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The views and opinions expressed in this submission are solely those of the authors and do not represent the views of the Department of Justice.
| Supplement to Verizon Symposium Comments |
This paper supplements Verizon's previous submission regarding the state of video competition and responds to the Department's follow-up questions. First, it demonstrates that, despite improvements in the past year, the local franchising process continues to pose barriers to entry. Second, it describes Verizon's pricing for its FiOS services. Third, it shows that Verizon's term and package discounts for video services are highly valued by consumers and promote competition.
The Department notes that a Wall Street Journal article reported Verizon has deployed FiOS to a greater percentage of homes in Cablevision's territory (25 percent), which lies mostly in New York where there is no state law making it easier to obtain cable franchises, than in Comcast's and Time Warner's territories (4 percent), which lie partly in states that have enacted laws simplifying and expediting franchise approvals. The Department asks, "[g]iven these statistics, how big of a barrier to entry is the local franchising process," and asks whether there are "statistics showing that your entry is faster in states with state franchising laws than in those without such laws."
As an initial matter, Verizon is willing to provide to the Department on a confidential basis the numbers of lines of FiOS TV it has deployed and is deploying on a state-by-state basis. Those numbers show that Verizon has sought to deploy its competing service both in states with higher and lower entry barriers, and that Verizon's entry has been significantly slowed down by the need to obtain franchises. As of the end of January 2008, Verizon has deployed its FiOS network to 9.7 million homes, and has deployed video capabilities to 8 million homes, yet Verizon is able to sell video services to only about 6 million homes, due principally to delay in obtaining local franchises and other franchise-related requirements (e.g., local franchise geographic areas that are substantially broader than Verizon's central office coverage areas in which seeking a franchise would trigger broader deployment).
In Cablevision's territory, Verizon is marketing FiOS data services to approximately 1.4 million homes yet is able to market video services to only about 1 million of those homes.1 Cablevision passes approximately 4 million homes in Verizon's local telephone service territory.2 The vast majority of those homes are unable to benefit from video competition by Verizon.
Most of Verizon's lines are in states that do not have statutes simplifying and expediting franchise approvals. In the last six months of 2007 alone, Verizon has been forced to conduct individual franchise negotiations with more than 200 LFAs. Each negotiation, even when it takes only a few months, delays and increases the cost of entry.
New York State is the most problematic jurisdiction for Verizon: In 2007, Verizon was able to obtain franchises in only 60 percent of the municipalities that it targeted at the beginning of the year. The average time to achieve a franchise is six to twelve months. Many LFAs still demand up-front payments even to begin negotiations – one LFA recently demanded $30,000. There are currently approximately half a dozen LFAs with which Verizon has not been able to begin negotiations because of the large up-front payments they have demanded. Following the grant of a franchise, additional delays occur waiting for New York PSC approval, obtaining letters of credit and insurance certificates, and other process.
Verizon's experience in Massachusetts has been comparable. The franchise application process in Massachusetts is burdensome, with elaborate paperwork required before franchise negotiations can even begin. Many LFAs continue to demand payments or other compensation that exceed permissible levels. As a result, as in New York, the typical negotiation lasts six to twelve months.
Verizon's experience in Pennsylvania has been a little better than in New York or Massachusetts, but it still takes five to nine months to obtain a franchise. In addition, the burdens of negotiations are multiplied because of the large number of small LFAs in Pennsylvania.
By contrast, where states have passed legislation to facilitate new entry, the franchise process poses reduced barriers to entry. In New Jersey, Verizon can begin offering video service within 48 hours after filing a letter with the city and state authorities. In Florida and Indiana, state rules provide for action on an application to provide service within 15 days. In Texas, an application must be acted on within 16 days. In California, state rules require the PSC to approve a franchise application within 45 days, but based on Verizon's recent experience the PSC may act even faster. Under Virginia's rules, Verizon is permitted to begin providing service - with or without an agreement with the LFA – within 75 days. Even though the states in which Verizon obtained its franchises predominantly through state-level franchise streamlining rules account for less than a quarter of Verizon's residential access lines, Verizon has obtained almost half its local franchises in those states – and almost all of those within the last two years. See Table 1 below.
The delays attendant on the LFA process harm consumers. Not only are Verizon's FiOS TV offerings superior in quality and often lower priced than those of the cable incumbents, but cable has responded to competition by lowering prices, moderating price increases, and improving service. Where Verizon's entry is delayed, it takes longer for consumers to realize these benefits, which is a permanent loss in consumer welfare. Breaking remaining LFA logjams thus promises concrete, immediate consumer benefit.
