Telecom & Cable Regulation

Google lately seems to be taking on the world. A year ago it launched Google desktop, putting it in competition with mighty Microsoft. Version 2 was introduced last week. But in the same week, the firm also launched Google Talk — the first venture into communications for Google. Technically, by most accounts, the service isn’t groundbreaking–its a somewhat basic instant messenger service. Economically, however, the move caused some tremors, signalling increased competition in a number of markets.

On the first level, Google Talk pits Google head-to-head with Yahoo and other IM providers. Its hard to believe that only a few years ago policymakers were wringing their hands over a feared AOL monopoly over the market. The Yahoo-Google struggle, being played out in other arenas such as search engines, is particularly worth noting.

Importantly, Google Talk (like most other IM services) now allow voice conversations as well as text. This puts Google squarely in the competition with VoIP providers such as Vonage and Skype. Importantly, Google doesn’t yet allow connections from the Internet to the traditional public switched network, but such a move would be relatively easy for the Googlites. And, with connections to the public switched network, Google becomes a competitor as well to incumbent telephone systems. In other words, Google–which a few years ago was just a good search algorithm, is now (or soon will be) in competition with the likes of Verizon and SBC.

Just one more piece of evidence that telephony is not in Kansas anymore. Competition is here, and more is coming–from increasingly unlikely places.

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TechCentralStation.com ran a piece of mine today on the Ensign telecom reform bill. The gist: the proposal is a good step in the right direction. And, importantly, it gets the long-stalled telecom reform show moving. Of course, actually getting reform passed will a lot harder than some thought at the beginning of this year.

Here it is.

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I’m not too surprised to see populist interest groups on the right and left jump on an intellectually incoherent but crowd-pleasing proposal like “a la carte” cable, but Matt Yglesias should know better.

What everyone seems to miss in this debate is that a cable channel isn’t like a banana. If every grocery store somehow forced you to buy a banana with every orange, the banana-orange bundle would be more expensive than a banana or an orange alone, and a lot of bananas and oranges would end up in the garbage.

But a cable channel is a non-rivalrous good. The marginal cost of providing it to another consumer is zero. The goal of the cable company is to recover it’s rather large fixed costs in equipment, programming, etc. It will price its products so that it is able to recover those costs along with a profit margin.

To simplify things, let’s imagine that a cable company has only two channels, Spike TV and Women’s Entertainment, and only two kinds of customers, men and women. Men value STV at $10 and WE at $4. Women value WE at $10 and STV at $4. The cable company might bundle the channels together and charge $12 for the bundle. Each consumer would be getting $14 of TV for $12.

Now, people like Yglesias seem to assume that in an a la carte world make each channel would cost, say, $6. In that case, men would buy only STV, women would buy only WE, and consumers would save a bunch of money.

But that’s absurd. The cable company would lose half of its revenue in that scenario, and would be unlikely to even be covering its fixed costs. More likely, it would set the price for each channel at $10. The cable company would still be losing a lot of revenue, but that might be enough to keep it in business.

But notice that both the consumer and the cable company loses in this scenario. Before, the cable company was getting $12/subscriber, now it’s getting $10. The male consumer, meanwhile, went from getting $14 of TV for $12 to getting $10 of TV for $10. There might be a show he likes on WE, but not that he likes enough to pay twice as much for his cable bill.

Bundling increases consumer welfare by distributing low-marginal-cost goods to wider audiences. A la carte cable wouldn’t save consumers money. It would simply reduce the number of channels on their TVs. Buying twice as many cable channels isn’t like buying twice as many bananas.

It might be objected that the cable company does pay a per-viewer fee to the studio for those channels. But that’s just the same phenomenon one step removed. How do the studios price their channels when selling them to the cable company? Their marginal costs are also close to zero, so the same bundling argument above applies to them. If they gave their customers the option of buying channels a la carte, they’d have to dramatically raise their per-subscriber rates to cover their fixed costs. Consumers would be the loser–paying about the same for a much smaller variety of channels.

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In an interview with The Wall Street Journal today (p. A4), FCC Chairman Kevin Martin said he might consider “a la carte” mandates on cable and satellite operators as a possible way to clean up content on pay TV. He told the Journal, “I saw a quote recently where one person said ‘I can call up and order HBO, I don’t understand why I can’t call up and cancel any of my cable… programming.’ I think that there could be additional control over that.”

Well, before the Chairman rushes to impose a sweeping new regulatory regime on cable based on what he heard one guy say in the papers, I would hope he would consider what more rigorous research has revealed regarding the potential pitfalls of a la carte mandates. He might start by re-reading the report his own agency issued on the subject just 8 months ago. He should also take a second look at an important report issued by the General Accountability Office in October 2004.

These government reports, like the vast majority of serious academic reports penned on this topic, came to the conclusion that a la carte regulation would be devastating for the industry and consumers alike. (I should point out that I filed comments in the FCC proceeding as did my colleagues Randy May and Tom Lenard.)

Here’s why a la carte mandates, while sounding so good on the surface, would really be a disaster for consumers in the end:

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There are officially more cell phones than land lines in the United States. I ditched my last landline in 2003 and I haven’t looked back.

If there was ever a philosophical argument for regulating telephone service as a “natural monopoly,” there certainly isn’t any more. These days, the Baby Bells are just four competitors in the vibrant market for telephone service. Their phones just happen to be the anachronistic ones with cords still attached to them.

(Hat tip: Ezra)

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Forbes has an interesting column on how to lower your mobile phone taxes by changing your area code to a lower tax jusrisdiction. Though this loophole will likely be plugged quickly, it illustrates the difficulty of jurisdictional controls in an increasingly borderless world and the increasing absurdity of regulations based on mere physical location. It also demonstrates the benefits of tax competition among the states.

Adam co-authored an excellent paper on the benefits of tax competiton a couple of years ago, which is worth a read.

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In its biggest decision since new chairman Kevin Martin took over, the FCC voted last week to impose federal regulation on Internet telephone service. Specifically, the Commission required VoIP providers to provide 911 connections as a standard feature of their service within 120 days. The decision was not surprising, and is something consumers were demanding in any case. For that reason fellow Techliberation blogger Tim Lee gave the decision positive marks. I’m less sanguine. Not only may the decision chill some competition in VoIP markets, but–perhaps more important–the extent of the ruling doesn’t bode well for the new chairman’s commitment to minimal regulation of new technologies.

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The FCC recently voted to require VoIP providers to offer full 911 support.

Obviously, my initial libertarian reaction is that the government should butt out and let consumers choose the phone service they like. If 911 service is important to them, they can choose a provider that offers it. If none do, they can stick with good old Plain Old Telephone Service. No one is being forced to get VoIPed.

But I think it’s not crazy to argue that 911 service is one of those things you don’t really think about until you need it, and then it’s too late. Moreover, one can’t always tell if one has 911 service–you can’t exactly call 911 to find out if the service is working. So I’m not sure I’m necessarily opposed to a 911 mandate as such. In the POTS world, at least, it’s minimally intrusive and probably saves lives.

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