Tuesday, July 14, 2009

Wireless Regulation: "First, do no harm"

Senator Herb Kohl has written to the FCC and Department of Justice asking that these agencies "take action to enhance competition in [the wireless] market and to remove barriers to competition preventing the emergence of new competitors." In light of the fact that the wireless market already is quite competitive, and that government intervention in markets as competitive as wireless usually does more harm than good, this is a case where the old adage "leave well enough alone" surely applies. Or the even older one from Hippocrates: "First, do no harm!"

The second sentence in Senator Kohl's letter is somewhat of what lawyers call an admission against (his) interest: "Wireless telephones have become a vital means of communications for the vast majority of Americans, with over 270 million subscribers nationwide." Eight years ago the number of U.S. subscribers was 100 million. Since there is no government mandate that requires every American to possess a cell phone, the very rapid increase in the number of subscribers should be taken as a good indication that the wireless industry is delivering services and products that provide American consumers with a high degree of satisfaction.

It is important to have in mind that the subscribership growth and delivery of value has occurred in the largely deregulated wireless environment put in place by Congress in 1993.

A few facts and figures are relevant to appreciating the current situation. There is little dispute that the U.S. has the lowest price per minute of service and the highest minutes of use per month of the 26 OECD countries. Over thirty companies manufacture wireless devices for the U.S. market, and over 630 handsets are sold in the U.S. Already, U.S. consumers have access to over 40,000 wireless applications sold through multiple "apps stores." Another 20,000 apps are anticipated to be made available this year. The U.S. has a higher percentage of active mobile broadband users than any other country.

As for the competitive environment, the top four facilities-based providers currently have 86% of the market, and another four facilities-based providers each have over a million subscribers. More than 98% of Americans have a choice of three or more providers.

In reality, competition and consumer benefits have flourished hand-in-hand under the deregulatory regime mandated by Congress in 1993. Senator Kohl's references to the "concentrated nature" of the marketplace and to "prices increases" by the providers (focusing only on one little-used text messaging option) do not reflect this market reality.

This is not to say it is inappropriate for the Justice Department and the FCC to review competitive developments in the wireless marketplace and to consider acting if it were determined a market failure existed. But, as of now, there is plenty of evidence to the contrary. And, to the extent that the government is going to expend scarce resources examining the competitive status of the wireless marketplace, the DOJ's Antitrust Division, which traditionally engages in a more fact-based, rigorous economic analysis than the FCC, should be the primary agency that undertakes such task.

While ongoing competitive assessments based on rigorous fact-based marketplace analysis are appropriate, the problem with Senator Kohl's letter is that he urges the FCC to pursue regulatory policies that, in light of the evidence of existing competition, are more likely than not to stifle the development of further competition and continued investment and innovation. I have written about these problematic policies often in this space, so just a few additional words here should suffice.

With respect to special access, as I explained in a recent paper, "Assessing the FCC's Competition-Assessing Competence," the fact that there are many "competitors" that continue to resist providing their own customer and location data is telling. If they had no customers or market presence, they surely wouldn't expend so many resources resisting disclosure.

It is also telling that the non-incumbent facilities-based special access competitors, such as the cable operators and fiber-based providers such as FiberTower, are not complaining to the FCC about the incumbents' rates. This is because, if the FCC forces incumbent special access rate reductions, it will make it more difficult for these facilities-based special access providers to grow their business and become stronger competitors. Such forced rate reductions would be an example of how -- as markets are in the process of becoming effectively competitive or are already so -- policies urged on the FCC by "competitors" that are really more essentially resellers often are, in practical effect, anti-consumer. Certainly, it is not in anything but the short-term interests of consumers for the FCC to regulate "down" the incumbents' special access services in a way that deters further facilities-based investment and innovation by new entrants.

Finally, the problem with Senator Kohl's call for the FCC to "take action to prevent dominant cell phone providers from gaining exclusive access to the most in-demand cell phones" is that government intervention along the lines suggested surely would also deter investment and innovation to the detriment of consumers. If there were a single dominant wireless provider, then perhaps (although economists differ) the concerns about handset exclusivity would warrant regulatory concern. But, as explained above, more than 98% of Americans have a choice of three or more facilities-based providers. In most parts of the country there are at least four facilities-based providers.

In this competitive market environment, the ability of wireless providers and device manufacturers to enter freely into voluntary agreements to provide for a period of handset exclusivity provides financial incentives necessary for the parties to undertake the investment necessary to develop, say, an innovative I-Phone. And then if a device, say the I-Phone, actually succeeds in the marketplace, such success provides incentives for other device manufacturers and providers to enter into risk-sharing agreements with a period of exclusivity to develop innovative competitive models, say the Palm Pre. And so on and on. With the spate of innovative, feature-rich new handset devices coming to market in rapid succession, and with over 630 handset devices available, the market is working well without government intervention, all to the long-run benefit of consumers.

In conclusion, for various reasons, it is often difficult for legislators and regulators to resist calling for more regulation when urged on by particular interests or interest groups. That seems to be the case with the potpourri of regulatory interventions suggested by Senator Kohl. But, particularly with regard to competitive markets such as wireless, such regulatory interventions more often than not ultimately harm consumers, even though they might offer some protection to the special interests calling for marketplace intervention. In the face of such regulatory pleas, Hippocrates remains very good authority: "First, do no harm!"

(In calling Hippocrates into service here, I should acknowledge my debt to Dennis Weisman and Glen Robinson, whose chapter in the shortly forthcoming Free State Foundation book, "New Directions in Communications Policy," is titled: "Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn." As a teaser, I will say, as explained by Professors Weisman and Robinson, modern regulators have much to learn from all three great teachers. And, fortunately, Fred Kahn is still with us, and teaching still.)