Lies, Damn Lies and Statistics: What Lies, Damn Lies and Statistics: What the FCC and the Public Need to Know the FCC and the Public Need to Know

About Wireless CompetitionAbout Wireless Competition

A presentation at Wireless Competition Assessment A presentation at Wireless Competition Assessment

Mercatus Center Mercatus Center

George Mason University, School of LawGeorge Mason University, School of Law

May 18, 2011May 18, 2011

Rob Frieden, Pioneers Chair and ProfessorPenn State University

email: rmf5@psu.edu; web site: http://www.personal.psu.edu/faculty/r/m/rmf5blog site: http://telefrieden.blogspot.com/

Empirical Data or “Goosed” Statistics?Empirical Data or “Goosed” Statistics?

47 U.S.C. 332 (c)(1)(C) requires the FCC to: “47 U.S.C. 332 (c)(1)(C) requires the FCC to: “review competitive market review competitive market conditions with respect to commercial mobile services and shall include in its conditions with respect to commercial mobile services and shall include in its annual report an analysis of those conditions. Such analysis shall include an annual report an analysis of those conditions. Such analysis shall include an identification of the number of competitors in various commercial mobile services, 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 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 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 a statement of whether additional providers or classes of providers in those services would be likely to enhance competition.”would be likely to enhance competition.”

This section requires the FCC to collect empirical data and not to engage in results-This section requires the FCC to collect empirical data and not to engage in results-driven report writing. Of course politically savvy players know the benefits in driven report writing. Of course politically savvy players know the benefits in having good news to report. Had the Commission ignored politics it would have 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 had generated a mixed report that does not completely support inferences of an effectively self-regulating market, or the need for significant and intrusive effectively self-regulating market, or the need for significant and intrusive government regulation.government regulation.

The Commission’s series of reports on competitive wireless market conditions The Commission’s series of reports on competitive wireless market conditions reminds me that there are “lies, damn lies and statistics.”reminds me that there are “lies, damn lies and statistics.”

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What the Average Consumer ExperiencesWhat the Average Consumer Experiences

Average consumers—on a rate plan, using a subsidized handset—accrue plenty of Average consumers—on a rate plan, using a subsidized handset—accrue plenty of competitive benefits and suffer from “consciously parallel” service terms, competitive benefits and suffer from “consciously parallel” service terms, conditions, prices and industry practices.conditions, prices and industry practices.

On the positive side: rate plans that guarantee the latest and greatest handsets, 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.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 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 terms and conditions. They cannot possibly all be “price takers” operating near marginal cost can they? No sales, infrequent price changes, no option for marginal cost can they? No sales, infrequent price changes, no option for discounted rates when using an unsubsidized handset, two year service discounted rates when using an unsubsidized handset, two year service commitments to recover handset subsidies, locked handsets, walled gardens, etc. commitments to recover handset subsidies, locked handsets, walled gardens, etc.

Just like the all you can eat buffet restaurants wireless subscribers maximize the 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 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 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 and “free” categories of service. But in return carriers generate some of the world’s highest margins and ARPU. highest margins and ARPU.

The bottom line surely is a win/win proposition provided subscribers do not deviate The bottom line surely is a win/win proposition provided subscribers do not deviate from relative narrow, carrier-defined parameters.from relative narrow, carrier-defined parameters.

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The FCC Historically Overstates the PositiveThe FCC Historically Overstates the Positive

With insufficiently granular data, favorable assumptions about spectrum availability, cost of With insufficiently granular data, favorable assumptions about spectrum availability, cost of service, impact of a highly concentrated market, non-price rivalry, prospects from market 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 entry, impact of market concentration, etc. the FCC errs on the side of seeing a more competitive wireless market than probably exists.competitive wireless market than probably exists.

The FCC acknowledges that it cannot estimate carriers’ actual costs or their margins. It relies 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 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 Commission can tell a happy story based on high average MOU offsetting high ARPU thereby generating low revenue per minute. Talk Up!generating low revenue per minute. Talk Up!

The FCC largely dismisses any problem with the fact that the HHI nears 3000 (the reported 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 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 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.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 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%.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 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. 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 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?and data, or both? Is fixed wireline POTS a competitive alternative to CMRS?

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The FCC Historically Avoids Asking The FCC Historically Avoids Asking and Answering Tough Questionsand Answering Tough Questions

The FCC never really answers the fundamental question whether effective competition exists. 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 answer is “it depends.” But the Commission should have assessed the following:

the consequences of it having approved every wireless merger and acquisition the consequences of it having approved every wireless merger and acquisition presented; presented;

the absence of a forensic examination of pricing; send a secret shopper to each of the absence of a forensic examination of pricing; send a secret shopper to each of the the Big Four carriers and report how similar or different are the rates, terms and Big Four carriers and report how similar or different are the rates, terms and conditions conditions of service;of service;

reliance on industry-supplied or analyst-generated data instead of reported data; 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 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 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 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% 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 EBITDA margin (and gross margins in 3 digits) corroborate an inference of robust competition?competition?

the roll of resale; opponents of local loop unbundling argue that resellers lack 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 incentives to become facilities-based carriers, but for wireless they are essential competitors, albeit reliant on a margin between wholesale and retail MOU costs.competitors, albeit reliant on a margin between wholesale and retail MOU costs.

whether and how spectrum scarcity contributes to industry consolidation, the whether and how spectrum scarcity contributes to industry consolidation, the ability of ability of incumbents to erect barriers to market entry and supracompetitive margins.incumbents to erect barriers to market entry and supracompetitive margins.

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The FCC Historically Avoids Asking The FCC Historically Avoids Asking and Answering Tough Questions (cont.)and Answering Tough Questions (cont.)

What factors/inputs contribute to, or thwart robust competition? The Commission identifies 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 spectrum, tower sites, network equipment and backhaul. Each of these have the potential to thwart or reduce competition.thwart or reduce competition.

Would reserving new spectrum exclusively for market entrants promote competition, or 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?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 A wireless carrier with its own backhaul/middle mile network might erect a price squeeze to competitively disadvantage a competitor. competitively disadvantage a competitor.

What is the marketplace impact of exclusive handset deals, two year service contracts, early What is the marketplace impact of exclusive handset deals, two year service contracts, early termination penalties, etc.?termination penalties, etc.?

What impact would applying the What impact would applying the CarterfoneCarterfone policy have on the wireless marketplace? policy have on the wireless marketplace?

Based on the Commission’s applied methodology does a reduction in average voice MOU Based on the Commission’s applied methodology does a reduction in average voice MOU show a reduction in the value proposition?show a reduction in the value proposition?

Under current conditions, what are the prospects for market entry by new facilities-based Under current conditions, what are the prospects for market entry by new facilities-based competitors?competitors?

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A Lesson From Wall StreetA Lesson From Wall Street

Buy-side analyst Craig Moffet bemoaned excessive Buy-side analyst Craig Moffet bemoaned excessive wireless competition: wireless competition: “The U.S. wireless market is “The U.S. wireless market is crying out for consolidation, … there are too many crying out for consolidation, … there are too many cooks in the kitchen.” cooks in the kitchen.”

He explained to me that his goal is to help achieve He explained to me that his goal is to help achieve “more rational pricing” through industry “more rational pricing” through industry consolidation. He told me his job description does consolidation. He told me his job description does not include caring about wireless consumers.not include caring about wireless consumers.

The FCC has a different job description.The FCC has a different job description.

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