A decade ago, a heated debate raged over the benefits of “a la carte” (or “unbundling”) mandates for cable and satellite TV operators. Regulatory advocates said consumers wanted to buy all TV channels individually to lower costs. The FCC under former Republican Chairman Kevin Martin got close to mandating a la carte regulation.

But the math just didn’t add up. A la carte mandates, many economists noted, would actually cost consumers just as much (or even more) once they repurchased all the individual channels they desired. And it wasn’t clear people really wanted a completely atomized one-by-one content shopping experience anyway.

Throughout media history, bundles of all different sorts had been used across many different sectors (books, newspapers, music, etc.). This was because consumers often enjoyed the benefits of getting a package of diverse content delivered to them in an all-in-one package. Bundling also helped media operators create and sustain a diversity of content using creative cross-subsidization schemes. The traditional newspaper format and business is perhaps the greatest example of media bundling. The classifieds and sports sections helped cross-subsidize hard news (especially local reporting). See this 2008 essay by Jeff Eisenach and me for details for more details on the economics of a la carte.

Yet, with the rise of cable and satellite television, some critics protested the use of bundles for delivering content. Even though it was clear that the incredible diversity of 500+ channels on pay TV was directly attributable to strong channels cross-subsidizing weaker ones, many regulatory advocates said we would be better off without bundles. Moreover, they said, online video markets could show us the path forward in the form of radically atomized content options and cheaper prices.

Flash-forward to today. As this Wall Street Journal article points out, online video providers are rejecting a la carte and recreating content bundles to keep a diversity of programming flowing. This happened in unregulated markets without any FCC rules. YouTube, Hulu, PlayStation, and many other online video providers are creating new bundles and monetization schemes.

It is also worth noting that this same sort of “re-bundling” of content is happening with online news sources and other digital platforms as various sites struggle to find content monetization schemes that can sustain diverse, high-quality content in the Digital Era. Content bundling and various paywall schemes are helping them do so.

The lesson here is that the economics of content creation and delivery are quite dynamic, challenging, and extremely hard to predict. Mandating “a la carte” unbundling of content sounded smart and well-intentioned to many people a decade ago, but it proved to be problematic even in highly competitive online markets. Thankfully, we did not mandate unbundling by law. We waited and watched to see how it naturally played out in various markets. We now have a better feel for how big of a mistake mandatory a la carte would have likely been in practice.

The smell of high-tech regulation is increasingly in the air these days and many lawmakers and some activist groups now have the mobile marketplace in their regulatory cross-hairs. Critics make a variety of claims about the wireless market supposedly lacking competition, choice, innovation, or reasonable pricing. Consequently, they want to wrap America’s wireless sector in a sea of red tape.   Two important new studies thoroughly debunk these assertions and set the record straight regarding the state of wireless competition and innovation in the U.S. today. These reports are must-reading for Washington policymakers and FCC officials who are currently contemplating regulatory action.

First, Gerald Faulhaber and Dave Farber have a new report out entitled “Innovation in the Wireless Ecosystem: A Customer-Centric Framework.”  Here’s what Faulhaber and Farber find:

the three segments of the wireless marketplace (applications, devices, and core network) have exhibited very substantial innovation and investment since its inception. Perhaps more interesting, innovation in each segment is highly dependent upon innovation in the other segments. For example, new applications depend upon both advances in device hardware capabilities and advances in spectral efficiency of the core network to provide the network capacity to serve those applications. Further, we find that the three segments of the industry are also highly competitive. There are many players in each segment, each of which aggressively seeks out customers through new technology and new business methods. The results of this competition are manifest: (i) firms are driven to innovate and invest in order to win in the competitive marketplace; (ii) new business models have emerged that give customers more choice; and (iii) firms have opened new areas such as wireless broadband and laptop wireless in order to expand their strategic options.

They continue on to address the policy issues in play here and discuss the “consumer-centric” approach they recommend that the FCC adopt:

Having found that all three segments are highly competitive, we ask, where is the market failure? If none, then the principle of customer-centric applies: let customers make the key decisions regarding which products, services, open vs. managed business models, net neutrality, et al. will survive in the marketplace. While there is no shortage of pundits, advocates, lobbyists and academics advising the FCC that it, rather than customers, should be making these decisions and advising the FCC what those decisions should be, a customer-centric FCC must leave these decisions to customers in a competitive marketplace. Should the FCC decide to preempt customers and make choices for them, it follows as does night from day that the result will be (i) less customer choice, and therefore reduced customer well-being; (ii) higher costs for producers and therefore customers; (iii) lower incentives to invest and innovate, harming customers, producers and the American economy. In this case, economics and technology are on the same page: economists advise intervention only in the case of demonstrated market failure, and then only if there is evidence that the intervention will do more good than harm. The technologist’s advice is more pithy and down to earth: if it ain’t broke, don’t fix it!

