Does Intense Price Competition Drive U.S. Wireless Industry Concentration?

Can price and other forms of competition beneficial for users still occur when markets are highly concentrated? Yes, say Jerry B. Duvall and George S. Ford of the Phoenix Center for Advanced Legal and Economic Public Policy Studies. The question now matters, once again, as the Federal Communications Commission seems to be hinting it thinks the U.S. wireless market is growing unduly concentrated.

The important observation is that, in some markets, even high levels of supplier concentration do not preclude important, even robust levels of competition, on price, quality and other dimensions.

When analyzing levels of competition in a market, economists often, and rationally,  infer it from the level of industry concentration, where higher levels of concentration indicate the presence of market power. But industry concentration is related to the size of a market as well as high sunk costs or intense price competition, or some combination.

High industry concentration can be the result of a limited market or high fixed costs, as for a water, electricity or wastewater system, for example, all cases where fixed costs are so that facilities-based competition is not possible.

In some other markets, high capital investment requirements can create huge barriers to entry. Where that barrier exists, even when competition increases because of new entrants in a market, market concentration could still increase, even in the face of price competition. Market concentration appears to reach a lower bound, despite continuing growth in the size of the market.

It is possible that the apparent lower bound on market concentration could reflect economic and technological constraints that continuing growth in the number of competitors will not, and cannot, affect. In other words, some markets might always feature few competitors, for logical reasons. Few today would agree that telecommunications is a natural monopoly. But neither would many agree that the number of facilities-based contestants can be a large number.

The video entertainment market is less price competitive than the broadband access, fixed voice or wireless markets, but perhaps not because the number of competitors is notably less.

The implication is that telecommunications market structure will always be relatively concentrated compared to industries where entry does not require substantial upfront capital costs.

The relationship between the number of firms and market power, where market power is defined as the ability of firms to price above marginal cost, implies that that some communications firms will now, and in the future, possess some degree of market power, Duvall and Ford say. Competition will not be "perfect," but rather workable.

Still, there is an important observation: tthe more intense is price competition the higher is industry concentration. The typical view of competition has price competition increasing with declines in industry concentration. In other words, the more firms in a market, the more “competitive” that market is.

The implication is that high concentration can be the result of intense price competition, rather than market defects.

In the summer of 2000, the proposed merger of MCI-WorldCom and Sprint was abandoned due to the
challenge of the merger by antitrust authorities. In retrospect, one can note that faulty conclusions were drawn from incomplete analysis. Market power in the long distance industry actually was illusory. Even strong industry concentration did not actually imply serious market power, as price competition, for example, was intense.

The obvious implication is that high levels of wireless industry concentration do not preclude or foreclose robust levels of competition. In fact, robust competition causes industry concentration. See http://www.phoenix-center.org/pcpp/PCPP10Final.pdf, for example.

Android Seems Built for the "Cloud"

One thing is clear with the release of Android version 2.2: Google seems to be much better positioned for a "cloud-based" approach to features.

The new Android version has a “cloud-to-device” feature that Apple doesn't seem able to match, at least for the moment.

If a user buys an app from the Android Marketplace using a PC web browser, he or she can select an Android device, and the item you just purchased will be pushed directly to that device over the air.

If a user is working in browser, then wants to leave and resume on the Android, that can be done. It is possible, using version 2.2, to push the the current URL from the PC web browser to the Android, over the air. If it’s a web page, it’ll open in the Android web browser; if it’s a Google Maps URL, it’ll open in the Android Maps app.

To the extent that mobiles do have a shot at "replacing PCs" in many cases, such cloud-based features likely will be important.

Daring Fireball: Post-I/O Thoughts

Google and Apple Likely to Dominate Mobile Advertising

Apple’s ownership of mobile advertising firm iAd gives it advantages over any other advertiser wishing to place ads on iPhone OS devices such as the iPad, iPhone and iPod Touch.

Apple, for instance, can harvest data about how such ads interact with items for sale in the iTunes store that other ad networks cannot access.

Google will be able to do the same on Android OS devices, but the stability of its legacy business has to be questioned, given that much AdMob traffic is generated by iPhones and other Apple devices. Over time, much of that traffic, perhaps all of it, will migrate to iAd, Apple's network.

AdMob’s success to date on the iPhone platform is unlikely to be an accurate predictor of AdMob’s competitive significance going forward, the Federal Trade Commission has concluded. Still, AdMob does essentially triple the number of mobile ad formats Google can sponsor. In addition to search ads, Google now will expand into display and "in application" advertising.

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How Much Competition Is Possible in Telecommunications?

What makes a market workably competitive? That might not be a tough question in the abstract. Most people would probably agree that multiple competitors in any market are good for competition, and therefore good for consumer welfare. Matters are tougher when looking at capital-intensive industries.

