How Can U.S. Wireless Carriers Have the World’s Highest ARPUs and Some of the Lowest Rates?

          U.S. wireless carriers, their trade associations and sponsored researchers do not want widespread understanding that the U.S. market generates the highest average revenue per user (“ARPU”) returns in the world. “Verizon Wireless, NTT DOCOMO, AT&T, Softbank and KDDI reported highest wireless data revenues among other global top 10.”  B.P. Tawari, Beyond 4G Blog Site, New Report : Global Wireless Data Update Q1,2010 (Aug. 4, 2010); available at: http://www.beyond4g.org/new-report-global-wireless-data-update-q12010.  Leading ARPUs range in the 35-40%.

         U.S. carriers prefer to emphasize that they offer some of the lowest rates globally.  The carriers conclude that if market forces necessitate having to offer low rates, then the wireless marketplace must be fiercely competitive, notwithstanding best in class ARPUs.

       How these carriers generate massive ARPUs while also offering low rates?  Answer: All You Can Eat Pricing (“AYCE”) for extremely high volume customers with extremely high margin rates for low volume customers. It is easy for a wireless carrier to claim per minute voice and per text rates are extremely low, even if in fact most customers do not come close to using all of their allotted minutes of use and texts.  With all you can eat buffet pricing, wireless carriers can claim incredibly small margins for serving the households that, for example, generates several thousand text messages monthly.  For customers unwilling to pay the $20 monthly rate, wireless carriers can charge 20 cents a text for a service that costs less than one tenth of a cent to deliver.

          Wireless carriers want to eliminate AYCE pricing particularly for data service.  But in doing so they risk a clearer understanding of just how profitable and uncompetitive they are.

 

A Wireless Duopoly?

Recently Cox Communications announced its departure from the wireless telecommunications.  Similarly some speculate whether T-Mobile can survive if its merger with AT&T does not happen.  What does it mean when an incumbent carrier exits a market, with doubts about the ongoing viability of one of the Big Four national carriers? There are too many carriers and a market shake out must reduce competition?  The Big Two carriers (AT&T and Verizon) have engaged in lawful and questionable tactics to “corner the market.”?  Something else?

If a hyper-competitive market migrates to a less competitive balance of two carriers, two things appear clear: 1) a duopoly has evolved making ludicrous to claim self-regulation will foreclose anticompetitive conduct; and 2) market failure has occurred, unless consumers somehow do not suffer from haivng a choice of two facilities-based carriers and a few resellers.

If the Big Two have captured the market, then it becomes necessary to identify what lawful, questionable and unlawful tactics they have pursued.  In the lawful department, the Big Two have invested the money to build superior networks.  They have captured the competitive benefits of positive network externalities: offering not to debit minutes of use for intranetwork use.  Additionally they have exploited economies of scale.

             In the questionable department the Big Two have exploited exclusive handset deals and the first mover advantage of having received free spectrum from the FCC while other carriers had to compete in a comparative hearing, or hope for success in a ping pong ball selection.  While they appear not to have colluded in a “smoke-filled room,” these carriers offer nearly identical rate plans, what antitrust law considers conscious parallelism.

At the very least the FCC should aggressively work to promote market entry so that the facilities-based wireless market does not end up being more concentrated than commercial aviation.