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The  High Cost of Proposed New Wireless Regulations

The  High Cost of Proposed New Wireless Regulations. Debra J. Aron, Ph. D. Northwestern University and LECG, LLC April 2003. Presentation Outline. Impact on Carrier Costs Impact on Customer Bills Impact on Consumer Welfare Impact on Investment Impact on Employment and Output

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The  High Cost of Proposed New Wireless Regulations

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  1. The  High Cost of Proposed New Wireless Regulations Debra J. Aron, Ph. D. Northwestern University and LECG, LLC April 2003

  2. Presentation Outline • Impact on Carrier Costs • Impact on Customer Bills • Impact on Consumer Welfare • Impact on Investment • Impact on Employment and Output • Unintended Effects of Specific Rules

  3. I. Impact on Carrier Costs In research done by LECG Director William Palmer, the cost of implementing the proposed rules is estimated to exceed $475 million in one-time implementation costs and $925 million per year in annual recurring costs, or $1.1 billion per year for the first three years.

  4. Cost Drivers Examples: • Hardware, software, and storage required to develop and operate archival and retrieval systems for millions of customer conversations (signature/TPV/OC rules 3(e), 8(b)). • Employee and support equipment to process material contract changes (signature/TPV/OC rule 8(b)). • Costs of customizing newspaper, magazine, and TV ads (advertising rules (2(a), 2(d)). • Mailing and storage (privacy rule 12). • Hardware and software for audit trail (privacy rule 12). • Designing, developing, and printing voluminous master contracts (incorporation by reference rules 1(h), 2(b)). • Loss of handset value (rescission period rule 3(f)). • Increased overhead.

  5. II. Impact on Customer Bills Economic Principles Prices in competitive markets tend over time to reflect costs Cost incurred by wireless companies in complying with the proposed rules would be borne ultimately by California consumers

  6. Wireless Competition in the U.S. is Robust Between 1996-2000, wireless prices in the U.S. declined by over 60% There are multiple wireless alternatives available to consumers

  7. Wireless Competition in California is Ubiquitous and Growing Rapidly At least 5 wireless providers are available in every California market Wireless penetration has increased dramatically In CA, penetration increased by 87% since Dec-99

  8. Cost of Implementing Proposed Rules (LECG Estimates): Total annual cost for first three years (assuming one-time cost is amortized over 3 years) is $1.1 billion.

  9. Under the proposed rules, wireless bills would ultimately increase by an estimated $5.74 per monthor almost 10%

  10. The effect may be proportionately larger to low-usage customers. The effect may be proportionately larger to rural customers, because ARPU for rural and regional carriers is lower. The effect may be proportionately larger to customers served by smaller carriers, which LECG estimates face per-customer compliance costs of almost twice the cost for the national carriers. Individual Consumers Would be Affected Differently

  11. Higher prices will discourage use of wireless services. Certain proposed rules may decrease the value of wireless services to some consumers (hassle, inconvenience, decreased information). II. Impact on Consumer Welfare Consumer welfare losses in addition to those resulting from higher bills:

  12. Imposing Specific Consumer Protection Rules Would Distort Competition Wireless providers already have significant incentives to “protect” consumers: • Providers with higher satisfaction scores retain customers an average of 2 months longer and generate $4 more in monthly revenue per customer. (JDPA, 2002) • Acquisition costs and customer churn are critical cost issues (Booz Allen and Hamilton, 2001): • A company with 56 million customers and an annual churn rate of 30% looses around $870/year. • The cost of acquiring a new customer ranges between $300 and $425.

  13. The magnitude of consumer welfare losses could exceed $2.8 billion annually

  14. III. Impact on Investment • Cost increases will reduce wireless carriers’ incentive to invest (lower returns). • Cost increases may reduce wireless carriers’ ability to invest (decreased cash flow). • Reductions in investment will affect all consumers by delaying or precluding: • Technology upgrades; • Capacity enhancements; • Network expansions. • Decreased investment will likely have a greater impact on rural and lower-income consumers.

  15. IV. Impact on Employment and Output Value of lost output: Between $2.6 billion and $3.0 billion per year. Loss in employment: Between 13,532 and 15,586 jobs per year. Loss in labor earnings: Between $675.3 million and $777.8 million per year.

  16. Losses to the California economy caused by the reduction in wireless output and employment

  17. Proposed rules: Customer consent for service initiation or renewal through customer signature, TPV, or oral capture. Customer signature before effectuating any material change. Effects: Reduced ease of initiating service. Longer time on the phone (the rule requires 9 “essential terms” to verify). Inconvenience and hassle when making changes. Time Costs. Loss of flexibility: Obstruction to innovation; Harm to consumers by reducing the ability to change plans quickly and according to needs. V. Unintended Effects of Specific Rules Signature

  18. Proposed rules: 10-point or larger type for written solicitations Advertising must disclose all information “likely to affect” customer’s decision. Effects: Reduction of quality and quantity of information: Lessens competition. May cause advertising and provision of information to be entirely removed. Advertising

  19. Proposed rules: Carrier must obtain permission of customer before using CSI. Information can be disclosed to third parties only after customer’s approval. Commission approval must be obtained before rolling out services with “privacy implications.” Effects: Customers will be denied the benefit of information they may want or need. Requiring preapproval of new services dampens incentive for innovation. Privacy

  20. Proposed rules: Rates, terms and conditions included in service agreements cannot incorporate important terms by reference. Agreements and contracts must be separate from marketing materials. Effects: Reduction in new service offerings. Reduction in short-term promotions. Additional transaction costs may discourage consumers from acquiring service. “Incorporation by Reference”

  21. Proposed Rule: Customers may terminate any contract with a term, without penalty within 20 days after the date of their first bill where cause is alleged, or seven days where cause is not alleged. Effects: Reduces possibilities of differentiation. Reduces ability of providing discounted handsets. Undermines the ability of recovering costs from cost-causer. Early termination

  22. The  High Cost of Proposed New Wireless Regulations Debra J. Aron, Ph. D. Director LECG, LLC April 2003

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