Most people, and most economists, might agree that dams, highways, electrical and water systems tend to be so capital intensive that they are "natural monopolies." In such cases, competition from other firms likely is unworkable because there simply is no way as few as two providers could make money over the long term.

Typically, such firms are allowed to operate as highly-regulated monopolies. 

At the other end of the spectrum, most people might agree that consumer goods tend to be wildly competitive, and do not typically require much reguluation as such, though other "product safety" regulations might be appropriate. Where markets are robust and can function, most people likely tend to believe there is no fundamental need for price and other forms of "monopoly provider" regulation, as consumer choice leads to restraint on predatory supplier behavior. 

But there are some industries in between these relatively clear cases. Airlines once were highly regulated, though perhaps the airline industry has not had perceived monopoly characteristics as did the telephone industry. Many are too young to remember it, but there once was no choice in telecom services. Everybody bought from one supplier, AT&T, in about 85 percent to 90 percent of cases (there always have been some areas served by other providers, on a monopoly basis). 

The point is that the number of firms that a market can sustain is directly related to the size of potential addressable market and the cost of entering that market. In fact, says Ford, "having only a few providers does not imply poor economic performance, but might indicate intense competition." 

The point is that the number of firms that a market can sustain is directly related to the size of potential addressable market and the cost of entering that market. In fact, says Ford, "having only a few providers does not imply poor economic performance, but might indicate intense competition." 

Neither regulators nor most people likely believe anymore that telecommunications actually is a natural monopoly. 


But the industry is hugely capital intensive, so the question does arise: how many competitors in a single market are required so that most of the benefits of competition are reaped? 


There are subsidiary questions such as what the relevant "market" is, but the key question is the number of sustainable competitors a given telecom market can support. Some people used to debate whether services provided by wireless networks were, in fact, part of the same market as the wireline segment of the market. 


The point is that it is possible, perhaps likely, that telecommunications markets cannot sustain acilities-based competition by more than a smallish number of viable competitors. If that is the case, then a small number of competitors is not, by itself, evidence of an uncompetitive market. 


In voice services, this already has proven to be true. There now are three times as many mobile "voice" accounts in service as there are fixed voice lines, and the disparity is growing. In the multi-channel video markets, fixed providers now see the satellite firms eating away at fixed-network market share as well. 


And the next question is the extent to which wireless will likewise expand and displace significant portions of the fixed broadband market as well. The point is that wireless and wireline contestants are in the same market, though not each contender competes in every segment of the market. 

Lots of people appear to believe two competitors is too few. Such views tend to point to cable versus telco competition as the salient example. But recent pricing and product trends in the high-speed broadband and voice markets suggest there is a clear trend of price declines in both markets, as well as a continual "price per megabit per second" as well. The former is important as it suggests competition is working; the latter is important because it suggests competition is forcing providers to upgrade the quality and features of the product over time.

That is not to say everyone is happy with the level of competition, which is workable, if not "complete." But it also remains the case that the number of competitors in either the wired or wireline business "always" will be limited to a relatively small number of competitors, because of the capital intensity of the business and the startling impact of just a few competitors in the market on achieveable business results.

Simply put, beyond several competitors in a single market, it might not be possible for any firm to sustain a business in either the wireless or fixed portions of the market.

For example, a theoretical market with a $1 million revenue potential, a monopoly price of $100 per customer, with $100,000 required to enter the market, with variable costs of $10 per customer, and each additional firm reducing profit margins by 10 percent, would typically result in a market structure where no more than seven firms could make a profit of any sort.

And a normal Pareto distribution would have 80 percent of the profits earned by the first two players, with the typical long tail of profit for the remaining players.

The point is that it is not unusual for a Pareto distribution to exist, though not in "idealized" form, in most markets, including telecommunications, which is a scale business. In fact, if one looks at a single retailers sales of products over a month's time, what one sees is another Pareto distribution. Most of the revenue comes from the sale of just seven percent of products. The point is that highly-uneven and highly-unequal Pareto distributions are commonplace.

So are two players enough to create workable competition? Maybe, though not always. That arguably is true for the consumer high-speed access market.

But one might argue from history that the U.S. wireless market was somewhat competitive in the 1970s when a duopoly essentially existed, but become vigorously competitive when additional spectrum was granted to other players with the "Personal Communications Service" spectrum awards. Since then, the U.S. market has shown strong signs of being robustly competititve on virtually all consumer metrics. In the U.S. wireless market, a two-player market does not seem to have produced as much competition as a three-player or four-player market. Still, returns are unequal and uneven.

Some will point to the dominance of two firms, but that would simply confirm that the wireless market is a typical market, with a Pareto distribution. If one looks at developer interest in creating apps for smartphones, the distribution of interest is a classic Pareto distribution, with the most interest clustered around just a few devices, and then dropping off in a classic "long tail" distribution.

