Telecom “Innovation”

NewYork Times technology columnist David Pogue is mounting a campaign against those canned messages that cellular carriers play after the greeting on your mobile phone voicemail (hat tip Mark Thoma’s son) – you know, the ones that say “to leave a voice message, wait for the beep,” only they take 30 seconds doing so, for th sole purpose of chewing up the mobile phone minutes of the person calling you. (According to Pogue, multiple carrier executives have admitted that the sole purpose of these value-destroying messages is to maximize airtime and hence revenue.)

This is exactly the same kind of “innovation” that we’ve seen in financial services and in health insurance. In each case, it’s what you get when you have too much concentration, so that a small group of oligopolists can effectively agree on the same business practice that generates profits at the consumer’s expense.

In this case, it’s particularly dependent on there being an oligopoly, because implementing the practice doesn’t even make you any additional revenue. Because you’re chewing up the minutes of the person calling your customer, you’re actually helping one of your “competitors.” (If the caller is also your customer, then the airtime is probably free anyway.) The only reason to implement this practice is because you can count on your competitors reciprocating the favor, and they do. Once you reach that equilibrium, there is no reason for any of the big four carriers to do the consumer-friendly thing and eliminating the timewasting messages. And mobile phone service is an industry with particularly high barriers to entry, since at this point you would have to buy spectrum in all of the major national markets, and that spectrum is owned by the current oligopolists. So there’s no way someone could start a new, consumer-friendly cell phone carrier.

It’s also revealing that Apple forced AT&T not to impose the mandatory message on iPhone customers. Apple, as a company that actually cares about every detail of its customers’ experience, insisted that AT&T remove the messages. More importantly, Apple had a product that had even more market power than mobile phone service – the iPhone.

This is just more evidence that companies pursue profits in other ways than providing better goods and services that customers will pay more for, and that many times they are successful – especially when you have concentrated market power, or you have products that consumers do not understand very well. If consumers cannot recognize the bad deal that is being forced on them, or if no one in the market has an incentive to offer them a better deal, then the bad deal can persist indefinitely, boosting profits and destroying value. The transfers of cash from customers to carriers does not destroy value – it’s just a transfer – but the fact that we all spend unnecessary time on the phone is a clear destruction of value or, to put it in economic terms, an inefficient outcome.

For the record, I’m proud to say that my voice mail greeting for several years has begun, “Hi, this is James. To skip this message press star . . .”

By James Kwak

35 responses to “Telecom “Innovation”

  1. By definition capitalists are aspiring criminals. No one wants to be a capitalist for one day longer than he has to be. The exceptions are rare enough that we can assert this as a rule.

    There’s no sector where the “entrepreneur” doesn’t dream of entrenched stagnation, where the “innovator” doesn’t dream of going through the motions with impunity, where “talent” doesn’t dream of getting to stop performing, where the “competitor” doesn’t want to stop competing.

    As they climb the ladder, they all want nothing more than to reach some comfortable vantage and pull it up behind them forever.

    By now this feudal entrenchment has matured. That’s why America has become congealed, calcified, stagnant, fetid, rancid. It’s why nothing can be accomplished in politics or society. It’s why every attempted reform is strangled in the cradle. It’s why every human initiative is stifled and smothered.

    It’s why nothing can be done within this system.

  2. Cellular voicemail itself is only free because it gets people to use more minutes.

    But there’s another “innovation” worthy of admiration here. Remember when the old ATT was the largest company in the world? It was the largest because it owned a huge “wire plant.” In every town & city there used to be a wire from the local central office to almost every home and business. Back in 1980, the fully allocated cost of underground cable was $5/foot. Cellular telephone service does not need a local wire plant–it is enormously less capital intensive than wireline service. If there was real competition or regulation, it would be much cheaper than wireline service, instead of much more expensive. I’d guess a good profit could be made if the companies charged $5/month, perhaps even as little as $1/month.

    There’s no reason I can see why wireless voice and moderate-latency moderate-speed wireless data couldn’t simply be a tax-funded public service. It would cost enormously less than the road network.

  3. some guy in a cube

    Excuse me, but here in the USA, we call these inefficient outcomes “an economy”.

    On a more serious note, the technology exists today to entirely bypass the wireless carrier’s “in-band” networks. It’s called “mobile broadband”. You could use an existing VoIP app such as Skype, to converse over it. But don’t look for it at a store near you anytime soon. And for that, you can thank, er, “inefficient outcomes”.

