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Comcast and Us

 

Comcast tells us how much better our lives will be after they acquire Time Warner. Great, thanks! Perhaps this is an opportunity to look at other ways that we can “acquire” Cable TV and Internet access.

Comcast CEO Brian Roberts thinks we’re powerless idiots. This is what his company’s website says about the planned Time Warner acquisition :

“Transaction Creates Multiple Pro-Consumer and Pro-Competitive Benefits…”

Don’t read the full legal verbiage that purports to explain the maneuver. A more productive use of your time will be had by reading Counternotion’s pointed summary in Obfuscation by disclosure: a lawyerly design pattern:

(tl;dr: According to Comcast, the merger is “pro-sumer” if you “get past some of the hysteria,” it’s “approvable” by the regulators and won’t “reduce consumer choice at all”. Will it raise prices? “not promising that they will go down or even that they will increase less rapidly.” Given the historical record of the industry, it’s Comedy Central material.)

Let’s not loiter around Comcast’s lobbying operations, either — the $18.8M spent in 2013, the pictures of Mr. Roberts golfing with our President, the well-oiled revolving door between the FCC and the businesses they regulate. Feelings of powerlessness and anger may ensue, as trenchantly expressed in this lament from a former FCC Commissioner.

Instead, let’s use our agitation as an opportunity to rethink what we really want from Cable carriers. The wish list is long: TV à la carte instead of today’s stupid bundles, real cable competition vs. de facto local monopolies, metered Internet access in exchange for neutrality and lower prices for lighter usage, decent set-top boxes, 21st century cable modems, and, of course, lower prices.

These are all valid desires, but if there were just one thing that we could change about the carrier business, what would it be? What would really make a big, meaningful difference to our daily use of TV and the Internet?

Do you remember the Carterfone Decision? For a century (telephone service started in the US in 1877), AT&T reigned supreme in telecommunications networking. (I should say the former AT&T, not today’s company rebuilt from old body parts.) The company owned everything along its path, all the way down to your telephone handset — only MaBell’s could be used.

Then, in the late fifties, a company called Carterfone began to sell two-way radios that could be hooked up to a telephone. The device was invented by a Texan named Thomas Carter as a clumsy but clever way to allow oil field owners and managers sitting in their offices in Dallas to reach their workers out at the pumps.

AT&T was not amused.

“[AT&T] advised their subscribers that the Carterfone, when used in conjunction with the subscriber’s telephone, is a prohibited interconnecting device, the use of which would subject the user to the penalties provided in the tariff…”

Carterfone brought an antitrust suit against AT&T… and won. With its decision in favor of Thomas Carter’s company, the Federal Communications Commission got us to a new era where any device meeting the appropriate technical standards could connect to the phone network.

“…we hold, as did the examiner, that application of the tariff to bar the Carterfone in the future would be unreasonable and unduly discriminatory.”

The regulator — an impartial representative, in an ideal world — decides what can connect to the network. It’s not a decision that’s left to the phone company.

Back in the 21st century, we need a Carterfone Decision for cable boxes and modems. We need a set of rules that would allow Microsoft, Google, Roku, Samsung, Amazon, Apple — and companies that are yet to be founded — to provide true alternatives to Comcast’s set-top boxes.

Today, you have a cable modem that’s so dumb it forces you to restart everything in a particular sequence after a power outage. You have a WiFi base station stashed in among the wires. Your set-top box looks like it was made in the former Soviet Union (a fortuitous product introduction days before the merger announcement doesn’t improve things, much). You have to find your TV’s remote in order to switch between broadcast TV, your game console, and your Roku/AppleTV/Chromecast…and you have to reach into your basket of remotes just to change channels.

Imagine what would happen if a real tech company were allowed to compete on equal terms with the cable providers.

Microsoft, for example, could offer an integrated Xbox that would provide Internet access, TV channels with a guide designed by Microsoft, WiFi, an optional telephone, games of course, and other apps as desired. One box, three connectors: power, coax from the street, and HDMI to the TV set. There would be dancing in the streets.

