Monday, July 30, 2007

Wireless State of Play: When Good Enough is the Enemy of Greatness

I marvel at the creativeness in the opposition to policy initiatives that I believe would confer ample consumer benefits by imposing lawful interconnection and accessibility requirements. You should consider reading closely the rationales proposed by Robert Hahn, Robert Litan and Hal Singer, The Economics of 'Wireless Net Neutrality' http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111
for objecting to rules that would force wireless carriers to comply with regulations long since applied to wireline carriers with great consumer benefits.

Professor Tim Wu proposed that wireless carriers comply with rules that would force them to decouple service from the sale of handsets and to comply with network neutrality principles. See Wireless Net Neutrality: Cellular Carterfone on Mobile Networks, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027.

Opponents to the Wu proposal offer a glowing endorsement of how good the wireless infrastructure has become in the U.S. presumably because of light regulation and robust marketplace competition. Messrs Hahn, Litan and Singer would put the burden of proving market failure on Professor Wu in light of the wonderful output of self-regulation and competition. In other words regulatory safeguards, like the ones suggested by Professor Wu, are unnecessary and were applied when a vertically integrated monopolist operated.

First of all I marvel at how quickly opponents of wireless regulation ignore the still applicable common carrier requirements. Cellular carriers are subject to Title II of the Communications Act, including compulsory interconnection in a fair and nondiscriminatory manner. When 95% of all cellphones are sold at the time the cellular operator initiates service, I know there is an interconnection issue and a bundling problem. The cellular operator does not want anyone to buy a $2 phone at a garage sale, because a secondary market for handsets would prevent carriers from locking in consumers to 2 year service “commitments.” Additionally the carriers would lose any argument that they need two years of service to recoup the subsidy they paid to sell a $400 phone for much less. Yes the cellular carrier might reluctantly agree to interconnect and provide service to the used phone, but the consumer would have to pay rates as though the carrier supplied an expensive new phone.

So opponents to wireless net neutrality ignore the rents carriers capture when consumers can’t engage in a transaction that involves cellular service only. When wireline telephone service subscribers got the “right” to “own their own phone” telephone service rates dropped significantly because the carrier no longer could bundle the lease rate for the phone along with various maintenance fees.

Fair interconnection terms are needed for wireless carriers regardless of whether they are vertically integrated with a handset manufacturer and whether they operate as a monopoly. The integration allows any carrier to capture revenues well in excess of the handset subsidy. Indeed Iphone customers seem to be paying full price for the handset and cellular service rates as though a handset subsidy existed. Even in the absence of a monopoly the handful of cellphone service options available to consumers does not include lower cost bring your own handset rates.

I also take issue with the self-congratulatory assessment of the cellphone industry in the U.S. Contrary to what Messrs. Han, Litan and Singer would have you believe the U.S. does not come anywhere close to best practices in wireless in terms of throughout, cost, features, and even market penetration. The ITU ranks the U.S. at 63rd in wireless penetration. See http://www.itu.int/osg/spu/publications/digitalife/;
See also, http://www.itu.int/ITU-D/icteye/Reporting/ShowReportFrame.aspx?ReportName=/WTI/CellularSubscribersPublic&RP_intYear=2005&RP_intLanguageID=1;
High speed, broadband service is nothing like that available in Europe and Asia in terms of accessibility and price. The ITU reports that broadband access costs 49 cents per 100 kilobits per second in the U.S. versus 7 cents in Japan and 8 cents in Korea. See http://www.itu.int/osg/spu/publications/digitalife/statisticalhighlights.html.

Of course when statistics do not support the party line and display inconvenient truths, stakeholders shoot the messenger and challenge the veracity of the statistics. In the wireless arena mediocre to good performance provides the basis for rejecting initiatives that would force carriers to become better.