Wireless Industry Needs Spectrum, Not More Regulation

by on February 22, 2012 · 9 comments

Congress freed up much-needed electromagnetic spectrum for mobile communications services Friday (H.R. 3630), but it set the stage for years of wasteful lobbying and litigating over whether regulators should be allowed to pick winners and losers among mobile service providers.

The wireless industry has thrived in the near absence of any regulation since 1993.  But lately the Federal Communications Commission has been hard at work attempting to change that.

A leaked staff report in December helped sink AT&T’s attempted acquisition of T-Mobile.  And the commission has taken the extraordinary step of requesting public comments on an agreement between Comcast and Verizon Wireless to jointly market their respective cable TV, voice and Internet services, beginning in Portland and Seattle.  Nothing in the Communications Act prohibits cable operators and mobile phone service providers from jointly marketing their products.

FCC Chairman Julius Genachowski objected to a previous version of the spectrum bill which, among other things, would have prohibited the commission from manipulating spectrum auctions for the benefit of preferred entities.  The limitation was removed, and Sec. 6404 provides that nothing in the legislation “affects any authority the Commission has to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.

The common thread is a determination limit the size of leading firms for the benefit of smaller or less successful wireless competitors, such as Sprint, T-Mobile or approximately 100 other entities.  Conventional theory implies that more equally-sized competitors yield lower prices for consumers.  In this case, however, if a wireless service provider cannot obtain additional spectrum to meet growing demand for its service, it could be forced to raise prices in order to reduce network congestion rather than lower prices to sell more service.

The FCC tried a similar “pro-competition” experiment in the late 1990s.  Seeking to promote retail competition in local telephone service, the commission ensured that new entrants got below-cost wholesale access to incumbent networks.  It also delayed the incumbents from competing in the long-distance market to ensure their obedience.  These policies precipitated a disastrous investment bubble that burst in 2000-02.  Meaningful voice competition eventually emerged from the wireless and cable industries, which are subject to minimal FCC oversight.

Congress gave the commission wide-ranging powers in 1934 to tame telephone monopolies and award “scarce” broadcasting rights to “worthy” men.  Although technological innovation has radically reduced the economic and physical barriers to competition, influential commercial and ideological special interest groups refuse to let go of power and privilege.

Free Press, one of the most strident of the FCC’s ideological clients, claims that the Comcast-Verizon Wireless joint marketing agreement would “put an end to any hope for nationwide competition between truly high-speed Internet service providers, while dousing any chance of next-generation wireless services competing against cable and telco broadband.”

Free Press is the same group that argued in 2007 that wireless and wireline broadband services are completely different products.  “They are not comparable in either performance or price; they are not substitutable services; and they are certainly not direct competitors.”  That was a snapshot, not a trending analysis.  Pew Research found in 2010 that 59 percent of U.S. adults now access the internet wirelessly.  And according to the FCC, nearly 70 percent of the U.S. population can choose between four or more wireless broadband providers.  Now even Free Press acknowledges that next-generation wireless services can compete against cable and telco broadband.

Free Press also predicted in 2007 that “carriers that dominate the wireline broadband market are highly unlikely to offer a wireless broadband product that can potentially cannibalize their wireline marketshare.”  But this is exactly what Verizon and AT&T are doing with the roll out of faster fourth generation mobile broadband networks.

If the wireless market is difficult to predict, that is because it’s still a dynamic arena where innovative providers compete to offer superior coverage, reliability and functionality.  It is not a mature commodity market where retail price is the only basis of competition, everything else being equal.

If regulators create obstacles for firms that have invested wisely and operate efficiently, to make it easier for rivals catch up, they reduce the incentive to innovate.  Ultimately the best way to achieve the lowest prices is to maintain incentives for private investment in bigger and faster networks.  If investment is discouraged as a result of regulation, there is a danger wireless service providers will have no choice but to ration service to relieve network congestion.

With wireless device and service providers delivering constantly improving products and services, it is not clear there is anything regulators can or should do to promote consumer welfare besides conducting efficient auctions in which spectrum can be assigned to the highest bidders and approving spectrum license transfers between willing buyers and sellers.

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