Nothing beats a platform monopoly

Since the birth of broadband, net neutrality’s cheerleaders have feared that service providers might begin to act as the internet’s “gatekeepers,” …The real distortions come from massive “platform monopolies” like Google, Facebook and Amazon, whose proprietary algorithms decide what users see online.

The supposed purpose of “net neutrality” is to stop any internet company from getting a leg up over others. But that’s exactly what happens when Google’s search results prioritize its own services—and profits—over competitors’. …If Google’s favoring its own products while pushing potential competitors down its rankings doesn’t create “fast” and “slow” lanes, what on earth does?

Similarly, avowed net-neutrality supporter Amazon was granted a patent in May for “Physical Store Online Shopping Control,” a system to block shoppers in brick-and-mortar stores from using Wi-Fi to view competitors’ prices. Isn’t “no blocking” the heart of net neutrality? Facebook, meanwhile, has virtually abandoned chronology in its News Feed in favor of picking and choosing what users see—and what they don’t—based on what the company has learned about them.

The costs of such abuses from the platform monopolies are obvious and many. Newspapers have nearly been “prioritized” out of existence by Google’s shameless appropriation of their work: Why click through and read a whole article when Google News will pluck out the most important bits and show them to you free—alongside its own ads, of course. … Last year, the FCC chairman tried and failed to force TV companies to make their feeds available on set-top devices made by—wait for it—Google, Apple and Amazon.

The internet giants behind the Day of Action can now track users’ physical location 24 hours a day, learning where they live and work, by logging where their phones are at different times of day or the Wi-Fi networks they pass. If two phones sit side by side overnight, advertisers knows what that means—and appropriately “targeted” pitches are sure to follow.

From Ev Ehrlich, “‘Neutrality’ for Thee, but Not for Google, Facebook and Amazon,” Wall Street Journal, July 21, 2017.

Hollywood's inability to have its cake and eat it too

Now that it’s been successful (at least by Web 2.0 standards), the studio owners of Hulu have put it on the block. Various companies have expressed interest, led by Apple.

The problem is that after years of running an oligopoly in which they dictated terms, the Hollywood studios are hoping they will be able to have their cake and eat it too. As their record label siblings and cousins have already learned, it’s not possible in this brave new digital world.

As USA Today points out, the studios want to extract more onerous terms from Hulu to make more money off of online distribution. Examples include putting new TV episodes under a paywall, or delaying their free availability.

However, by doing so they may kill the market value for the Hulu joint venture they have been trying to spin off. Who wants to buy a distribution service whose business model only works because the studios have been pulling their punches — when they have made clear that they plan to start punching hard real soon now?

As the LA Times noted earlier this year, Hulu has been much more successful than anticipated — great for Hulu, but bad for the network parent:

In a short time, Hulu has exploded into one of the top Internet video destinations, defying skeptics who predicted that a service backed by such an unwieldy joint venture would never work. It now attracts some 27 million users every month, according to ComScore Video Metrix.
…
As a result, Hulu's media owners — the corporate parents of ABC, Fox and NBC — are tussling with the site's entrepreneurial managers over opposing visions for the venture. The companies originally crafted the service as a way to control online distribution of their content. But by offering popular shows such as "Glee" and "Modern Family" online at no charge, the media companies fear they may be encouraging consumers to drop cable and satellite TV services, one of their chief sources of revenue.

In other words, the network-studios created to Hulu to profit from the brave new world, but had no intention of speeding the transition.

The LAT points out (as others do occasionally) that the rapid growth of Hulu’s revenues is still a drop in the bucket compared to the revenues of the traditional TV network business model — more than 50:1. (The Hulu platform could equally be used for 2 hour movies rather than 22 minute TV shows, but that hasn’t been a priority of the network-owners.)

The problem with this thinking is that the original vision of Hulu was spot on: the new world is coming, whether the studios do anything or not. So if they don’t want to be a leader in the transition and proactively shape where it’s going, they can be a follower and be whipsawed as they react to the implosion of their long-cherished business models. (NB: Record labels in the 1990s).

Perhaps the behavior of the network executives is selfishly rational — like that of a Eastern European or third world despot. The dictators know they’re going to (at best) flee into exile or (at worst) join Cesusescu in hell — so the longer they hold onto the power, the longer they postpone the day of reckoning. Similarly, a TV exec in his 60s or even early 50s might hope to collect bonuses for a few more years while kicking the can far enough so it blows up on someone else’s watch.

