Category: Economics

Is previous monopoly power to blame?

I have no opinion on this ruling’s merits, but I am mildly concerned.

A federal judge [last week] dealt a potentially fatal blow to Vonage Holdings, the Internet-phone service that offers one of the few alternatives to traditional carriers, by ordering it to stop using a technology that connects its network to the public telephone system.

U.S. District Judge Claude Hilton approved the request by Verizon Communications for a permanent injunction two weeks after a jury in Alexandria found that three of its patents had been infringed by Vonage, including one for the technology allowing the Internet company’s 2.2 million customers to call regular phones.

I don’t have the intellectual hissy fit that many libertarians have about intellectual property protections. I think they’re necessary and appropriate in capitalism. Intellectual property has subjective but identifiable value, much like other forms of property. If Verizon innovated a technology, to an extent, it should be able to reap the benefits of that.

That said, I’m a Vonage customer. I like its service. I refuse to pay Verizon’s prices, which I deem absurdly high. If Verizon wins through the appeals process and decides against licensing its technology to Vonage in favor of forcing voice-over-Internet protocol companies out of business, I will not become a Verizon customer. I suspect many VoIP customers feel the same. I have a cell phone, which will be enough. Frustrating, but enough.

If it ultimately wins, this should be an opportunity for Verizon to figure out that it can earn an additional revenue stream if it doesn’t kill the golden goose. The mere existence of VoIP should tell it that it’s been passed. Will it listen?

Ability to Speak Does Not Validate the Opinion

Many people fought for the title of stupidest logic yesterday.

The proposed merger of the nation’s two satellite radio companies came under sharp criticism yesterday from the chairman of a Senate panel that monitors antitrust matters, who said consumers probably would suffer if the deal goes through.

“You’d be virtually unrivaled, unchallenged in this area,” said Sen. Herb Kohl (D-Wis.), chairman of the Judiciary subcommittee on antitrust, competition policy and consumer rights. “You’d have no competition — what a business!” he told Mel Karmazin, chief executive of Sirius Satellite Radio, at a two-hour hearing.

Right, and satellite radio subscriptions are price inelastic. Whatever the merged company wants to charge me, I’ll pay. I’m a sucker and an automaton. If the merged company offered a service to take over my financial well-being and make choices for me, I’d give up control in an instant. I am beholden to the power of Mel Karmizin.

That’s pretty bad, but this is like what I expect to say after a kick in the head.

Mary Quass, chief executive of NRG Media, a radio company in Iowa, said local AM and FM stations cannot match Sirius’s and XM’s ability to send scores of channels to every corner of the country. Listeners and advertisers might abandon local stations, she said, and “consumers will be the losers.”

If listeners abandon local radio stations, they, as those consumed, will choose to “lose”. This makes sense in what understanding of reality? The government needs to step in because I might make a decision to abandon local stations. I’m unable to know that I’d lose by doing this. Thanks, but I can make up my own mind. Local stations already lost me, anyway. There are only so many Yuk Yuk D-Double-E-Jays I can suffer, and I’ve already passed my lifetime limit.

Of course, a company like Clear Channel owns lots of local stations, all over the country. Somehow this seems like radio companies send “scores of channels to every corner of the country”. Ms. Quass’ objection surely has nothing to do with being CEO of a competing radio company.

Just for fun, I like this euphemism for central planning of the essential satellite radio product:

Gigi B. Sohn, president of the advocacy group Public Knowledge, urged the government to set price caps and other restrictions on the merger. “We believe that a properly conditioned merger would be in the public interest,” she said.

Baseball gloves are “properly conditioned”. Hair is “properly conditioned”. This is plain vanilla government regulation designed to give consumers what they “should” get and to protect specific donors constituents. No doubt the latter decides the former. Goverment knows best, after all.

