New FCC Intrusion into Wireless Is Unneeded, Harmful

Published November 1, 2007

There’s been a lot of confusion lately over whether there is enough competition in wireless telecommunications.

In the more than 20 years since cellular technology emerged, Congress and the Federal Communications Commission (FCC) purposefully held the line on intrusive regulation and allowed market forces to take their course. The result has been four service providers with national footprints and several more regional operators, all of which compete with a large selection of wireless devices and services at a wide range of prices.

Today FCC doesn’t think that’s enough. In an unprecedented effort to manage the wireless market, it will require the winner of a portion of coveted wireless radio spectrum that will be auctioned in January to commit to an “open access” business model. The winning bidder will have to allow any phone, using any type of software, to work on its network.

Different Model

This differs from the current business model service providers such as AT&T, Verizon Wireless, T-Mobile, and Sprint use.

Wireless companies generally authorize phones and PDAs, and the software they use, to work on their network. This practice ensures the device is truly compatible with the network and customers who select it get a quality experience. It also makes phones purchased from one service provider difficult or impossible to work with another. Some models are available from one provider only, such as the Apple iPhone exclusive to AT&T.

Robust Market

But this business model has not prevented a robust market for wireless phones from developing. (See accompanying figure). Motorola, Ericsson, Samsung, LG, Palm, and others compete to win contracts from service providers. All manufacturers provide different types of phones at different prices. And, in most markets, at least five service providers compete.

Phone Distribution

Nevertheless, FCC officials, with some support from Congress and consumer advocates, are mandating open access in the name of creating competition. Proponents assume the tight relationships between service providers and phone manufacturers are inherently anti-consumer.

Rep. Edward Markey (D-MA) exemplified this mindset when he complained on the House floor that the iPhone worked solely with AT&T.

Enhanced Competition

But are exclusive deals between manufacturers and consumer-facing distributors anti-competitive? Exclusivity can serve competition by creating differentiation. Among big retailers, only Target offers low-price apparel designed by Isaac Mizrahi. A dedicated Wal-Mart shopper who likes Mizrahi designs may resent having to shop at Target, but that doesn’t make the deal anti-competitive. Quite the opposite–Target’s drive to win customers led it to create its line of popular-priced designer clothing.

A prohibition on such agreements, or the converse requirement that any Mizrahi designs created for Target must be sold at Wal-Mart and K-Mart too, would so undermine any attempt at innovation or differentiation that agreements like Target-Mizrahi would be unlikely to happen.

Market competition was actually at the root of Markey’s complaint. In order to purchase and use an iPhone, he said consumers had to switch to AT&T service–evidence there are competing companies to switch from.

The choice Markey has–whether the benefits of owning an iPhone are worth the cost and inconvenience of changing providers–is not a sign of market dysfunction. On the contrary, a healthy market engages consumers with multiple products and value propositions.

Closing Opportunities

And that’s why FCC’s open access requirement is troublesome: It closes off opportunities for companies to risk working together to develop new products.

Also, open access comes with its own tradeoffs. It’s a business model, not a vehicle for economic justice. Today, the tight relationship between phones and service providers results in low prices and differentiation. Those who believe service providers will be able to give away phones in an open access environment will be in for a surprise.

Market competition grows out of laws and policies that make it easy to create a business when an opportunity presents itself. The wireless industry has flourished under these conditions since its inception, and the result has been a healthy global wireless industry with a diverse and competitive supply chain that delivers consumers affordable cell phone service.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.