telephone service's broad economic importance

A quantitative indicator of telephone service’s importance to the economy is the volume of toll-free calls.  These calls are typically made from an individual to an organization that provides services to individuals across a wide geographic area.  Offering toll-free calling encourages individuals to call  and emphasizes a company’s willingness to provide services.

In the U.S. about the year 2000, every adult made on average roughly 250 toll-free (1-800) calls.  That’s more than one call every other day.  That indicates both that the cost of telephone calls was significant for a large number of calls, and that a large number of calls were directly related to economic transactions or service provision.

More recent data on U.S. 1-800 calls are more difficult to interpret. In the early 2000s, regional Bell Operating Companies (RBOCs), which provide the majority of U.S. local telephone lines, were authorized to provide calls between parties located anywhere. The RBOCs thus gained the opportunity to retail geographically comprehensive 1-800 service.  In addition, the growth of mobile phone use has shifted 1-800 call origination from wireline local exchange companies to mobile phones.  The 40% drop in BellSouth 1-800 queries (wholesale to other telephone service providers) from 1999 to 2008 thus isn’t surprising, but Pacific Bell’s nearly constant volume of 1-800 queries across that period is.

Falling telephone rates and changes in telephone addressing are likely to cause toll-free calling to contract in the future.  If the marginal cost of calls are zero, such as in flat-rate service or large-bucket calling plans, toll-free service doesn’t lower the cost of calls. Moreover, toll-free calling through clicking on a hyperlink eliminates the need to have a single, brand-identified 1-800 number.  Brand names have enduring value.  Memorable 1-800 numbers have recently sold for millions of dollars.  But if these numbers don’t need to be entered (“dialed”) to make the corresponding call, the value of 1-800 branded numbers will vanish.

A future decline in 1-800 calling will be associated with voice communication services being more tightly integrated with a wide range of economic transactions and services.  eBay’s divesting from Skype doesn’t imply that the future of voice communications is a stand-alone service.  More economic separation of Skype from eBay gives Skype a bigger field for play. Telephone service has broad economic importance.  That fact will be an important determinant of future industry structure.

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Data:  Online spreadsheets estimating total U.S 1-800 calls in 2000, along with Pacific Bell and BellSouth public tariff data on 1-800 calls and rates, 1993-2009 (also available as an Excel workbook).

bundling verbal work in ancient Rome

In ancient Rome, elite men competed intensely in verbal arts. They evaluated each other at the fine granularity of phrases and specific word choices. [1]  Epigrams, compact verbal expressions, were highly valued.

In these circumstances, a Roman orator c. 100 GC described his business strategy for a speech that he hoped to sell widely:

I have certainly tried, by varying the character of the style, to get hold of all sorts and conditions of readers, and though I am afraid that each individual reader will not find every single passage to his liking, yet I think I may be pretty confident that the variety of styles will recommend the whole to all classes.  For at a banquet, though we each one of us taboo certain dishes, yet we all praise the banquet as a whole, nor do the dishes which our palate declines make those we like any less enjoyable.[2]

While a speech today isn’t usually considered a bundle of goods, the strategy described is essentially that of bundling. Recent analysis of bundling has identified favorable economic circumstances for bundling:

The bundling strategy is particularly attractive when the marginal costs of the goods are very low, when the correlation in the demand for different goods is low, and when consumer valuations for the individual goods are of comparable magnitude.[3]

The marginal cost of short passages in a speech are very low. In addition, hearer valuations of such passages are likely to be of comparable magnitude. Pleasurable or unpleasurable, an oratorical sentence itself can’t create a fortune or cause death.

What about correlation in demand for different style passages? Modern textual works tend to have a fairly uniform style designed for the rather predictable preferences of the target audience. Perhaps the author’s intended Roman audience had more disparate stylistic preferences than typical modern audiences.

Bundling in the communications industry today tends to be considered in terms of content and information goods.  Styles, however, can also be aspects of bundles.

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Notes:

[1]  The Elder Seneca, recounting rhetorical exhibits for his sons so as to instruct them, declared:

Who would put up with a man saying of siphons: “They rain back at the sky,” and about sprays, “perfumed showers,” or using the phrase “chiselled forests” of a spruce garden, and “springing glades” of a picture?  Or what I remember him saying of sudden deaths one day when you took me along to listen to him: “Every bird that flies, every fish that swims, every beast that roams finds burial in our stomach.  Now ask why we die suddenly: it is on deaths that we live.”  Should he not have paid us for that with his hide, even if he had already been manumitted?  I’m not one of those very rigid judges, determined to direct everything by a precise rule.  I think that many concessions must be made to genius — but it is faults, not monstrosities, that we must concede.

Seneca (circa 37 GC), Controversiae 10, preface 9,  quoted from Declamations, trans. M. Winterbottom (London: William Heinemann, 1974) p. 361.  Seneca’s willingness to forgive faults for genius echos that of Longinus, On the Sublime, Ch. 36.  Both Seneca and Longinus indicate a culture acutely concerned about stylistic details of short expressions.

