clear that in internet access, the incumbents have taken billions of government subsidies, and used this money to cement their monopoly positions, rather than improvement access.

It’s why US internet performance and penetration* is the worst in the developed world.

These are not people who you partner with to get the outcome you want, these are people you defeat to get the outcomes you want.

As to the long term consequences, I’ll go with what Atrios says:

I’m one who thinks that ultimately the forces of light will prevail and the repeated attempts to carve out internet walled gardens will, over the long run, fail as killing the internet would… kill the internet. But the long run is a long time and companies will likely screw and gouge us over the not very short run unless the FCC acts.

So not hopey changey, and as I have said before, this sort of craven acquiescence to the incumbent players who screwed everything in the first place appears to be a core philosophy of Barack Obama and His Clueless Minions™, whether it be telecommunications, finance, healthcare, etc.

*That sounds dirty, doesn’t it?

Monopolies Are Strangling Our Economy

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Graphic Courtesy of the WaPo

In Washington Monthly, Barry C. Lynn and Phillip Longman argue that the increase in jobless recovery and stagnation is an artifact of the increasingly monopolistic marketplace that we encounter:

If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.

…………

But while the mystery of what killed the great American jobs machine has yielded no shortage of debatable answers, one of the more compelling potential explanations has been conspicuously absent from the national conversation: monopolization. The word itself feels anachronistic, a relic from the age of the Rockefellers and Carnegies. But the fact that the term has faded from our daily discourse doesn’t mean the thing itself has vanished—in fact, the opposite is true. In nearly every sector of our economy, far fewer firms control far greater shares of their markets than they did a generation ago.

Indeed, in the years after officials in the Reagan administration radically altered how our government enforces our antimonopoly laws, the American economy underwent a truly revolutionary restructuring. Four great waves of mergers and acquisitions—in the mid-1980s, early ’90s, late ’90s, and between 2003 and 2007—transformed America’s industrial landscape at least as much as globalization. Over the same two decades, meanwhile, the spread of mega-retailers like Wal-Mart and Home Depot and agricultural behemoths like Smithfield and Tyson’s resulted in a more piecemeal approach to consolidation, through the destruction or displacement of countless independent family-owned businesses.

It is now widely accepted among scholars that small businesses are responsible for most of the net job creation in the United States. It is also widely agreed that small businesses tend to be more inventive, producing more patents per employee, for example, than do larger firms. Less well established is what role concentration plays in suppressing new business formation and the expansion of existing businesses, along with the jobs and innovation that go with such growth. Evidence is growing, however, that the radical, wide-ranging consolidation of recent years has reduced job creation at both big and small firms simultaneously. At one extreme, ever more dominant Goliaths increasingly lack any real incentive to create new jobs; after all, many can increase their earnings merely by using their power to charge customers more or pay suppliers less. At the other extreme, the people who run our small enterprises enjoy fewer opportunities than in the past to grow their businesses. The Goliaths of today are so big and so adept at protecting their turf that they leave few niches open to exploit.

One of the points that I have made when I discuss the role of the large monopoly Telcos and how this effects the availability and price of broadband is that when a company gets large enough, it’s more profitable to keep out competitors than it is to improve the quality and efficiency of its process.

If one understands the nature of any corporation, which is that they are short-sighted sociopaths by design, this makes perfect sense: You can spend billions on innovation, or millions on locking out and/or buying up competitors.

Even Sci-Fi author Jerry Pournelle, who describes himself as being somewhere to the right of Attila the Hun, says that for the free market to function, aggressive anti-trust activities are essential. (No link, it was from his “Chaos Manor” column in Byte about 20 years ago)

H/t Kevin Drum.

Good News on the Broadband Front

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The Phone Company

When one compares broadband in the US and the rest of the developed world, we discover that that in the US we have higher prices, and lower performance, much like our healthcare system.

What is common in both is that markets are controlled largely by monopolistic,* and largely unregulated, for profit private companies.

Well, now it looks like the FCC will be ordering the large players to lease lines to their competitors:

AT&T Inc. and Verizon Communications Inc. would be forced to lease fast Internet lines to rivals providing Web services to small businesses under a proposal being weighed by U.S. regulators.

