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Wireless industry is anticompetitive? Not so fast
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Concerns over the wireless industry's "competitiveness" are heating up once again. The centerpiece issue is handset exclusivity, but there are broader concerns about the industry's structure, such as the size and scale of the major operators and the commonplace "subsidy for contract" practice. FierceWireless Managing Editor Mike Dano's piece a week ago opened up a good debate on this issue, so I thought it might be idea to get into this a little further, particularly given Verizon Wireless' move Friday. (Interesting strategically: pro-active and conciliatory to smaller operators, while at the same time firing a shot across the bow at AT&T and Apple as they consider extending their three-year exclusivity agreement for the iPhone.)
Let me start by saying right up front that I don't think the government has a good case. First, the departure point of many arguments is the 1968 Carterfone decision, which required that the Carterfone and other devices be extended to the AT&T network as long as they "did no harm," thus opening the market for customer premises-owned equipment. Does Carterfone apply to wireless, and by extension, the iPhone and other devices? Wireless is still considered by the FCC as a "commercial mobile radio service," and thus does not fall under the same requirements (such as providing universal service) as the PSTN. Additionally, we should recognize that all cellular phones, no matter the OEM, brand, or network, do offer core functionality--you can make a call, send a text, and in most cases, access content. I do not think the "spirit" of Carterfone applies to visual voice mail, app stores, or other aspects of the mobile "experience."
Second, our industry is healthy and competitive, and its performance is over-indexing most other sectors of the economy. Why mess with it? Sure, there has been consolidation among the operators. AT&T and Verizon have leapt ahead of the pack, size-wise, but consumers still can choose from among four and eight operators in nearly every market, if regional providers and larger MVNOs (Virgin Mobile USA and TracFone, for example) are included. The same cannot be said for related industries--cable, broadband Internet, fixed line and any utility you can think of. We are also now leading much of the rest of the world in many aspects of the customer experience: Wireless voice prices are among the lowest in the Organization of Economic Cooperation and Development; we have three, and soon to be four, national 3G networks; and the tide of innovation--handset design, user interface evolution, apps, content, location services, you name it--has shifted in this direction over the past few years. As for scale, this is in part the government's own making: The FCC is happy to extract the maximum amount possible in spectrum auctions, then it questions the "size" of the operators who spend tens of billions of dollars to buy spectrum and build the world's most advanced networks before they start collecting the first dollar of revenue. That is why we don't have, for example, Google, AOL or Comcast "wireless" (or Joe's Wireless for that matter).
Third, we must recognize that competition has changed in the past few years. Where once the value proposition centered around network coverage and price, the device has become a much more important part of the decision factor, particularly in an era of 85 percent-plus penetration and nickel-a-minute wireless service. If handset exclusivity was outlawed, what would be the primary differentiating factors? Note, too, that wireless operators are among the country's largest physical retailers--they gotta have something to draw customers into stores and to talk about in their tens of billions of dollars in annual ad spend.
Fourth, there are numerous examples of exclusivity arrangements in other, related, industries. Take TV. If I want the NFL Network, I have to subscribe to DIRECTV. The new Red Sox On Demand channel is only available to Comcast subscribers, not FiOS or RCN. Some TV shows are available on iTunes but not Hulu. Certain video game titles are exclusive to particular game consoles. Yes, I can go to the Web on either a PC or a Mac, but I can't use Safari or iPhoto on a Windows machine and conversely many applications and titles available on the PC are not available on a Mac. Some consumer electronics brands are available exclusively at Best Buy. And so on.
