Competition in High Capacity Telecom

Choices for consumers – including small businesses – in the telecommunications arena have expanded rapidly in recent years. Contrary to claims and concerns from various politicians and/or regulators, the market is vibrant, innovative and competitive.

However, on July 7, The Wall Street Journal reported that the U.S. Department of Justice was taking a look at telecommunications firms: “The review is expected to cover all areas from land-line voice and broadband service to wireless,” including exclusivity deals between wireless carriers and cell phone/handheld device makers.

On the previous day, U.S. Senator Herb Kohl, chairman of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights, sent a lengthy letter to Christine Varney of the DoJ’s Antitrust Division and Julius Genachowski, chairman of the Federal Communications Commission. Kohl declared: “I am concerned that the concentrated nature of the cell phone marketplace could lead to future price increases for [text messages] and other cell phone services relied upon by millions of Americans.” While saying he supported more choice and competition, he got much his market information wrong (such as the actual prices of texting) and went on to support or call for rules and regulations that would restrain investment in wireless and other broadband infrastructure; have spectrum allocated according to political preferences rather than sound economics; and reduce investment and innovation in phones/handsets (such as iPhone, BlackBerry, et al). That’s anti-competition, and anti-consumer.

Just a glance at the industry makes clear that phone and cable companies are fighting hard for customers – both residential and business – in terms of land-lines, while the wireless market has exploded from 100 million customers eight years ago to in excess of 270 million today. There are nine independent firms each serving at least 4 million customers, and about 95 percent of Americans can choose among at least three competitors and more than half of the population picking among at least five. And while other industries are experiencing a dramatic falloff in investment during the current recession, telecom firms, unlike other industries in the current economy, continue to make large investments.

Senator Kohl, the DoJ and FCC should take note of a report from USTelecom released on July 16 titled “High-Capacity Services: Abundant, Affordable and Evolving.” Among the key points in an accompanying summary were:

• Newer competitive entrants, including cable and fixed wireless, are being drawn to the growth opportunity in high-capacity services. In addition to growing fiber-based competing carriers, the top five cable operators have announced plans to invest several billion dollars to expand high-capacity services for business customers. They already report annual revenues from these services of approximately $3 billion, with at least 15-20% annual growth. There also are more than a dozen fixed wireless companies providing high-capacity services throughout the country.

• There is an average of more than 9 fiber competitors in the top 10 metropolitan areas and an average of six fiber competitors in the top 50 metropolitan areas.

• Wireless backhaul is fast emerging as a competitive growth opportunity. With increased wireless data usage, analysts estimate the wireless backhaul market will triple in the next two to four years. Substantial new investment will be required to deploy the technology necessary to meet this demand. Dozens of competitive fiber suppliers, cable operators and fixed wireless providers either already serve this market or are actively targeting this opportunity. Wireless companies also have expanding self-supply options.

• Special access prices have continued to fall since pricing flexibility was granted in competitive markets. Previous independent studies (GAO, 2006 and NRRI, 2009) confirm that prices for special access declined from 2001 to 2007. More recent data supplied by participants in this study show that special access channel termination prices for major ILECs declined by 11% to 23% in inflation-adjusted terms from 2005 to 2008.

• High-capacity deployment and innovative offerings continue to proliferate. More offerings continue to come online from diverse competitors even as prices decline. Suppliers are deploying innovative solutions, such as carrier Ethernet and wireless broadband, to efficiently transport exploding volumes of traffic. Intense competition in retail areas that use high-capacity services—from corporate enterprise communications to consumer wireless services—further illustrate the competitiveness of high-capacity services.

These are big positives for consumers – most certainly including entrepreneurs and small businesses – and the economy. Elected officials and regulators must avoid imposing rules and regulations that will dampen investment, constrain competition, and thereby, reduce the innovations, improvements, choices and services enjoyed by individuals and businesses. The message to the government is simple: Don’t mess with what is so clearly working.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Connecticut Tax Hikes

Connecticut Governor Jodi Rell, a Republican, apparently has given up on tightening the state’s budget, and given up on helping the state’s economy, by proposing a bevy of increased taxes.

According to the Hartford Courant, Rell’s tax hikes include jacking up the state’s cigarette tax from $2 per pack to $3 per pack, which comes on the heels of a 2007 increase from $1.51 to $2. Also, Rell called for a 10 percent increase in the tax on alcohol, and a three-year, 10 percent surcharge on corporate profits (moving the top corporate tax rate from 7.5 percent to 8.25 percent).

As for the Democrats that run the state legislature, they want a higher cigarette tax as well, but also are seeking a big jump in the state’s personal income tax rate (moving the top rate from 5% to 7%) and the imposition of a 15 percent (down from 30 percent) surcharge on corporate profits (shifting the top rate to 8.625 percent).

