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The Ad Hoc Public Interest Spectrum Coalition (PISC) respectfully submits these comments in support of the Petition for Rulemaking filed by the Rural Cellular Association (RCA). The Commission should consider issuing a Notice of Proposed Rulemaking to limit the widespread use and anticompetitive effects of exclusivity arrangements between commercial wireless carriers and handset manufacturers, arrangements which limit consumer choice over devices and providers. The market for wireless services in 2009 is concentrated and will continue to grow more concentrated as large carriers absorb competitors and acquire disproportionate shares of newly available spectrum. Worse, the market does not promote competition over quality and cost of wireless service--competition that benefits consumers directly--due in part to the widespread use of exclusivity arrangements that prevent would-be subscribers to rural and competitive wireless services from acquiring the newest and most popular wireless devices. Prohibiting exclusivity arrangements encourages innovation and promotes beneficial competition, reducing prices for consumers and improving quality of service, by taking carrier control out of the device market.
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
In the Matter of RURAL CELLULAR ASSOCIATION Petition for Rulemaking Regarding Exclusivity Arrangements Between Commercial Wireless Carriers and Handset Manufacturers
RM-11497
COMMENTS of the Ad Hoc PUBLIC INTEREST SPECTRUM COALITION
The Ad Hoc Public Interest Spectrum Coalition (PISC)[1] respectfully submits these comments in support of the Petition for Rulemaking filed by the Rural Cellular Association (RCA).[2] The Commission should consider issuing a Notice of Proposed Rulemaking to limit the widespread use and anticompetitive effects of exclusivity arrangements between commercial wireless carriers and handset manufacturers, arrangements which limit consumer choice over devices and providers. The market for wireless services in 2009 is concentrated and will continue to grow more concentrated as large carriers absorb competitors and acquire disproportionate shares of newly available spectrum. Worse, the market does not promote competition over quality and cost of wireless service--competition that benefits consumers directly--due in part to the widespread use of exclusivity arrangements that prevent would-be subscribers to rural and competitive wireless services from acquiring the newest and most popular wireless devices. Prohibiting exclusivity arrangements encourages innovation and promotes beneficial competition, reducing prices for consumers and improving quality of service, by taking carrier control out of the device market.
I. THE MARKET FOR WIRELESS SERVICES IS NOT COMPETITIVE
Recent FCC reports demonstrate increased levels of concentration in the wireless market.
Following a series of mergers of major nationwide and regional wireless carriers, the market for wireless services in 2009 demonstrates ever lower levels of competition.[3] The Federal Communications Commission's eleventh annual report on wireless competition showed that the HHI level in all of the top 25 wireless markets nationwide had increased in 2006, and the most recent report, released in January of 2009 and based on data from 2007, indicates that there has been no improvement.[4] The two largest carriers, AT&T and Verizon, have a combined market share of over 60%, and together purchased a majority of all spectrum made available in the FCC's most recent spectrum auction.[5] The combination of major nationwide carrier ownership of vast portions of spectrum, increased demand for high speed mobile Internet access requiring carriers to employ more spectrum to provide competitive service, and greater financial ability of major carriers to purchase new spectrum at auction, is a world characterized by a few haves and countless have-nots. The effect on consumers of this consolidation is significantly reduced consumer choice and, ultimately, higher prices and lower quality of service.
Handset exclusivity arrangements reduce competition further.
The unique market dynamic associated with exclusivity provisions exaggerates the harms of consolidation by providing consumers with an undesirable choice between service offered by a less expensive or higher quality rural or small wireless carrier, and service offered by a larger provider who may not offer the best service or the best rate but who offers the latest in popular wireless devices.[6] Without handset exclusivity arrangements, the consumer could choose service provider and device independently. Instead, rural and small wireless carriers face substantial obstacles to gaining new customers by being unable to offer their customers desirable smartphones like the Apple iPhone (exclusive to AT&T), the Blackberry Storm (exclusive to Verizon), or the Samsung Instinct (exclusive to Sprint) for use with their services.[7] The iPhone and other new devices – all exclusively tied to major national carriers – drive increased demand of wireless broadband services and, thus, of wireless services in general.[8] If the Commission does not act to prohibit handset exclusivity arrangements, more consumers will choose new devices over better service providers, and meaningful competition in the wireless market, along with quality and cost of wireless service, will suffer.
