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.

1 comment:

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