Still, the slow-motion collapse of the broadcast-cable monopoly over pricing and distribution is utterly predictable and inevitable. So if the studios are rejecting a viable Hulu as their future distribution strategy, what’s Plan B (or Plan C or D)?

Network effects and self-perpetuating incumbents

As part of my travels to and from the latest user innovation conference, I’ve been traveling through a lot of airports.

Airport hubs are an example of both network effects and more general IO economics (i.e. Michael Porter) barriers to entry and supplier power. With enough market power — such as by reducing rivalry through mergers — large airlines can offer mediocre service at a high price and people will be stuck paying it. (Or, they won’t fly.)

This is particularly true since airlines have accepted commoditization of their service, with few offering differentiation. (Frequent flyer plans were once intended to offer differentiation, but once everyone copied them, all they do is create switching costs which discourage price shopping by business customers.)

Flying through European capitals this week, I realized how my view of airline competition was distorted by the US experience, where a few Midwest (or non-coastal) cities got nabbed by airlines to build fortress hubs: Chicago (United, American), Dallas (American, Delta), Houston (Continental), Atlanta (Delta), Pittsburgh (US Air), Minneapolis (Northwest), St. Louis (TWA), Salt Lake City (Western) — or secondary hubs like Denver (United), Kansas City (TWA), Cincinnati (Delta), Detroit (Northwest) and so on. A few international airlines had the bulk of their international departures from key “gateway” cities like New York, Miami, San Francisco and Los Angeles, but only later did these become international hubs.

In Europe, the pattern is very different. Most countries had one airline which offered non-stop flights from their capital (or largest city) to key international destinations. And of course for minor obscure languages, the national airline meant customer service in a language you understood.

Only later did they convert their capital to a through hub to attract through passengers. Judging from my efforts to book connecting tickets to small EU cities online, the most successful seem to be British AIrways (London), KLM (Amsterdam) and Lufthansa (Frankfurt).

Airline hub theory states that to make a hub work, you need both connecting passengers and terminating passengers (whether local residents or visitors). So big cities like NY, LA, London etc. have a lot of built-in demand to support the hub.

A few things surprised me about this airline competition during trip. One is the reminder that 40 years ago, every country (even Belgium) wanted its own airline no matter how sub-critical mass it was. Exhibit A: Sabena Airlines.

Meanwhile the Scandinavians (except Icelanders) swallowed national pride and combined the local demand of three countries. Even so, sitting in the SAS hub in Copenhagen today, it seems surprisingly weak compared to my first visit 15 years ago — in terms of size of planes and number of destinations.

I guess the problem is that Copenhagen is the connecting hub but Stockholm has twice the local traffic, so neither is particularly viable. Also, the rise of the Star Alliance and code-sharing means that it’s easier for SAS to code-share with longhaul partners than to offer its own tiny fleet of long-distance jets. (It was interesting to note that nonstop traffic between Japan and Germany is carried by both Lufthansa and Star Alliance partner ANA, with every flight by one code-shared on the other.)

The final observation is the reminder that the natural reaction to rent-seeking and extortionist monopolies (the aspirational goal of most airlines) is to encourage new entrants to do a better job. In the US, we hear about Ryanair (more penny-pinching than Southwest) and EasyJet but not the dozens of others that have sprouted up.

For this trip, to save $500 I bought a separate ticket from Copenhagen to the Vienna conference on AirBerlin. However, I ended up on Niki, the smaller Vienna-based Austrian discount airline that it acquired in 2010. Both seem to be German-speaking versions of Southwest, catering to German-speaking travelers, but (unlike Ryanair or EasyJet) offering slightly more amenities than Southwest (i.e. a free cold meal). I guess AirBerlin (which has longhaul flights to the US, the Caribbean, Africa and Southeast Asia) is a German version of Virgin Atlantic, but without Sir Richard and his out-of-this-world ego.

Niki is strictly a European short-haul carrier. Even though it is tiny (21 planes), it was clear at Vienna airport it was cutting into the business of Austrian Airlines (the former national carrier acquired in 2009 by Lufthansa). In Copenhagen we had Sterling and Norwegian, and of course European authorities showing (a limited) interest in competition has transformed the airline industry to make these carriers cheaper and quicker (if not quite as convenient) alternatives to the monopoly national train systems.