The biggest U.S. phone companies have told the Federal Communications Commission that opening access to lines they laid would curb their incentive to continue spending billions of dollars expanding high-speed service. The FCC’s decision “will significantly affect investment in fiber-based networks,” line- maker Corning Inc. said in a filing with the agency.

The idea, proposed to the FCC by computer-services company Cbeyond Inc., has support from the Small Business Administration, which said it could spur job creation. The plan would add to competition for business clients, who are also being courted by cable providers led by Comcast Corp. and Time Warner Cable Inc.

Players like AT&T and Verizon make much of their profits from doing business under either a monopoly of a duopoly environment, and this is a start to creating meaningful competition.

*Full disclosure: I have Verizon® Fios™., so I receive my connectivity from one of these, “monopolistic, and largely unregulated, for profit private companies.”

Capitalism at Its Finest: Debit Card Edition

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Andrew Martin exposes how Visa and the banks have colluded to increase the interchange fees charged merchants for debit cards.

Basically, because Visa can use its market share to force merchants to accept its products, and because it splits the interchange fees with the banks, it creates a situation where fees in the US are the highest in the world, and every merchant, and by extension every buyer, pays to shovel money to Visa and its client banks.

The reason for this is because Visa and MasterCard do not compete for end user consumers, they compete to get banks to offer their cards to end-user consumers, and they compete by raising prices, which they split with the banks:

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

This is only possible because Visa has a near monopoly, and even after it settled an anti-trust lawsuit, and agreed not to tie its expensive debit cards to all Visa products, merchants still cannot afford to diss the product, because the market share is too high.

This is, of course, what the Chicago School’s “perfect markets” create: Monopolies and near markets that create market “stickiness” that ill serve anyone but the monopolist.

It’s a capitalist’s dream, but a consumer’s nightmare, to the tune of about $427 per household per year.

The Problem With Higher Education in the United States

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This picture really says it all

Felix Salmon uses this chart to suggest that colleges are using these prices increases to become dropout factories, since it’s cheaper to educate a freshman than a senior, but you get the same tuition.

I think that problem comes down to a number of things:

  • Federal aid for college education, particularly the guaranteed student loan program, has been subsidizing increases in tuition and fees for years.
  • The program was introduced in the Higher Education Act of 1965, at the height of the Vietnam war, so the alternative to going to college was to go to the ‘Nam and get shot.
    • When your product is competing against going to war, people will buy your product.
  • The top end schools have been colluding on tuition and fees, along with student aid awards for decades, and this monopolistic behavior is inherently inflationary.
    • In the interest, my step-mother, a former college president, has always maintained that this is not an issue, it’s just a way of “freeing” students from making the choice on anything but quality, and that colleges supply a lot more than they did in, say, 1960.
      • I have always responded that this is classic monopoly theory.  It’s not that competition ends, it’s that price competition ends, so you end up with gold plating.  It’s one of the reasons that professors’ salaries have skyrocketed: Without financial constraints, you get bidding wars.

The real solution is to implement cost growth containment measures in order to show price increases, to require with excessive endowments (Harvard, Yale, etc.), and to keep government aid flat until inflation catches up.

Of course, this won’t happen, because the Ivy league has a death grip on governance in Washington, DC, and because business likes to have its employees in debt peonage.

Why the US Mobile Phone Industry is a Horrible Model for the Internet

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The advocacy group Free Press has filed a complaint with the FCC over Apple and AT&T’s ban on the use of Skype on their network.

The money quote on this is from a typically clueless AT&T spokesman, “Customers are free to download and use the apps they want, but we have no obligation—nor should we have—to facilitate or subsidize our competitors’ businesses.”

It sounds reasonable, but what is really going on here is that AT&T is using monopoly power, it is the exclusive licensee for the iPhone in the US, and it’s customers incur hefty roaming charges on other networks, in order to lock a potential competitor out on a service that their customers have paid for.

This is why network neutrality is necessary, and it is yet another example as to how the US privatized largely unregulated telco markets do not serve the consumer: it creates businesses whose model is largely predicated on creating, and maintaining, a monopoly.

New EU Scraps Net Neutrality

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It appears that the new EU telecommunications rules are likely to scrap network neutrality completely.

The big incumbent Telcos there are very much in support of this, because milking money out of their monopoly is really their only skill, same as in the good old USA, and the regulators believe that the market will cure everything, “This approach is backed by the European Commission, which argues that if consumers feel their content is somehow being compromised, they will switch to other providers.”

