[Senate Hearing 111-449]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-449
 
                    THE CONSUMER WIRELESS EXPERIENCE 
=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 17, 2009

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri           DAVID VITTER, Louisiana
AMY KLOBUCHAR, Minnesota             SAM BROWNBACK, Kansas
TOM UDALL, New Mexico                MEL MARTINEZ, Florida
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Chief of Staff
                   James Reid, Deputy Chief of Staff
                   Bruce H. Andrews, General Counsel
   Christine D. Kurth, Republican Staff Director and General Counsel
              Brian M. Hendricks, Republican Chief Counsel

















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 17, 2009....................................     1
Statement of Senator Rockefeller.................................     1
    Prepared statement of Hon. Kay Bailey Hutchison submitted by 
      Hon. John D. Rockefeller IV................................     3
Statement of Senator Begich......................................    14
Statement of Senator Warner......................................    16
Statement of Senator Klobuchar...................................    19
Statement of Senator Kerry.......................................    22
Statement of Senator Wicker......................................    66

                               Witnesses

Mark Goldstein, Director, Physical Infrastructure Issues, U.S. 
  Government Accountability Office...............................     3
    Prepared statement...........................................     5
Paul Roth, President--Retail Sales and Service, AT&T Inc.........    25
    Prepared statement...........................................    26
John E. Rooney, President and CEO, United States Cellular 
  Corporation....................................................    29
    Prepared statement...........................................    31
Robert M. Frieden, Pioneers Chair and Professor of 
  Telecommunications and Law, Penn State University..............    36
    Prepared statement...........................................    38
Barbara S. Esbin, Senior Fellow and Director of the Center for 
  Communications and Competition Policy, The Progress & Freedom 
  Foundation.....................................................    43
    Prepared statement...........................................    45
Victor H. ``Hu'' Meena, President and CEO, Cellular South, Inc...    53
    Prepared statement...........................................    55

                                Appendix

Response to written question submitted by Hon. Mark Warner to 
  Mark Goldstein.................................................    77
Response to written questions submitted by Hon. Tom Udall to Paul 
  Roth...........................................................    78
Response to written question submitted to John E. Rooney by:
    Hon. Mark Warner.............................................    79
    Hon. Tom Udall...............................................    80
Response to written questions submitted by Hon. Tom Udall to:
    Robert M. Frieden............................................    82
    Barbara S. Esbin.............................................    84
    Victor H. ``Hu'' Meena.......................................    86


                    THE CONSUMER WIRELESS EXPERIENCE

                              ----------                              


                        WEDNESDAY, JUNE 17, 2009

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:32 p.m. in room 
SR-253, Russell Senate Office Building. Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. I'd just like to start off with a kind of 
mood setter. I've never used--I've been in the Senate for 24 
years and I've never used a chart on the floor of the U.S. 
Senate, so my record is intact. However, this is special.
    This is wireless broadband, and the--if you can see, and if 
you can't, I will make it clear--this is, as you know, not the 
whole of the United States. It's the Eastern part of the United 
States. This is called Appalachia; this is called Northeast. 
This is called Maine; it is white. White means: nothing there. 
This is called West Virginia; that means: nothing there. And 
then a little bit in Ohio, that's here. This was the--that 
would be Kentucky.
    But it makes--it makes a very powerful point to me, and it 
makes a point that resonates emotionally, very, very deeply 
with me. And that is, we may have hills, Vermont may have some 
hills and great beauty, as we do. But they also have people, 
and they have--they count just as much as anybody living at the 
most fancy address in New York City. So, that picture--white 
Maine, white West Virginia, me here, Olympia over there, that's 
just something to think about. It's just a mood setter, that's 
all it was, it was a mood setter, nothing more than that.
    So, throughout the last decade, consumers have grown to 
rely on the mobility, convenience, and safety that wireless 
service can and does provide. Ten years ago, less than 100 
million consumers had wireless phones. Today, the wireless 
industry counts more than 270 million Americans who have that, 
evidently not all of them, however, in at least two states.
    However, in light of this success, we have a serious 
responsibility to ask what the consequences are for an industry 
that has grown up so fast and in such a short period of time. 
Usually things don't emerge that quickly without having 
problems. And so, we're going to discuss some of them.
    Have our regulatory models kept up? Yesterday, I had the 
Chairman of the FCC, for a nomination hearing, and I said if he 
didn't fix his shop, we were going to do it for him. It was a 
stupid thing for me to say, because the guy is so good he'll 
have it fixed in 3 months; he's brilliant. But, this I'm saying 
to an industry. Our regulatory models or methods are, I think, 
wholly insufficient if they exist at all.
    If consumers choose to make their wireless phone their only 
phone, then do they get the service quality they need for such 
an essential service? Is the phone as good? Does it work as 
well? Is it as clear? That's important to them. I, for one, 
have concerns about all of this and more. I have concerns that 
too many consumers are bound to confusing contracts, I mean 
brilliantly constructed, but not funny and not amusing to 
people who don't necessarily spend all their time reading the 
fine print on prescription drugs or on what you may put out 
with your product.
    So, I have concerns that too many consumers are confounded 
by the charges on their wireless bills and the way that those 
charges are delineated, explained, or not explained. I have 
concerns that the Federal Communications Commission gets so 
many consumer complaints about wireless service, but then does 
so little about those complaints. And I'm extremely concerned, 
as I've indicated, I think six or seven times, for my great 
State of West Virginia, that we have second-class wireless 
service in too many rural communities throughout America; I 
broadened it to include the entire country. So, all of this is 
very unacceptable to me. And I look forward to making it 
better, with you.
    Let me illustrate. The map I've shown you and the gap in 
coverage is extraordinarily difficult--I know you have a 
witness that you can't stay for, but you want to be able to say 
something about them, and--but you can't----
    Senator Wicker. Thank you, no, Mr. Chairman, you go right 
ahead. I----
    The Chairman. No, I'm not going to interrupt myself.
    Senator Wicker. OK.
    The Chairman. But when the moment comes, you're welcome to 
do that.
    Senator Wicker. OK, very good. Well, you proceed in your 
own fashion, and I'll be fine.
    The Chairman. In my own fashion.
    So, when people tell me their wireless service is 
ubiquitous, I have my doubts, and that's what this hearing is 
about. I will--I didn't even see what Alaska looked like.
    Senator Begich. I have a map I'll share with you later.
    The Chairman. I worry that rural States like West Virginia 
will be left behind, and I simply will not stand for that. We 
can remedy that on this committee. They can remedy that at the 
FCC or you can remedy it, but one of the three is going to 
happen. We're a fair country, we don't treat people unequally, 
and particularly in something which is growing so fast.
    I mean, if you were--if you were a diminishing industry, 
and you had all kinds of problems, then, you know, I still 
wouldn't have that much sympathy, but you aren't. You are 
growing faster than any industry on the face of the Earth.
    With that said, I'm grateful to all of our witnesses for 
being here today. John Kerry is going to take the second part 
of this hearing, as he's very deeply and expertly into this 
area. I thank you for your willingness to participate in what I 
hope will be a frank and fair conversation about the consumer 
benefits of wireless service, the viability of our existing 
regulatory models, and the pros and cons of handset 
exclusivity, which will be part of the second panel. I look 
forward to your testimony.
    I do not have a Ranking Member, and I'm sorry about that 
because she's very good.
    [The prepared statement of Senator Hutchison follows:]

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas
    It is critically important that this Committee listen and be 
responsive to the concerns expressed by consumers. Likewise, it is 
imperative that we avoid regulating where the marketplace is actively 
responding to consumers' concerns. In the context of the wireless 
industry, over the last 10 years the Nation has witnessed unparalleled 
innovation and growth. Americans have access to more device options 
than anywhere else in the world, and the sophistication of the 
applications available to consumers continues to advance rapidly due to 
significant investment by manufacturers and the wireless providers.
    With regard to exclusive handset arrangements, I understand the 
concerns expressed by some of my colleagues; however, it is important 
to note that these arrangements are largely responsible for many of the 
exciting products in the marketplace today. The marketplace is 
competitive, and the introduction of a breakthrough new technology by 
one company, spurred by a competitive desire to offer consumers 
something new and exciting, in turn drives other providers to invest 
heavily in research and development of similar devices. That creative 
force provides direct benefits to consumers through rapid advances in 
technology. I hope we will be mindful of this and tread lightly when it 
comes to considering new regulations or restrictions on this industry.
    I am concerned that unnecessary regulatory intervention here could 
risk stifling the remarkable levels of private investment and job 
creation that the wireless industry--both service providers and 
equipment manufacturers--bring to our economy. Despite the financial 
challenges that permeate our economy, this industry continues to 
flourish and, as our economy rebounds, we must work to ensure that 
investment and job growth continues.
    This Committee has previously examined many of the issues to be 
discussed here today, and I ask my colleagues to take note of the 
progress that has been made, in the absence of regulatory intervention, 
in addressing these concerns expressed by consumers. Providers are 
already responding to many of these issues, and I note that many 
providers are using their responsiveness in this respect to promote 
their competitive advantages.
    No other segment of the communications industry over the last 15 
years has shown the continual growth and innovation of the wireless 
industry. To date, we have refrained from micro-managing the business 
practices of this industry, and as we stand on the verge of the next 
generation of innovative wireless broadband products, the government 
should proceed with great caution so as to ensure the best outcome for 
consumers.

    So, Mr. Goldstein, the floor is yours.

             STATEMENT OF MARK GOLDSTEIN, DIRECTOR,

                PHYSICAL INFRASTRUCTURE ISSUES,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Goldstein. Thank you, Mr. Chairman, and members of the 
Committee. I'm pleased to be here today to discuss wireless 
consumer issues. The results I will share with you come from 
GAO's ongoing work to examine the quality of wireless phone 
service and related FCC and State oversight efforts. Some of 
the findings I will discuss are based on our recent nationwide 
survey of wireless phone service users.
    The use of wireless phone service in the United States has 
risen dramatically during the past 20 years. Industry data show 
the number of wireless phone service subscribers has grown from 
3.5 million subscribers in 1989, to about 270 million 
subscribers today. Americans increasingly rely on wireless 
phones as their primary or sole means of communication. Over 
one-third of households now use only or mostly wireless phones 
instead of landlines. Concerns have been raised in recent years 
about the quality of this service.
    My statement today will focus on consumers' satisfaction 
and problems with their wireless phone service, and FCC's 
efforts to assist wireless consumers with complaints. First, 
according to the preliminary results of our national survey, 
most consumers are satisfied with their wireless phone service, 
but some have experienced problems. Specifically, we estimate 
that about 84 percent of wireless users are very or somewhat 
satisfied with their service. However, we also estimate that 10 
percent, roughly 20 million people, are very or somewhat 
dissatisfied.
    Looking beyond the overall numbers, we asked users about 
their satisfaction with five key aspects of wireless service, 
which were: billing, the terms of service contracts, the 
carrier's explanation of their service at the point of sale, 
call quality, and customer service.
    Similar to our overall results, we estimate that user 
satisfaction with each of these aspects ranged from about 70 to 
85 percent. However, we also found that the percentage of those 
users were very or somewhat dissatisfied with these specific 
aspects, ranged from about 9 to 14 percent.
    When examining specific problem areas, our survey results 
indicate that some users have recently experienced problems 
with billing, contract terms, and customer service. For 
example, we estimate that about one-third of those users who 
are responsible for paying for their service experience 
problems, at least some of the time, understanding their bills 
or had unexpected charges. Additionally, among those users who 
wanted to switch carriers within the last year, about 42 
percent did not do so because of the early termination fee they 
would have to pay. Finally, among those users who contacted 
their carrier's customer service about a problem, 21 percent 
were dissatisfied with how their carrier tried to address their 
concern.
    In response to these types of consumer problems noted 
above, wireless carriers have taken a number of actions. For 
example, the major carriers now prorate their early termination 
fees, so that such costs decrease over time. Carriers also 
offer service options that do not require contracts, and the 
industry spends billions of dollars each year on infrastructure 
to improve call quality and coverage.
    Second, FCC assists wireless consumers by handling 
thousands of their complaints about carrier service every year, 
but consumers may lack awareness of this process and its 
intended outcomes. Consumers can complain to the FCC through 
various means, including contacting FCC by phone or using the 
agency's website to submit complaints. FCC reviews these 
complaints, forwards them to a carrier for a response, and 
reviews whether the carrier responded to the concerns the 
consumers raised.
    When considering that, as our survey suggests, some 
consumers are dissatisfied even after contacting their carrier 
for help, the FCC's efforts to handle complaints are an 
important means by which consumers may be able to seek relief. 
However, our survey results suggest that most consumers do not 
know they can complain to the FCC. Specifically, when asked 
where they would complain if they had a problem their carrier 
couldn't resolve, only about 13 percent of wireless users said 
they would complain to the FCC. Further, we estimated that 
about 34 percent do not know where they would complain, that is 
roughly translatable to about 66 million people.
    Third, the FCC lacks goals that clearly identify the 
intended outcomes of its consumer complaint efforts. For 
example, it is not clear if the intended outcome of the FCC's 
complaint process is resolving consumer problems or fostering 
communication between consumers and carriers. The agency also 
lacks measures to demonstrate how well it is achieving its 
intended outcomes.
    For example, the FCC has a goal to improve the customer 
experience with its call centers and websites, but it lacks 
measures of customer service. Consequently, consumers may not 
understand what to expect from the FCC's complaint process, and 
the effectiveness of the FCC's efforts appears unclear. They do 
not, for instance, measure the effectiveness of their own 
complaint process and how consumers are responding.
    We intend to complete our work on this engagement for the 
Committee this fall, which will include examination of the 
FCC's oversight of wireless phone service, and the extent to 
which State Utility Commissions provide oversight and assist 
customers. We expect to have recommendations for the FCC when 
we complete our work.
    Mr. Chairman, this concludes my remarks and I'd be happy to 
answer questions you or members of the Committee have.
    [The prepared statement of Mr. Goldstein follows:]

            Prepared Statement of Mark Goldstein, Director, 
 Physical Infrastructure Issues, U.S. Government Accountability Office
    Chairman Rockefeller and Members of the Committee:
    We appreciate the opportunity to participate in this hearing to 
discuss wireless phone service consumer issues. My statement today is 
based on our ongoing work on consumers' experience with wireless phone 
service and efforts by the Federal Communications Commission (FCC) to 
assist wireless phone service consumers with complaints.\1\ The use of 
wireless phone service in the United States has risen dramatically over 
the last 20 years, and Americans increasingly rely on wireless phones 
as their primary or sole means of telephone communication. According to 
industry data, wireless subscribership has grown from about 3.5 million 
subscribers in the United States in 1989 to about 270 million today 
(see fig. 1).\2\ About 82 percent of adults now live in households with 
wireless phone service, and 35 percent of households use wireless 
phones as their primary or only means of telephone service.\3\
---------------------------------------------------------------------------
    \1\ For the purposes of this report, the term wireless phone 
service includes the provision of wireless phone service by cellular, 
broadband personal communications service, and digital specialized 
mobile radio carriers. Federal law and FCC regulations refer to 
wireless phone service as ``commercial mobile service'' or ``commercial 
mobile radio service.'' This service may generally be referred to as 
wireless phone service, mobile phone service, or cellular (or cell) 
phone service interchangeably.
    \2\ CTIA--The Wireless Association (CTIA), a nonprofit membership 
organization representing all sectors of wireless communications, 
estimated there were 270.3 million wireless phone service subscribers 
in the United States as of December 2008. CTIA, since 1985, has 
surveyed its members semi-annually about their subscriber numbers. 
Industry data count a subscriber as any person using a wireless phone 
under a paid subscription. Because an individual could have more than 
one wireless phone, and thus more than one subscription, the number of 
wireless phone service users would be smaller than the number of 
subscribers.
    \3\ The Centers for Disease Control's National Center for Health 
Statistics estimated that as of December 2008, about 20 percent of 
American households had only wireless phones and another 15 percent 
that also had landlines received all or most calls on wireless phones.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: CTIA--The Wireless Association, used by permission.
    Note: Industry data count a subscriber as any person using a 
wireless phone under a paid subscription. Because an individual could 
have more than one wireless phone, and thus more than one subscription, 
the number of wireless phone service users would be smaller than the 
number of subscribers.

    Concerns have been raised in recent years about the quality of 
wireless phone service, including specific concerns about billing, 
customer service, and carriers' contract terms, such as fees carriers 
charge customers for terminating their service before the end of the 
contract period (known as early termination fees). Under Federal law, 
FCC is directed to foster a competitive wireless marketplace and the 
agency has the flexibility to exempt wireless carriers from regulation 
if it determines that doing so promotes competition and is in the 
public interest.\4\ FCC's rules require that wireless carriers, like 
other common carriers, provide their services to consumers at a 
reasonable rate and in a manner that is not discriminatory.\5\ Its 
rules also establish procedures for FCC to work with carriers to 
address consumer complaints.\6\ States, which have traditionally 
regulated local telephone service, also retain some authority under 
Federal law to regulate the terms and conditions of wireless phone 
service, and many address consumer complaints.\7\
---------------------------------------------------------------------------
    \4\ 47 U.S.C.  332(c). FCC was given the authority to refrain from 
applying certain provisions of the Communications Act of 1934 to 
wireless carriers that it found to be unnecessary under specific 
statutory criteria. For example, FCC did not apply provisions that 
restricted market entry or exit.
    \5\ 47 C.F.R.  20.15(a). Section 201(b) of the Communications Act 
of 1934 requires just and reasonable rates and 202(a) prohibits rates 
that are unreasonably discriminatory. 47 U.S.C.  201, 202. A common 
carrier, such as a telephone company, provides communications services 
for hire to the public.
    \6\ 47 C.F.R.  1.711-1.736.
    \7\ See 47 U.S.C.  332(c)(3)(A). The House Committee Report on the 
Omnibus Budget Reconciliation Act of 1993, in reference to section 
332(c)(3)(A), explained that ``other terms and conditions'' of wireless 
service, which are regulated by the states, ``include such matters as 
customer billing information and practices and billing disputes and 
other consumer protection matters.'' H.R. Rep. No. 103-111 (1993). 
Under  332(c)(3)(A) states are preempted from regulating rates and 
market entry but are not precluded from regulating the other terms and 
conditions of service.
---------------------------------------------------------------------------
    My testimony today discusses: (1) consumers' satisfaction with 
wireless phone service and problems they have experienced with this 
service and (2) FCC's efforts to address consumers' complaints about 
this service. This testimony presents preliminary observations based on 
ongoing work we expect to complete this Fall for this committee and the 
House Subcommittee on Communications, Technology, and the Internet. 
This ongoing work will also examine FCC's wireless phone service 
oversight efforts and the extent to which state utility commissions 
oversee wireless phone service and assist consumers.
    To determine consumers' satisfaction with their wireless phone 
service and identify problems consumers have experienced with this 
service, we surveyed a nationally representative, randomly selected 
sample of adult wireless phone users aged 18 or older who had cell 
phone service in 2008, from which we completed 1,143 interviews; \8\ 
interviewed stakeholders from various organizations, including national 
consumer and state agency organizations, state agencies in three 
selected states (California, Nebraska, and West Virginia),\9\ wireless 
industry associations, the four major wireless carriers and two 
selected smaller carriers, and FCC; and reviewed documents obtained 
from these sources. To determine how FCC addresses consumers' 
complaints, we interviewed FCC officials about these activities and 
reviewed related documentation obtained from the agency. We also 
reviewed relevant laws, regulations, and procedures and FCC's quarterly 
complaint reports, strategic plan, and budget, including the agency's 
performance goals and measures (additional information about our scope 
and methodology appears in app. I). We are conducting this performance 
audit, which began in September 2008, in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings based on our audit objectives.
---------------------------------------------------------------------------
    \8\ The response rate was calculated as 32 percent using a survey 
research industry accepted method; however, since response rates can be 
calculated in other ways, the response rate could be different. We use 
the terms ``user'' and ``consumer'' in our report. ``User'' refers 
specifically to the population sampled for our survey, while 
``consumer'' is used more generally.
    \9\ We selected these states based on their various geography, 
populations, and regions, and their varying approaches to providing 
wireless phone service oversight based on information obtained from 
national organizations representing state agency officials.
---------------------------------------------------------------------------
According to Our National Survey, Most Consumers Are Satisfied with 
        Their Wireless Phone Service, but Some Have Experienced 
        Problems
    According to our survey results, overall, wireless phone service 
consumers are satisfied with the service they receive. Specifically, we 
estimate that 84 percent of adult wireless phone users are very or 
somewhat satisfied with their wireless phone service, and that 
approximately 10 percent are very or somewhat dissatisfied with their 
service (see fig. 2).\10\
---------------------------------------------------------------------------
    \10\ Estimates we present based on our survey results have a margin 
of error of less than 5 percent unless otherwise noted.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: GAO survey.
    Note: GAO conducted its survey of adult wireless phone users from 
February 23, 2009, through April 5, 2009. All estimates presented in 
this figure have a margin of error of less than plus or minus 5 
percentage points. The percentage of users very or somewhat 
dissatisfied with wireless phone service is 10 percent but does not add 
up to such in the figure due to rounding. ``Neither'' refers to 
respondents who indicated they were neither satisfied nor dissatisfied. 
Additionally, we estimate that less than 1 percent of users had no 
opinion or did not know about their overall satisfaction. Numbers may 
not sum to 100 because of rounding.

    Stakeholders we interviewed identified a number of areas in which 
consumers have reported problems with their wireless phone service in 
recent years.\11\ On the basis of these interviews and related 
documents, we identified five key areas of concern (see table 1).\12\
---------------------------------------------------------------------------
    \11\ The stakeholders we interviewed represent consumer 
organizations, state agencies in selected states, national 
organizations that represent state officials, wireless carriers, 
industry associations, and FCC.
    \12\ Unsolicited telemarketing on wireless phones was also cited as 
a key area of consumer concern by the stakeholders we interviewed. 
Congress passed the Telecommunications Consumer Protection Act (TCPA), 
as well as the Controlling the Assault of Non-Solicited Pornography and 
Marketing Act (CANSPAM), to protect consumers against unsolicited 
telemarketing. Because such problems generally deal with telemarketers, 
not the services provided by wireless carriers, we did not examine this 
issue within the scope of our review. However, from our survey, we 
estimate that unsolicited calls or text messages to users' wireless 
phones are not a problem at all for 48 percent of wireless phone users, 
a little problem for 24 percent, somewhat of a problem for 10 percent, 
and a moderate or major problem for 17 percent.
 
------------------------------------------------------------------------

   Table 1.--Key Areas of Consumer Concern Identified by Stakeholders 
------------------------------------------------------------------------Key area of concern--Nature of concern----------------------------------
------------------------------------------------------------------------
Billing                   Complexity of billing statements leads
                                   to lack of consumer understanding.
                          Bills contain unexpected charges and
                                   errors.
------------------------------------------------------------------------
Terms of service          Consumers are subject to fees for
 contract                          canceling their service before the
                                   end of their contract term (early
                                   termination fees), regardless of
                                   their reason for wanting to terminate
                                   service, effectively locking
                                   consumers into their contracts.
                          Consumers are not given enough time to
                                   try out their service before having
                                   to commit to the contract.
                          Carriers extend contracts when
                                   consumers request service changes.
------------------------------------------------------------------------
Explanation of            Key aspects of service, such as rates
 service                           and coverage, are not clearly
                                   explained to consumers at the point
                                   of sale (when they sign up for the
                                   service).
------------------------------------------------------------------------
Call quality              Consumers experience dropped or
                                   blocked calls as well as noise on
                                   calls that makes hearing calls
                                   difficult.
                          Consumers experience poor coverage,
                                   which in rural areas may be the
                                   result of lack of infrastructure and
                                   in urban areas stems from lack of
                                   capacity to manage the volume of
                                   calls at peak times.
Customer service          Consumers experience problems such as
                                   long waits, ineffective assistance,
                                   and insufficient resolution to
                                   problems.
------------------------------------------------------------------------
Source: GAO analysis.

    Based on our survey results, we estimate that most wireless phone 
users are satisfied with these five specific aspects of service; 
however, the percentages of those very or somewhat dissatisfied range 
from about 9 to 14 percent, depending on the specific aspect of service 
(see table 2). For example, we estimate that 14 percent of wireless 
phone users are dissatisfied with the terms of their service contract. 
We also estimate that 85 percent of wireless phone users are very or 
somewhat satisfied with call quality, while the percentages of those 
very or somewhat satisfied with billing, contract terms, carrier's 
explanation of key aspects of service at the point of sale, and 
customer service range from about 70 to 76 percent. Additionally, we 
estimate that most wireless phone users are satisfied with specific 
dimensions of call quality. For example, we estimate that 86 to 89 
percent of wireless phone users are satisfied with their coverage when 
using their wireless phones at home, at work, or in their vehicle.
 
