Pushing Back Against Oligopoly Rule: This Time It's Telecom

By James Kwak

New York Times technology columnist David Pogue is mounting a campaign against those canned messages that cellular carriers play after the greeting on your mobile phone voicemail (hat tip Mark Thoma’s son) – you know, the ones that say “to leave a voice message, wait for the beep,” only they take 30 seconds doing so, for th sole purpose of chewing up the mobile phone minutes of the person calling you. (According to Pogue, multiple carrier executives have admitted that the sole purpose of these value-destroying messages is to maximize airtime and hence revenue.)

This is exactly the same kind of “innovation” that we’ve seen in financial services and in health insurance. In each case, it’s what you get when you have too much concentration, so that a small group of oligopolists can effectively agree on the same business practice that generates profits at the consumer’s expense.

In this case, it’s particularly dependent on there being an oligopoly, because implementing the practice doesn’t even make you any additional revenue. Because you’re chewing up the minutes of the person calling your customer, you’re actually helping one of your “competitors.” (If the caller is also your customer, then the airtime is probably free anyway.) The only reason to implement this practice is because you can count on your competitors reciprocating the favor, and they do. Once you reach that equilibrium, there is no reason for any of the big four carriers to do the consumer-friendly thing and eliminating the timewasting messages. And mobile phone service is an industry with particularly high barriers to entry, since at this point you would have to buy spectrum in all of the major national markets, and that spectrum is owned by the current oligopolists. So there’s no way someone could start a new, consumer-friendly cell phone carrier.

It’s also revealing that Apple (AAPL) forced AT&T (T) not to impose the mandatory message on iPhone customers. Apple, as a company that actually cares about every detail of its customers’ experience, insisted that AT&T remove the messages. More importantly, Apple had a product that had even more market power than mobile phone service – the iPhone.

This is just more evidence that companies pursue profits in other ways than providing better goods and services that customers will pay more for, and that many times they are successful – especially when you have concentrated market power, or you have products that consumers do not understand very well. If consumers cannot recognize the bad deal that is being forced on them, or if no one in the market has an incentive to offer them a better deal, then the bad deal can persist indefinitely, boosting profits and destroying value. The transfers of cash from customers to carriers does not destroy value – it’s just a transfer – but the fact that we all spend unnecessary time on the phone is a clear destruction of value or, to put it in economic terms, an inefficient outcome.

For the record, I’m proud to say that my voice mail greeting for several years has begun, “Hi, this is James. To skip this message press star . . .”

Comments

[FreeRange:]

And how about the companies you call that instead of answering the phone with the "first available rerpresentative" make you listen to a FULL advertisement for additional services! Equally annoying!

Aug 01 03:02 AM

[buoy:]

APPL doesn't seem concerned at all, with all of these IPhone problems.

Aug 01 11:10 AM

[Don Bowey:]

And why SHOULD Apple be concerned? They are straightforward questions, and I'm positive Apple will reply in a straightforward, business-like manner. The answers may be more complex than either you or the FCC will follow easily, but it will all come clear. WAIT!

Aug 01 12:01 PM

[Afthought:]

Oops! I don't even know anyone who has an iPhone but I gather they signed a deal with ATT that has iPhoners very displeased with their telecom experience. I know two people with macBooks (sp?) and both have made mutiple trips to the Genius Bar only to ultimately have their macBooks swapped. Both are very happy and tell me the Apple Store is a slice of paradise on this good earth.

Aug 01 11:21 PM

[User 465163:]

My oligopolist mobile carrier does let me turn off those messages. So on a late evening, I called my voice mail and did the dastardly deed... turned off all the extra messages, and my message now is very short: "This is <me>, leave a message at the beep"

Aug 03 01:09 AM

[dcb:]

Wall Street profits from trades with Fed
By Henny Sender in New York

Published: August 2 2009 23:04 | Last updated: August 2 2009 23:04

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

EDITOR’S CHOICE
Wall Street benefits from Fed and Treasury - Aug-02Editorial: The value of bank independence - Aug-02Opinion: Trichet should convene a trip to the beach - Aug-02In depth: US banks - May-07In depth: Central banks - Mar-09However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. “We believe that opting for transparency is a greater good,” he said. “If we didn’t have transparency, we’d be criticised on other grounds.”

However, another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system.

“You can’t rescue the credit system without benefiting some of the people in it.” Still, Mr Frank said Congress would be watching. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

The growing Fed activity has coincided with a general widening of market spreads – the difference between bid and offer prices – as the number of market participants declines. Wider spreads enable banks, in their capacity as market-makers, to make more profit.

Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as “luxurious”, reflecting the banks’ ability to take advantage of diminished competition.

“Bid-offer spreads have remained unusually wide, notwithstanding the normalisation of financial markets,” said Mohamed El-Erian, chief executive of fund manager Pimco in Newport Beach, California.

Spreads narrowed dramatically during the years of the credit bubble.

Brad Hintz, an analyst at AllianceBernstein, said he doubted that spreads would ever return to those levels, a development that could be pleasing to the Fed.

“They want to help Wall Street make money,” he said.

Additional reporting by Brooke Masters in Washington
Copyright The Financial Times Limited 2009

Aug 03 09:43 AM