[2] Pliny the Younger, Letters, 2.5: “To Lupercus.”  For additional evidence of Pliny’s relation to commercial booksellers, see also Letters 1.2, “To Arrianus,” and 1.8, “To Pompeius Saturninus.”

[3] Bakos, Yannis and Brynjolfsson, Erik, Bundling Information Goods: Pricing, Profits and Efficiency (April 1998). Available at SSRN: http://ssrn.com/abstract=11488 or DOI: 10.2139/ssrn.11488

perverse incentives under incentive regulation

Incentives in incentive regulation, as in many other types of regulation, depend on operational details.  Pacific Bell’s public rate detail filings under its FCC interstate communications services price caps illustrate the importance of obscure details for the operation of price caps.

Among the thousands of Pacific Bell rate elements filed from 2003 to 2009 are some revenue-aggregate rate elements.  These elements have notional demand or rates (the notional form has actually changed across years) of 1.  For example, from 2003 to 2009 Pacific Bell filings have included “miscellaneous revenue” rate elements. The demand is reported as 1, and the rate as the total revenue, or vice versa. In the 2009 filing, such miscellaneous revenue totaled about $37 million.  Revenue for expediting orders has been similarly reported.  It totaled about $18 million in the 2009 filing.

Price caps don’t work effectively with such aggregate revenue elements.  These elements treat price caps as revenue caps.  Revenue caps have much different incentive properties than price caps.  A revenue cap constrains a firm’s ability to grow demand for its products.  In particular, providing extra services reported as miscellaneous revenue and providing additional expediting services appears like an increase in prices.  That’s fundamentally inconsistent with the basic idea of prices caps.

Both BellSouth and Pacific Bell have include aggregate credits (negative revenue) as rate elements in their price caps.  Since 1995, BellSouth has included in its price caps negative revenue, without any demand or rates, for Service Assurance Warranty (SAW) credits.  In filing year 2000, these credits amounted to about $11 million.  These credits are money BellSouth pays its customer for BellSouth service outages.[1]  Hence BellSouth service outages penalized through payments to its customers function like price reductions in price caps.  Price caps are not meant to encourage service outages.

Pacific Bell has also included aggregate credits (negative revenue) as rate elements in its price caps.  In the Pacific Bell filings, these credits are discounts associated with various types of volume and term rate plans.  Just as for miscellaneous revenue, the discount credit revenues are reported with demand of 1, and the rate as the total revenue, or vice versa.  From 2003 to 2008, the negative discount credit revenue averaged $28 million per year.  In Pacific Bell’s 2009 filing, discount credit revenue soared to $120 million.  These credits are not easy to associate with any particular prices, but they function like price reductions under price caps. Discount credits reported without any associated demand and rates obscure actual prices under price caps.

The obscurity of discount credits is not merely a theoretical problem.  Managed Value Plan (MVP) credits account for all the discount credits in Pacific Bell’s 2009 filing.  MVP billing discounts include commitment discounts that grow from 9% in year 1 to 15% in year 5.  MVP billing discounts also include service level assurance discounts of up to 2% for Pacific Bell failure to meet agreed service quality standards.[2]  To the extent that MVP credit revenue in Pacific Bell’s price cap filing includes such credits, the situation is like that for BellSouth’s Service Assurance Warranty credits.

Even assuming that Pacific Bell’s reported MVP credits in 2009 include service quality failure credits, the MVP credits are large relative to corresponding reported service revenues.  For example, Pacific Bell reported about -$37.8 million as “DS3 MVP credit” in its 2009 filing.  Pacific Bell also reported a total of $144.8 in price-cap DS3 revenue in its 2009 filing. Assuming the largest (year 5) MVP credit of 14% plus 2% for service quality failure implies DS3 price-cap MVP revenue of  $236 million.  That’s nearly $50 million greater than the DS3 revenue that Pacific Bell reported under price caps, before subtracting credits (negative revenue). Assuming an average discount of 12% (year 3 discount) plus 1% for service quality failures, and assuming half of reported DS3 revenue is not associated with MVP services, then reported price-cap MVP credits imply price-cap MVP service revenue $180 million greater than what was actually reported under price caps. These discrepancies highlight that Pacific Bell’s total discount credits are difficult to relate to particular price-cap service volumes and prices.

Incentive regulation creates additional incentives for regulatory obscurity.  Compared to more directed regulation, incentive regulation tends to be associated with more diffuse policy goals. More diffuse policy goals imply greater difficulties in comparing policy goals to outcomes.  Less focus on meaningful, concrete, outcome-oriented policy goals increases incentives for regulatory obscurity.

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Data: Pacific Bell rate detail, 1994-1999; Pacific Bell’s undetailed rate elements; BellSouth’s Service Assurance Warranty credits.

Notes:

[1] BellSouth’s Service Assurance Warranty credits are described in BellSouth’s FCC Tariff No. 1, Section 2.4.4. For details on their application in a contract tariff, see Section 25.29.1.(E)(2)(b) (Contract Tariff – No. 026).

[2]  For MVP billing discounts associated with volume and term commitments, see Pacific Bell’s FCC Tariff No. 1, Section 22.3.(E)(3).  For MVP service level assurance discounts, see Section 22.3.(E)(4).