October 7, 2009

Mobile Wireless Competition Notice of Inquiry

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Congress requires the FCC to submit annual reports on the state of competition in commercial mobile wireless communications. On May 14, 2009, the FCC's Wireless Communications Bureau issued a public notice seeking data for its 14th annual report. On August 27, 2009, the commission adopted an additional Notice of Inquiry seeking comment on how it should "expand and enhance" its analysis of competition, "both to improve our assessment of the current state of competition in the entire mobile wireless market ecosystem and to better understand the net effects on the American consumer."

Because the Notice of Inquiry considers broadening the scope of the commission's competitive analysis, the commission explicitly invited participation from additional parties who may not have participated in prior wireless competition proceedings, including academics. This comment responds to that invitation. We offer the following suggestions on six topics the commission explicitly sought comment upon:

• Overall analytical framework: The FCC's current framework investigates the mobile wireless industry's structure, firm conduct, consumer behavior, and market performance. This framework is adequate for understanding performance of the wireless carriers and the larger industry (including handsets, applications, etc.). However, the framework is only useful as a list of topics to consider. The commission should avoid assuming that market structure (such as the number of firms) rigidly determines firm conduct and market performance.

• Non-regulatory entry barriers: The commission's annual report on mobile wireless competition should include a rigorous definition of non-regulatory barriers to entry, a coherent theory explaining why enumerated potential barriers might satisfy that definition, and empirical analysis that shows whether the potential non-regulatory barriers are in fact barriers. The most recent report, for example, helpfully identifies advertising expenditures as a potential "sunk cost" that inhibits entry, but fails to explain whether the commission believes sunk costs are the only non-regulatory barriers to entry and provides no evidence assessing how much of the advertising expenditures are a sunk cost.

• Spectrum as an entry barrier: Analysis of spectrum as an entry barrier should recognize that limits on the amount of spectrum available for commercial use effectively limit the quantity and quality of service that existing or new carriers can offer. The fact that carriers willingly pay billions of dollars for spectrum indicates that federal spectrum policy limits entry and/or expansion of service. By limiting the quantity and quality of service, federal spectrum policy diminishes consumer welfare.

• Switching costs: Switching costs can inhibit competition, and the Notice of Inquiry asks for data about the size of switching costs. One can also examine consumer behavior to determine whether switching costs may be high or low. Substantial consumer "churn," totaling 18-36 percent per year, suggests that switching costs are relatively small compared to the benefits consumers perceive from switching. Therefore, it is unlikely that switching costs inhibit competition.

• Profitability calculations: Calculating wireless companies' profits based on accounting data would likely produce little additional insight about market performance and may produce highly misleading results. Past wireless competition reports demonstrate that the wireless market is structurally competitive, firms engage in rivalrous competition, prices have plummeted, and quantity and variety of services have expanded. We estimate that even a very stringent, efficient, and perfectly functioning regulatory system would have produced less than half of the price reductions that the competitive wirelessmarket produced during the past decade. Other, less ambiguous indicators-such rivalrous firm conduct, substantial customer switching, and actual entry-demonstrate that mobile wireless is highly competitive.

• Vertical relationships: The commission asks how upstream and downstream relationships affect competition in wireless, and vice versa. A special concern in both this Notice of Inquiry and the accompanying one on wireless innovation is the existence of closed, proprietary platforms, and devices. A closed platform or device causes competitive concerns only if consumers lack access to competing platforms or devices. Given the intense competition between platforms with varying degrees of openness, we see little reason regulators should favor open over closed platforms.