----------------------------------------------------------------------------------------------------------------

    Table 2.--Estimated Levels of Satisfaction with Specific Aspects of Wireless Phone Service, by Percentage
----------------------------------------------------------------------------------------------------------------
                                                                 Level of satisfaction
                                     ---------------------------------------------------------------------------
          Aspect of service                                 Dissatisfied    Neither satisfied
                                       Satisfied (very        (very or       or dissatisfied     No opinion/no
                                         or somewhat)        somewhat)                           basis to judge
----------------------------------------------------------------------------------------------------------------
Billing                                              76                 12                  4                  8
----------------------------------------------------------------------------------------------------------------
Terms of service contract                            72                 14                  6                  8
----------------------------------------------------------------------------------------------------------------
Explanation of service                               76                  9                  5                 10
----------------------------------------------------------------------------------------------------------------
Call quality                                         85                 11                  4                 <1
----------------------------------------------------------------------------------------------------------------
Customer service                                     70                 12                  6                 12
----------------------------------------------------------------------------------------------------------------
Source: GAO survey.
Note: GAO conducted its survey of adult wireless phone users from February 23, 2009, through April 5, 2009. All
  estimates presented in this table have a margin of error of less than plus or minus 5 percentage points. All
  respondents were asked about their level of satisfaction with each of these five aspects of wireless phone
  service. Respondents were also asked not to indicate a level of satisfaction if they had no basis to judge a
  particular aspect of service. For example, a respondent may have no basis to judge satisfaction with the
  contract terms if he or she did not sign the contract under which they have service. Percentages may not sum
  to 100 due to rounding.

    Other results of the survey suggest that some wireless phone 
consumers have recently experienced problems with billing, certain 
contract terms, and customer service since the beginning of 2008. For 
example, we estimate that during this time about 34 percent of wireless 
phone users responsible for paying for their service received 
unexpected charges, and about 31 percent had difficulty understanding 
their bill at least some of the time.\13\ Also during this time, almost 
one-third of wireless users who contacted customer service about a 
problem did so because of problems related to billing.\14\ Further, 
among wireless users who wanted to switch carriers during this time but 
did not do so, we estimate that 42 percent did not switch because they 
did not want to pay an early termination fee.\15\ Finally, among those 
users who contacted customer service, we estimate that 21 percent were 
very or somewhat dissatisfied with how the carrier handled the problem.
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    \13\ We estimate that about 83 percent of wireless users are 
responsible for paying for their wireless phone service. Respondents 
were asked about the extent of such billing problems since the 
beginning of 2008.
    \14\ We estimate that about 44 percent of wireless users contacted 
customer service about a problem since the beginning of 2008.
    \15\ We estimate that about 19 percent of wireless users wanted to 
switch carriers since the beginning of 2008 but did not do so. The 42 
percent of these wireless phone users who wanted to switch but did not 
because of the early termination fee has a margin of error of 7.4 
percent. Additionally, among the wireless users who did not indicate 
they were satisfied with the terms of their wireless phone service, we 
estimate that 25 percent were not satisfied because of early 
termination fees. Wireless users were asked about their satisfaction 
with the terms of their service in general, not specifically since the 
beginning of 2008. The margin of error for the estimate of wireless 
phone users that were not satisfied with the terms of their service 
because of early termination fees is 6.7 percent.
---------------------------------------------------------------------------
    In response to the areas of consumer concern noted above, wireless 
carriers have taken a number of actions in recent years. For example, 
officials from the four major carriers, Verizon Wireless, AT&T, Sprint 
Nextel, and T-Mobile, reported taking actions such as prorating their 
early termination fees, offering service options without contracts, and 
providing web-based tools consumers can use to research a carrier's 
coverage area, among other efforts.\16\ In addition, according to 
CTIA--The Wireless Association, the wireless industry spent an average 
of $24 billion annually between 2001 and 2007 on infrastructure and 
equipment to improve call quality and coverage. Also, carriers told us 
they use information from third-party tests and customer feedback to 
determine their network and service performance and identify needed 
improvements.
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    \16\ In addition, in 2003, the industry adopted a voluntary code 
that includes a number of requirements carriers that sign the code 
agree to abide by. These requirements include disclosing to consumers 
at the point of sale and on their websites certain service terms and 
rates, providing a 14-day trial period before customers must commit to 
contracts, providing access to customer service, and separately 
identifying certain fees and charges on customers' bills, among other 
requirements. Carriers submit information annually to CTIA for review 
to demonstrate compliance with the code.
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FCC Assists Consumers with Wireless Complaints but Lacks Clear Goals 
        and Outcome Measures for These Efforts
    FCC assists wireless consumers by handling thousands of their 
informal complaints each year,\17\ but consumers may lack awareness of 
this process and its intended outcomes. FCC has a process to receive 
consumers' complaints and forward them to carriers for a response. 
However, the results of our consumer survey suggest that most consumers 
are not aware of FCC's complaint process. Furthermore, FCC has not 
articulated goals that clearly identify the intended outcomes of its 
efforts to address wireless consumer complaints and lacks related 
measures. As a consequence, FCC's effectiveness in assisting wireless 
consumers with complaints is unclear and consumers may not understand 
what to expect from FCC's complaint process.
---------------------------------------------------------------------------
    \17\ In addition to addressing informal complaints, FCC also 
assists wireless consumers through other outreach and education 
efforts, such as answering consumer inquiries and publishing fact 
sheets about wireless phone service issues and complaints. The 
information presented here represents a description of FCC's process 
for handling informal consumer complaints. The agency also has a formal 
complaint process, and consumers may file formal complaints if they are 
not satisfied with the results of filing an informal complaint. 
However, there is a cost for filing a formal complaint, the process for 
doing so is similar to a court proceeding, and it is governed by 
specific rules about what information must be submitted. According to 
FCC, the formal complaint process is typically used by corporations, 
not consumers, and FCC has held only one proceeding in response to a 
consumer's formal wireless complaint within the past 5 years.
---------------------------------------------------------------------------
FCC Assists Consumers with Wireless Complaints
    Each year, FCC receives thousands of complaints submitted by 
consumers about problems with telecommunications services, including 
wireless service, via its website, telephone, e-mail, mail, or fax.\18\ 
In 2008, the agency received over 430,000 informal complaints from 
consumers, including over 19,000 complaints related to services 
provided by wireless carriers.\19\ The top categories of wireless 
complaints FCC reported receiving were for problems related to billing 
and rates, service-related issues, and contract early termination 
fees.\20\ According to FCC officials, the agency informs consumers they 
may complain to FCC about problems with their wireless service or other 
telecommunications services by providing information on how to complain 
to the agency on its website and in fact sheets that are distributed to 
consumers through its website and other methods.\21\
---------------------------------------------------------------------------
    \18\ In addition to wireless complaints, FCC reported receiving 
complaints about wireline services, cable and satellite services, and 
television and radio broadcasting. To be considered a complaint by FCC, 
a consumer's contact must identify a particular entity under FCC's 
jurisdiction, allege harm or injury, and seek relief. Other consumer 
contacts seeking information about matters under FCC's jurisdiction are 
inquiries.
    \19\ FCC reports quarterly on the number and types of consumer 
complaints it receives. Although the agency includes complaint totals 
in these reports, FCC officials explained that the figures do not 
represent the total number of complaints received--only the totals of 
the top categories reported. We are conducting an analysis of FCC's 
complaint data that we intend to report on at a later date. FCC also 
reported receiving over 42,000 wireless complaints in 2008 about 
unsolicited telemarketing.
    \20\ Service-related issues could include problems related to call 
quality, coverage, and roaming.
    \21\ In addition to addressing complaints, FCC also assists 
wireless consumers through other outreach and education efforts, such 
as answering consumer inquiries and publishing fact sheets about 
wireless phone service issues and complaints.
---------------------------------------------------------------------------
    After reviewing a complaint received, FCC responds by sending the 
consumer a letter about the complaint's status. If FCC determines that 
the complaint should be forwarded to the carrier for a response, the 
agency sends the complaint to the carrier and asks the carrier to 
respond to FCC and the consumer within 30 days. Once FCC receives a 
response from the carrier, the agency reviews the response, and if FCC 
determines the response has addressed the consumer's complaint, marks 
the complaint as closed.\22\ FCC officials told us they consider a 
carrier's response to be sufficient if it responds to the issue raised 
in the consumer's complaint; however, such a response may not address 
the problem to the consumer's satisfaction. When FCC considers a 
complaint to be closed, it sends another letter to the consumer, which 
states that the consumer can call FCC with further questions or, if not 
satisfied with the carrier's response, can file a formal complaint. FCC 
officials also told us that if a consumer is not satisfied, the 
consumer can request that FCC mediate with the carrier on his or her 
behalf; however, the letter FCC sends to a consumer whose complaint has 
been closed does not indicate this is an option.\23\
---------------------------------------------------------------------------
    \22\ According to FCC officials, if the response is not sufficient, 
FCC contacts the carrier again. FCC may also close a complaint for 
other reasons and not serve it to a carrier, such as if a consumer does 
not submit complete information with the complaint, if the complaint is 
not related to an issue within FCC's jurisdiction, if the consumer 
withdraws the complaint, or if FCC rejects the complaint because it is 
invalid, incomplete, a duplicate, a false submission, or submitted on 
the wrong form, among other reasons. According to FCC officials, a 
valid complaint that can be served to a carrier must identify a 
particular carrier, allege harm, and seek relief.
    \23\ The mediation process described here is informal and conducted 
by FCC's Consumer and Governmental Affairs Bureau. FCC officials told 
us that the agency's Enforcement Bureau has a separate formal mediation 
process that handles resolving complaints by market participants, 
entities, or organizations against common carriers.
---------------------------------------------------------------------------
    Since, based on our survey results, we estimate that about 21 
percent of wireless phone users who contacted their carriers' customer 
service were dissatisfied with how their carriers addressed their 
concerns, FCC's efforts to handle complaints are an important means by 
which consumers may be able to get assistance in resolving their 
problems. However, the results of our consumer survey suggest that most 
consumers would not complain to FCC if they have a problem that their 
carrier did not resolve. Specifically, we estimate that 13 percent of 
wireless phone users would complain to FCC if they had such a problem 
and that 34 percent do not know where they could complain.
FCC Lacks Clear Goals and Measures for Its Complaint Handling Efforts
    FCC has not articulated goals that clearly identify intended 
outcomes for its efforts to address wireless consumer complaints and 
lacks measures to demonstrate how well it is achieving intended 
outcomes. The Government Performance and Results Act of 1993 (GPRA) 
requires an agency to establish outcome-related performance goals for 
the major functions of the agency.\24\ GPRA also requires an agency to 
develop performance indicators for measuring the relevant outcomes of 
each program activity in order for the agency to demonstrate how well 
it is achieving its goals.\25\
---------------------------------------------------------------------------
    \24\ This Act is the centerpiece of a statutory framework that 
Congress put in place during the 1990s to help resolve the long-
standing management problems that have undermined the Federal 
Government's efficiency and effectiveness and to provide greater 
accountability for results. See GAO, Results-Oriented Government: GPRA 
Has Established a Solid Foundation for Achieving Greater Results, GAO-
04-38 (Washington, D.C.: Mar. 10, 2004).
    \25\ 31 U.S.C.  1115.
---------------------------------------------------------------------------
    FCC's key goal related to its consumer complaint efforts is to 
``work to inform American consumers about their rights and 
responsibilities in the competitive marketplace.'' Under this key goal, 
one of FCC's subgoals is to ``facilitate informed choice in the 
competitive telecommunications marketplace.'' According to FCC 
officials, ``informed choice'' means consumers are informed about how a 
particular telecommunications market works, what general services are 
offered, and what to expect when they buy a service. FCC's measure 
pertaining to its efforts to address wireless consumer complaints under 
this subgoal is to respond to consumers' general complaints within 30 
days.\26\ According to FCC officials, this measure reflects the time it 
takes FCC to initially respond to the consumer about the status of a 
complaint. This measure does not clearly or fully demonstrate FCC's 
achievement of its goal to facilitate informed consumer choice. 
Additionally, this is a measure of a program output, or activity, 
rather than of the outcome the agency is trying to achieve. Another 
subgoal is to ``improve customer experience with FCC's call centers and 
website.'' While this subgoal does identify an intended outcome, FCC 
does not have a measure related to this outcome that pertains to 
consumers who complain about services provided by their wireless 
carrier.\27\ FCC officials told us that they do not measure customer 
experience with the agency's call centers and websites, but sometimes 
receive anecdotal information from customers about their 
experiences.\28\
---------------------------------------------------------------------------
    \26\ This goal has a separate measure for responding to TCPA-
related complaints (junk fax and do-not-call list complaints) within 20 
days.
    \27\ For this subgoal, FCC does have a measure to inform consumers 
with TCPA-related complaints about the status of their complaints 
within 20 days and to refer all such eligible complaints to the 
Enforcement Bureau.
    \28\ FCC officials told us they do take steps to review the quality 
of their complaint handling efforts internally, such as having 
supervisors review complaints and monitor staff performance.
---------------------------------------------------------------------------
    We have previously reported that to better articulate results, 
agencies should create a set of performance goals and measures that 
address important dimensions of program performance. FCC's goals may 
not represent all of the important dimensions of FCC's performance in 
addressing consumer complaints. A logical outcome of handling 
complaints is resolving problems, or, if a problem cannot be resolved, 
helping the consumer understand why that is the case.\29\ However, it 
is not clear whether resolving problems is an intended outcome of FCC's 
consumer complaint efforts. While FCC's goals in this area indicate 
that informing consumers is a goal of the agency, some information from 
FCC implies that another intended outcome of these efforts is to 
resolve consumers' problems. For example, FCC's fact sheets state that 
consumers can file a complaint with FCC if they are unable to resolve a 
problem directly with their carrier. This may lead consumers to believe 
that FCC will assist them in obtaining a resolution. However, FCC 
officials told us that the agency's role in addressing complaints, as 
outlined in the law, is to facilitate communication between the 
consumer and the carrier and that FCC lacks the authority to compel a 
carrier to take action to satisfy many consumer concerns. Thus, it is 
not clear if the intended outcome of FCC's complaint handling efforts 
is resolving consumer problems, fostering communication between 
consumers and carriers, or both. Furthermore, FCC has not established 
measures of its effectiveness in either resolving consumer problems or 
fostering communication between consumers and carriers.\30\ For 
example, FCC does not measure consumer satisfaction with its complaint-
handling efforts. Without clear outcome-related goals and measures 
linked to those goals, the purpose and effectiveness of these efforts 
are unclear and the agency's accountability for its performance is 
limited.\31\ Moreover, consumers may not understand what to expect from 
FCC's complaint process.
---------------------------------------------------------------------------
    \29\ An agency's complaint-handling effort may lead to various 
resolution outcomes for the consumer. For example, we reported that the 
Office of the Comptroller of the Currency's process for resolving 
consumers' complaints about banks could lead to the agency providing 
the consumer with additional information, a complaint being withdrawn 
or tabled because of litigation, or the agency determining that the 
bank did, or did not, make an error. See GAO, OCC Consumer Assistance: 
Process Is Similar to That of Other Regulators but Could Be Improved by 
Enhanced Outreach, GAO-06-93 (Washington, D.C.: Feb. 23, 2006).
    \30\ FCC does track its closures of consumer complaints and the 
amount of money that is refunded to consumers as a result of its 
complaint handling efforts.
    \31\ We have identified inadequate performance management practices 
as a recurring problem in our recent reviews of FCC programs. 
Specifically, we reported in March 2009 that FCC's E-rate program for 
universal service lacked performance goals and adequate performance 
measures; in June 2008 that the high-cost universal service program 
also lacked performance goals and measures; in February 2008 that FCC's 
enforcement efforts lacked measurable goals and related performance 
measures, as well as management tools to fully measure outcomes; and in 
April 2006 that FCC's efforts to address junk fax complaints lacked 
long-term and annual goals for monitoring and enforcement, as well as 
analysis needed to demonstrate the effectiveness of current enforcement 
measures. See GAO, Telecommunications: Long-Term Strategic Vision Would 
Help Ensure Targeting of E-rate Funds to Highest-Priority Uses, GAO-09-
253 (Washington, D.C.: Mar. 27, 2009); Telecommunications: FCC Needs to 
Improve Performance Management and Strengthen Oversight of the High-
Cost Program, GAO-08-633 (Washington, D.C.: June 13, 2008); 
Telecommunications: FCC Has Made Some Progress in the Management of its 
Enforcement Program but Faces Limitations, and Additional Actions Are 
Needed, GAO-08-125 (Washington, D.C.: Feb. 15, 2008); and 
Telecommunications: Weaknesses in Procedures and Performance Management 
Hinder Junk Fax Enforcement, GAO-06-425 (Washington, D.C.: Apr. 5, 
2006).
---------------------------------------------------------------------------
    Chairman Rockefeller and members of the Committee, this concludes 
my prepared statement. Our future work, which we expect to complete 
this Fall, will provide more definitive information about many of the 
matters covered in my statement today, including detailed information 
about oversight of wireless phone service carried out by FCC and state 
utility commissions. We also expect to make recommendations at that 
time. I would be pleased to respond to any questions that you or other 
members of the Committee might have.
                   Appendix I: Scope and Methodology
    To obtain information about consumers' satisfaction and problems 
with their wireless phone service, we commissioned a telephone survey 
of the U.S. adult population of wireless phone service users. Our aim 
was to produce nationally representative estimates of adult wireless 
phone service users': (1) satisfaction with wireless service overall 
and with specific aspects of service, including billing, terms of 
service, carriers' explanation of key aspects of service, call quality 
and coverage, and customer service; (2) frequency of problems with call 
quality and billing; (3) desire to switch carriers and barriers to 
switching; and (4) knowledge of where to complain about problems. 
Percentage estimates have a margin of error of less than 5 percentage 
points unless otherwise noted. We conducted this survey of the American 
public from February 23, 2009, through April 5, 2009. A total of 1,143 
completed interviews were collected, and calls were made to all 50 
states. Our sampling approach included randomly contacting potential 
respondents using both landline and cell phone telephone numbers. Using 
these two sampling frames provided us with a more comprehensive 
coverage of adult cell phone users.
    Because we followed a probability procedure based on random 
selections, our sample is only one of a large number of samples that we 
might have drawn. Since each sample could have provided different 
estimates, we express our confidence in the precision of our particular 
sample's results as a 95 percent confidence interval. This is the 
interval that would contain the actual population value for 95 percent 
of the samples we could have drawn. As a result, we are 95 percent 
confident that each of the confidence intervals in this report will 
include the true values in the study population. Each sampled adult was 
subsequently weighted in the analysis to account statistically for all 
the adult cell phone users of the population. The final weight applied 
to each responding adult cell phone user included an adjustment for the 
overlap in the two sampling frames, a raking adjustment to align the 
weighted sample to the known population distributions from the 2009 
supplement of the U.S. Census Bureau's Current Population Survey and 
the Centers for Disease Control's 2008 National Health Interview 
Survey, and an expansion weight to ensure the total number of weighted 
adults represent an estimated adult population eligible for this 
study.\1\
---------------------------------------------------------------------------
    \1\ U.S. Census Bureau, Current Population Survey: March 2008 
Annual Social and Economic Supplement (Washington, D.C.: Feb. 5, 2009); 
S.J. Blumberg and J.V. Luke, Wireless substitution: Early release of 
estimates from the National Health Interview Survey, January-June 2008, 
Centers for Disease Control, National Center for Health Statistics 
(Available from: http://www.cdc.gov/nchs/nhis.htm.: Dec. 17, 2008).
---------------------------------------------------------------------------
    Telephone surveys require assumptions about the disposition of 
noncontacted sample households that meet certain standards. These 
assumptions affect the response rate calculation. For this survey the 
response rate was calculated using the American Association of Public 
Opinion Research (AAPOR) Response Rate 3. Based on these assumptions, 
the response rate for the survey was 32 percent; however, the response 
rate could be lower if different assumptions had been made and might 
also be different if calculated using a different method. We used 
random digit dial (RDD) sampling frames that include both listed and 
unlisted landline numbers from working blocks of numbers in the United 
States. The RDD sampling frame approach cannot provide any coverage of 
the increasing number of cell-phone-only households and limited 
coverage of cell-phone-mostly households (i.e., households that receive 
most of their calls on cell phones in spite of having a landline). 
Because of the importance of reaching such households for this survey 
about wireless phone service, we also used an RDD cell phone sampling 
frame. The RDD cell phone sampling frame was randomly generated from 
blocks of phone numbers that are dedicated to cellular service. About 
43 percent of the completed interviews were from the RDD cell phone 
sample.
    Because many households contain more than one potential respondent, 
obtaining an unbiased sample from an RDD frame of landline numbers 
requires interviewing a randomly selected respondent from among all 
potential respondents within the sampled household (as opposed to 
always interviewing the individual who initially answers the phone). We 
obtained an unbiased sample by using the most recent birthday method, 
in which the interviewer asks to speak to the household member aged 18 
or older with a wireless phone who had the most recent birthday. If the 
respondent who was identified as the member of the household with the 
most recent birthday was unavailable to talk and asked to schedule a 
callback, the call representative recorded the person's name and 
preferred telephone number for the callback. There were also cases when 
a respondent from the cell phone sample asked to be called back on his 
or her landline. These respondents, if they completed the survey, were 
considered a completed interview from the cell phone sample. There were 
no respondent selection criteria for the cell phone sample; each number 
dialed from the cell phone sample was assumed to be a cell phone 
number, and each cell phone was assumed to have only one possible 
respondent to contact.
    The results of this survey reflect wireless phone users' experience 
with their current or most recent wireless phone service from the 
beginning of 2008 through the time they were surveyed. Not all 
questions were asked of all respondents. For example, questions about 
the prevalence of billing problems were asked only of respondents who 
indicated they were solely or jointly responsible for paying for their 
service. Additionally, satisfaction with wireless coverage for 
particular locations (i.e., at home, at work, and in a vehicle) was 
calculated only among respondents who indicated they used their 
wireless phone service in those locations.
    To identify the type and nature of problems consumers have 
experienced in recent years with their wireless phone service, we 
interviewed officials from the Federal Communications Commission (FCC), 
consumer organizations,\2\ national organizations that represent state 
agency officials,\3\ and state agency officials from three selected 
states--California, Nebraska, and West Virginia--representing utility 
commissions, offices of consumer advocates, and offices of attorneys 
general. We selected these states based on their various geography, 
populations, and region, and their varying approaches to providing 
wireless phone service oversight based on information obtained from 
national organizations representing state agency officials. We also 
interviewed officials from the four major wireless carriers,\4\ two 
selected smaller carriers that serve mostly rural areas,\5\ and 
wireless industry associations.\6\ In addition, we reviewed documents 
obtained from some of these sources and FCC's recent quarterly reports 
about consumer complaints. We also used the information obtained from 
these stakeholders to develop some of the questions in the consumer 
survey.
---------------------------------------------------------------------------
    \2\ We met with the national organizations AARP, Consumers Union, 
and the Council of Better Business Bureaus. We also met with The 
Utility Reform Network and Consumer Action in California.
    \3\ The National Association of Attorneys General, the National 
Association of Regulatory Utility Commissioners, and the National 
Association of State Utility Consumer Advocates.
    \4\ AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless.
    \5\ The two rural carriers, nTelos and Viaero, were selected 
because they operated in two of the states from which we interviewed 
state officials based on referrals from those officials.
    \6\ CTIA--The Wireless Association and the Rural Cellular 
Association.
---------------------------------------------------------------------------
    To determine how FCC addresses consumer complaints, we interviewed 
FCC officials about these activities and reviewed related documentation 
obtained from these officials. We also reviewed relevant laws, 
regulations, and procedures, as well as FCC's quarterly complaint 
reports, strategic plan, and budget with performance goals and 
measures. In addition, we reviewed the Government Performance and 
Results Act of 1993 requirements and our prior recommendations on 
performance goals and measures and determined whether FCC's efforts to 
measure the performance of its consumer assistance efforts are 
consistent with these requirements and recommendations.

    The Chairman. Thank you, Mr. Goldstein. You are right on 
time.
    Mr. Goldstein. Thank you, sir.
    The Chairman. We don't know how to adjust to that around 
here.
    [Laughter.]
    Mr. Goldstein. I have done this before.
    The Chairman. I want to beg my two colleagues, Senator 
Begich and Senator Warner, that Senator Wicker has to go to an 
important meeting, but he has somebody who is in the second 
panel, from his State, that he wishes to introduce, and I 
wanted to give him the chance to do so.
    Senator Wicker. Actually, I'm--I think what I'll do--I 
appreciate that, Mr. Chairman--is I'll attend a very brief 
meeting and come back, and I think I'll be able to mention my 
constituent from Mississippi at that point. Thank you, sir.
    The Chairman. Well, at least everybody knows how gracious I 
am.
    [Laughter.]
    Senator Wicker. We've known that for quite a number of 
years, Mr. Chairman.
    The Chairman. Senator Begich?