The Department asks whether and by how much Verizon has raised its FiOS prices in Keller, Texas and whether a price increase is anticipated for 2008.
Verizon's 2008 packages are less expensive than the average prices that cable incumbents charged in 2005 – before the last three years of cable price increases. According to the FCC's most recent report on cable prices, which reflects cable offerings as of January 2005, consumers of incumbent cable operators' most highly subscribed tier received an average of 74 analog channels and 34 digital channels for an average price of $56 per month, including a standard-definition set-top box.3 This is $2 to $8 more expensive than Verizon's 2008 rate of $47.98 for existing customers or $53.98 for new customers. Since 2005, cable operators raised their rates an average of 1 to 7 percent in 2006 and again in 2007,4 and have announced additional increases of 5 to 6 percent for 2008.5 Despite the repeated price increases, none of the major cable operator has a core offering with as many channels as Verizon's FiOS TV Premier. See Table 2 for sample current price and channel comparisons in several individual cable markets.6
Verizon's video pricing is uniform everywhere it provides service. Cable operators, by contrast, charge different prices market-by-market, which enables them to price discriminate - that is, set their prices higher in markets where they face less competition. As Verizon's initial submission showed, in markets where Verizon has entered, cable operators have responded by reducing their prices, sometimes only for the customers who have Verizon as a competitive option. But even after such decreases, Verizon's pricing and value are often superior to comparable offerings of the cable incumbents. For example, as shown in Table 2, Cablevision's "Family Cable" package costs more than Verizon's FiOS TV Premier ($56.45 with a standard- or high-definition set-top box), and includes fewer channels (only 91 standard-definition plus 34 HD channels). Cablevision's "iO Package" add-on, which provides a total of 130 standard-definition and 36 high-definition channels, costs a total of $67.40.
Verizon's pricing of FiOS services reflects two types of discounts. There are relatively small discounts for consumers who choose to purchase bundles of services on a month-to-month basis: consumers who subscribe to double play bundles including video generally get no discount (except in Indiana where a video double play earns a discount of 5 percent off stand-alone rates without any term contract); consumers who subscribe to triple play bundles can earn discounts of 3-4 percent off stand-alone rates without any term contract (8 percent in Indiana). Greater discounts are available for term contracts: for double-play bundles, consumers receive discounts of 11-33 percent with a 12-month contract; and discounts of 17-38 percent with a 24-month contract;9 for triple-play bundles consumers receive discounts of 14-30 percent with a 12-month contract; and discounts of 21-36 percent with a 24-month contract.
Verizon also offers promotions to entice new consumers. For example, Verizon is currently running an online promotion that waives the usual $29.99 activation fee for new customers. Verizon is also offering customers a free 19" Sharp Aquos HDTV set, with an estimated retail value of $450, or a $200 Best Buy gift card, in exchange for signing up with Verizon for a bundle of FiOS TV plus two other Verizon services. Verizon is offering a RCA Camcorder, with an estimated retail value of $129, or a $50 Best Buy gift card, in exchange for signing up with Verizon for FiOS TV plus one other Verizon service.10
For 2008, Verizon raised the rates for FiOS TV Premier from $42.99 to $47.99, but this rate applies only to new contracts. Customers who signed up for FiOS in 2007 will not be subject to any rate increases, and existing customers were given until January 18, 2008 to add new services or sign up for bundles at the 2007 rates. Customers who signed up for FiOS in 2005 and 2006 have not been subject to rate increases in the past three years, and, for 2008, those who subscribed in 2005 or 2006 to FiOS TV plus at least one other Verizon service are not subject to an increase. Those 2005/2006 subscribers who purchase only FiOS TV Premier will be subject to the 2007 rates for FiOS TV premier (i.e., $42.99 rather than $47.99).11 Thus, unlike incumbent cable operators, Verizon has not increased rates each year, and even its most recent increases were implemented using a tiered approach that limits the increase for customers under existing contracts. By contrast, in any given market, incumbent cable operators typically raise rates across the board for all of their customers.