Amen to that.  Let’s hope our lawmakers are listening.

Second, Everett Ehrlich, Jeffrey Eisenach, and Wayne Leighton have a terrific new paper out entitled “The Impact of Regulation on Innovation and Choice in Wireless Communications,” which reaches similar conclusions to those Faulhaber and Farber found in their report. Here’s the executive summary from the Ehrlich-Eisenach-Leighton report:

Proposals to increase regulation of mobile wireless services, for example, by applying “net neutrality” regulation, are often based on claims that such regulation would enhance innovation and increase consumer choice. In fact, they would have the opposite effect. The business practices that would be banned by such regulation are efficient mechanisms for spreading and reducing risk, lowering transactions costs, and enhancing marketing activities, all of which contribute to innovation and choice. Moreover, product differentiation increases competition and thus contributes both directly and indirectly to consumer choice. While some types of exclusive agreements and other “discriminatory” practices can theoretically harm competition, the precondition for such harm to occur – i.e., market power in one or more of the affected markets – generally is not present in wireless markets. Hence, the proposed regulations cannot be justified on grounds of market failure. Rather than increasing innovation and consumer choice, as promised, they would severely disrupt the wireless sector’s highly successful business model and significantly reduce innovation and consumer choice.

Like the Faulhaber-Farber paper, the Ehrlich-Eisenach-Leighton paper examines the major segments of the wireless marketplace — applications, devices, and networks — and shows them all to be vigorously competitive and experiencing significant innovation. Some of the following tables and charts help to illustrate this.

This first table shows how concentration ratios for the U.S. market (as measured by HHI) are among the lowest in the world.

The next two charts show that U.S. carriers have the lowest revenue per minute (60% lower than the average OECD country) even though average minutes per use are more than twice the amount of the next highest ranked country (Canada).

Finally, this final chart from their report offers a snapshot of mobile Internet penetration in 16 countries showing the U.S. on top:

Incidentally, the Faulhaber-Farber study also does a nice job listing the various mobile application stores out there today:

Device Manufacturer App Stores Apple’s App Store BlackBerry’s App World Palm’s App Catalog Nokia’s Ovi Store Samsung’s Application Store Sony’s PlayNow arena LG’s Application Store

Software Developers Google’s Android Market Microsoft’s Windows Mobile

Carriers AT&T’s MEdia Mall Verizon Wireless’ Tools & Applications Sprint’s Software Store US Cellular’s easyedge Cellular South’s Discover Center Cricket’s Downloads

Independent Stores Handango GetJar

And the Ehrlich-Eisenach-Leighton paper provides some addition perspective on innovation in the handset and applications space:

On the metrics that seem to be of greatest concern to regulation advocates – choice and innovation – the data also show the industry is performing well. For example, CTIA reports there are more than 630 different wireless handsets and devices available in the U.S., compared with only 147 in the United Kingdom, and notes that many of the most advanced handsets introduced in recent months have been launched in the U.S., including (among others) the iPhone 3G, the Google G1, and the Blackberry Storm. Amazon’s highly popular Kindle was also launched in the U.S. with connectivity provided by Sprint – while its European launch was delayed for a full year by Amazon’s inability to reach agreement with a mobile carrier there. As noted above, the number and variety of available applications is increasing rapidly: In addition to the Apple Apps Store, application downloads are now available from the Android Market (Google), the Palm Software Store, Blackberry App World and the Nokia Ovi Store, offering a total of more than 60,000 different applications. On July 14, 2009 Apple announced that more than 1.5 billion applications had been downloaded from its iPhone App Store since its launch in July 2008.

Actually, that number is even higher now.  As I noted here recently, in just a little over a year, Apple reports there’s been 2 billion downloads of over 85,000 apps from over 125,000 developers.  It’s just stunning when you think about it.

I encourage everyone to read both reports cover-to-cover.  They provide a comprehensive look at the reality on the ground — or in the air, as the case may be — in America’s mobile marketplace.