In fact, outsized returns for two firms with outsized market share is the normal and expected state of affairs in any market, especially a market with high capital investment barriers to entry, such as telecommunications. The point is that in a perfectly-competitive scenario, what we now see is what we would expect to see. The normal Pareto distribution would suggest something on the order of 80 percent of revenue, profit or market share to be held by just two firms.

Will iAd Lead to Rapid Rearrangement of Mobile Ad Network Rankings?

Google, at the moment, runs the biggest U.S. mobile advertising network while Apple currently ranks about seventh.

Apple certainly does not expect to remain seventh, and most observers likely believe Apple will ultimately rise up to the top ranks.

That might happen faster if AdMob clients shift over to the iAd network, since the iPhone now accounts for the majority of AdMob revenues.

It wouldn't be unusual if Apple and Google found themselves in the top-two spots before long.

AT&T to Hike Early Termination Fees in June for iPhone, Netbook Contracts

AT&T starting June 1, 2010 will be raising early termination fees for new iPhone and mobile-connected netbook subscribers from the current $175 to $325, the Wall Street Journal reports. The move is certain to outrage consumer advocates and put off potential buyers, and certainly will not help reduce the degree of regulatory scrutiny now being focused on early termination fees and contracts.

Some will speculate the move is designed to limit desertions if Verizon Wireless is able to start selling iPhones in 2012. That doesn't make quite so much sense, since a GSM iPhone won't work on the Verizon network.

Perhaps the more-logical explanation is that a new iPhone model expected to be released in June will provoke a large churn of customers from the older models to the new models.

Nor does the move immediately explain why connected netbooks are seeing the higher charge. A customer able to buy a $199 iPhone is getting a subsidy of about $400, since the retail, non-subsidized price would be $599 without a contract. But the netbook subsidy does not appear to represent that large a subsidy. Perhaps a significantly-better retail plan is coming, or AT&T thinks netbook owners will want to substitute an iPad.

On the other hand, maybe AT&T is simply moving to bring its ETFs more in line with Verizon Wireless ETF fees, which likewise were hiked from $175 to $350 for smartphone devices.

AT&T will pro-rate the new fees, which will fall by $10 for each month that passes in the two-year agreement.

FCC Title II Push is "Reckless," "Risky" and Will Create a "Casino" Environment

Mincing no words, former FCC Commissioner Harold Furchgott-Roth says the Federal Communications Commission's drive to reclassify broadband access as a common carrier service is "reckless" and "risky," will lead to a dampening of investment in networks, years of legal challenge and replaces an investment climate with a "casino" environment.

Of course, the drive to regulate broadband access as a common carrier service, despite being described as a targeted "third way" between unregulated information services and regulated common carrier services can be no such thing. The service either is an unregulated data service or it is a common carrier service under Title II. There is no permanent middle ground, as the FCC can later apply virtually any Title II common carrier obligations if it so desires, once the change is made.

In fact, the FCC's latest effort is the fourth time the FCC has launched inquiries into the status of information services, concluding three times before (Computer Inquiry I, II and III) that information or enhanced services are in fact to remain unregulated.

In light of those decisions, one has to ask: is broadband Internet access a separable telecommunications service plus a separate information service including processing, storage, retrieval, or a single integrated information service that uses telecommunications? If broadband access is deemed to be the former, the FCC might try to regulate some parts of the "access" service under Title II. If broadband access is seen to be the latter, then the current information services classification logically remains in place.

That's the chief problem with the Federal Communications Commission's effort to find some "third way" as it seeks

to impose Title II regulation for the first time, on broadband access services, says Russell Hanser, an attorney at

Wilkinson, Barker & Knauer.

"The uncertainty the proposal creates will create a dampening effect on investment in the broadband business,"

says Harold Furchgott-Roth, former FCC commissioner. Companies aren't sure what will happen and will delay

investment until there is certainty, he says.

The FCC's proposal simply is not conducive to investment, he says. "This is risky," he adds. It "puts businesses at

risk of making decisions they can't be certain about."

Years of litigation are certain to follow if the rules are put into place, Furchgott-Roth says. "The problem is that the proposal is not clear or narrow," and that is the sort of FCC decision that tends to clearly withstand legal challenge," he adds. "Anybody who talks to investors knows how much investors got burned 10 years ago based on faulty interpretations of rules," he says. "This is a casino environment."

If the FCC proceeds, and succeeds, "things will be tied up in courts for years an investors will gravitate to areas with greater certainty and opportunity for profit."

One might argue that means overseas investments will make more sense, or that investments in wireless will make more sense. But the FCC also seems to leaning towards regulating mobile providers more intensely than it already does, arguing that industry concentration is growing.

"There is a very clear correlation between certainty and investment," says Furchgott-Roth. "Unfortunately, both regulation and uncertainty is where we appear to be headed."