The Eternal, Infernal Disharmony in Being Half-Pregnant

When a regulator takes on the job of managing a market, even overseeing a market to ensure fair competition, they have to give some thought to what constitutes a Win for a buyer. They need to have some empathy with the buyers. What makes for happiness? Is it when they get a good deal? What makes a good deal then? When the seller is very considerate? When the buyer was really looking forward to what they were buying?

As we look at broadband as a market, an assumption we tend to make is that unless there's substantial choice, the buyers are not doing as well as they could. Sometimes we accept lack of choice as just something we have to learn to live with. Other times it leads to customer dissatisfaction. Every day we buy things and often we don't give a lot of thought to this equation, but I think it is central to the broadband economy and worth exploring a little further.

I just finished a real estate refinancing last week, and I had a very unsatisfactory experience working with the mortgage broker and the title company. It was pretty miserable, and I got to pay thousands of dollars in "service" fees for the pleasure. I think one thing that bothered me was the tremendous lack of concern about customer satisfaction, sloppy process, missed deadlines, missed documents, etc - a factor that I would say is directly correlated with the nature of that market, since this is an infrequent transaction where I have low familiarity with the purchase and little recourse if things go wrong. But I'm assured all those fees are there "because of the Legislature." So, I think that having a good buying experience is about a lot more than getting a good price. It's about a sense of fair play as well.

From the seller's perspective, I assume a sale with substantial margin is a Win. That could mean getting a high market price, or selling a product that has a low cost, which contributes to a high price. It could also mean lining up an account that will produce a long-term revenue stream. Or, landing a customer that will become a good strategic reference to lead to further business development.

I think one has a functioning market in place when there is some balance between buyers and sellers. When you think about it, isn't a successful market transaction the very definition of a Win/Win? A happy buyer and a happy seller should be the goal of every market transaction. And thinking about the longer term, I think that the overall goal should be not just market harmony, but sustainable market harmony, which implies a complex system in balance.

So backing up, going up to 50,000 feet, a long-term sustainable market can be had with competition or with no competition (but regulation), but rarely if ever with very little competition.

Market Harmony in a Market with Competition

When competition is present, competing firms work a number of angles in order to win business. They can compete on price, which is the natural way to compete if their product or service is widely available, making it hard to differentiate, even making it a commodity. They can compete on value or service, seeking a higher margin, if they have a product that is different or unique in some way. The best case for a seller is to have a product or service that has few or no substitutes, or that is difficult to switch from, so that the seller can charge a price with some flexibility, either seeking higher margins (premium pricing) or seeking larger market share (competitive pricing).

So back to what makes a happy buyer in a competitive market - that is, one with healthy competition? I'd call that a market where a substitute is readily available and where the cost to switch providers is not altogether onerous. I'd focus on two things: value and customer service experience.

a) Value. A happy buyer is one who receives fair value - that's a subjective assessment, because value has to do not only with the buyer's perception of price, but also with their perception of product or service quality. And satisfaction presumes that the purchase comes with a modicum of shopping, so that the buyer is aware of market conditions. The buyer needs to determine that they received a price that is about the same or lower than they could have received had they bought elsewhere. If the search cost is too high, often a buyer will be more satisfied even with a fairly wide margin in pricing - it just wasn't worth it to hunt for a bargain, so they opted to buy without much or any comparison shopping.

In contrast, an unhappy buyer is one who finds out after the sale that they made a bad deal, either by paying too much or by getting less than what they had expected for their money. Fear of this outcome can paralyze a buyer, or put them in the unhappy role of perpetual shopper, always looking for a better deal.

b) Customer Service Experience. A happy buyer is treated as if they were special - as if the seller really cares about their experience and wants them to return as a customer. A happy buyer should want to brag about their purchase and their seller. Conversely, an unhappy buyer gets treated like shit. They know it when the seller doesn't care about them, and they don't like it.

Market Harmony in a Market with No Competition

As long as it's managed and regulated well, a non-competitive market can still result in customer satisfaction despite the lack of choice, especially if other factors are present. A good example of such long-term stability and sustained market harmony is found with a public utility. In the absence of competition, a regulator serves to ensure that each side, both buyer and seller, receives a fair price and fair value.

So, the price should be high enough so that the seller recovers its costs and makes a rate of return sufficient to be able to raise capital to finance its operations and long-term capital expenses. And the price should be low enough so that any buyer that wishes to buy can. That is the description of the regulatory compact that electric utilities entered under in order to be granted monopoly status. And it's the system in place that enabled most of the nation's electric grid to be built. (I still don't know why that can't be a model to build a broadband infrastructure, but when I suggested it recently, I was assured that "times have changed.")

What makes a happy buyer in a regulated, non-competitive market? In a word, good, reliable service. Pleasant interaction with the seller. Personality makes a much bigger difference when the customer has no way to leave the seller, when the option is limited to either buy or not buy the product. That's why I was so dissatisfied in my real estate close. That's why I'm generally upset with my cellular carrier, because I'm locked into a two-year contract and they treat me poorly with some regularity.

Market Harmony in a Market with Very Little Competition

So, back to our Half-Pregnant scenario. I'd argue that it's difficult to achieve market harmony under circumstances of very little competition, because there's a lack of balance between the buy and sell side. The seller holds most of the cards in such a market and can charge a price set just high enough to keep the market sizable. In an untampered free market, such an inharmonious, out-of-balance market is generally a temporary situation, because the higher prices charged by sellers and the lack of harmony invites new market entrants to come in, so in the seller's view, the good times don't last too long.

And while low customer satisfaction need not be inevitable in this market scenario, it's not uncommon for sellers that enjoy such a circumstance to lower product quality to increase margins - again, it's natural and can become almost irresistible. You can just hear the argument in the board room - "why are we still spending so much on product quality when we don't even have any real competition?" - "we could be making even more margin in this market, are we nuts?!!?" "We owe it to our share holders (us) to trim costs and increase margins." And they can be less attentive to customer service as well, if they believe the customers are stuck with them. What's worse, cost cutting in that area will hurt service when reps become over stressed.

Of course, this market condition describes any number of broadband markets in the United States, and it's arguable that it also describes many telecom, cable, and cellular markets, especially in rural areas. Even in local markets where there are as many as three providers, which the FCC would deem "competitive," all have a strong incentive to keep their prices at about the same level and to avoid a price war. So, the prices stay high, the choices stay low, and that condition can persist over a long period of time.

Customers feel disempowered under these conditions and rightly so - they have little control over what they buy - for instance, I'm on my third cellular company in about five years, and I think they all provide pretty poor, pretty expensive service. Problem is, they are all about the same, I've come to realize. I try not to think about it. I find a coping strategy, and go to my happy place.

But there will come a time when there's real competition, and I will drop them like a rock. Executive management at incumbent firms in Half Pregnant markets know that customers like me feel this way, and that there are lots more like me on their roles. In their quiet moments, some of them toast each other and enjoy the good times while they last. But the smart ones are worried about their futures, because they know that however well they have things now, this condition is not sustainable over the very long term. And yet, another year goes by, and the profits roll in, and the markets consolidate further....