But then, that’s not that different than the US, either. American’s attempts to control Dallas passengers helped fuel the success of Southwest. Delta’s control of Atlanta begat ValuJet (rebranded to AirTran after that terrible crash) which is now a division of Southwest.

Interestingly, it seems that big destination cities are impossible to dominate. No single airline has dominated NYC or LA the way the middle-American hubs have been dominated. (Perhaps PanAm did so once upon a time, but that was well before my time). And if you look at London, while BA is by far the largest carrier, it has lots of competition.

In the end, it comes back to a first-year strategy principle: businesses hate competition and choice (except with suppliers) and customers love it. The entire field of IO economics is about how incumbent firms can develop monopoly (or oligopoly or monopsony) strategies and how new entrants and customers conspire to destroy them.

We deserve better commodity information

It’s no news that Wikipedia, with all its flaws, is the default information source of a generation of skulls full of mush. If this wasn’t obvious enough from my college students, it was brought home a week ago when interviewing FLL robotics contestants (ages 9-14), when nearly all said their project “research” consisted of Google and Wikipedia. (One team said Google and Yahoo).

However, since then, Wikipedia’s problem has been a front page Wall Street Journal story Monday (and blog entry) on how Wikipedia is losing volunteers, specifically 49,000 in Q1 2009. The Telegraph had the most comprehensive follow up stories although the Times of London had good coverage (including a great article on the four sources of error.)

The impetus for the original WSJ article was the academic research of Felipe Ortega, who is part of a group studying open source software but actually did his Ph.D. dissertation on Wikipedia (a related but quite different species). He’s been tweeting to offer his comment on the current news coverage. While the bulk of his research hasn’t gone through the peer review, the abstract suggests he’s taken seriously all the research design issues.

After all the articles and the academic study, the official Wikipedia response is pretty unsatisfactory. It changes the subject, arguing that while the tide of new volunteers roughly matches the ongoing losses, at least the site traffic and number of articles continue to grow.

However, none of this relates to two inherent problems in Wikipedia that the current management is unable to solve, plus the third (and potentially catastrophic) outcome of WIkipedia’s commoditization of information.

The first problem is that Wikipedia publishes content by persistent idiots. Now that there are dozens or thousands of individuals trying edit articles on almost any topic, there are chronic edit wars with rival editors taking out each other’s changes in edit wars.

Competition is healthy — if there’s a selection mechanism based on quality or performance. Wikipedia has no such mechanism. Instead, what gets published comes from people who whine and bitch and moan, who win out over people who know what they’re talking about but have better things to do with their life. This works well for chronicling Simpsons episodes but not for summarizing academic research or major historical controversies. (Yes, I know that there are capable contributors, but in every battle between idiots and experts, the idiots are winning.)

I tried to sell this angle to a reporter I spoke with Monday, but I guess he thought it was just the griping of a snobby college professor who gave up years ago after watching his work be mangled by twits. However, in the 27 comments (thus far) to the official Wikipedia response were these five comments:

1. Well, I have taken hours editing and polishing a biographical article about a scientist. There is nothing in the article now that is under dispute, yet it is probably going to be taken down and deleted as one editor is exercising his or hers petty power-plays.
2. My most recent experiences have been quite negative: edits reverted with no reason, pages tagged as grammatically terrible when they were no such thing, or tagged as “not up to WP’s standards” when they were stubs and in some cases *still editing*. These taggings tended to be “drive-by” in the sense that some other editor dropped the tag onto the page or made their reversion but then failed to respond to explanations on the talk page for days.
3. I used to spend a lot of time writing for Wikipedia, amending entries and creating new articles. Now it seems that a small number of self-appointed editors run the site. If I create new articles then they are nearly always deleted. If I correct information I know for a fact is wrong, it is reverted back and I am warned by the small sub class of elite editors
4. I took on editing the Albigensian Crusade page a while back, a fairly simple job because what’s known about it comes principally from three contemporary chronicles dealing with the specific subject. A chronicle is self-indexed by time, therefore it should have been adequate to simply point readers in the direction of the sources, but no, that was inadequate, full references please. I got started, went so far, and checked if this was right. The %*$^^@# responsible refused to take the time to feedback, and was quite rude about it, so I stopped. Other appeals to administration went nowhere, and I concluded this is a system full of chiefs who can’t be bothered to get their hands dirty actually editing,
5. I, for one, am one of those professional contributors who left Wiki in disgust. After spending a lot of time creating pages or adding a lot of content, some amateur came along and dumbed down the content and added fictious pictures that were purported to be of the creatures listed. It became a waste of my time to provide a lot of information that could be cut-and-paste into term papers, dissertations, reports, etc., and have some arm-chair contributor wreck it all.

