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Walgreens pricing vs Telecom Pricing
From: David Farber <dave () farber net>
Date: Sun, 22 Mar 2009 11:51:58 -0400



Begin forwarded message:

From: "Bob Frankston" <Bob19-0501 () bobf frankston com>
Date: March 22, 2009 11:30:19 AM EDT
To: "'Open Infrastructure Alliance'" <oia () lists bway net>
Cc: <dave () farber net>
Subject: Walgreens pricing vs Telecom Pricing

This is not meant to be a definitive treatise on pricing – I’m just trying to give a sense why price in itself is not the issue. The problem is in the very definition of telecom as silo, AKA, a value chain.

I was in Walgreens yesterday and happened to notice that the price for a 128MB memory stick was about the same price as a 4GB one. I found it amusing and wondered what darn fool would buy the 128MB one. It’s tempting to instrument it and see what happens.

In some ways it’s like telecom prices that are based on complex and error-prone formulas that can bubble up in bizarre ways. Per-minute pricing, for example, is the result of an accounting model that allocates cost in a way that used to make more sense than it does now.

So what’s the difference between Telecom and Walgreens? It’s not the perverse pricing – that’s the norm. The difference is that Walgreen’s doesn’t control the market enough to force me to buy 32 128MB memory sticks instead of the 4GB one. And there is also more transparency so I can compare the two memory stick prices. Though not always effective transparency – it could be that the 4GB one is too slow to be usable. Few people even know that speed can be an issue and it generally isn’t.

In theory there is a relationship between the actual costs and the prices so we can make rational comparisons and this relationship is enforced because competitors are bound by their own costs and the need to present the most attractive price to customers. Of course it isn’t just about posted price – it can be take into account convenience and availability. They are part of the effective price.

In the case of the memory sticks I presume that the Walgreens pricing and other policies are not tuned for the rapid changes in the price of computing devices. At least you can price a memory stick in isolation and see what people will pay for it and if you get it wrong they don’t buy. The memory stick has a reality unto itself and there is a limit to the ability to tap into the value created using it.

The problem with telecom is the lack of a unit akin to a memory stick – the measures are arbitrary and bear little direct value to the underlying costs. They are creations of accounting models. For example instead of pricing a copper wire to the CO per minute we can allocate a percentage of the cost to each subscriber and, in fact, we do that with local unmeasured pricing. Even then you aren’t buying the wire – just leasing it. The lack of transparency makes the billing process very prone to errors but those errors are more a symptom than a first order issue, especially when a class of “errors” are a consequence of complex policies interacting badly.

In telecom you can and do tap into the value users create and thus limit the ability to develop new applications that aren’t as valuable on day one as the premium applications even if, in the future, they are far more important. You can’t take advantage of the very low incremental cost of connectivity.

It’s not about the price – it’s really about the business and accounting models and the very ability to lock away the infrastructure and limit our use to patterns dictated by arbitrary and perverse models. In the case of the memory stick we don’t suffer very much by having a 128MB memory stick stuck at old prices. In telecom the suffering reaches the point of profound tragedy as we are stuck with models that made sense in 1934 when the physical infrastructure existed only to support the services defined by telecom providers.

We cannot afford to lock away the infrastructure that can drive the economy, an infrastructure we can use to improve our health and lives. We cannot afford a system that allows regulators to use railroads as the model for our ability to communicate. It’s as if we tried to understand how fish swim by studying dead fish nailed to the wall and then had then impose that misunderstanding on us as policy.





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