Tuesday, April 15, 2008

Wireless Carterfone is Not Overbearing Regulation

I don't understand why applying Carterfone to wireless is controversial and successfully framed by opponents as an extension of regulation. I consider it consumer empowerment/protection and a logical extension of the consumer welfare enhancement achieved when wireline telcos had to decouple compulsory handset rentals with mandatory inside wiring “maintenance” and telephone service. I see the same consumer welfare gain when wireless subscribers, like me, do not want to play the “free” handset subsidy game and simply want cheaper service. Using the $5 a month offset from the early termination penalty I do not see why one or more wireless carriers won’t offer me a $5 a month discount if I bring my use my own phone and do not trigger a subsidy. But when 4 carriers control 88%+ of the market it’s quite easy for them to engage in consciously parallel behavior. No carrier offers a discount rate plan for existing subscribers coming off a 2 year plan, or a new subscriber who wants to use an existing phone. Why not? BTW I am not expecting the FCC to compel such a discount or to “meddle” with carriers’ business decisions.

I consider it a disingenuous argument to deem Carterfone applicable only to a vertically integrated Bell System environment 30 years past. First the FCC has applied Carterfone post-Divestiture to non-vertically integrated markets such as cable. Second one could argue that by bundling the handset with service, the wireless carriers in effect are doing the same integration as the pre-Carterfone wireline carriers did. In reality Nokia and few independent companies retail handsets; over 80% of all handsets come from the carriers themselves or from big box stores such as Best Buy who get a commission. Third wireless carriers (CMRS operators) remain common carriers when providing telecommunications services; the Commission has authority to require these carriers to comply with handset attachment/interconnection requirements no different than wireline carriers have done for 40 years. No one seems to recall that wireless common carriers accrue ample, quantifiable financial benefits from this classification, e.g., below market access to federal, state and municipal land for tower sites.

We could have quite a disagreement about the scope of competition in the wireless and broadband marketplace. From my perspective and that of the HHI, 2 carriers controlling 96+% of the broadband market and 4 carriers controlling 88+% of the wireless market do not show robust competition. Imagine an airline marketplace in the U.S. served only by United and American. Furthermore someone really ought to introduce the concept of cross elasticity to the FCC statisticians: do you think satellite delivered “broadband” at one tenth the bitrate and 2-3 times the cost is a functional equivalent? Do you think terrestrial wireless 600-800 kilobits per second is a functional equivalent to 4000 or more kilobits per second?

Perhaps I can make a more persuasive argument if we examine Carterfone outside the wireline/wireless environment. You probably know that the Commission requires cable companies to support a CableCard alternative to compulsory leasing of set top converters. The CableCard rental typically is $1-2 a month compared to a set top box rental of $5-7 a month. I don’t see many researchers claiming the mandatory CableCard alternative is over reaching regulation and a taking of cable company property. And I surely don’t see anyone making a credible argument that consumers opting for the CableCard option don’t extract a quantifiable welfare gain. Wireline and wireless subscribers should have the freedom to acquire a cheap but functional phone subject to a Part 68 process that creates a certification process using third party labs and third party IEEE standards. I am not fully comfortable with the fox guarding the chicken coop, i.e., carriers making the decision which phones, applications and software are permissible.

Lastly I recognize that wireless subscribers heretofore have liked the option to get a new phone every 2 years. But there is no doubt they pay a premium that more than compensates the carrier for the handset subsidy. Increasingly consumers recognize what they give up in terms of handset freedom. The million+ hacked iPhones attest to the self help tactics of consumers. Perhaps the wireless carriers have gotten religion from such consumer push back. I still would fee more comfortable with a formal determination that Carterfone applies in the event the carriers are not as fair and as transparent as a third party would be.

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