A presentation at Wireless Competition Assessment Mercatus Center

1. Lies, Damn Lies and Statistics: What the FCC and the Public Need to Know About Wireless Competition Rob Frieden, Pioneers Chair and Professor Penn State University email: rmf5@psu.edu; web site: http://www.personal.psu.edu/faculty/r/m/rmf5 blog site: http://telefrieden.blogspot.com/ A presentation at Wireless Competition Assessment Mercatus Center George Mason University, School of Law May 18, 2011

2. 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 results-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 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.”

3. 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.

4. 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?

5. 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.

6. 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?

7. 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.