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 (NASDAQ:AAPL) forced AT&T (NYSE: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 . . .”

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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