Incumbents Running Scared: An Economic Analysis

One thing that comes through in qoutes from Huval in the [not online] Advertiser Advocate article “LUS plan changes look of telecommunications,” and in the feasibility study itself is a pretty steely-eyed determination to out-compete the incumbents on both product and price. The LUS strategy will be simple and competitive: offer more for less. Should LUS do this consisitently, and I have no doubt they can and will, they will be the dominant carrier in their footprint. A footprint, incidently, which Huval hints may expand into the parish. (Mayor Langlinais of Broussard is undoubtably happy to “hear” this said publicly.)

This story implicitly raises the question of whether Lafayette will have multiple fiber optic networks in the end. My own thoughts on this are on the record: I believe that it is unlikely.

Consider: One thing that LUS’ strategy has done is to cut off a retreat into low-end products—analog telephone and video—for both incumbents. LUS’ projected equipment buys make it clear that they intend to provide these legacy services indefinitely. LUS has also cut off any attempt to colonize high-end services: LUS’ fiber, its committment to advanced services such as Voice Over Internet Protocal and Video on Demand make it clear that there will be no room at the top of the heap for the incumbents to reap special profits off of high-end customers. There will be no uncontested areas of profit for the established incumbents. None. They wil have to decide to compete head to head with an entity that has the trust of local people, that is pumping its profits directly back into the community (in the form of lowered prices, government revenues, local construction, and local jobs), that is offering a superior product in each category, and that is offering it for a lower price. In the face of such daunting competition it has to decide to dump a big chunk of change into a small town (by its lights) ahead of schedule (or face LUS being the established incumbent when it gets around to it). It will have to spend this money anticipating that it will never have the percentage of the market that it enjoys anywhere else it will choose to spend its fiber dollars.

In a nutshell: the incumbents will have to choose to invest heavily and early in a place where they can never expect their rate of return to equal what that same investment will garner almost anywhere else.

I don’t expect them to do it. No matter what they say in the next month or so… it just doesn’t make financial sense and that is all they are really about. (Unlike LUS which does have other, community-based values that might well lead them to persevere in a similar circumstance because they value low prices for citizens and the community development consequences.)

But, the objection can be raised, “They really expect LUS to fail; they will simply do what private enterprise does and out-compete the governmental body.” No. Honestly that won’t happen and the incumbents won’t believe it unless they’ve taken to drinking themselves the koolaide they’ve been offering the public. I know this flows against ideological correctness and may seem counterintuitive but that sort of reasoning substitutes ideology for a dispassionate analysis of what really is—and businesses like those the incumbent have haven’t survived by believing their press releases. If you need evidence look no further than the fact that the Cox and BellSouth have so frantically opposed the very idea. They know, they know very well, that once this is built LUS will hold all the cards.

LUS will not have to make a profit. Break-even is good enough. It isn’t good enough for any private enterprise. Not only that, private companies have to make their money back pretty quickly. They most certainly can’t wait twenty five years. LUS can. LUS will stretch it out that long without batting a eyelash.

The raw, and terrifying truth is that the competitive advantage that LUS holds over its competition is that it actually cares about its citizen/consumers. It is willing to cut its profit to naught to benefit them. It is willing to wait for a very long time to get its money out–if it benefits them.

And that is why the incumbents are running scared. As well they ought.

Attribution corrected 10:10 10/22/04

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