But, you’ll object, what about the technical challenges? Cable systems are antiquated and poorly standardized. The cables themselves carry all sorts of noisy signals. What tech giant would want to deal with this mess?

To which one can reply: Look at the smartphone. It’s the most complicated consumer device we’ve ever known. It contains radios (Wifi, Bluetooth, multi-band cellular), accelerometers/gyroscopes, displays, loudspeakers, cameras, batteries… And yet, smartphones are made in huge quantities and function across a wide range of network standards. There’s no dearth of engineering talent (and money) to overcome the challenges, especially when they’re tackled outside of the cable companies and their cost-before-everything cultures.

Skeptics are more likely to be correct about the regulatory environment or, to be more precise, regulatory capture, a phrase that…captures the way regulators now work for the industries they were supposed to control. Can we imagine the FCC telling Comcast: “Go ahead and buy Time Warner…just one little condition, make sure any and all of your connection protocols and services APIs are open to any and all that pass the technical tests listed in Appendix FU at the end of this ruling.”

That’s not going to happen. We must prepare ourselves for a sorry display of bad faith and financial muscle. Who knows, in the end, Comcast might give up, as AT&T did after telling us how pro-consumer the merger with T-Mobile would be.

JLG@mondaynote.com

@gassee

Shameless Carriers

 

Wireless carriers used to rule smartphone suppliers. In 2007, Steve Jobs upended such rules. Why can’t the carriers accept the change and enjoy the revenues the iPhone generates for them… and why do tech journalists encourage their whining?

Until about two weeks ago, it seemed that our major wireless carriers had given up whining about the unjust subsidies imposed by a certain overly-confident (they said) handset maker. I hoped that their silence on the topic meant that they had finally realized that the extra revenue (ARPU) generated by these smartphones more than made up for the “subsidy burden”, for the exorbitant amounts of money that (they thought) ended up in the wrong coffers.

Then, I saw this this headline:

Everyone Pays No 5c

The article’s lede promises to reveal secret Apple deals that squeeze rivals and tax you. According to the piece’s “logic”, Apple’s one-sided agreements force carriers to swallow inordinate numbers of iPhones, an arrangement that produces all-around nefarious results. To meet their volume commitments, carriers allocate disproportionate amounts of shelf space to iPhones, thus crowding out competitors. And because the Apple contracts drain their finances, carriers are forced to price other handsets higher than they otherwise would. Hence an “iPhone Tax” that everyone must pay, even when using another brand.

In the same piece, we find dark suggestions that Verizon is threatened by a $12B to $14B shortfall in meeting it’s $23B commitment to purchase Apple handsets. A bit of googling led me to a pair of July 2013 articles (here and here) that back up the prediction by pointing to an anal-ist’s write-up of Verizon’s SEC filings (a medium that, as Regular Monday Note readers know too well, I happily wallow in, especially the always-rich MD&A [Management Discussion and Analysis] section where execs are supposed to help us navigate the filing’s sea of numbers).

I went to Verizon’s SEC Filings page and looked up quarterly and annual reports. The first mention of an Apple agreement appears in the 10-K (annual) filing of February 28th, 2011. Since then, no word whatsoever of any purchase commitment, whether for the iPhone or any other device. If you search for “purchase” and “commitment” in the latest October 2013 SEC document, you’ll only find talk of pension funding and share-repurchase obligations:

Verizon 10-Q Oct 2013 Commitments

One would think that a looming $12B to $14B shortfall — more than a third of Verizon’s $30B quarterly revenue — would be mentioned to shareholders. The worried articles fail to explain Verizon’s silence.

This is both novel and familiar.

The novelty is finding Apple guilty of forcing carriers to raise prices on competitors‘ handsets. I hadn’t seen this angle before.