Independent analysts confirm that Verizon's service has consistently "drawn raves" from consumers.15 In its February 2008 issue, Consumer Reports rated Verizon FiOS video, high-speed Internet, and long-distance telephone service the top service available in the country.16 FiOS video and Internet both gained the top possible ranking in each of four categories – value, reliability, performance, and customer support.17 These were the "first ever 'perfect' score[s] for a video or broadband provider."18 In its March 2008 issue, Consumer Reports rated Verizon FiOS number one in the country for high definition TV service. 19
The fiber facilities that Verizon uses for FiOS services have a long lifetime and have the capability to provide multiple services simultaneously. Verizon sells individual services on the fiber on a month-to-month basis. But, as discussed above, if a consumer commits to a 12- or 24-month contract or purchases multiple services (or does both), Verizon provides a discount compared to the individual cancel anytime, single-service prices. Customers have been very enthusiastic about receiving service on these terms and the discounts in fact reflect substantial supplier efficiencies. Customers also benefit from the intense competition between different bundles.
As noted, the February 2008 issue of Consumers Reports found, based on a survey of 37,166 respondents with a home internet account, 44,457 with TV service, and 26,599 with long-distance phone service, that Verizon FiOS is the number one favorite provider in all three categories.22 Reflecting the strong consensus, Consumer Reports rated Verizon FiOS the sole "best choice overall."23 Verizon FiOS customers do not need to opt for an inferior product on any element of the bundle in order to get the lower price; Verizon customers get low price and the best quality for each element of the bundle.
According to Consumer Reports, even non-Verizon bundles are good deals for consumers. Its survey found that in general "you needn't compromise service quality to buy a bundle. Subscribers to many companies were reasonably satisfied with all three of the most commonly bundled telecom services."24 Consumer Reports notes that there are both substantial price and non-price benefits: "You can get a good deal. A bundling mainstay is the one-year, $99-a-month package, typically made up of a premium level of TV service, standard-speed broadband Internet service, and telephone service with a variety of calling features. Such deals could save you up to hundreds of dollars a year over the amount you'd pay if you received the three services separately." "Bundling offers convenient consolidation of your telecom bills."25 Consumer Reports also notes the intensity of competition between bundle providers makes it possible for consumers to negotiate extensions of promotional discounts: "Having signed you up for the cheap bundle, 'the last thing the company wants is to lose you.'"26
Other sources describe the increasing consumer popularity of bundles. A recent report by Frost & Sullivan found that, as of 2006, 48 percent of U.S. households subscribed to bundles of two or more services, while 11 percent subscribed to bundles of three or more services.27 TNS found that 64 percent of U.S. households receive two or more services (excluding long distance) from the same provider.28 These numbers have been rising rapidly. For example, TNS recently found that the proportion of customers who receive voice, data, and video service from a single provider has tripled in the past two years (2Q05 through 2Q07).29 A Yankee Group study likewise found that "the number of consumers who purchased multiple subscription services from a single provider reached 54% in 2006; we forecast that will hit 76% by the end of 2007."30
Verizon's internal data provide further confirmation that consumers value bundled offerings. Of the customers who subscribed to FiOS as of the end of third quarter 2007, half purchased a bundle of video plus at least one other service (voice and/or data). Another 38 percent purchased a combination of voice and data service. By comparison, only about 11 percent of subscribers take just one FiOS service. A recent Verizon consumer survey of 3,000 households in the FiOS footprint in the New York metropolitan area found that "[b]undle offers which include voice and video produce the biggest draw in any of the pricing scenarios tested" and that regardless of price "customers show a much higher disposition toward a bundle with voice and/or TV than stand-alone Internet."31 Another study conducted for Verizon found that of the consumers who have switched from Verizon to another provider, 56 percent did so in order to obtain a bundle of three services, and that 82 percent of those customers received a bundled discount.32
Many of the general reasons that bundle discounts are ubiquitous in American commerce apply here.33 "There are obvious business reasons why firms offer A and B together. These include benefits of integration, economies of scope in distributing products, packaging cost savings, reduced transaction costs for businesses and consumers, and increased reliability for consumers."34 Bundling can also lower costs by reducing uncertainty about aggregate demand, reducing overhead and marketing expenses, and economizing on the quality signaling benefits of well-known brands.35 Bundling also can substitute for advertising as a short-term way to promote one or more products. For some or all of these reasons, providers of goods and services frequently have both the ability and the incentive to offer bundles of services to consumers at a discount off of the sum of the stand-alone prices for the goods. Many of these justifications for bundled discounts apply to communications service bundles: customers benefit from the reduced transaction costs of a single bill; providers save on billing and customer service costs; and Verizon has been able to capitalize on its hard-earned reputation for outstanding service and network quality.