This is a problem I’ve known about since soon after I joined Wikipedia in November 2003. The entire production process would have to be ripped up to fix this. Even Amazon has a way of providing feedback on user contributions so that readers know whose comments have been useful, even if it (and other processes) is fatally broken for highly polarized topics like politics.

One problem I didn’t see coming was the inevitable shift from original writing to maintenance mode. I started my main burst of Wikipedia contributions (2003-2004) by creating 11 new articles, from venture capitalists Eugene Kleiner and Tom Perkins to adding two missing campuses (CSULB, CSUSM) of the 23-campus CSU system.

Today, thanks to the law of large numbers (and the long tail) are very few significant articles left to be written. (Yes, Wikipedia has an article on only one Joel West — and it’s a lame one — but I don’t consider that a major omission.)

This reminds me of what I experienced in my first few years as a professional programmer: it is so much more more fun to write new code than maintain someone else’s code. In fact, as I became a manager I learned this is a major recruiting and staffing problem — even when you pay people, let alone when they’re volunteers. Over and over again, I saw that the manager or other “stuck” (high switching cost) programmers had to take the scut work so you could offer the new exciting stuff to attract the best talent.

Clearly, at Wikipedia existing volunteers don’t want to do the scut work, nor do the newcomers. If it’s de minimus, then (to use an analogy) perhaps good citizens will just pitch in and pick up the candy wrapper, but nobody’s going to spend a weekend clearing up the trash along the highway just for the fun of it.

Wikipedia is running out of good jobs to hand out. If you can’t give out fun work, how are you going to attract people? What I didn’t see six years ago was that inevitably Wikipedia’s content base would mature: first in English and eventually in all the major languages. When this happened, the opportunities for adding new content would mainly be limited to current events like new hurricanes or those Simpsons episodes.

However, I find hope in Wikipedia’s current troubles, as they suggest a solution WIkipedia’s most invidious problem: the commoditization of human knowledge. Monopolies are bad, even if they are for free goods. When I was interviewing open source leaders, the Apache (and most “open source” types) seemed to get this, while the free software types (Linux, OpenOffice) did not.

Competition is inefficient, but it provides choice. Monopolies at best mean benevolent dictators, and few benevolent dictators remain benevolent forever.

The mind-numbing ubiquity of WIkipedia is teaching a generation of kids to be lazy and uncritical consumers of information — whether it’s truth or merely wikitruth. They take what shows up on the first page of Google or in Wikipedia and assumes it’s true, even when it’s not.

When I was a kid, I would do my 5th grade reports using World Book, Encyclopedia Brittanica, usually one other encyclopedia like Collier’s or Compton’s, and also the Information Please Almanac. (If the report was important, I would also try to find a real book or two.) This wouldn’t make me an expert, but at least I would get multiple perspectives.

Today, Wikipedia’s commoditization of information means that Encyclopedia Britannica is struggling and its previous nemesis (the Encarta CD-ROM) is gone. At least a five-year-old version of the Columbia Encyclopedia survives as Reference.com.

Once upon a time, I assumed that the network effects meant that nothing would ever compete with Wikipedia. This week shows that in less than a decade it’s possible to create a significant body of knowledge with volunteer labor. None of the existing rivals have yet succeeded, whether Citizendium, Conservapedia, Liberapedia or Knol. However, with this large body of existing (or potential) body of would-be Wikipedia labor becoming available, they are certainly trying.

I will be curious to see if we can achieve success from volunteer organizations that focus on the quality rather than the quantity of contributions. In this direction, Citizendium (by WIkipedia co-founder Larry Sanger) is using a somewhat modified version of the Wikipedia process, while Google’s Knol is heading in a different direction by emphasizing authorial integrity over cumulative production.

Given the almost total lack of competition, anything that provides a viable alternative to WIkipedia is a good thing. It will be a good thing if a decade from now we have three or four online encyclopedias to choose from, much as today we can choose from three or four cellphone carriers.

It’s likely that one of these alternatives will be Wikipedia. Perhaps if its leaders take its current problems seriously, it will still be the most popular alternative out there and will be able to meet its current modest fundraising goals.

