WTF?

The RNC’s Health Care Bill of Rights for Seniors

Specifically distressing is the second point:

PROTECT MEDICARE AND NOT CUT IT IN THE NAME OF HEALTH CARE REFORM: President Obama and Congressional Democrats are promoting a government-run health care experiment that will cut over $500 billion from Medicare to be used to pay for their plan. Medicare should not be raided to pay for another entitlement.

Since when are we about “protecting” medicare? It’s a bloated program full of fraud and abuse. If we guarantee it won’t be “raided to pay for another entitlement”, we’re essentially demanding that government create two conflicting and somewhat duplicative health programs – both of which will likely be full of fraud and abuse.

To a cynic’s eye, this ‘proposal’ is the “let’s rile and confuse seniors so they’ll get even more flummoxed” plan. It’s disgusting to me that the party of small government is pushing a plan that would guarantee bureaucratic longevity simply to curry favor with seniors.

I’ve got a better idea for a plan. Why don’t we make the government fix Medicare and Medicaid – thus demonstrating they have a clue – before we let them create yet another program. If they can’t be fixed, then let’s figure out how to dismantle them.

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 which will do two things. First, it will make Kessler’s assertion that ‘voice is data’ more or less 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’s 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 canceled 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.”

I commented earlier today on Twitter about this article. It seems the good folks in Congress have decided to vote themselves eight new planes – 4 Gulfstreams and 4 737s. This after bashing corporate CEOs for their “excesses” in traveling by private aircraft.

In response, I got the standard pushback that the costs for such things are reasonable because of the security details that travel with elected officials. I was specifically asked if CEOs travel with security.

I had similar discussions in the spring when the issue was $12 billion for new helicopters in the Marine One fleet. The President, to his credit, was at least smart enough to say, “I’ll make do with the old ones.” Congress has had no such thought. Instead, the Congressional plan to buy eight planes actually DOUBLES the costs and number of aircraft the Department of Defense had requested.

This strikes me as odd on three levels.

First, there is a size issue. The request included four 737s. These are not small planes. So we have to ask exactly how big these security details are. Do we really need planes that big to ferry them?

Second, I am guessing that many CEOs do travel with security, but I am guessing that most do not. As a stockholder, I’m of two minds on that. I would like to think that the CEO of a company I have invested in is protected from threats of kidnapping or assassination. I may count on that company to provide income in the form of dividends or retirement planning. It would be nice if that were safeguarded.

On the other hand, however, I appreciate that most CEOs understand that they are expendable. If something happened to them, there are a lot of people who could be brought in to fill that role.

This brings me to the last point. Most Members of Congress don’t share that understanding of their relative importance. And we as a people seem to condone their inflated sense of their place in the world. We make excuses for their excess because “they have to be protected”. Yet we must ask ourselves whether that’s really true.

Their jobs, by nature, are such that they can be replaced on a whim by us in regular intervals. A Representative, specifically, serves only two years at a time and can be fired by the public every 750 days. Yet they believe (and we allow them to believe) that they are critical to the function of our government. That they even have security details is absurd. You can argue that only certain Members in leadership have such protection, but their term of service is still at our pleasure. We, and the Constitution clearly feel we could do without them.

We coddle our elected officials. More specifically, we allow them to coddle themselves. Then we make excuses for their behavior because its easier than looking in the mirror and asking ourselves why we don’t throw them out when they get out of control.

We’re left with Congress deciding, contrary to the wishes of the Department of Defense, how many planes are appropriate and how much private access to aircraft they need.

Perhaps we need to rethink things and send a clear message by throwing out every Member who votes for these planes. They clearly believe they mean more to us than we think they do.

If we took away some of their perks, forced them to live like the common citizens they’re supposed to be, and specifically did away with security details designed to protect them from us, maybe they’d behave less like protected overlords and more like our representatives.

Since the day job launched a blog on telecom issues, I have confined my rants about such topics to that forum. This is a “gray area” kind of post. It’s not really policy related, but it touches on the Internet and video. I’m writing it here because it is not, in any way, the view of my employer.

At issue is a column by the Washington Post’s Rob Pegoraro about the recently announced TV Everywhere plan cable companies are pursuing. In his column Rob writes:

Yes, you read that right: To watch this new batch of TV shows online, you’d have to sign up for a traditional pay-TV plan.