Buying Anti-Competitive Protection

Here is a perfect example of why I would never join a labor union:

Leaders of the AFL-CIO pledged yesterday to consult more widely with workers before making a decision about endorsing a candidate for the 2008 Democratic presidential nomination and strongly urged individual unions not to back any candidate until later in the fall.
…

AFL-CIO President John Sweeney and Gerald McEntee, president of the American Federation of State, County and Municipal Employees, outlined the evaluation process at a news conference in Las Vegas.

“The breadth and depth of our effort to engage union members and their families in the 2008 presidential endorsement process will be unparalleled,” Sweeney said.

He means the 2008 Democratic president endorsement process, of course. What about those union members who wouldn’t vote for a Democrat? If they would vote Democrat, what about those who support a different candidate? Too bad, I guess, except their money is compelled. That’s obscene.

Economic laws can’t be broken.

We must be careful to avoid news like this:

Mortgage applications jumped last week as borrowers emerged in droves to refinance their existing home loans as interest rates fell to their lowest since early December, an industry trade group said Wednesday.
…

Consumers tend to be sensitive to shifts in interest rate moves when they are looking to refinance their current home loans.

Too many reports like this and some people might have to admit that incentives matter. We wouldn’t want that.

The government doesn’t stimulate competition.

Today’s Congressional hearings into the proposed Sirius-XM Merger will go well:

He can expect resistance. “What I’m concerned about now is whether we’re creating a monopolistic situation,” Rep. John Conyers Jr. (D-Mich.), who will chair the task force hearing, said in an interview yesterday. “I don’t think it will stimulate competition, and it could very well take away from the competition taking place now in the industry.”
…

With FCC hearings yet to be scheduled, the new Democratic-controlled Congress will get the first public whack at the debate. Conyers, a champion of liberal causes and a 42-year House veteran, called it “a great discussion, because it gets into the whole question of where the consumer comes in when these mergers take place. And too often recently, they’ve been taking place with too little concern for the people who are paying the freight.”

Of course. Business is all about screwing the little guy. Companies have unfettered control over customers. You and I are just pawns in the global game played by the few capitalist elites. Evidence to the contrary doesn’t matter. Because a situation might arise in which politicians customers could deem themselves harmed, we must prevent that slight chance from occurring. Guilty with no chance of proving innocence.

Such a champion of liberal causes is exactly the target audience for the guy I saw today wearing a “Say ‘No’ to a satellite radio monopoly” button. Simple enough to ignore facts.

I love competition and choice.

I’m committed to the Xbox 360, but I’m not generally left lacking some title because of market pressure. (And with Gears of War, I win by committing to the 360.) This article explains that game publishers are responding to competition in the next gen console wars:

Screen Digest’s Next Generation Consoles: Games publishing, hardware analysis and forecasts to 2010 surveyed a number of major video game publishers and found that they’re taking different approaches to survive the tough video game landscape. “Publishers have responded by employing risk reduction strategies, including outsourcing, releasing games on as many platforms as possible (including handheld and last generation consoles), making sequels to popular titles and producing games based on popular movies,” states Screen Digest.

I wonder how a central planner would assess the next generation video game console market. Am I screwed by too many (3) choices so much that I’m paralyzed? No, but I don’t think that would stop a central planner from offering one and only one video game console, if I got a video game console at all. Still, even after betting on one, I’m left with the choices that gamers with other systems get because the market demands it. I’m not forced to buy anything, but if I want a particular game, I’m probably going to get it because publishers want to survive and make money, not screw me with the highest possible price. I love capitalism.

I know how to read Google Finance.

I’ve said enough for the week on the Sirius-XM merger, but a comment left at this opposing view in the USA Today editorial page highlights a flaw in investor thinking that is dangerous.

XM, you have higher valued stock as of this writing, get rid of the guy with the potty mouth and get on with your life. Why do you feel that you have to bale the other company out because of their poor management.

Sirius’ share price is $3.74, while XM’s share price is $15.10. Wow, XM is valued so much higher than Sirius. Except, Sirius’ market capitalization is $5.26 billion, while XM’s market capitalization is $4.05 billion. Sirius has the higher valued stock, by more than 25%. This is basic analysis.