The benefits of high supplier power

From today’s Merc:

At the heart of the European antitrust case against Intel are a series of once-confidential memos that provide a rare glimpse into the intense and at times acrimonious negotiations between the world's biggest chip maker and Hewlett-Packard, the world's biggest computer company.

Even a company as powerful as HP, the documents suggest, had to make business decisions based on how Intel would react. The Palo Alto computer company reportedly was so worried about threats from Intel that it dramatically scaled back its plans earlier this decade to sell computers powered by chips from Intel competitor Advanced Micro Devices of Sunnyvale.

And when AMD offered HP 1 million free microprocessors, saying it was a gift "no reasonable business partner could refuse," HP took only 160,000 to avoid Intel retaliation, according to the report unveiled last week by the European Commission.
…
HP declined a Mercury News request to be interviewed and Intel insists it did nothing illegal, calling the commission's findings "wrong as a matter of fact, law, economics and elementary fairness."

Of course, HP is not the world’s largest computer company — which has remain unchanged since the System 360 in 1963 (if not before). But it is the largest PC maker, and the rest of the story is pretty convincing.

Still, the allegations suggest that our local chip designer (no longer making chips here) is as predatory as Microsoft under Bill Gates.

Comcast: Charging more for less

Monopolies are bad for consumers and society (and of course death to competition). To my mind, telecom monopolies are the worst, particularly now that they’re fighting the threats to their core business.

Our local cable TV provider, Comcast, is pushing a double whammy to try to raise revenue, and hiding behind misleading (and most likely untrue) claims as to why it needs to charge customers more in a down economy.

First, without notice last month it dropped 11 channels (including TV Land and SyFy) from its cheapest service — “Limited basic”. When I called to ask, the switch was attributed to the digital switchover. (It dropped a 12th channel last year). As best I can tell, it dropped the channels not because it needs to drop them, but because now it has the technology to more finely control channel choices — and wants to force consumers off the basic service to more expensive plans.

The Mercury-News this morning reported that Comcast plans to raise rates 1.5-9% on the three least expensive services — priced at $15, $46, and $60. Its honesty here is even more suspect. (Ironically, the Merc and its sister papers won a full-page of “tombstone” legal notices by Comcast announcing the price hikes in 9 separate jurisdictions.)

According to the Merc,

Comcast attributed the price hike to rising costs, including an increase in the cost of TV programming, and investments in new technology.

"These investments make it possible to deliver continued innovations such as more high-definition (HD) networks and video-on-demand (VOD), converged services, multi-platform content and new services that consumers demand," the company said in a statement.

The problem with this claim is that none of these new services are going to the basic cable customers who are paying the 9% rate increase. It’s a smokescreen for using its monopoly power to raise profits — presumably because it can’t extract the money from its most expensive plans.

The Merc continued

Mindy Spat, communications director of The Utility Reform Network, a San Francisco-based consumer advocacy organization, said Comcast appears to be taking advantage of its lower-end customers.

She noted that many Bay Area consumers who were unable to tune in the new digital broadcast signals signed up for limited basic cable to continue to get the local channels after the old analog ones were switched off earlier this year. With the increases, Comcast also appears to be trying to push customers into higher-tier packages, she charged.

"If consumers had choices, they certainly would not choose Comcast," Spat said. "But they don't, and Comcast is taking advantage of the fact."

TURN is an activist group to the left of Consumers Union and to the right of ACORN. This may be the first time in my life I’ve agreed with TURN, perhaps suggesting the degree of the company’s naked assertion of monopoly power.

Guess what: monopolists gouge customers!

USA Today wrote Friday about how travelers are mad at airport shops that gouge customers. I was reading this in the dead tree paper on the flight home Friday; this would be ironic except that USA Today oversamples travel-related news for its readership, which is mainly travelers.

A few sample paragraphs:

[Frequent flyer Sammy] Tawil's irritation is shared by many travelers, who see themselves as captive to whatever prices retailers charge at a time they're spending more hours in airports and despite efforts by many facilities to prevent gouging.
…
Once you go through security," [Larry O’Neill] says, "you're at their mercy. It's like, 'We can charge anything we want. It's either you eat here or not eat at all.' "

Frequently purchased items at post-security shops in particular, such as bottled water, food and breath mints, are noticeably more expensive than in street stores, travelers say.

Wow! So once you’re inside security, you have less choice, less competition and pay higher prices! Dog bites man!

