FCC Releases Report on Wireless Competition

February 4, 2008. The Federal Communications Commission (FCC) released a report [pages in PDF] titled "Twelfth Report". This is the FCC's annual report to the Congress on the state of competition Commercial Mobile Radio Services (CMRS) industry. The report concludes that "there is effective competition in the CMRS market".

Moreover, when examining trends in mobile internet access for handsets, laptops and other devices, the report concludes that "competition in mobile telecommunications markets is flourishing".

The report finds that 99.8 percent of the U.S. population is served by at least one CMRS provider. 99 percent of the population is served by at least two providers. 95.5 percent is served by at least three. 89.9 percent is served by at least four.

47 U.S.C. § 332(c)(1)(C) requires the FCC to write an annual report on "competitive market conditions with respect to commercial mobile services", including "an analysis of whether or not there is effective competition". Neither the statute, nor this report, define the term "effective competition".

See also, FCC release [PDF] summarizing this report. This report is FCC 08-28 in WT Docket No. 07-71.

Price Competition. The report finds that "The continued rollout of differentiated pricing plans also indicates a competitive marketplace. In the mobile telephone sector, we observe independent pricing behavior, in the form of continued experimentation with varying pricing levels and structures, for varying service packages, with various handsets and policies on handset pricing. Today all of the nationwide operators, and many smaller operators, offer some version of a national rate pricing plan in which customers can purchase a bucket of minutes to use on a nationwide or nearly nationwide network without incurring roaming or long-distance charges." (Footnote omitted.)

Price Trends. The report states that "Wide variations in the non-price terms and features of wireless service plans make it difficult to characterize the price of mobile telephone service, and consequently it is difficult to identify sources of information that track mobile telephone prices in a comprehensive manner." (Footnote omitted.)

It continues that "there is ample evidence of a sharp decline in mobile telephone prices in the period since the launch of PCS service. During 2006, however, pricing has been relatively stable, due in part to, as one analyst characterized it, ``already very low pricing.´´" (Footnote omitted.)

The report also states that the "average price of a mobile call as measured by an estimate of average revenue per minute in December 2006 was unchanged from the previous year". Finally, it states that prices in the U.S. remain "relatively inexpensive on a per minute basis compared with that in Western Europe and Japan".

Wireline Wireless Competition. The report states that "While exact percentages are difficult to determine, wireless substitution has grown significantly in recent years. Between the end of 2001 and 2006, total RBOC access lines dropped 23 percent, from 161 million to 124 million lines. In 2006 alone, the RBOCs lost almost 7 percent of their wireline access lines, with wireless substitution being a significant reason." (Footnote omitted.)

The report adds that "These trends appear to be due to the relatively low cost, widespread availability, and increased use of wireless service", and notes that a number of analysts have argued that "wireless service is competitive or cheaper than wireline, particularly if one is making a long-distance call or when traveling".

The report also states that "A number of mobile wireless providers offer service plans designed to compete directly with wireline local telephone service".

Finally, the report notes that WiFi hotspots "are playing an increasingly important role as a competitor and supplement to the services offered by the CMRS industry", and that "Several mobile telephone providers have entered the hot spot operation".

And furthermore, the Apple/AT&T iPhone "can connect to any Wi-Fi hot spot for Internet access service", while "over the past year certain mobile operators have begun to use WLANs to augment their CMRS-based voice services with voice connections at Wi-Fi hot spots."

Comments. Steve Largent, head of the CTIA, stated in a release that "As long as regulators recognize our success is based on market forces, not costly government regulations, the industry will operate effectively in this competitive market in order to serve consumers well. Wireless has proven time and time again that market competition is the best regulator for the industry. Let’s allow it to continue working for consumers."

FCC Commissioner Robert McDowell wrote that there is a "great deal of good news" in this report, particularly regarding wireless broadband.

McDowell (at left) continued that "Given the timing of all of these positive developments -- which began sprouting in 2006 and even earlier -- I question the assertion made by some that the government can claim credit for spurring device and application portability. Indeed, certain discussions set forth in this report appear to apply a shiny new gloss on the Commission’s very recent, and as yet untested, open access regulations in the 700 MHz spectrum band. I continue to be concerned that the Commission may have imposed an artificial ceiling that will hamper ongoing market-driven innovation and creativity. I also question the Commission’s unwillingness to admit that the wireless industry is (and has been) responding to consumer demand, not prospective regulatory fiats. In sum, I strongly caution against attempts to “spin” the data contained in this report into an ex post facto justification of regulatory mandates." (Parentheses in original.)

FCC Chairman Kevin Martin wrote that "As I noted when we adopted open network rules for the ongoing 700 MHz spectrum auction, wireless customers should be able to use the wireless device of their choice and download whatever software they want onto it. I continue to believe that more openness -- at the network, device, and application level -- helps foster innovation and enhances consumers' freedom and choice in purchasing wireless service. I am optimistic that these commitments along with the ongoing 700 MHz spectrum auction will ensure an exciting new era in wireless technology for the benefit of all consumers."

FCC Commissioner Deborah Tate wrote that "this report is a testament to how the application of a light regulatory touch to a competitive market has resulted in one of the most innovative and vibrant sectors of the U.S. economy."

FCC Commissioner Michael Copps wrote that he merely concurred in the report because it "still fails to define the term ``effective competition.´´" He also cited "Broad-ranging critiques about the openness of the cell phone market"

HHI and Future Consolidation. The report finds that the "Concentration in the U.S. mobile telephone market, as measured by the Herfindahl-Hirschman Index (``HHI´´), declined from 2706 at the end of 2005 to 2674 at the end of 2006. No single competitor has a dominant share of the market."

Pursuant to the Horizontal Merger Guidelines issued by the Department of Justice's (DOJ) Antitrust Division and the Federal Trade Commission (FTC), a market with an HHI score of over 1800 is considered to be concentrated. See, Chapter 1.5 of these Guidelines.

The Guidelines state that the HHI score is calculated as follows: "For example, a market consisting of four firms with market shares of 30 percent, 30 percent, 20 percent and 20 percent has an HHI of 2600 (302 + 302 + 202 + 202 = 2600). The HHI ranges from l0,000 (in the case of a pure monopoly) to a number approaching zero (in the case of an atomistic market)." (Parentheses in original.)

The Guidelines state that for post merger HHI scores of over 1800, "The Agency regards markets in this region to be highly concentrated. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets post-merger potentially raise significant competitive concerns".

The FCC report notes that "In interpreting these HHIs, it is worth noting that the specific technological and economic characteristics of an industry are important determinants of the level of market concentration. Of particular importance is the relationship between economies of scale and the potential size of the market. In industries where the scale of output at which a firm can fully exploit scale economies (the minimum efficient scale) is large relative to potential demand, there will be room in the market for only a small number of firms operating at the lowest possible cost."

It adds that "Consolidation and exit of service providers, whether through secondary market transactions or bankruptcy, may affect the structure of the mobile telecommunications market. A reduction in the number of competing service providers due to consolidation or exit may increase the market power of any given service provider, which in turn could lead to higher prices, fewer services, and/or less innovation. However, consolidation does not always result in a negative impact on consumers. Consolidation in the mobile telecommunications market may enable providers to achieve certain economies of scale and increased efficiencies compared to smaller operators." (Footnote omitted.)