Debunking the New York Times Editorial on Wireless Competition

Hal Singer —  27 October 2011

Yesterday, the editorial page of the New York Times opined that wireless consumers needed “more protection” than that afforded by voluntary agreements by the carriers and existing regulation. The essay pointed to the “troublesome pricing practices that have flourished” in the industry, including Verizon’s alleged billing errors, as the basis for stepped up enforcement. As evidence of a lack of wireless competition, the editorial cites several indicia, none of which is persuasive.

Let’s address each indicator in turn. (For readers interested in a more rigorous analysis of wireless competition, see the recent paper I co-authored with Gerry Faulhaber and Bob Hahn, forthcoming in the Federal Communications Law Journal.)

NYT: “Most customers, locked into their contracts by high early-termination penalties, have no easy way to switch providers.”

Although many wireless contracts contain early-termination fees (ETFs), the fees generally decline as the contract nears expiration. For example, AT&T’s fee begins at $325 and declines by $10 each month. One year into the contract and the fee becomes a fancy dinner date and a movie (not including the popcorn). The editorial fails to recognize that ETFs are a substitute for handset subsidies by the carriers: Limit ETFs and those subsidies will decline. Moreover, customers who are highly adverse to ETFs can either pay the full freight of the handset under a post-paid plan or enter into a pre-paid plan (and again pay full freight). I am happy to make a commitment—the prospect of an ETF makes my commitment credible—in exchange for a big discount on the latest iPhone.

NYT: “And two companies — Verizon and AT&T — now control 60 percent of the market nationwide.”

According to the FCC’s 14th Annual report (Chart 1), the combined shares of AT&T and Verizon are 55 percent, not 60 percent. Setting aside that rounding error, barring evidence of coordinating pricing by AT&T and Verizon, it makes no sense to add together their respective shares when assessing market power. To the extent that market shares have any meaning, Verizon’s market share alone (and not the sum of Verizon’s and AT&T’s share) informs Verizon’s market power. The same is true for AT&T. But as demonstrated by the Faulhaber paper, market shares have no predictive power of wireless prices (and hence market power), whether across time or across geography at a given point in time.

NYT: “Take cellphone text messaging. Companies typically charge from $5 for 250 texts a month (2 cents per message) to $20 for an unlimited package. Pay-as-you-go rates can be as high as 20 cents a message. But the cost of sending a text message is about a third of a penny, according to Congressional testimony from Srinivasan Keshav, a professor at the University of Waterloo. The markup is enormous.”

Like wireless voice services, the price of text messaging is falling. According to Nielsen (2011), the effective price per text message declined from six cents to a penny from 2005 to 2010. If one cent per message is not the right price, what is? Of course, the margins on any service in a network industry with steep fixed costs will be large. But they need to be large to induce the operator to take the risk of building the network in the first instance. Moreover, savvy wireless users with a data plan can download applications that replicate the functionality of text messaging for free. A search for “SMS text messaging for free” from Apple’s App Store yields myriad hits, beginning with textPLUS, Textfree, Fake-a-Message, Text-for-Free, Text Me!, Messagey, Fake Text Free, iText, and Texter. So long as carriers allow users to install these apps, we should expect text messaging prices to decline further.

NYT: “Even the most expensive monthly wireless data plans, costing about $15 for 250 megabytes or 6 cents per megabyte, are orders of magnitude cheaper than cellphone text pricing.”

For the reasons explained above, the days of surcharges for texting appear to be numbered. As these free-texting and other applications such as Viber (free Internet-based calls) increasingly cannibalize the carriers’ basic offerings, difficult policy issues emerge, like whether the carriers should be allowed to decide which applications can be used on their systems. Limiting a carrier’s ability to exclude such applications (or even charge for them) might put upward pressure on the price of the data plan.

NYT: “It is hugely profitable for companies to segregate voice, data and text into different plans and to force customers to buy a different plan for each device, like a phone or a tablet. But, on today’s networks, segregating services makes little sense technologically. This expensive segregation would be more difficult to maintain if the market were truly competitive and consumers could easily switch from one company to another that offers a better deal.”

