Friday, February 02, 2007

Back to 1968? No Way!

Kevin Maney, USA Today’s technology columnist, has a piece this week headlined “FCC Ruling Changed Phone Industry in 1968” suggesting that the FCC needs “another Carterfone,” referring to the famous 1968 decision in which the Commission ruled that Tom Carter’s acoustic coupler could be attached to the Bell System’s public switched network. This allowed mobile phones of the day to communicate with the landline network. The decision was an important step in the development of the FCC’s policies that led to the unbundling of customer premises equipment (for example, telephone handsets) from network transmission services. Part 68 of the Commision’s rules, which established interconnection rights and standards for telephone equipment, followed soon thereafter.

1968 was certainly a year of turmoil and change. Amidst it all, Carterfone may have been one of the more positive things to happen that memorable year. Indeed, many are still nostalgic about all things ’68.

Nostalgia is not altogether bad. But being nostalgic about Carterfone, and thinking that it is a “neat historical analogy” that should guide communications policy today are two very different things. Kevin Maney is wrong to suggest the FCC ought to follow Carterfone and “bust open the cellphone industry.” By busting open the cellphone industry, he means mandating cellphones and service must be unbundled so all cellphones will be compatible with the networks of all the various network operators, Cingular, Verizon Wireless, Sprint, T-Mobile, and the like. Maney also urges the FCC not to postpone its rule that will require, in July of this year, the unbundling of security and navigation functions in set-top TV boxes.

To be blunt, the communications environment has changed so much since the 1960s and 1970s when the Bell System exercised monopolistic power in both the communications transmission and equipment markets that the Carterfone analogy just doesn’t make sense. Carterfone was an important decision on the road to introducing competition in the communications marketplace; it is not a religious dictate. I wrote about this very subject a couple of weeks ago in a piece called “Integration Bans Then and Now” and in another in this week’s edition of Broadcasting & Cable magazine entitled “FCC Should Let Bygones Be Bygones.”

Without repeating all that here, I want to make a few explicit general points:

In his column, Maney completely ignores the difference that the existence of competition makes in determining whether the costs of mandating unbundling outweigh the consumer benefits. In a competitive market, network operators have an incentive to satisfy consumer demand, or consumers will simply switch providers. The wireless market is very competitive, and what we sometimes still call the “cable” market is competitive as well, with satellite operators garnering over a 25% market share, and with the "telephone" companies now beginning to compete vigorously too. In reality, for most purposes of competition analysis, we’re close to having just a “POBS” market (“plain ‘ol broadband service”), in which providers compete to offer voice, video, data, and Internet services over different POBS technology platforms. (No, by “plain” I don’t in any sense mean that the new razzle-dazzle applications, with all their incredible bells and whistles, that broadband makes possible are really plain. Anything but. I am just suggesting that POBS, with bandwidth available that enables high-speed, feature-rich applications, is rapidly replacing POTS (“plain ‘ol telephone service”) as the prevalent service).

Maney completely ignores the economic efficiencies that often result from integration (or “bundling”). He does not acknowledge that innovation and new investment depend on allowing innovators and those who risk capital to capture efficiencies that may give a service provider a competitive edge in the marketplace. Maney says that "bundling arrangements are an unnatural levee set up to hold back market forces.” He’s got it just backwards: Once a market is competitive, like the wireless and video markets are, market forces drive service providers to determine whether consumers prefer service and equipment to be offered on a bundled or unbundled basis, and under what varying circumstances. Service providers will be responsive to consumer demands.

To be more specific, consider these differences between the communications environment during the Carterfone era and now:

· The Bell System was a monopoly then. The operators providing mobile and video services definitely are not.

· The Bell System included an affiliated equipment manufacturer, Western Electric, with all the incentives to extend market power that accompany such corporate affiliation. Video and mobile services providers do not have corporate-affiliated equipment manufacturers.

· The Bell System’s ubiquitous telephone network was mostly standardized across the country and, in 1968, had been essentially stable for decades. In today’s dynamic technological environment, the networks of mobile and video service operators change rapidly, and the technologies employed in the various networks differ from one operator to the next.

· In the analog era dominated by the Bell System, each phone line generally was dedicated to one customer (except for the 50s-ish party lines I fondly recalled in the Integration Bans piece). The facilities and frequencies used by video and mobile providers generally are shared by multiple users. They employ complex protocols and digital technologies that make operating these shared networks much more challenging than operating a network that features subscribers using dedicated channels.

· Phone lines typically carried one service—recall “POTS”, or “plain ‘ol telephone service.” The facilities of cable and mobile operators typically carry voice, video, and Internet service applications on an integrated basis.

· In the common carrier era, phone lines carried only the subscribers’ own content, and there was little reason to worry about theft-of-service. Video service providers carry proprietary content—often developed at great expense—that must be protected against theft-of-service. And now mobile services are carrying high value proprietary content as well.

I can be as nostalgic about Carterfone as the next guy. But a decision that made sense in 1968 should not be misused in a way that fosters poor communications policy 40 years later. That does a disservice to Carterfone's legacy. In today’s radically changed marketplace environment, with all its technological dynamism, it is important to distinguish between nostalgia and common sense.