Mobile Market Might Require More Sophisticated Regulatory Treatment

The accepted way most people think about the structure of communications industries (to the extent they think about such matters at all) is that more competitors produce better consumer outcomes. In principle, that makes sense.

But that might not always be the case, and it matters greatly whether communications regulators have a sophisticated and analytically sound basis for thinking about issues of competition in markets where a greater number of providers automatically is assumed to be “better.”

In the mobile business, for example, when spectrum resources are constrained, the rules get turned upside down, in essence.

“Using the standard Cournot model of competition, a capacity constraint turns the standard antitrust analysis on its head—that is, under spectrum exhaust, fewer firms produce lower prices and more investment,” argue analysts and economists at the Phoenix Center for Advanced Legal & Economic Public Policy Studies.

In other words, under conditions where spectrum really is scarce and capital investment requirements are significant, better consumer outcomes actually result from fewer providers in the market, not more competitors.

That is a profoundly jarring conclusion, but matters greatly if what the Federal Communications Commission, for example, desires is a regulatory framework that promotes maximum feasible competition that leads to consumer benefits.

The point is that “maximum feasible competition” might not mean “as many providers as possible.” That is counter-intuitive but no less valid for that reason.

In some cases, regulatory bodies might even conclude, after rigorous analysis, that “doing nothing” is preferable to “adding more regulations” to enable additional competitors in the mobile market.

And that will be a jarring approach, for some. “For example, it is entirely legitimate for the FCC to decide that no feasible regulatory solution exists, whether there is market power or not,” the Phoenix Center argues. “

Some things just cannot be fixed, in other words, whether we wish to fix them, or not. One example is the typical market structure in a capital-intensive industry facing huge transitions of its products and revenues, either mobile or fixed.

In other words, no matter what we might prefer (many competitors), the economics of the access networks business (as distinct from the economics of applications that use such networks) virtually everywhere leads to only a few leading providers in each market.

European regulators are grappling with that issue now. Many observers say the only way European service providers can stop losing money is to merge to gain scale. That will have the effect of reducing the number of service providers in most national markets.

At the same time, some regulators maintain that four mobile service providers is the minimum necessary to ensure the benefits of competition. But that’s the rub. In many markets with four contestants, the market is shrinking, as measured by collective service provider revenues.

In principle, we might argue that four competitors leads to better outcomes for consumers than three competitors. We might argue that three contestants is better than two.

But industry economics may not allow that many viable contestants, over the longer term. As we might well find, in most markets, that there is room only for a single facilities-based telco, a single cable company, a single satellite provider and two or three leading mobile providers.

To the extent that the benefits of competition are obtained, it will be on an inter-modal basis, not intra-modal. In other words, telcos, cable, satellite and mobile providers will compete to provide all the core services a customer can buy from any of the suppliers.

It likely will not be common to find intra-modal competition between multiple telcos, multiple cable providers, multiple satellite providers in a single country or market.

“The Commission may also conclude that consumers are better served by fewer competitors than many,” a conclusion that will startle some, and rankle some.

But that might be the wisest course, when no matter what is done, the fundamental number of fixed network suppliers will be quite limited.

“The Federal Communications Commission is viewed as the ‘expert’ agency which not only uniquely understands the complex economics of communications industries, but also knows how and when to apply this knowledge to achieve Congress’s (sometimes incompatible) policy goals as articulated in the Communications Act,” the Phoenix Center says.

In other words, traditional antitrust considerations might still be the primary concern of agencies such as the U.S. Justice Department. The FCC’s concerns arguably are different, namely applying appropriate regulation to industries that are convulsing.
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