The Academics’ Blessing and Curse

            One of the true joys available to academics is having the time to stay current on the literature.  Particularly during the summer I read many law review articles, FCC and court decisions, books and sponsored research.  I’m rethinking the wisdom in devoting time to separate the plausible from absolute falsity in sponsored research.  I get so agitated and motivated to fire up a rebuttal to set the record straight.  And just who will find about such work, much less read it?

            Of course a rather obscure academic like me has little chance of getting much of a forum.  I don’t have a deep pocketed benefactor underwriting a campaign to get my work prominently displayed, cited, quoted and believed.  All I can offer to anyone who finds out about me is a fair minded assessment of the situation with an eye toward finding facts and detecting falsity.  So when three prominent researchers tell the world how competitive the wireless marketplace is I have to read their work.

            Recently I am told that significant market entry stands as a major reason to conclude how competitive the wireless marketplace is.  The authors identify the following carriers as proof positive that the Big Four national carriers, with 92% market share, face a robustly competitive market: Clearwire, Leap, MetroPCS, LightSquared and the super regional carriers like U.S. Cellular, Cellular South, and Atlantic Tele‐Network.

            At first blush I thought that the claim of spectrum scarcity must be bogus what with all of these presumably new carriers. But examine the list closely and first ask which of these carriers acquired new spectrum and new licenses say in the last four years.  Answer: two,; Clearwire and Lightsquared.  Then ask which of these two new carriers provide commercial service right now?  Answer: one, Clearwire.  Finally ask whether Clearwire offers a competitive alternative to what commercial mobile radio service operators offer?  Answer: It depends.  If you are looking for a Clearwire smartphone to make and receive both telephone and Internet calls, Clearwire does not deliver.  Clearwire works primarily with lap top computers equipped with a USB dongle providing a wireless tether.

            Of course the authors of this particular sponsored research know this.  But what’s wrong with interpreting the facts a tad differently?  For me the answer is: a lot!  But even with a largely free summer it is absolutely foolish of me to attempt to set the record straight when the process all but guarantees that my work will get ignored.

Wireless Cost Per Minute and Consumer Behavior

           It has become a largely unquestioned “fact” that U.S. wireless consumers enjoy remarkably low per minute costs rivaling what the poor in Africa and Southeast Asia pay.  Sponsored researchers recently chided the FCC for failing to state unequivocally how effectively competitive the U.S. wireless market is, largely by reciting the low cost mantra, counting carriers and heralding evidence of market entry.  See, e.g.,  Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 2011); available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1880964.

            The low cost claim can be validated by certain assumptions, most notably that subscribers consume all or nearly all available minutes of use per month.  So one way to goose the cost statistics would be simply to take the maximum available minutes of use, e.g., 450, 700 or 1200—remarkably identical for the Big Four national carriers—and divide it by the monthly subscription rate, conveniently forgetting to add the extra 20-30% in fees, taxes, surcharges and pass throughs.   A slightly more valid analysis would use some national consumption average rather than the maximum allotment.

            So if you come close to the allocated maximum minutes of use, or if you take the carriers at their word and robustly consume on an all you can talk, text or surf basis, you certainly have low per unit costs.  It makes absolute financial sense to get on a texting rate plan at $10 a month—no make that $20 a month, raised in lock step by the Big Four—if you have nimble thumbs and one or more teens in your household.  U.S. carriers don’t need sponsored researchers to tout lowest global texting rates when the average teen makes over 3300 a month.  

Rather than prove the U.S. wireless marketplace is robustly or even effectively competitive, such uncalibrated calculations of cost do nothing more than confirm certain rather obvious facts about consumer behavior.  When presented with a large basket of minutes, or better yet a buffet-style, unmetered service, many consumers push their consumption to maximize the perceived value.  When I consume a buffet meal—especially those grand affairs at hotels—I consume well past a normal level of satiety.  Call it wasteful, unhealthy and an encouragement of “overconsumption.”  Call it unfair, particularly to people with small appetites who must subsidize their gluttonous, big appetite counterparts.  But recognize that the low per minute rate results less from competition and more from a pricing strategy shared by all carriers offering post-paid plans. 

Becuase the majority of U.S. wireless subscribers have post-paid plans with unlimited or large baskets of minutes, researchers can tout low per unit costs only if monthly consumption is high.  Users of metered service are far more attentive to their usage and their cost per minute cannot drop simply by talking and texting more. 

The availability of low cost per minute wireless rates in the U.S. for subscribers with large baskets of minutes or unlimited use says little about whether competitive necessity forces low rates.  Nor does it “prove” a market driven need to price rates low. 

Number Counting as a Measurement of Wireless Competition

           Advocates for deregulation often use a simple measure as the primary basis for claiming a particular marketplace operates competitively.  They count the number of operators, both facilities-based and resellers.  So if there are four wireless carriers in most of America, it stands to reason that the market operates competitively, right?

            In reality, we need a little more than number counting.  Do these ventures offer different services, at different prices?  One could count into the hundreds the number of gas stations in a locality, but these ventures offer fungible (substitutable) products typically at the same price. Gas rises or falls in my community when the price setter, a major regional chain, decides to act.  Every other gas station operator follows as “price takers.”  Are they competing?  Certainly not on price.

            There surely are four major wireless carriers in most U.S. cities, but they rarely compete on price.  Shiny new handsets, yes, but the price points of the four carriers remain almost lock step the same.  When has any carrier announce a sale?  Why do all four carriers have the same minutes of use baskets, starting at 450 minutes? What discount can one get if they eschew a subsidized handset?  The little price competition that exists comes from T. Mobile and Sprint, one of which may evaporate soon.

            Of course ventures can compete on factors other than price, but an analysis of the wireless marketplace requires more than a glib reference to the number of operators.  The FCC’s last two wireless competition reports (see http://wireless.fcc.gov/index.htm?job=cmrs_reports) try to make a more nuanced, granular and sophisticated analysis.  Stakeholders who want you to believe the wireless marketplace is “robustly” competitive scoff at such an exercise.

Interconnection Incentives—The Commercial Aviation Example

            One would think airlines affiliated in one of the three major alliances would have a keen interest in interconnecting their reservation and other networks.    But even these motivated carriers come up short, largely because interconnection means more than the physical joining of lines.  Interconnection in commercial aviation requires affiliated airlines to use the same software, or at least devise ways for different software to become more compatible.

            It happens less than you’d think.

            On several international trips my itineraries have required a change of plane and airline, all of which are affiliated in the Star Alliance.  On a code share, where United Airlines operated the aircraft, but All Nippon Airways may have ticketed the flight, United all but disavowed the fact that I was an upcoming passenger.  No access to seating charts, buck passing to ANA for any questions or issues, lower frequent flier miles, etc.  Of course ANA did not have access to the reservation, because it was on a United aircraft, so around and around I went.  On a few flights Lufthansa was convinced my wife and I were blind and repeated efforts to claim sight failed.

            The point here is that even when carriers have motivations to cooperate and interconnect, incompatible operating software and protocols gum up the works.  So when unwilling and uncooperative parties have to interconnect imagine how many issues can arise that frustrate consumers.

            Despite efforts to emasculate and dilute the meaning of common carriage, both airlines and telecommunications service providers still have duties to cooperate.  Airlines—even those in separate alliances—generally have to accept baggage and passengers that may have originated or will terminate on another carrier.  Telecommunications generally have to accept traffic from other carriers.  But with and without incentives to cooperate bad things happen.  Without a referee consumers may end up short changes and some grand long term marketplace remedy seems far, far away.