Thursday, May 20, 2010 - The Progress & Freedom Foundation Blog

FCC Wireless Report Punts - Effective Competition Actually Prevails

As I peruse the FCC's just released Wireless Report, I wanted to jot down some initial thoughts before wading knee-deep in the regulatory morass.

First off - far from press reports which state the FCC clearly determined the market is not "effectively competitive," well, that's wrong. In fact, the FCC fails to make any such determination whatsoever. It says:

...[R]ather than reaching an overarching, industry-wide determination with respect to whether there is "effective competition," the Report complies with the statutory requirement by providing a detailed analysis of the state of competition that seeks to identify areas where market conditions appear to be producing substantial consumer benefits and provides data that can form the basis for inquiries into whether policy levers could produce superior outcomes...

In essence, the FCC has punted, seemingly missing the clear language in the statute that orders the body to include "an analysis whether or not there is effective competition..." (emphasis added). In the agency's view, the market is too complex to make such a simplistic determination. So, why do it?

One overarching point seems worth making here. The Commission has a hard time reading the law of late. You'd think that after the Comcast v. FCC decision they'd be better at it. There, the Court said the agency couldn't read authority into the Communications Act that doesn't exist. Well, maybe that fell on deaf ears, because after about a month's passage, the Commission proposed a "Third Way," which looks pretty similar to the authority the Comcast Court said the Agency lacked. Perhaps not so weirdly then, when the agency does have a chance to do what is actually in the statute - what Congress specifically directed it to do - the FCC's chooses not to. Sure, other FCC's have done the same, and within this very report. But, for this FCC, it sounds like a disturbing trend that does not bode well for the communications marketplace or consumers.

All this stated, the report, looks pretty good. If the FCC can't wrap it lips around the words "effective competition," I'll do it for them - the wireless market is marked by "effective competition." There.

Where's the good news? Innovation in devices and apps - growing; data traffic - growing significantly; mobile broadband spectrum - access is significant (but 1 GHz and below a little spotty); maturation of services - 90% of Americans have devices; capital investment - growing (though slowing some); mobile voice providers - 96% of America is served by at least three; mobile broadband providers - 98% have at least one provider, and 76% are served by at least three; unit prices - low, well below the CPI; text prices - falling.

For the most part, innovation, investment, service output and prices look healthy and vibrant. One need only look at the related edge innovation - from Apple, Google and others - to get a good idea. That could not happen if the marketplace was somehow broken.

Where the FCC has some larger competitive heartburn is around market concentration. The agency calculates the HHI number is 2848, which is technically concentrated by U.S. standards. But, when compared with other OECD countries, the U.S. actually has the lowest HHI (see table 41. p. 197 from the Report). If it were calculated the same way as those other countries, the FCC concedes "the U.S. HHI would be considerably lower, given the large number of regional and local mobile operators in the United States with sub-national footprints."

They also hone in on profitability of players - a new metric - with the top seven having margins of over 20%; four of which, including the top two providers, having margins greater than 30%.

Will rules ensue from these concerns? One can only guess. I'd hope not, though.

Wireless markets are capital intense and risky. Profits drive growth, and growth serves consumer demand. Companies need these profits. But, they need something more, too. The industry cannot compete itself into the ground - a "lemonade stand" model, which leads to suboptimal markets (i.e., less revenue per unit "x"), can't be shouldered for long. To remain viable, companies demand increased economies of scale and scope. Consequently, the market will likely get more concentrated as it matures further. It may be, as Adam Thierer has suggested in the past, that the there will be only three companies providing service in any given market. But, far from revealing a market failure, further market concentration can still provide "effective competition' for consumers. In fact, for the fast-moving, technologically evolving wireless marketplace, this may be the best model going forward.

Though the FCC seems to have punted - ostensibly to justify new rules somewhere down the road - the market speaks for itself. "Effective competition" appears alive and well. We only hope that the FCC realizes this, and avoids trying to reach "superior outcomes" through investment and innovation-killing regulations and mandates. Consumers are winning. Less regulation and marketplace guidance has produced this amazing result.

posted by Mike Wendy @ 10:25 PM | Antitrust & Competition Policy , Broadband , Communications , Innovation , Internet , Net Neutrality , Spectrum , The FCC , Wireless