News Flash: Airlines Discover Wireless Profit Center; Forget About Harm to Cockpit Communications

After years of claims that in-cabin wireless use would risk calamity, the airlines now want the public to believe any wireless access regulation--and the failure to make timely deregulation-- results from government inflexibility and inertia.  Why the change of strategy? 

The airlines want to "monetize" wireless access making it another profit center along with checked baggage and snacks.  But to fully do so they need to undo several decades of claims that wireless handset use would cause--or at least risk--harmful interference with air traffic control communications and other essential avionics.

    The restrictive FAA/FCC regulations resulted from active airline participation with a different rent seeking strategy.  The airlines' motivation did not solely stem from concern about consumer welfare.  Instead they wanted to protect their Airfone monopoly deal with GTE and later BellAtlantic/Verizon.
 

    Over time wireless has migrated from voice/text only to a vast array of data and applications.  The airlines now need to refute the avionics harm rationale they vigorously advocated in the first place.  True to form, sponsored engineers and now economists are retained to claim the need for immediate deregulation of "job killing" regulations.  These researchers join with more clearly defined stakeholders to vilify regulatory inertia, etc. 
 

    So now the avionics harm risk does not exist, if it ever did.  Smartphones always have had the ability to reduce transmission power to the lowest wattage needed making it highly unlikely that in cabin interference could result.  Also the airlines now have a transmission routing scheme, albeit overly costly, that eliminates the avionics risk by locating the necessary higher wattage link to an outside the cabin antenna for ground tower, or satellite access.

    My takeaway from this case study: it's easy to blame government regulators as inflexible.  But the political process forces these regulators to accommodate well-financed stakeholders like the airlines.  Belatedly the airlines have come to understand that wireless can become a lucrative, new revenue center.  So they launch a "public interest" campaign to persuade the FAA/FCC to remove now unnecessary, inefficient and costly regulations they helped create.  Sadly the true public interest has suffered for the decades of unnecessary handset restrictions.
 

    Also consider this irony: back on earth the wireless carriers have spent billions convincing Congress and the FCC that subscribers should not have certain access freedoms, including the "right" to unblock a fully paid for handset.  The wireless carriers claim that subscribers have no legal right to use a handset to access a competitor even if the subscriber no longer is bound  by a service agreement and even after the carrier has recouped any handset subsidy it offered the subscriber.  Some subscribers have resorted to "illegal" self-help strategies instead of asserting their right of ownership.

    I marvel at how wireless carriers can regulate and constrict individual economic freedoms, including the right to control fully owned property like handsets, including ones bought on an installment basis during a two year subscription term.  The FCC has a longstanding Carterfone policy that would prohibit such consumer restraints on corded handsets.  Sadly the FCC has bought bogus concerns about radio spectrum harm raised by the wireless carriers who benefit from the restrictions they impose in subscription agreements.

Response to Questions from Senator Udall

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Tom Udall posed additional questions. My answers are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/ (in the section entitled Testimony on the Consumer Wireless Experience).

WSJ Editorial on Wireless Handset Exclusivity

The Wall Street Journal has extended its record for knee jerk corporate boosterism and extreme snarkiness, this time rejecting any need to scrutinize the wireless industry. See
http://online.wsj.com/article/SB124692981354203419.html. The Journal waxes poetic about the competitiveness and innovativeness of the industry, but surprisingly reports in its editorial that the top four wireless carriers in the U.S. control 87.4% of the market.

Down here at the consumer level, we know that the Big Four mimic each other in prices, terms, conditions, and even in their advertisements. As the wireless market reaches maturity, the carriers still pitch how reliable their service has become and the niftiness of their exclusive handsets.

Innovative? The Big Four—and for that matter the entire industry, except for resellers-- apply a single business model that ties wireless service with subsidized wireless handset sales. Consumers may think they are getting a great deal, but in reality they pay more for the handset through higher monthly rates than if they simply had bought the handset without the subsidy. No carrier offers lower rates for new or existing subscribers who use unsubsidized handsets. The handset tie-in reduces churn and guarantees the subsidy pay back and more thanks to the two year service lock in.