The commenter should probably stay away from picking individual stocks and stick with mutual funds.

There is no such thing as a little bit free.

Comprehending the full range of anti-trade absurdity in Harold Meyerson’s preposterous column in today’s Washington Post would probably be impossible. It would definitely require a point-by-point analysis to grasp the scope, but it’s not worth that much effort. Instead, this key excerpt explains the problem.

These domestic policy proposals all have merit; the question is whether they’re remotely sufficient to the challenge of a globalized economy. In fact, there are nations with advanced economies that trade even more than we do and have still managed, chiefly through domestic policies, to retain high levels of economic equality and vitality: the nations of northern Europe. Trade constitutes a higher percentage of Scandinavian nations’ gross domestic product than it does ours, with little of the downward-leveling and, accordingly, anti-trade backlash that we experience. Their secret is a series of job-training and placement policies, a bigger and better-paying public sector than ours, and the fact that their leading trade partners are other high-wage European nations.

The cost of creating this economic security while remaining globally competitive isn’t cheap. In the March issue of the American Prospect (which I edit), my colleague Robert Kuttner calculates that these nations devote roughly 15 percent more of their GDP to governmental outlays than the United States does. That pencils out to roughly $2 trillion a year that we’d have to shift to the public sector to build an economy in which globalization wouldn’t be viewed as so dire a threat. Neither Rubin, a true believer in balanced budgets, nor anybody functioning in the real world of American politics is calling for anything this far-reaching to reshape the U.S. economy.

There is a complete mish-mash of concepts here. Free trade must somehow be fair to be deemed acceptable. My Meyerson uses the term decent capitalism to explain his idea of what trade should be. He’s entitled to that idea, but he seeks to impose his idea of decent onto everyone. This is classic central planning, which is not capitalism. People can choose “decent” in their trade, but Mr. Meyerson is merely proposing socialism.

Specifically, we should push another $2 trillion per year into the public sector to promote capitalism? That makes no sense. It would be better if Mr. Meyerson admitted that he hates capitalism becomes some people don’t win equally. That would be honest. Instead we get babbling about how we should increase public spending to redistribute into equality. We should buy off the disgruntled so they’ll abandon some of their antagonism. Please. Grow up.

“You see yourself as some sort of humanitarian, don’t you?”¹

Now that I’ve had a day or so to digest the proposed Sirius–XM merger, I have a few more coherent thoughts about it. As a Sirius investor, I think this is ultimately the right deal. I know that CEO Mel Karmazin is offering the usual talk of synergies and cost savings. This is standard fare for such transactions. I have no doubt a combined company will realize some of that, but I’m not silly enough to assume it’ll be grandiose or immediate. Any significant benefit from this is years away, at least. I’m okay with that because I’ve invested for the long term. Most of the time I only know the general Sirius share price. When my shareholder ballot arrives, I’ll check “yes” with realistic expectations.

As a customer, I’m thrilled by this deal. As I mentioned, the ability to receive Howard Stern and Major League Baseball on one subscription is irresistible. I find Sirius’ radio programming better (particularly the original MTV VJs on The Big ’80s), and I’m a devoted Howard Stern fan. Those two items are year-round. That’s why I subscribe to Sirius. But the absence of Major League Baseball broadcasts is a huge frustration. This merger would solve that, even if the combined company offers a “cafeteria-style” selection of programming, as I’ve read. I can live with that. I don’t really care to have Oprah, Bob Dylan, Opie and Anthony, Nascar, or Martha Stewart. Give me Howard Stern and the Phillies for a reasonable price, and I’ll be a subscriber. To get me, it’s that simple.

However, the information announced so far is insufficient. The FCC and Department of Justice will have questions. First, Sirius and XM must convince the government that their market is not satellite radio, but audio entertainment. (I’d cite a reference for the term audio entertainment, but I don’t remember where I read it. I’ll give credit if I stumble upon it again.)