Fifth, and most importantly, I can't imagine how a mandate banning handset exclusivity would actually be implemented. The slope gets slippery very quickly. First is the blurry distinction between device and experience. Would the government's requirement, let's say for the iPhone, apply to visual voicemail, or other aspects of the user experience that might be customized or optimized for a particular operator relationship? Would a popular iPhone app have to be made available in the BlackBerry and Ovi app stores as well? Second, to whom would this requirement apply--the operator or the OEM? Would Nokia be required to make CDMA versions of all of its handsets so Verizon and Sprint could sell them? Would all devices be required to work across all spectrum bands? It's great to use the iPhone as a lightning rod for this conversation, since it's a device that a lot of people want. But what about a niche device (such as the G'zOne mil spec PTT phone), or one where Operator A believes there's a good market and Operator B does not? And what applicability would this have at the operating system level, given that we have ten different device operating systems--some tightly linked to the device (iPhone, BlackBerry, Pre), others less so (Windows, Symbian, Android)?
A further question is whether the government's attempt to "level the playing field" would extend to the price of the device. Smaller operators are frustrated that they can't get devices for the same price as larger operators. While I am sympathetic to this issue, it's no different than in other industries. Home Depot will get that hammer from the supplier at a lower price than the corner hardware store.
Finally, a few words on the handset subsidy issue, which some have argued is part of this industry's "monopolistic practices." If we were to start the wireless business model from scratch, and with the benefit of hindsight, I'm sure that many operator executives would eschew the subsidy model. But let's face it--this is a credit society. Even though there are many more non-subsidy options than before (graduated termination fees, more prepaid choices, clear disclosures of and ability to buy at full retail price), consumers are sticking with the subsidy model for desired phones. And there are tradeoffs with any alternative pricing models, whether it's 0 percent financing or free TV. The pace of innovation in mobile devices is faster than a lot of other industry sectors (PCs, game consoles), hence our sub-two-year average handset replacement rate.
So, a note to the Congressmen and Commissioners: Our industry is not perfect, and there are legitimate, understandable concerns with our business model. But before expending too many calories on the antitrust issue, I'd urge regulators to step back and consider the health, competitiveness, rate of innovation, and level of customer satisfaction of the wireless industry compared with other, far more troubled sectors of the economy.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is managing director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter. Lowenstein will also be hosting a webinar on wireless industry trends Aug. 13 at 2 p.m. EST. David Barden, Managing Director at Bank of America Merrill Lynch will join Lowenstein for this can't miss web event. Register today.
Comments
Posted by Anonymous | July 21, 2009 - 12:49pm
I've read some of Mark's pieces in the past; and sadly, I have to say, I never really knew how little he knows about the North American wireless telecom industry until now.
Posted by Mark Lowenstein | July 21, 2009 - 2:04pm
Hi there Mr. Anonymous-
Thanks for taking the time to read the piece. I'd welcome a substantive, reasoned, constructive comment/argument.
Posted by Anonymous | July 21, 2009 - 2:43pm
Mobile phone use while operating a vehicle resulting in train crashes and car crashes with fatalities and injuries is the the higher priority issue for our government leaders. The numbers, sadly, are climbing.
Posted by Mike K | July 21, 2009 - 2:49pm
This article is right on !! We have a far more competetive marketplace than most of the world with better pricing and higher 3G smartphone uptake than anybody. Who can afford a $700 smartphone unsubsidized? Our carriers also need incentive to continue to invest in great products and networks.If carriers cant make money then they can't invest and then we all fall behind. -- the Anonymous commenter above can only throw out a question and to me seems cluless one.
Posted by Anonymous | July 21, 2009 - 7:58pm
I would argue that our pricing is actually somewhat messed up in the US. The carriers subsidize the phone prices but also drive up costs by requiring completely separate software loads, let alone the industrial design.
On a system wide scale, if the US adopted a more standards based approach such as the GSM ecosystem where RF perfromance/compatibility and service enablers are standardized, the total costs can be significantly reduced.
Now, how that savings gets allocated within the system, of course, is another argument all together.
