Andrew Kessler recently wrote a lengthy article laying the blame for Apple’s rejection of the Google Voice application squarely at the feet of AT&T. While Kessler’s arguments are mostly about wireless, and posts here have typically focused on wired broadband, the article makes some proposals for broader telecommunications reform that compel us to respond.

There is plenty of evidence that Kessler’s whole premise is wrong. For instance, Google Voice runs on Blackberries on the AT&T network. Apple allows other VoIP applications like Skype to run on the iPhone. There are reports that Apple is developing a product that would compete with Google Voice.

Even if you discount all of that, however, Kessler’s column is full of inaccuracies, faulty assumptions and outright misconceptions of the state of competition in the telecommunications space. These errors fall into four main areas:

• Misunderstanding and misapplication of technology concepts
• Business competition on features versus price
• Network investment and sunk costs
• Cable deregulation

We’ll break these down one by one.

Technology
Kessler’s suggestion for reform of wireless telecommunications is simple – “any device should work on any network.”

While that truly does sound like technology nirvana, unless we agree to one universal standard for every technology, it’s not likely to happen. Why? It’s due to the very thing Kessler claims to want – competition. As Victor Godinez points out in the Dallas Morning News:

Kessler’s insistence that “any device should work on any network” suggests that he doesn’t understand even the basics of cellphone technologies. T-Mobile’s and AT&T’s GSM networks are simply incompatible with Verizon’s and Sprint’s CDMA systems, no matter how much Kessler might think they are. That’s why, even when you unlock an iPhone, you can’t make it run on Verizon’s network.

Kessler makes a similar error when he suggests that “voice is data”. As The Social Telco blog points out:

While there’s a sense in which that’s true – all communication is ultimately “data” – it’s only true in the technical sense if it’s carried that way. Which it isn’t, on today’s cellular networks and most public telephone networks. Other than where voice over IP is used, voice is circuit-switched, which means it ties up an entire (virtual) circuit from end to end for the duration of a call, making it unavailable for other purposes. Data, on the other hand, is typically packet-switched, meaning that a data “connection” in fact only uses up network bandwidth when packets are actually being sent back and forth, otherwise freeing up that bandwidth for the use of others. As such, voice networks and voice calls use network capacity in a very different way from data, with different equipment required and different economics associated with them.

Wireless networks today are moving toward a new standard called LTE. The LTE standard will do two things. First, it will make Kessler’s assertion that “voice is data” more or les accurate as it does rely on IP for voice traffic. Second, it breaks down the barrier between CDMA and GSM networks. Verizon has suggested they’ll be using LTE by next year. These advances are being brought about by the very competition Kessler claims is thwarting them.

Kessler also suggests that connection speeds to our homes and phones should double every year, and suggests they have not. Here again, Kessler gets it wrong.

We explored exactly this topic on Cable’s blog after Robb Topolski made a similar assertion about broadband speeds and Moore‚Äôs Law. The fact is, since the inception of the 300 baud modem in 1978, broadband speed to the home has more than doubled every two years. We have not done a similar comparison for cellular technology since people have used wireless for data for a very short period of time.

Competing on Price or Features
While Kessler spends most of his space clamoring for competition in price, he ignores robust competition on features. It is a glaring omission given the economics of telecommunications.

Telecommunications is an expensive game. Cable companies have spent billions, as have the telephone companies, building out their networks. We have seen estimates that the per-home connection and acquisition cost for one FiOS customer is between $3,000 and $5,000. The same holds true for wireless when you factor in spectrum costs, towers, etc. It will take those companies a very long time to recuperate the sunk costs.

So, how do you compete to get that back if you focus only on competition on price? The answer is that you don’t. You compete on price, if at all, only to gain market share. Once you have a healthy share of the market, you stop competing on price and compete on features.

That competition on features is exactly what the iPhone represents. Ringtones, app stores, and other features are the core of competition when costs are roughly equivalent. Working in cable, we often hear arguments about price. They typically go like this:

Complaint: My cable (and/or broadband) bill is too high.

Reply: Well, then switch to Satelite/DSL

Customer: But they don’t offer (VOD, speed like cable, etc)

Reply: So what you’re really saying is you want all the features that cable offers, but you don’t want to pay for them?

In other words, the choice of which offering to choose comes down to features. There are, people will acknowledge, cheaper options. However, people don’t make decisions solely on price. They make them on perceived value and that includes features. I can get a phone that makes calls, and plays MP3s, and does other things, for less than I’d pay for an iPhone. But I want the perceived value of the iPhone. That’s the value of exclusivity. Do I have to use your network to get the phone I want, yes you do.