                STATEMENT OF HON. MARK BEGICH, 
                    U.S. SENATOR FROM ALASKA

    Senator Begich. Thank you, Mr. Chairman, and I will be 
leaving in just a few minutes because I have to preside on the 
floor.
    But let me, if I can, I have a couple of questions about 
this, and thank you for doing this work on behalf of the 
Committee. You had indicated in October, you'll be completed 
and final with recommendations.
    Mr. Goldstein. We expect by November, sir.
    Senator Begich. By November, I'm sorry, but with 
recommendations?
    Mr. Goldstein. That's correct.
    Senator Begich. Will that be--you had mentioned 
recommendations, I think to FCC, but also will you have any 
legislative recommendations, or is it really just focused on 
regulatory changes within the FCC?
    Mr. Goldstein. It's too early to really tell the nature of 
the changes. We will clearly have recommendations, I suspect, 
for FCC, but depending on the nature of our findings and 
results, we might have legislative recommendations, as well. We 
sometimes do.
    Senator Begich. And, can you tell me, just remind me from 
the report, the universe of survey that you used and what size 
of group and how did you do that, just very quickly.
    Mr. Goldstein. The survey was based on a national sample of 
1,143 randomly chosen Americans, all adults who use cell 
phones.
    Senator Begich. OK. Did you--in your process, did you 
identify within the survey sample, I'm trying to figure out how 
to say this, you know, when you do a survey sample--a political 
one--you're trying to get the demographics. In this case, the 
demographics are users--or types of companies that they use. 
Did you have any of that demographic data that you could use in 
this 1,100-plus sample? In other words, could you tell, you 
know, it's predominantly one company--or was it smaller 
companies, or anything of that nature?
    Mr. Goldstein. We did not include in our survey any 
questions about specific companies that the consumers used. It 
was more to get at the quality experience they've had in 
dealing with calls and locations and billing and things like 
that. But we did not specifically discuss companies.
    Senator Begich. Would you, through your process so far, do 
you think there--and I guess this is what I'm trying to get 
to--the second panel will have more of this discussion I think, 
because you have smaller carriers--or smaller companies and 
then large nationals. Will your survey show or have some 
discussion of any variance in how people feel about, you know, 
a national company versus a smaller company, that they get 
service from?
    Is that--do you see where I'm going? I'm trying to--because 
if you don't have that differential--if 1,100 folks have been 
surveyed, 1,100-plus, but it's all from predominantly one 
company or two companies, they might have one view versus a 
larger spectrum.
    Mr. Goldstein. I understand, sir. Since it was random 
across the United States, they had an equal opportunity really 
of getting picked up with any particular carrier. I recognize 
that some carriers are larger and have more dominant positions, 
but we did not account for that in the survey itself.
    Senator Begich. Is that something, as you get the analysis, 
you kind of put in the back of your mind as you're seeing the 
final analysis, if anything pops out of that nature? You know, 
even though you did it by geographic location, but in case 
something pops out, for example, in the Western States or--you 
know, I use Alaska, and the map is very interesting, it's very 
empty--share that with you.
    But I'd just be curious if you kind of keep that in the 
back of your mind as you're completing, if there are any 
regional differentials, based on customer response to your 
questions that you asked.
    Mr. Goldstein. Certainly, we will. We will probably be able 
to determine differences between urban and rural. The sample 
size population will not allow us to disaggregate to the State 
level, unfortunately.
    Senator Begich. No, but I mean like, Western States, South, 
and so forth.
    Mr. Goldstein. We will--we'll go back and see what we can 
do about that.
    Senator Begich. OK, just--and if it can be done.
    The other--you made me think of a thought here--in the--and 
you may not know this--but when the bills are sent out, is 
there a notification somewhere that's visible--I can't even 
remember on my bill--that if you have a concern or a complaint, 
that you can go to the FCC? Is that a requirement? It's not a 
requirement, is it?
    Mr. Goldstein. I don't believe it is, sir.
    Senator Begich. OK. Because your point was an interesting 
point, that so few don't--they don't know where to go, but if 
we're not telling them where to go, then they won't know where 
to go.
    Mr. Goldstein. Right, the----
    Senator Begich. If that's my simplistic way to say it.
    Mr. Goldstein. That's right. As we indicated, roughly 34 
percent of the sample, about 60 million people or so, did not 
know where to go. They did not know that they could go to 
anyone other than their carriers. And interestingly enough, we 
determined that 44 percent of the sample, which is roughly 90 
million people, contacted their carrier with a problem last 
year.
    Senator Begich. Wow. So, again, in your recommendations, 
those are the kinds of things you'll look for, to say what do 
we do to inform the customer better, how do we deal with early 
termination fees, which seem to be a big complaint by people, 
even though you've mentioned some things they are doing, some 
pro rata, and some other things. But, those are the efforts 
you'll lay out in your recommendations?
    Mr. Goldstein. That's correct, sir.
    Senator Begich. Very good. Well, thank you very much, and I 
appreciate the time and--it is very interesting reading the 
data points that you've laid out in your testimony, and your 
report also, at this point.
    Mr. Goldstein. Thank you.
    Senator Begich. Thank you.
    The Chairman. Senator Warner?

                STATEMENT OF HON. MARK WARNER, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Warner. Thank you, Mr. Chairman.
    And thank you, Mr. Goldstein, for your report. I used to 
know a little something about cell phones and wireless 
industry.
    I have just a couple of follow-up questions following along 
Senator Begich. Did your sample size allow you to determine--a 
respondent, whether there were other competitors--other 
wireless competitors? So, you know, were the incidents of 
complaints, in terms of quality of service or billing, higher 
in an area where there may only be a single--single provider, 
as opposed to a variety of competitive providers?
    Mr. Goldstein. I don't think we determined it, based on how 
many competitors. We didn't to a level that would allow us to 
determine how many specific competitors there were.
    Senator Warner. Mr. Chairman, I think that would be, you 
know--as we look at those areas, I know you've got quite a few 
unfortunate, kind of, blind spots in your State, and we've got 
some in my State, in South West Virginia where we don't have 
coverage. And, as I think we've often shown, where you don't 
have competition, the ability of a single provider to provide, 
perhaps, spotty service and spotty coverage is pretty high.
    I'd be very interested in knowing, one, if--if there was 
any way--and I guess you've already completed your survey, but 
I would have loved to have been in there on the drafting and 
say--one of the questions being to anybody who takes the 
survey--did you have any other competitive option in your 
marketplace, number one.
    Mr. Goldstein. We are doing a companion job, Senator, that 
we're starting shortly, looking at competition among cell phone 
providers, which may get into that specific area. But, we tried 
to focus this particular work solely looking at the experience 
that customers had.
    Senator Warner. But, my point being--my point being, that 
I--I would probably wager you a bet, having been in the 
business for 20 years, around wireless industry, that if you 
only had a single provider, the incidents of customer 
complaints would probably be higher than if there was some 
competitor that you could go to. So, I just--I think that would 
be a relevant fact.
    Mr. Goldstein. I think that's----
    Senator Warner. Second is, you know, one of the things 
that--when I used to be in the business, there was a big move 
toward bundling--bundling your charges in a single billing 
instrument and, you know, kind of offering an all-you-can-eat 
package or, a combined level of services that might be--your 
wireless services and other communications or entertainment 
services in a single bill. Were you able to determine whether 
the more bundled packages of--bundled billing packages had 
higher levels of complaints or was there any kind of analysis 
done of what type of billing package they got?
    Mr. Goldstein. We didn't, again, didn't get into that level 
of specificity, just because we had quite a number of questions 
and wanted to--had to obviously limit the amount of time we 
could spend with any one consumer. So, there were constraints 
to the number of questions that we could ask.
    Senator Warner. I know--and I know this is off subject, but 
I see that--since you're the Director of Physical 
Infrastructure, as we look at the development of the 700 
megahertz bandwidth, you know, which has--as we've seen since--
a lot of that has been traditional television broadcast, 
whether that might help us, in terms of some of the underserved 
areas, in terms of better coverage patterns.
    And I know Senator Rockefeller has got in his, again, his 
State, and coverage gaps, as we've got in ours, but how we--
I'm--I don't know about the Chairman, but one of my goals is to 
make sure that we get 100 percent wireless coverage in most of 
our communities. And I just wondered if you had any, kind of, 
comments or thoughts about----
    Mr. Goldstein. It's obviously a very important issue. I 
think it's something we will cover in this next part of work on 
competition, to try and understand just how this map--I think 
the map that the Chairman put up is very telling, and I think 
it would be a useful issue to focus on further, and I think we 
will.
    Senator Warner. Right, because there is, clearly within the 
existing wireless spectrum, you know, areas that are 
mountainous, areas with a lot of foliage, have a higher 
coverage or higher coverage constraints, whereas I think some 
of this new spectrum that has been allocated actually does a 
better job of penetration, and we might want to--we might want 
to address that.
    And thank you, Mr. Chairman, for bringing this hearing 
together.
    The Chairman. Thank you, Senator Warner.
    I'm going to take advantage of asking my questions, which 
I've not asked yet.
    I'm fascinated that you took a random survey in the first 
place. It would--it seems to me that almost, on its face, a 
random survey of the United States--let me call it the United 
States of America--without differentiation between peoples, 
places, densities, all the rest of it, is almost worthless.
    When you are trying to figure out what doctors should be 
reimbursed for Medicare, you study it very closely, you break 
the country down very closely. There is no such thing as a 
random survey and there will not be in the future.
    But a random survey on something which has grown so fast, 
which is so important to so many people, it may be that you 
were just caught, when you did your survey, by the fact that it 
was going right past you and you couldn't see it or you didn't 
have a chance to see it. Otherwise, it seems to me, there 
wasn't very good judgment, because you can't tell anything from 
a random survey, you can only tell from the specifics, which 
Senator Warner was referring to.
    Mr. Goldstein. I understand your concern, Mr. Chairman.
    Our goal in doing this was--it was our understanding, and I 
believe this is accurate, that there has never even been a 
random survey of Americans about the quality of their cell 
phone service and experience, that the information collected by 
FCC is insufficient to do that, and that industry data is 
pretty much proprietary, and that no one even attempted the 
effort that we did here today.
    And so, from that perspective, we felt that it was useful 
to at least get a benchmark for how Americans felt overall. 
There certainly can be additional efforts, but to achieve a 
random sample survey, we followed standard procedure that is 
done, and they typically are not broken out at this level, for 
the purposes that you are suggesting, which I believe are 
obviously worthwhile, and I think could be done. But, just to 
say, that wasn't initially the purpose of this work.
    The Chairman. You indicate you're going--you're undertaking 
another survey. Will that be----
    Mr. Goldstein. We're undertaking additional work. We have 
not determined yet, and I think we will in discussing with your 
staff and committees in the House that we're also doing this 
work for, exactly what the methodology we would use to do that. 
It may be that we do a survey, yes sir.
    The Chairman. But you said you were going to do a survey. 
You said you were going--in your testimony, you said you were 
going to do another survey.
    Mr. Goldstein. Sir, we have not made that decision. I don't 
think we----
    The Chairman. Well, then I think you should make that 
decision, and you should make that decision that it should not 
be a random survey, but a very specified survey----
    Mr. Goldstein. OK.
    The Chairman.--based upon very obvious factors, that is 
people, their ages, their incomes, their locations, their, you 
know, all the rest of it. It's not--it's not rocket science, 
but the results of it are incredibly important to telling the 
industry and the American people--should they be interested, if 
they want to complain, if they know where to complain--what 
they need to know.
    For example, it's statistically sound, on a national basis, 
to do that, take a random survey. But are the results of the 
GAO, representative of the experiences and opinions of 
residents of rural communities? You don't know the answer to 
that.
    Mr. Goldstein. That is correct, we do not know that. As I 
said, this particular survey was not designed to attain that 
information.
    The Chairman. Well, if by chance there is a next one, which 
I hope there will be, please make it that way.
    Mr. Goldstein. Certainly.
    The Chairman. Or else we won't know what to do.
    Just to finish up, according to your testimony, only 13 
percent of wireless phone users would complain to the FCC if 
they had a problem their carrier could not resolve. And 34 
percent of people do not know where they would complain. Now 
that's a bit gloomy, so my question to you is, to whom would 
the remaining 53 percent of the consumers turn, where would 
they turn?
    Mr. Goldstein. We do have a short list of where they would 
turn. We did ask. Thirty-eight percent would complain only to 
their wireless carrier, 34 percent did not know, 13 percent 
said they would complain to the FCC, 4 percent to the FTC, the 
Federal Trade Commission, 3 named another Federal agency or--
without actually saying what it would be--13 percent said they 
would complain to their State, 20 percent said the Better 
Business Bureau, and 4 percent said some other consumer 
organization.
    The Chairman. But on the other hand--I mean, I have read 
where people call up their--their radio stations and they call 
up their fire departments, or their police departments, trying 
to get help. Obviously they--they're not going to find any help 
there.
    Mr. Goldstein. Sure.
    The Chairman. So, they have to be the--they have to be the 
right kind of places and only the right kind of places that can 
give them help, because if they don't get help from the first 
place, they're not going to try again. And where you have 
people with relatively low incomes and relatively hard to reach 
places, that's a very serious matter.
    Well, I'm going to leave it there, but I think we have a 
lot of work to do. Again, I assume I'm right in saying this is 
the fastest growing industry in the United States. Am I right?
    Mr. Goldstein. It's among the fastest, I could not say if 
it's the fastest, but it's certainly rapidly growing, because 
the numbers we've talked about indicate that.
    The Chairman. So--so it would seem to me that logically, 
therefore, we would be at, particularly at this point and 
hopefully before, have been putting every single bit of focus 
onto how we can break this down to see if it's being done 
fairly, where we have to do more work, where we may have to cut 
out special efforts, or whatever, don't you think?
    Mr. Goldstein. I think that's absolutely useful.
    The Chairman. Thank you, sir.
    Mr. Goldstein. Thank you.
    The Chairman. Senator Klobuchar or Senator Warner? No, you 
already spoke.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much. Thank you, Mr. 
Chairman, for holding this hearing.
    Mr. Goldstein, as you're running through a people complaint 
to Senator Kerry, you just said, and the rest complain to Amy 
Klobuchar. I do think, as members of the Senate, we do get some 
of these stories and we're well aware of some of the issues 
that come up. They can go beyond your survey results.
    And personal experiences, as Senator Warner was relating, 
in dropped calls, just this weekend I must have had, probably 
five times when I was on the cell phone on major interstates 
where it dropped off. So, when we had our original hearing on 
this, we actually had one of the CEOs of one of the companies, 
and I showed a billboard from their company showing that they 
would have service to connect people around the world, and we 
showed a cell phone with no bars. So, there are problems still, 
and I think that lack of competition, as Senator Warner was 
pointing out, can lead to issues, that people don't really even 
realize they could get better rates or better service.
    Following up on what the Chairman said, this industry has 
changed so greatly back from the time that, you know, Gordon 
Gecko in the movie ``Wall Street'' had a cell phone the size of 
a briefcase. And now, there are 270 million subscribers, nearly 
20 percent of the people in this country only have cell phones, 
yet the rules really haven't changed.
    And that's why Senator Rockefeller and I introduced our 
bill last year on this--on cell phones. We are very happy that 
some of the changes were made. I think one carrier changed 
their early termination policies on the eve of the hearing that 
we had on the bill, which we greatly appreciated. And there has 
clearly been some improvements since that time, but as the 
Chairman noted, I think there is a lot of work to be done. And 
we were always aware of this issue with consumers not knowing 
where to complain to or what to do, and I think that was a 
helpful fact coming out of your survey.
    The complaints that I continue to hear, as I said, is 
that--this issue of early termination fees, I still hear it. I 
do note that according to your preliminary results, 42 percent 
of those surveyed, who wanted to, but ultimately did not switch 
services, found ETFs to be a problem. Were you surprised by 
that number, that it's that high?
    Mr. Goldstein. I was a little surprised by it. I'd thought 
that it would not be so. But, you know, it was indicated--19 
percent of phone users wanted to switch their service, and 
among the reasons they did not was the ETFs, and that 
represents about, almost 16 million people.
    Senator Klobuchar. Exactly, and I think what happens 
sometimes--again, it ties into that other issue of when you buy 
a phone and you're not quite sure whether the service is going 
to work or not, which is why part of our bill is to try to 
improve the information that consumers get when they can--when 
they buy service.
    But the second thing is, people move, they move jobs, and 
then suddenly their service doesn't work in that area, and it's 
very burdensome for them to--to try to change. And now we know 
that both Verizon and AT&T prorate new and renewed contracts by 
$5 a month, and this would mean that with a 2-year contract and 
a $200 ETF, a consumer would still have to pay $140 to get out 
of that contract, after the first year. And I think if you 
wonder why people are concerned about it, it's still not really 
evenly prorated as we would have liked to have done.
    And in fact, when you compare it to some local service, 
which for increasingly number of people it's their only phone, 
it's much more burdensome. So, that might be why you found that 
in your survey.
    The other thing I wanted to ask you about was the--the 
filing of the complaint. Now, 21 percent of the phone users who 
contacted their carriers' customer service were dissatisfied 
with how the carriers addressed their concerns, is that right?
    Mr. Goldstein. That's correct.
    Senator Klobuchar. How do you think we should let consumers 
know that the FCC is an avenue open to them? Do you have ideas 
for that?
    Mr. Goldstein. At this point we haven't completed the work, 
so I'm hesitant to talk about specific recommendations, but 
it's clear that, as my statement indicated, the FCC is not 
tracking their own performance in this area, there are no 
measures that they use to determine how satisfied cell phone 
users are with their actions in trying to help with carriers. 
It's also quite unclear exactly what it is FCC is trying to do, 
when you look at how they've established their process, and 
what they've told consumers. There are mixed messages on their 
website and in other venues about what it is consumers can 
expect from the FCC.
    And then, again, when combined with the fact that they 
don't know how that process is working and how they're helping 
consumers, it's difficult to really get a handle on it.
    I would also add, that one of the actions the FCC has said 
that they will do is act as mediators between cell phone users 
and carriers, however, this doesn't appear in the letters that 
users get or in any other place. So, it's a process that isn't 
working terribly well, it's inadequate still.
    Senator Klobuchar. That must be why our staff's been doing 
that a lot.
    Mr. Goldstein. I think you're doing that work for them, yes 
ma'am.
    Senator Klobuchar. We had a hearing yesterday with Julius 
Genachowski and a talk--he talked about the fact that he wants 
to make the website more accessible, and I think we will add 
that to his list of things to do, which is to make this piece 
of it more accessible. It's clearly an issue and I hope that 
that will be part of your recommendations as we go forward.
    I also think you identified--and I'm running out of time, 
here--but the fact that they weren't tracking which type of 
complaints, which would, again, be much more helpful as we 
shape policy on things like the dropped calls and the 
information. Because right now, it's very difficult to track 
what exactly the problems are. It's just more our own problems 
that we have and what we hear from our constituents.
    Mr. Goldstein. Thank you.
    Senator Klobuchar. Thank you very much.
    The Chairman. Thank you Senator Klobuchar. I really am 
fascinated by this FCC thing. I mean, you were asked, what are 
you doing to let people know where they should call? That's not 
your job, that's not your job. You put out reports, you study 
things, you don't say--take out TV ads, the rest of it.
    FCC has quite a lot of money and that is their job. It was 
like with the DTV thing, it was divided between them and NTIA, 
and between them they didn't do a horrible job. They didn't do 
a great job, but it could have been worse.
    Why do you think this is? I mean, it's going to change 
under Julius, I just know it is--I just know it is.
    Mr. Goldstein. Mr. Chairman, I would offer two points. 
We've done a lot of work on FCC over the years, and almost 
every single report we do--and I don't think I'm exaggerating--
we end up taking FCC to task for their planning and their 
performance measures and their data collection, whether it's 
the enforcement program, whether it's junk fax, whether it's 
DTV, or whether it's cell phone usage. FCC has not seemed, in 
the years we've been following them, to do a good job in 
collecting data and determining how to focus their mission and 
to plan.
    I know under previous Chairs, including the most recent 
Chair, there was ambivalence out of that office as to what 
their role was, with respect to consumers. And so, I think they 
don't, and have not in the recent years, set themselves up to 
see data collection and strong performance measures and 
management and understanding their mission and the transparency 
of that role, vis-a-vis the public to be terribly important, at 
least it certainly isn't exhibited in the programs we've looked 
at.
    The Chairman. Well, that certainly has to change. I believe 
there's one point where--if somebody wants to write their 
carrier, and the question is not spot on, in other words it 
doesn't locate exactly on something which the carriers is 
prepared--they simply don't respond, they just don't respond. I 
mean, this whole thing has to be--in this vast growing 
industry, with people communicating, industries depending upon 
it, the country depending upon it, the world depending upon it, 
we're just going to have to do a lot better job.
    With that, I'm going to yield the floor to Senator John 
Kerry, who will continue this hearing.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry [presiding]. Mr. Chairman, thank you very 
much. I appreciate it.
    I think we're going to call the second panel up at this 
point in time, and I appreciate, Mr. Chairman, your holding 
this hearing and the opportunity to focus on this particular 
aspect of the industry, the exclusive agreements in the 
wireless industry.
    So, if we could have the second panel just seamlessly seat 
themselves at the table. I'd like to ask each member of the 
panel if you'd summarize comments in about 5 minutes, and your 
full testimony will be placed in the record, as if read in 
full.
    While you take your seats, let me introduce this topic, if 
I can for a moment. First of all, we have a very distinguished 
panel here to give testimony on an issue that grows in 
relevance as wireless services become a much bigger part of 
everyday American life. Needless to say, amazing things are 
happening with wireless technology. My colleague on this 
committee, Senator Warner, who knows something about this 
field, tells a story about how when he was getting into the 
cellular business all the big money and smart money was saying 
it was going to take 30 years to build a wireless network, and 
how at the end of that period, only 3 percent of the country 
was going to have wireless phones.
    Well, obviously, that is not quite what happened. Today, 
there are about 270 million cell phone subscribers in America. 
Eighteen percent of all households rely solely on a wireless 
phone to communicate. And wireless phones are fast becoming the 
primary and preferred method of communicating, and they are 
also becoming indispensable to American life and business.
    The market share for smartphones, devices like the iPhone 
and the Blackberry, has grown from 12 to 23 percent of all 
handset sales over just the last year alone. And these phones 
are, as we know, far more like computers in our pockets than, 
like traditional telephones. And as this revolution continues, 
and as I listen to people in the field, it's clear that, you 
know, even further extraordinary things could happen, ranging 
from just being able to come home and take your Blackberry or 
iPhone, or whatever it is, and plunk it down in a port, and 
that port is going to manage a whole lot of things for you at 
home--conceivably, from the temperature of your home, to the 
lighting of the fire, to your bank accounts, and a whole bunch 
of other things.
    With that in mind, this panel is going to examine the 
growing trend of exclusive agreements that are being struck 
between the four largest wireless carriers and the manufactures 
of wireless handsets. These carriers account for roughly 90 
percent of all wireless subscriptions. And as a result of these 
exclusive agreements, their customers enjoy access to the 
latest and the greatest smartphones.
    Now, I assure you that what brings us to a hearing, is a 
genuine desire to have legitimate questions answered. My staff 
came to me, and a number of folks from different sectors of our 
economy came to me, raising questions about this. Some 
suggesting that some kind of legislative fix might be 
necessary. Frankly, I really am not sure; I don't know the 
answers to some of the questions that are linked to these 
issues. And so, this is really the best rationale for why we 
have hearings. It's to try to get those answers and to get them 
in a very public way.
    At the heart of this are a whole bunch of questions. Is it 
better or worse for competition? Is it better or worse for 
innovation? Is it better or worse for the American consumer if 
the carrier controls the decision over what devices can and 
can't operate on their network?
    More than 40 years ago, the FCC decided, in its seminal 
Carterfone case, that AT&T should not have that kind of 
control. For those of you in the room who are as old as I am 
and can remember it, before the Carterfone you were stuck with 
the old black Western Electric rotary phone that you rented or 
bought from AT&T. And the Carterfone ruling opened the wireline 
network, and in the years following that, we saw an explosion 
of innovation that included the fax machine, the computer 
modem, and the cordless telephone. The Carterfone decision, in 
the end, was good for consumers, it was good for the country, 
and it was good for business. It separated the network from 
end-use technologies.
    Similarly today, when you sit down at a computer and you 
access a broadband connection, you're not told by your 
broadband provider that you have to have a Dell or you have to 
have an HP or an Apple in order to access the network. And when 
you purchase a wireless phone in Asia or in Europe, you 
typically don't buy it through a wireless carrier, you purchase 
it separately from the manufacturer or from an outlet.
    So, the panel today is going to explore the issue of 
exclusive agreements in the U.S. market from both sides of the 
argument. And I want to thank our witnesses for their 
willingness to testify on this issue.
    I have to tell you, it was not easy to find witnesses 
willing to testify to the benefits of these exclusive 
arrangements. And so I greatly appreciate Mr. Roth's 
willingness to provide his perspective from AT&T, which has 
famously offered the iPhone exclusively on its network for 
several years now.
    I will tell you that we extended an invitation to every 
major handset manufacturer, and we were unfortunately turned 
down in every case. That actually raises more questions than it 
answers. And I must say, not a smart way to send a signal, 
frankly, but it does send a signal and I have read it the way 
I've read it.
    On Monday, I sent a letter to the FCC to Acting Chairman 
Copps, expressing concern over the issue, joined by Senators 
Wicker, Dorgan, and Klobuchar, all of whom serve on this 
Committee. And so, we will take the testimony today, with a 
view of really trying to learn about the impact on our economy 
and on competitiveness and innovation, regarding these 
practices.
    And we look forward to your testimony.
    Senator Warner. Mr. Chairman?
    Senator Kerry. Senator Warner.
    Senator Warner. Just a--I'm not going to be able to stay 
through the whole balance, so I just want to thank you for 
doing this hearing, because, you know, as we think about the 
next round of spectrum allocations and as we--and I think you 
accurately laid out the point that, you know, the benefits that 
the country had by having a common set of standards, which 
everyone could work off of. And this Balkanization that I think 
we're starting to see in this area, you know, I think you 
appropriately raise a great concern.
    If we would have had the same kind of forethought, for 
example, on another related area, in healthcare IT, we wouldn't 
have had the kind of Balkanized systems that now is requiring 
us to kind of come in after the fact and try to create common 
standards for healthcare IT. And I would really hate to see us, 
a few years from now, end up with a Balkanized, system-driven 
set of wireless communication systems that I think would 
actually put us at a competitive disadvantage against folks 
across the world.
    So, I'm going to listen to as much of the hearing as I can, 
but I really appreciate----
    Senator Kerry. Well, I appreciate that, particularly coming 
from you, Senator Warner, because you've got a lot of 
background in this and knowledge about it, so I would 
appreciate your participation and your comments.
    If we could begin. Mr. Roth, if you'd begin, and we'll just 
run down the table here. And again, we're very grateful to you 
being here. There really--this is inquisitive and I look 
forward to a good, healthy discussion. Mr. Roth?