  4. “Apple, as a company that actually cares about every detail of its customers’ experience”
    Really? Is that why you can’t use an iPhone without also using AT&T? Is that why you can’t use an iPhone without paying for an expensive data plan? Is that why Apple wants to make it illegal for you to use your purchased iPhone the way you want to instead of the limited ways they want you to use it? http://www.wired.com/threatlevel/2009/07/jailbreak/

    Apple’s no different than the rest of them. Just another up-and-coming monopoly that nobody wants to notice. But they make everything so soft and furry so you’ll believe that they’re the “good guys” while everyone else is all bad and evil.

  5. A few more bits of telco creative accounting:

    Billing in minutes or half-minutes. This made sense when accounting was done electromechanically. Now it’s just a way to pad the bill by charging for the average extra half-minute that won’t be used. The voicemail delay probably ensures that a minute boundary is crossed.

    Voicemail 2: call which go to voicemail are “completed” and billable. As far as I know, every call to a cell phone always completes, even if it’s only to a recorded message.

  6. After dealing with telecom accounts for a number of years at various companies, I have to admit that the distinction between billing and fraud is no longer clear.

    I’m certain there’s a rational explanation…

  7. I tried to think of a single large business which does not screw the consumer at every opportunity. I couldn’t. Of course, we have Congress to protect us so I guess there is no reason to worry. Can’t wait to see health care reform. My guess is the reform will involve blackmailing healthy people, forcing them at gunpoint to buy coverage for which they have no need. Just received a credit card offer in today’s mail. It offers a zero % APR for one year but only on ‘balance transfers’. Can this be a trend of predators eating one anothers’ lunch? Let’s see: I move my seven cards to this one card; next month I move the new purchases on this card to new card B, soon I will be borrowing at zero percent in perpetuity just like GE and Goldman Sachs. Now if I only had a job…

  8. Carl Weetabix

    At some level the question becomes – why do we put up with this? Everywhere you turn we’re being lied to, cheated, manipulated, overcharged, overbilled, you name it. Yet, we just do nothing about it.

    I’m not talking about anecdotal incidents either. I’m talking about well documented, fully baked examples like you indicate above. I’m talking about Goldman Sachs getting paid 100 cents on the dollar when no one gets paid 100 cents on the dollar. I’m talking about TV ads for medications that guarantee health benefits that would take 10 minutes to prove false. I’m talking border ads on practically every web site that are absolute obvious bunk. I’m talking credit card companies changing rates AFTER you have a balance. These aren’t “iffy”, they’re blatant “in your face” black and white immorality.

    Sure, some of us (very few of us) write our Congressmen or the newspaper or protest, but given how pervasive the shenanigans you’d think we’d be out on the street on the verge of a revolution. Instead it’s just “business as usual”, “can’t do anything about it”, or “if they didn’t do it, someone else would.”

    It’s frankly weird when you get down to it. It’s almost as if we are fully aware of the reality which we exist nor the power which we hold.

    I mean collectively we all agree that this stuff is wrong and collectively we have the capability to make change if we could organize ourselves, but somehow we (including myself), can never make that happen.

  9. I really wonder why no tele com has come up with the funny little antenna, that would be attached to your telephone interface box, that sits on the side of your house, that would allow you to have cellular phone service into your house, at all 5 of your telephones.

  10. mdoerr2000, I think it exists, and if not it can be built very simply, but why would you want it? Wireline service costs less in the USA.

    Matt Fahrner, my belief is that the social contract has broken down, and the rich and powerful have no more respect for those less rich and powerful, and the “democratic” governments have been captured by their ideology. I do not think it is so different in the rest of the world, though I’d be interested in hearing Prof. Johnson’s thoughts on this.

  11. It exists. T-Mobile has Linksys units that you can plug a regular phone into once you get a SIM for it.

  12. Sprint has a version of this too (or at least used to, I can’t seem to find a link anywhere), but it’s several times more expensive than just a regular land line, not including the mandatory purchase of equipment.

  13. My take is that all professions have been captured by the big money. For example, respectable economists are generally bunko artists, pandering to the rich. Toadying economist is now redundant. One hundred years ago the subject was ‘political economy’. Everyone knew economics was political. Along came Marshall with his equations, the Keynesian consensus (although Keynes himself was too smart to be a Keynesian), and then we got Milton Friedman, who peddled utter nonsense and somehow captured the University of Chicago (how did that happen?). The only economists worth reading today are Veblen and Henry George. Veblen’s Theory of Business Enterprise is the real truth about business: that profits are made by sabotaging the machine process. The ultimate sabotage has been engineered by monopoly finance. Today, the name of the game is usury. Borrow from the fed at 1% and lend to consumers at 30%. Of course at least sixty percent of the borrowers will be unable to pay, so perhaps the game will not be all that profitable ultimately, but as Keynes said, in the long run we’re all dead, although what he meant was that in the long run WE’RE all dead. As for what individuals can do about this the answer is only one thing: opt out of the system and build a personal survival strategy. This is quite difficult. It requires many difficult choices, personal sacrifice, some good luck. Find a niche and fill it. Hopefully, you can find one that doesn’t hurt others. Good luck with that.

