May 30, 2012
by Harold Furchtgott-Roth
Over the past few months, the Federal Communications Commission has received dozens of comments from the public for the current version of its annual report on competition in the wireless industry. Over the past 17 years, the Federal Communications Commission has issued 15 annual reports to Congress on wireless competition as mandated by statute.
The legal mandate for the report is in the Communications Act as Section 332(c)(1)(C), a rather confused paragraph that might serve as Exhibit A in a treatise on how not to draft statutory language. Part of the paragraph is a requirement that report include "an analysis of whether or not there is effective competition" as Commissioner McDowell has noted in recent years.
The word "competition" has popular interpretations, but it also has rather exacting economic meanings. Those economic meanings, regrettably, have been unaddressed in the Annual Competition Reports, and even in the FCC's reviews of mergers.
Although the FCC's wireless competition reports are organized along economic concepts-industry structure, provider conduct, performance, and consumer behavior-the reports state conclusions rather than providing a means to test whether those conclusions are accurate or not.
Consider industry structure. Do commercial mobile wireless services comprise a single market, or are there several economically distinguishable services within commercial mobile wireless services? Or are commercial mobile wireless services simply part of a broader communications market in which consumers can and do substitute between wireline and wireless services?
The annual reports hint at these economic questions, but never squarely address them. The economic studies that address them are not cited. The word "substitute" is used cautiously a few times. The economic tools and concepts, however, such as cross-price elasticities of demand are never mentioned, no doubt for fear of frightening the uninitiated reader.
No, we are simply told that there is a mobile wireless service industry and that it is too complex to examine industry structure much less competition.
"Thus, the Fifteenth Report makes no formal finding as to whether there is, or is not, effective competition in the industry. Rather, given the complexity of the various inter-related segments and services within the mobile wireless ecosystem, the Report focuses on presenting the best data available on competition throughout this sector of the economy and highlighting several key trends in the mobile wireless industry."
Labeling the wireless sector as an "ecosystem" may give the sector heightened political sensibilities, but the precious epithet does not diminish the economic importance of defining the relevant market.
Countless services are available to consumers, and deciding which are mobile wireless services is not an easy task. Are Wi-Fi hotspots that offer laptops access to the internet in the same market as a mobility card in a laptop? Are services such as Amazon's Kindle in the same market with iTunes on a iPad? Are satellite-based mobile services on an airliner in the same market as Wild Blue or a traditional mobile voice phone? Are long-distance phone cards in the same market as cell phones? Are smart phones in the same market as wireless phones without internet access?
Each of these and many other services are discussed various parts of the wireless competition reports. But the central issue of whether these other services are part of the same market as traditional wireless services is not directly addressed. The FCC tends to view industry structure narrowly, assuming away those segments that do not fit neatly into traditional definitions of the wireless industry. The net result is a narrow view not only of the wireless industry, but also a narrow view of competition in the wireless industry.
Even more troubling, the wireless competition reports never address whether wireless and wireline services might be part of a larger communications market. Millions of Americans have ported wireline numbers to wireless services, and many thousands have ported wireless numbers to wireline accounts. Relatively few Americans under 40 subscribe to wireline services. The most recent competition report even notes that nearly 25 percent of adults in 2010 lived in households with no wireline phone. Yet in the view of the FCC, or so it seems, wireline and wireless are entirely separable.
The FCC does little better with geographic market definitions. While recognizing the importance of geographic areas to understanding competition, the FCC without explanation examines horizontal concentration in terms of 172 economic areas around the United States. This makes no sense. On the one hand, many, but not all, consumers choose a wireless provider based on the availability of nationwide service. For these consumers, horizontal concentration in a particular economic area is of little consequence. On the other hand, some of the economic areas cover vast swaths of geography. One economic area covers all of Alaska. It is of little interest to a consumer in a remote area of Alaska that several providers compete in Anchorage. But one need not go to remote Alaska to find holes in coverage. Dead zones are all too common in the District of Columbia and mid-town Manhattan.
Even sillier in the FCC's analysis is that only traditional, facilities-based wireless carriers are counted as competitors. Excluding resellers, MVNOs, wireline, satellite, Wi-Fi hot-spots, data services, and the extraordinary and ever changing realm of new technologies leads to meaningless measures of concentration and competition. The old adage goes: "Better to be approximately right than exactly wrong." The FCC goes one better. It calculates incorrect HHIs (Herfindahl-Hirschman Indexes) down to four-digit accuracy in each of 172 economic areas. Thus the FCC is exactly wrong not once, but 172 times.
Without a clear understanding of either service markets or geographic markets, the FCC wireless competition reports cannot provide economically meaningful discussions of conduct, performance, and consumer behavior, much less competition. While the wireless competition reports provide a wealth of information, they never fully or persuasively address the central issue: competition.
Section 332(c)(1)(C) is filled with vague and ambiguous language. When written nearly 20 years ago, the wireless industry was in its infancy. Today it has exploded in countless different directions. The annual competition report can use the vagueness and ambiguity as a reason to present much useful information but avoid any meaningful discussion of competition. Or the vagueness and ambiguity could be an opportunity for the FCC to explain in detail the concepts of markets, how they have evolved over time, how fiercely competitive and rapidly changing much of the wireless industry is, and how wireless services have transformed America.
Harold Furchtgott-Roth is a Senior Fellow and Director of Hudson Institute's Center for Economics of the Internet.
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