More specifically, the bundled services here are all provided by a common facility. Many of the costs associated with fiber plant are common costs that do not depend on whether the customer orders a single service such as video or broadband or a bundle of all three services – for example, the cost of installing fiber to a particular residence is the same whether the customer purchases one service or three. Accordingly, Verizon incurs significantly lower costs in providing three services to one customer than it does in providing a single service to three different customers. That cost savings is reflected in the discounts available for bundled services.36
Furthermore, many of the costs that Verizon incurs in providing all of its services – voice, video, broadband, and wireless – are essentially fixed, that is, they do not vary as Verizon adds additional customers. For example, the cost of wiring a neighborhood for FiOS does not depend on the number of customers in the neighborhood that eventually choose to purchase service; the cost of establishing a video head-end does not vary with each additional customer (existing or new) who decides to order video service. Verizon does not price discriminate in its provision of FiOS services, offering uniform state-wide pricing, in part because consumers welcome the simplicity of uniform pricing and see it as fair. Bundled discounts nevertheless help to enable Verizon to make the broadest range of products available to subscribers with varying preferences.37 For example, individual A may value video service more highly than her neighbor B, but place a lower value on broadband service than B. Suppose that A values video service at more than the stand-alone price, but would pay only $35 per month for high-speed broadband, which is less than the stand-alone FiOS Internet price; suppose the reverse is true for B. In the absence of a bundled discount, A will not buy broadband service, and B will not buy video service. With the bundled discount, the incremental price of each service in the triple-play bundle is less than the value that the customer places on that service, and both A and B will order the triple-play bundle.
That outcome benefits both Verizon and overall economic efficiency.38 Verizon benefits because it recovers additional revenue in excess of any incremental cost of serving the additional customer, which contributes to recovery of fixed costs. And more consumers benefit because more consumers are able to purchase additional services at prices that are less than the value the consumers place on those services. At the same time, because consumers also have the option to purchase bundles of voice and one other service – still at a substantial discount – or individual services, consumers have great flexibility to purchase the set of services they value most highly.39
There are additional reasons why Verizon offers discounts for customers who order FiOS bundles. The installation of FiOS substantially reduces operational costs.40 Verizon estimates cost savings of $110 annually per home served over fiber rather than copper – a savings of nearly $10 per month. These savings reflect the labor-cost-intensive nature of service changes on a copper network, which frequently require a truck roll or manipulation of electronics in the network. By contrast, in a fiber network, many customer service changes can be handled without any work by a technician.
Verizon's discounts also reflect the substantial cost savings associated with term contracts. Verizon lost approximately 8 percent of its access lines in 2007.41 Reacquiring customers that have left Verizon's network is very costly – with customer acquisition costs of hundreds of dollars. Verizon is able to grant term discounts to reflect the cost savings associated with reduced churn. That is why Verizon's term discounts are available to new FiOS customers and existing customers.
4. C. Moffett, et al., Bernstein Research, U.S. Cable Pricing: Rationality Prevails? Cable Video Rate Increases Running 5-6% for 2008 at 2 (Nov. 30, 2007) (Cablevision raised rates 1.1% in 2007, while Comcast raised rates 5.4% in 2007); L. Singer, et al., SG Cowen & Co., Cable Pricing Survey - January 2006 at 3-4 (Feb. 22, 2006) (in 2006, Comcast and Cablevision raised rates 6.0%, and 2.3%, respectively, Time Warner raised rates between 0 and 5%); C. Moffett, et al., Bernstein Research, Comcast: 2006 Basic Video Price Increases Running at 6.7% at 2 (Dec. 16, 2005) ("A sampling of 14 rate increase announcements - including some in Comcast's largest markets - suggests that expanded basic-analog price increases average 6.7% in 2006 (see Exhibit 1; unweighted arithmetic average). We also note that Comcast has recently confirmed that its total 2006 price increase will be closer to 6%.").
5. See C. Moffett, et al., Bernstein Research, U.S. Cable Pricing: All the Districts Are In, and Prices Are . . . You Guessed It . . . Going UP. Price Hikes Average 5% (Jan. 31, 2008) (Comcast is raising rates roughly 6% in 2008 compared with 5.4% in 2007; Time Warner Cable is raising rates an average of 5-6% in 2008; Cablevision is raising rates 4.7% in 2008).