Setting aside the inconvenient fact that voice, data and text are different services from the perspective of customers, why not look at switching data directly to see whether customers are trapped? Churn refers to the percentage of wireless customers who depart for other carriers. Assuming that most departing customers find a new wireless home, churn data are a reasonable proxy for switching data. In the first quarter of 2011, U.S. carriers reported monthly churn rates between 1.3 (for post-paid customers) and 4.3 percent (for pre-paid customers). Ignoring customer additions, a carrier that begins the year with 10 million customers and experiences a 2 percent monthly churn ends up losing 2.15 million of those original customers (roughly 21 percent) over the year. By this measure, wireless customers are hardly locked into place.

Finally, in addition to asking the FCC to curtail ETFs on phone contracts, the editorial requests that additional spectrum be made “available to more competitors.” I interpret “more” to mean “carriers that do not rhyme with KT&T or with Spurizon.” If only there was no such thing as spectrum exhaust, the social costs of excluding AT&T and Verizon from the next auction would be trivial. But alas, as acknowledged by the FCC’s National Broadband Plan and demonstrated in a new report by Peter Rysavy, existing carriers need access to at least 500 MHz of additional spectrum to support the precipitous increase in demand for bandwidth-intensive wireless applications. Yet another new study by the Global Information Industry Center at the University of California, San Diego shows wireless demand outstripping capacity shortly. When licensing any future spectrum, the FCC must carefully balance the need to ensure quality of service for existing subscribers against the speculative benefit of adding a sixth or seventh local carrier—90 percent of the population is served by at least five carriers according to the FCC’s 15th Wireless Report—to an already competitive wireless environment.

7 responses to Debunking the New York Times Editorial on Wireless Competition

  1. 

    Mr. Singer makes a very good point near the end of his piece regarding alllocating additional spectrum to new competitors. To make additional and effective spectrum available to a new entrant, you would have to take another source of spectrum, a current provider, offline. How much are we willing to pay the existing source and user of spectrum to get off line? Are we prepared to address complaints about more dropped calls if a current carrier cannot provide a continuity in transmission from cell site to cell site? Is society willing to pay the price for denying existing carriers additional space to generate radiation in order to add an additional carrier?

  2. 

    I don’t have a cell phone. I think they are over priced and I refuse to pay the high fees and rates.

    If more people did, rates would fall.

    Its absolutely ridicules that teenagers have monthly cell phone bills, often in excess of $50.

    Spoiled.

  3. 

    I consider that choosing a wireless service is like choosing a politician. They make big promises. Reality might not match the promises.

    Bundling and pricing packages are another issue. Imagine if your ISP charged you one rate for regular surfing, but a much higher rate for academic surfing.

    And what great choices. If you don’t want to choose between Heckle and Jeckle, you can always choose one of Moe Larry and Curly.

  4. 

    I still remember the days when texting was free. The wireless industry is a relatively new market and the worst part is that it changes rapidly. This is a really good topic to be investigated further.

  5. 

    I think better evidence of limited competition is the lack of variety in service offerings.

    For example, AT&T now offers only two text messaging options: unlimited and pay-as-you-go. There are no intermediate options, such as $10 for 500 messages (pick any combo of price/message caps)

    Another practice that seems much harder to justify than ETFs are “locking” phones to a particular carrier, particularly after the contract term is up. This may replace the lack of number portability as the leading mechanism to artificially reduce churn.

    • 

      Antitrustguy,

      Wireless carriers offer myriad plans and phones. As shown in Appendix 1 of the Faulhaber study, there are ten distinct service plans under $40 per month in Washington, D.C. How many plans are enough? In any event, I’ve never heard the claim that “lack of variety” is an indicator of lack of competition. Do you have an authority? And have you ever heard of menu costs? Carriers have to limit their offerings for the same reasons that restaurants do–there is only so much space on a page. The locking of the phone is mitigated by handset subsidies: When a Verizon customer shows up at a Sprint store, he should expect a steep discount on the latest phone. With the advances in technology, why do you want to hang on to your two-year-old phone anyway?

      Hal

Trackbacks and Pingbacks:

  1. Is the cost of adding one more competitor to the wireless market worth the benefit | Law and Politics of Broadband - November 1, 2011

    […] Singer’s recent blog post in Truth on the Market rebutting a New York Times’ piece on wireless competition raises the […]