My audio choices at work are a perfect example. During a typical day, I’ll listen to Stern in the morning through my Sirius subscription. When that’s done, I’ll move on to my iPod and whatever music appeals to me at the time. Or maybe an audiobook. Then I might switch over to an internet radio station. On my commute home, I usually listen to terrestrial radio. When I get home, I have cable television, Netflix, and Xbox 360.

Every one of these things competes for my time and money. I can afford various subscriptions for those that require one, but if the programming on any one of them becomes stale or the price exceeds what I think it’s worth, I’ll cancel it. That’s the fate that HBO faces from my household as soon as The Sopranos is done. It’s barely $10 per month, but it isn’t worth it to me. I’m capable of making the decision better than the federal government, regardless of the implied public trust built into the artificial market created by government satellite licensing.

The short-term implications of this deal are also apparent, both as an investor and a subscriber. Sirius and XM work on separate signals, so each company’s hardware is incompatible with the other. I’ve been thinking about upgrading my Sirius receiver since the unit I have is several years out-of-date. But I don’t want to spend $300+ on a new receiver with all the features I want if I’ll have to dump it in a year when (if) the merger wraps up. I’ve seen no concrete answers on this, only that the companies are working this out. That’s wonderful, but current subscribers are left out in the interim if they want to upgrade.

As for potential subscribers, what incentive will they have to sign up now? The rational decision is obviously to wait this out until the executives offer answers. That will hurt both companies financially until they decide. That makes me nervous realistic about any short-term bump in the share price from this deal. The downward pressure on revenue and subscriber growth, which is what this industry needs least right now, is evident. The only responsible choice is for customers and potential customers to get answers soon. Essentially, I want the Heroes approach to answering questions, not the Lost approach.

I understand the hurdles this merger will face. In the end I think the government should get out of the way let it proceed. It will benefit customers when viewed with the correct understanding of the combined company’s market competition. I applaud the deal with guarded enthusiasm.

Full disclosure: Several times in the past, I subscribed to XM. For a brief time, I owned XM shares. For what it’s worth.

¹ The title of this entry is a quote from Heroes. Sylar said it to Mr. Bennett. I think we might be able to ask the same thing of the federal government as it reviews this deal.

Dividends are an umbrella.

Here’s an essay from Robert Samuelson on the risks of global finance, and there isn’t one proposed government intervention. I’m impressed. That’s refreshing.

“Liquidity” is a common, but confusing, economic metaphor. Financial markets (say, stock and bond markets) are said to be “liquid” when it’s easy to buy and sell. Transactions flow smoothly. By contrast, either buyers or sellers are scarce in an “illiquid” market. Prices move sharply, up or down. Markets can also have too much liquidity: Investors may take increasingly large risks to put their abundant funds to use. “Bubbles” can form. Losses may follow.

We now have evidence of that.

Mr. Samuelson offers recent subprime mortgage losses as an example. It’s true enough, but I would take his idea a step further and explain the reasonable alternative when corporations get into “excess” liquidity. When in doubt, return it to shareholders. What makes executives believe they’re significantly better at finding uses for those funds? The new dividend doesn’t need to be permanent, just an acceptance from management that they can’t always find investments with a risk-return ratio suitable for their business.

Sure, those subprime mortgages will work out well for some mortgage companies. But if the company offering them isn’t normally in the subprime market and is now offering loans simply to utilize excess cash, it ignores risk relative to what its business deems reasonable. That’s unwise and bad for shareholders. It would be better off giving the money to them. It’s their money, after all. Let them judge how they want to invest (or spend or whatever).

I’ve oversimplified, of course, because there is nuance here. While Mr. Samuelson is correct that “‘excess liquidity’ often evaporates through losses”, it doesn’t have to be that way. Take the next step. How do we utilize excess liquidity without seeing it end in losses?