The Courant reported: “Overall, Rell is seeking to raise taxes by $391 million, while the Democrats intend to raise taxes by $1.8 billion over two years.”

In Connecticut, taxpayers, including entrepreneurs, small businesses and investors, face bad ideas from a Republican governor, and even worse proposals from Democratic state lawmakers. So, the state’s policy climate for entrepreneurship and small business, which already is pretty poor (see SBE Council’s “Small Business Survival Index”), seems destined to only get worse – by how much is the question.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Support for ObamaCare?

The Wall Street Journal just reported that the latest Wall Street Journal/NBC poll shows that more people oppose than support the health care agenda being pushed by the President and Democratic leaders in Congress.

The Journal noted:

Support for President Barack Obama's health-care effort has declined over the past five weeks, particularly among those who already have insurance, a Wall Street Journal/NBC News poll found, amid prolonged debate over costs and quality of care.

In mid-June, respondents were evenly divided when asked whether they thought Mr. Obama's health plan was a good or bad idea. In the new poll, conducted July 24-27, 42% called it a bad idea while 36% said it was a good idea.

Among those with private insurance, the proportion calling the plan a bad idea rose to 47% from 37%.

People have good reason to be skeptical of what would be, in effect, a government takeover of health care in this nation, with an accompanying rise in costs and decline in quality of care.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Symposium on End of Economic Downturn?

National Review Online asked the following symposium question this week:

Now that the stock market is beginning to rally and profits are once again being reported, we called and asked them what they make of this good news. Did TARP work, or at least help? Should President Obama get credit? Will he?

I chipped in an answer, along with several other economic and financial experts.

Check it out here.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Commerce Secretary Locke and Emissions Tariffs

It’s bad enough when the U.S. energy secretary and the Democratic leadership in the U.S. House of Representatives talk favorably or vote in favor of protectionist trade measures in the name of fighting so-called manmade global warming, but the U.S. Commerce Secretary as well?

In case you missed it, speaking before the American Chamber of Commerce in Shanghai earlier this month, Commerce Secretary Gary Locke, according to Reuters, said:

It’s important that those who consume the products being made all around the world to the benefit of America — and it’s our own consumption activity that’s causing the emission of greenhouse gases, then quite frankly Americans need to pay for that.

Reuters went on to report:

Though U.S. President Barack Obama has expressed concern about the House "carbon tariffs", Locke said it was an open question whether he opposed them or not. "The president has not taken a position on any particular element of the legislation," Locke said. "It's simply premature to talk about individual pieces of the legislation without seeing it in its totality," Locke said, noting the Senate still has to pass its version of the bill.

Wait a minute, shouldn’t the Commerce Secretary be a strong voice for free trade, and reduced costs on businesses and consumers? And why is the Obama administration, once again, wavering on trade?

A few days later, Locke seemed to back off. Reuters again reported:

As the United States and other developed countries make costly commitments to address climate change, "developing countries like China must do the same," Locke told members of the Manufacturing Council, a private sector advisory group.

"They've got to step up. They've got to pay for the cost of complying with global climate change. They've got to invest in energy efficiency and conservation, but also very definitive steps in reducing greenhouse gas emissions," Locke said.

Of course, the irony that Locke and others miss is that U.S. consumers would pay either way. Mandated emissions reductions, at home and elsewhere, would jack up energy costs and prices paid by consumers, and/or tariffs would raise prices and trigger a trade war. There are no good options here.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

High-Tech Immigrant Entrepreneurs

Immigrants are critical to the well-being of the U.S. economy. And that most certainly includes immigrant entrepreneurs.

Earlier this month, the U.S. Small Business Administration’s Office of Advocacy released a new study by David Hart, Zoltan Acs, and Spencer Tracy, Jr. titled “High-tech Immigrant Entrepreneurship in the United States.”

Among the findings of a survey of “rapidly growing high-impact, high-tech companies” were:

• “We find that about 16% of the companies in our sample had at least one foreign-born person among their founding teams. This estimate is lower than that found in most previous studies of high-tech immigrant entrepreneurship. Nonetheless, our data show that immigrants play a crucial role in this vital economic activity.”

• “Policymakers are rightly concerned that government should sustain a healthy climate for starting and running high-impact, high-tech companies like those in our sample. Immigration policy, as it affects highly educated and highly experienced foreign-born individuals who might be drawn into high-tech entrepreneurship, is an important element of that climate.”

The full study can be read here.

What are the necessary policy measures? Provide broadbased tax and regulatory relief to spur entrepreneurship and investment in general, while implementing immigration reform that opens more doors for legal immigration.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council