THE BLOG

If You Want Competition, Stop Complaining When You Get It

01/14/2014 01:03 pm ET | Updated Mar 16, 2014

AT&T made headlines this week by announcing a new program for its mobile users called "Sponsored Data." Under this program, willing websites would pay for any charges you incurred for using their data. So, for example, Netflix could let you watch the first episode of this season's House of Cards and would pay for any usage charges against your mobile bill so you don't.

This is something like getting your parking validated when you go to the movies at the mall -- do business with us, the theater says, and we'll defray the associated cost. If the theater didn't have to compete, they'd tell you to park your own car, but they do compete, so they offer this incentive. It's a clear-cut case of competition delivering benefits to the consumer (and, as Arlo Guthrie would have said, there wasn't nothin' Office Obie could do about it).

Are people going to flock to AT&T now? I don't know, and AT&T doesn't either, but AT&T's going to give it a try, much as they gave Apple a deal in order to offer the iPhone before anybody else. And it speaks to several points about the nature of competition in the broadband world.

For years, advocates have argued that the Internet is ruled by a "monopoly," or "duopoly," or some other kind of -opoly that restricts competition and leaves us with second-rate service. Yet, while they've been complaining, U.S. connection speeds have gone from 22nd to 9th in the world (according to Akamai) and we're improving at one of the fastest rates among the developed world -- in fact, we're quickly catching up to such broadband paradises as Japan (where speed is growing at a quarter the rate ours is) and Korea (whose speeds are actually declining, now that the big and easy hook-ups to urban apartment buildings are done). And the "opoly" complaints sometimes drown out the reality that the U.S. invests a higher share of GDP in its networks each year than Japan or continental Europe.

So here's competition in action -- in fact, the Sponsored Data is a good example of "business model competition" that's often overlooked. For example, do consumers prefer cheaper plans with caps, or more expensive but unlimited ones? Would they rather have fixed-price long-term deals or month-to-month ones? Do they want their equipment subsidized so they can always have the latest, or do they want their equipment and service a la carte? Providers are trying to figure that out, which is why we see all of these options side-by-side in the market. Now, we'll find out if they prefer Sponsored Data or not. If you think these questions about "how to approach the consumer" aren't important, ask companies such as Lending Tree or Express Scripts or CarMax, who got big by coming up with a different model of how to "go to market." That's why it's so important to let markets work these questions out, instead of having them answered by advocates, planners, or other elites.

It also demonstrates another point about competition in the Internet universe. We usually think about competition as being like a sprint -- Coke against Pepsi, Oreos against Hydrox, Usain Bolt against Tyson Gay. But in the Internet World, it's more like a multidimensional cage match, in which a platoon's worth of wrestlers are put in a cage and start whaling on each other, with alliances and confrontations constantly forming and reforming. Think about this: what if AT&T's right and people switch from, say, Sprint to AT&T as a result? When Sprint loses customers, they can either lower prices, improve service, or pound sand and lower their expectations. But they were put in this position because the websites -- the Netflixes and Googles of the world -- were willing to defray the consumer's costs. So the websites decisions and behaviors would be forcing Sprint to do what conventional competition makes them do -- get cheaper, get better, or take the loss. That's how cage match competition works.

And when Netflix puts that House of Cards episode in the Sponsored Data program, someone's going to decide to watch it for the first time, or might even use wireless broadband for the first time, meaning that the market for wireless broadband expands. And, again, that's what competition does -- it expands the pie while improving and dividing it.

But for the industry's critics, every silver lining has a cloud. The Free Press, for example, promptly issued a list of complaints about the program. First, they noted, it wouldn't affect people with unlimited data plans. Yes, that's true, although perhaps people would switch to capped plans if this made them cheaper. Moreover, the industry's critics have regularly complained about the harmful effects of data caps, so it's good that they now admit that people have the option of unlimited plans but don't always take them.

Second, this amazing assertion, and I quote:

"AT&T has invented a new form of double-dipping: It charges customers for monthly data plans, and goes back and charges Web sites and content providers again for the same data."

In a word, no. Websites are paying consumers bills for them -- no one's double dipping. You could argue that a customer with an unlimited data plan might create an opportunity to "double dip," but what value would the program have to such a customer? Is the parking lot operator at the mall double dipping when the movies validate your parking? That's just silly.

Third, there's this:

"If ESPN pays more money to AT&T to sponsor data for wireless customers, ESPN will make that money back somewhere else." That is, if they choose to pay AT&T for their users' data charges, they'll raise their prices for, say, their cable station."

But that argues that ESPN, for example, can charge whatever it wants whenever it wants it. (And it ignores that cable companies and you, their customer, aren't already a little honked off about what sports programming costs). It argues that ESPN (for example) can raise their prices any time they like, but don't right now, yet will when they sign up for Sponsored Data. I mean, if they have the ability to raise their prices at will, why wait for their costs to go up? In fact, broadband is a competitive space in which competition limits prices. That's how markets work. And competition is forcing the ESPNs of the world to ante up if they want to win customers.

So perhaps the last point we can take from this proposal is that some proponents of "more competition" in the Internet World might not know competition if it jumped out of a tree and bit them on the neck. To some critics, the Internet won't be competitive until there are a hundred companies out there providing broadband. But given the tens of billions such a company has to spend each year to play this game, that's not going to happen, ever, period, full stop. Instead, the companies we do have are continually investing, innovating, and improving, and the proof is in the data.

And perhaps the best proof that Internet providers aren't profiteering is that they don't appear to be making that much profit. According to Forbes, the average profit rate for Internet providers AT&T, Comcast, Sprint, and Verizon is 1 percent of assets and 3 percent of sales. The same rate for Internet "platforms" Apple, eBay, Facebook, and Google is 19 percent on assets and 24 percent on sales. Companies that provide the Internet don't make money, but companies that use it do. That's the fingerprint of competition -- delivering benefit to the customer. It's time for the folks who think the providers aren't competing to stop complaining when they get what they claim what they want - a competitive broadband market.