The Sixteenth CMRS Competition Report: A Paralysis Born in Humility

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Each year, Section 331(c)(1)(C) of the Communications Act directs the Federal Communications Commission (FCC) to “review competitive market conditions with respect to commercial mobile services and shall include in its annual report an analysis of those conditions.”  To this end, the agency released its Sixteenth Annual CMRS Report last week.  In this latest report, the FCC makes few formal findings, but instead “focuses on presenting the best data available on competition throughout this sector of the economy and highlighting several key trends in the mobile wireless industry.”  (Sixteenth Report at ¶ 2.)  Consistent with the other CMRS Reports issued under Chairman Julius Genachowski’s watch, the latest report present a vast quantity of evidence but draws no conclusions. Why not?  Because the Commission now believes that drawing “any single conclusion” (id. at ¶15) is unwise because the industry, and the competition within that industry, has become too complex for the agency to get its mind around.

Considering the response to earlier reports, I expect that many will be dismayed by the agency’s failure to make findings, particularly as to whether the U.S. wireless industry is “effectively competitive.”  After all, Section 331(c)(1)(C) requires the agency to perform “an analysis of whether or not there is effective competition,” and a failure to do so seems to be in direct contradiction to the statute. Further, the Commission likewise fails to follow other mandates of Section 331(c)(1)(C).  For example, the statute requires the agency to conduct “an analysis of whether any …. competitors have a dominant share of the market for such services,” yet the Commission provides no analysis or discussion of “dominance.”  Indeed, the word “dominant” appears only twice in the text and then only as quotes of the statute.  Also, the statutory guidance mandates that the Commission issue “a statement of whether additional providers or classes of providers in those services would be likely to enhance competition,” but there is no direct statement on this point in the Sixteenth Report (though perhaps an indirect statement as discussed below).

At bottom, what the agency’s critics want is for the FCC to conclude that because some observed factor X is above or below some arbitrarily defined critical level, the market is or is not effectively competitive.  In my opinion as a trained economist, such an approach is non-sense.

To prove my point, consider the most obvious and commonly-used statistic for measuring competition:  the number of competitors.  Section 331(c)(3)(C) requires the Commission to provide “an identification of the number of competitors in various commercial mobile services,” and Section III.D of the latest report provides a very detailed discussion of industry concentration.  In transforming evidence on the number of competitors to a finding on “effective competition,” one approach would be a strict adherence to the DOJ/FTC Merger Guidelines.  With an HHI of 2,873 (Sixteenth Report at ¶ 59), the agency could use the Merger Guidelines’ thresholds to conclude that the mobile industry is “Highly Concentrated,” and thus is not “effectively competitive.”  In contrast, the agency could adopt the definition of “effectively competitive” from the 1992 Cable Act, effectively establishing an HHI of 7,450 as the threshold for effective competition, and conclude the mobile industry is, in fact, effectively competitive.   What does the FCC do?  In the Sixteenth Report, the agency rightly concludes,

High market concentration is not synonymous with a non-competitive market or with market power—the ability to charge prices above the competitive level for a sustained period of time.  High market concentration may indicate that a firm or firms potentially may be able to exercise market power, but market concentration measures alone are insufficient to draw such a conclusion.  (Sixteenth Report at ¶ 61.)

Put simply, the Commission concludes that “concentration” bears no direct relationship with “competition.”  This conclusion is profoundly significant and absolutely legitimate.  [If you don’t know why, read our paper (cited frequently in the Sixteenth Report) entitled Competition After Unbundling: Entry, Industry Structure and Convergence.]  So, while the statute requires the agency to “review competitive market conditions,” the agency concludes that the requirement to “identif[y] the number of competitors” is not helpful in that regard.  This recognition is a huge development in the agency’s thinking, and appears to reject the pedestrian and simplistic approach to competitive analysis many want the agency to take (at least in the CMRS Reports).