What I do not understand is why consumers do not push back more strongly. On the front page of the Journal was an article about how a teenage has hacked the iPhone 3GS to accept unauthorized software. So some consumers can resort to self help. For everyone else, the allure of 30,000—count ‘em—software applications appears plenty. But if I asked most personal computer users if they would tolerate Dell or Comcast specifying the type and number of applications consumers could download, I think the response would be different. Smartphones have become handheld personal computers. Users of wireless handsets should have the same freedom to access software and services, limited only by a “harm to the network” and technical compatibility standard.

Currently, wireless manufacturers, such as Nokia, only have two major sales outlets: 1) the wireless carriers, which sell 60+% of all handsets; and 2) Big Box stores such as Best Buy and Walmart, which sell about 25% of all handsets. Think of the incentives to innovate and diversify if consumers could buy wireless devices through the many different channels available for wirebased devices. When the FCC forty years ago decoupled wireline services from handsets, a substantial boost in innovation and consumer choice arose.

Response to Questions From Senator Snowe

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Olympia Snowe posed additional questions. My answers are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/ (in the section entitled Testimony on the Consumer Wireless Experience).

Testimony on the Consumer Wireless Experience

The Senate Commerce Committee held a hearing that examined wireless handset exclusivity, as well as limitations on consumers' access to functions available from wireless devices, and downloadable software applications. While no one disputed the likelihood that smart phones will increasingly operate like small personal computers. However, wireless subscribers do not have the same freedom to attach to networks as they do for televisions, conventional personal computers and devices attached to the wired network.

The Apple Apps store current offers 30,000 choices compared to the millions available via the web. Major wireless carriers, such as AT&T and Verizon, claim handset exclusivity and access limitations are necessary business decisions that do not harm consumers. I disagree, and in testimony explain how an emphasis on recouping handset subsidies reduces innovation for devices that will become increasingly essential "third screen" alternatives to televisions and larger computers.

My written testimony and a two page summary is available at: http://www.personal.psu.edu/faculty/r/m/rmf5/.

The Commerce Committee link to the Hearing is available at: http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=03b81ffd-ba9f-42e6-8331-7c28f6d112b0

Skype Jailbreak and the Unholy Alliance of Wireless Handset Makers and Carriers

News of conditional iPhone Skype access has arrived; see http://gadgetwise.blogs.nytimes.com/2009/01/09/fring-for-the-iphone-all-skype-no-gripe/?pagemode=print. I use the word conditional, because iPhone users can access the service only via a Wi-Fi connection and not via the AT&T network.

This announcement provides both good and bad news. On one hand, Apple the computer manufacturer recognizes the user benefit in constructing a handset that can incorporate many applications, including ones that the wireless carrier may not be thrilled to support. On the other hand, both Apple and AT&T have absolutely no interest in considering the iPhone property owned and controlled by consumers. This means that Apple does not protest when AT&T limits Skype access to Wi-Fi islands of connectivity. Because iPhone users frequently use their phone while moving, AT&T can tolerate the loss of some revenue in the limited instances where non-moving subscribers make Skype calls.

Many iPhone users have undertaken the warranty violating exercise of “jailbreaking” their handsets to add an “illegal” application, i.e., software either Apple or AT&T do not want users to have. Clever users will find ways to make Skype useable over the AT&T networks, but I wonder why handset manufacturers and wireless carriers have the power to condemn such user options as illegal hacking. Surely after paying rates that recoup the handset subsidy don’t iPhone users own their phone?

In a number of different forums and writings I have argued for a wireless Carterfone policy that recognizes the lawfulness of using handsets to access any service, application, software or carrier provided such access causes no technical harm. We expect such attachment freedom when using handsets attached to wired networks, as well as television sets and personal computers. But apparently in our delight with a working wireless connection we accept limitations on handset attachment freedom. Some wireless carriers disable handset Wi-Fi access, so Apple must come across as a consumer advocate of sorts.

Wireless carriers do not have to comply with the wireless Carterfone policy in part because handset manufacturers carriers do not vigorously contest handset limitations imposed by wireless carriers. With only four major carriers controlling most of the market, and locking most subscribers into two year service agreements, in exchange for the privilege to buy a subsidized handset, no handset manufacturer cares to risk its good standing with the carriers. If Nokia had more ways to sell handsets—as occurs in most parts of the world outside the U.S.—it would have far less tolerance for carriers disabling consumer welfare enhancing features like Wi-Fi access.

U.S. wireless carriers have cowed handset manufacturers into submission. With such an unholy alliance limited Wi-Fi-based iPhone access to Skype looks generous.