It turns out, there is one thing they can do to increase competition and cut prices:

Some airports are taking other steps to hold down prices, such as taking retailing out of the hands of a single, or "master," concessionaire and leasing to individual store owners.

"There's no competition" when retail stores are concentrated in the hands of a master concessionaire, says Mark Knight, president of BAA USA, an airport retail developer. "And what you get is higher prices."

At least 12 airports, including Boston, have eliminated the master concessionaire recently, Knight says, and the result not only is lower prices but greater overall sales.

Even with such competition and (claimed) efforts by airports to keep terminal prices closers to street prices, there still is an airport premium. An official airport industry spokesman claims that prices are higher because operating costs are higher. Airport backers claims that the average in-airport location generates 3x as much revenue per square foot — a somewhat misleading figure since may airport shops are much smaller than their external counterparts.

One thing only hinted at in the article: the role of airport owners in raising costs. USA Today quotes one concessionaire paying 2-4% more (as a royalty on net revenues). DFW airport reports the margin as 5% more than outside; Denver charges luxury retailers 10-14% of sales. Meanwhile, a NYC real estate blog estimates LAX rent as $238/square foot.

There is no alternate supplier and no competition for retail space inside the security gates (except in those rare metropolitan regions with two airports owned by two operators). Thus, there’s more than a little hypocrisy by airport owners (i.e. governments) who say “don’t gouge your customers” and “pay us as much as possible.”

As the “street price” movement has concluded, at some point price increases reduce total revenues. However, while both owner and concessionaire have different profit maximizing, and thus their interests are usually not perfectly aligned.

Not quite a love-hate relationship

In yesterday’s Merc, the column by Vindu Goel was entitled “Our love-hate relationship with Comcast.” I’d say he’s half right, which is more than we usually agree.

Comcast has been spending hundreds of millions with its Slowsky (and other) ad campaigns trying to make people think that it has a better Internet service than anywhere else, while SBC (aka AT&T) is attacking Comcast and other cable TV over misleading teaser prices. Apparently hyperbole and dishonesty is normal for telecom advertising (like laundry detergent of 40 years ago) but there’s clearly more of a factual basis to the AT&T attacks.

Comcast claims to have 16 megabits/second; all I know it isn't in my neighborhood. I don't know if we have poor infrastructure, too much shared bandwidth or it's just the normal latency problems, but under normal conditions the responsiveness is no better than DSL and noticeably worse than at work. We had Cox in San Diego for nearly a decade, and boy I wish I could have that service up here.

What is, clear, however, is that Comcast is a monopoly and acts like it in its pricing. It reminds me of 20 years ago, when people were mad at DEC for acting as though its customers had no other choice. Once they did — through POSIX, Unix, and Open Systems — buyers deserted DEC in droves.

Comcast will never have a cable TV competitor (in those markets where it has the franchise), but it certainly will face relentless competition from substitutes. About its only hope is that once SBC gets good TV market share that its arrogance will eventually match Comcast's. For consumers, that would be the nightmare scenario.

All good monopolies come to an end

Anyone who teaches strategy ends up teaching some aspects on industrial economics, specifically Michael Porter’s Five Forces. Generally instructors need illustrative examples of the two extremes: a highly competitive, low-profit industry and an oligopoly (or monopoly) with high profits.

As I’ve said before, if you want to make money, nothing beats a good monopoly. But a good oligopoly comes close: a favorite industry for illustrating this point is the pre-Napster recording industry, ca. 1995. (Obviously a lot has changed in the last decade).

With undergraduates, I need something to illustrate the concept of formal entry barriers, such as a government-controlled monopolies. Cable TV — one franchise per city — is pretty easy for most to understand. And, in fact, it’s been a very lucrative business for the past few decades to own.

This month’s (Jan. 28) Forbes looks at the recent decline in the market power of Comcast, one of the top 4 cable operators (a national oligopoly, each with a local monopoly). It focuses on the ability of the Internet to deliver content while bypassing the last mile monopoly for TV.

An interesting commonality between record labels and cable TV operators is that they didn’t face increased competition — the entry barriers to their traditional business remain as before. Instead, the threat comes from substitutes enabled by technological change — either things that weren’t possible to do before, or things that were possible but now have become more attractive substitutes.

Are substitutes the most likely cause of ending monopoly power? Another example is the world’s richest man (no not Bill Gates) who bought CompUSA — the biggest US computer store, pinched between general electronics retailers on one side and online retailers on the other.