In a past life — that is, from roughly 1994-2004 — I spent an enormous amount of time countering the proponents of “open access” regulation for communications and high-tech networks.  My work in that field culminated in the publication of a 2003 book with my old Cato colleague Wayne Crews entitled, What’s Yours is Mine: Open Access & the Rise of Infrastructure Socialism. We aimed to counter the efforts of bureaucrats and central planners to command technology companies and industry sectors to share networks, facilities, or specific technologies with rivals in the name of “competition.”  Simply stated, sharing is not competing, and competition in the creation of networks is just as important as competition in the goods, services, and information that move across those networks.  Moreover, there are property right considerations that come into play when governments seek to commandeer networks or take over network management decisions.

But let’s just stick to the economic issue here regarding the incentives created by the network-sharing mentality of the “forced access” movement and the fiction associated with the belief that network sharing can create competition.  My old PFF colleague Randy May, who currently serves as President of the Free State Foundation, continues to cover developments in this field far closer than I do, and has always done much better work on the subject than me.  Recently, Randy addressed some new fictions put forth by the radical Leftist activity group, the (Un-)Free Press who are, once again, spinning a revisionist history of telecom and media policy.  Specifically, Free Press has recently suggested that in the late 1990s we lived in a veritable communications nirvana, with thousands of Internet Service Providers and/or “competitive exchange carriers” hotly “competing” for our business.  Here’s how Randy May addresses this:

Let’s assume for the sake of argument that the 6000 figure for the number of independent ISPs is an indisputable fact. Nevertheless, I would not want the FCC’s development of a broadband plan to be “data driven” (in the wrong way) by this particular data point. Rather, I would want commissioners to understand that the 6000 ISPs existed merely at the sufferance of an agency policy of “managed competition” through regulated common carrier resale, and that such a “managed competition” policy does not provide incentives either for the incumbent providers to upgrade their networks or for the so-called “competitors” actually to build out their own network facilities. And I would want them to understand that, in the long run, which is what matters, consumers benefit more from facilities-based competition that supports sustainable competition than from managed resale that does not support sustainable competition.

As usual, Randy gets it exactly right.  Of course, it is certainly true that if you don’t give a damn about facilities-based innovation and the growth of networks at the core, not just the periphery, then forced access regulation may seem preferable.  If you want to treat the provision of broadband as a “plain vanilla” commoditized service, with just a basic level of service available from dozens of “competitors,” then forced access can maintain the illusion of “a market” for a time.  Indeed, this is essential what many foreign governments are still doing today; squeezing as much juice out of the old lemons as possible and hoping for a miracle when infrastructure upgrades are needed.  Some supporters of this regulatory model will say that government can always just pass a big tax increase or use a massive government outlay for new services, or something along those lines.  But even if you think government spending on high-tech infrastructure is the sensible way to go — and it certainly doesn’t seem to be going so well these days — you still have to hope that government bureaucrats will do a better job of directing investments and innovation than private network managers. Again, if you can believe in that fairy tale, then forced access is just your ticket. But don’t be surprised when the bubble bursts and investment dries up. [For the complete story on how all this unfolded here in the U.S. over the past decades, see Jeff Eisenach’s PFF paper, “Broadband Policy: Does the U.S. Have It Right After All?”]

Of course, these battles live on with the Net neutrality wars as the forced access crowd seeks to assert more government control over broadband networks by regulating terms of service or even price (see 1, 2, 3, 4).  I’ve become quite convinced that we’ll always have these forced access fights with us.  The network or service in question might change — broadband networks, operating systems, search engines, whatever — but the battle about control over digital technologies and networks will continue.  Here’s hoping that real Internet freedom prevails.

Jeff Eisenach, Chairman of Criterion Economics, and I have just released a new article about the perils of a la carte regulation in the Federalist Society’s journal Engage. In “A La Carte Regulation of Pay TV: Good Intentions vs. Good Economics,” we argue that: “From a policy perspective, a la carte regulation is worse than a solution in search of a problem; it is a problem waiting to happen.” We show that the pay TV marketplace is functioning quite efficiently and that consumers have more choices and content diversity at their disposal than ever. A la carte mandates, we argue, would destroy that diversity and likely put pressure on prices to go up, contrary to the goals of the backers of a la carte.

We also discuss how a la carte is being proposed a tool of social regulation / speech control, with backers labeling it a way of “cleaning up cable.” We explain why that is not going to work and why, even if it did, it would be a betrayal of the First Amendment.

This new article can be found online here.