Andy McAdoo, General Manager of Nicholville Telephone Company, writes, in part, about my earlier essay on DANC:
The central issue of the DANC project should be cream skimming. DANC discounts prices to large anchor users while ignoring the needs of smaller, less attractive users. DANC's cream skimming approach is widely viewed as anti-competitive by most knowledgeable regulators. By removing the large "anchor" customers from market, DANC creates a disincentive for service providers to invest in infrastructure and is actually limiting choices for the small business community and consumers in SLC.
Sorry, no, Andy, but free markets don't quite work that way (then again, with a government agency under discussion, who's talking about a free market, but I get ahead of myself). It's a serious problem, but not for the reason you state. Cream skimming is a natural effect in a free market, and one to be expected and enjoyed in its way.
Rich people have yachts. Everybody expects this to be the case. Only the people who worry that some rich person, somewhere, might be having fun oppose this (they are, by the way, the people responsible for killing the yacht industry by taxing it out of existance). Most people really don't care for yachting, so the price of yachts has remained high.
Rich people also buy Cadillacs, or at least they used to. The Cadillac still has the imprinteur of style, class, and just plain wealth, even if there are other expensive cars competing with them. A childhood friend of mine, Peter Goldring, had a father who worked on Madison Avenue. They had a Cadillac (this was back in the 60's). It was an amazingly plush and well-equipped automobile. It had automatic windshield washers and electric windows.
I always wanted to own a car with windshield washers and electric windows. I thought they were the neatest gadgets. I dreamed of being wealthy enough to own a Cadillac with those features. Of course, now I own a fairly pedestrian Subaru Outback with windshield washers and electric windows. You can't buy the car without them. It also has -- get this -- electric seat heaters. Not even Cadillacs had them back in the 60's.
Was Cadillac cream skimming? Yup. Was there anything wrong with that? Nope. They were specifically targetting a wealthy minority with advanced features and benefits, with no intention of ever providing them to the rest of us.
Why, then, do we have them now? The answer, simply enough, is free markets. In a free market, new things are always provided to wealthy people first. In time, entrepreneurs find a way to reduce the cost of those things, and sell them to everyone else.
What is wrong with the DANC proposed cream skimming? It is that it intends to operate outside free markets. First of all, they plan to sell to BOCES, which are about as socialist, centrally-planned institution as you can find in America (where is McCarthy when you really need a hearing?) apart from Congress itself. I'm not going to get into BOCES right now, since I've already ripped them up and down, and back up again.
But second of all, DANC is not a profit-seeking institution. They could, quite reasonably, stop at providing Internet access to the schools, hospitals and local governments. They don't have stockholders clamoring for the last bit of profit in a market. Andy is upset, and reasonably so, because DANC is planning on monopolizing the marketplace with subsidized (paid-for by grants) Internet. It would be too bad for Andy if DANC was a private company and was able to out-compete him. But they're not. DANC has their hand in the public till.
After all, once you've provisioned Internet access to the schools, hospitals, and local governments, what's left? Fibermark? Resnick Mattress Outlets? Kinney's? Wisebuys? Potters? In a competitive marketplace, a private DANC would end up taking only part of the market, leaving some for Nicholville Telephone, and Verizon, and Time-Warner. Everyone would skim off whatever cream they could, and in order to gain continued growth in profits, they would have to sell to the little customers who are less profitable to begin with.
So no, Andy should attack DANC for having their fingers in the public till (and that includes accepting money from BOCES) rather than attacking the idea of cream skimming. Given the chance, he'd do it himself. Or try, but so would everyone else who owned a right-of-way on the utility poles of St. Lawrence County.
posted at: 16:41 | path: /economics | permanent link to this entry