Because competition in such matters has worked so well in the most free market telco environment in the industrialized world, where the speeds are the slowest, and the rates are highest, and ISPs lie about their policies.

My First Take on Obama’s Broadband Plan

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I like it, because the telecommunications companies don’t:

The grants would be conditioned on companies building so- called open-access networks, which would allow other companies to offer competing service over the same lines.

The telcos want free money, which is what they got when the Clinton administration was trying to build out what they still called the, “information superhighway,” and they used the money for mergers.

They spent very little time or effort making broadband widely available, they used the money to reinforce their monopoly advantages.

I could be wrong, but if the incumbent providers don’t like it, it’s a pretty good indication that this is good policy.

Obama Goes for Massive Infrastructure Spending

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This is not a surprise. It’s a good way to prime the pump, and the needs in terms of deferred maintenance on roads, bridges, water supplies, etc. are very real.

One thing that does concern me is that some of this infrastructure spending is on broadband (good), but they are (at least according to what I heard on Marketplace Money Sunday) planning to use incentives to private firms.

While Obama is correct in saying that it’s unconscionable for the US to be number 15 in broadband penetration, the idea that the private sector would save this is absurd and misguided.

This was tried in the 1990s, with the incumbent telcos getting over $100 billion in incentives, but they spent the money that they got on cementing their position as incumbents, rather than on improving the communications infrastructure.

This is not surprising. Monopoly and near-monopoly generate the best profits, which is the objective in a capitalist system.

I do believe in competition in broadband, from the curb to the home phone/TV/PC, where the incumbent advantages are small, but in the last mile from the “central office” to the curb, having a private entity in running the business is an epic fail, and it is why the US lags behind state owned Telcos in both performance and price in places like Korea and Japan.

Unregulated Competition Hurts Innovation and Consumers

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This analysis comes from that bastion of Communist thought, the Financial Times. John Gapper compares Europe, where GSM was mandated by government, and the US, where anyone who rented the spectrum could use whatever standard they wanted, giving us providers with GSM and CDMA.

He quotes a 5 year old article from Wired:

Once the marketplace was allowed to work, it quickly converged to CDMA, which proved to be superior. CDMA is ascendant in America. More important, it’s the foundation for the next generation of cell phone technology – 3G – since it turned out to be the only technology capable of making the leap to fast and capacious wireless data transmission. Had the US government mandated a standard, by contrast, it would undoubtedly have picked TDMA or GSM, since those were the dominant technologies at the time. And then we wouldn’t have CDMA leading the way to 3G today.

Certainly, it is good to read such a deeply held faith in the marketplace leading to its own advancement.

Of course, it would help if it were not 180° wrong. As Mr. Gapper states:

I am afraid that history has not been kind to this argument. Europe has stayed ahead of the US in mobile telephony, and in 3G services. Having one technology standard has spurred competition among network operators and handset manufacturers while competition in the US has been stymied by a proliferation of technologies.

In truth, he is only partly right. US mobile technology deployment, and for that matter US broadband suck because this is what the unfettered free market leads to.

The Europeans mandated a single standard, and have prevented carriers from locking in customers. From a purely profit perspective, there is more money in making your customers captive than there is in providing them a superior and innovative product.

That’s why local phone carriers and cable companies spent their money on lobbying, and creating limited products that require you to purchase all or nothing. To quote Willie Sutton, it’s where the money is.

They are monopolists by necessity….There is only so much in the way of wire or cable you can place in a city, so the last mile is necessarily a monopoly or duopoly, and they spend their money on protecting this, not on benefiting the consumer.

Free Market Gets Us Slower More Expensive Internet

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No surprise, the U.S. is lagging in broadband penetration, performance and price, and it is falling further behind. The free market shills claim that it’s bad data, but every study confirms this.

This is not surprising. Telcos are not in the business of providing good service. They are in the business of making money, and it is far more profitable to use their natural monopoly, the ownership of the last mile of wire to the home, to keep competitors out than it is for them to invest in new equipment.

Given recent deregulatory decisions by the FCC, the level of competition, and hence the level of innovation are low, and prices are high. They will remain that way until the government steps in.