Tuesday, August 31, 2010

GAO Report Sees Wireless Competition But Mulls Regulation

The Government Accountability Office recently released a report to Congress, the title of which contained the GAO's own recommendation: Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry. The GAO report confirms the tremendous innovation in wireless services, particularly smartphones. And it acknowledges that in recent years wireless consumers continue to benefit from more choices and lower prices. Even so, the report tries to kick up enough dust about wireless competition to somehow justify calls for more extensive data collection requirements that seem premised on need for imposing new regulations on wireless.

The GAO report acknowledges that more consumers are benefitting from "generally lower prices, which are approximately 50 percent less than 1999 prices, and better coverage." Particularly in light of wireless innovation—faster speeds, the arrival of a variety of advanced handsets, and a growing abundance of smartphone applications—better prices for consumers should be the touchstone of any consumer-focused approach to wireless services.

However, the GAO report reduces this undisputed fact about lower prices to one consideration among many, balancing it against a handful of anecdotal opinions expressed to the GAO by "stakeholders." The report's overview of innovative and competitive trends in the wireless industry is combined with short summaries of opinions from different quarters—such as "consumer groups" and "some small carriers"—clamoring for new regulation of wireless. For instance, the report says that "[o]fficials with whom we spoke in Iowa noted that consumers are now facing higher than ever ETFs, which 'take people out of the market' by locking them in to specific carriers." And "[a]ccording to some small carriers and other stakeholders, exclusive handset deals are largely the result of the largest carriers' ability to exploit their market power in the mobile wireless market by requiring that device manufacturers enter into exclusive arrangements." The report also touches on prospective special access rate regulation or re-regulation, spectrum use and auction conditions, and even hints at "bill shock" regulation. (For more on "bill shock" see the FSF blog post "No Need for 'EU-Style' Wireless Mandates.")

Moreover, many of the supposed "stakeholder" grievances aired in the GAO report are premised on competitor welfare concerns, not consumer welfare concerns. The report's discussion about wireless competitive trends plays up concerns over "industry consolidation" as detrimental to certain small or regional wireless carriers. The "consolidation" theme is persistent in the report, despite being undercut by the report's own acknowledgment that recent wireless mergers that have been reviewed and approved by the FCC have resulted in larger numbers of consumers having access to multiple, competing national carriers, led to the proliferation of unlimited calling plans, and have reduced the percentage of roaming minutes used by consumers.

A consumer welfare approach recognizes that regulation designed to prop up certain "stakeholders" in a market can actually stifle innovation and competition, reducing choice and leading to higher prices for consumer "bagholders." For instance, contrary to the claims that ETFs "take people out of the market" echoed in the report, smartphones subsidized by carriers and offered to consumers with ETF contracts are what draw adopting consumers into the market. And now that wireless carriers are prorating ETF contracts, consumers now incur lower costs for breaking ETF contracts. (For more on this, see the FSF Perspectives piece "Let Competition and Choice Check Wireless ETFs" and the blog post "Fairly Disclosing ETFs vs. Price Regulating ETFs.")

In key respects the GAO dittos the FCC's recent wireless competition report (that was discussed in the FSF Perspectives piece "FCC Won't Face Up to Wireless Competition"). Both reports recount positive trends in wireless innovation and competition, resulting in a wider variety of consumer choice and decreasing prices. But, unfortunately, both reports also employ competitor-welfare and static market assumptions to raise doubts about just how competitive the wireless "ecosystem" really is and whether government interventionism will result in wireless competition "stimulus." In these respects, the light-touch regulatory environment in which wireless has so flourished has once again been called into question by a government report, and once again on dubious grounds.

Playing the observed trends in wireless innovation and competition against "stakeholder" calls for more regulation, the GAO report calls for the FCC to consider "expanding its original data collection of wireless industry inputs and outputs—such as prices, special access rates, capital expenditures, and equipment costs." At first glance, this might seem like an easy way of reconciling wireless innovation and competition with perceived consolidation and competitor concerns. As a general matter, data collection requirements are less burdensome than regulations of prices and service terms. But compliance with extensive data collection mandates can become costly. And here the additional data collection urged by the GAO appears premised on market concentration and competitor-welfare concerns. The FCC would presumably analyze the data with an eye toward regulating wireless prices and service terms to address the "stakeholder" concerns voiced in the report. This makes the GAO's recommendations appear less justifiable after all.

Ultimately, the reasonableness of any possible expanded wireless data collection by the FCC will depend on whether such an expanded collection is mandated or voluntary and on how much more expansive or expensive that data collection would be. And given the growth in wireless innovation and competition that the GAO report readily admits, reasonableness here is on the side of continuing a light-touch regulatory treatment for wireless.