Playing Chicken With Consumers: Wu Calls for Cellphone Regulation

by on February 12, 2007 · 4 comments

Last year, as the net neutrality wars raged, the wireless industry by and large stayed out of the line of fire. It firmly opposed regulation, no question of that, but the debate almost exclusively focused on telephone companies and cable company broadband services. Now here comes Tim Wu–a prof at Columbia University and father of the term “net neutrality”–with a paper (to be presented this week to the FTC) arguing that wireless telephone service should be comprehensively regulated under net neutrality principles based on those applied the old Bell System.

This is a major escalation of the neutrality war, promising to change the character and dynamics of the entire debate.

I have always thought that one of the weak points of the argument for network neutrality last year was its over breadth. At its core, the argument for neutrality regulation boils down to a claim that broadband markets are not competitive. Yet, proposals for regulation virtually–no, skip the virtually, they never made exceptions for competitive elements of this market–such as wireless broadband.

Certainly, I thought, it wouldn’t be too long before someone proposed carving out wireless from regulation, so as to focus public attention away from this innovative and fast-growing market. Instead, Wu’s paper goes in the opposite direction–arguing that the wireless industry is in dire need of regulation.

It’s a bold argument. But completely wrong. And, it the end, one that may hurt the entire neutrality regulation effort, by showing how–once unleashed–few will be safe from its reach.

Wu provides a long litany of charges against wireless carriers–ranging from not allowing consumers free choice of hardware, to limits on bandwidth usage, to limiting content. But such limits are hardly unique in the economy, and almost never require regulation. KFC, for example requires you to eat only their chicken in their restaurants, and sells only Pepsi, but no one argues for chicken regulation (to take an example used previously by Wu).

Why is wireless different? Because it’s an oligopoly, he argues, pointing to the fact that there are four leading national wireless providers. Moreover, spectrum is limited–making new competition difficult.

It’s a tough argument to sustain. The fact is that wireless doesn’t, walk, talk or cluck (to continue the chicken analogy) at all like an oligopoly.

Some facts:

There are far more than four providers. The field is littered with many other small and not so small competitors. (As pointed out below by Tim Lee). Of the four largest, none is dominant (as pointed out by the FCC in its 2006 report on the state of wireless competition).

Wu argues however, that further competition is limited. It’s not like opening up a hot dog stand, he says. Very true–the costs are immense. The job of building a nationwide wireless network are huge–with some $199 billion invested cumulatively so far, $10 billion in the first half of 2006 alone. But the risks are high too–has anyone who bet on quick adoption of “3G” wireless can attest. Don’t expect this investment to continue if regulators take control of the networks it makes possible.

He also argues that spectrum is limited. True enough–we need more spectrum out there. But the answer to that is to release more spectrum for use. At the moment, for instance, efforts are proceeding to take 30 MHz away from a planned spectrum auction. Why not fight to make sure that spectrum goes to wireless consumers?

Moreover, wireless firms face constraints beyond just traditional “wireless” firms, and the frequencies allocated for them.. Most significantly–wireless Internet access, which presents a significant threat to traditional wireless carriers. (Now’s a good time to revisit The Economist’s piece on “How the Internet Killed the Phone Business“).

The effects of this competition are showing. As reported in the FCC’s wireless competition report, the number of wireless customers is rising, prices are decreasing and quality is improving. New features and services are constantly being made available. (Does anyone really know half of what their phone can do?)

This is not a failed market–its one of the most successful in history. As Wu writes in the introduction to his paper: “In many respects the mobile wireless market is and remains a wonder.”

Let’s not threaten that.

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