If you argue competition solely on price, though, Kessler suggests that AT&T Wireless margins are an “embarrassingly high” 25%. Does that point to a flaw in my argument? Not really. As Hance Haney at Tech Liberation Front points out:

Before we get to that, Kessler complains that margins in AT&T’s cellphone unit are an “embarrassingly” high 25%. He doesn’t point out that AT&T’s combined profit margin — taking into account all products and services — is only 9.66%.

AT&T is actually earning less now than it was legally entitled to earn when fully regulated — 9.66% versus 11.75%.

Haney also points out that those margins are required by government mandate, to subsidize landline service.

In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It’s called the “carrier of last resort” obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.

This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.

Network Investment and Sunk Costs
Let us pretend for a moment that Kessler’s notions of reform made any kind of sense. He suggests the root evil lies in “own[ing] a pipe between you and your customers,” and thus we should take pipe ownership away. Except, those pipes are already built and paid for.

The mobile carriers already paid handsomely for the spectrum they use. If the government were to take ownership, then those companies would have to be compensated for the billions they spent. You may recall the “open access” argument from a decade ago that proposed that it would be bad to let companies own their pipes because they could have exclusivity over the data that flows through them. Since the cable industry has invested more than $145 billion over the past 13 years, how should they be compensated? What of AT&T and Verizon’s investment in their networks because they want to compete with cable? Should that all be taken away with no compensation? And if it’s taken away, who can do a better job?

Companies are investing in networks to compete with each other. Is the competition and investment happening fast enough? Arguably not. But it is happening, and that competition is being spurred by exactly the concerns Kessler raises – demand for services, demand for speed, and demand for features.

Cable Deregulation
As we said, most of Kessler’s piece concerns itself with wireless. We have our issues with his facts and arguments there. However, given our employment with the cable industry, where we truly take umbrage at his comments is Kessler’s claim that one of the key elements of a new national data policy would be to “End municipal exclusivity deals for cable companies.”

Fortunately for Kessler, his work has already been done, since this was covered in the 1992 Communications Act. To quote from the section on “Franchising and Regulation”:

“…a franchising authority may not grant an exclusive franchise and may not unreasonably refuse to grant an additional competitive franchise.”

Over the last few years, many states have taken that federal mandate a step further and passed laws that took franchise authority away from the cities and placed it at the state level. The FCC went a step further and made sweeping changes to section 621 of the Cable Act and granted a federal franchise authority to further streamline the process.

Conclusion
There’s plenty of irony in Kessler’s piece. He argues for competition, which already exists. He argues against exclusivity and pipe ownership and in favor of “new, feature-rich and productive applications.” But if you can’t own the pipe, who will pay for upgrades? If you can’t have an exclusive offering of a product or service, why invest the money to develop such offerings? How will we get the “faster and faster data connections” that Kessler wants? If you can take away the ownership of infrastructure that is already built, why should investors have any faith in supporting a business affected by such radically sweeping changes?

Focusing on a strong broadband infrastructure is a good thing. Focusing on a national data plan, especially as voice actually does become data, makes sense. However, Kessler’s arguments, based as they are on faulty technical, policy, and business assumptions simply don’t add up to much.

In trying to quell the uproar over the government takeover of medical care in the US, Obama made a point that I think is really worth exploring. He said:

[I]f the private insurance companies are providing a good bargain, and if the public option has to be self-sustaining — meaning taxpayers aren’t subsidizing it, but it has to run on charging premiums and providing good services and a good network of doctors, just like any other private insurer would do — then I think private insurers should be able to compete. They do it all the time. I mean, if you think about — if you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems. (emphasis mine)

This argument really breaks down on a number of levels, and it’s worth a look at all of them.

First, let’s start with the fact that Obama’s comparing the most advanced medical care system in the world with the job of moving a package from Point A to Point B. Any schmuck can take a package – which has your name and address right on it – and get it from here to there. If I gave anyone reading this post an addressed package, you could jump in your car and drive it to the destination with minimal failure (allowing for flat tires, the recipient having moved and left no address, random explosion of the house, whatever).

The fact is, shipping isn’t a teribly complicated business. Yet even Obama admits that the Government option is the one that gets it wrong. He points out that FedEx and UPS are doing it right, but the USPS isn’t.

So that raises the next point of failure in his argument. It’s not like FedEx and UPS were doing it first, and the government created a new mail delivery vehicle to force FedEx and UPS to lower their costs. FedEx and UPS, to the contrary, sprung up in response to a near complete failure of the government option. They arose from the ashes of countless lost packages, and inefficient government bungling. They recognized a market for reliable package delivery.

Let us imagine, however, that we treat package delivery the way we treat medical care. In the package delivery business, you must a) declare the value of your package, and b) acknowledge that should it be lost or damaged, you will be entitled to only that amount.