                    STATEMENT OF PAUL ROTH, 
         PRESIDENT--RETAIL SALES AND SERVICE, AT&T INC.

    Mr. Roth. Thank you, Senator Kerry.
    Senator Kerry. You just pop it on there.
    Mr. Roth. And I'm a technical person.
    Senator Kerry. Let me just say, also, I apologize, but I 
have a previous commitment that's going to require me to leave 
around 4 o'clock and Senator Klobuchar has graciously accepted 
to chair at that point in time. So, we'll try and get as much 
in as we can prior to that.
    Thanks.
    Mr. Roth. Yes, sir. Thank you, Senator Kerry.
    My name is Paul Roth, and I'm the President of Retail Sales 
and Service for AT&T, and I do thank you for the opportunity to 
testify here today. I've been in the wireless industry for 
about 23 years, and that experience is the basis for my belief 
that exclusive device deals are really good for consumers. 
Although much of the interest of my testimonies can be related 
to the iPhone, I will direct most of my comments in that area.
    I believe that consumers benefit from exclusive device 
deals in three specific ways. They benefit from innovation, 
lower cost, and more choice. And in my 5 minutes, I'll expand 
on those and I'd be happy to answer your questions.
    First, exclusive deals lead to innovation of both devices 
and applications. In 2005, then-FCC Chairman Martin, challenged 
the U.S. industry, it challenged the industry saying that it 
lagged European and Asian nations in bringing innovation to the 
United States. And since, we've introduced more exclusive 
deals. What we've seen is the U.S. has become the leader in 
producing innovative devices like the iPhone and others. The 
iPhone is now sold in more than 70 countries worldwide, but it 
launched first in the United States in June of 2007, more than 
a year before it showed up in other countries.
    And innovation has been more than just devices. Apple's App 
Store on iTunes, has allowed consumers to personalize their 
devices and their lifestyle with more than 30,000 applications 
created, and more than a billion of them downloaded in less 
than a year. And people quickly went from, ``Is that an 
iPhone?'' to, ``What's on your iPhone?'' as it reflected the 
consumers ability to personalize the device for their own use.
    And other innovative high-speed touch screen devices 
entered the market in response to the iPhone. I don't believe 
this competitive response would have occurred, had it not been 
an exclusive device deal.
    Second, exclusive device deals lead to lower prices. 
Consumers pay well under what AT&T pays Apple for the iPhone. 
It's a standard U.S. industry practice, where the device is 
sold below its cost in return for a two-year agreement, for the 
subsidy that made the initial price possible is recovered over 
the term of the agreement. In the past 2 years that the iPhone 
has been exclusive to AT&T, the price of the iPhone has gone 
from $399 to $299--to $199, and just last week to $99, all 
while exclusive to AT&T. And with the iPhone at $99, prices of 
other devices, including other exclusive devices will drop and 
will continue--have dropped and will continue to drop in 
response to that.
    And exclusive device deals create competition and choice. I 
want to be clear, AT&T has an open network. You can bring any 
GSM-based device to the AT&T network today, we'll sell you a 
SIM card for $25, and you can work that device on our network.
    But, we also travel the world seeking partners who will 
create innovative devices and bring those to the U.S. We often 
ask for innovative features or design, which requires the 
manufacturer to create an entirely new product. And our 
requirements are often the catalyst for innovation.
    To build really new and innovative devices creates risk for 
manufacturers, and the manufacturers are seeking a partner to 
share that risk with them. They ask us to commit both technical 
and financial resources, and make volume commitments, all 
without the assurance that the device will be a success. AT&T 
competes with foreign carriers like Deutsche Telecom and 
Vodaphone for the attention of these manufacturers, to bring 
innovative devices first to consumers in the United States. 
It's not an accident that the iPhone launched first in the 
United States.
    We took a risk with Apple on the iPhone, that it would be a 
big success for consumers, and consumers were the ones who 
benefited from that. Because these innovative devices are 
exclusive, competitors are forced to innovate or risk losing 
customers. It's a cycle where consumers reap the benefits, and 
carriers and manufacturers carry the risk.
    There have been over 30 new smartphones that have hit the 
market to challenge the original iPhone since it debuted in 
2007. Let me repeat that again, there are more than 30 new 
smartphones, some dubbed iPhone killers, in direct response to 
the iPhone. And Apple, who started it all with the original 2G 
iPhone in June of 2007, followed in 2008 with an iPhone 3G, and 
just followed in--just this last week with the iPhone 3GS, each 
version better, faster, and less expensive than its 
predecessor, all while exclusive deals with AT&T.
    So, some will frame this issue as--whether it's fair to 
have exclusive deals or for how long they should be exclusive, 
as if these iPhone or other innovative devices would have 
occurred any way. Without exclusive deals, the iPhone and 
whatever follows next, may not have occurred. And I think 
consumers are the ones, ultimately, who would suffer from such 
a policy that would put those restrictions in place.
    Thank you for the opportunity to listen to my comments, and 
I welcome your questions.
    [The prepared statement of Mr. Roth follows:]

                   Prepared Statement of Paul Roth, 
             President--Retail Sales and Service, AT&T Inc.
    AT&T appreciates the opportunity to discuss the competitive 
dynamics of today's vibrant wireless industry and, in particular, the 
pro-innovation, pro-consumer model for bringing next-generation devices 
to the marketplace. My name is Paul Roth. I am AT&T's President for 
Retail Sales and Service. In that capacity, I am responsible, among 
other things, for ensuring that we provide the highest-quality 
experience possible to our wireless customers. I look forward to 
discussing these important matters with you.
    The wireless business has been one of the great success stories in 
all of American business, and the wireless industry of today represents 
a true bright spot in a weakened economy. Now, the industry is on the 
brink of another huge leap forward, as wireless carriers prepare to 
invest in even faster networks designed to take advantage of the next 
round of revolutionary devices and applications. Those multi-billion 
dollar investments would be put at risk and discouraged, however, if, 
as some have urged, the government were suddenly to reverse its pro-
investment, pro-competition policies and impose intrusive restrictions 
on these services or the way that service providers and manufacturers 
collaborate on next-generation devices.
Wireless Competition and Consumer Benefits
    Few businesses are more intensely competitive than today's wireless 
industry. According to the FCC's latest statistics, more than 95 
percent of the U.S. population lives in census blocks with at least 
three competing wireless carriers, and more than half of the population 
lives in census blocks with at least five competing carriers.\1\ The 
FCC continues to make additional spectrum available, and major new 
providers, such as Clearwire and the cable companies, continue to 
enter. As the FCC's detailed annual reports to Congress time-and-again 
confirm, the wireless marketplace is and will remain effectively 
competitive.\2\ In fact, as a recent study shows, the U.S. enjoys the 
least concentrated wireless industry of any major industrial 
country.\3\
---------------------------------------------------------------------------
    \1\ Thirteenth Report, Implementation of Section 6002(b) of the 
Omnibus Budget Reconciliation Act of 1993; Annual Report and Analysis 
of Competitive Market Conditions With Respect to Commercial Mobile 
Services, WT Docket No. 08-27,  2 (January 15, 2009) (``Thirteenth 
Report'').
    \2\ Thirteenth Report,  2.
    \3\ See The United States and World Wireless Markets: Competition 
and Innovation are Driving Wireless Value in the U.S., Presentation by 
CTIA--The Wireless Association at 6-7 (submitted in FCC WC Docket Nos. 
09-51, May 12, 2009) (``CTIA Study'').
---------------------------------------------------------------------------
    Because of this intense facilities-based competition, output 
continues to soar and prices continue to fall. There are now 270 
million wireless subscribers in the United States, and in 2008 they 
used more than 2.2 trillion minutes--a tenfold increase since 2000.\4\ 
At the same time, prices have declined precipitously. Revenue per 
minute has fallen 89 percent since 1994, and U.S. wireless prices are 
much lower than in any other major industrialized country in the 
world.\5\
---------------------------------------------------------------------------
    \4\ CTIA Study at 4, 9.
    \5\ CTIA Study at 3, 9; Thirteenth Report,  192.
---------------------------------------------------------------------------
    Consumers are also getting far more value for their wireless 
dollars than they did even a few years ago. Carriers, device 
manufacturers, and operating system and applications developers compete 
fiercely to provide consumers with an increasingly broad array of new 
features, functions and capabilities. This is especially true of 
wireless broadband services. Carriers have invested tens of billions of 
dollars in recent years to upgrade their networks to increase speeds 
and to support a wave of revolutionary new broadband devices and 
applications. Americans today do not just talk on their wireless 
``phones''--they surf the Internet, listen to music, send e-mails, edit 
documents, use GPS-enabled features, watch TV, play games, and much 
more.
    The wireless industry is just beginning to tap these possibilities. 
Seemingly every month a new and innovative wireless device bursts onto 
the scene, from the Amazon Kindle--a wireless e-reading device that 
does not even support voice calls--to wireless mini-laptop computers, 
medical monitoring devices, and specialized devices tailored to the 
needs of particular businesses. AT&T alone currently supports specialty 
devices from more than 100 manufacturers. Because of this intense 
competition and furious pace of innovation, wireless services are 
transforming American life.
    For its part, AT&T has responded to and, indeed, helped shape these 
industry dynamics by investing in its networks and offering its 
customers a broad array of high-quality services and options. AT&T has 
invested $38 billion in its wireless and wireline networks in the past 
2 years; AT&T's capital expenditures this year alone will exceed $17 
billion--more than any other company in America in any industry. AT&T 
has deployed 3G technology in almost 350 markets, and now has the 
fastest 3G network in the Nation. AT&T has established thousands of Wi-
Fi hot-spots across the country that provide free broadband 
connectivity to AT&T customers. In addition, AT&T offers an 
extraordinary variety of wireless devices, which give consumers a 
choice of capabilities and operating systems and thousands upon 
thousands of applications.\6\ And, AT&T has introduced a multitude of 
consumer-centric policies and product options, including, just to name 
a few, unlimited calling plans; pro-rated early termination fees; and 
the freedom and capability to download virtually any application 
without restriction from the Internet, including the more than 4,000 
applications that have been created by third-party developers who have 
worked with AT&T to optimize those applications for the AT&T network. 
In fact, it is AT&T policy that customers may use their own compatible 
wireless devices on the AT&T network.
---------------------------------------------------------------------------
    \6\ See www.att.com/choice. iPhone users alone have downloaded over 
1 billion applications from the iTunes applications store in its first 
year of its existence.
---------------------------------------------------------------------------
    This multitude of consumer benefits is due to a single factor: 
competition in the wireless marketplace is white hot. If government 
continues its thoughtful policies that allow the vibrant marketplace to 
work, wireless carriers will compete even harder in the coming years to 
build the wireless broadband networks of the future and to find ways to 
increase value for their customers. If, on the other hand, government 
were to impose a new set of restrictions on these services, carriers 
would be able to undertake fewer of those risky, multi-billion dollar 
investments--which, in turn, could well stymie any economic recovery. 
Neither Congress nor the FCC should try to ``fix'' one of the few 
things in the American economy that is not broken.
Exclusive Handset Distribution Arrangements
    Calls for the government to dictate the terms of contracts for 
handset distribution between device manufacturers and carriers should 
be rejected. The reasons for this are simple and compelling: the 
current business and regulatory framework--which allows service 
providers and device manufactures to partner and share risks to develop 
the most compelling devices--ensures innovation, lower prices, and 
choice. Regulations that would prohibit or nullify these critical 
partnerships would serve only to harm consumers, as devices would 
devolve into the lowest common technological denominator and the key 
pillars of wireless competition would evaporate.
    Wireless carriers battle fiercely to attract and retain customers. 
Each carrier strives to differentiate its offerings from those of its 
rivals by offering more attractive service plans, improved coverage and 
service quality, innovative features and content, and a mix of handsets 
that it believes will best meet consumers' widely varying needs. And, 
as is common in highly competitive industries, wireless competitors 
sometimes seek to set themselves apart through exclusive offerings--
i.e., a wireless carrier may ink a deal with a like-minded manufacturer 
to be the exclusive distributor of a new handset in the hope that it 
will prove popular.
    It is widely recognized in economics and the law that such 
exclusive distribution arrangements, which have been a feature of the 
U.S. wireless marketplace since its inception, promote innovation, 
product differentiation, consumer choice and competition. Exclusive 
handset distribution arrangements encourage the necessary collaboration 
that optimizes handset performance and accelerates the delivery of 
next-generation features. They increase a carrier's incentives to make 
purchase commitments and to invest in promotions, network improvements 
and special training of sales staff. They lower manufacturer entry 
barriers and serve as a key tool to maintain brand value. And, as an 
important form of competition, they encourage other carriers and 
manufacturers to do better, by improving their own handset portfolios 
or the prices, features and other characteristics of their existing 
offerings.
    Against this backdrop, it should be obvious that consumers would be 
the ultimate victims of any prohibition on exclusive handset 
arrangements; indeed, there is no clearer proof of this than the iPhone 
arrangement, the success of which is exactly what has spawned calls for 
bans on exclusive arrangements. There is, quite simply, no more 
dramatic example of an exclusive arrangement creating enormous benefits 
for all consumers. The popularity of the iPhone and its innovative 
features and applications has provoked an unprecedented competitive 
frenzy, palpably accelerating not only handset innovation, but also the 
pace of wireless broadband investment and applications development. 
Before the iPhone, mobile handheld ``computers'' tended to be clunky, 
expensive devices with traditional applications; now, the marketplace 
is awash with innovative devices that allow consumers to do things that 
no one even imagined only a year earlier and that cost consumers less 
than their more limited predecessors.
    Indeed, not 2 weeks ago Palm deployed just the newest potential 
``iPhone killer,'' called the ``Pre,'' which is provided exclusively by 
Sprint. Early reviews of the device are positive. Since the Pre's entry 
into the market, not only has Apple announced the introduction of an 
upgraded iPhone--the iPhone S--that will go on sale this week, but also 
AT&T has reduced the price of the currently available iPhone 3G to just 
$99.00.\7\ It is the ability of carriers to partner with device 
manufacturers to bring to market new devices that allow for competitive 
differentiation that sparks the virtuous cycle of innovation and 
response.
---------------------------------------------------------------------------
    \7\ Should there be any doubt about the importance of this price 
move, one need only consider its impact in Detroit, arguably the city 
hardest hit by the current recession. Not surprisingly, sales of all 
devices, including the iPhone, have been relatively harder to come by 
in Detroit. Once we reduced the price of the iPhone 3G to $99.00, 
however, we rapidly sold out our inventory in Detroit. The point: 
innovations of all kinds matter, even pricing innovations. Now, the 
best device is a realistic option for the mass market even in 
economically hard hit Detroit.
---------------------------------------------------------------------------
    With the benefit of hindsight it is easy to view the iPhone as only 
a great boon for AT&T and Apple. In truth, both companies risked a 
great deal and success surely was not guaranteed. Put differently, the 
success of the iPhone was not an accident; it was the culmination of a 
deep collaboration between AT&T and Apple that spanned years, not 
months, and led to revolutions in the wireless industry. One notable 
example of this collaboration was the ability of iPhone customers to 
activate their phones and initiate service simply by logging onto Apple 
iTunes. For customers, this was a boon, and for the industry it was a 
game-changer. But it only happened because AT&T and Apple committed the 
money, resources and countless hours necessary to develop and 
synchronize the systems and software that enable it. It is highly 
unlikely either that Apple would have been willing or able to devote 
the resources necessary to enable the process with dozens or even a few 
providers, or that AT&T would have risked this time, talent and money, 
just to see the iPhone available to its competitors.
    Notably, another AT&T collaboration on a wireless device evidences 
the very real risks of failure that faced the iPhone. AT&T teamed with 
Motorola and Apple to develop a robust wireless device that would also 
include direct access to iTunes and store up to 100 songs. The 
companies made significant investments, heavily marketed the device, 
and fully anticipated that it would be a game-changer. It was not. 
Despite all the effort, the Motorola ROKR E680 simply did not connect 
with consumers and failed in the marketplace. It also drove customer 
defections from AT&T, and is just one of many examples of seemingly 
promising but ultimately unavailing attempts to compete--examples that 
are rarely talked about and almost never drive calls for regulatory 
reform.
    Thus, those now calling for bans on exclusive arrangements--and 
even government abrogation of existing contracts--should ask themselves 
whether they would be just as willing to repay wireless carriers and 
handset makers that took risks on new handsets that did not pan out as 
expected. The answer is, of course, no. And there is likewise no 
conceivable basis to conclude that it would be in the ``public 
interest'' to forgo future opportunities to unleash market forces 
through exclusive distribution arrangements: heavy-handed intervention 
in manufacturer and carrier choices would dramatically decrease the 
chances that consumers would reap the pro-competitive benefits of the 
next iPhone or whatever other as-yet-unimagined handset innovation is 
on the horizon.
    Finally, even if public policy was concerned with protecting small 
competitors from competition, rather than protecting competition and 
consumers, claims that exclusivity prevents smaller wireless carriers 
from obtaining desirable handsets on terms that allow them to remain 
competitive are simply false. In fact, an entire industry has developed 
for the wholesale distribution of wireless handsets to smaller 
carriers. These wholesale distributors buy in bulk, operate worldwide, 
and plainly have the clout to obtain favorable terms for popular 
handsets from the scores of manufacturers that compete in the 
vigorously competitive global handset market. Thus, even the smallest 
carriers offer dozens of handsets, from basic voice phones to the 
highest of the high end, including ``smartphones'' from multiple 
manufacturers that include the latest features. And smaller carriers 
also can (and do) band together to obtain their own handset exclusives. 
For all of these reasons, exclusivity provides enormous consumer 
benefits and results in devices and innovations that would not 
otherwise be introduced.

    Senator Kerry. Thank you very much, we appreciate it.
    Mr. Rooney?

 STATEMENT OF JOHN E. ROONEY, PRESIDENT AND CEO, UNITED STATES 
                      CELLULAR CORPORATION

    Mr. Rooney. Good afternoon, Mr. Chairman.
    Senator Kerry. Can you push the mike and pull it toward 
you?
    Mr. Rooney. Is it on?
    Senator Kerry. If there's a light on it, it's on. If the 
light goes on----
    Mr. Rooney. Yes, there we go. It was on.
    Senator Kerry. And pull it toward you, if you would, 
please.
    Mr. Rooney. I'm sorry.
    Senator Kerry. Can you pull it toward you? Thank you.
    Mr. Rooney. Good afternoon, Mr. Chairman. It's a privilege 
to appear before you and the Committee today. My name is John 
Rooney and I'm the President and Chief Executive Officer of 
U.S. Cellular. We are the fifth-largest wireless carrier in the 
United States, serving over 6.2 million customers.
    I'm here to talk about the wireless industry's current 
reality. Four wireless carriers have hijacked consumer access 
to handset technology. These dominant wireless carriers are 
leveraging their economic might, to obtain from handset 
manufacturers the right to be exclusive distributors of the 
handsets most desired by consumers. These arrangements deny 
consumers the ability to select a handset, access popular 
software applications, and use it on a network of their 
choosing.
    The biggest problem is the market for higher-end, iconic 
phones, and smartphones that are essentially a little computer 
in your hand, such as Blackberry Storm, and the iPhone. 
Smartphones represent the fastest growing segment of the 
industry. As our Nation commits itself to an aggressive 
deployment of broadband to serve all Americans, it is vitally 
important that we get the issue of access to mobile wireless 
handsets right.
    Exclusive arrangements are especially damaging to rural 
citizens, because oftentimes the biggest carriers don't offer 
any service at all, and so the product is unavailable to that 
consumer. When rural consumers buy an exclusive phone from one 
of the bigger carriers, they frequently must accept an inferior 
network as a tradeoff, a tradeoff no consumer should be 
compelled to make.
    There is harm in urban areas as well. Consumers who desire 
an iPhone or a Blackberry Storm Smartphone, cannot use it on 
our network, even if they prefer our service. We do not 
understand how the public can possibly be served by such a 
practice.
    If you take away nothing else from this meeting, I want you 
to understand, a central goal of policymakers should be to 
enable consumers to buy the handset they want and choose the 
service that best suits their needs. We think the anti-consumer 
effects of handset exclusivity must be examined in a broader 
context, to include the entire relationship between these 
dominant carriers and their handset manufacturers.
    Even without exclusiveness, the ability of the dominant 
carriers to manipulate the handset manufacturers through their 
purchasing power, to the detriment of all consumers, should be 
of concern to the Committee.
    Under the Telecommunications Act, it is illegal for 
carriers to engage in unreasonable and discriminatory 
practices. We ask you to direct the FCC to use these tools you 
have already given them, to protect consumers from the harms 
created by exclusive arrangements. Monday's bipartisan letter 
was a good start.
    Now, let me address a few of the objections addressed in 
this problem that we have heard from the biggest carriers. I 
have heard that exclusive arrangements drive innovation. This 
is counter-intuitive. Every manufacturer desires to sell its 
products to the widest possible audience. If handset 
exclusivity did not exist, would any manufacturer refuse to 
invest in great devices, knowing that there's currently a 
handset market of nearly 300 users in the United States. Any 
handset maker that invents a great device, receives 
intellectual property protection, and that confers a tremendous 
financial incentive to build a winning product.
    Others have argued that removing handset exclusivity will 
kill the incentive to invest risk capital in the handset 
market. I cannot identify a single market, as large as the U.S. 
wireless handset business, that needs exclusive dealing to 
attract risk capital on investment. When you overlay both 
European and Asian markets available to handset manufacturers, 
this answer becomes even more problematic.
    Turning to the iPhone, Apple does not require their 
customers to connect their computers only to the ISP of the 
manufacturers' choice, and who would accept such a proposition 
for their laptop or personal computer? Well, that's precisely 
what's happening in this sector. You should not approve of 
arrangements that limit a wireless consumer's ability to choose 
what is essentially a handheld computer.
    I've been part of the mobile and wireless industry for over 
15 years, and until recently, both carriers and handset 
manufacturers thrived without exclusive arrangements. I believe 
it is no coincidence that the growth in exclusive arrangements 
occurred in concert with the acquisition binge of this decade, 
and the resulting consolidation of market power in the hands of 
a few.
    In closing, we understand that simply banning exclusivity 
arrangements is not the complete answer. We ask you to look 
carefully at the bigger picture, the fact that the wireless 
industry consolidation enables the largest carriers to dominate 
the product supply chain in ways that harm consumers.
    Mr. Chairman, thank you for your interest in this important 
issue, and I'm happy to answer any questions.
    [The prepared statement of Mr. Rooney follows:]