The familiar is the carriers’ use of journalists who present themselves as independent observers/reporters when, in fact, these practitioners of access journalism carry water for their corporate connections. During a lunch conversation some years ago with a Wall Street Journal repentito, I pointed to a fellatious Microsoft article in his old paper and questioned the excessive reverence: ‘Access, Jean-Louis, access. It’s the price you pay to get the next Ballmer interview… ‘

We saw the process at work in a December 2011 WSJ article titled How the iPhone Zapped Carriers, a devotional piece that makes the key points in the carriers’ incessant complaint:

Carriers do all the grunt work while handset makers and software developers take all the money.
The $400 subsidy per iPhone (and now a similar amount for its best competitors as well) is clearly excessive and must stop.
We need a new business model to account (to monetize) the shift from voice to voracious use of data.

Let’s rewind the tape. Once upon a time, there was The Way of The Carrier. Verizon, Sprint, AT&T treated handsets makers the way a supermarket chain treats yogurt suppliers: We’ll tell you the flavors and quantities we want to carry, we’ll set the delivery schedule, dictate the marketing/branding arrangements, define the return privileges and, of course, we’ll let you know what we want to pay for your product — and when we want to pay it.

Then Steve Jobs hypnotized AT&T’s management. He convinced them to let Apple set the terms for iPhone distribution in exchange for AT&T’s “running the table”. This meant no AT&T fingerprints on Apple’s pristine iPhone, no branding, no independent pricing, no pre-installed crapware — content and software would be downloaded via iTunes, only.

In this arrangement, the iPhone helped AT&T steal customers from its main competitor, Verizon. When Verizon finally signed up with Apple in 2010, they were in a much weaker position than if they had obliged at the very beginning of the Smartphone 2.0 era.

Apple is master of the slow-but-steady, surround-from-below approach. First, sign up a weaker player who will accept Apple’s stringent control in exchange for the opportunity to take business away from the dominant player who balks at Cupertino’s terms. After enough customers have switched to the smaller competitor, the market leader changes its mind and signs up with Apple — on Apple’s terms.

The drill has worked in Japan. The smaller SoftBank signed up with Apple while DoCoMo, Japan’s largest wireless carrier, refused. DoCoMo wanted to install its own software on the iPhone; Apple wouldn’t budge. Subscribers migrated to Softbank in numbers significant enough to change DoCoMo’s mind. The happy ending is DoCoMo and its competitors now appear to sell large numbers of iPhones.

Turning to China, the same maneuver is at work. China Unicom and China Telecom have been selling iPhones with the expected result: They’re taking customers from the giant China Mobile. (There are rumors of an Apple-China Mobile agreement, but it’s unclear when this will happen. We should know soon.)

This only works if – and only if – the iPhone is a great salesman for the carrier. Apple extracts a higher price for its iPhone for two reasons: strong volumes and higher revenue per subscriber compared to other sets. In Horace Dediu’s felicitous words [emphasis mine]:

‘I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.’

Carriers should stop whining; these are robust companies run by intelligent businesspeople with immense resources at their disposal. As explained in previous Monday Notes (here and here), there’s no rational basis for their kvetching. Assuming they bleed an extra $200 when subsidizing an iPhone (or a top Samsung handset, now that the Korean giant followed suit), they only need $8/month in extra subscriber revenue from the “offending” smartphone. And yet here we are: Randall Stephenson, AT&T’s CEO, predicts the end of subsidies because  “wireless operators can no longer afford to suck up the costs of customers’ devices”.

I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.

I was told as much by Verizon. In preparation for this Monday Note, I went to the Palo Alto Verizon store and asked if I could negotiate a lower monthly payment since Verizon doesn’t subsidize my iPhone (for which I had paid full price). Brian, the pit boss, gave me a definite, if not terribly friendly, answer: “No, you should have bought it from us, you would have paid much less (about $400 less) with a 2-year agreement.” My mistake. Verizon wants to be my loan shark.

In the meantime, AT&T has finally followed T-Mobile’s initiative and has unbundled the service cost from the handset. If you pay full price for your smartphone, an AT&T contract will cost you $15 less than with a subsidized phone on a 2-year agreement. This leads one to wonder how long Verizon can keep its current indifferent price structure.

