Monday, August 6, 2007

Protecting the Wireless Crown Jewel

The incumbent wireline telephone companies increasingly rely on wireless service revenues to generate growth and upward trajectory in their stock. Accordingly it should come as no surprise that they would gear up their formidable public policy/sponsored research machinery to oppose any initiative that would generate more competition, enhance consumer welfare and possibly reduce profit.

That explains the noisy, but largely bogus explanations why it makes no sense to allow consumers to access any cellular network with any cellular telephone. A high ranking official at Verizon opposes the applying Carterfone principles to wireless on three grounds: 1) separating handsets from service was necessary for a monopoly, but not a competitive market; 2) separation would involve “sweeping government intervention;” and 3) an any handset rule would risk harm to wireless networks. see Link Hoewing, The Hype in the Skype Petition; available at

Ouch. These rationales come across as rehashed Bell System doctrine that made no sense in the 1970s and surely makes no sense now. Separating handsets from service is a smart regulatory remedy regardless of the market structure of the wireless business. The FCC would unleash billions of dollars in savings to consumers simply by allowing them to extend the usable lives of existing handsets and allow cheapskakes like me to activate the $1 handset I can buy at garage sales. Indeed some of the savings would flow to cellular operators who would have fewer handsets to subsidize. Of course the operators are not balking at having to subsidize handset sales. They want to preserve the two year lock in that the subsidy supports, limit customer churn and reduce price competition.

If consumers could bring their own phone to a new service arrangement, cellular operators might have to offer lower service rates, because they would have no subsidy obligation. Cellphone operators claim to allow consumers to use a “compatible” phone, but consumers receive no benefit through lower rates. U.S. cellphone operators do not want you to know that in other places in the world consumers have access to both cheap prepaid service, using calling cards, as well as cheap almost “throwaway” handsets geared to the prepaid services. These arrangements have no lock in and offer a far better value proposition than what Virgin and other so call mobile virtual network operators offer in the U.S.

I do not see how government sweeps in and pervasively regulates the commercial mobile radio service simply by requiring the unbundling of service and handset sales. If anything government remedies a market failure. When over 60% of all handset sales occur at cellphone company stores and another 30+% from a handful of Big Box stores, such as Best Buy, Circuit City and Walmart, I believe that the carriers have blocked the development of a secondary and resale market for handsets. According to the MIT Dictionary of Modern Economics market failure occurs as a result of the “inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optima’ level.” Safeguarding 95% to a captive, single distribution chain strikes me as viciously anticompetitive.

The harm to the network argument reminds me of the Bell System claim that attaching a non-Western Electric handset would “violate systemic integrity.” Of course systemic integrity had nothing to do with potential or real technical harm. The FCC established a lab certification and common interface requirement and the rest is history. The same could be done for wireless handsets.

Mr. Hoewing claims unbundling has not generated any major innovations in telephone handsets, but that misses the point in two ways. First he ignores that separating handsets from the network forced the network to remain largely neutral and accessible by any device and for any services. This did not relegate underlying carriers to operating “dumb” networks in perpetuity, but it did allow end users to inject network management functions at the edge instead of having to pay for a finite set of centralized options available from the carrier. Second, Mr. Hoewing ignores the widespread proliferation of handset types available in a competitive marketplace.

On the other hand what great innovations have the U.S. cellphone carriers provided consumers? Ringtones, short messaging and slow speed Internet access comes to mind. Compare that level of progress with the scope of innovation in the Internet.