Cleland served as Deputy United States Coordinator for Communications and Information Policy in the George H. W. Bush Administration. Eight Congressional subcommittees have sought Cleland’s expert testimony and Institutional Investor twice ranked him the #1 independent analyst in his field. Scott Cleland has been profiled in Fortune, National Journal, Barrons, WSJ’s Smart Money, and Investors Business Daily. Ten publications have featured his op-eds. For a full bio see: www.ScottCleland.com.
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Market forces have produced a barrage of big competitive developments in just a few weeks. Dish’s disruptive $25b bid for Sprint could offer consumers a new choice of a lower-price, faster-speed, all-wireless platform for the first time. Google’s disruptive ongoing expansion of Google Fiber from Kansas City to Austin Texas and Provo Utah signals more and new consumers could increasingly enjoy the choice of a new, much-faster, near-comprehensively-integrated broadband offering. And T-Mobile is disrupting in yet another major way with a new maverick wireless pricing model that offers no contract plans and relatively more a la carte pricing.
These developments are proof positive why competition is so far superior to regulation. Survival is a powerful motivator to disrupt, differentiate and innovate, just as the opportunity for large profit and market leadership are powerful motivators as well.
While regulators slowly fret over how they can solve yesterday’s problems by fiat or opaque subsidy, competition is automatically devising alternative solutions to today’s problems, and inevitably is working on different solutions to tomorrow’s problems.
Dish’s $25b offer for Sprint spotlights a huge relative weakness in the Softbank-Sprint deal – no synergies. In the absence of a competing bid, Softbank could get away with the bluff of a no-synergies offer: a simple debt-capital-infusion and the “special sauce” of a billionaire’s-price-cutting-acumen.
However, the Dish offer matches one billionaire’s-price-cutting-acumen with another billionaire’s-price-cutting-acumen, and matches one debt-capital infusion with another debt-capital infusion.
Then most importantly, Dish raises Softbank’s bid substantially with a higher bid reflecting: real cost and marketing synergies, valuable 4G-ready fallow spectrum, and a uniquely-differentiated, lower-priced, more-mobile-video-friendly, all-wireless platform.
Real synergies are the mother’s milk of deals. Real differentiation is the key to competing successfully. Spectrum is hugely valuable to an all-wireless platform. And combining different assets in new ways to meet new needs is innovation.
Even if Softbank raises its bid, Sprint would be foolish to not take the superior Dish offer. A Dish-Sprint offering would be much more competitively disruptive than a Softbank-Sprint deal; it’s not even a close call.
This Dish-Sprint opportunity represents a real gut check for Sprint’s board and management (and for regulators and antitrust authorities as well). Do they really want more vibrant competition in the marketplace that will increase competitive pressure on pricing, bundling, and innovation? If so, they will go with Dish and make it happen.
However, if they are more wedded to complaining about insufficient competition and pursuing industrial-policy regulatory-favoritism and subsidies, both will go with the Softbank deal, and what they think would be best for (government-managed) competition.
II. Google Fiber Expansion
Just the prospect of Google entering local broadband markets around the country quickly — like it has with Google Fiber in Kansas City, Austin and Provo, with a much faster, more comprehensive and commoditizing competitive offering — is highly disruptive competitively. In a fixed-cost, capital-intensive market, that traditionally requires long-lead times and substantial share to be profitable, Google knows it can compete in the provision of broadband, despite many financial naysayers, by changing the game.
Google is no traditional over-builder. Google’s comprehensively-integrated service potentially offers more ways for Google to make money than any other competitor. Apparently Google is taking the concept of an integrated offering further than the “triple” or “quadruple play” of broadband, video, voice, pay-TV, and mobile; and further than the Apple-pioneered, integrated offering of hardware, software, and a store. Google Fiber can leverage the #1 search, Internet video, mobile operating system, and location services, the #2 social media platform, and competitive mobile devices, free full-service software, cloud services, content-store, shopping, payment mechanisms, etc.
Traditional subscription broadband service is an end in itself. For Google Fiber, it is both a subscription “end” but also a “means” to another business “end” – more web services advertising.
Just because current broadband providers can’t make money from giving broadband service away for free does not mean that Google can’t. Google is offering a 5MBs broadband service for free to anyone that will pay for the installation fee. This isn’t charity, it is a shrewd investment in greatly expanding the market for Google’s advertising, just like it has done before by offering a slew of services for free that people previously paid for – gMail, YouTube, Android, Maps, Voice, etc.
With Google Fiber’s paid and free offerings, Google knows it will be identifying and developing an all-Google customer cohort based on low-cost/free connectivity, devices and services: i.e. Fiber, Chromebooks, low-cost smart phones, free software, free video, free communications, free maps, low-cost/free payments, low-cost/free cloud services/storage, etc.
Google Fiber will continue to roll-out shrewdly where it makes sense because Google Fiber enables Google to meet most all of a person’s Internet needs in a way other competitors cannot.
And the competitive disruption of Google Fiber also continues because Google drives a hard bargain. Google is shrewdly entering markets selectively where regulators allow Google to control the extent of its build-out based on pre-orders, a freedom and massive cost savings that traditional broadband players have never enjoyed.
Kansas City, Austin, and Provo all have given Google substantial regulatory advantages, subsidies and benefits that were unavailable to their competitors. Simply, Google is enjoying a special national cherry-picking strategy, ultimately focusing on the ~20% of the markets it assesses that offer ~80% of the upside for Google.
Regulators must recognize that communications competition is going through a profound metamorphosis that is rapidly making existing communications law and regulation obsolescent, and at the same time creating new competitors and forms of competition like Google Fiber.
Regulators should focus on clearing away obsolete restrictions and micromanagement of a bygone era, so that there is modern system and a level-playing field, where similarly-situated competitors are treated similarly.
III. T-Mobile No Contracts
T-Mobile has made a big marketing splash recently by boldly differentiating its service by requiring no contracts and allowing users to pay installments for just a device not bundled with the wireless service plan. This maverick competitive pricing meets and satisfies a consumer need without the need for regulation. If there is sufficient demand for this type of pricing flexibility, other competitors will be compelled to offer it.
While regulators wring their hands that T-Mobile is not a strong enough competitor for their liking, they forget that competition works because it makes competitors that aren’t fully succeeding adapt, change and disrupt the status quo in new ways. Rather than trying to stand on the scales to help smaller competitors like T-Mobile and Sprint to compete, regulators need to open their eyes and see that more motivated competitors make for more competition.
In short, the U.S. communications marketplace is highly competitive and only becoming more so.
The big mistake that regulators can make now is imagining that competition should produce neatly-monolithic commodity price competition.
Real market competition in the communications marketplace is all about differentiation — meeting new and old needs in innovative ways. Market forces deliver this automatically, without Government.
Proof positive is the multiple major competitive disruptions we have witnessed in the last few weeks. Dish is disruptively proposing to redraw the boundaries of broadband facilities-based competition. Google is disruptively entering a high-fixed cost business via a non-traditional hybrid revenue model, and in doing so threatens to redraw the boundaries of broadband competition in yet another way. And T-Mobile’s pricing disruptions remind us of the competitive truism: necessity is the mother of invention.
Competition is alive and well in the U.S. communications marketplace. Regulators should stay out of the way and let competitors compete on a level-playing field.
[First Published at The Precursor Blog]