       Prepared Statement of John E. Rooney, President and CEO, 
                   United States Cellular Corporation
Introduction
    Good afternoon, Mr. Chairman and members of the Committee. I am 
John Rooney, President and Chief Executive Officer of United States 
Cellular Corporation. Thank you for the opportunity to appear before 
you today. My testimony addresses why the Federal Communications 
Commission must examine wireless carriers' handset exclusivity 
arrangements and impose restrictions on these practices. These 
arrangements harm consumers in rural areas and decrease competition 
nationwide and do not enhance innovation.
    Expanding wireless broadband services is an important public 
policy, and the dominant carriers' handset practices should not be 
allowed to continue impeding this goal. We also ask the Committee to 
examine the business practices of dominant carriers in a broader 
context, to protect robust competition and ensure that consumers have 
the ability to choose the handset and the network that best suit their 
needs. We think the bi-partisan letter from some members of this 
Committee of earlier this week to the FCC requesting expeditious 
examination of the issue and decisive action if such arrangements are 
found to unfairly restrict consumer choice or adversely impact wireless 
competition is a really good step.
Wireless Marketplace
    U.S. Cellular provides wireless services in nearly 200 markets 
located in regional clusters across the country. We serve many of the 
states represented on this Committee, including: West Virginia, Texas, 
Maine, California, Kansas, Minnesota, Missouri, Nebraska, Virginia, and 
Washington. The overwhelming majority of the geography we serve is 
rural.
    We continue to expand our network to increase coverage, call 
quality and the availability of broadband services. In 2008, U.S. 
Cellular deployed new cell towers to bring wireless service to unserved 
and underserved areas in every state where we provide service. As we 
aggressively upgrade our CDMA networks with third-generation technology 
(EVDO rev-A), we have been or are likely to be the first provider of 
broadband wireless services in many rural markets.
    Satisfying customers with excellent network quality and customer 
service is central to U.S. Cellular's operations. For the seventh 
consecutive time, U.S. Cellular received the J.D. Power and Associates 
award for overall call quality in the North Central Region. Moreover, 
people in our service areas increasingly look to our network for 
advanced wireless services, as shown by the 36 percent increase in our 
data revenues in the most recent quarter.
    U.S. Cellular serves over 6.2 million customers, making us the 
country's fifth largest wireless carrier. Yet, we are tiny compared to 
the two wireless industry giants--Verizon Wireless is about 14 times 
our size, and AT&T is about 13 times larger. Together, these two 
dominant carriers account for about 60 percent of subscribers 
nationwide. The next two leading carriers are part of the excessive 
concentration in this industry--Sprint Nextel is over 8 times our size, 
and T-Mobile is over 5 times larger. These four carriers, which 
collectively hold a 90 percent market share, have come to dominate the 
industry not through superior network quality or efficiency, but rather 
because the FCC and Justice Department approved a long string of 
acquisitions in this decade.
    Despite their size and huge spectrum holdings, the ``Big Four'' 
carriers have decided not to serve many rural areas. These carriers 
focus on providing service in densely populated urban areas, and their 
coverage is much more limited in rural areas, especially away from 
major highways. For example, many rural residents of Alaska, Arizona, 
Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New 
Hampshire, New Mexico, North Dakota, South Dakota, Utah, West Virginia 
and Wyoming are not served by AT&T network facilities. Many rural 
residents and businesses look to U.S. Cellular and other smaller 
carriers to provide them with important voice and data wireless 
services to raise their productivity, give them access to public safety 
and health care services, and improve their quality of life.
Handset Exclusivity
    One manifestation of wireless market concentration is the ability 
of dominant carriers to tie up almost all of the most advanced, 
attractive handsets through exclusive arrangements. While U.S. Cellular 
sells about 3 million handsets annually, each of the two largest 
carriers sell that many in 4 weeks. The ``Big Four'' exert their 
enormous buying and marketing clout over handset manufacturers. 
Recently, nine of the ten most popular handsets were offered 
exclusively by one of the ``Big Four'' carriers.
    In rural areas where none of the ``Big Four'' carriers offers 
service, their exclusive handsets are simply not available to consumers 
at any price. Where the ``Big Four'' have built networks, people who 
want to use Apple's iPhone have to sign up for service with AT&T and 
people who want Blackberry's Storm have to take service from Verizon 
Wireless, even if their prices, network quality, and customer service 
levels do not measure up to their competitors.
    The handset exclusivity period negotiated by the dominant carriers 
is often 5 years or, in some cases, for the lifetime of the device. In 
some cases they apply to handsets not yet developed. Handset 
technologies and features are advancing rapidly, with the lifecycle of 
handsets averaging about twelve months after initial commercial 
offering. Consequently, even an exclusive period of 6 months--together 
with the 5 or 6 months needed to test and launch a handset on another 
network--can greatly impair the availability of that handset through 
other carriers.
    As I will explain, the dominant carriers' handset practices harm 
consumers in rural areas and decrease competition nationwide. The 
remainder of my testimony is organized in three sections: (1) harms to 
rural consumers and broadband expansion; (2) decreasing competition 
nationwide; and (3) actions the FCC should take to promote the public 
interest.
1. Harms to Rural Consumers and Broadband Expansion
    The four dominant wireless carriers have locked-up almost all of 
the advanced, highly desired devices. Consumer harms from these 
practices are especially severe in rural areas. Since the ``Big Four'' 
carriers have decided not to build high-quality networks in many rural 
areas, many rural residents cannot use some or all of these advanced 
handsets. Inability to use the best devices impairs business 
productivity and quality of life for rural residents.
    Although U.S. Cellular and other smaller carriers are aggressively 
expanding their networks and broadband wireless deployment, they cannot 
offer certain handsets. Many rural consumers are left unsatisfied by 
inferior wireless service from the ``Big Four'' and an inability to 
access the most desirable devices from competitors.
    In rural areas where one of the ``Big Four'' carriers provides 
service, it can attract customers to its exclusive handsets and 
services even with higher prices and inferior network coverage. The 
handset advantage dulls a Big Four carrier's incentive to invest in 
improving its service quality and network coverage in rural areas. 
Moreover, a decision to invest in network facilities that can deliver 
advanced services is greatly complicated when you cannot offer the most 
advanced handsets to attract customers.
    Despite the public policies and programs supporting comparable 
telecom services in urban and rural areas, the dominant carriers are 
consigning rural businesses and residents to second class status for 
some handset-enabled capabilities. We are not talking about just 
sleeker cases or cooler video games. For example, some leading 
education applications for medical professionals and students are only 
available to AT&T's customers through the Apple iPhone. These 
applications and features are not available in many rural areas, even 
though smaller carriers serve those areas and are eager to provide the 
most advanced services there.
    Congress is to be commended for expanding rural broadband wireless 
services via the American Recovery and Reinvestment Act of 2009. This 
legislation wisely provides grants through the Departments of 
Agriculture and Commerce for broadband wireless infrastructure 
projects. These projects are vital for the economic health of rural 
areas and for the economic recovery of the entire nation. Additionally, 
they can contribute to rural education, health care, public safety 
services and quality of life. However, infrastructure projects alone 
will not bring the most advanced wireless broadband services to rural 
areas. The Federal Government must ensure that rural citizens have 
reasonably comparable choices in telecommunications products and 
services. This hearing is an important step in eliminating the 
detrimental effects on rural areas of the dominant carriers' handset 
exclusivity arrangements.
2. Decreasing Competition Nationwide
    While rural areas suffer particularly severe harms from handset 
exclusivity arrangements, these practices hurt businesses and consumers 
in markets nationwide by lessening competition in wireless services. 
Smaller carriers are drivers of wireless competition and innovation, 
but are handicapped by these practices. There is no evidence showing 
that these practices create significant pro-competitive benefits.
    Congress recognized the competitive importance of smaller wireless 
carriers in directing the FCC to disseminate licenses among a wide 
variety of applicants and to avoid excessive concentration of licenses. 
Wisely, Congress sought to avoid the harms to consumers and the Nation 
from an oligopoly in this critical industry. Nevertheless, the FCC has 
approved a series of transactions and rules leading to domination of 
the wireless market by just four carriers. And among those four, two 
are exerting increasing power with each acquisition. These carriers 
have recently leveraged their huge subscriber bases and dominant 
spectrum holdings to obtain exclusive distribution arrangements for 
almost all of the hottest handsets. While several smaller carriers have 
been acquired by the Big Four, there are many markets where other 
smaller carriers remain significant competitors, many markets where 
smaller carriers are expanding their networks, and many markets where 
smaller carriers are entering.
    Smaller carriers like U.S. Cellular have been able to achieve 
excellent network quality and offer competitive prices. In part, our 
success in building competitive networks in rural areas has been a 
direct result of our participation in the Federal Universal Service 
program. We have used Federal universal service funds to build cell 
sites and improve network quality in rural areas that would not 
otherwise receive such investments. The increased competition in the 
areas where we are building networks has delivered tremendous consumer 
benefits including:

   Improved health and safety through our CDMA technology's 
        superior E-911 accuracy, along with improved coverage enabling 
        critical and sometimes life saving calls to be placed;

   Improved economic development opportunities in every area 
        where businesses need mobile wireless services to improve 
        efficiency and productivity;

   Lower prices as a result of our wider local calling areas, 
        enabling many rural citizens to avoid expensive toll charges on 
        competing networks;

   Increased availability and improved telecommunications 
        services encourages all other carriers to improve service 
        quality; and

   Job creation in two areas: (1) jobs created by the 
        construction and operation of new network facilities, and (2) 
        jobs created through the ``multiplier effect'', that is, the 
        presence of a mobile wireless network driving secondary 
        investments from industries that use our technology.

    Economic development benefits described above will increasingly 
require a smartphone, which is capable of voice, messaging, and 
Internet access. Many businesses increasingly rely on applications 
available over the Internet, which cannot be accessed on a traditional 
telephone device. It is frustrating for rural consumers to be denied 
the ability to purchase the best smartphone devices and place them on 
the network that delivers the best coverage. It scarcely bears mention 
that network quality is important to a business user. Unfortunately, 
the Big Four's control over the most advanced, attractive handsets has 
made it significantly harder for smaller carriers to attract and retain 
subscribers, and to effectively compete in rural areas, even with 
Federal universal service support.
    Our perspective that the ``Big Four'' carriers have less interest 
in providing high-quality service to rural communities is borne out by 
our experience. We know that in almost every area where we are 
investing Federal universal service funds, our network quality is 
superior. Beyond just our experience, however, it is important for the 
Committee to understand that at a time when we are experiencing the 
worst economic crisis since the Great Depression, a time when job 
creation and business investment are critical to helping citizens, 
Verizon Wireless and Sprint have voluntarily agreed to withdraw from 
receiving Federal universal service support as a condition to approval 
of large merger transactions.
    What is the takeaway from these actions? From our perspective, 
these carriers may wish to free themselves from the additional 
regulatory burdens associated with the receipt of universal service 
support, a valid motive if their business plan does not include 
providing high-quality service throughout the rural areas where their 
universal service obligations attach. Our problem is not their choice 
to forego universal service--it is that we cannot offer the best 
devices to consumers in areas where we are providing the best network 
quality.
    In this respect, our parochial business interest aligns with the 
interests of rural citizens, who are paying into the Federal Universal 
Service Fund and deserve to have the benefits of telecommunications 
services that are reasonably comparable in quality and price to those 
available in urban areas. I understand that this is what Congress 
intended, and that is why we are here. If these practices are allowed 
to continue, competition in many markets will fall and consumers will 
pay more for inferior network services.
    Of course, the dominant carriers have proclaimed that their 
exclusive handset arrangements foster innovation and competition. The 
experience of U.S. Cellular in about 200 markets across the country 
does not bear out these claims. Moreover, it is counterintuitive that 
handset manufacturers with access to a customer base of over 300 
million users in the United State alone, would want or need exclusive 
arrangements that limit the pool of potential customers who can buy 
their products. In fact, we cannot identify a single market the size of 
the U.S. handset business that requires exclusive contracts to improve 
innovation and competition.
    This Committee would not approve if a rural customer could not buy 
an Apple computer because it could only be connected to a particular 
Internet Service Provider that did not serve that customer's home. We 
see no reason for a different result in the mobile wireless industry. 
Moreover, handset exclusivity for Smartphones is just the beginning. We 
are already seeing exclusivity arrangements being used in the market 
for netbooks, and if Congress takes no action it will likely spread to 
other device categories as they are invented.
    Consumers would benefit if smaller carriers could offer the most 
attractive handsets and compete with the dominant carriers on the basis 
of network quality, customer service and price, as well as handset 
features. Our subscribers who have enjoyed our leading network quality 
and customer service would not have to choose between, (a) inferior 
service but the hottest handsets from another carrier, or (b) remaining 
with U.S. Cellular but using a less productive set of handset-enabled 
applications and features. Additionally, manufacturers would be driven 
to innovate by rapid distribution to the entire base of nearly 300 
million handset buyers, including our 3 million sales annually.
    Dr. William P. Rogerson (Professor of Economics at Northwestern 
University and Chief Economist of the FCC in 1998-99) recently examined 
the arguments and available evidence on this issue. In an economic 
analysis filed at the FCC in February 2009, he found no evidence 
showing that any of the ``Big Four'' carriers played a significant role 
in advancing handset technology. In particular, he concluded that AT&T 
played almost no role in developing the iPhone, and that the carrier 
likely made relatively insignificant network and other investments to 
support this innovative handset.
    As wireless markets have become increasingly concentrated, this 
handset exclusivity (along with decreased roaming opportunities, high 
special access rates and certain other practices) has emerged as a 
major threat to competition in markets nationwide. In the next section, 
I describe the actions that the FCC must take to address this threat.
3. Actions the FCC Should Take to Promote the Public Interest
    U.S. Cellular supports the petition for rulemaking filed by the 
Rural Cellular Association (RCA) at the FCC over one year ago. Along 
with consumer groups and most wireless carriers, we urged the FCC to 
commence a rulemaking proceeding to examine the effects on consumers of 
exclusivity arrangements between wireless carriers and handset 
manufacturers, and to adopt rules necessary to promote the public 
interest in competition, innovation and expansion of broadband 
services. There is convincing evidence in the record demonstrating the 
need for the FCC to take these actions. Moreover, we agree with RCA's 
position that the FCC has authority under the Federal statute to 
prevent carriers from engaging in unreasonable or discriminatory 
practices. We applaud the letter of earlier this week from some members 
of this Committee urging the FCC to investigate handset exclusivity 
arrangements to protect consumers.
    To date, the FCC has not commenced a rulemaking or restrained the 
dominant carriers' harmful handset practices. While this petition has 
been pending, the FCC approved further industry consolidation for the 
dominant carriers, via acquisitions by Verizon Wireless, AT&T and 
Sprint. Two pending transactions would add about 2.6 million 
subscribers for AT&T. During this period, as the dominance of the ``Big 
Four'' increased, they have locked-up almost all of the hottest new 
handsets, including exclusives for AT&T on new models of Apple's 
iPhone, for Verizon Wireless on the Blackberry Storm, for Sprint on the 
Palm Pre, and for T-Mobile on the Samsung Behold. Rural areas and 
smaller carriers are suffering from the increased consolidation and 
these handset practices.
    The last time that the FCC looked at wireless carriers' exclusive 
dealing contracts with handset manufacturers was in 1992. The FCC 
decided that it had the statutory authority to regulate such dealings, 
and promised ``if in the future, it comes to our attention that 
carriers' exclusive distribution agreements with [handset] 
manufacturers are resulting in anticompetitive abuse, we will not 
hesitate to revisit this area.'' Not only has the FCC received 
extensive evidence of anticompetitive abuses in response to the RCA 
petition, but also the changes in the marketplace warrant prompt re-
examination by the FCC.
    Subscribers to cellular and similar services have grown from 11 
million in 1992 to over 270 million in 2008; each of the two largest 
carriers now annually sells handsets in volumes that are about four 
times greater than the total number of cellular subscribers in 1992; 
these two carriers have through acquisitions come to control about 60 
percent or more of handset sales nationwide; wireless devices and 
services have become critical for business productivity, health care, 
public safety and other services; about 41 percent of consumers are 
likely to choose a smartphone for their next mobile device, according 
to a recent survey; and access to the most advanced handsets is 
important to achieving rural wireless broadband expansion and 
competition in markets nationwide.
    The FCC's regulation of landline carriers' practices regarding 
customer equipment has been an unquestioned success in spurring 
competition, innovation and consumer satisfaction. Congress should 
direct the FCC promptly to examine wireless carriers' practices in 
handset exclusivity and take necessary actions to promote the public 
interest.
Conclusion
    I am pleased that this Committee is devoting its attention to the 
emergence of exclusive handset arrangements for the four dominant 
wireless carriers, and appreciate the opportunity to testify today. By 
leveraging their market dominance in negotiations with handset 
manufacturers, the largest wireless carriers are locking-up almost all 
of the most advanced, attractive handsets for many months or years. 
These practices deprive rural areas of leading handset-enabled 
applications and features, and impede the productivity of rural 
businesses, important services to rural residents and the expansion of 
broadband capabilities. Furthermore, these practices impair competition 
in wireless markets nationwide, and do not enhance innovation. Congress 
should act so that the FCC promptly examines these practices and adopts 
rules to eliminate these harms.

    Senator Kerry. Thank you, Mr. Rooney, we appreciate it.
    Mr. Frieden?

         STATEMENT OF ROBERT M. FRIEDEN, PIONEERS CHAIR

          AND PROFESSOR OF TELECOMMUNICATIONS AND LAW,

                     PENN STATE UNIVERSITY

    Mr. Frieden. Senator Kerry, and members of the Committee, 
thank you for inviting me to contribute to this discussion 
about the consumer wireless experience.
    I hold the Pioneers Chair and serve as a Professor of 
Telecommunications and Law at Penn State University. As a 
teacher, researcher, and cell phone subscriber, I'm working to 
understand the potential for wireless handsets to stimulate 
innovation, particularly as these devices become even more 
widespread and essential.
    Three major developments in the wireless marketplace have 
the most significant impact on consumers and innovation. First, 
wireless handsets will provide a third screen for users, no 
less important than what the first screen, television, and the 
second screen, the personal computer monitor, have provided. 
Wireless handsets have started the evolution to become a much 
more diverse Swiss Army Knife collection of features and 
functions. But the scope of innovation in handset design 
depends on difficult balancing between the sometimes divergent 
interests of consumers, carriers, and handset makers.
    Second, near-exclusive reliance by wireless carriers and 
their agents, on a single business model, which combines 
wireless service and handsets used to access this service, 
strongly influences what kinds of services the handset can 
perform and what kinds of software the subscriber can download. 
This combination of handset and service also creates incentives 
for carriers to secure exclusive distribution rights for choice 
devices, such as the Apple iPhone. It motivates carriers to 
favor ways to recoup their handset subsidies, rather than to 
concentrate on offering unconditional access to the features 
within the handset or services available by downloading 
software and content to the handset.
    Third, even as some subscribers resort to self-help 
strategies to remove these limitations, legislation should 
direct the Federal Communications Commission to ensure non-
discriminatory access to wireless networks and services, 
including the elimination of handset exclusivity arrangements. 
Forty years ago, the FCC established the Carterfone policy, 
which specified the right of consumers to own phones and to 
attach them and other devices, such as fax machines and modems, 
to the wired telephone network.
    This policy made it possible for consumers to decide what 
type of devices and functions would best serve their needs. 
More fundamentally, separation of service and equipment allows 
consumers to decide how to use the telecommunications and 
information services available for wireless handsets, now and 
in the future.
    We take for granted the right to attach telephones to the 
wired network, and that freedom should extend to wireless 
networks, subject to legitimate and readily addressed network 
management and spectrum interface concerns. Television 
broadcasters have no right to restrict consumers from watching 
cable and DVDs. Likewise, no personal computer manufacturer or 
software vendor can regulate what consumers see on their 
monitors and what services they can access. Applying the 
Carterfone policy to wireless would stimulate innovation in 
handset design, promote competition, and motivate carriers to 
make their networks more accessible.
    Remarkably, the 270 million wireless cell phone subscribers 
in the United States do not have the same freedoms for the 
third screen, as they do for television sets, computer 
monitors, and wired telephone service. If the wireless handset 
marketplace worked like its wired counterpart, carriers would 
derive limited benefit from exclusivity--exclusive handset 
distribution agreements, and they would not program 
restrictions on the limited types of phones they make 
available.
    Manufacturers would have great reluctance in disabling 
features or refraining from devising new ones that carriers do 
not want consumers to have. Applying the Carterfone non-
discrimination policy does not impose new or additional 
regulations. Cell phones companies operate as 
telecommunications service providers, already obligated by law 
to comply with FCC common carrier regulations. Wireless 
handsets use radio spectrum, subject to the FCC's jurisdiction.
    The FCC has applied its widely respected Carterfone policy 
in many ways and for many different types of competitive 
industries since 1968, including cable television. Most 
recently, the Commission included the Carterfone open-access 
policy in its 2005 policy statement on what freedoms consumers 
have a right to expect when accessing the Internet. Limitations 
on access can frustrate consumers, stifle innovation in 
wireless services and software applications, and adversely 
affect the international competitiveness of U.S. equipment and 
services.
    The potential for Swiss Army Knife versatility in handsets 
diminishes when carriers and handset manufacturers agree on 
exclusive handset distribution deals, locks on what functions 
handsets can performs, and locking out consumers from 
downloading software and other content. Mandating consumer 
access freedoms, supports development of separate wireless 
handset and service markets. This will create incentives for 
wireless equipment manufacturers to offer customized solutions 
to diverse user requirements.
    Additionally, it will create incentives for wireless 
carriers to come up with innovative service plans and to 
compete based on how many different services wireless devices 
can access.
    I appreciate the opportunity to share my views with the 
Committee and to participate in a discussion about this 
important issue. Thank you very much.
    [The prepared statement of Mr. Frieden follows:]

 Prepared Statement of Robert M. Frieden, Pioneers Chair and Professor 
          of Telecommunications and Law, Penn State University
    Good afternoon Mr. Chairman and Senators. Thank you for inviting me 
to contribute to this discussion on the consumer wireless experience.
    I hold the Pioneers Chair and serve as a Professor of 
Telecommunications and Law at Penn State University. As a teacher, 
researcher,\1\ observer of student behavior, and cellphone service 
subscriber, I am working to understand the potential for wireless 
handsets to stimulate innovation, particularly as these devices becomes 
even more widespread and essential.
---------------------------------------------------------------------------
    \1\ For more comprehensive examination of wireless handset access 
to content and services, see Rob Frieden, Lock Down on the Third 
Screen: How Wireless Carriers Evade Regulation of Their Video Services, 
23 Berkeley Technology Law Journal (2009) (in production); draft 
available at: http://papers.ssrn.com/sol3/cf_dev/
AbsByAuth.cfm?per_id=102928; Hold the Phone: Assessing the Rights of 
Wireless Handset Owners and Carriers, 69 Pittsburgh Law Review, No. 4, 
675-725 (2008); draft available at: http://papers.ssrn.com/sol3/cf_dev/
AbsByAuth.cfm?per
_id=102928; Wireless Carterfone--A Long Overdue Policy Promoting 
Consumer Choice and Competition (New America Foundation, Wireless 
Future Program, Working Paper No. 20), available at http://
www.newamerica.net/files/Wireless_Carterfone_Frieden.pdf.
---------------------------------------------------------------------------
    Three major developments in the wireless marketplace have a 
substantial impact on consumers and innovation:

        1. The wireless handset will provide a ``third screen'' for 
        users,\2\ no less important than what the first screen, 
        television, and the second screen, the personal computer 
        monitor, have provided. Wireless handsets have started the 
        migration from cordless telephones to a much more diverse 
        ``Swiss Army Knife'' collection of features and functions. But 
        the scope of innovation in handset design depends on a 
        difficult balancing between the sometimes divergent interests 
        of consumers, carriers, and handset makers.
---------------------------------------------------------------------------
    \2\ See, e.g., Nick Wingfield, Time to Leave the Laptop Behind, The 
Wall Street Journal, (Oct. 27, 2008), available at http://
online.wsj.com/article/SB122477763884262815.html, Int'l 
Telecommunication Union, The Regulatory Environment for Future Mobile 
Multimedia Services, http://www.itu.int/osg/spu/ni/multimobile/
index.html.

        2. Near exclusive reliance by wireless carriers and their 
        agents on a single business model, which combines wireless 
        service and the handset used to access this service, strongly 
        influences what kinds of services handsets can perform, and 
        what kinds of software subscribers can download. In exchange 
        for the opportunity to use a subsidized handset, wireless 
        subscribers must agree to a one or two year service commitment 
        and accept significant limitations on what services their 
        handsets can access and what features their handsets offer. The 
        ability to combine handsets and service creates incentives for 
        carriers to secure exclusive distribution rights for choice 
        handsets, such as the Apple iPhone. It also motivates carriers 
        to favor ways to recoup their handset subsidies, rather than to 
        concentrate on offering unconditional access to features within 
        the handset, or services available by downloading software and 
---------------------------------------------------------------------------
        content to the handset.

        3. Even as some subscribers resort to ``self-help'' strategies 
        to remove limitations,\3\ legislation should direct the Federal 
        Communications Commission (``FCC'') to ensure non-
        discriminatory access to wireless networks and services, and to 
        order carriers to eliminate handset exclusivity arrangements. 
        Forty years ago, the FCC established its Carterfone policy that 
        specified the right of consumers to own phones and to attach 
        them and other devices, such as fax machines and modems, to the 
        wired telephone network.\4\ Applying the Carterfone policy to 
        wireless would stimulate innovation in handset design, promote 
        competition, and motivate carriers to make their networks more 
        accessible.
---------------------------------------------------------------------------
    \3\ Wireless subscribers violate service contracts and lose 
warranty coverage when they ``unlock'' their handsets for use on 
unauthorized networks. Wireless subscribers ``jailbreak'' a handset 
``which allows a user to install on his device third-party applications 
unapproved by the provider.'' See Sarah Perez, Why You Have To 
Jailbreak the iPhone, N.Y. Times (Jan. 12, 2009), http://
www.nytimes.com/external/readwriteweb/2009/01/12/12readwriteweb-
why_you_have_to_jailbreak_the_iphone.html.
    \4\ See Hush-a-Phone v. United States, 238 F.2d 266, 269 (D.C. Cir. 
1956) (ordering the FCC to eliminate telephone company tariff 
restrictions on customers' right to attach non-electronic acoustic 
devices to telephones). In 1968, the FCC extended the right to include 
attachment of electronic devices. Use of the Carterfone Device in 
Message Toll Tel. Serv., 13 F.C.C.2d 420 (1968), recon. denied, 14 
F.C.C. 2d 571 (1968).
---------------------------------------------------------------------------
Third Generation Wireless and Beyond
    Wireless technology has developed along three generations of 
service. In the first generation, from 1984 to the early 1990s, analog 
cellphones almost exclusively provided voice telephone service. The 
second generation, which approaches its conclusion, offers digital 
technologies capable of providing many enhancements, including text 
messaging, music downloading, photography, and slow speed access to the 
Internet. The third generation, promises a variety of features at least 
in theory no less numerous and diverse than what consumers can access 
via computers and television sets.
    I use the phrase ``in theory,'' because the combination of handset 
and service enables wireless carriers to impose limitations on what 
handsets subscribers can use, the functions performed by these 
handsets, and what applications subscribers can download to their 
handsets. Even the much-touted Apple iPhone has significant 
limitations. Apple now offers over 30,000 diverse applications,\5\ 
quite a large number as compared to what other handsets can download. 
But consider 30,000 in the context of the millions of applications 
available via personal computers. Innovators with hopes for offering 
the next ``killer application'' have limited prospects if one or more 
of the major wireless carriers choose not to allow subscribers to 
access the service, or download the software.
---------------------------------------------------------------------------
    \5\ See Apple, Inc., App Store and Applications for iPhone, http://
www.apple.com/iphone/appstore/.
---------------------------------------------------------------------------
    The list below identifies many of the handset limitations wireless 
carriers have imposed:

        Locking handsets so that subscribers cannot access competitors' 
        networks (by frequency, transmission format, firmware, or 
        software). Some carriers even lock handsets designed to allow 
        multiple carrier access by changing an easily inserted chip, 
        commonly referred to as the Subscriber Identity Module;

        Using firmware ``upgrades'' to ``brick,'' i.e., render 
        inoperative, the handset, or alternatively disable third-party 
        firmware and software;

        Disabling handset functions, e.g., bluetooth, Wi-Fi access, 
        Internet browsers, GPS services, and e-mail clients;

        Specifying formats for accessing memory, e.g., music, 
        ringtones, and photos;

        Creating ``walled garden'' access to favored video content of 
        affiliates and partners; and

        Using proprietary, non-standard interfaces making it difficult 
        for third parties to develop compatible applications and 
        content.

