Archaic Telecom

The AT&T-Verse

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Waves of bad news coming out of AT&T recently stand as a reminder of what life would be like if the crown was restored to this former monarch.

First there was the iPad security escapade wherein a group of hackers fooled a very insecure AT&T web form to display email addresses of iPad owners. Then the pre-order web meltdown in which customers for Apple’s iPhone 4  were faced with an AT&T back-end order entry system that stopped working. Then there’s the customer who received a terse cease-and-desist voicemail response after he emailed AT&T’s CEO Randall Stephenson to complain about the new caps on data—Zappos’s Tony Hsieh is probably smiling and FedExing a copy of his latest book, Delivering Happiness, to Randall.

Add to this brew the usual problems with AT&T’s 3G coverage (see TechCrunch’s  wireless frustrations) and barely acceptable customer service, and you’ll get a pretty good sense of how telecom was delivered in the Middle Ages (circa 1970s) when AT&T and the Bells were the only games in town.

And to rub salt into our wounds, AT&T is threatening to cut off investment in its U-verse/IPTV cable rollout if the FCC doesn’t reconsider its reclassification of cable broadband as Title II telecommunications.

On the run up to FCC’s June 17th open hearings on broadband internet and net neutrality, AT&T Chairman Stephenson told the Wall Street Journal that  it may, in effect, take its marbles and leave the game. Said Stephenson: “If this Title 2 regulation looks imminent, we have to re-evaluate whether we put shovels in the ground.”

Ars Technica’s Matt Lazaar points out that even under the existing framework, AT&T is already slowing down its investment in U-verse!

What gives?

The incumbents investing philosophy is based on a cost of capital approach: if the additional  expected revenue gained in investing another dollar in equipment (additional cell phone towers,  cable headends ) can pay the cost of using the capital, they will continue to do so.

In the face of “unfair” competition—say from a few pesky CLECs— or unfair regulatory rules or other uncertainties, the incumbents invest less  since they expect less additional  revenue.

Unfortunately, the recent evidence points to just the opposite.

I’ve excerpted a table from a 2002 paper by Kevin Hasset (American Enterprise Institute) and Laurence Kotlkoff  (National Bureau of Economic Research) that shows investment peaking during the years when there were more CLECs, thanks to the Telecommunications Act of 1996, and dropping after the dot-com bust, when there were less.

The analysis for all this rests on core Econ 101 ideas (interested readers can check out the paper for the details and refresher course): monopolies want to produce less because they are mindful of falling prices when they push out more product.

When there was competition pre-2002, and the telecom incumbents realized they couldn’t increase revenue by holding back supply, they had to push more product and services out on the market to increase revenue, forcing an investment in additional capacity.

To me the most troubling aspects of Stephenson’s recent remarks and AT&T’s troubles are  the below-the-radar signs of wanting to do less—we don’t need new iPad customers,  we don’t have enough 3G capacity, we’re investing less— and therefore an indication  of market concentration, not as they tell it, more competition.

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  1. Pingback: The Technoverse | The AT&T Verse | « Telecom Regulation

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