In May of 1996, a man cut off his own hand believing it to be evil. He refused to let doctors reattach the hand, then sued them for not doing so. He claimed they should have known he was nuts and forced him to accept the reattachment of the hand. While this is an extreme example, this sort of frivolous suit is filed every day. Malpractice suits and insurance contribute a staggering amount to the costs of health care. The total amount can be debated, but a Congressional Budget Office Brief looking at malpractice insurance premiums paid by doctors rose twice as fast as medical spending between 2000 and 2002 – roughly 15%. For general surgeons the hike was even greater running at 33%.

In package delivery, the cost of package breakage doesn’t rise dramatically year over year. If it did, the companies would look at ways to reduce breakage and loss. Yet our government has ignored the skyrocketing costs of malpractice and malpractice insurance as a part of the reform debate.

Costs are a huge problem. We get that. But that raises another key difference between the healthcare debate and the President’s chosen analogy of package delivery. Research into package delivery technology isn’t a dramatic portion of the package delivery costs. Do they buy equipment? Yes. Do they invest in dfferent ways to scan barcodes and create shipping labels? Of course. Are they handwritten package slips a huge pain in the ass versus the barcoded, Internet-generated slips? I imagine they are. But unlike, for instance, pharmaceutical companies, the amount they spend on R&D is fairly constrained. They don’t spend a decade or longer trying to figure out a way to move ONE particular size and shape of package.

As a result, comparing the amount of money invested in drug research and clinical trials to the box moving industry is probably a silly thing to do. Yet their was POTUS, telling us that the two are somehow equivalent.

Looking at his argument, the one part of the example the President got right was when he said, “It’s the [Government] that’s always having problems.” If you think the same people that brought you Katrina, the US Postal Service, the missing $400 million dollar Mars Global Surveyor, the $600 hammer and the $900 toilet seat, and countless other blunders will do a better job with health of every American, look no further than the countless stories of Medicare and Medicaid fraud and abuse.

The fact is, Obama’s example probably gives us more to think about as an example of why we shouldn’t let government manhandle our health care system. As Obama points out, and as the famed economist Milton Friedman said, “The government solution to a problem is usually as bad as the problem.”

Let’s be clear about one thing. The economic disaster we find ourselves in is not entirely the making of Wall Street. For the Democrats in the audience, it is not entirely the fault of Republicans. For the Republicans in the audience, this is not entirely the fault of Democrats. This is, to put it plainly, the net result of the perfect storm of stupidity.

If you have ever read The Perfect Storm, there is a great explanation of the three weather phenomenon that came together to create the system that is the focus of the book. The movie glosses over the explanation, so read the book instead.

What we are witnessing this week is the same interaction of three deadly factors. Any one of the three would be destructive. In total, however, they have just cost you and I a trillion dollars. And don’t for a moment think the total will end there. Mark my words, this bailout has only begun to cost us.

The Three Factors

Under a Republican congress and Democratic President, Washington expanded a Carter era relic called the Community Reinvestment Act.

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.

In other words, banks will make loans for houses to people who are ill-equipped to pay them back. The “encouragement” came in the form of penalties for not doing so.

Add to that another bill passed by a GOP controlled Congress with a Democratic President. That bill, the Gramm-Leach-Bliley Act sought to:

Enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes.

In other words, prior to the law, Insurance companies could sell insurance, banks could do loans, securities firms sold stock, and never the three should meet. After the law, it was a free for all. Banks created securities out of the shitty loans they issued under the CRA, Insurance companies under wrote those while creating their own shitty securities, etc, etc.

Now into the mix you have to throw the American people. They look at the news and see home values going through the roof. The react the same way they did during the Beanie Baby craze. They rush out to get a piece of that action. They can buy a $5 stuffed animal and sell it for $300 on eBay, so they buy the hell out of Beanie Babies.

Unfortunately, economic laws will only support that for so long. The company will make more (thereby reducing demand for the things), people will lose interest, or some other force will enter the market and suddenly your left with crates full of stuffed animals rotting in closets. Beanie Babies were an artificial market.

In the same way, people saw home ownership as a great way to make money. Home flipping became the rage, people took out second mortgages to buy second homes, and suddenly everyone had to buy a house.

The Perfect Storm

The trouble is when you have people who can’t afford to buy houses meeting up with people who have to sell houses to keep from running afoul of laws designed to promote home ownership among the poor, you wind up with a) a guy who will lie about his income or b) a guy who will lie about the value of the house or the terms of the loan.

So suddenly a lot of people are invested in houses they can barely afford anyway, and the real terms of those notes go into effect. People can’t pay, so the value of that note becomes worthless.

Since you have built shitty securities on the value of that house, the value of those securities go into the toilet. When that happens, the debt that the mortgage company is carrying becomes unsustainable and the house of cards comes tumbling down.

This is exactly what we’re witnessing. We’re seeing exactly what happens when an artificial market comes tumbling down. There never was a market for housing for people who can’t afford it. The government created one, took their eyes of the guys who were managing it, and is now asking us to throw another deck on the house of cards so people who can’t afford to borrow can keep doing so.