Posted by Mark Lowenstein | July 22, 2009 - 9:18am
You are right - the industry structure would be very different if we had one air interface standard, as Europe has since the early 1990s. A conscious decision was made in the direction of market forces, rather than industrial policy. Which is why we have GSM, CDMA, iDEN, and WiMax. More complicated, yes, but it has also spurred innovations in spectral efficiency, multi-band capability, and software defined radio. Additionally, Qualcomm - and the multitude of companies riding on its coattails - has been positive force in the U.S. economy.
Posted by PrepaidWirelessGuy | July 22, 2009 - 2:49pm
Interesting discussion. I agree that the US is actually behind. And while pricing often tends to be quite good (compare to Canada for example), carriers are losing money left and right; in fact, some LARGE MVNOs have never even turned a profit...crazy. We need standards, and volumes to gain economies of scale. Only time will tell which companies can actually survive the long haul. As we have recently learned, being a large company doesn't mean that's it's run well and will survive.
www.prepaid-wireless-guide.com
Posted by Anonymous | July 22, 2009 - 8:26pm
Ok, your entire article ticks me off.
First off, your claim about prices is infuriatingly misleading. Monthly prices in other countries are significantly LOWER than in the US. In South Korea an individual plan starts at $10/month, and a family plan including voice and data costs a maximum of $60/month. In India, a DEVELOPING COUNTRY, text messaging is FREE.
Our phones are also a generation behind the rest of the world in terms of hardware quality. We get stuck with hand-me-downs from the rest of the world because of these idiotic exclusive contracts.
Next, comparing the wireless industry with the wireline broadband industry is just pathetic. The wireline industry is so non-competitive you have monopolies or duopolies in many areas of the US. It's like comparing a 10 year old to a sick grandma and saying that 10 year old is "strong".
All wireless carriers offer the exact same prices for the exact same length of contracts. It's a colluder's dream, and a consumer's nightmare. Furthermore, many carriers have already gotten together and formed a group to complain about the insanely marked up prices Verizon and AT&T charge for their special access lines. No one can really compete with their inflated prices because of this.
"We have three, and soon to be four, national 3G networks"
And this is a good thing? Last time I recall this was the source of massive frustration for consumers. Do you even understand that the rest of the world uses one standard? It is insane that we have multiple networks here. It's costly, unnecessary, and economically wasteful.
"Third, we must recognize that competition has changed in the past few years. Where once the value proposition centered around network coverage and price, the device has become a much more important part of the decision factor"
So wireless carriers are not supposed to focus on providing the best network coverage and price, but instead can focus on providing the coolest hardware? And you think this is a GOOD THING?
"If handset exclusivity was outlawed, what would be the primary differentiating factors?"
I don't know, NETWORK COVERAGE and PRICE?
"they gotta have something to draw customers into stores"
You're right, AT&t needs *something* to distract consumers from how utterly terrible their network coverage and price is.
"I can't imagine how a mandate banning handset exclusivity would actually be implemented."
Most likely the FCC would create a mandate banning handset exclusivity. Guffaw.
"First is the blurry distinction between device and experience."
Blurry huh? Well let me clear that up for you. I want to purchase whatever device I want and use it with whatever carrier I want, so I can have the EXPERIENCE I WANT. I shouldn't be forced into paying subsidized monthly fees EVEN IF I BUY AN UNSUBSIDIZED PHONE. The list of complaints can go on and on.
Posted by Anonymous | July 22, 2009 - 9:41pm
I think we should have taken an approach such as they did in Europe. I was just in Europe more specifically London. The sony X1 is 700 dollars unlocked and that is a choice us consumers should have. We should be able to go on a carrier we want with an unlocked phone. The way cell phone companies lure customers is by offering that phone for 20 euros. Vodafone offers the phone for 20 euros and a 16 month contract. Here in America the only option you have is to buy it from the specific carrier that carries it and still pay about 200 dollars for the phone and they can get away with this because they are the only one in America carrying that phone. In Europe they don't rely on the phone they rely on price and thats why I can get unlimited data and 1100 minutes and unlimited texting for about 55 dollars on a national carrier and thats with a contract or not.
