THE BLOG
10/20/2014 05:11 pm ET Updated Dec 20, 2014

Learn From the French -- Reducing Our Mobile Bills by 90%

Boston -- It is only symbolic that the Noble Prize in Economic Sciences went last week to a French economist -- Jean Tirole. He earned his PhD from the Massachusetts Institute of Technology, but chose to continue his research in France.

9 month after Thomas Piketty -- a french economist that reshaped economic discourse in America with his book Capital in the 21st century -- another french economist gets the limelight -- only this time it is not about inequality or redistribution -- the Nobel Laurete is an expert on competition -- a subject most Americans think that they own.

But wait. Last week we had another French here making headlines in the business and economics sections: Xavier Niel -- the boss of the French Iliad Communication group -- decided to scrap his plans to take over T-Mobile, the third biggest mobile provider in the country. Price was too high for him. There is something in common here between those two French mavericks and the US economy.

Newly minted Noble Laurete Jean Tirole has developed and revolutionized research into how big companies and specifically telecommunication companies -- use their market power to corner markets, raise prices and extract value from consumers.

Niel, the French entrepreneur, disrupted and revolutionized the French communication market, introducing competition, fighting the incumbent players and lowering prices for both retail and business consumers. 

Unfortunately, the United States still believes in the myth that it is the world's leading country in competition; many industries here lack real competitive pressures and punish consumers with high costs. 

Susan Crawford of Bloomberg described last week how American federal policy makers turned their backs on Tirole's assessments of private communications utilities -- with disastrous results. The former chairman of the Federal Communications Commission, Michael Powell, decided not to intervene aggressively in the Internet market -- as Tirole would have advised -- and the results have been a monopolistic market with high prices. Powell is now head of the cable trade association, basically a lobbyist. 

If Americans want to understand the costs of their regulatory policy, they should look no further than the kind of disruption that Niel has brought to communication markets.
Maybe the best example would be Israel, where a new startup that Niel backed created a revolution in fewer than two years, cutting the bills for millions of Israelis by 50 percent to 90 percent.

Until three years ago, the Israeli mobile market was controlled by a cartel of three companies that charged one of the highest rates in the world. Retail consumers and small businesses could rack up mobile telephone bills of $300 to $500 a month. 

Regulators were reluctant to deal with the cartel, as it was controlled by some of the biggest conglomerates in Israel that had a strong grip and influence on most politicians and media outlets in the country. 

In 2009, a new minister of communication decided to challenge the incumbents. Backed by a continuous campaign of TheMarker, the financial newspaper I founded, he introduced two competitors into the market. 

Strangely enough, the two groups that won the tender were French: Golan Telecom -- backed by Xavier Niel and run by Michael Golan -- a French executive -- and Hot Telecommunication Systems controlled by another French entrepreneur, Patrick Drahi.

Niel led the charge and established the rules in May 2012 when Golan Telecom hit the market on its launch day with a $30 monthly price that was 50 percent to 70 percent lower than the average Israeli bill at that time. The incumbents had to follow suit. Today, you can get a monthly limitless text-and-talk package for as low as 15$ a month -- a 90 percent drop in price in fewer than three years. 

If you follow the discourse in the American newspapers and financial news outlets, you would notice that most of the discussion on the possibility that Iliad, the company controlled by Niel, could enter the U.S. market by buying T-Mobile is centered on the price offered to shareholders that apparently wasn't high enough to conclude a deal. This is the common American approach: to focus on the "value" created or destroyed by companies in the eyes of shareholders. 

But when prices of companies such as AT&T, Verizon or T-mobile rise, is it really a value that is being "created" or rather only extracted from consumers? After all, these are mere utilities companies from which most of their profits are from rent-seeking derived from the concentration in the market and regulatory protection -- and not from innovation in products or processes. What are the negative externalities that high prices of Internet connection or mobile connection have on the U.S. economy? What could be the positive externalities on the U.S. economy if it were leading the world in low communication prices?

The obstacle to such discussion and progress -- of course, another subject of the pioneering research of Tirole, called "Regulatory Capture" -- is how big business and industry capture the very organization that is supposed to regulate them.

Capture has happened everywhere since the day regulation was invented, but it is perhaps in its worst form now in the world's biggest capitalistic democracy -- namely the US. The cartel of the U.S. companies in the Internet, mobile and cable industries has a huge influence on politicians and regulations, and it has prevented any French- or Israeli-style reforms in the communication markets.

It's time for Americans to ditch the myth that they are part of the most competitive country in the world; they instead need to start to focus on developing ways to curtail the power of the huge special interest groups in the country. The Nobel Prize economic committee in Sweden just signaled us that this a good time for some real disruption. Maybe Tom Wheeler, chairman of the Federal Communications Commission, should sit down with 2 french guys -- Tirole and Niel and seek their advice on how to disrupt these markets and create real value not only for shareholders but for all stakeholders in the economy.