Wednesday, May 11, 2011

FCC's Wireless Competition Report Should Take Wireless Substitution Seriously

A year ago this month the FCC issued its annual Wireless Competition Report. So a new report from the Commission should be just around the corner. One of the biggest questions surrounding its forthcoming report is whether the Commission will finally take stock of wireless substitution for wireline services.

In its next Wireless Competition Report, the FCC should take the opportunity to more closely examine the growing phenomenon of wireless customers "cutting the cord" and going without wireline voice service altogether. The Commission should also forthrightly examine in its report the impact of wireless on the wireline market. Particularly when it comes to voice service, a strong case can be made that competition from wireless service is rendering legacy wireline regulation unnecessary and costly.

From time to time, the FCC has acknowledged the increasing numbers of wireless subscribers. The Commission's recent Local Telephone Competition Report, for instance, states that as of the end of June 2010, the number of wireless voice subscribers nationwide had increased to almost 279 million – up almost 14 million from a year before and up more than 61 million from four years prior.

It's difficult to imagine how such a momentous spike in wireless subscribership could possibly leave wireline unaffected. And, in fact, the Commission has acknowledged the decreasing numbers of switched access lines. Its Local Telephone Competition Report indicates that the number of switched access lines for both ILECs and non-ILEC telecommunications providers total some 122 million. (ILECs and non-ILECs also serve a combined total of approximately 29 million VoIP subscribers). This number for switched access lines is down from approximately 133 million the year before and down from over 172 million from June 2006. In addition, the number of ILEC access lines and VoIP subscribership has declined relative to increases for non-ILECs. On June 30, 2010, ILEC total end-user switched access lines and VoIP subscriptions equaled just over 102 million, down over 10 million from a year prior and down nearly 40 million from four years earlier. Non-ILEC total end-user switched access lines and VoIP subscriptions equaled nearly 49 million as of June 30, 2010, up over 4 million from a year prior and up almost 20 million from four years before.

The FCC has also acknowledged the increasing numbers of consumers who have "cut the cord" and now rely exclusively on wireless. For instance, one 2010 survey cited by the Commissionshows that a fast-growing number of households — now approximately one-quarter of all households — have "cut the cord" and rely exclusively on wireless: "For the last 3 years, the proportion of households subscribing to both landline and mobile wireless service has fluctuated around 59%, while the proportion of households that subscribe only to mobile wireless increased from 13.6% to 24.5%." The latest iteration of that survey suggests those same trends are continuing. Age demographics alone should suggest these cord-cutting trends will continue, as the number of wireless-only subscribers increases among users in younger age brackets. The chart below conveys a general sense of the upward trajectory of wireless-only subscribership as a percentage of all wireless subscribers.

Furthermore, when it comes to assessing wireless in competition with wireline, one should also take into account the degree of wireless choices available to consumers. Consider the Commission's findings in its 2010 Wireless Competition Report that "[t]he percentage of the population served by at least two mobile broadband providers increased from 73 percent in May 2008 to nearly 90 percent in November 2009," "the percentage of the population served by three or more providers increased from 51 percent in May 2008 to 76 percent in November 2009," and "approximately 58 percent of the population is served by at least four mobile broadband providers." A forthcoming Wireless Competition Report should provide an updated set of numbers. But the continuing presence of wireless alternatives to wireline services in the voice market is a certainty.

Unfortunately, the FCC's Qwest Phoenix MSA Order from last year followed a string of prior orders in which the Commission has declined to incorporate these insights regarding wireline and wireless subscribership into its overall regulatory approach to wireline services. This despite the Commission's concession that "most subscribers to wireline and wireless engage in some usage substitution," and that "[t]he increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless services may materially constrain the price of residential wireline service."

The Commission excluded wireless as a substitute for wireline in its market analysis in the Qwest Phoenix MSA Order by suggesting mere usage substitution is not the same as access substitution, and that conclusive proof of the latter would be required to show price-constraining effects. The Commission insisted that "[k]nowing the percentage of households that rely exclusively upon mobile wireless is insufficient to determine whether mobile wireless services have a price-constraining effect on wireline access services." But the Commission suggested that what it calls conclusive proof of price-constraining effects might not itself be enough to treat wireless as a substitution for wireline, claiming that cord-cutting "could be driven more by differences in consumers' age, household structure, and underlying preferences than by relative price differentials."

The Commission's refusal to consider wireless substitution in the Qwest Phoenix MSA Order runs contrary to a commonsense look at the data regarding increasing wireless subscribership, decreasing ILEC access switches, and increasing wireless-only subscribership that is bound to continue rising in light of associated age demographics. But it should also be remembered that the wireless substitution issue was subsumed by the FCC's rollout of a new and controversial market power analysis in the Section 10 regulatory forbearance context and its application to one particular metropolitan statistical area.

The next Wireless Competition Report now offers the FCC a better place to take a fresh look at the big picture of wireless competition and cord-cutting. The Commission should take that opportunity to face up to the substitutability of wireless for wireline. Once that long overdue step is taken, the Commission can then begin to recognize that aspect of market competition into its future rulemakings, regulatory reviews, and forbearance proceedings.