Lawmakers: Beware of Regulating Wireless Networks

Published April 1, 2007

A recent paper by Columbia Law School Professor Tim Wu discusses “Wireless Net Neutrality.” He suggests that several features of the U.S. wireless industry may be harming consumers.

Overall, Wu wants wireless carriers to open their networks in many ways. He advocates creating standards that will make it easier for developers to write applications and for hardware firms to create devices that will operate on a network. He also urges following some “net neutrality” standard for use of the spectrum itself.

It is an interesting paper, but flawed in several fundamental respects.

Not a New Issue

First, Wu writes as if this were a new issue. But just like the broader debate over network neutrality, this is simply another version of an extensively debated topic: When should a network operator be forced to allow users particular types of access to its network? Wu ignores the history of this type of regulation.

We saw such regulations in the U.S. under the UNE-P regime, when the telcos were forced to sell access to their networks to competitors at regulated rates. Proponents had hoped unbundling would have a “stepping stone” effect, by allowing competitors to enter the market and, once they had a customer base, begin to invest in facilities.

Unfortunately, it did not turn out that way. Few of the competitive local exchange carriers (CLECs), as they were called, invested in any facilities, while the sharing regulations reduced investment incentives by the telcos.

Regulating how wireless carriers allow their networks to be used would represent another version of regulating network access, and the history of such regulation does not bode well for its success.

No Market Failure

Even in the case of the UNE regime and today’s debates in Europe and Asia about unbundling, advocates assume some firm has enough market power to profitably act anticompetitively. The wireless industry displays no such evidence of market failure.

Indeed, the evidence suggests the wireless market is competitive and has brought tremendous benefits to consumers. The accompanying graph suggests prices have, on average, decreased substantially while mobile use has soared. While entering the market takes a lot of capital, as Wu points out, that does not by itself indicate a market failure. The presence of four major national carriers and several regional players (some of which have now bought enough spectrum to eventually provide nationwide service) shows investors are able to mobilize resources to enter the market.

Given the unimpressive history of network-sharing regulations, one should take care in imposing similar regulations under any circumstances. Imposing them in such a competitive industry makes little sense.


Nevertheless, it is worth evaluating a few of Wu’s specific points.

Wu is concerned by the carriers’ control over the type of devices that can use their networks. He asserts consumers would be better off if the providers’ networks were open to any device manufactured to be compatible with the network technology, including allowing consumers to purchase handsets of their choice rather than the ones approved by the wireless carrier.

As Wu seems to understand, the current situation may result, in part, from a lack of standards. One of his recommendations is for the industry to “work together to create clear and unified standards to which developers can work.”

The challenge of creating standards is far more complicated than Wu implies. Standards can be important to an industry, but it is not always obvious how to establish them. Allowing all the firms in an industry to work together to create standards is one approach. That approach can create large benefits, but it also might undercut competition and promote collusion. Some cooperation among firms is important, which is why Congress passed the National Cooperative Research and Production Act in 1993 to allow firms to collaborate on certain research ventures with some protection from antitrust prosecution.

Moreover, it’s not at all clear that Wu himself would be satisfied with such a standard. He decries the industry-created Wireless Application Protocol (WAP) standard for viewing Web pages. The point here is not to praise or criticize WAP, but to point out that standards are difficult to create, and that Wu was not happy with one standard created under the type of system he seems to advocate.

Compatibility Exists

Wu also is concerned about the common industry practice of wireless carriers controlling which phones will be able to operate on their networks. Wu asks, “Why can’t you just buy a cell phone and use it on any network, like a normal phone?” Part of the answer is that you can. As he notes, GSM networks (T-Mobile and AT&T in the U.S.) will accept any GSM-compatible phone that is built to operate on the correct frequency. Amazon has a page explaining how to use unlocked GSM phones and seems to offer 163 different phones for this purpose.

Another part of the answer is that the standard practice here is for carriers to subsidize handsets to induce people to sign contracts. Would some people prefer to buy unsubsidized handsets and not sign contracts? How many, and how much would they be willing to pay? Do these subsidies increase demand for handsets? If so, how does this increased demand affect innovation?

Perhaps knowing something about consumers who choose to buy their own handsets versus those who buy directly from the network operator would shed some light on those questions. Unfortunately, Wu seems to already have decided his preferred answer to questions such as these.

Regulations always must be considered carefully to ensure that they target a specific market failure and that the benefits of the regulation are expected to exceed its costs. In the case of the wireless industry, there is no evidence of a market failure, and regulations–especially sweeping ones of the type Wu would like us to consider–are likely to impose significant costs on society and ultimately harm consumers.

Scott Wallsten ([email protected]) is senior fellow and director of communications policy studies at the Progress & Freedom Foundation.