Thursday, January 1, 2009

Wireless Economies of Scale at the Price of Diminished Competition

In 2001 the FCC eliminated a cap on the amount of bandwidth a single wireless carrier could control. With nothing coming close to quantifiable or empirical evidence, the Commission simply bought the assertion of incumbent carriers that the public interest would benefit when incumbent carriers can achieve better scale economies to serve a growing subscriber base. The FCC made no credible assessment whether larger scale would preempt market entry and reduce the potential for more facilities-based competition.

Since 2001 incumbent carriers have dominated the wireless marketplace in the United States, building on the FCC’s decision in the early 1980s to award incumbent wireline carriers the first of two licenses. Currently four national carriers control 90% of the market and their primary advertising message emphasizes how well their networks work. In other words price competition rarely appears while the carriers engage in what antitrust lawyers and economists term “conscious parallelism” conduct. If one carrier raises text messaging rates from ten to twenty cents, then the other three matches the increase. Once in a while the weakest carrier Sprint, comes up with a pricing initiative matched by the other three, but all four carriers offer few differentiating price options, e.g., a discount to subscribers with used handsets that the carrier does not have to subsidize.

What if the FCC had retained a 45 MHz or 55 MHz spectrum cap? The possibility exists that a fifth or sixth national carrier might have evolved as well as several more regional carriers. If the number of carriers increases beyond four, the potential increases for one of the carriers to conclude that a pricing initiative will capture more subscribers and revenues than sticking to parallel pricing. As well it would not take a venture with incredibly deep pockets to enter the market.

In the latest auction of spectrum, the choice 700 MHz band, Verizon, AT&T, Sprint and T-Mobile dominated and even Google opted eventually not to challenge the incumbents. The incumbent carriers now so dominate that absent affirmative legislative or regulatory efforts, the market appears likely to remain static.

How can creative destruction and competition thrive when precious little spectrum remains available? The national treasury perhaps received more money from incumbents keen on warehousing spectrum and preempting market entry. But these carriers get to amortize their spectrum investment which reduces future tax liability. As well the public probably has fewer choices and a profitable surplus accrues to carriers able to avoid sleepless afternoons competing.

Monday, December 29, 2008

Fuzzy Math in Calculating the Cost and Profit in Wireless Text Messaging

The New York Times recently addressed the issue of wireless texting cost and strongly implied that carriers make a lot of money from this service that costs them little to provide. See http://www.nytimes.com/2008/12/28/business/28digi.html?_r=2&partner=rss&emc=rss. Of course wireless carriers quickly will respond that consumers (can) get an incredible bargain by subscribing to an all you can eat (“AYCE”) rate plan. If you apply the typical non-rate plan of twenty cents per text message, you can conclude the carriers are gouging, but if you use a $10.00 per month rate, coupled with lots of usage, the per message cost drops substantially.

Texting provides a helpful case study for assessing the competitiveness of the wireless marketplace and the value proposition presented. First, we should appreciate that the wireless infrastructure has substantial upfront, sunk costs, e.g., the need for carriers to competitively bid for spectrum, construct towers and install other facilities before accruing the first dollar in revenues. However, once having sunk this substantial investment, the incremental cost of providing an additional minute of service approaches zero absent network congestion. For text messaging, the additional or “marginal” cost of providing service surely approaches zero, because carriers can load text traffic onto control channels already installed for a different purpose, to set up calls. See http://www.privateline.com/mt_cellbasics/2006/01/channel_names_and_functions.html.

One could argue that charging twenty cents for something that costs next to nothing constitutes a major rip off. However, you do have to keep in mind the substantial start up costs the carriers incurred and the need to recoup that investment from any and all services. On the other hand, even when offering texting at AYCE rates the carriers can generate ample profits.

So if texting is so popular and profitable why don’t wireless carriers compete on price? Good question. In a robustly competitive market price becomes a major factor, yet for wireless the carriers’ advertisements almost exclusively tout reliability and they match each other’s texting prices. Additionally carriers, their trade associations, and the FCC regularly emphasize the rate plan per text message or per minute talk time rate to show how competitive the wireless marketplace is and what great consumer surpluses subscribers accrue.

In reality not all wireless subscribers enroll in a text messaging plan, nor do all subscribers come close to using all their monthly allotments of use. For the high volume user, rate plans help reduce per minute costs, just as buffet restaurants reduce patrons costs per once of consumption. A big gap exists between metered and AYCE per minute costs, but to make the best claim of marketplace competitiveness one has to work with AYCE plans, or ones offering large buckets of minutes.

U.S. wireless carriers currently offer some of the most expensive and cheapest rates for texting and telephoning. Of course it makes sense for subcribers to enroll in rate plans, but only if they accept the reality that low cost results only from large usage.

Deconstructing AT&T’s Claims About the iPhone

Unlike the other wireless carriers, which primarily use advertisements to claim how well their networks work, AT&T pitches both reliability and speed. AT&T claims to operate the nation’s fastest 3G network. See http://www.wireless.att.com/cell-phone-service/specials/iPhone.jsp?WT.srch=1. The carrier claims the following bit rate delivery speeds: “typical download speeds of 700 Kbps—1.7 Mbps;” and “typical upload speeds of 500 Kbps—1.2 Mbps.” See http://www.wireless.att.com/learn/why/technology/3g-umts.jsp.

AT&T’s claims about transmission speeds remind me of the claimed distance coverage of Family Radio Service transceivers, the next generation of Citizens Band radios. Uniden claims my transceivers will provide service for “up to twelve miles.” Yeah, right. I am lucky to get one and one-half miles.

So what bitrates do AT&T 3G subscribers actually get? Wall Street Journal columnist Wall Mossberg measured the 3G iPhone bitrates at not terribly blazing 200-500 kbps.
See http://ptech.allthingsd.com/20080708/newer-faster-cheaper-iphone-3g/.

The good news about AT&T’s suspect bitrates claim lies in the apparent strategy to pitch something more than service reliability. The bad news lies in the overstatement and the reality that U.S. wireless carriers comparatively lag carriers in many other nations. But of course that would require consumers, regulators and legislatures to question the claims of carriers, something "obviously" best left to the marketplace.