    The most recent limitation affects when and how iPhone subscribers 
can use their handsets to access services that provide voice 
communications via the Internet, a service commonly referred to as 
Voice over the Internet Protocol (``VoIP'').\6\ AT&T will allow 
subscribers to exploit VoIP innovation supplied by Skype, when they 
have Wi-Fi Internet access, currently available in various standalone 
``islands'' such as coffee shops, libraries, hotels, offices, and 
residences. However, once a subscriber no longer has Wi-Fi access, the 
iPhone contains programming that blocks access to Skype via the AT&T 
wireless network.\7\ Additionally, AT&T has not yet set a date when 
iPhone subscribers can activate built-in features in their handsets to 
link lap top computers with the Internet via their phone, or to offer 
enhanced multimedia messaging.\8\
---------------------------------------------------------------------------
    \6\ Voice over the Internet Protocol (``VoIP'') offers voice 
communications capabilities, much like ordinary telephone service, 
using the packet-switched Internet, for all or part of the link between 
call originator and call recipient.
    \7\ Brad Stone, Skype, the Web Phone Giant, Brings Cheap Calls to 
Cellular, The New York Times, Internet, Inside Technology (March 29, 
2009); available at: http://www.nytimes.com/2009/03/30/technology/
internet/30skype.html.
    \8\ ``Tethering is the ability to connect your mobile phone (either 
wirelessly, over Bluetooth, or via a cable) to your PC and use it as a 
wireless modem. MMS is a format for sending multimedia, such as photos, 
over the wireless network. In both cases Apple displayed lists of 
carriers around the world who would support these features, and AT&T 
was not on them.'' Brad Stone, AT&T: Tethering and MMS Coming to the 
iPhone, The New York Times, Technology, Bits, (June 8, 2009); available 
at: http://bits.blogs.nytimes.com/2009/06/08/att-tethering-and-mms-
coming-to-the-iphone-in-us/.
---------------------------------------------------------------------------
    AT&T, to its credit, wants to promote a robust, versatile, and 
innovative wireless handset, an interest in synch with that of Apple, 
its manufacturing partner, and with consumers. But AT&T part ways when 
handset innovation prevents it from maximizing revenues and profits in 
providing long distance telephone services, particularly costly 
international calls. Skype offers free international VoIP calls when 
both parties use the Internet, and retails service at pennies-a-minute 
when a call leaves the Internet and travels via conventional telephone 
networks. AT&T and other wireless carriers charge a substantially 
higher rate for international calls.
    Wireless subscribers suffer when carriers and handset manufacturers 
lack clear incentives to offer the most versatile services and handsets 
possible. Understandably, wireless carriers need to recoup subsidies in 
handsets and to offer new services, in addition to offering the basic 
commodity of wireless transmission time. But when carriers and handset 
manufacturers can readily implement strategies to lock down handsets, 
and to lock out consumers from competing services and features, the 
potential for Swiss Army Knife versatility in handsets diminishes.
    Bear in mind that the limitations imposed by wireless carriers 
apply regardless of whether a subscriber uses an unsubsidized handset, 
and these restrictions extend even after completion of the service 
commitment by subscribers using subsidized handsets. I know of no 
wireless carrier in the United States that offers lower rates, and more 
relaxed software and third-party access policies for subscribers who 
activate service with an existing handset, thereby freeing the carrier 
of having to make a subsidy. These type subscribers pay the same rates, 
on a month-to-month basis, as subscribers reimbursing carrier 
subsidies.
Liberating Handsets and Spurring Innovation
    Consumers' right to own and attach any technically compatible 
device will spur competition and innovation in the development of 
handsets and other devices, as well as the software that can customize 
services. The FCC's Carterfone policy, established in 1968, made it 
possible not only for consumers to consider the telephone a fashion 
accessory, but more importantly, to have the freedom to decide what 
types of devices and functions would best serve their needs. More 
fundamentally, separation of service and equipment supports consumers 
in their freedom to decide how to use the telecommunications and 
information services available from wireless handsets now and in the 
future.
    We take for granted the right to own and attach telephones to the 
wired network and that freedom should extend to wireless networks, 
subject to legitimate and readily addressed network management and 
spectrum interface concerns. Television broadcasters have no right to 
determine how consumers use their television sets, including accessing 
video content from competing sources such as cable television and DVDs. 
Likewise, no personal computer manufacturer or software vendor can 
regulate what consumers see on their monitors and what services they 
can access.
    Remarkably, the 270.3 million wireless cellphone subscribers in the 
United States \9\ do not have the same freedoms for the third screen as 
they do for television sets, computer monitors, and wired telephone 
service. If the wireless handset marketplace worked like its wired 
counterpart, carriers would derive limited benefit from exclusive 
handset distribution agreements, and they could not program 
restrictions on the limited types of phones they make available. 
Manufacturers would have great reluctance in disabling features, or 
refraining from devising new ones that carriers do not want consumers 
to have.
---------------------------------------------------------------------------
    \9\ CTIA, The Wireless Association, Wireless Quick Facts (as of 
Dec., 2008); available at: http://www.ctia.org/advocacy/research/
index.cfm/AID/10323 [hereinafter cited as CTIA Wireless Quick Facts].
---------------------------------------------------------------------------
Applying Carterfone Policy to Wireless Service Promotes Innovation, 
        Helps Consumers, and Offers Carriers the Opportunity to Pursue 
        Different Business Models.
    Wireless carriers seem to perceive a wireless Carterfone policy as 
technologically infeasible, imposing more regulation, guaranteeing 
greater subscriber churn, and adversely impacting profitability. Just 
as wired carriers did in the 1960s, wireless carriers dismiss any 
likelihood that separating handsets from service providers will 
generate more opportunities to develop networks that stimulate usage, 
customer loyalty, and diversification of services available from a 
wireless network. I see no basis for concluding that the upside 
benefits accruing from the wired Carterfone policy somehow will not 
apply to wireless networks.
    The wired Carterfone policy triggered widespread innovation in 
handsets and other devises located on customer premises. Such 
advancement did not shut down parallel progress in wired 
telecommunications, but instead promoted increased network use by a 
diversifying array of equipment. Rather than cause harm to telephone 
employees and networks, consumers' freedom to attach devices of their 
choice enhanced the utility of the network and the satisfaction of 
subscribers with the network.
    When we move from a discussion about the benefits of wired 
Carterfone to wireless networks, carriers seek to frame the issue as 
one involving burdensome regulatory intrusions,\10\ unnecessary and 
inappropriate in light of how competitive, innovative, and successful 
the wireless industry has become. Applying the Carterfone policy does 
not impose new, or additional regulations. Cellphone companies operate 
as telecommunications service providers, already obligated by Title II 
\11\ and III of the Communications Act of 1934, as amended, to comply 
with FCC common carrier regulations.\12\ The fact that wireless 
carriers now offer information and video services does not diminish 
their common carrier responsibilities.\13\
---------------------------------------------------------------------------
    \10\ A prominent Wall Street Journal industry analyst has concluded 
that the wireless carriers have succeeded in creating the inference 
that they are unregulatable:
    A shortsighted and often just plain stupid Federal Government has 
allowed itself to be bullied and fooled by a handful of big wireless 
phone operators for decades now. And the result has been a mobile phone 
system that is the direct opposite of the PC model. It severely limits 
consumer choice, stifles innovation, crushes entrepreneurship, and has 
made the U.S. the laughingstock of the mobile-technology world, just as 
the cellphone is morphing into a powerful hand-held computer. . . . 
That's why I refer to the big cellphone carriers as the `Soviet 
ministries.' Like the old bureaucracies of communism, they sit athwart 
the market, breaking the link between the producers of goods and 
services and the people who use them.
    Posting of Walt Mossberg to All Things Digital (Mossblog), Free My 
Phone, (Oct. 21, 2007) available at: http://mossblog.allthingsd.com/
20071021/free-my-phone/.
    \11\ Title II of the Communications Act, as amended, 47 U.S.C.  
201 et. seq. (2008) requires providers of basic telecommunications 
services to operate on a nondiscriminatory basis, providing services on 
just and reasonable charges and also subject to numerous entry 
regulations, tariffing, interconnection, and operating requirements.
    \12\ See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 
103-66, 107 Stat. 312, Pub. L. No. 103-66, Title VI,  6002(b), 
amending the Communications Act of 1934 and codified at 47 U.S.C.  
332(c) creating a hybrid, streamlined regulatory classification for 
Commercial Mobile Radio Service Providers, commonly known as cellular 
telephone carriers. The term ``commercial mobile service'' is defined 
by the Communications Act of 1934, as amended, as ``any mobile service 
. . . that is provided for profit and makes interconnected service 
available: (A) to the public or (B) to such classes of eligible users 
as to be effectively available to a substantial portion of the public, 
as specified by the Commission.'' Communications Act  332(d)(1), 47 
U.S.C.  332(d)(1)(2008). ``Mobile service'' is defined at Section 3 of 
the Act. Communications Act  3(27), 47 U.S.C.  153(27)(2006). The 
term ``commercial mobile service'' came to be known as the ``commercial 
mobile radio service.'' 47 C.F.R.  20.3(2008).
    \13\ See Reexamination of Roaming Obligations of Commercial Mobile 
Radio Service Providers, Report and Order and Further Notice of 
Proposed Rulemaking, 22 FCC Rcd. 15817 (2007).
---------------------------------------------------------------------------
    Wireless carriers also assert that the Carterfone policy had a 
legitimate and necessary function only back in the time when a monopoly 
Bell System dominated all aspects of telephone service. The FCC has 
applied its ``venerable,'' \14\ longstanding,\15\ and ``widely 
respected'' \16\ Carterfone policy in many ways and for many different 
types of competitive industries well after divestiture of AT&T and its 
Bell System. For example, the FCC included the Carterfone open access 
concept in the Commission's 2005 Policy Statement of what freedoms 
consumers have a right to expect when accessing the Internet.\17\ The 
Commission also established an ``Open Platform'' requirement for a 
portion of the choice 700 MHz spectrum made available by the conversion 
to digital television.\18\ Speaking of digital television, the FCC 
established a long conversion period, and Congress extended it,\19\ so 
that consumers could acquire the necessary digital converter to 
continue watching broadcast television without having to replace their 
existing analog sets.\20\
---------------------------------------------------------------------------
    \14\ ``[O]ur venerable Carterfone principles, for example, were 
first established via adjudication and then codified into rules.'' 
Formal Complaint of Free Press & Public Knowledge Against Comcast Corp. 
for Secretly Degrading Peer-to-Peer Applications, 23 FCC Rcd.13028, 
13050 (2008) available at http://hraunfoss.fcc.gov/edocs_public/
attachmatch/FCC-08-183A1.doc [hereinafter cited as Free Press 
Complaint].
    \15\ See, e.g., Pub. Util. Comm'n of Tex. v. FCC, 886 F. 2d 1325, 
1329 (D.C. Cir. 1989) (noting long established FCC policy that carriers 
and non-carriers alike have a Federal right to interconnect to the 
public telephone network in ways that are privately beneficial if they 
are not publicly detrimental); Am. Tel. & Tel. Co.'s Proposed Tariff 
Revisions, 53 F.C.C.2d 473, 477 (1975), aff'd sub nom. Mebane Home Tel. 
Co. v. FCC, 535 F.2d 1324, 1329 (D.C. Cir. 1976); Telerent Leasing 
Corp., 45 F.C.C.2d 204, 205 (1974), aff'd sub nom. N.C. Util. Comm'n v. 
FCC, 537 F.2d 787 (4th Cir. 1976), cert. denied, 429 U.S. 1027 (1976).
    \16\ ``[T]he Commission adopted the widely respected Carterfone 
principles via adjudication.'' Free Press Complaint, 23 FCC Rcd. at 
13045.
    \17\ ``Internet, consumers are entitled to connect their choice of 
legal devices that do not harm the network.'' Appropriate Framework for 
Broadband Access to the Internet Over Wired Facilities, Policy 
Statement, 20 FCC Rcd. 14986, 14988 (2005).
    \18\ Service Rules for the 698-746, 747-762 and 777-792 MHz Bands, 
Second Report and Order, 22 FCC Rcd. 15289(2007).
    \19\ DTV Delay Act, Pub. L. No. 111-4, 123 Stat. 112 (Feb. 11, 
2009).
    \20\ Implementation of the DTV Delay Act, MB Docket No. 09-17, 
Third Report and Order and Order on Reconsideration, 24 FCC Rcd. 3399 
(2009).
---------------------------------------------------------------------------
    The FCC has ordered cable television companies to continue offering 
service to ``cable ready'' analog televisions that do not require 
installation of a set top box.\21\ Additionally, the FCC prevents 
device lock in by requiring cable television operators to support 
CableCard access to programming in lieu of mandatory leasing of a cable 
company supplied set top box for watching digital television service 
tiers.\22\ To guard against cable operators exploiting the ability to 
favor content created by affiliates, Congress prohibited exclusive 
program access deals.\23\ Even in the wireless marketplace, the FCC has 
mandated number portability to prevent locking in subscribers by 
preventing them from using the same telephone number when shifting 
carriers.\24\
---------------------------------------------------------------------------
    \21\ FCC rules ensure ``that all cable TV viewers, including the 98 
million analog-only cable TV viewers, retain the same access to their 
local stations after the transition as they have today. The rules 
require cable operators to comply with the statutory viewability 
requirement by choosing to either: (1) carry digital signals in analog 
format, or (2) for all-digital systems, carry the signals only in 
digital format, provided that all subscribers have the necessary 
equipment to view the broadcast content. The viewability requirements 
apply from June 12, 2009 through February 2012, subject to review by 
the Commission during the last year of this period. Carriage of Digital 
Television Broadcast Signals: Amendment to Part 76 of the Commission's 
Rules, CS Docket No. 98-120, Third Report and Order and Third Further 
Notice of Proposed Rule Making, 22 FCC Rcd 21064 (2007).
    \22\ ``[A] CableCARD . . . plugs into a slot in a host navigation 
device, permitting the device to perform both the security and non-
security functions.'' Charter Communications, Inc. v. Federal 
Communications Commission, 460 F.3d 31, 34 (D.C. Cir. 2006) available 
at: http://www.cesweb.org/shared_files/edm/2006/govalert/
DCCircuitAdvanceNewhousevFCCOrder081
806.pdf.
    \23\ See Implementation of the Cable Television Consumer Protection 
and Competition Act of 1992, Development of Competition and Diversity 
in Video Programming Distribution: Section 628(c)(5) of the 
Communications Act: Sunset of Exclusive Contract Prohibition, MB Docket 
No. 07-29, Report and Order and Notice of Proposed Rulemaking , 22 FCC 
Rcd. 17791 (2007).
    \24\ ``The ability of end users to retain their telephone numbers 
when changing service providers gives customers flexibility in the 
quality, price, and variety of telecommunications services they can 
choose to purchase. Number portability promotes competition between 
telecommunications service providers by, among other things, allowing 
customers to respond to price and service changes without changing 
their telephone numbers. The resulting competition will benefit all 
users of telecommunications services. Indeed, competition should foster 
lower local telephone prices and, consequently, stimulate demand for 
telecommunications services and increase economic growth.'' Telephone 
Number Portability, CC Docket No. 95-116, First Report and Order and 
Further Notice of Proposed Rulemaking, 11 FCC Rcd 8352, 8368 (1996).
---------------------------------------------------------------------------
    Wireless carriers appear to have concluded that applying the 
Carterfone policy could lead to higher rates of customer churn, because 
fewer subscribers might acquire a subsidized phone and accordingly 
would not have to commit to a one-, or two-year term of service. The 
policy does not absolutely guarantee increases in churn, particularly 
if wireless carriers work harder to customize service, to respond to 
consumers' diverse service requirements, and to provide service via any 
functioning handset. Wireless carriers would have to consider 
implementing alternative business models, including ones where 
customers initiate service using an existing handset instead of using a 
new one subsidized by the carrier. Under this scenario, the carrier 
might have to offer a discounted rate, but service diversification and 
discounting constitute two strategies any business must consider in a 
maturing market.
    After having achieved a nearly saturated market of 87 percent 
penetration,\25\ wireless carriers should consider service 
diversification and as well differentiating their brand by something 
other than the likelihood of getting reliable service and the handset 
choices they offer.
---------------------------------------------------------------------------
    \25\ CTIA, Wireless Quick Facts.
---------------------------------------------------------------------------
Conclusions and Recommendations
    Technological and marketplace convergence favor increasing reliance 
on the Internet as a medium for delivering all kinds of information, 
communications and entertainment services. Already the Internet makes 
it possible for carriers and consumers to combine traffic onto a single 
Internet conduit in lieu of using separate networks to carry voice, 
data, and video traffic. Wireless access to the Internet, via next 
generation networks, will offer consumers the potential to use a truly 
broadband information superhighway.\26\ However, if wireless carriers 
continue to limit subscribers' handset options, the breadth and scope 
of wireless access will not achieve parity with wired alternatives.
---------------------------------------------------------------------------
    \26\ ``Few doubt that the future of telecommunications will rely 
mostly on broadband and wireless technologies. Wireless and broadband 
technologies are transforming the telecommunications market, offering 
users ubiquitous access to voice, data, and Internet services. The 
number of mobile subscribers has already surpassed that of end-user 
switched access lines served by local exchange carriers.'' National 
Regulatory Research Institute, Methods for Analyzing the Effects of 
Broadband and Wireless Services on Competition in Local Telephony, 
Project Announcement; available at: http://www.nrri.ohio-state.edu/
current-projects/telecommunications/methods-for-analyzing-the-impact-
of-broadband-and-wireless-services-on/.
---------------------------------------------------------------------------
    I see no compelling case why wireless networks should not offer 
consumers the same access opportunities as available from wired 
broadband networks. Any limitations on access can frustrate consumers, 
stifle innovation in wireless services and software applications, and 
adversely affect the international competitiveness of United States 
equipment and services. Many nations do not permit the bundling of 
wireless service and handsets. Such separation does require wireless 
consumers initially to pay more for their handsets, in light of the 
absence of a carrier subsidy. But bear in mind that because U.S. 
wireless carriers do not operate as charities, consumers surely pay for 
their upfront subsidy over the one-, or two-year service commitment. In 
nations prohibiting the bundling of handsets and service, carriers 
typically offer a broader array of service plans, including many more 
pre-paid, calling card opportunities for low volume callers.
    Mandating consumer access freedom supports development of separate 
wireless handset and service markets. This will create incentives for 
wireless equipment manufacturers to offer customized solutions to 
diverse user requirements. Additionally, it will create greater 
incentives for wireless carriers to come up with innovative service 
plans, and to compete based on how many different services wireless 
devices can access.

    Senator Kerry. Thank you very much, we appreciate it, Mr. 
Frieden.
    Ms. Esbin?

         STATEMENT OF BARBARA S. ESBIN, SENIOR FELLOW 
 AND DIRECTOR OF THE CENTER FOR COMMUNICATIONS AND COMPETITION 
           POLICY, THE PROGRESS & FREEDOM FOUNDATION

    Ms. Esbin. Thank you, Senator Kerry, and members of the 
Committee for the opportunity to testify on the issue of 
wireless handset exclusivity. My name is Barbara Esbin, I'm a 
Senior Fellow at the Progress and Freedom Foundation, a think-
tank focused on the digital economy.
    My research indicates that exclusive handset arrangements 
have brought palpable benefits to both consumers and 
competition within the wireless sector, because both the 
wireless services and handset markets are robustly competitive 
and show no evidence of market failure, a regulatory 
prohibition on such exclusive arrangements would be ill-
advised. Consumers will remain protected from demonstrable 
anti-competitive activity or unfair and deceptive practices in 
this sector by our anti-trust and consumer protection 
authorities.
    The FCC has repeatedly found the wireless marketplace to be 
effectively competitive, not perfectly competitive, but 
effectively competitive. The most recent report found that over 
90 percent of U.S. residents live in areas served by four or 
more mobile carriers and that, ``Consumers continue to reap 
significant benefits, including low prices, new technologies, 
improved service quality, and choice among providers of 
commercial mobile radio services.''
    The level of concentration in the U.S. wireless carrier 
market is below that of other nations and below the usual level 
of concern for the anti-trust authorities. The wireless handset 
market is even more robustly competitive. There are hundreds of 
models sold in the U.S., manufactured by 33 companies. No 
single firm appears to have market power in the handset market, 
and certainly no single firm may be viewed as the sole source 
of innovation.
    The typical exclusive handset agreement grants the carrier 
an exclusive distribution right for a particular handset model 
or a set of features for a limited period of time. Carriers are 
willing to pay for exclusive arrangements, because offering 
subscribers a hot new handset is a way to differentiate their 
service.
    The FCC has acknowledged that product differentiation is a 
natural competitive response by carriers to customer churn. 
Churn itself is a sign of competition and the exclusive 
arrangements are simply a feature of an intensely competitive 
market.
    Handset manufacturers benefit from the exclusives by being 
able to develop the initial version of a device for one type of 
network, ensuring both speed to market and some control over 
the user experience. Guaranteed minimum orders from the 
manufacturer, another common feature, can remove some of the 
risks associated with a new product offering, thus permitting 
riskier and more innovative designs. Each side of the 
exclusivity transaction benefits, but more importantly, 
consumers benefit in terms of gaining innovative handset 
features, applications, and services.
    Analysts have noted that the exclusives are fairly good 
from the consumer standpoint, because guaranteed distribution 
incentivizes the carriers to heavily promote the product and 
offer subsidies to lower the price of the phone for consumers. 
Prohibiting such arrangements and effectively mandating that 
all offerings look the same would leave the carriers with fewer 
options to attract customers. Over the long term, it would 
likely lessen rather than enhance competition and consumer 
welfare.
    Indeed, since 1992, when there were only two mobile 
carriers per region and far fewer equipment manufacturers, the 
FCC has permitted exclusive handset arrangements in light of 
competition in the relevant markets.
    Today's wireless carriers, facing far greater service 
competition and increased numbers of suppliers, have even less 
economic power to stop equipment manufacturers from working 
with other carriers. In the case of the iPhone, for example, it 
was Apple, a new entrant with a single handset, who sought 
exclusivity and tightly-controlled product development, rather 
than AT&T.
    Exclusivity is far from a rarity in the world of cell 
phones and is not a practice limited to large carriers. Even 
some mobile virtual network operators have successfully 
obtained such agreements, which one would not expect if these 
arrangements were the result of the exercise of market power.
    The dynamic created by exclusive handset arrangements has 
allowed equipment manufacturers and carriers to bridge the gap 
between the technologies of today and the disruptive 
innovations of tomorrow. If exclusive arrangements were to be 
prohibited today, we would run the risk that all Americans will 
miss out on the dramatic benefits of innovation tomorrow, thus 
banning exclusive arrangements would effectively spite all 
consumers by ensuring that if some consumers can't have the 
fruits of device innovation immediately, then none may.
    I respectfully submit that upon further development of the 
record, neither Congress nor the Commission will find the need 
for additional action on the matter of exclusive handsets.
    Thank you again for the invitation to testify and I welcome 
any questions.
    [The prepared statement of Ms. Esbin follows:]

