Transcript Lies, Damn Lies and Statistics: What the FCC and the Public Need to Know About Wireless Competition A presentation at Wireless Competition Assessment Mercatus.

Lies, Damn Lies and Statistics: What the FCC and
the Public Need to Know
About Wireless Competition
A presentation at Wireless Competition Assessment
Mercatus Center
George Mason University, School of Law
May 18, 2011
Rob Frieden, Pioneers Chair and Professor
Penn State University
email: [email protected]; web site: http://www.personal.psu.edu/faculty/r/m/rmf5
blog site: http://telefrieden.blogspot.com/
Empirical Data or “Goosed” Statistics?

47 U.S.C. 332 (c)(1)(C) requires the FCC to: “review competitive market
conditions with respect to commercial mobile services and shall include in its
annual report an analysis of those conditions. Such analysis shall include an
identification of the number of competitors in various commercial mobile services,
an analysis of whether or not there is effective competition, an analysis of whether
any of such competitors have a dominant share of the market for such services, and
a statement of whether additional providers or classes of providers in those services
would be likely to enhance competition.”

This section requires the FCC to collect empirical data and not to engage in resultsdriven report writing. Of course politically savvy players know the benefits in
having good news to report. Had the Commission ignored politics it would have
had generated a mixed report that does not completely support inferences of an
effectively self-regulating market, or the need for significant and intrusive
government regulation.

The Commission’s series of reports on competitive wireless market conditions
reminds me that there are “lies, damn lies and statistics.”
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What the Average Consumer Experiences

Average consumers—on a rate plan, using a subsidized handset—accrue plenty of
competitive benefits and suffer from “consciously parallel” service terms,
conditions, prices and industry practices.

On the positive side: rate plans that guarantee the latest and greatest handsets,
jumbo minutes of use and until recently “all you can eat” data service.

On the negative side: mobile carriers offer nearly identical price points and service
terms and conditions. They cannot possibly all be “price takers” operating near
marginal cost can they? No sales, infrequent price changes, no option for
discounted rates when using an unsubsidized handset, two year service
commitments to recover handset subsidies, locked handsets, walled gardens, etc.

Just like the all you can eat buffet restaurants wireless subscribers maximize the
U.S. value proposition with as much consumption as possible. We get to best in
class minutes of use and near lowest cost per minute with large baskets of minutes
and “free” categories of service. But in return carriers generate some of the world’s
highest margins and ARPU.

The bottom line surely is a win/win proposition provided subscribers do not deviate
from relative narrow, carrier-defined parameters.
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The FCC Historically Overstates the Positive

With insufficiently granular data, favorable assumptions about spectrum availability, cost of
service, impact of a highly concentrated market, non-price rivalry, prospects from market
entry, impact of market concentration, etc. the FCC errs on the side of seeing a more
competitive wireless market than probably exists.

The FCC acknowledges that it cannot estimate carriers’ actual costs or their margins. It relies
on estimates of ARPU, average minutes of use (“MOU”) and cost per minute. So the
Commission can tell a happy story based on high average MOU offsetting high ARPU
thereby generating low revenue per minute. Talk Up!

The FCC largely dismisses any problem with the fact that the HHI nears 3000 (the reported
2848 plus the consequences of Verizon’s $28 billion acquisition of Alltel’s 5.2% of
subscribers). There must be a lot of rivalrous, competitive behavior to offset the Dept. of
Justice’s view that HHI’s above 1800 constitute a “highly concentrated” market.

The Commission “buries the lead” by inserting 1 sentence on p. 29 that the 4 national carriers
hold a 90% market share with Verizon and AT&T holding 60%.

The FCC identifies 586 MHz of spectrum available for CMRS use (p. 145), but does not
consider whether propagation and other suitability factors promote truly competitive options.
Would you consider Clearwire a competitive alternative to mobile voice and data, fixed voice
and data, or both? Is fixed wireline POTS a competitive alternative to CMRS?
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The FCC Historically Avoids Asking
and Answering Tough Questions

The FCC never really answers the fundamental question whether effective competition exists.
The answer is “it depends.” But the Commission should have assessed the following:
the consequences of it having approved every wireless merger and acquisition
presented;
the absence of a forensic examination of pricing; send a secret shopper to each of the
Big Four carriers and report how similar or different are the rates, terms and conditions
of service;
reliance on industry-supplied or analyst-generated data instead of reported data;
MOUs fit into many categories, each with different cost factors, e.g., on or off
network; local vs. long distance; local vs. roaming. The Commission’s happy story
about MOUs, revenue and cost per minute largely depend on proof of high MOUs at
relatively high cost to the carrier, despite highest ARPUs in the world. Does a 46.3%
EBITDA margin (and gross margins in 3 digits) corroborate an inference of robust
competition?
the roll of resale; opponents of local loop unbundling argue that resellers lack
incentives to become facilities-based carriers, but for wireless they are essential
competitors, albeit reliant on a margin between wholesale and retail MOU costs.
whether and how spectrum scarcity contributes to industry consolidation, the ability of
incumbents to erect barriers to market entry and supracompetitive margins.
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The FCC Historically Avoids Asking
and Answering Tough Questions (cont.)
What factors/inputs contribute to, or thwart robust competition? The Commission identifies
spectrum, tower sites, network equipment and backhaul. Each of these have the potential to
thwart or reduce competition.
Would reserving new spectrum exclusively for market entrants promote competition, or
deprive incumbents of much needed additional spectrum/scale and reduce the Treasury’s
take?
A wireless carrier with its own backhaul/middle mile network might erect a price squeeze to
competitively disadvantage a competitor.
What is the marketplace impact of exclusive handset deals, two year service contracts, early
termination penalties, etc.?
What impact would applying the Carterfone policy have on the wireless marketplace?
Based on the Commission’s applied methodology does a reduction in average voice MOU
show a reduction in the value proposition?
Under current conditions, what are the prospects for market entry by new facilities-based
competitors?
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A Lesson From Wall Street
Buy-side analyst Craig Moffet bemoaned excessive
wireless competition: “The U.S. wireless market is
crying out for consolidation, … there are too many
cooks in the kitchen.”
He explained to me that his goal is to help achieve
“more rational pricing” through industry
consolidation. He told me his job description does
not include caring about wireless consumers.
The FCC has a different job description.
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