The Downsides in Maximizing Spectrum Auction Proceeds

My classical economics training suggests that when governments maximize spectrum auctions—or the award of any franchise—the nation “wins” by awarding a public resource to the party most willing and able to maximize the value reflected by the asset. Surely a venture willing to part with the most money has maximum motivation to operate efficiently and to offer consumers what they want.

But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.

Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.

I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.

There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.

Voodoo Economic Modeling and Telecom Policy

In my capacity as a university professor, one of the ways I serve “the academy” involves blind peer review of journal manuscripts. I also have the opportunity to read the academic literature. I marvel at the number of instances where someone—typically holding a PhD in economics—uses a model to rationalize a regulatory agency decision, or to quantify the harm resulting from an ill-advised initiative. The use of complex equations, complete with Greek symbols, attempts to legitimize any sort of bogus conclusion. Worse yet, far too many of these models did not arise out of an academic’s intellectually curious mind, but instead provides some scientific basis for a public policy outcome sought by a specific stakeholder who has financially sponsored the research.

This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.

Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.

Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?

It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:

Quantification of how many jobs a sought after initiative will create;

Estimates of how much money a change in regulatory policy will cost consumers;

Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and

Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.

Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.

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.

Who Makes the Any Apps Any Handset Call?

The Wall Street Journal today reported that FCC Chairman Kevin Martin wants to reject a Petition for Declaratory Ruling filed by Skype that would establish a wireless Carterfone policy, i.e., that wireless carriers must allow subscribers to use any compatible handset to aceess any application, content or software.

Chairman Martin has confidence that the marketplace solutions obviate any necessary FCC intervention. Such optimism must derive in part from the apparently newfound willingness of one major wireless carrier, Verizon, to support aspects of open access. Perhaps Chairman Martin has confidence in the marketplace based on the magnanimous offer of most wireless carriers to pro-rate their early termination penalties by $5 a month.

But here’s the rub: there is a big difference between a carrier making the decision of what constitutes compatibility and network harmlessness and the neutral criteria driven decisions of a third party. The variety of handset options that attached to wired networks attests to a robust marketplace structured by a rule that simply requires a third party lab certification that the handset will not cause technical harm to the any wired network. But for wireless handset access the carrier—and not a third party--can serve as judge, jury and executioner.

I recognize that wireless carriers have invested greatly in networks that they own and operate. But these network operators have agreed to take on the responsibilities of common carriers in exchange for major, financially quantifiable benefits. It works both ways, but the wireless carriers never seem to have to acknowledge the benefits for which they qualify including access to government owned rights of ways at bargain rates. Wireless carriers may not have gotten free access to land, which their wired carrier counterparts got, but the right to install towers adjoining the interstate highways and on other public lands does not cost anything near the price of access to private land.

Sponsored researchers, including economists who ought to know better, have attempted to make the concept of market failure an oxymoron. Call it what you will, but with a market as concentrated at wireless is in the United States with generally the same terms and conditions available to subscribers, does not appear to be a market upon which we can rely on the carriers to self-regulate.

I surely do not see the wireless carriers busting a gut to offer a discount to subscribers who do not trigger a handset subsidy, or to encourage more network use with generally open access policies. If the market were so robust, would not at least one carrier consider an alternative to bundling a subsidized handset with higher monthly rates to recoup the handset subsidy? For subscribers content to continuing using an existing handset, no carrier offers a lower rate reflecting the fact that they do not have to subsidize a handset.
The carriers might want to have every subscriber equipped with the latest handset containing the latest average return per user (“ARPU”) enhancing options, but I do not see the carriers aggressively offering new third generation features.

I guess one can infer that Chairman Martin seems to think a wireless Carterfone policy imposes more unnecessary regulations. But that simply is not the case. Carterfone establishes game rules about what constitutes fair play in terms of what subscribers can do with the handsets that they own. Carterfone established the consumer right to own and attach telephones to the wireline network. Chairman Martin has endorse applying Carterfone principles to the cable industry by requiring operators to support the CableCard option in lieu of allowing carriers to tie cable television service with a compulsory lease of a set top box.

But when it comes to wireless handsets—even one that you think you own—Chairman Martin thinks it just fine for those market-driven wireless carriers to limit subscribers’ freedoms well beyond any legitimate concerns about network harm.