 Prepared Statement of Barbara S. Esbin, Senior Fellow and Director of 
 the Center for Communications and Competition Policy, The Progress & 
                           Freedom Foundation
I. Introduction
    Chairman Rockefeller, Ranking Member Hutchison, and members of the 
Committee, good afternoon and thank you for inviting me to discuss the 
issue of handset exclusivity arrangements. My name is Barbara S. Esbin, 
and I am a Senior Fellow at the Progress & Freedom Foundation, a non-
profit think tank that is focused on the digital economy. As Director 
of PFF's Center for Communications and Competition Policy, I have 
endeavored to develop and advocate an evidence-based policy framework 
that relies to the maximum extent possible on competitive forces to 
achieve next generation infrastructure deployment and service 
innovation in the communications industries. Prior to joining PFF, I 
spent over fourteen years as a regulatory attorney at the Federal 
Communications Commission, where I held a variety of senior staff 
positions with the Common Carrier, Wireless Telecommunications, Cable 
Services, Media, and Enforcement Bureaus.
    My testimony will focus on the ongoing debate about exclusive 
handset arrangements and their role in the consumer wireless 
experience. On the basis of my research into the issue, it is my 
conclusion that the wireless service and handset markets are 
effectively, if not robustly, competitive; that exclusive handset 
arrangements have brought palpable benefits to both consumers and 
competition within the wireless sector; and that regulatory 
intervention to prohibit such arrangements would be ill-advised. Any 
actual consumer harm arising from demonstrable anticompetitive activity 
or unfair and deceptive practices would be better handled through our 
antitrust and consumer protection authorities.
II. The Wireless Service and Handset Markets are Thriving
    In January of this year, the FCC's Wireless Telecommunications 
Bureau released its Thirteenth Annual Report on the state of 
competition in Commercial Mobile Radio Services. It found that there is 
effective competition in the CMRS market and that ``U.S. consumers 
continue to reap significant benefits--including low prices, new 
technologies, improved service quality, and choice among providers--
from competition in the CMRS marketplace, both terrestrial and 
satellite CMRS.'' American consumers may receive service from a host of 
national, regional, and small providers, including dozens of mobile 
virtual network operators (MVNOs). According to the report, ``there was 
an approximate 8 percent increase in the percentage of the U.S. 
population with access to five or more different mobile telephone 
operators in 1 year, from nearly 57 percent at the end of 2006 to 
almost 65 percent at the end of 2007. Moreover, approximately 96 
percent of the total U.S. population lives in areas where three or more 
different operators compete to offer mobile telephone service in some 
parts of those counties, while nearly 91 percent of the U.S. population 
continues to live in counties with four or more mobile telephone 
operators competing to offer service.'' According to information 
compiled by CTIA--The Wireless Association, the United States has the 
lowest HHI (that is, the least concentration) among wireless carriers 
of the 26 Organisation for Economic Co-operation and Development 
countries tracked by Merrill Lynch. Further, in the U.S., the top four 
carriers control only 86 percent of the market, yet in 23 of the 26 
OECD countries, the top four carriers control 100 percent of the 
market. No U.S. carrier has a market share appreciably over 30 percent, 
which is well below the level of concern for antitrust authorities.
    There is also extremely healthy competition in the market for 
wireless handsets. InformationWeek reported U.S. handset market shares 
for the larger suppliers as of late 2008: 22.4 percent for Samsung, 
21.1 percent for Motorola, 20.5 percent for LG, 10.2 percent for 
Research in Motion, 8.4 percent for Nokia, and 5.7 percent for Apple. 
CTIA reports that there are over 630 handsets sold in the United 
States, manufactured by 33 companies. These devices are sold by both 
carriers and a vast number of retailers, including ``Big Box'' and 
national electronics stores, independent retail outlets, manufacturers' 
stores and websites, and online auction sites. In nearly every case 
(Apple has only one handset to sell: the iPhone), handset manufacturers 
offer a variety of models, only a few of which are sold under exclusive 
distribution agreements. New products are hitting the market regularly, 
and prices for existing models are dropping. Additionally, in the past 
year, several on-line ``applications stores'' have launched, making 
over 40,000 applications suitable for wireless devices available to 
consumers. There is every reason to expect this cycle of innovation to 
continue to grow, as carrier networks evolve to support the new 
handsets and applications, and the latter develop to utilize the 
former.
    This level of competition for both services and equipment has 
directly benefited wireless consumers as a whole. The price per minute 
of service in the United States is the lowest of the 26 OECD countries 
tracked by Merrill Lynch. From December 2006 to December 2007, the 
average number of minutes each subscriber used per month increased 7.7 
percent and the average numbers of text and multimedia messages each 
subscriber sent each month doubled.
    The evidence above clearly illustrates that the market for both 
wireless carriers and handsets in the U.S. is competitive and 
innovative, and is delivering consumer benefits. Yet rural carriers 
have painted a vastly more pessimistic picture of today's wireless 
marketplace, one in which the market is dominated by four large 
nationwide carriers with large enough subscriber bases to exert 
significant influence on handset manufacturers, such that no 
manufacturer can afford not to `play ball' with the largest wireless 
carriers. The rural carriers do not claim that the handset markets are 
uncompetitive; rather they stretch to argue that consumers and smaller 
competitors are harmed by the actions of the ``Big Four'' carriers 
(AT&T Mobility, Verizon Wireless, Sprint Nextel , and T-Mobile) in 
accepting these exclusive deals because the effect is to deprive some 
consumers of either their desired handset, their desired carrier, or 
both.
    But this overstates the market power of the carriers when it comes 
to desirable new handsets. First, as discussed previously, the FCC has 
found the wireless services market is subject to effective competition. 
Although the largest national carriers may be large, the level of 
concentration in these markets is below that which is typically of 
concern to the antitrust authorities. The RCA Petition alleges that the 
``Big Four'' carriers today exercise ``monopolistic'' control over 
device manufacturers and use their market power to force manufactures 
into exclusive relationships that harm the ability of rural carriers to 
compete. In the case of high-end handsets, the very opposite seems 
true: It appears now that it is the manufacturers who ``command'' the 
carriers, and the manufacturers are under no generalized ``duty to 
deal'' under our antitrust laws. Economists have long recognized the 
benefits of exclusive deals entered into by companies who lack 
substantial market power.
    Even the RCA Petition acknowledges that ``unique services and 
features'' are a key element of competition among carriers. The FCC 
itself has noted that exclusive handset arrangements--i.e., product 
differentiation--is a natural competitive response by carriers to the 
high customer ``churn'' rates they face. In other words, ``churn'' is 
the sign of a competitive marketplace and the exclusive arrangements 
are a simply feature of an intensely competitive market, rather than an 
``unfair'' or ``anticompetitive'' tool.
    Rural consumers are by no means bereft of attractive options for 
smartphones and other advanced handsets. There is less a ``smartphone 
divide'' than ``lag'' in the availability of certain models in certain 
regions of the country. Even if the leader-of-the-pack, the iPhone, 
remains available in the U.S. exclusively through AT&T for another year 
or two, there are already a wide variety of increasingly sophisticated 
alternatives to the iPhone, each of which also has a limited period of 
exclusivity with a single carrier. And the other large carriers have 
all announced plans to support ``open'' applications and handsets, with 
not one but two emerging open-source mobile platforms--Google's Android 
and Linux Mobile or ``LiMo.''
III. Calls for Exclusive Handset Prohibitions Overstate the Harms and 
        Understate the Pro-Competitive Benefits
    The typical exclusive handset agreement permits the product 
distributor, the wireless carrier, an exclusive right to distribute the 
product for some period of time. Exclusive handset arrangements benefit 
the manufacturer, the carrier and ultimately, the consumer. The deals 
typically include a guaranteed minimum order, which gives the carrier 
an incentive to heavily promote the product and offer subsidies to 
lower the price of the phone to consumers. Such arrangements can enable 
the research and development of more innovative--that is, riskier--
handsets knowing that the carrier partner has greater incentive to 
promote and support the result. For manufacturers of smartphones such 
as the Apple iPhone, RIM Blackberry, and Palm Pre, securing a large 
base of users is especially important as it ensures that third-party 
developers will develop applications for the handset. As the number of 
third-party applications increases, the handsets are even more 
desirable. As Apple itself expressed it, ``Your iPhone gets better with 
every new app.''
    Carriers are willing to pay for the right to be the sole retailer 
of a ``hot'' new handset in the belief that the handset will draw in 
new customers. The ability to lure subscribers with a handset that has 
created a ``buzz'' is a key element in operator differentiation, and 
differentiation is what permits companies to thrive in a competitive 
environment. AT&T improved its position with the iPhone and now Sprint 
is hoping to do the same with its exclusive introduction of the Palm 
Pre. For smartphones, these new customers often also have higher bills 
because of increased data usage, resulting in even more revenue for the 
carrier. The net result is a competitive wireless services market that 
offers consumers a variety of devices, applications, service plans, and 
content associated with their wireless handsets.
    Exclusivity is far from a rarity in the world of cell phones, and 
it is not a practice limited only to the largest carriers. Many 
carriers work closely with manufacturers to offer the specific package 
of features that they think will be most desirable to potential 
customers. For example, Cellular South's ``Pic Sender'' feature 
automatically delivers every picture taken with the built-in camera in 
a subscriber's cell phone to a specific e-mail account, a folder on the 
user's computer, or photo sharing websites. T-Mobile's Hotspot Calling 
feature allows certain of its WiFi-enabled phones to make unlimited 
calls from any WiFi hotspot and can seamlessly transition from WiFi to 
cellular networks. And as a startup with no customers, Jitterbug was 
able to work with Samsung to design and manufacture an exclusive 
handset designed specifically for the elderly, thus differentiating 
itself from other providers. Jitterbug is now a successful MVNO with 5 
million subscribers. Helio (which was recently sold to Virgin Mobile), 
another small MVNO that never had more than 170,000 subscribers, worked 
with Pantech to develop one of 2007's most talked about phones, the 
Ocean.
    There are many potential developers of innovative handsets, 
including both traditional manufacturers and new entrants such as Apple 
and Google. No single firm appears to have market power in the handset 
market, and certainly no single firm may be viewed as a sole source of 
innovation. The fact that small MVNOs can procure innovative 
``exclusive'' handsets strongly suggests that there is no market 
failure to be addressed by regulatory intervention.
A. The iPhone is an Example of a Successful Exclusive Distribution 
        Arrangement
    Back in 2005, what we now know as the ``iPhone'' was just a 
concept, with no name, design plan or operating system, offered by a 
computer company with neither market share nor experience in wireless 
service or devices. This was a risky venture for both the equipment 
designer and the wireless carrier, one that has paid off handsomely. 
But the success of the iPhone follows the failure of Apple's first 
attempt to bring its iTunes music service to the mobile phone: the 
Motorola ROKR, launched in September 2005. The ROKR failed, in part, 
because Motorola insisted on loading the phone with its standard 
software. ROKR's failure to meet Apple's expectations caused the 
company to launch development of its own mobile phone product.
    Part of the iPhone's success is because of features, such as Visual 
Voicemail, that were only possible through changes to the carrier's 
wireless network. Apple originally began negotiations with Verizon to 
be the exclusive carrier of its product, but Verizon was unwilling to 
meet Apple's demands, which also included limitations on the set of 
retailers for its handsets. Apple then turned to Cingular (now AT&T). 
AT&T was willing to cede control and take the risk of modifying its 
network and entering into an exclusive arrangement when the iPhone's 
market success was unknown. AT&T recognized that only by letting Apple 
take the lead on technological development could a truly revolutionary 
device be created. The resulting partnership allowed the two companies 
to make significant investments to develop a radically innovative 
device while ensuring that the phone and its new features would 
function properly on AT&T's network, thus guaranteeing the high-level 
user experience that Apple seeks for its devices.
    In agreeing to be the exclusive provider of wireless service for 
this product, AT&T gave up the substantial sway that carriers normally 
had over how phones were developed and marketed for use on their 
wireless networks. Both carrier and equipment manufacturer took 
considerable risks, and contributed substantial assets toward product 
development. Nearly eighteen months and $150 million in development 
costs later, the iPhone was born.
    The iPhone was not only a revolutionary product in terms of design 
and features. The original business model struck between Apple and AT&T 
was revolutionary as well: It appears to be the first time a handset 
manufacturer was able to obtain a share of the monthly subscriber 
revenues generated by its product. When the follow-up ``iPhone 3G'' was 
launched in 2008, it was sold for $199, less than half the price of the 
original. This dramatic price reduction reflected a change in the 
business model: AT&T agreed to pay Apple a subsidy of about $300 per 
device, according to industry analysts, to help hold down the retail 
cost of the handset to consumers. Although this represented a reversion 
to the traditional business model of carrier subsidization of handsets, 
at $199, the iPhone became far more affordable for the average wireless 
user and available to a vastly expanded customer demographic.
    This continual cycle of technological innovation, aided by flexible 
business arrangements, has led to iPhone capacity increasing and prices 
dropping approximately $500 in a 2-year period. Overall, this is an 
extremely consumer-friendly outcome, as it brings the iPhone, first 
released as a very high-end wireless phone and data product, within the 
reach of average wireless users. Regulation, with its inherent delays 
and disputes, simply cannot produce comparable consumer benefits.
B. The Harms of Exclusive Arrangements are Overstated
    One might think that everyone would celebrate the iPhone as a 
breakthrough stimulus to innovation in the handset market as well as to 
the business relationships between carriers and equipment 
manufacturers. Yet, on May 20, 2008, the Rural Cellular Association 
(RCA) petitioned the FCC to investigate whether the agency should 
prohibit as anticompetitive the business model that helped bring the 
iPhone to fruition: an exclusive arrangement between the wireless 
carrier and the handset manufacturer. This is a profoundly backward-
looking request, and I respectfully suggest that both the FCC and 
Congress decline the invitation.
    RCA's Petition to the FCC casts the Nations' ``Big Four'' carriers 
variously as ``monopolistic,'' ``dominant,'' and ``oligopsonistic'' 
villains who use their market power to ``command'' exclusive 
arrangement's like that between AT&T and Apple. The RCA Petition claims 
that its members are challenged in their ability to compete with the 
``Big Four'' not only by their inability to access wireless handsets 
comparable in function and style to the high-end exclusive handsets, 
but by virtue of their inability to command the same volume discounts 
from vendors as the largest carriers, creating what RCA states is a 
``wireless marketplace bordering on oligopsony.'' The alleged 
``oligopsony'' is a small group of carriers who, as handset buyers, 
supposedly exercise market power over handset suppliers. But the RCA 
Petition overlooks the fact that rival handset manufacturers offer many 
advanced handsets with features that are competitive with the most 
popular models sold under exclusive distribution arrangements, and that 
several of these models are available to and offered by RCA member 
companies, including the HTC ``Touch'' series of phones (offering 
touchscreen, Internet access, e-mail and music capability).
    In addition to their alleged harms to smaller competitors, the RCA 
Petition claims that the exclusives create two distinct forms of 
consumer harm: (I) Consumers in ``Big Four'' service areas are forced 
to purchase service from a carrier they may not wish to use in order to 
utilize their handset of choice (which will cost more due to the lack 
of competition for distribution), and (ii) consumers in the foreclosed 
areas (those served by RCA members) are denied the opportunity to 
obtain service for the premium handsets they desire.
    There is not yet--nor should there be--a governmentally-sanctioned 
right to obtain a particular handset (no matter how desirable that 
handset might be). Where both the handset manufacturer and the carrier 
service markets are effectively--if not robustly--competitive, the lack 
of availability of some equipment in certain parts of the country today 
should not give rise to an FCC rulemaking tomorrow.
    RCA offers not a shred of evidence that the iPhone, for example, 
would cost less but for the exclusive distribution deal with AT&T. Nor 
would it seem likely that such a case could be made. There has been a 
steady decline in iPhone prices and the introduction of larger-capacity 
phones since its introduction 2 years ago. Nor do these arguments take 
into account that despite its initial premium (although falling) price, 
the iPhone has set record sales globally since its introduction. Again, 
this is the sign of a highly desirable product for which consumers are 
willing to pay a high price--in other words, the sign of a healthy 
marketplace, not one hobbled by anticompetitive activity.
    Additionally, it is argued that exclusive arrangements are 
disproportionably harmful to rural consumers. An unstated premise of 
the rural carrier's request that exclusives be prohibited is that 
consumers in every area of the country have a legal or perhaps even 
constitutional right to the smartphone of their choice, and that any 
business arrangement that restricts the exercise of this right is, in 
essence, ``contrary to the public interest.'' This is an extraordinary 
proposition, unsupported by fact, law, or reason.
    Consumers today have an incredible array of wireless devices before 
them, and are by no means foreclosed from obtaining competitive 
wireless services by reason of the exclusive handset agreements. 
Moreover, the exclusive handset arrangements in the market today are 
for limited periods of time, and appear to be undergoing significant 
renegotiation by the principals as the market for these products 
evolves. Resolution of the thorny problem of the correct duration of an 
exclusive distribution arrangement is best left to freely negotiated 
contractual arrangements between the carrier and the equipment 
manufacturer.
    RCA has argued that such arrangements harm rural consumers (and, of 
course, RCA's members) because only the largest wireless carriers are 
able to command these exclusive arrangements, leaving small rural 
wireless carriers and their customers without access to the most 
innovative handsets and services. According to RCA, the combination of 
Apple's exclusive U.S. deal with AT&T and the carrier's policy of 
barring its users from spending more than 40 percent of their time 
roaming off-network effectively renders the iPhone unavailable to 
subscribers in RCA member service territories.
    The argument that these deals are driven by the market power of the 
four largest national wireless carriers, who use exclusive arrangements 
as a weapon against their competitors, including rural carriers, 
overlooks the fact that, if the iPhone is unavailable in certain rural 
areas, it is because AT&T does not compete as an originating carrier in 
that area. The sought-after prohibition on a wireless carrier's ability 
to enter into an exclusive handset distribution agreement with an 
equipment manufacturer would effectively regulate the equipment 
manufacturer's ability to conduct business in a profitable manner. It 
would interfere with the manufacturer's ability to freely contract the 
terms and conditions under which it sells its products, by imposing a 
back-door ``duty to deal'' with each and every wireless carrier. This 
would be both unprecedented and bad public policy.
C. The Benefits of Exclusive Handset Arrangements Are Increased 
        Innovation and Competition
    Now that the iPhone's success is established, why should other 
carriers that were initially unwilling to take the risk be able to 
share in the success? More importantly, if every wireless carrier had 
been able to sell the iPhone when it was initially released, it is 
unlikely that there would have been as much carrier support for 
developing competing products such as Google's G1, Research In Motion's 
touch screen Blackberry Storm, Samsung's Instinct, or Palm's Pre. And 
without those smartphones to compete with, Apple might have had little 
incentive to release the second-generation and now third-generation 
iPhones so quickly after the initial iPhone's release. For its part, 
Congress and the FCC should let the competitive forces of the wireless 
services and handset markets continue to produce devices like the 
iPhone unhindered by unnecessary government intervention.
    Arguments that exclusive agreements doom rural customers to dwell 
forever on the wrong side of the so-called ``Digital Divide'' between 
urban/suburban residents with access to the hottest new smartphones and 
rural customers without ignores an even more important divide: that 
between the technologies of today and the disruptive innovations of 
tomorrow. If Congress or the FCC prohibits the exclusive partnerships 
between manufactures and carriers that make it possible to master the 
technical challenge of device innovation and to finance such risky 
ventures, all Americans will miss out on the dramatic benefits of 
innovation and increased mobility of Internet access.
    One must ask whether the iPhone or its competitor devices would 
have been developed as well and as quickly without such exclusive 
deals--and ask the same question about future devices. In other words, 
would banning such arrangements effectively spite all consumers by 
ensuring that, if some customers can't have the fruits of device 
innovation immediately, then none should?
    While some carriers had reached exclusive arrangements prior to the 
2005 Apple/Cingular iPhone deal, most of those deals concerned MVNOs, 
whose business model as resellers required that distinguish themselves 
from the underlying carriers whose services they resold by offering 
unique devices and service features. These early exclusive equipment 
arrangements largely failed in the marketplace. But today other 
smartphone manufacturers are following Apple's lead and demanding 
exclusive deals with sharing of revenue from resulting customer 
wireless data service plans rather than the traditional model of simply 
try to sell as many units as possible. This practice makes sense--the 
attractive new devices can attract huge numbers of new customers to a 
carrier--with each new customer paying for data as well as voice 
service. In an industry with high fixed costs and low marginal costs, 
this translates into large potential profits for a carrier with an 
attractive new device.
    This dynamic can incentivize a new entrant like Apple to fund 
expensive, risky efforts to develop revolutionary wireless handset 
products like the iPhone. Handset innovation, in turn, can spur 
carriers to upgrade their infrastructure to accommodate the increased 
bandwidth demands sophisticated handsets place on their wireless 
networks. Each side of the business transaction gains, but more 
importantly, so do consumers in terms of gaining innovative handset 
features, data applications, and wireless service offerings.
    The phenomenal success of the iPhone has galvanized other equipment 
manufacturers and carriers to enter into similar exclusive arrangements 
to develop their own innovative, competing products. The introduction 
of the iPhone was followed by a flood of other innovative handsets 
under exclusive distribution agreements. These include, in addition to 
the handset options discussed above, LG's Voyager (offered exclusively 
by Verizon Wireless), Samsung's Ace and Instinct (offered exclusively 
by Sprint Nextel), Samsung's Katalyst (offered exclusively by T-
Mobile), and the RIM Blackberry Storm (offered exclusively by Verizon 
Wireless). Several of these handsets have features the iPhone lacks, 
such as the Bold's higher resolution and the Instinct's tactile 
feedback. Similarly, Google has teamed up with HTC to offer a ``G1'' 
smartphone exclusively through T-Mobile. The G1 makes use of Android, 
Google's new operating system, and also offers features not available 
with the iPhone. Many, if not most, of these products are direct 
competitive responses to the challenge posed by AT&T and the iPhone; 
their development has brought additional feature-rich options to 
consumers.
    The most recent entrant to this burgeoning field is the ``Palm 
Pre,'' touted as a ``respectable competitor'' to Apple's increasingly 
popular device, which for a limited time, will be exclusively sold by 
Sprint Nextel, a carrier that has been struggling with customer losses 
over the past few years and is looking for a way to stop subscriber 
losses and win back market share. The device is being marketed at $299 
before a $100 rebate for new or renewing Sprint data plan customers.
    It is likely not coincidental that Apple announced its new lower 
$100 pricing for last year's iPhone 3G at about the same time the Pre 
hit the market. Just days later, AT&T itself took out advertisements 
promoting its exclusive Blackberry Bold smartphone for $199 after mail-
in rebate of $100. In addition, there are recent signs that some 
carriers are dropping, and others considering dropping, the cost of 
their monthly data service plans supporting these smartphones to 
further drive penetration. These are signs of a well-functioning 
marketplace: one competitor breaks ahead of the pack with a unique 
offering, others race to catch up, new products and services are 
introduced, prices drop, and consumers benefit.
    Product development, like business arrangements, in the fast-moving 
technology sector can be a hit or miss endeavor. For every successful 
product like the iPhone, there are tens if not hundreds of commercial 
failures. It would be unfair to require carriers and manufacturers to 
share the rewards of only their successes, while bearing sole 
responsibility for their product failures.
IV. Competition Should be Protected, not Competitors
    It is the competitive process, rather than individual competitors, 
that competition policy seeks to protect in light of the benefits 
competition brings to consumers in the form of lower prices, greater 
innovation and better service quality. It is well recognized that the 
wireless market is reaching saturation: that is, most all of the people 
who want mobile phones likely have them already. Subscriber growth for 
the carriers must come from attracting new customers away from the 
competition. Handset differentiation is a key means of drawing such 
customers, and handset exclusivity is a key marketing tool. Prohibiting 
such arrangements and effectively mandating that all offerings look the 
same would interrupt a well-functioning competitive process and leave 
the carriers with fewer options to attract customers. Although this 
undeniably leaves some carriers out of the competition for customers 
desiring a particular smartphone, it does not completely foreclose 
their ability to compete on other service features and functions.
    One of the enduring lessons of childhood is that you should share 
your toys. But in the realm of electronic communications networks, this 
rule of thumb does not always have beneficial consequences. In a 1999 
U.S. Supreme Court decision overturning portions of the FCC's unbundled 
network element sharing rules, AT&T v. Iowa Utilities Board, concurring 
Justice Stephen Breyer observed:

        Nor can one guarantee that firms will undertake the investment 
        necessary to produce complex technological innovations knowing 
        that any competitive advantage derived from those innovations 
        will be dissipated by the sharing requirement . . . Increased 
        sharing by itself does not automatically mean increased 
        competition. It is in the unshared, not in the shared, portions 
        of the enterprise that meaningful competition would likely 
        emerge.

        A totally unbundled world--a world in which competitors share 
        every part of an incumbent's existing system, including say, 
        billing, advertising, sales staff, and workforce (and in which 
        regulators set all unbundling charges)--is a world in which 
        competitors would have little, if anything, to compete about.