The TV Everywhere idea has been a dream of some media people for the last few years; see, for instance, Mark Cuban’s defense of the idea. But I don’t get it. At all.

Well, my immediate thought is, “You’re right. You don’t get it.” But after that, words fail me.

First, Rob, this isn’t “a new batch of TV shows”. This is the content you’re already paying for, but you’re now allowed to view it online. In order to view Pay-TV online, you need to pay for Pay-TV. That’s sort of the whole point.

Pegoraro suggests that this is like requiring people to pay for a subscription to the Washington Post in order to take a college prep test course. Ummm… No. That’s not at all the same thing. TV everywhere is, however, the equivalent of saying, “If you want to eat your McDonald’s Happy Meal in the park, you still have to pay for the McDonald’s happy meal.”

Next, Pegoraro asserts that incredibly complicated things like “authentication” are way to difficult to comprehend or apply:

Set aside such operational issues as authentication (how do you verify that one person’s a Comcast/DirecTV/Fios/etc. customer and another is not?)…

Ummm… How do you know if someone is a Gmail user or not? Well, Rob, they’re called “accounts”. When you subscribe, they create one. They come with something called an “account number” or a “user name” and a “password”. When you want to access your service online, you type (that big flat thing in front of your monitor is called a keyboard) those pieces of information into a form, click “submit” and voila! You are authenticated.

Pegoraro, again:

If somebody wants to watch video online, let ‘em: Charge them a fee, make money off their attention through advertising–better yet, give people a choice between watching ads or paying for an ad-free experience. But don’t force them to sign up for an unrelated, non-Internet service.

Sure, because the “ad-supported” model is working so well for broadcasters and newspapers. Even YouTube (ad supported video) is projected to lose between $175 million and $470 million this year. Even TV advertising is a failing venture because people are skipping the commercials. Hollywood has begun writing the commercials directly into the script to stave off that practice. NBC recently announced that Jay Leno’s show in the fall will be “DVR-proof” to force advertising on the public.

Do such actions seem like the tactics of a business model that works?

So let’s take a business model that works (a hybrid ad/subscriber model) and force it to pursue a failing business model because you want content for free – content that may cost millions per episode to produce.

As for the comment that you are forcing someone “to sign up for an unrelated, non-Internet service”, that’s still ridiculous no matter how many times you repeat it. This isn’t a non-Internet service. It’s the same service you already subscribe to, you just have more ways to consume it now. However, if you want to consume it, you have to subscribe.

Finally, Pegoraro suggests that media companies should simply give up and make all their media available for free:

Repeat after me: Trying to introduce an artificial scarcity of easily-duplicated content on the Internet does not work. If you set up boundaries that make no sense to your customers, you will simply cede the field to bootleg redistribution of your work. Fighting this principle is like trying to push water uphill–with a broom.

Well, actually, Rob. Most cable content isn’t available online for free – even through bootleg. Some of the most popular shows on cable are HGTV’s design programs. I challenege you to go find a readily available bootleg source of them. Go ahead, I’ll wait…

…

…

Back yet? What about ESPN sporting events? They’re all available for free elsewhere, right? No? What about NFL games? Surely the satellite guys give those away for free and you don’t need to subscribe to get the Sunday ticket, right? No? Hmmm… Well what about HBO’s programming. You can get Entourage episodes for free all over the net, right? Really? Only the old ones that have been released for sale well after the air date?

How can that be? How can people control such things? How can they possibly defeat the bootleg distribution of their work? Because they don’t make them available online for free? Perhaps.

The fact is, despite Rob’s characterization of Pay-TV as “easily-duplicated content”, it’s simply not true. Look at YouTube. The most popular video sharing site will disable the soundtrack to your video if the audio patterns in the file match copyrighted content. Sure. You could cruise BitTorrents looking for content. And many do. Those sites are constantly defending against their copyright violations and go out of business regardless of the legitimacy they claim (AllOfMP3.com, anyone?).

You can also find websites that show grainy, handicam captured versions of first-run films – often before they appear in theaters. But the quality sucks. Under Pegoraro’s theory, movie theaters should simply give up the fight and make all movies (regardless of the cost to produce and market them) open to the public at no cost on day one. Better yet, just close all the theaters and let people download the movies for free? Heck, the studio could easily make up those $30 million salaries and production budgets by displaying an ad for mortgage caluclators right along side the film, right?