Opinion

Felix Salmon

Why AT&T is evil to have multiple data plans

Felix Salmon
Jun 3, 2010 17:06 UTC

On the London Underground, you don’t need to decide whether it makes more sense to buy an individual ticket or to buy a daily or a weekly or a monthly pass. With the Oyster card, you just tap in and tap out around the system, and it charges you whatever’s cheapest. You only make one journey? You only get charged for one journey. The minute that your journeys in one day add up to more than the daily-pass rate, you get charged the daily-pass rate, and no more. Similarly for your journeys in one week, with the weekly pass. And so on. Really, there’s only one plan, and there’s no way to get inadvertently ripped off.

When AT&T decided to abolish unlimited data usage on its smartphones, that’s the kind of of plan it should have implemented. Instead, it went the evil route, and it’s forcing its current customers to make one of three different choices, based on limited information. Whatever they choose is quite likely to be the wrong choice, and AT&T will chortle as it collects all that extra money which its customers didn’t need to pay.

The first choice is known as Data Plus, and gives 200 MB of data for $15. If you go over the 200 MB cap, you pay another $15 for another 200 MB. If you go over that cap, it’s not clear what happens, but you’ve already paid $30 and will certainly be asked to pay more.

The second choice, Data Pro, gives you 2 GB of data for $25, and then $10 per GB thereafter.

And the third choice is to stay grandfathered in to the current plan, which is $30 per month for unlimited data usage.

You can switch as much as you like between Plus and Pro, but once you leave the unlimited plan, you’ve left forever; you can’t go back.

AT&T is good at disingenuous statements like this:

Currently, 65 percent of AT&T smartphone customers use less than 200 MB of data per month on average.

This is disingenuous on two levels. First, as John Gruber points out, it carefully talks about “smartphones” rather than iPhones: the number for iPhone users is surely significantly lower.

But second, just because you’re using less than 200 MB of data on average doesn’t mean that you should necessarily choose Data Plus. I’ve just had a look over my most recent iPhone bills, and here’s my monthly data usage over the past 8 months: 202, 120, 160, 143, 89, 39, 333, 287. On average, I’m using 172 MB of data per month, and even with the overage charges I would have been better off with Plus rather than Pro. But for the past couple of months I’ve been significantly over 200 MB, and would be better off with Pro rather than Plus. And then, if I get the new iPhone 4G, is that going to raise my data consumption? Who knows.

At least with the subway you’re in control of how much you use it. With data usage on a phone, it often comes down to questions consumers can’t be expected to understand: how much data does say Google Maps use? And, more generally, if the AT&T network is good, and doesn’t time out on a regular basis, you’re going to use it more. And consumers can’t reasonably predict how good the AT&T network is going to be next month.

AT&T could easily have saved consumers all the trouble of having to try to predict their next month’s data usage by having a single plan: $15 for the first 200 MB, say, and then $10 per GB thereafter. They didn’t, because they’re looking forward to getting $30 per month from people exceeding 200 MB of data but who use nowhere near the 2 GB that “Pro” users get for $25. That’s where AT&T is evil, even if you think (contra Jeff Jarvis) that it makes sense to abolish unlimited plans.

COMMENT

Assume I have a jailbroken iPhone and a grandfathered account. I’d previously been scared of using up too much data because AT&T might slap a hefty data surcharge on me.

There was a soft limit of 5GB that people generally understood they must stay under. Additionally, even though I *could* go up to 5GB, I couldn’t really, because the network was so slow.

Their 3G network has improved in NYC over the past few months. Now that it’s created 200MB and 2GB hard limit plans, doesn’t this soft limit go away? Can’t all us grandfathers throw away our WiFi Cablevision/RCN/FiOS Internet connections and just start relying on our iPhone?

Sounds like a good deal for me.

Posted by manubhardwaj | Report as abusive

Continuing risks in the housing market

Felix Salmon
Jun 3, 2010 14:42 UTC

Wcw explains the economics of the housing bubble, in a smart comment:

As for borrowing the money, I think the folks who did so did absolutely the right thing. When someone offers you a government-subsidized non-recourse loan on an appreciating asset, they’re giving you a put option. The more you borrow and the less you put down, the more that option is worth. These borrowers maximized their leverage. The market turned, and they exercised their put options. They are not the dumb ones, they are the smart ones. The dumb ones are the ones who gave away the farm lending this money.

It’s well worth noting, here, that there was an extra necessary ingredient: fudgy accounting on the bank side. If the banks had marked those put options to market, they would either have never made the loans in the first place, or they would have noticed their balance sheets eroding long before it was too late to raise new capital.