Normally in teaching business we teach that profits are good and competition is bad. (Sorta the opposite of economics, where competition and consumer welfare are good). But in this case, substitutes can provide market entry for those blocked by the old entry barriers — openness that is bad for one part of the value chain is good for another part. It hasn’t changed the lot of independent record labels (yet), but clearly video producers have a way to bring content to market that they never had in the days of the big three TV networks and the subsequent cable oligopoly. (Not counting new business models like JibJab, which wouldn’t exist without the Internet).

NOTHING beats a good monopoly

Before I finished my last posting, I had grabbed the dead tree edition of Fortune from the department mailroom. Even more blatantly than previous years, Fortune, Business Week and the Wall Street Journal are using teaser rates and faculty promotion to get our help hooking business students on their respective periodicals. (I can see why it works — I’ve been reading the Wall Street Journal for over 25 years although — after this year’s redesign shrunk the space for news — I’m getting ready to dump the paper copy.)

As implied, the cover item was about Carlos Slim, the Mexican oligarch who’s now the richest man in the world (who others speculated earlier this year had passed Bill Gates). It was the first detailed account I’d seen of how Slim had made all his money.

Fortune presents the org chart and the Slim’s holdings, now worth $58.5 billion. The short version is that Slim was a savvy investor who bought 20% of the (newly-privatized) Telmex telephone monopoly — and then leveraged that into América Móvil, the Latin mobile phone franchise. The two holdings are now worth $13 billion and $31 billion, respectively.

At a time that the telecom industry was embracing liberalization, Slim got the government to guarantee monopoly protection for the next seven years — keeping competition out of the Mexican market at the one time there was foreign capital to available to create new competitors. Winning political influence was easy during seven decades of single-party rule:

“He made his billions because of an extremely close and advantageous relationship with the Salinas government,” says professor [George] Grayson of William & Mary. More recently Slim has been pragmatically investing in multiple parties, a common practice among Mexico's oligarchs.

Interestingly, this is one of the few places the liberal Fortune and the conservative WSJ would agree: Fortune doesn’t believe in monopolies, and the WSJ doesn’t believe in government distortion of the markets (whether through bribery, lobbying or sheer ignorance).

Clearly, if you can’t inherit a monopoly, the next best thing is to be able to buy one at below market prices. Such monopoly (or oligopoly) restraint of trade is a focus of the economic subfield of industrial organization — best known for Michael Porter’s five forces model studied by MBA students around the world.

IO economics has been criticized for over-emphasizing structural explanations for profitability. But real monopolies — like that enjoyed by Señor Slim — are still a sure path to riches. (Or more riches, as the case may be.)

Technorati Tags: antitrust

Baby Bells come out blasting

Back in February, Skype asked the FCC to open up cellular networks. While some called this a “Cartefone for cellphones,” Skype’s arguments were less about wireline voice and more about the FCC’s 2005 wireline datacomm (i.e. wired broadband) precedent.

If the FCC backed Skype, it would mean that VoIP software, hardware and service providers could bypass carriers’ voice services, a spectre that global carriers just hope will go away. Not surprisingly, the two largest US cellphone operators and their trade association are opposed, and on Monday they filed additional objections.

Over the past week, the CTIA has posted a flurry of reports and memos against the Skype petition at their website. There are objections from the CTIA, their high-profile lobbying firm, Verizon executives, and economic consultants hired by CTIA and Verizon. I suspect the two reports from economic consultants alone cost over $100K. Skype is unlikely to get any manufacturers to openly oppose the big carriers, so they are clearly outgunned unless they can get some nonprofits to take their side.

Interestingly, some of the objections to Skype’s petition are being made on antitrust grounds. But strangely silent in the filings is the company that now calls itself AT&T — really Southwestern Bell and all the parts of old Ma Bell that SBC Ed Whitacre was able to stitch together before he acquiring the AT&T name. As SBC got bigger, the acquisitions got more controversial, particularly when SBC gobbled up BellSouth (and with it the other 40% of Cingular).

The Reagan Administration thought it was a good idea to break up Ma Bell, but now SBC and Verizon (NY Bell) have built most of it back up into a national telecom duopoly. Maybe a company called “AT&T” doesn’t want to be mentioning “antitrust” in front of the Feds right now for fear of waking the ghost of William Baxter (1929-1998).

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