Monday, June 11, 2007

Separating Cellular Service From Handsets

You may know that Skype has proposed the unbundling of cellular service from the sale of handsets; see http://svartifoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518909730. The FCC started the wireline equivalent of this in 1968, so why has it not occurred in the wireless arena?

One would think market separation as an option would serve the public interest and save money for consumers and possibly cellular operators as well. If you don't need the latest and greatest handset you could pick up a perfectly good handset for a couple of dollars. The cellular operator could activate service perhaps at a lower monthly rate and certainly without a 1-2 year lock-in period, becuase customer acquisition costs would near zero. There would be no handset to subsidize. But of course the handset provides the means (and justification) for the lock-in in the first place.

Cellular operators must have reached the conclusion that they have more to gain by locking in consumers to a 2 year service commitment, coupled with $175 early termination charges, than they lose in having to subsidize the cost of a handset. As usual there are plenty of hired scholars willing to ignore this simple fact and come up with spurious reasons why wireless unbundling is a bad idea and has no parallel to the successful wireline unbundling. For example, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.

Much of the opposition to wireless unbundling hypes the competitiveness and innovativeness of the industry and the fact that wireline unbundling occurred in a monopolized and vertically integrated environment. Fair enough, but what about the lost consumer welfare for people like me who want a month to month contract and the flexibility to vote with my feet to a better deal? If I can make do with a $5 garage sale handset, why shouldn't I get a cheaper rate plan?

BTW all cellular subscribers have paid hundreds of millions for number portability--the ability to migrate carriers while retaining an existing telephone number. The two year lock ins and the absence of a market for used handsets limits our ability to available ourselves of number portability.

1 comment:

pcsolotto said...

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