But they still aren’t marking those options to market. Everybody in America who has a mortgage has the option to default on that mortgage. That option is worth some non-zero sum, and in aggregate, across all the homeowners in the country, that option is worth billions, if not hundreds of billions, of dollars. And if homeowners own an option worth billions, then lenders have a liability of exactly the same magnitude.

The biggest lenders, in this regard, are Fannie and Freddie. But many banks are in the same position.

Look at the question another way. The likes of Mike Konczal have been looking for a while at second liens, and asking tough questions about how much they’re really worth. But let’s zoom back and look at the first liens, and think of it like this:

Let’s say you’re a good, creditworthy borrower: a tenured university professor, say, earning $200,000 a year. You ask for a $500,000 30-year amortizing loan at a 5% interest rate, which would involve you paying back about $2,900 a month — well within your earnings. The bank would laugh you away. But ask for the same loan in mortgage form, and suddenly it’s no problem. Why? Because the loan is secured.

Clearly, the existence of the security radically changes the economics of the loan. And equally clearly, the value of banks’ mortgage security — the houses the mortgages are borrowed against — has been falling fast. We know that the value of a home is the best predictor of future default, and that mortgages become much riskier when the homeowner doesn’t have any equity. We also know that roughly 25% of homeowners with mortgages have negative equity.

So it’s pretty obvious that even without taking into account a single actual default, the value of banks’ performing mortgages has been falling fast. And it’s equally obvious that no one has even attempted to quantify the numbers involved here — just how much has the value of banks’ performing mortgages fallen? And how does that number compare to the banks’ own equity?

This is one of the reasons why I’m still very nervous about markets generally: while there are lots of big sovereign and geopolitical risks out there, it’s far from clear that the big mortgage/housing risk is even behind us yet. And I would be much more reassured if there were some numbers marking banks’ mortgage books to some kind of market or model. Even if those numbers didn’t turn up in the formal GAAP accounts, it would be good to know that someone was at least keeping an eye on them. Especially when prices could easily plunge again, if and when the government stops artificially propping up the market.

COMMENT

It is only a nonrecourse loan in about 11 states, but one of those is a true biggie – California. In the DC area, it is otherwise. Residental mortgages in Virginia are definately full recourse. Furthermore, the lender has additional leverage here from the fact that >80% of the people in the capitol area work for the US government or its contractors. Getting a deficiency judgement can cost you your security clearance, and thus your job.

Posted by Andrewp111 | Report as abusive

Buffett’s PR disaster

Felix Salmon
Jun 3, 2010 13:49 UTC

From a PR point of view — and Warren Buffett cares deeply about his public image — yesterday was arguably the single worst day of Buffett’s life. He was dragged against his will — with a subpoena, no less — in front of the Financial Crisis Inquiry Commission, which grilled him on whether, as Moody’s largest shareholder, he took any responsibility at all for the disaster that happened there. His answer — no — was met with unanimous derision, both in the mainstream media and in the blogosphere: see The Pragmatic Capitalist, or Bond Girl (“It’s funny how heroes end up cutting themselves down to size even when no one else can”), or Edmund Andrews:

Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon…

When asked by Phil Angelides, the commission chairman, what the agencies did wrong, Buffett passed the buck as shamelessly as every other Wall Street powerhouse player: “I think they made the same mistake that virtually everybody else made,” Buffett told in the first in a long series of evasions…

Having basked for years in public adulation for his his investment brilliance, Buffett suddenly acted as if he hadn’t the slightest idea about the goings on at Moody’s even though Berkshire Hathaway had been one of its biggest shareholders.

Between his Moody’s investment and his Goldman investment, Buffett is slowly working out that only half of his public adulation comes from his compounded annual returns. The other half comes from the fact that he seemingly got those returns investing in Coca-Cola, motherhood, and apple pie. Rather than in entities without which the current wave of misery overtaking homeowners nationwide could never have happened.

Buffett is that rarest of institutional shareholders: someone who actually owns and runs lots of large companies of his own. As such, he can and should act much more like an owner than most shareholders. But he doesn’t, and he has no visible desire to fix the problems at Moody’s or at the ratings agencies more generally. He just says he wishes he’d sold his Moody’s stock earlier, passing on those losses to some other sucker. I don’t think he’s ever going to be able to live this one down.

COMMENT

Felix – you write great stuff, but a big part of the reason I enjoy your blog is the educated commentary from your readers. What about selecting a Felix Top 20 comments every week to display…

Posted by Soho | Report as abusive

Counterparties

Felix Salmon
Jun 3, 2010 04:03 UTC

Roddy Boyd’s new home — The Financial Investigator

Sarah Ferguson: “I’m very honest and real and authentic to it, but, whatever. I’m a tiny little newborn chick.” — Jezebel

“Mr. Buffett has elected to provide written testimony” — FCIC

Get well soon Floyd Norris — NYT

COMMENT

I’m with you on Floyd Norris. I hope he has a Refuah Shlema.

