The House Subcommittee on Telecommunications and the Internet (a part of the House Energy and Commerce Committee) just concluded a hearing on innovation in the wireless industry.   It is hard to believe that there is any question about the industry’s innovative nature or the benefits it has generated for consumers and our economy but some of those testifying – such as Columbia University’s Tim Wu – did try to make a case that the industry is not as innovative nor as competitive as it should be.

But the issue of innovation in the wireless industry was not really the focus of many of those testifying.  They used Professor Wu’s research to argue that the 700 Mhz spectrum auctions need to be changed to encourage new bidders.  The advocates at this hearing were suggesting that specific conditions and rules be applied to the spectrum before it is auctioned, making it quite likely that only players pushing the spectrum conditions would bid.   They are trying to jigger the spectrum process in a way that reduces the competitive nature of the auction and could very likely end up “steering” the conditioned spectrum to specific bidders.  It sure seems to me to be a throw back to the “old political spectrum deals” of the past that we got away from in moving to open, competitive bidding.   Democratic and Republican regulators have supported competitive bidding over the years and it is hard to see why – given the resources some of those clamoring for these new spectrum conditions have – they can’t just bid for the spectrum in an open process and implement any strategy or business model they wish.

What this is really all about, in other words, is the imposition of regulatory judgments and intervention in the markets.   Given the benefits of our free market economy, policymakers typically need to be convinced there is a market failure in an industry before intervening with regulation.  Professor Wu tried to create that image of failure by suggesting the industry is not as competitive or innovative as it should be.   So how does he square the fact that wireless prices have declined on average from 43 cents per minute in 1995 to 7 cents per minute in 2005?  How is this consistent with an image of an industry that is not competitive or is experiencing some sort of market failure?   

Professor Wu also focused on what he believes is a lack of innovation in the industry.   Yet, 3G networks today are already widely available, in the case of some of the carriers to 5 out of 6 Americans.  The newest EVDO service operates at speeds close to DSL on a wireless network.   To get to 4G - multimegabit speeds in both directions - we will need more spectrum to be made available.   I’m for open and competitive bidding as I said and if a new investor wins the spectrum, fine.  But is it smart to artificially constrain this spectrum with conditions so that it is not attractive to carriers who already have networks and can expand them further?  Notice again I am not advocating that spectrum be “steered” to these carriers, just that they have the chance to bid fairly and squarely – without the imposition of “tailor made” conditions – for the chance to win more spectrum.

An analysis by Hahn, Litan and Singer reveals that there are more than 150 unique models of handsets directly available from the five largest operators.   A recent study from the HSBC analyst firm (not free, offered for retail purchase) suggests that U. S. handsets have more advanced features built in than ever before, even more than many phones in Europe, a market Professor Wu praises as being ahead of the U. S.  It is hard to believe that with all of these phones and with all of these different networks people are not being given a wide range of choices and options. 

The argument will be made that people have to switch in order to get these choices.  Yes, but the FCC’s own annual report on the wireless industry – approved by all five commissioners in September of last year – found high levels of switching to the point that millions of Americans are moving to a new carrier every year.  Hundreds of thousands apparently switched recently to use the new iPhone.

Despite the inference in Professor Wu’s testimony and white paper, there are a number of business models and market approaches in the wireless industry today. As a loyal Verizon employee, I’m no T-Mobile fan but that company just last month launched a service that combines wi-fi service with cell phone service, allowing customers to use their wi-fi connection at home or at hot spots and then transition seamlessly to the cell phone network when wi-fi is not available.  And a recent study by former FCC staffer Harold Furchtgott Roth found that there are many different customer offerings and many providers in most markets today.  In Atlanta, for example, Furchgott-Roth found 118 different customer plans ranging from prepaid, to one year and two year contracts and hybrids (that included a mix of features).  He also found you could sign up for monthly service with no cancellation fees.  And 11 different carriers offer service.  Sounds like lots of choice to me.

Further, carriers have been innovating in marketing and in services provided to consumers.  Verizon recently pro-rated its early termination fees.  It came out in support of number portability well before other players.  And it offers wholesale services on its network today that supports prepaid phones such as those offered by Tracfone. 

Professor Wu and other advocates are pushing a wholesale network model in which the network would be open to any provider to use.   Networks like this certainly could have value, just as the Internet with its similar model does today.   But the implication of Professor Wu’s comments and white paper are that the managed networks that are operated by cellular companies have much less value.  That is simply not true.   These cellular networks protect consumers from spam, unwanted phone calls and even pornography and they get networks and equipment that are tested to work and free of viruses.   Consumers get lots of value out of the managed cellular networks.  That is why today 230 million Americans have cell phones, why Americans use their phones four times as much as the Europeans (whom Wu believes have better markets for cell phones) and why our prices are generally lower than those Europeans pay.  Shouldn't we give these networks a chance to continue advance through open bids without artificial constraints imposed by government?

Facts are stubborn things but we should not ignore them.  The FCC’s own facts from its own reports tell an important story.  At least one of the major allegations made by Professor Wu is that we need more competition.   Yet, again the FCC’s own recent report on the cellular market concluded that “there is effective competition in the CMRS marketplace.”  In the same report, the FCC concluded that "With respect to carrier conduct, the record indicates that competitive pressure continues to drive carriers to introduce innovative pricing plans and service offerings, and to match the pricing and service innovations introduced by rival carriers.” It specifically found that the deployment of next-generation networks based on competing technological standards continues to be an important dimension of non-price rivalry in the U.S. mobile telecommunications market.  

Finally, the FCC report also concludes that “Because the speeds on EV-DO and WCDMA/HSDPA networks are much faster than the speeds on European WCDMA networks, it has been argued that the deployment of these next-generation technologies by U.S. wireless carriers has given the United States an edge over Europe in wireless data networks for the first time in years."  The HSBC analyst report I referenced earlier says the same thing and suggests that the U. S. has a lead over Europe in terms of network speed and quality.  That’s not what you would believe reading Tim Wu’s paper but it is true.  Doesn’t that suggest our current system is working pretty well including the open auction process that got us to this point?  I think so but facts like these are completely obscured in the debate and in the white paper Tim Wu wrote.