II. TRUE CONSUMER CHOICE OF WIRELESS DEVICES AND SERVICES BENEFITS THE PUBLIC INTEREST
Breaking carrier control over devices through exclusivity arrangements would encourage innovation in the device market.
Handset exclusivity arrangements prevent consumers from purchasing a new phone and using it with service from the wireless provider of their choice, without waiting for the termination of the initial contract (by which time the phone is widely considered obsolete) or paying a hefty "early termination fee." Leveraging the market power of dominant carriers through promotions and advertisements associated with exclusivity arrangements confers a tremendous advantage to devices, but comes at a hefty price to consumers--too often, wireless carriers possess effective control over innovations and developments in the device market. Breaking open handset exclusivity arrangements would allow consumers to purchase new and popular wireless devices with any carrier, which would in turn break the control any individual carrier might be able to exert over the development and features of new devices, and would result in increased innovation for wireless devices.
Taking advantage of their control over the devices through exclusivity arrangements, wireless carriers evoke the days gone by when AT&T held a monopoly over landline services and exerted total control over the phones--leading to the popular riff on Henry Ford's famous saying about the Model-T, "You can get a phone in any color you want, as long as it's black."[9] Using their control over the ancillary device market, wireless carriers have resisted and will continue to resist possible innovations in devices whenever the social benefits of those innovations cannot be internalized to the carriers.
Consider that the iPhone--the most innovative wireless device in recent years--was produced under truly unique circumstances where, thanks to the daunting market power of the device manufacturer Apple, AT&T was unable to exert any influence over the design of the device.[10] The iPhone is the exception that proves the rule--carrier control over wireless device design restricts innovation. Hopefully the success of the iPhone will encourage other device manufacturers to take their chances and resist carrier influence over device design, but nearly two years after the iPhone's release, none have yet followed suit.
True customer choice of wireless devices is consistent with the Federal Communications Commission's Internet Policy Statement.
In 2005, the Federal Communications Commission released its Internet Policy Statement, adopting four principles to protect consumers and consumer choice on the Internet.[11] The statement included one provision of particular relevance here: "To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to connect their choice of legal devices that do not harm the network." Through the Internet Policy Statement, the FCC established open devices as a key component of proper telecommunications policy for the Internet. The principles of the Internet Policy Statement served as a guide in the FCC's adjudication of the Comcast complaint filed in November of 2007, concerning Comcast's restrictions on the use of specific applications with Comcast Internet service.[12] The FCC has yet to adjudicate a similar complaint against a wireless carrier, though Acting Chairman Copps (while serving as a Commissioner) has stated his belief that the Internet Policy Statement is applicable to wireless service providers.[13]
Although handset exclusivity arrangements do not legally prohibit consumers from connecting wireless broadband devices of their choice to the network once they have been purchased, the control that they provide to wireless carriers over the device market has a similar impact – wireless carriers exert substantial control the market for wireless broadband devices, restricting competition and consumer choice in both the service and device markets. The principles of the Internet Policy Statement are inconsistent with integrated markets for wireless broadband service and wireless devices, and by separating the markets, a prohibition on exclusivity arrangements would promote the Commission's broadband policy agenda.
III. THE COMMISSION HAS SUFFICIENT LEGAL AUTHORITY TO ACT
As RCA has stated, at a minimum, the Commission has the statutory authority to declare exclusive arrangements between wireless carriers and device manufacturers to be unreasonable practices in the offering of a common carrier wireless service and thus in violation of section 201(b) of the Communications Act as incorporated through section 332(c), among other sources of authority.[14]
CONCLUSION
The Commission should act to prohibit wireless carriers from entering into exclusive deals with device manufacturers. A prohibition on exclusive deals would promote competition and innovation in the market for wireless devices, and, perhaps more importantly, would promote true competition in the increasingly concentrated market for wireless services, competition over service quality and price rather than negotiating leverage.
Respectfully submitted,
Ad Hoc Public Interest Spectrum Coalition
Consumer Federation of America
Consumers Union
Free Press
Media Access Project
New America Foundation
Public Knowledge
U.S. PIRG
By:__/s/ Chris Riley______
Chris Riley
Free Press
501 Third Street NW
Suite 875
Washington, DC 20001
202-265-1490
criley@freepress.net
February 2, 2009
[1] The Public Interest Spectrum Coalition includes the Consumer Federation of America, Consumers Union, Free Press, Media Access Project, the New America Foundation, Public Knowledge, and U.S. PIRG.
