Regulating U.S. Wireless Networks: Facts about Failure

The Federal Communications Commission (FCC) will soon spell out proposed new government regulations imposed in the name of preserving and fostering “network neutrality.” FCC Chairman Julius Genachowski announced plans to expand and convert existing FCC network neutrality ”principles” to formal new rules. Importantly to the purpose of this ConsumerGram, the agency would extend the application of the rules to cover not only wireline broadband systems, but wireless networks and services as well.

This ConsumerGram is another in a series focusing on facts germane to issues arising in current policy debates and the merits of alternative courses of regulatory action.

Failure to Meet Consumer Needs Should Be the Test for New Regulations

It is fair, nay obligatory, to ask: “What is the rationale for imposing ‘net neutrality’ or any form of rate and service regulation on the wireless sector – a sector that has evolved to its current state more or less free from wireline telephone economic style rules and government micromanagement?” Put differently, is there any evidence that wireless network providers are failing to meet the requirements of reasonable public policy objectives or, more specifically, the needs of their customers? As discussed herein, frequently cited characterizations of market failure in the wireless sector have been largely disproven, notwithstanding skeptics among us, by a combination of technological change and evolving market behavior by network suppliers, applications providers, equipment device manufacturers and, most importantly, the actions of consumers. Our review of the record reveals little basis in fact, and none from competent consumer welfare analysis, to justify rate and service regulation of wireless networks, which by standard performance measures, and comparisons with other countries, are performing admirably.

The first question that must be resolved in deciding the optimal mix of regulatory restraints and market forces is: “What is the alleged harm experienced by consumers and is it evidence of remediable market failures?” Market failure, like beauty, is in the eye of the beholder. Use of discrete and limited examples to prove systemic market failure is a common tool used by advocates favorably disposed to regulation, stakeholders dissatisfied with the conduct of suppliers, and firms who gain market advantages from regulation. But, the real interests of consumers – lots of choices and the freedom to explore those choices at prices they can afford requires that regulatory issues should not be resolved on theory or philosophy or individual value judgments or limited information, but on a fact-based analysis of actual consumer costs and identification of true market failure. Commendably, the FCC has made that patently clear in recent weeks through both speeches by Commissioners and senior staff and in formal Commission documents.

Market Evolution More Quickly Addresses”Failures”

The second question addresses the likelihood that markets will or will not in the natural course of events evolve in reasonable timeframes to eliminate the alleged harm or to demonstrate it does not constitute a market failure. That might be a difficult question to answer if the focus were on markets for, say, coal or another sector where technology and consumer demand are fairly stable. But, recent experience in the highly dynamic market – on both the supply side and the demand side – for wireless services suggests that market “imperfections” are being addressed rapidly and successfully by consumer driven responses by suppliers of networks, applications, and equipment devices.

To test our sense that markets are rapidly adjusting to consumer demands, we compared recent facts and analyses addressing current market structure, conduct and performance in the wireless sector with the market failures cited in two sources – a law review article by Professor Timothy Wu (Wireless Carterphone)1 and a Petition to the FCC by Skype. These market failure pieces were written barely two and a half years ago, but their conclusions and forecasts about wireless carrier behavior are still relied on as testaments to market failures and the need for government remedies. Accepting both the old and new descriptions of the sector as accurate (which many advocates may not be willing to do), it seems quite clear that most of the Wu and Skype allegations of market failure are no longer valid, even if they were accurate when alleged. Firms in the sector are responding to signals from consumers and eliminating earlier sources of discontent.

Chairman Genachowski had it absolutely correct when he reflected recently on the rate of progress in the wireless sector and emphasized our inability to “predict with confidence” how the revolution in mobile broadband will ultimately play out. In the context of the technological and economic dynamism of wireless markets, it is extremely difficult to identify and quantify the expected costs, or benefits, of imposition of static regulation.

Our comparison of a) the fears and concerns and conjectures and forecasts of market conduct expressed two years ago in the context of making the “Wireless Carterphone” case for applying equipment interconnection requirements imposed three decades ago on the Bell System wireline monopoly with b) the facts of current market performance makes indicates to us that early market infirmities are being addressed and whatever perfections remain do not demand new government programs to address them.

Regulation Is Not Costless to Consumers

The third question relates to consumer costs and benefits of using government intervention as the tool for offsetting perceived market failures. Like markets, governments are not perfect, nor are government actions free of unwanted or unintended costs. Nobel prize winning economist Professor Stiglitz, formerly Chairman of the President’s Council of Economic Advisors, recently wrote: “Anyone who has watched the U.S. government in the last seven years is well aware not only of the possibility of government failure but also of its reality.”2 We take recent remarks of FCC Chairman Genachowski as in substantial agreement with the need to take a realistic view of not only market imperfections, but of government imperfections as well. The Chairman recently emphasized the importance when considering new regulations of “getting it right,” while also being candid about the Commission’s mixed history of doing so: “The Commission’s history in this area holds great examples of success…But there are also examples of failures…In short, at times the Commission has gotten it right, and at times it has gotten it wrong.”

In Short

A consumer-oriented assessment of the need for imposing new government restrictions or mandates on suppliers of wireless networks, equipment or applications can only be performed after a careful accumulation of facts, not outdated conjectures, analysis of the infirmities of both markets and government action and the impact of same on consumers.

Footnotes:
1. International Journal of Communication, Vol. 1, 2007.
2. Joseph E. Stiglitz, “Government and Markets: Toward a New Theory of Regulation”, Government Failure vs. Market Failure: Principles of Regulation, Available online at: http://www.tobinproject.org/twobooks.
Posted October 12, 2009

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