Economic Theory in Action: The FCC’s Assault on the Mobile Broadband Consumer…

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Recently, I spotted an interesting blog by Scott Wallsten at the Technology Policy Institute.  In this blog, Scott discusses the FCC’s recent decision that Verizon violated the open access rules of the 700 MHz C-Block auction by charging its customers an additional $20 per month on its data plans to tether a device.  In response, Verizon paid a fine and now allows tethering on all new data plans.  However, Scott observes that:

Verizon effectively abandoned the post-paid market for light users after the FCC decision.  Verizon no longer offers individual plans.  Even consumers with only a single smartphone must purchase a shared data plan.  That’s sensible from Verizon’s perspective since mandatory tethering means that Verizon effectively cannot enforce a single-user contract.  The result is that Verizon no longer directly competes for light users.

Scott adds that prior to the FCC’s decision, a Verizon customer could have purchased an individual data plan for $70 (plus $20 for tethering if desired), but now the customer must purchase a $90 plan.  He also points out that given typical usage levels, a large number of consumers could benefit from a light-use plan.

Scott’s blog reminded me of the economic argument we made in Policy Perspective No. 12-02, A Most Egregious Act?  The Impact on Consumers of Usage-Based Pricing we released last May.  Our economic argument predicts, albeit using a different case study, the economic consequences of the FCC’s decision outlined by Scott.  In our Perspective, we considered a scenario where a cable operator could provide a broadband service that was capable of delivering over-the-top video (OTT) as well as a service (at a lower price) that was not so capable.  The operator also provided its own multichannel video product.  Network Neutrality advocates claim that an upcharge for an OTT-capable service is anti-consumer in that it is likely motivated by a desire to protect video revenues;  thus, such advocates call for regulation that ensures that broadband service is always compliant.  Our theoretical analysis revealed, however, that consumers could be harmed by a policy that prohibited the offer of an OTT-incompatible broadband service.  (In fact, we assumed that the operator had to sell one or the other, but not both, but the analysis led to the conclusion that the operator would offer the OTT-capable service.)  Put simply, the prohibition on a lower-price, limited service forces all consumers to buy the higher priced, less limited service, thus harming those consumers that would prefer the lower price, limited service.

The cable-OTT scenario we used in the Perspective is merely an example of a more general idea.  Scott has pointed to another illustration of the same idea—the Verizon tethering case.  In this instance, the regulation prohibiting the offer a lower-priced, limited broadband service forces all consumers, regardless of their demand, to purchase the higher-priced offering.  Assuming that there are some customers that would prefer a low price and have no interest in tethering (a plausible assumption), the FCC’s decision must reduce consumer well being (since the new price is the sum of the low price plus the tethering charge).  So while the FCC claims that its decision will “protect consumer choice”, the fact is that the agency’s decision unquestionably reduced consumer choice (fewer product offerings) and raised prices.  In so doing, the agency clearly made consumers worse off.

Scott recognizes the anti-consumer effects of the FCC’s decision, but also suggests that the decision may have spurred the creation of shared data plans, which for many consumers represents a price cut in data plans.  This benefit, according to Scott, may— in part or in whole—offset the negative effects of the regulation.  At this point, however, I respectively depart from Scott’s line of reasoning.  First, there’s no causal connection between the FCC’s decision and the shared data plan, since such plans had long been under development (see here and here) prior to the decision.  Second, it is possible to offer both individual and shared data plans simultaneously if consumer demand so warrants—at least it was for Verizon prior to the FCC’s decision.

In sum, since an offer of a low-priced, limited alternative is most often intended to expand subscription—not reduce it—it is fairly safe to conclude that the FCC’s decision in the Verizon tethering case is a bad one.