Will the FCC regulate wireless phone rates?

by on September 30, 2009 · 4 comments

Today is the filing deadline in a somewhat unusual Federal Communications Notice of Inquiry that asks how the commission should revise its framework for evaluating competition in mobile wireless communications. Among other things, the FCC asks how it should measure wireless companies’ profits. It’s clear from an earlier public notice issued by the FCC’s Wireless Bureau that regulators are looking for a way to identify “abnormal” profits that might justify new regulation.

For 13 years, Congress has required the FCC to issue annual reports on wireless competition.  These reports have usually found that wireless is pretty competitive by most conventional measures. There are now four national competitors, numerous regional ones that are growing larger, and a bunch of resellers.   The FCC’s most recent report provides numerous examples of innovation in technology, pricing, and services. 

About the only fly in the ointment is federal policies that severely limit the amount of spectrum allocated for “flexible use.”  Limits on the amount of flexible use spectrum are like taxi medallions: they hinder entry and  limit the amount of service the wireless firms can offer.

Nevertheless, the wireless industry’s performance has been impressive. Adjusted for inflation, average revenue per minute fell by 87 percent between 1997 and 2007, and average voice revenue per minute fell by 90 percent.  Just during the last five years, inflation-adjusted average revenue per minute fell by 53 percent, and average voice revenue per minute fell by 61 percent.

Could regulation improve on these outcomes? In our comments to the FCC, Jerry Brito and I offer a little thought experiment.  Suppose the wireless industry were subject to enlightened, highly efficient, and perfectly operating price regulation. Specifically, suppose the FCC had mandated a version of “incentive” regulation that allowed the wireless companies to increase their prices by no more than the rate of increase in the consumer price index minus an annual 7 percent offset to reflect increased productivity. (Seven percent is the highest productivity offset we’ve seen any telecommuncations regulator in the U.S. use in any context.) Would this be better or worse than what the market actually produced?

Wireless market vs incentive regs

This graph shows the answer.  If wireless had been subject to incentive regulation, even a 7 percent productivity offset would have reduced wireless revenue per minute by only 36 percent since 1997 and by 19 percent since 2002.  In other words, the lightly regulated wireless market produced price reductions nearly 2.5 times as large as those that could have been expected under severe, highly efficient, perfectly operating regulation. And these results measure only the price effects, not the explosion of innovation that accompanied the price reductions.

Would the results have been even better if more spectrum were available for wireless services?  Probably. But beyond that step, it’s doubtful that regulators could have done much else to improve on the 90 percent price reduction we’ve seen in the past decade.

  • http://8ball.tridelphia.net/ Spike

    There's a pretty serious inflection point in the blue line on that graph in 2001. The theoretical government regulations would have a far track record post 2001 than pre-2001.

    Roughly speaking, pre-2001 was when the technology was still getting established, and I think that there is a clear case that price controls would have been a bad thing.

    What happened is 2001? Well, for one thing, market penetration reached near saturation levels – everyone who was going to buy a cell phone had already bought one. Secondly, and more significantly. I think, there was major industry consolidation after the tech bubble burst. Its no surprise that reduced competition in the marketplace resulted in an enhanced ability for the surviving companies to put the breaks on dropping prices.

    However, given that cell phone service is now far more of a standard utility than a new, up-and-coming technology, and given that there are few enough incumbent carriers that they apparently have the ability to bend the curve on price reductions, I think you need to do a better job of making the case that regulation would not be beneficial on the post-2001 portion of that graph.

  • jerryellig

    Good point!

    Here are four things to keep in mind:

    1. Both lines show cents per minute. The line showing actual prices had to start leveling out sometime, because we wouldn't expect the price to fall to zero (unless most of the companies adopted some kind of advertising-supported business model, which seems unlikely for wireless voice). That doesn't explain why there's an inflection in 2001 rather than a smoother path, but it does explain why the absolute size of the price reductions eventually had to fall as the price fell.

    2. Does industry consolidation after the tech bubble explain the inflection point? I don't know if it was caused by industry consolidation, some other effect related to the popping of the bubble, or something unrelated to the bubble. But keep in mind that if the tech bubble was fueling wireless price reductions, then some of those price reductions were not sustainable over the long term. (Just as free dialup service was not sustainable over the long term.) Post-bubble pricing is closer to normal and efficient, precisely because the bubble is gone. Perhaps the inflection point was caused by some bubble-fueled unsustainable price cutting between 1997 and 2001; a more “normal” path of prices without the bubble would have given us a smoother line. But again, I don't know for sure.

    3. I re-ran the numbers assuming price regulation had been imposed in 2001. Between 2001 and 2007, average revenue per minute fell from 12 cents to 6 cents — a 50 percent reduction. (These figures are from the FCC's most recent wireless competition report and are reproduced in our FCC comment, both of which are linked in my original post.) If incentive regulation with a draconian 7 percent productivity adjustment had been imposed starting in 2001, average revenue per minute would have fallen to 9.7 cents in 2007 — a 19 percent reduction. Even since 2001, actual market performance handily beats hypothetical perfect regulation.

    4. This little calculation is not the only reason Jerry B. and I think regulation aimed at wireless profits or prices is unwise; it's just one little nugget of information. The full discussion is in our filing with the FCC.

  • reedhundt

    looking at the graph i'd say, whew, at least we got something right. Reed Hundt

  • reedhundt

    looking at the graph i'd say, whew, at least we got something right. Reed Hundt

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