Monday, August 24, 2009

What Andy Kessler Doesn't Get

It is possible that Andy Kessler was a good hedge fund manager in his day. But his recent Wall Street Journal commentary ("Why AT&T Killed Google Voice,") reveals there is a lot he doesn't understand about communications policy and communications network economics. Apparently in a heat because Apple rejected Google's voice application for its iPhone, Mr. Kessler launches into a misguided attack on AT&T and other broadband providers. He's especially perturbed that wireless broadband service providers have entered into certain exclusive arrangements with handset device manufacturers, such as Apple. And he makes clear he'd prefer to pay less rather than more for his wireless services, or at least to be offered a pricing package designed to fit his own particular usage patterns.

A few basic points in response. Mr. Kessler says that "the trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like." Andy, it's no trick. These communications pipes don't grow on trees. Over the last few years, service providers like AT&T, Verizon, and Comcast have invested over $200 billion in private capital building out wireline and wireless broadband networks with the latest technologies, including fiber optic lines and 3G and 4G wireless platforms. Curiously, Mr. Kessler – while complaining about the "pricing power" of the wireless providers – acknowledges that "Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s." He doesn't understand that implicit in his statement concerning AT&T, Verizon, T-Mobile, and others is an acknowledgement that competition already exists in the wireless market, albeit as a result of a huge amount of investment of private capital. Indeed, five facilities-based providers offer nationwide coverage.

Mr. Kessler calls the Google Voice application "the new competition." Andy, how wrong! What Google wants is to continue using the wireless networks of AT&T, Verizon and the others without having to pay a market price for doing so, regardless of the costs incurred in creating and operating the networks. (For years it has employed the same "ride the back of others on the cheap" strategy with respect to broadband wireline communications.) While Google made feints a few years ago designed to cause the FCC and others to believe it might actually bid at auction for spectrum and build its own network – in other words, become a real facilities-based competitor -- when the FCC adopted "open access" policies for that spectrum block, Google quickly dropped out of the bidding. It realized it was much cheaper to lobby the FCC than to build and operate a communications network.

Mr. Kessler's complaints about exclusivity arrangements between wireless providers and handset manufacturers demonstrate a surprising lack of appreciation that such arrangements provide the incentives that lead to the development of innovative devices such as the iPhone, or the new Palm Pre, available exclusively through Sprint. And his complaints about wireless prices are equally puzzling in that he doesn't relate prices in any way to the cost of providing service. Nor does he seem to know U.S. consumers enjoy the lowest wireless prices per minute and highest minutes of usage of any developed nation.

There are other basic errors in his piece, such as his complaint that, with respect to video, cable needs "a little competition." Doesn't he know that in most areas there is vigorous competition among the telephone companies and satellite and cable operators for video services?

The short of it is that Mr. Kessler shows little comprehension of the role that competitive markets and respect for property rights play in encouraging investment and innovation and, ultimately, enhancing consumer welfare. While most people rightly look at the U.S. wireless marketplace, largely deregulated since 1993, as a real success story, Andy seems to just want regulators to allow him to pay less money for any particularized service plan that he imagines he might fancy. And to make sure the government continues to allow Google to ride on the backs of others' network investment without bearing any burdens of such capital costs.

I'm not sure I'd want to invest in one of Andy's hedge funds, but I'd sure like to have a debate with him about sound communications policy.

Or at least have a talk at a backyard Beer Summit to explain what he doesn't get about network economics and today's digital marketplace environment.