All this leaves carriers with conflicted feelings: They like their iPhone salesman but, like short-sighted bosses who think their top earner makes too much money, they angle for ways to cut commissions down.

On the other side, Apple’s teams must be spending much energy finding ways to keep generating high monthly revenues for their “victims”.

JLG@mondaynote.com

Other carrier news: Sprint, now owned by SoftBank’s Masayoshi Son, is said to be preparing a $20B bid for T-Mobile. We barely avoided excessive concentration when the Department of Justice nixed AT&T’s attempt to acquire T-Mobile; now we again risk a three-way market and its unavoidable collusions. As much as I admire SoftBank’s founder and am happy he took control of Sprint, I hope our regulators won’t facilitate more concentration.

This might be the last Monday Note for 2013. I’ll soon be in Paris where jet-lag and various (legal) substances will conspire to make writing more difficult. If so, Happy Holidays to Monday Note readers and their loved ones. –

AT&T Buys T-Mobile: Farce or Retro-Metamorphosis?

Four weeks ago, we got the bad news: AT&T will acquire T-Mobile USA for $39B. An already bad carrier will get worse by gobbling a competitor, thus gaining more pricing power and reducing competitive pressure. Higher prices, lower service levels. The transaction leads us into a de facto oligopoly: AT&T and Verizon. (From the Wikipedia article just linked to: “Oligopolies are price setters rather than price takers.”)

Am I forgetting Sprint and other carriers such as Metro PCS and Leap?

Not at all. They’re merely too small to matter. They don’t have enough money for spectrum purchases and infrastructure build-up. Today, they don’t prosper, they merely survive. Tomorrow, with higher prices dictated by the two Big Guys, they’ll be thrilled to get a little bit of breathing room in exchange for their presence as token competitors on PowerPoint presentations to the Justice Department’s Antitrust Division.

Speaking of slides, feast your eyes on AT&T’s merger pitch at a special site, MobilizeEverything. You’ll see the “fiercely competitive landscape” and the gigantic increase in data volume: 8,000% since 2007.

No mention of the iPhone. Surely an innocent omission.

Coincidentally, “Mobilize Everything” is the title of an interview with AT&T CEO Randall Stephenson in the Brunswick Review, a PR mouthpiece. The interview, focused on “Strategy, Technology And Trust”, treats us to a collection of corpospeak platitudes such as:

“Leaders are people who get things done, and that takes courage…And above all, leaders never miss in terms of integrity.”

Very reassuring for this AT&T customer whose calls in the middle of the Palo Alto desert get disconnected several times a day.

Unsurprisingly, reactions to the projected acquisition have been negative. The overall sentiment is “everybody loses”. Well, not everybody: Wall Street sees the opportunity for more pricing power and cheerfully granted “T” (a single-letter stock symbol signals that you’re genuine Blue Blood) a 10% bump since the announcement.

Politicians, various government agencies, and the competition are jumping on the posturing opportunity. Sprint, with their expression of concern, is probably angling for concessions that will facilitate “regulatory approval.”

This is a farce. Compared to developed–and not-so-developed–nations, we have a terrible wireless infrastructure. Go to Europe, Japan, Korea, parts of China, and weep. With less competition, what incentive will AT&T have to improve coverage and service? Instead, AT&T will continue to milk its customers, parade its record $100 monthly ARPU for the iPhone…and continue to be the butt of jokes for its legendary bad service.

The regulatory review will unfold as an elaborate Kabuki script that will culminate in a pre-ordained approval. There will be congressional hearings, protests, and much handwringing but, in the end, we’ll hear sonorous but toothless concessions. AT&T is a company with deep knowledge of legislative and regulatory processes. In plain English: They know how to buy votes. Surely, they didn’t propose the acquisition without assurances it would go through, albeit at a (small) price, such as shedding assets or assuming new compliance obligations.

