Ev Ehrlich's Everyday Economics

The Sound of One Hand Clapping

Have you ever watched an old movie on television – say, Sorry, Wrong Number, with Barbara Stanwyck – and at a critical moment in the plot said to yourself “Well, if they had cell phones back then...”  Cell phones have become a ubiquitous feature of modern life, with rapidly escalating power (so-called “4G” technology, with phone connection speeds in excess of those of DSL, is already on the market) and declining unit cost (the U.S. has the lowest wireless provider revenues per minute used in the developed world).

An essay on the remarkable performance of mobile telephony is hardly worth reading.  But that performance has not persuaded the Federal Communications Commission – last week, it released its 2010 “Wireless Competition Report,” which failed to find for the first time in six years that the U.S. cell phone market was  “effectively competitive.” 

I think the facts disagree.  The U.S. in one of only four OECD countries with more than four facilities-based wireless operators and more than 140 wireless providers total.  Almost three-quarters of consumers can now pick from five or more mobile services, and the percentage of households served by wireless broadband has recently gone from 51 to 76 percent.  Perhaps most importantly, the wireless industry continues to invest over $20 billion annually, an investment that reaches well beyond the big urban markets to smaller communities around the country.   

Part of the FCC’s complaint appears to be that Verizon and ATT are increasing their share of the market.  If they are, it’s unsurprising – they’ve been the biggest investors in cellular infrastructure, and the two most aggressive providers of higher-end, data-friendly handsets.  In fact, the way they’ve revolutionized the handset market is important evidence of competition in its own right.   Enhanced feature phones and smart phones accounted for 81 percent of total sales last year, and The New York Times recently reported that data (in the form of texts, e-mail messages, streaming video and other services) surpassed voice signals on mobile phone traffic.    And, as the Times reported, the burgeoning growth is occurring because “calling is cheaper than ever because of fierce competition among rival wireless networks.”

That the FCC should see this success as problematic is itself problematic given that body’s proclivity to take serious the application of “neutrality” concepts to mobile telephony.  “Neutrality’ proponents argue that new devices, such as Apple’s iPhone, should be capable of operating across all mobile systems as opposed to being “tied” to one particular mobile provider.   But, leaving aside technical difficulties, the “tied” feature of these new devices has been a spur, not an obstacle, to competition.  What if the iPhone quickly monopolized the market and established a choke hold on applications innovation?  Instead, confronted with ATT’s growth following their iPhone deal, other vendors have entered deals with such device manufacturers as Google, Blackberry, Palm, Windows Mobile.  And all of these handset manufacturers, in turn, now compete to provide applications to run on their devices.  Can you imagine an advertisement claiming that a particular phone runs thousands of applications – from recognizing a restaurant across the street to counting the calories in the meal it serves – only five years ago?  Three years ago?

Moreover, the trends in competition are moving in the right direction.  While ATT and Verizon are the largest providers, pre-paid phones – and area in which neither has a commanding share – are the fastest growing segment of the market.  And Sprint, written off by many critics, has recorded the largest industry gain in the past two years in the American Customer Satisfaction Index.

In fact, the U.S. now has the best of all competitive worlds – more active providers than most other nations, rapidly growing penetration, high investment, low prices, and competition that is spreading from line access to devices to applications.  And if this track record isn’t enough for the FCC, then we should keep in mind that the solution to the imagined problem is in their own hands – making more spectrum available to the industry.

And all of that suggests to the skeptical that the FCC’s hand-wringing is a prelude to a new regulatory foray.  Perhaps it leads to some misapplication of “neutrality” that requires iPhones or Androids to work with every provider’s system, even though that horse appears to have left the barn.  Perhaps they intend to cut Verizon and ATT out of future spectrum auctions, in essence subsidizing their competitors at taxpayer expense.  But that doesn’t make sense – at least some part of the subsidy would be absorbed by the other firms as higher profits that served no public purpose.  (And given the very high proportion of places that offer consumers several viable choices for mobile phone service – and therefore already having a competitive market price – the proportion of the subsidy turned into profits is likely to be substantial.)  If the FCC wants to tie spectrum auctions to providing mobile broadband to markets lacking such service, that would be interesting, but you have to be willing to stop worrying about who steps up to take that deal.

But beyond a statement about the FCC’s view of mobile telephony, this recent report is another glimpse into the FCC’s mindset.  The FCC has now, within a few short weeks, pronounced both that the wireless telephone market isn’t competitive and that it needs to embrace a risky legal strategy to impose “neutrality” regulation on wireline broadband Internet (as I discussed here).   Which means they don’t think the wired market for broadband isn’t very competitive either.

What these findings seem to miss is that not only are these two markets competitive, but that they are rapidly coming to compete with each other.   That is, telephony, like broadband, is increasingly available from both wired and wireless sources, and consumers are increasingly seeing one as a substitute for the other.

A recent report by the Center for Disease Control noted that one quarter of American families live in homes with no landline connection – including almost half of adults aged 25–29 years and well over one-third of adults aged 18–24 or 30–34.  This growing number of Americans who prefer mobile telephony seem likely to use that connection for broadband access as rapidly as it can be delivered.  And when “4G’ phones penetrate the market – this summer’s “big thing” is going to be their introduction   -- the interchangeability of the two is going to leap forward.   Verizon recently claimed  average data rates of 5 to 12 megabits per second on the downlink and 2 to 5 megabits per second on the uplink in “real-world environments.”    It’s not enough to watch a high-def live-stream or do telemedicine, but it’s plenty good for most of what we do today, and faster than many if not most home connections.   And if that’s true, how can you look at one market – whether wired or wireless – without looking at the other?

The FCC should lose its blinders and focus on this competition.  Parts of its national broadband plan, released in March, did exactly that – freeing up more spectrum, expediting the creation of more mobile infrastructure, and so on.  The point is to feed that competition, not to deny it.  Predicting technological progress is difficult, but it’s hard to bet against the nation’s ultimate broadband infrastructure’s being a mix of wired and wireless provision, and the competition between the two is already underway.  By separating the two parts of the market and considering them individually, the FCC is busy contemplating the sound of one hand clapping -- even as the ovation created by two hands is turning into a crescendo.