  14. Ἐγκώμιον Shill


    fact that we all spend unnecessary time on the phone is a clear destruction of value or, to put it in economic terms, an inefficient outcome.

    You are not actually tying up the tower. We have instantly downloaded the boiler-plate message into the memory of your schmaltz phone which replays it into your ear at agonizingly slow rate as our tower is diverted to more important communication. This procedure promotes social efficiency by delaying your daughter’s call to her boyfriend for the purpose of telling him to get lost then calling her girl friend to laugh about it.

    Whoops! I just forgot to ask. “Is this the party to whom I am talking?”

  15. Anonymous:

    As a former Apple Retail staff member, I do have a different opinion about the “no different than the rest of them” comment. Apple is a joint-stock corporation formed to create profit for its shareholders, of course–if it didn’t make profit, it wouldn’t exist. However, I believe Apple seeks to make its profit through the long-term benefit of its customers using their product, by not only selling CPUs and phones, but by also providing education, training, and technical support (sometimes free, sometimes at an additional charge). There are other tech/IT companies with a similar philosophy, I’m sure, but to tell you the truth I can’t think of any at this time.

    And as far as the iPhone goes…I love my iPhone, but AT&T can kiss my arse….

  16. Is communism/socialism better? I’d prefer the current system to being ruled by a mob boss like Kim Jong il or Stalin.

  17. Hmm, if the only thing you can come up with which might be worse than today’s American gangsterism is Kim Jong Il, I think that supports my point.

  18. It seems that the FCC is now investigating some of Apple/ATT’s practices. Of course, they’re doing so on behalf of Google.

  19. Sycophant of the Bourgeois

    Surely it was the regulators that tipped David off. Only our wise and magnanimous overlords could ever catch such awful abuse of consumers. The proletariat must fight the evil phone messages!

  20. I often think Chomsky may be right that basically now we’re experiencing a great social experiment to see how far we can push the “little guy”. That is, how far we can alter the “social contract” you indicated to favor the ruling class.

    This experiment has been carried out before with ugly conclusions for all involved, but also fortunately ultimately leading to the “Great Society” etc.

    However much has changed since the previous failures, particularly in the perfection of propaganda techniques (thanks to TV) and advances in military/police technologies (ie: control of the “mob”). In short, due to these advances, the game may be over.

  21. Cellular voicemail is free as it is necessary to terminate calls. Telecom voice service has little utility unless voicemail exists. Where consumers can add their own solution (landlines with answering machines), Operator voicemail costs money. Where consumers cannot add their own solution (wireless, Internet telecom), the Operators must supply it to insure the service is successful.

  22. I’m sure that Skype would love to pony up the capital to build out the wireless infrastructure. It is an expected outcome that mobile Operators would prevent revenue loss to a “free rider” like Skype.

  23. In reading these posts I wonder why, if so many educated people are disgruntled, doesn’t the system change. What benefit, force, or illusion works to keep us enthralled? (I refer to an aintique meaning of thrall.)

  24. Patrick, with all due respect, one would expect to receive a certain level of service/assistance when you’re paying 2-3 times the price…although last time I checked, Apple charged an *additional* premium for much of that service/Apple Care (at 120/year?). And as far as support, perfectly good Apple hardware is often made completely obsolete (even if it’s a year or two old) by just a simple Apple software change…whereas I’ve kept PCs going up to 10 years with very minor upgrades.

    That said, I’d love to own an iPhone too, but I quit AT&T a few years ago when they decided to triple-bill me for service I never received.

  25. I think the choice to buy AppleCare or some other extended warranty is going to be a judgement call to each customer. I admit, I almost never buy extended warranties–mainly because my credit cards tack on an additional year to get a refund if the item goes wrong.

    With AppleCare, I’ve received discounts on it because of either being an employee or my involvement in education. I’ve also had a laptop drive fail on me. Twice. AppleCare (through my employer at the time) paid for the replacement each time. That usually drives me to get the plan for a CPU.

    This is the best article I’ve seen discussing the pros and cons: http://www.tuaw.com/2009/07/20/to-applecare-or-not-to-applecare-that-is-the-question/

    enjoy!

  26. “mainly because my credit cards tack on an additional year to get a refund if the item goes wrong. With AppleCare, I’ve received discounts on it because of either being an employee or my involvement in education.”
    Right. Certain people get privileges. Most don’t. Usually the ones who most need it.

