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Wireless Industry Wants To Be New ‘Ma Bell’

May 9, 2007 ,

We have seen the wireless future, and according to the wireless industry comments filed with the FCC in the Skype petition asking the Commission to loosen the rules on what phones and services can be used on wireless networks, the future looks quite a bit like the past we thought had been discarded. PK and public-interest friends filed in support of the Skype petition.

The industry argued strenuously that it must restrict the use of some phones in order to protect its network against harm and to sustain innovation. AT&T, for example, argued: “… although AT&T does not prohibit the use of uncertified handsets, AT&T strongly encourages its customers to use certified handsets – those that are optimized for its network – and it guarantees the service of and provides technical support only for those handsets.”

The company also told the Commission: “Regulatory intervention at this point, with the market in its infancy, could have disastrous long-term effects, distorting investment and stifling the ongoing innovation and experimentation that is critical…”

Compare those arguments, made just a couple of weeks ago, with this: “Installation of unauthorized equipment, according to the telephone companies, would have at least two negative results. First, it would divide the responsibility for assuring that each part of the system is able to function effectively and, second, it would retard development of the system…”

The last quotation seems to be on point with the other two. It comes, in fact, from the Commission's 1968 Carterfone order, written by then-Commissioner Nicholas Johnson, one of the greatest consumer advocates the Commission has ever seen. (If you haven't read his 1970 book, “How To Talk Back To Your Television Set,” you are missing a scary, prescient commentary.) That was the order establishing the principle that any device that doesn't harm the telephone network can be used. As a result, people could own their telephones made by any company. The fax machine and modem are two direct descendents of that groundbreaking order.

There appears to be some similarity as the wireless industry is striving mightily to protect now what the landline side has gradually lost in the last 40 years.

AT&T and the rest of the industry argued strenuously to the FCC in their comments on the Skype petition to open up the wireless equipment market that no regulation is needed because the market is competitive. To a degree, they are right. There are four national carriers, and those carriers are spending millions of dollars to attract customers. They do offer lots of phones. That's all well and good, but irrelevant.

To a greater degree, they are wrong, because the competition is restricted at best. What the carriers have in common is much greater than what sets them apart, namely the business structure that requires a customer to buy a certain amount of minutes (local and long-distance combined) and strongly encourages the purchase of an “approved' handset through subsidies on the price and lock in customers with high termination fees as a means of restricting the ability of consumers to switch services. The defenses they raise in their comments as justifications for not regulating are telling because the facts can be taken in different ways.

Even when there are differences among the carriers, the distinction is not particularly helpful. AT&T noted in its comments that competition is “driving Sprint, Verizon Wireless, and AT&T to develop competing music services. In addition, carriers are investigating a variety of mobile video services. AT&T launched a streaming video service in 2006, and Verizon Wireless and AT&T will soon be providing video services through a broadcast TV network that connects to wireless handsets.”

All that sounds like healthy competition, except for one thing: Suppose a customer doesn't want the Sprint music service, or is a Sprint customer and wants Verizon's offering, or wants iTunes, which is “none of the above.” The customer is out of luck. There's a similar situation with video.

Suppose that a customer wants to use a service like Skype. CTIA noted in its comments that Skype provides for downloads of its software to a mobile phone. That's fine. On the other hand, consider AT&T's terms of service: “Data Service sessions may be conducted only for the following purposes: (i) Internet browsing; (ii) email; and (iii) corporate intranet access (including access to corporate email, customer relationship management, sales force automation, and field service automation applications).” One of those applications specifically prohibited is Voice over Internet Protocol (VoIP) services. Not so fine.

There is, of course, lots of rhetoric in the industry comments about the evils of regulation. AT&T said: “It would be a giant step backwards if the Commission were to now substitute its judgment for that of the market and impose the one-size-fits-all regulatory mandate that Skype proposes, with all the interventionist regulation that such a mandate would necessarily entail.” Specifically, breaking the bond between service and handset will not only discourage investment and innovation but break up the cozy arrangement that allows cell companies to sell subsidize phones, and would put the Commission in the business of adopting standards to govern how carriers and manufacturers interact.

That's one view of regulation. Another is that regulation can be a pro-consumer tool to open markets and to provide choice, as Carterfone did. Telephone prices dropped in the landline business. Is there any reason to believe that prices would stay high and choice would decrease in a liberated wireless environment? The Commission has enforced regulations for the wireline network for years.

The choice for the Commission comes down to the wireless version of the Bell System on one hand, with one company locking in services and equipment, or the open, free market giving consumers choice on the other. The FCC of 1968 chose the right path in allowing consumers, not Ma Bell, to have the upper hand. One hopes the FCC of 2007 will do the same.