Posted by DonthelibertDem | Report as abusive

How soon might Greece default?

Felix Salmon
Jun 2, 2010 22:43 UTC

I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.

The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss. And Greece, in a fiscal bind, will probably at some point start issuing its own scrip alongside the formal national currency of the euro, much as California did in 2009.

Most surprising to me was how mainstream Adam Lerrick seems to be these days. He was making a lot of good points, including a simple extrapolation showing that if Greece continues on its present path through 2012, the EU and the IMF are going to end up owning more than half of all Greek debt by the time the current program comes to an end. At that point, with Greece’s debt-to-GDP level somewhere around 150%, the country still won’t have access to private markets, and therefore the only alternative to default would be to essentially remain a ward of the multinational community more or less indefinitely.

Whether or not Greece defaults is in Greece’s hands, and Greece itself will be hurt much less badly by a Greek default than the rest of Europe would be. So a default is still inevitable, I still think. It won’t happen during the World Cup. But once that’s over, it might happen any time — and Europe will respond by turning its liquidity firehose on the Spanish banks, to try to contain the problem. You never know, it might even work.

COMMENT

In first place Greece was created indebted back in the 19th century! Westerners indemnified the Ottoman Empire with the sum of 40,000,000 piastres in gold for the loss of the territory, then followed the first and the second (£2,400,000) “Greek” loan, and so on…

The problem appeared under the surface many times during the short Greek history when the creditors asked their money and interests back, and was always solved in the worest manner – violence, wars, military coups, ban from Europe …

People have short memory and always forget that the history repeats!

The diference this time is in the amount of the accumulated debt – 2625 billions of euros, according to Lombard Odier, a Swiss bank ( http://www.globalresearch.ca/index.php?c ontext=va&aid=19527 ).

…more people, more needs, much more debt!

Posted by Basilski | Report as abusive

The congestion pricing debate

Felix Salmon
Jun 2, 2010 22:26 UTC

I recorded a lively sit-down discussion today with Charles Komanoff, the subject of my Wired article; Reihan Salam; Skymeter CEO Kamal Hassan; and Corey Bearak of Keep NYC Free. We were safely ensconced in Reuters’s fourth-floor studio overlooking the traffic of Times Square, and the full talk should be available on Friday. But here’s a couple of teasers, courtesy of Hassan: firstly, might it be possible to implement a de facto congestion-pricing scheme using only parking fees, with no fees for driving? Is that the way Chicago is headed? And secondly, did you know that after London implemented its Congestion Charge, subway ridership went down, rather than up?

Here’s a video promo for the debate:

COMMENT

Certainly the buses seem to be fuller (and are definitely more frequent) than they used to be pre-charge, but then I’ve moved several times since then so it could just be the different routes.

Posted by GingerYellow | Report as abusive

Why is the Fed so bank-friendly on credit cards?

Felix Salmon
Jun 2, 2010 18:46 UTC

Shahien Nasiripour has found an interesting report from the Federal Reserve, looking at whether the credit-card rules which apply to individuals should apply to small businesses as well. The Fed, weirdly, fudges the question, but it’s clear to me that small businesses deserve all the same protections that individuals get.

At the same time, I’m impressed with how conservative small businesses are when it comes to credit cards:

Despite the widespread use of credit cards, only a minority of small businesses—18 percent—reported borrowing on credit cards… In 2003, when 24 percent of small businesses reported borrowing on credit cards, credit card debt accounted for just 1.4 percent of all debt held by small businesses and the majority of credit card–borrowing firms reported borrowing less than $5,000 in total on all their credit cards.

Available evidence indicates that relatively high-risk firms, as measured by their business credit score from Dun & Bradstreet, are less likely than relatively low-risk firms to use small business credit cards. Nonetheless, higher-risk firms borrow more frequently on small business credit cards than lower-risk firms. Higher-risk firms also have a greater propensity to use and to borrow on personal credit cards compared with lower-risk firms. But again, total credit card debt accounted for less than 2 percent of higher-risk firms’ total debt in 2003.

Small businesses, it seems, are like large businesses: they’re fundamentally conservative, and the overwhelming majority of them pay off their credit cards in full every month. These businesses wouldn’t be hurt at all by any marginal increase in interest rates that card issuers might (or might not) impose should they be forced to comply with the Truth in Lending Act (TILA). And the rest, of course, would be protected by the provisions of the act.