Game, Set and Match: How AT&T and Verizon Will Largely Lock Down the Third Screen

The results of the 700 MHz spectrum auction solidify the market dominance of AT&T and Verizon by locking up the best additional spectrum a competitor could access for the foreseeable future. In light of shroud of secrecy surrounding the mechanics of the auction—no doubt to maximize the one time windfall for the national treasury—we will never know what sort of premium these two carriers paid to force out even such a deep pocketed player as Google.

AT&T and Verizon now have plenty of warehoused bandwidth to add to their considerable market share. The top four cellular telephone carriers in the United States have a combined market share of 88.1 percent . See Leslie Cauley, AT&T eager to wield its iWeapon, USA TODAY May 21, 2007)(displaying statistics compiled by Forrester Research); available at: http://www.usatoday.com/tech/wireless/2007-05-21-at&t-iphone_N.htm. With Sprint/Nextel a likely acquisition target, look for the next generation network of choice to become almost as tightly controlled as when benevolent Ma Bell dominated.

Once upon a time the United States demonstrated best practices in market performance and government oversight of the ICT sector. That cannot be said now. Instead we have an acutely political FCC which panders to economic doctrine and deep pocketed advocacy of stakeholders such as AT&T and Verizon. How can this nation not suffer in the global information economy when two incumbent carrier types (telco and cable television) share a 96+ percent duopoly over broadband terrestrial networks while one of the two incumbents (telco) dominate the wireless alternative. Susan Crawford notes that AT&T and Verizon have every incentive not to make wireless a robust competitor of wireline broadband; see http://scrawford.net/blog/.

Verizon can tell us how close to a open network they will operate, but absent a third party certification process—which is what a wireless Carterfone policy would require—carriers can invoke network and “systemic” integrity to preserve walled gardens and a mutual non aggression pact with their wireline brethren.

Former FCC Chairman Reed Hundt says it succinctly:
“[The U.S.] is the last market in the world that people choose to bring a new wireless product to. Not second or third--the absolute last. Right now the policy of the FCC has been to encourage AT&T and Verizon to become the twin Bells that dominate the wireless business. They’re allowed to buy all the spectrum they can find. The antitrust laws are waived and ignored every time they appear to be a problem. The FCC is the only spectrum auction entity in the world that does not carve out spectrum for new entrants. They do it in Mexico, Canada, the U.K., China and Japan. Only here does the new entrant not get much of a chance. This is the only country in the world where the rule is the big guys can buy all of it. When you consolidate service providers, just like in the old days, when there was not two Bells like today but one, everybody knows what happens. It’s very hard for innovators to get into the market, in terms of content or software or hardware.” Reed Hundt, Interview with Ed Gubbins, Telephony Online, Feb 28, 2008; available at: http://telephonyonline.com/broadband/news/reed-hundt-auction-0228/.

Recent Presentation and Paper on Wireless Carterfone

Belatedly the network neutrality debate has begun to address the extent to which wireless subscribers can use their handsets to access any content, including software. In 1968 the Federal Communications Commission's Carterfone policy required wireline telephone companies to decouple telecommunications service from the installation and maintenance of inside wiring and the lease or sale of telephones.

Decades later the FCC may consider what rights wireless subscribers have to attach devices and access content of their choosing. I have written a paper supporting wireless Carterfone for the New America Foundation; see http://www.newamerica.net/publications/policy/wireless_cartefone.

Some slides outlining the paper are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/New%20America%20Foundation%20Free%20My%20Phone.ppt.

Anyone interested in a longer, heavily footnoted piece can access it at: http://www.personal.psu.edu/faculty/r/m/rmf5/HoldthePhone.pdf.

Despite promising words from Verizon and other wireless carriers, wireless Carterfone policy does not currently exist. The fact that a significant percentage of Apple iPhone owners would risk "bricking" their phone (rendering the device inoperable) attests to the growing desire to be free of handset restrictions.

At a Congressional briefing hosted by the New America foundation Wall Street Journal opinion columnist Walt Mossberg reiterated his view that wireless carriers operate as "Soviet Ministries." Whether these carriers embrace wireless Carterfone will depend on future initiatives that offer discounts for service to subscribers with unsubsidized handsets, speedy access to subscribers by third party (unaffiliated) software, applications and content providers and a whether a level competitive playing field exists between carrier affiliated handset and content providers and unaffiliated ventures.