DC is Fundamentally Broken

I have said that Washington DC is so fundamentally broken it is going to drag the rest of the country down with it. I am more convinced of that than ever today.

With this bailout, we’re solving nothing. We’re simply allowing people who shouldn’t have credit to keep on borrowing. We’re enabling addictive behavior. The Congressmen who voted for the bailout should be tried as traitors.

Despite all of that, I was forced to watch to politicians on TV last night both of whom blamed “the greed and corruption of Wall Street” for the mess while giving a pass to the incompetence and stupidity of Washington. Make no mistake. This dismal situation was the result of horrible policy that started with, and was supposed to be overseen by, Congress. They passed the laws that allowed this to happen and ARE TAKING ABSOLUTELY NO RESPONSIBILITY for the mess they created.

What’s worse, is both candidates for President, and both candidates for Vice President, appear to have learned absolutely nothing from watching this happen and are pursuing the same ridculous policies that have crippled our nation.

I believe you can absolutely count on two things.

First, when the next Administration is about 6 months or a year into its term, they will have to deal with an economic disaster of Biblical proportions. This is a band-aid fix for a missing leg. It’s stupid and will do nothing but punt the problem into an off-year when the sheep aren’t watching.

Second, if you think we dodged a bullet with this bill today, you haven’t seen anything yet.

The attention to earmarks that has been paid in this campaign highlights the hypocritical nature of the American electorate. We decry “the other guy’s” earmarks. When our guy is bringing back the fat, we praise him. When the other guy is doing it, we vilify him. It’s one of the odd ironies of our political system.

The fact is, we judge our elected officials by what they do for their state. The jobs they bring home, the scientific research centers located in our towns, the military bases, the bridges, etc. When someone is good at attracting that investment in their home state, we call them effective. If they fail at bringing federal dollars back home, we call them ineffective.

We hire politician’s to do a job where the goal is to get stuff for their state. We give them the power – through the nation’s checkbook – to get that stuff. Then, we demand that they not do their job. It’s ridiculous.

If earmarks are evil, and we want to get rid of them, then we need to fundamentally change the role of the elected official. We cannot support a system where their election depends on their ability to deliver for the people, and then blame them for delivering.

Banning earmarks outright would take more political will than Congress has ever had. It’s like challenging them to put down their machine gun and walk willingly into a knife fight. They know they have the advantage over their would-be rivals. As long as they bring back the pork, they don’t have to find a real job.

Why would they want to give up such a powerful tool?

Since political hacks are inclined to take credit for the sun coming up every day, I will be the first to declare victory in my ongoing campaign against the USDA Graduate School. An alert reader (holy crap! I have readers?) points me to this little passage in HR 6124 which became law in June.

`(B) TERMINATION OF AUTHORITY- The authority under paragraph (1) shall terminate on the earlier of–

`(i) the completion of the transition of the Graduate School to an entity that is non-governmental and not a nonappropriated fund instrumentality of the United States, as determined by the Secretary; or

`(A) IN GENERAL- The Secretary of Agriculture is authorized to use funds available to the Department of Agriculture and such resources of the Department as the Secretary considers appropriate (including the assignment of such employees of the Department as the Secretary considers appropriate) to assist the General Administrative Board of the Graduate School in the conversion of the Graduate School to an entity that is non-governmental and not a nonappropriated fund instrumentality of the United States, including such privatization activities not otherwise inconsistent with law or regulation.

`(1) CEASE OPERATIONS- Not later than October 1, 2009, the Secretary of Agriculture shall cease to maintain or operate a nonappropriated fund instrumentality of the United States to develop, administer, or provide educational training and professional development activities, including educational activities for Federal agencies, Federal employees, non-profit organizations, other entities, and members of the general public.

`(2) TRANSITION-

`(ii) September 30, 2009.’.

That’s right! The ridiculous waste of taxpayer time that is the USDA Graduate School must become a private entity or close its doors by October of next year.

Having flaunted its tax status to engage in direct competition with schools that don’t get such breaks, while still claiming to be “non-governmental” the USDA boxed itself into a corner. Apparently someone in government realized the ridiculous contradiction in calling it an NAFI while allowing it to use its government connection to skirt laws. So language was inserted to pull the plug on this $60 million boondoggle.

All I can say is it’s about time. Thank you to whatever House staffer followed my gripes about this and finally had the stones to kill it. Now the next question is, what bloated piece of bureaucratic crap do I set my sights on next?

P.S. I don’t actually believe I had anything to do with getting this killed, but I’ll be the first to pop the cork on a champagne bottle next October 1.

Update: My dear friend Anne was the first person to point out the absurd government abuse that is the USDA Graduate School. Any part I played in in getting it closed (which was none, but ignore that) starts with her.