Yet somehow the Fed can’t bring itself to the obvious conclusion:

If, however, the Congress were to consider the application of these provisions to small business cards, it would be important to recognize the potential for adverse effects on the cost and availability of small business credit cards. For example, because credit card issuers have more difficulty assessing the creditworthiness of small businesses than of consumers, restricting issuers’ ability to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards. In addition, if credit card issuers were to reduce credit limits in response to such restrictions, even those businesses that use credit cards for transactions and cash management would be harmed. Thus, it is not apparent that the potential benefits of applying substantive restrictions similar to those in TILA to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.

I really don’t buy it, and I say this as someone with a small business credit card myself. I got the card from American Express when I was a freelance journalist: that was all they needed in terms of me being a small business. (And the ease with which individuals such as myself can get these cards only goes to underline the necessity of treating all credit cards equally.) The credit line on the card, when it was first issued to me, was embarrassingly enormous — many multiples of the credit line on my personal Amex card. I’ve never come remotely close to using the credit line I was given, I’d never want to, and if it was reduced that wouldn’t harm me in the slightest.

The card companies love issuing these cards, because they carry the biggest interchange fees of all. And if these cards continue to be carved out from TILA requirements, you can be sure that more and more individuals will end up applying for and using them: they’ll act as an obvious loophole for the card issuers to take advantage of.

So let’s make sure that all credit cards are treated equally, and let’s keep an eye too on the Federal Reserve, which still seems to be unduly captured by the very institutions it should be regulating. This paper doesn’t bode well for the Fed having much teeth going forwards.

COMMENT

I am just curious as to what action the FED has EVER taken that could be interpreted as bank unfriendly?

Posted by fresnodan | Report as abusive

The upside of mortgage default

Felix Salmon
Jun 2, 2010 14:21 UTC

I talked about “Jingle Mail 2.0” on Tech Ticker this morning, and Henry Blodget made the good point that freeing up mortgage payments for small-business operating expenses or consumer goods does provide a short-term boost to the economy — at the expense, of course, of banks’ balance sheets.

I’d be interested to see a economic take on this. In theory, the economy should be better off when you’re spending your money on mortgage repayments, because those repayments go straight into bank equity, which can then get levered 10X in the form of new bank loans. Similarly, if you stop making your mortgage repayments, the write-down at your bank can be enormous, and comes out of that bank’s equity, and therefore provides a significant constraint on that bank’s ability to make new loans.

But in the real world, things don’t seem to be working like that. The banks seem to be making good money while being very parsimonious in terms of new lending: all indications are that they are hoarding equity no matter what their customers do. Meanwhile, the money which would otherwise go to mortgage payments has very high utility and velocity: it keeps the employees of small businesses in their jobs, it gets spent at local businesses, and it can transform people’s lives.

And if the banks do end up in another solvency mess as a result of all this? Well, they seem to be good at raising new equity these days, and if that doesn’t work then maybe they can put together some kind of a debt-for-equity swap. So long as their cashflows are strong, a bit more deleveraging in the financial sector would probably do little harm, and might in fact improve systemic robustness.

I wonder though what would happen to mortgage lending over the long term. Right now it’s almost all being underwritten by the government, in one form or another — Fannie Mae, Freddie Mac, FHA, etc. At some point, banks are going to have to step in and take over that business. But when and how will that happen, if borrowers are significantly more willing to default than they ever have been in the past?

COMMENT

What ever happened to “render unto Caeser”? Anyone capable of paying their bills should do so – for those who cannot for GOOD reason the creditors should assist in any way they can. I do personally believe that in the case of homes they should be re-appraised for a fair price and the homeowner should be permitted to refinance based on the new value of the home. At least that way people wanting to sell and purchase something else would be able to do so without suffering a huge loss on their existing home.

Posted by kschoon | Report as abusive

Counterparties

Felix Salmon
Jun 2, 2010 05:14 UTC

Koblin keeps the Truffle Kerfuffle alive — NYO

Cramer, post-spill, recommends BP at $50, and then, a week later, at $49 — CNBC, ibid

How should ETFs account for dividend arbitrage, collateral costs, swap spreads, etc? — Index Universe

Basis points – an admonition — Dsquared

How a meme spreads, MSM stealing from blogs edition — Daggle

Spiegel fingers the culprit! “It was ECB President Jean-Claude Trichet, a Frenchman…” — Alphaville

Albany is withholding hundreds of millions of dollars in dedicated transit tax revenue from the MTA — Streetsblog

Basic broadband in Germany is $75/mo — WSJ

Immigrants don’t take jobs, they create them — OECD

Tad Friend dismantles Gary Vaynerchuk — TNY

COMMENT

From the OECD paper: “It appears … that certain nationalities are more prone to self-employment.”

Beware the fallacy of human fungibility, common among open borders types.

Posted by Mega | Report as abusive
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