Posted by jarnail24 | July 22, 2009 - 9:44pm
I think we should have taken an approach such as they did in Europe. I was just in Europe more specifically London. The sony X1 is 700 dollars unlocked and that is a choice us consumers should have. We should be able to go on a carrier we want with an unlocked phone. The way cell phone companies lure customers is by offering that phone for 20 euros. Vodafone offers the phone for 20 euros and a 16 month contract. Here in America the only option you have is to buy it from the specific carrier that carries it and still pay about 200 dollars for the phone and they can get away with this because they are the only one in America carrying that phone. In Europe they don't rely on the phone they rely on price and thats why I can get unlimited data and 1100 minutes and unlimited texting for about 55 dollars on a national carrier and thats with a contract or not.
Sorry for double post but wanted to post my name encase somebody had an argument?
Debate is freedom people.-me
Posted by Lawnmowerman | July 23, 2009 - 6:00am
There is a lot of logic to this article. However, there is still an anti-competetive atmosphere in the wireless industy.
For example, if one buys an unlocked phone online and takes it to a wireless carrier (I.e., there's no subsidy) and the customer wants a data plan, the customer will be forced into a two year contract. Yes, the customer could get a pre-paid plan, but they seldom include data and there's always restrictions on the pre-paid plans.
This is purely anti-competetive behavior. There's no justification for it because the carriers already charge a setup fee. The cost of a SIM card is not justification for a 2 year contract.
One should be have the freedom to pick any device compatible with a particular network, pay the full price for the device and then buy a month to month plan with data.
If another carrier has a better deal in a few months, the consumer should be able to switch carriers.
Ah, but there's another problem, the carriers are working in collusion with the device manufacturer's to keep multiple 3G radios out of the devices so that it is not easy to get 3G data on multiple networks with one device.
The fact is that consumers in the US really don't have the choice of buying unlocked devices and choosing the most competetive plan because they are not offered fair month to month or prepaid data contacts.
The average US consumer is extremely uninformed because of the marketing practices of the wireless carriers.
Posted by Anonymous | July 23, 2009 - 7:42am
Your third point - that the device has become a much more important part of the decision factor for consumers - is true. However, wireless carriers should not rise or fall based on the products of other companies, or on their ability to strike marketing deals in a back room. No, wireless carriers should in fact be judged precisely on network coverage and price. They are, after all, wireless carriers, not device OEMs.
And about stores? Let device OEMs build stores. Wireless carriers don't need stores, shouldn't have stores, and the sooner they get rid of (most of) them, the better off everyone in the wireless value chain will be - including and especially consumers. And their ad spend? The ends don't justify the means. Verizon, for example, is at its best when it's focusing on its network, not the ridiculous Storm or Chocolate. T-Mobile and Sprint advertise on their value play. And so on.
Interestingly, Verizon - of all carriers - should be welcoming an end to device exclusivity, assuming it really believes it has the best network. If true, Verizon stands to gain the most from an end to device exclusivity.
Overall, you make some good points. But the reality is that we will all be better off once exclusivity ends. It will move us forward as an industry.
Posted by Wizeguy | July 23, 2009 - 9:38am
Mr L said "That is why we don't have, for example, Google, AOL or Comcast "wireless" (or Joe's Wireless for that matter)"
I would like to see what Joe's has to offer as far as price. As a goober getting ready to retire (51-1/2 days but who's counting) one of my sacrifices will be my broadband cable. The big guys AT&T, Verizon & Sprint want $59 + all the little fees and taxes for Wireless Internet. I bet Joe's would be able to come in at about $29. My only other option would be is drag my lazy butt down to Main St and hit the internet cafe with my laptop.
Posted by welfarephone | July 23, 2009 - 12:49pm
I got a phone from Virgin mobile 10$ for 120min. Very competitive price. I recommend everyone call your local Virgin mobile and have them issue you the deal.
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