    Sorry, I don’t mean to be launching an anti-Apple debate, I just disagree with the post that Apple is necessarily more innovative than most, they do their share of price gauging and contract-fixing. Like you said, it’s just that they’ve got a slightly different business plan, they provide some level of customer service, but certainly at a (steep) price.

  27. Apathy. We’re used to being raked over the coals. So as long as we get to participate in the excitement that the marketing ploy promises (which might not even ever be fulfilled), we accept the abuse as part of our payment.

  28. I want to make a big-picture comment, basically ripping off something Rob Johnson said last week (http://www.newdeal20.org/?p=3476). Innovation is a pretty word that makes us all feel good, but at the end of the day—from cell phones to the financial sector—we’re not talking about anything more than companies looking for new ways to wring extra dollars out of their customers. We’re taught to praise and pave the way for innovation, but we’re really just the proverbial sheep being led to the slaughter.

    I’m not an economist, so there’s a lot of what Johnson says that’s above my head. But it’s a pretty compelling point.

  29. “…one would expect to receive a certain level of service/assistance when you’re paying 2-3 times the price…”

    No kidding.

    While I despise MicroSoft as much as the next guy, this idea that a company that charges roughly 2–3 times as much for a product is some kind of “nice guy” is laughable.

  30. “For example, respectable economists are generally bunko artists, pandering to the rich.”

    But _some_ economic science is correct—in particular, the theory of incentives.

    The incentives for economists to whore themselves out to the rich are plentiful.

    “The only economists worth reading today are Veblen and Henry George.”

    A huge part of the problem is that very few people know of or understand Henry George or land economics. More generally, very few people really understand rent-seeking. The few that do focus on rent-seeking by labor unions, not the rich and powerful.

    One problem actually is Marx. Many folks who would be on the right side of things are blinded by the legacy of Marxism, and view things only as a political competition between wealthy capitalists and workers. If you try to point out that the real problem is parasitic rent collection, and suggest e.g. that land tax is raised, they’ll raise the standard objection of the grandma who owns her own dwelling (and the land it sits on) forced out of her home by the big bad tax collector.

  31. Agoraphobic Kleptomaniac

    “”“Apple, as a company that actually cares about every detail of its customers’ experience”
    Really? Is that why you can’t use an iPhone without also using AT&T? Is that why you can’t use an iPhone without paying for an expensive data plan? Is that why Apple wants to make it illegal for you to use your purchased iPhone the way you want to instead of the limited ways they want you to use it?””

    Yes, yes and Yes. I’m not defending Apple here, but they want to control the experience so much, that they want every iPhone to act the same, as a complete package. If i pick up my sisters iPhone or my boss’s iPhone, they have the exact same toolset and usability. If Apple let you build your own package, you could forego the data plan, and have a really expensive device that makes phone calls (and would suck at that). They also don’t want you jailbreaking your phone and then complaining about your software that you broke.

    It’s a nice, well manicured, fenced-off garden. Sure there is stuff outside the garden, but they make it nice enough inside the garden that people on the outside accept the fence for the flowers they get. Kinda like Apples take on selling their own hardware to run its OS on.

    (full disclosure: I don’t own any Apple products, I prefer the wilds outside the nice looking garden)

  32. Amsused_in_sf

    Voicemail is not free in all countries. I have friends in Canada who don’t have voicemail on their cellphones because it would cost extra.

  33. “they want to control the experience so much, that they want every iPhone to act the same”

    Not really, the point of iPhone “Applications” is customization. Their recent banning of Google Voice applications has nothing to do with Apple Experience, it’s all about anti-competition. And there are numerous other examples of the same.

    Just for the record, I have an iPhone without the phone, it’s an iTouch. So it’s clearly not the user experience that they’re limiting, it’s the phone contract, because I can’t get the phone version if I don’t get ATT.

    “If Apple let you build your own package, you could forego the data plan, and have a really expensive device that makes phone calls (and would suck at that).”

    How do you know? Have you tried it?
    “(full disclosure: I don’t own any Apple products, I prefer the wilds outside the nice looking garden)”
    Better way to spend your day, certainly. But some of us have no choice. None whatsoever….

    “They also don’t want you jailbreaking your phone and then complaining about your software that you broke.”

    No, Apple says that they are afraid of us jailbreakers becoming terrorists with our phones. They say nothing about customer complaints in their latest anti-competition scheme. (See the article I linked to above.)

    The person who would go to the trouble of hacking/jailbreaking/etc of an Apple (or any) product knows better than to ask for support afterward. But the point is, nobody should have to jailbreak at all.

  34. that kind of “innovation” ain’t going away. they use it to squeeze out the smaller guys then have complete control.
    and since Obama doesn’t seem to keen on breaking up big companies, big corporations will continue to rule the world.