End of story? Not quite. More

The Carriers’ Rebellion

Before the Steve Jobs hypnosis session, AT&T ruled. Handsets, their prices, branding, applications, contractual terms, content sales…AT&T decided everything and made pennies on each bit that flowed through its network. Then the Great Mesmerizer swept the table. Apple provided the hardware, the operating system, and “everything else”: applications, music, ringtones, movies, books… The iTunes cash register rang and AT&T didn’t make a red cent on content.

In the eyes of other carriers, AT&T sold its birthright. But they didn’t sell cheap. The industry-wide ARPU (Average Revenue Per User per month) is a little more than $50. AT&T’s iPhone ARPU hovers above $100. Subtract $25 kicked back to Apple, and AT&T still wins. More important, AT&T’s iPhone exclusivity in the US “stole” millions of subscribers from rivals Verizon, Sprint, and T-Mobile—more than 1 million per quarter since the iPhone came out in June, 2007.

(Legend has it that Jobs approached Verizon before AT&T, but Apple’s demands were deemed “obscene”. If the story is true, Verizon’s disgust lost them 10 million subscribers and billions in revenue—much more than it would have made in content sales putatively under its control. Another theory, unprovable but preferable, is that Apple went for the worldwide “GSM’’ standard, hence AT&T.)

To the industry at large, the damage had been done. Jobs disintermediated carriers. Consumers woke up to a different life, one where the carrier supplied the bit pipe and nothing else. Yesterday’s smartphones became today’s mobile personal computers and carriers devolved into wireless ISPs, their worst fear.

Enter Android.

Android is like Linux, it’s Open Source, it’s free. And it’s very good, and rabidly getting better. But with two important differences. Android is Linux with money, Google’s money. And Android is Linux without a Microsoft adversary. There’s no legally—or illegally—dominant player in the smartphone/really personal computer space. Nokia, Palm, Microsoft, and RIM were and still are much larger than the Disintermediating Devil from Cupertino.

Handset makers and software developers love Android, new handsets and new applications are released daily; see the Android Market here. The current guess is that Android will grab the lion’s share of the handset market by 2012. Nokia, RIM, and Microsoft may disagree with that forecast, and Apple is certain to stick to its small market share/high margin, vertical, bare-metal-to-flesh strategy.

Carriers get excited about Android, too. For two reasons. First, Android (and the very good bundled Google apps) allows handset makers to make inexpensive devices. Carriers and Google both encourage a race to the bottom where handsets are commoditized, but smart.

Second, because Android is an Open Source platform, carriers can work with handset makers, they can dictate the feature set and, as a result, revitalize the revenue stream. They can promote their favorite apps, content, and services sales that have been choked by disintermediation.

But it’s not a straight shot. Android lays out the playing field for a contest between Google and carriers. More

Fun AT&T numbers

by Jean-Louis Gassée

AT&T can’t seem to catch a break. A couple of weeks ago, at All Things Digital, an industry conference, Randall Stephenson, AT&T’s Chairman, got the audience to snicker and roll eyes. The conference is held by the Wall Street Journal, led by its digital guru, Walt Mossberg and, “by invitation only”, $5K a pop, gathers movers, shakers and wannabes of what is now broadly called the digital media industry.
Mr. Stephenson was on stage, answering Walt Mossberg apparently softball questions. But, when you look more closely, Walt applies a trial attorney’s precept: Only ask questions for which you already know the answers, let the jury see how the witness responds. We were the jury as Walt asked the AT&T top dog about its wireless network performance problems. The witness got off to a decent start: “Yes, when the iPhone 3G came out we weren’t ready.” Then, he proceeded to claim things had significantly improved. That’s when the snickering started. In Silicon Valley, we all know the blank spots, the bad 3G coverage, right in the heart of high-tech’s garment district. See the full interview here.

Later, Stephenson committed a faux pas of Detroit proportions: he claimed everything (phone, Internet connection, TV) worked well when he moved to his new home in Texas. Really? AT&T’s Chairman, CEO and President gets a good connection? In a further misguided attempt to connect with his audience, he even mentioned his Apple TV. Clearly, he’s one of us, a discerning Apple customer… More