This surrender to the complexity of the mobile market extends to all the evidence.  Take the agency’s analysis of price and non-price competition.  From this evidence, which is substantial, all the Commission can muster for a conclusion is that there is “evidence of significant actions.”  (Sixteenth Report at ¶ 136.)  Many may find this tepid conclusion frustrating, but in my view, it is realistic.  What prices say about “effective competition” in an industry moving from a voice-centric pricing model to a data-centric pricing model is unclear.  What prices say about “effective competition” in an industry facing capacity shortages is unclear.  Even the evidence on the steady rise in mobile industry investment does not permit a clean shot at “effective competition,” since economic theory offers ambiguous relationships between the investment and market power.  It is therefore reasonable that the agency refrained from drawing definitive conclusions about price and non-price competition.

I could go on and on about the agency’s failure to link its review of the evidence with an analysis of competitive market conditions; however my point is simply that the agency seems to be recognizing the reality many of us have been living in for decades. The structure of the mobile industry and the ways it seeks to serve its customers is very complex and becoming more so.  Whether a particular anecdote or trend is evidence of competition (or the lack of it) is not obvious.  Further, applying time-worn theories to the industry as a model for determining competitiveness produces some peculiar outcomes.  For example, while the old method was to assume that more competitors implies more competition, the modern economist understands that more intense price competition could mean fewer competitors.  Behaviors that many contend are anti-consumer, such as usage-based pricing, can actually make consumers better off even under conditions that appear most egregious.  Economic theory indicates that under spectrum exhaust more competitors makes price go up, not down.

Let’s appreciate the fact that the agency has all but confessed that competition acts in ways we do not expect.  This view is, of all things, consistent with the views of economist Friedrich Hayek who observed,

… competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for; and that its salutary effects must manifest themselves by frustrating certain intentions and disappointing certain expectations (Competition as a Discovery Procedure (2002) at p.10).

The Sixteenth Report suggests that the agency may be refusing to think of competition in the mobile sector in an exceedingly naïve and narrow way.  In fact, it says so explicitly by stating, “[we] refrain from providing any single conclusion because such an assessment would be incomplete and possibly misleading in light of the variations and complexities we observe.”  (Sixteenth Report at ¶ 15.)  Its humility may imply, in turn, that regulation can no longer be trusted to improve economic well being by forcing particular behaviors, since the agency is unable to label specific behaviors as being consistent with what competitive forces will render.

Interestingly, the path forward for the agency and its CMRS Reports is spelled out plainly in the Sixteenth Report with the statement,

Competitive rivalry among providers is desirable not as an end in itself, but rather as a means of bringing tangible benefits to consumers, such as lower prices, higher quality, and greater choice of services.  (Sixteenth Report at ¶ 242 (emphasis supplied).)

The statute wants a competitive analysis, but as the Commission correctly points out, competition is not the goal, it is the means.  Better performance is the goal.  When the evidence presented in the Sixteenth Report is viewed in this way, the conclusion to be reached about the mobile industry, at least to me, is obvious:  the U.S. mobile wireless industry is performing exceptionally well for consumers, regardless of whether or not it satisfies someone’s arbitrarily-defined standard of “effective competition.”

I’m in good company.  Outgoing FCC Chairman Julius Genachowski lists among his proudest achievements that “the U.S. is now the envy of the world in advanced wireless networks, devices, applications, among other areas.”  Indeed, in his just-published list of what he believes to be his many accomplishments at the helm of the agency, he points to the facts that: (a) the U.S. is the first country deploying 4G LTE networks at scale, and in late 2012 the U.S. had as many LTE subscribers as the rest of the world combined, making the United States the global test bed for LTE apps and services; (b) annual investment in U.S. wireless networks grew more than 40% between 2009 and 2012, from $21 billion to $30 billion while investment in European wireless networks has been flat since 2009 and wireless investment in Asia, including China, is up only 4% during that time; (c) more than 90% of smartphones sold globally in 2012 run operating systems developed by U.S. companies, up from 25% three years ago; (d) the new mobile apps economy is a “made in the U.S.A.” phenomenon that has created more than 500,000 U.S. jobs; and, finally (e) investments in wireless broadband infrastructure created more than 1.6 million U.S. jobs since 2007.

‘Nuff said.