9. Verizon's bundled offerings may vary among the nine main geographic regions within its territory: New England, New Jersey, New York/Connecticut, Pennsylvania/Delaware, Potomac, Southeast, Texas, West Coast, and Midwest.
11. Although Verizon's 2006 rates are slightly higher than its 2005 rates, those increases were not applied to existing customers at the time; thus, customers who subscribed to FiOS in 2005 have been paying the 2005 rates since that time.
14. See ChangeWave, TV Service Battle Royale: Cable, Satellite Fight - But Watch Out for Fiber (Sept. 11, 2007), http://www.changewave.com/freecontent/viewalliance.html?source=/freecontent/2007/09/alliance-091107-TVServiceBattleRoyale.html.
20. Antitrust Modernization Commission, Report and Recommendations at 94 (Apr. 2007) ("Antitrust Modernization Report") ("Because they involve lower prices, bundled discounts and bundled rebates typically benefit consumers."); John Thorne, Discounted Bundling by Dominant Firms, 13 George Mason L. Rev. 339 (2005).
21. D. Williams, et al., Jupiter Research, Multi-play Offerings: Finding and Courting the Quadruple Play Customer at 2 (Oct. 22, 2007); id. at 2 ("Although the price of bundles surely impacts consumers' purchasing decisions, consumers overall expressed strong interest in receiving one bill and personalizing bundles to suit their individual needs."); GfK, Consumer Churn Study, Verizon Marketing Research at 26 (Apr. 2007) ("Service simplicity that comes from a single bundle of services was  a key factor in customers' decisions to defect.").
33. See Timothy J. Muris, Antitrust Law, Economics, and Bundled Discounts, Comments Submitted to United States Antitrust Modernization Commission at 2 (July 15, 2005), http://www.amc.gov/public_studies_fr28902/exclus_conduct_pdf/050715_US_Telecom-Exclus_Conduct-Bundling.pdf (Muris, Bundled Discounts).
36. See, e.g., William J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q. J. of Econ. 475, 475-476 (1976); Daniel A. Crane, Multiproduct Discounting: A Myth of Nonprice Predation, 72 U. Chi. L. Rev. 27, 39-43 (2005); David S. Evans & A. Jorge Padilla, Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach, 72 U. Chi. L. Rev. 73, 90 (2005); David S. Evans & Michael Salinger, Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law, 22 Yale J. on Reg. 37, 41-42 (2005), available at http://ssrn.com/abstract=550884; Barry Nalebuff, Bundling As a Barrier to Entry, 119 Q. J. of Econ. 159, 161 (2004); Lester G. Telser, A Theory of Monopoly of Complementary Goods, 52 J. of Bus. 211, 223 (1979).
37. See Stefan Stremersch & Gerard J. Tellis, Strategic Bundling of Products and Prices: A New Synthesis for Marketing, 66 J. Marketing 55, 70 (2002); Thomas T. Nagel & Reed K. Holden, The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, 245-246 (3d ed. 2002).
38. Yannis Bakos & Erik Brynjolfsson, Bundling and Competition on the Internet, 19 Mktg. Sci. 63, 66-68 (2000) (noting that when information goods have heterogeneous valuations by consumers "bundling substantially reduces the average deadweight loss and leads to higher average profits for the seller.").
39. The incremental price of FiOS TV for a subscriber to the phone / FiOS Internet bundle is approximately $30; the incremental price of FiOS Internet for subscriber to the phone / FiOS TV bundle is likewise approximately $30.
43. Id.; see also Richard A. Posner, Antitrust Law 253 (2d ed. 2001) ("If the practice is one employed widely in industries that resemble the monopolist's but are competitive, there should be a presumption that the monopolist is entitled to use it as well. For its widespread use implies that it has significant economizing properties, which implies in turn that to forbid the monopolist to use it will drive up his costs and so his optimum monopoly price.").
44. Barry Nalebuff, Competing Against Bundles, in Peter J. Hammond & Gareth D. Myles, Incentives, Organization, and Public Economics: Papers in Honor of Sir James Mirrlees 323, 328 (2000); see also Ioana Chioveanu, Strategic Pricing in Oligopoly Markets, Universitat Autonoma de Barcelona Doctoral Dissertation at 7 (July 2004) ("[B]undle against bundle competition (the market outcome with an elastic demand) generates higher consumer surplus and lower profits than bundle against component competition (the market outcome with an inelastic demand).").