Carrier competition and why more regulation is not the answer
This post from MG Siegler led to a conversation with my friend Michael Jennings, whose wisdom on all things tech I really miss since I moved away from London. (He’s wise about a lot more than that, with a depth of knowledge that is as scary as it is enlightening and useful. For more of him, check out this podcast just posted by our friend Brian Micklethwait in which Michael talks tech trends.)
Michael is an Aussie currently living in London, and also the most well-traveled person I have ever met (which, considering the circles I run in, is really saying something). Early this morning, I made him talk with me about how the whole mess with mobile carriers in the US is begging for a market-based solution. The ultimate solution (no, I don’t mean DEATH): open up more spectrum and regulate it less.
Courtesy of that back-and-forth with Michael, here’s the deal.
There are four main carriers in the US:
Verizon and AT&T - descendants from the Bell System, each with fixed line monopolies for about half of the US
T-Mobile - belongs to the German government owned - still! - monopoly phone carrier
Sprint - exists because of railroad rights of way that were created in the 19th century. The name originally stood for Southern Pacific Railroad Internal Network Telecommunications. Sprint had an internal telephone network and (more importantly) government created routes of land across the US that later turned out to be ideal on which to lay telephone lines.
These four carriers were ALL created by government granted monopolies or at least government created markets with limited competition.
The carriers leveraged their existing monopolies to gain control over a very limited number of licenses for new services, often by screaming that if they were not given control of new services, they would not be able to afford to subsidize services for poor 80-year-olds living in rural Idaho or whatever. Government and phone companies came to an agreement a very long time ago that phone companies would not have to face real competition. In exchange, the government would get to heavily regulate their businesses.
And just look where that has gotten us.
The amount of spectrum allocated for cellular services is small, even compared to Europe, and there is thus little competition. The best thing government could have done in the 1980s and 1990s would have been to allocate five times as much spectrum. We would now have much more competition (from new startups) and much better service.
The present situation is a direct consequence of the sort of government regulation to fix things that so many people are now advocating. When problems are caused by regulation, more regulation does not make things better. It just has unexpected and negative consequences that make things worse.
Filed under: Life
Almost all of this is factually true. But the FCC has historically allocated about the same amount of spectrum as Europe uses, but usually in the wrong bands. The EU, with their highly-regulated practices, always ensures that every member country frees the same frequencies for services like mobile telephony.
GSM technology was mandated in the EU while American service provides were free to continue running AMPS analog service or CDMA digital service. We didn’t see GSM until after the FCC auctioned the PCS (1900) band in 1996, which was another failed attempt to create competition in American cellular (the first were cellular “A” and “B” bands, more on that later). In Europe, requiring compatible digital service through GSM on the same 900/1800 spectrum since 1992 led to quick adoption of digital mobile phone service (in addition to the lack of landline infrastructure that we had), that far out-paced Americans who were still using analog through the early 2000’s. Consider this chart, as of 2006, we were finally nearing 100% digital coverage, but more than 20% of the population still didn’t have a mobile phone. http://www.china-profile.com/data/fig_cellular-phones_2006.htm
And according to the UN, as of 2007 in Denmark, there were 114 mobile phones per 100 people in the country. That’s more phones than people!
So, getting back to the point, we (and by we, I mean the FCC) have made a lot of mistakes in allocating spectrum for wireless service. The allocation of CMAs was a mess and the buildout rules were ridiculous. Quick example: if you acquired (by paying the highest bid) a license for a CMA, you had a period of time (IIRC it was 5 years, and keep in mind that most of these licenses were built out in the mid-to-late 80’s and cellular service was still expensive everywhere) to cover that license area with cellular service. The area that you covered is called the CGSA, or Cellular Geographic Service Area. Your bordering sectors actually had to be submitted and approved by application with the FCC, and to this day, any changes to your CGSA must be submitted as a modification to your license. The real slap in the face for the service provider was that after the buildout time elapsed, the FCC came back and took the uncovered area of your license (that you paid for) and re-auctioned it to somebody else. Ironically, because the FCC feared that the telecoms would hold onto these licenses for years and never provide service in those (often) rural areas. Because of the FCC’s ignorance to monopolistic tendencies in this industry, they successfully created, in 20 years, a duopoly that they sought to break up just as recently as the early 1980’s. What’s more, is that despite these “fears” that service providers would hold onto licenses and never build them out, they’ve created situations like in Florida and Ohio, where one provider has 50 MHz of 850MHz spectrum and another might have only 10MHz of PCS. This was an outright hypocritical move of the FCC who created the “A” and “B” cellular bands to force competition in every market by requiring that every market with cellular service have two providers. Of course, in good old American fashion, the “B” band was created specifically for the incumbent landline telco.
So in conclusion, yes Jackie, the FCC’s interference over the past 20 years got us where we are today. The flipside is that the EU intervened in their service providers’ operations as well, but they did it smarter and now they have nearly 100% of their population covered with service and in many places, over 100% of the population with a mobile phone. Yes, we pay less for voice minutes and there is much less land to cover in these European countries, but honestly, we could have done this better.
Steve, I’ll leave it to Michael to debate the finer points of spectrum allocation, but:
1) I lived in Europe for ten years, and everyone bitched about their mobile carriers there, too. EVERYONE.
2) I once worked for a start-up that provided expatriation services for global workers, including the ridiculously difficult task of getting them set up with a mobile phone contract in the EU.
3) Even if we accept that Europe regulated “better,” I’m not seeing an argument in favor of regulation over good old supply and demand, market forces being let loose on this.
4) The idea of “mobile saturation” is a total myth, because a lot of people own more than one cell phone (hence figures like the one quoted above). This is due, of course, to innovation and improvement on the handset (and application) side of things, and I daresay it happens in spite of the carriers, not because of them (or any regulation).