Conclusions in FCC Wireless Competition Report Remain Controversial

The Wireless Bureau is now developing the 2011 report, which has yet to circulate on the eighth floor. The 2010 report proved controversial, and was approved over concerns by Commissioners Robert McDowell and Meredith Baker (CD May 21/10 p1) about its discussion of industry competition.

"You can make a really nice report describing a lot about what the world looks like,” Wright said. “The action is in the prediction and the role of economics is providing the lens to do that prediction.” Wright said that reading the report allows a good snapshot of the wireless industry. But the commission’s economic analysis falls short in that it’s not informed by changes in industrial organization (IO) economics, the field of economics that studies the structure of and boundaries between businesses and markets and the strategic interactions of firms, he said.

"Relying on market structure to make predictions about competitive consequences is a very bad idea,” Wright said. “If [the report] is going to make predictions … that have real importance for the world, for how its technologies develop, for the state of competition for consumers, then it ought to update its economics. It ought to take more seriously the lessons in the IO literature.” The FCC had no immediate comment on the remarks.

The degree of competition in the wireless market is obvious, said Tom Hazlett, professor at GMU Law School and former chief FCC economist. Ask the average consumer about wireless competition and they would likely talk about the “explosion of choices” including offers by low-cost carriers, Hazlett said. “They'd probably show you their handset,” he said. “They'd say something about the apps and the different things that are happening there.”

Ask the average analyst on Wall Street and their likely response would be there’s “too much competition,” Hazlett said. “Prices are low. Investment requirements, capex are still high. Low-cost plans are straining the market.” AT&T and Verizon Wireless are “holding their own,” but that’s it, he said. Herfindahl-Hirschman Index values, a key focus of the FCC’s last report, “tell us very little about what the actual dynamics are,” Hazlett said: The regulator misses the real dynamic in the market. There has been “a shifting in the center of gravity,” he said. “Companies like Apple, Research in Motion and Google, Microsoft and Nokia, companies without any wireless assets … are becoming the dominant players."

Public Knowledge Legal Director Harold Feld said he’s “appalled” by Hazlett’s suggestions that the FCC can do its congressionally mandated job of writing a competition report by counting subscribers, collecting “some great, happy success stories” and then “go away saying ‘mission accomplished.'” The FCC “is supposed to every year go out and survey the market with respect to mobile services, whatever that is,” Feld said. “It’s supposed to look at it in its various segments and it’s supposed to make pronouncements particularly with regard to … ‘effective competition.'” The agency is also supposed to make some forecasts on where the market’s headed. “The question becomes, we have all these things that are supposed to be happening, but this turns out to be a very complicated market, an increasingly complicated market, particularly as it becomes interlinked with other markets."

The FCC’s 2010 report shows that the commission is doing its job, Feld said. The commission has to look at problems in the market, who has what spectrum and “why that matters,” where market dominance “is creeping up or not creeping up,” he said. “They do have certain statutory responsibilities.” The wireline market used to look competitive, Feld said. But “then, one day, all the CLECs died,” he said. AT&T was bought by SBC and Sprint sold off its wireline holdings to become just a wireless company. “Everybody kind of stood around and said, “Wow, why the hell did that happen?'” he said. “So you can have what looks like a very competitive market and still have deep-seated structural problem."

Responding to Feld, Hazlett said he wasn’t suggesting that the FCC’s report should be based on “man-on-the-street interviews” with consumers or analysts. “I am suggesting how even a ridiculously ad hoc methodology would reveal important economic insights that the FCC missed,” he said. The commission should take seriously the views of analysts with their “deep insights” on the market, he said. The best data on consumer welfare estimates for mobile markets in the U.S. and world, for example, comes from Merrill Lynch, he said. “It’s not going to come from the government."