[2] Rural Cellular Association Petition for Rulemaking Regarding Exclusivity Arrangements Between Commercial Wireless Carriers and Handset Manufacturers, RM-11497, filed May 20, 2008 ("RCA Petition").
[3] See, e.g., Comments of Public Interest Spectrum Coalition, WT Docket No. RM-11498, at p. 2-3 (PISC RTG Comments) (identifying the FCC's 3 key assumptions in its 2001 removal of spectrum caps, and contending that at least two if not all three are no longer valid in the current market for wireless services).
[4] Rural Telecommunications Group, Inc. Petition for Rulemaking To Impose a Spectrum Aggregation Limit on all Commercial Terrestrial Wireless Spectrum Below 2.3 GHz, RM-11498, at p. 11 (filed July 16, 2008). The most recent CMRS Report states "we find there was virtually no change in average concentration in 2007." Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services, WT Docket No. 08-27, DA 09-54, at para. 46 (rel. Jan. 16, 2009).
[5] See, e.g., PISC RTG Comments at p. 3-5.
[6] Wireless markets in other parts of the world, by and large, do not demonstrate widespread handset exclusivity deals. See, e.g., id. at p. 4.
[7] See, e.g., Rural Cellular Association Petition for Rulemaking Regarding Exclusivity Arrangements Between Commercial Wireless Carriers and Handset Manufacturers, RM-11497, at p. i-ii, 8 (filed May 20, 2008) (listing a different set of exclusive devices).
[8] See, e.g., Ralph De La Vega, AT&T Q3 2008 Earnings Call Transcript, SEEKING ALPHA, Oct. 22, 2008, p. 2, available at http://seekingalpha.com/article/101193-at-amp-t-q3-2008-earnings-call-transcript?page=2 ("iPhone 3G activations have exceeded our expectations and they have brought a significant halo effect which has driven store traffic and helped sales of other devices…."). See also Dan Frommer, AT&T's Q4 iPhone Sales More Than Double, SILICON ALLEY INSIDER, Jan. 28, 2009, available at http://www.alleyinsider.com/2009/1/att-q4-iphone-sales.
[9] E.g. Transcript of NewsHour with Jim Lehrer, PBS, Jan. 31, 2005, available at http://www.pbs.org/newshour/bb/business/jan-june05/merger_1-31.html (interview of James Katz) ("[F]or many years you could have a phone in any color as long as it was black, and the big innovation in the 1960s was the Princess phone, which came in a variety of pastel colors.").
[10] Leslie Cauley, AT&T: 'We're all about wireless', USA TODAY, July 31, 2008, available at http://www.usatoday.com/tech/wireless/phones/2008-07-31-att-iphone-stephenson-apple_N.htm ("AT&T, he notes, is "renowned for the amount of control" it typically exercises over new products. With the iPhone, however, "AT&T essentially surrendered to Apple.""); Fred Vogelstein, The Untold Story: How the iPhone Blew Up the Wireless Industry, WIRED, Jan. 9, 2008, available at http://www.wired.com/gadgets/wireless/magazine/16-02/ff_iphone ("Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry.").
[11] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities; Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services; Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review—Review of Computer III and ONA Safeguards and Requirements; Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities; Internet Over Cable Declaratory Ruling; Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, CC Docket Nos. 02-33, 01-337, 98-10, 95-20, GN Docket No. 00-185, CS Docket No. 02-52, Policy Statement, 20 FCC Rcd 14986 (2005) (Internet Policy Statement).
[12] In re Formal Complaint of Free Press & Pub. Knowledge Against Comcast Corp. for Secretly Degrading Peer-to-Peer Applications; Broadband Industry Practices; Petition of Free Press et al. for Declaratory Ruling That Degrading an Internet Application Violates the FCC's Internet Policy Statement & Does Not Meet an Exception for "Reasonable Network Management," WC Docket No. 07-52, Memorandum Opinion and Order, FCC 08-183, at paras. 6-8 (Aug. 20, 2008) (Comcast Order).
[13] Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless Networks, WT Docket No. 07-53, Declaratory Ruling, 22 FCC Rcd 5901 (2007) (concurring statement of Michael J. Copps, Commissioner) ("Now that IP-based wireless services are classified as Title I information services, the inescapable logical implication of our 2005 decision is that the right to attach network devices—as well as the three other principles of our policy statement—now applies to wireless broadband services.").
[14] RCA Petition at p. 12.