    Substitute mandatory ``sharing'' of handsets developed through 
equipment manufacturer-carrier collaboration and shared risk taking for 
``advertising'' and one can see the net effect of a prohibition on 
exclusive handset arrangements: there will be little left for the 
carriers to compete about. In networked industries like wireless, with 
high fixed costs, if all other areas of competition are removed, 
forcing the firms to compete on price alone will make recovery of 
network investment more difficult and eventually could lead to one or 
more of the current providers exiting the market. In other words, it 
would likely lessen, rather than enhance, competition and consumer 
welfare.
V. Existing FCC Policy and Rules Correctly Permit Exclusive Handset 
        Arrangements
    Well established FCC precedent supports exclusive handset 
arrangements, based on the highly competitive nature of the telephone 
consumer equipment market and the effectively competitive services 
market. In the 1968 Carterfone decision, the Commission first required 
that any piece of ``customer premise equipment'' be allowed to access 
the telephone network (then truly a monopoly) so long as it did not 
cause harm to the network. In the FCC's landmark 1980 Computer II 
decision, the agency ``de-tariffed''--removed from common carrier 
regulatory controls--customer premises equipment (CPE) as well as data 
transmission services, but required that both be sold unbundled from 
the underlying common carrier wireline service and by separate 
corporate entities. The FCC did so in recognition of the fact that the 
CPE market was highly competitive such that the imposition of common 
carrier regulation had serious and deleterious consequences. In 1992, 
the Commission created an exception to the bundling prohibition in its 
Cellular CPE Bundling Order, allowing wireless providers to bundle 
devices and transmission services with wireless voice service. The 
Commission justified this exception on the grounds that ``most wireless 
carriers were smaller and operated in local markets, making it unlikely 
that they could `possess market power that could impact the numerous 
CPE manufacturers operating on a national . . . basis.' ''
    In the same 1992 order, and at a time when there were only two 
cellular carriers per market, the FCC rejected claims by both cellular 
resellers and equipment manufacturers that permitting carriers to enter 
into exclusive agreements with CPE providers created the potential for 
anticompetitive abuse. Two markets were analyzed: the CPE market and 
the cellular services market. The FCC had little trouble concluding 
that the ``cellular CPE market is extremely competitive.'' After noting 
that the record was not conclusive as to whether the service market was 
``fully competitive,'' the FCC reiterated that in establishing the 
duopoly cellular market, it had concluded that ``even a marginal amount 
of facilities-based competition will foster public benefits of 
diversity of technology, service and price.'' Accordingly, the FCC 
refrained from intervening in these markets where the record before it 
was devoid of evidence that cellular carriers were violating their 
obligations to provide service to customers purchasing other brands of 
CPE or that the exclusives were having an anticompetitive impact on 
competition in the CPE market.
    Not only did the FCC find that no evidence of anticompetitive 
effects from the exclusive CPE deals had been presented on the record 
before it, but the agency went on to note that the record did not 
demonstrate a reason to be concerned about future exclusive dealing 
arrangements, because nondiscrimination requirements (still in effect 
today) precluded cellular carriers from refusing to provide services to 
a customer on the basis of the CPE he or she owns and it was unlikely 
that cellular carriers could effectively eliminate competition in the 
CPE market by entering into such agreements. In other words, the two 
markets potentially affected by exclusives--the upstream CPE market and 
the downstream carrier services market--were both sufficiently 
competitive even in 1992 to withstand any potential adverse effects 
from exclusive deals. Certainly today's exclusive deals pose no greater 
threat in wireless markets served by many more carriers offering a far 
greater variety of handset options.
VI. Any Prohibition on Handset Exclusivity Would Be Difficult to 
        Implement
    If Congress wished to impose a prohibition on exclusivity, it would 
have to address the question of what should be considered an 
``exclusive?'' As explained above, many carriers offer nearly identical 
handsets with the only differences being the software. In some cases, 
carriers offer handsets in exclusive colors, or with the camera 
removed.
    Similarly, because there are multiple wireless standards in the 
United States, a phone designed for GSM networks simply will not work 
on CD MA networks without significant product redesign. For voice, 
there is also Sprint's iDEN network, and for data there are multiple 
technologies for both of the two major network types. In the case of 
the iPhone, AT&T currently has a technological basis for its exclusive 
distribution arrangement. It is the only major U.S. carrier with a 3G 
network utilizing the HSPA standard on the 850 MHZ band, and the iPhone 
as currently configured only supports AT&T's service for full data 
functionality. Even if carriers were prohibited from entering into 
exclusive arrangements, manufacturers can easily obtain de facto 
exclusives by designing phones for only one carrier's network. Adapting 
the phone to the spectrum interface technologies utilized by other 
carriers would most likely require adding other spectrum bands and/or 
overhauling the device to utilize CDMA calling and 3G access utilizing 
standards other than HSPA. Forcing manufacturers to design phones for 
multiple carriers is more likely to destroy innovation than to increase 
consumer welfare.
    Eventually, as carriers transition their networks to a common 4G 
standard, some of these differentiating factors will disappear. But 
even if exclusive handset arrangements were prohibited tomorrow, it 
would not be possible for all carriers to immediately offer the iPhone 
or similar handsets on their network. Thus, little good would be 
accomplished but tomorrow's innovations would be put at risk.
    Even setting limits on the terms for exclusive arrangements, while 
less disruptive than an outright prohibition, would entail difficult 
decisions over exactly what the permissible period of exclusivity 
should be. Last December, France's Competition Council struck down 
Apple's five-year exclusive iPhone distribution agreement with Orange 
(formerly known as France Telecom). The decision was partly reflective 
of the authority's concern that the French mobile phone market was less 
competitive than others, such that a five-year exclusive sales 
agreement was far too long. The ruling specified that all existing and 
future sales agreements between Apple and Orange must expire after a 
maximum of 3 months, which the carrier argues will not allow it to 
justify the investments needed to upgrade its network to support mobile 
Internet services. If 5 years is too long, and 3 months too short, 
would Congress or the FCC be able to set a single time limit on 
exclusivity that will fairly balance the equities for all wireless 
providers and all equipment manufacturers?
    Finally, an economic assessment prepared for one of the larger 
rural carriers seeking an FCC rulemaking to limit use of exclusive 
handset arrangements suggests that any exclusive sales arrangement made 
by a ``Big Four'' carrier and an equipment manufacturer be limited to 
apply the handset exclusivity only to the other ``Big Four'' carriers, 
leaving smaller carriers free to obtain those handsets. Even assuming 
there were a competitive basis for such a restriction (which is 
doubtful), while it may be clear enough which carriers should be so 
restricted in their ability to contract for equipment today, it is by 
no means clear what the appropriate test should be in the future, or 
even how such a rule could be written into the Code of Federal 
Regulations.
VII. Alternatives Exist for Rural Carriers Seeking Access to Innovative 
        Handsets
    Rather than trying to prohibit or limit the use of exclusive 
handset arrangements, the rural carriers may wish to pick up where the 
ACG members left off, pool their resources, and negotiate such 
arrangements for themselves. Like AT&T, the rural carriers may have to 
be willing to share some subscriber revenue or increase their handset 
subsidies to bring prices on advanced units down sufficiently to 
increase the addressable market for such products, but that's simply 
the market at work.
    There is nothing stopping smaller carriers from banding together to 
achieve economies of scale. Indeed, many have already done so. The 
Associated Carrier Group (ACG), a consortium of 25 small or rural Tier 
II and II CDMA carriers ``was formed to benefit both its members and 
the consumer by facilitating efficient production and marketing of 
devices as well as increased competition. The consortium enables its 
members to work with manufacturers, suppliers and other vendors to 
develop and procure products in a more timely fashion through economies 
of scale and standardization of coding and other features.'' Proceeding 
in this manner, the ACG members actually beat Apple and Cingular's 
Motorola ROKR to market in 2005 with a digital music player smartphone, 
the Kyocera Slider Remix KX5 music phone. At the time, ACG's president 
proudly declared: ``Although other phones have been launched with MP3 
capability, we think this was the first phone to be centered around 
music. Shortly thereafter, other carriers launched music-centric 
devices,'' adding, ``This phone is exclusive to us for a limited 
time.''
    More recently, ACG has partnered with Brightpoint, Inc. which 
supplied approximately 84 million wireless devices globally in 2008. 
Similarly, twenty eight small carriers that won licenses in the FCC's 
recent 700 MHZ auction formed NextGen Mobile, LLC. An official of the 
new company explained that, ``By aggregating our orders, NextGen Mobile 
hopes to entice device manufacturers to develop and deliver the next 
`it' handset or data card to those customers shut out in the past.''
    The fact that these small carriers and MVNOs can procure innovative 
``exclusive'' handsets indicates that other smaller carriers can as 
well and strongly suggests that there is no market failure to be 
addressed by regulatory intervention. As no single carrier and no 
single manufacturer has a position of market power, exclusive 
arrangements should pose no antitrust concern.
    Yet another avenue is negotiating with the carriers who currently 
have exclusive distribution arrangements for desired handsets. There 
are indications that at least one rural cellular carrier, Cellular 
South, through the ACG, is in discussions with Verizon Wireless to 
secure access to handsets currently exclusive to Verizon Wireless from 
two manufacturers, 6 months after their introduction by Verizon 
Wireless. Such negotiated contractual resolutions to the problems 
alleged by rural cellular interests are surely far superior to 
resolution through government intervention.
VIII. Conclusion
    RCA has asked the FCC to initiate a rulemaking proceeding to 
investigate alleged anticompetitive effects of exclusivity arrangements 
between commercial wireless carriers and handset manufacturers, and to 
adopt such rules, as necessary, to prohibit such arrangements as 
contrary to the public interest. But the allegations supporting this 
request amount to little more than complaints that lack of access to 
the most popular new smartphones such as the iPhone and Blackberry 
Storm make it more difficult for rural carriers to compete with the 
largest national carriers. But the FCC and Congress should refrain from 
interfering with these beneficial contractual arrangements freely 
negotiated by equipment manufacturers and wireless carriers in a 
competitive marketplace.
    These exclusive handset arrangements do not preclude competition on 
other wireless service attributes any more than they preclude the 
smaller carriers from joining together to strike their own deals for 
exclusive handsets with equipment manufacturers. The situation is not 
analogous, for example, to that of an exclusive contract to serve 
multiple-dwelling unit for multichannel video programming services 
where the existence of the contract completely precludes marketing a 
competing service to the residents. Rather, it is more closely 
analogous to network sharing requirements for unbundled elements, where 
the accepted standard is whether access to the desired element is 
necessary in that lack of access would impair the ability of a 
competitor to enter the market. Mere difficulty is not impairment, and 
sharing of competitive assets should not be ordered lightly. A 
prohibition on exclusive handset arrangements would have the net effect 
on equipment manufacturers and carriers of a sharing obligation. Such 
an action is neither necessary nor advisable in today's wireless 
marketplace. But if I am incorrect in my views on the competitive 
situation or harms to consumers posed by these arrangements, there 
would be nothing to prevent our antitrust authorities from intervening 
under either the antitrust laws or consumer protection statutes.
    I respectfully submit that neither Congress nor the Commission 
should take such action on the matter of exclusive handsets. The FCC 
today has before it a record on this question. If further study of the 
matter is deemed advisable, the FCC is well within its powers to 
conduct a Notice of Inquiry and gather a more fulsome record from 
additional parties. I am confident that at the end of such an inquiry, 
the Commission would determine that there is no need for additional 
regulatory intervention.
    Mr. Chairman, thank you again for the invitation to testify today. 
I would welcome any questions the Committee may have.

    Senator Kerry. Thank you, Ms. Esbin, very much.
    Mr. Meena?

             STATEMENT OF VICTOR H. ``HU'' MEENA, 
            PRESIDENT AND CEO, CELLULAR SOUTH, INC.

    Mr. Meena. Good afternoon, Mr. Chairman, and members of the 
Committee. My name is Hu Meena, I'm President and CEO of 
Cellular South. Thank you for this opportunity to testify today 
on behalf of Cellular South, our customers and consumers 
everywhere who want more choices when it comes to their 
wireless plans and devices.
    Wireless has experienced a golden age and offers the 
opportunity to engage with the world as never before. We see 
this golden age coming to an end, as the largest wireless 
carriers engage in anti-competitive and anti-consumer 
practices--practices, such as exclusivity agreements with 
wireless device manufacturers.
    Today, AT&T and Verizon Wireless have over 60 percent of 
the national wireless market share and roughly 90 percent of 
the wireless market is in the hands of those two plus Sprint 
and T-Mobile. Instead of fostering innovation and offering 
consumers the best range of choices, the largest companies are 
using their power to demand and to receive long-term exclusive 
agreements with device manufacturers.
    These long-term agreements essentially put the best, most 
powerful, and most popular cell phones, smartphones, and other 
wireless devices out of the reach of millions of consumers.
    If you live in New York City and want a touch screen 
Blackberry Storm, then you will be a Verizon Wireless customer 
whether you want to be or not. If you live in Washington, D.C. 
and want an iPhone, then you are obligated to be an AT&T 
Wireless subscriber, even if they do not cover your metro 
route. If you live in Laurel, Mississippi and want to subscribe 
to a 3G network, you will be limited to only devices that 
Cellular South is allowed to offer.
    Of course the Nation's largest carriers aren't limiting the 
use of exclusive arrangements to wireless handsets, these 
carriers have already begun using exclusive arrangements in the 
Netbook market. I hold one here. The device is smaller than a 
laptop and a little larger than a PDA.
    Will Congress sit by and allow the largest carriers to lock 
the most attractive Netbooks into exclusivity agreements before 
this segment of market is fully--fully emerges? Left unchecked 
in this segment of the PC market, the largest wireless carriers 
will gain control and begin to restrict PC innovation and 
distribution, just as they have wireless handsets.
    Furthermore, the claim that exclusivity agreements drive 
innovation is completely unfounded in this segment of the 
market. Companies like Dell, Acer, and others were advancing 
the Netbook market well before the largest carriers got 
involved. How then can the largest carriers claim a divine 
right to exclusivity on Netbooks?
    The situation with exclusivity is bad and only getting 
worse. Cellular South and carriers like us have tried to find 
solutions to this problem without resorting to help from 
policymakers. We've attempted several solutions with industry, 
including fruitless direct talks with the large carriers and 
indirect talks via CTIA. We have tried to entice device 
manufacturers to sell us the latest technologies by forming a 
buying group and consolidating the purchasing power of 27 
regional carriers, but we have not been able to capture their 
attention--the manufacturer's attention, as they consistently 
look over their shoulders for approval from the largest 
carriers of what they might be allowed to sell to us.
    The big wireless carriers argue that device manufacturers 
can not innovate and offer new devices without the help of 
funding generated by exclusivity agreements. Yet, long before 
the Razor, before the iPhone or the Storm existed, consumer 
electronics manufacturers had established an almost 30-year 
record of innovation. And European and Asian consumers enjoy a 
broad choice of innovative devices, 70 to 80 percent of which 
are available independent of any network operator.
    In short, what we are witnessing is a strategy by the 
largest carriers to limit consumer choice and undermine 
competition. Our vision is to allow all consumers in the U.S. 
to freely choose their own combination of attractive devices, 
relevant applications, quality coverage, access to high-speed 
broadband networks, all with a rate plan that best fits their 
needs and their budget. Now, that's true innovation.
    I hope that our vision is the one that policymakers will 
embrace, before consumers find themselves in a wireless dead 
zone of limited choice.
    Thank you for your time today.
    [The prepared statement of Mr. Meena follows:]

             Prepared Statement of Victor H. ``Hu'' Meena, 
                President and CEO, Cellular South, Inc.
Introduction
    Mr. Chairman and members of the Committee, thank you for allowing 
this opportunity to testify before you today regarding a number of 
important issues related to competition in the wireless industry. I 
have been in the wireless industry for over twenty (20) years with 
Cellular South, the Nation's largest privately-owned wireless carrier, 
serving all of Mississippi and portions of four other southeastern 
states.
    In my years in the wireless industry, I have seen the duopolistic 
world of the early cellular licenses, the rise in wireless competition 
as a result of spectrum auctions in the personal communications 
service, and the growth and innovation throughout the industry as a 
result of the Telecommunications Act of 1996. However as I sit before 
you today, I am convinced that, unless things change quickly, the 
industry is coming full-circle and progressing--or, rather, 
regressing--into a duopoly once again.
    The Justice Department broke up the AT&T monopoly in 1982. In 1993, 
the wheels were set in motion for spectrum auctions that would open the 
duopoly in wireless markets to competition. In 1996, Congress rewrote 
the Telecommunications Act to further promote competition in 
telecommunications services. Today, however, the industry is trending 
back toward consolidation and the days of Ma Bell. The largest carriers 
continue with acquisition after acquisition--Centennial Wireless, 
Alltel, Rural Cellular Corporation, Midwest Wireless, SunCom, Dobson 
Communications, just to name a few--with seemingly no interest from 
regulators in the effects that this consolidation has on the market.
    Today over ninety percent (90%) of the wireless market is in the 
hands of AT&T Wireless, Verizon Wireless, Sprint Nextel and T-
Mobile.\1\ Combined, AT&T Wireless and Verizon Wireless control over 
sixty percent (60 percent) of the market.\2\ This should come as no 
surprise after the parade of acquisitions over the past several years.
---------------------------------------------------------------------------
    \1\ According to a series of SEC filings and/or corporate press 
releases all of which are publicly available, customer totals of the 
four largest carriers as of 3/31/09 were: Verizon Wireless--86.6 
million customers, AT&T--78.232 million customers, Sprint--49.083 
million customers, and T-Mobile--33.2 million customers. Total 
customers served by ``Big Four''--247,115,000. According to CTIA--The 
Wireless Association, there were 270.3 million wireless customers as of 
12/31/08. Even if one makes the unlikely assumption that wireless 
growth continued at the same rate in the first quarter of 2009 as it 
did in 2008, the total number of wireless subscribers rises to only 
274,025,000. These numbers yield a combined market share of 90.179 
percent for the Big Four. Of course, this does not include the addition 
of Centennial's customer figures to AT&T's customer count once that 
acquisition is approved by the FCC.
    \2\ See explanation in FN 1.
---------------------------------------------------------------------------
    One reason that this is a problem is that the largest carriers use 
their market power to prevent competitors from having access to devices 
and roaming. If this trend continues, and I believe it will without 
intervention from Congress, then there will once again be a duopoly in 
the wireless industry. Our country's banking and finance policy 
mistakenly believed that free reign in the marketplace with little 
oversight was the best course of action and that certain institutions 
were simply too big to fail. This reasoning will lead to the same 
market failures in the wireless industry. Congress must take action now 
to ensure that the wireless industry remains the competitive and 
innovative marketplace that Congress intended for consumers to have.
I. Exclusive Agreements for Devices
    One effect of the market concentration described above is that the 
largest carriers now use their market power to demand (and receive) 
long-term exclusive agreements with device manufacturers for the latest 
and greatest handsets. Exclusivity agreements prevent other carriers 
from acquiring these devices and are particularly harmful to wireless 
consumers.
A. Exclusive Agreements for Devices are Anti-Competitive
    Wireless service has evolved from a market where consumers were 
primarily concerned with attractive monthly plans and a provider's 
network, to a market where a carrier's wireless devices reign supreme. 
Cellular South and other regional and rural carriers have competed with 
the largest carriers for years based on network quality, network 
coverage and price. These are all factors that are within our control. 
If we lose a customer because we don't offer the right plan or because 
we drop too many calls, that blame falls squarely on our shoulders--and 
I can and will fix that problem. However, our ability to compete is 
compromised because the largest carriers lock up devices in exclusivity 
agreements. Put simply, regional and rural carriers cannot gain access 
to the latest, cutting-edge devices which gives large carriers a key 
competitive advantage. Focus groups of customers who have left Cellular 
South for the largest carriers repeatedly say that they are buying the 
device, not the network, and certainly not the company.
    Historically, exclusive agreements lasted three (3), maybe even six 
(6), months. Agreements of this length were certainly obstacles to 
competition, but they were not the anti-competitive weapons that 
today's long-term agreements have become. Today, handset manufacturers 
tell us that the largest carriers are demanding exclusivity on more 
devices, as well as longer exclusive periods for devices. The largest 
carriers are increasingly demanding ``lifetime'' exclusives on 
handsets. At least one large carrier is demanding that all of the 
devices it accepts from a particular manufacturer be provided under 
exclusive agreements. For years, Sprint has had exclusive agreements 
for all of Sanyo's devices.\3\ Manufacturers know that they must cater 
to the largest carriers in order to secure any kind of market share in 
the U.S. market.
---------------------------------------------------------------------------
    \3\ This has continued even though Sanyo is now owned by Kyocera.
---------------------------------------------------------------------------
B. Exclusive Agreements for Devices are Anti-Consumer
    This battle among the industry titans has left consumers as 
collateral damage because device manufacturers are prohibited from 
providing the cutting-edge devices that consumers desire to the smaller 
carriers. Vast portions of America--including all or part of Alaska, 
Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, 
Nebraska, Nevada, New Hampshire New Mexico, Oregon, Vermont, 
Washington, West Virginia and Wisconsin--are not served by any of the 
largest carriers, so Americans in these areas are prohibited from 
acquiring the newest and most innovative devices. Even in areas that 
are served by one of the largest carriers, consumers are not free to 
choose the latest devices without being forced into accepting service 
from a particular carrier. If you live in New York City and want a 
Blackberry Storm, then you will be a Verizon Wireless customer whether 
you want to pay confusing add on fees or not. If you live in 
Washington, D.C. and want an iPhone, then you are obligated to be an 
AT&T customer even though it will be years before you can reliably use 
your iPhone when traveling to and from work on the Metro. Because 
exclusive agreements prevent Cellular South from getting these devices, 
if you live in Laurel, Mississippi and want to subscribe to a third 
generation (``3G'') network, you will be limited to only those devices 
that Cellular South can provide.
    Of course, the Nation's largest carriers aren't limiting their use 
of exclusive arrangements to wireless handsets; these carriers have 
already begun using exclusive arrangements in the Netbook market. 
Netbooks are devices that fit somewhere between a Smartphone and a 
laptop computer. These devices offer Internet access and common laptop 
functionality, but are priced at a level at or near most Smartphones. 
These devices will offer the perfect solution for a number of wireless 
users who find Smartphones too small for extensive use, but find a 
laptop to be too cumbersome. Cellular South has been in touch with 
several Netbook manufacturers and, as you may have guessed, the largest 
carriers are already demanding exclusivity on many models of these 
wireless devices.
    What would happen if merchants sold computers that only worked with 
one Internet service provider? Imagine a world in which Macintosh 
computers only worked on AT&T's DSL. That's exactly the world we live 
in with the iPhone and Apple's exclusivity agreement with AT&T. If you 
want that handheld computer, you must have service through a particular 
wireless voice and Internet provider.
    As another example, what would happen if a pharmaceutical company 
developed a lifesaving drug that could be purchased exclusively from 
one pharmacy chain in the country, but you didn't have a branch of that 
chain in your city? That is similar to what consumers experience 
without access to some of the latest devices. Potentially lifesaving 
applications are being developed for devices that are exclusive to a 
single carrier. If that carrier does not serve your area, then you are 
simply out of luck.
    I was asked about this at a recent hearing in the House of 
Representatives. Unfortunately, the question was presented as if we 
were seeking a free ride off of the investments of AT&T and Verizon. 
Holding aside that it is far from clear that those carriers take any 
real risk in developing handsets, we are simply seeking to buy the 
products that handset manufacturers produce and sell to others. Our 
conduct in seeking to limit or ban exclusivity arrangements is intended 
to broaden the market for handsets. We do not seek any special 
treatment or discounts, only an opportunity to buy the products they 
make.
C. Impact on Consumers, Economic Development, Public Safety and Health 
        Care
    If a regional or small carrier cannot get access to the latest 
devices, then it cannot roll out next-generation services. No carrier 
can justify the expense of deploying a new technology unless it can 
also deliver the devices necessary to make that technology work and 
deliver the products and services that consumers want. While this is 
bad for the carrier, it is ultimately the consumer who pays the price 
for not having access to the devices necessary to use mobile broadband 
services. Without access to the latest devices, consumers are ill-
equipped to respond to natural disasters, they cannot access many 
benefits of telemedicine applications, and they cannot adequately 
protect themselves in emergency situations. Today's advances in 
wireless technology will not be realized until the latest wireless 
handsets are available to all of rural America.
    Collectively, a lack of access to the latest devices means that 
rural communities cannot maximize economic development. One of the 
first questions Toyota asked when it considered whether to build a 
plant in Mississippi was whether the rural town of Blue Springs had 
access to wireless 3G technology. Thankfully, for Blue Springs and the 
surrounding area that answer was ``yes.'' However, without access to 
modern wireless devices, large portions of America will be left behind 
as the industry continues to deploy third generation or 3G technologies 
and eventually deploys 4G technology. Yesterday's economic development 
infrastructure meant rail, electrical, and road access. Today's global 
economy demands that rural areas have access to wireless broadband and 
the latest wireless devices.
D. The False Dilemma: Keep Exclusivity Agreements or Lose Innovation
    The largest carriers claim that handset exclusivity agreements are 
good for consumers and the industry because they promote innovation. 
According to this argument, without exclusivity agreements, there would 
be no innovation in the wireless device market. The largest carriers 
offer a false dilemma between banning exclusivity agreements and 
innovation.
    If this tactic sounds familiar, it is because the argument is 
simply today's version of the doomsday scenario that legacy companies 
ask us to believe whenever their control is threatened. Years ago, we 
were warned that using non-AT&T owned equipment could cause harm to the 
landline network. When the Federal Government finally permitted 
Americans to use non-AT&T equipment, the network miraculously survived. 
Had AT&T prevailed in those days, the people that continue to have 
landline telephones may still be using rented, black, bulky boxes that 
are connected to the wall and useful only for voice connections.
    Not only did the landline network survive when consumers were 
allowed to purchase and use non-AT&T equipment, incredible innovation 
sprang forth and the network became more than just a tool for voice 
communication. Today, the old landline network is used for high-speed 
data connections between computers (albeit they are limited to 
location-to-location connectivity). No one could argue that the 
computer industry has lacked innovation, yet the service providers do 
not have exclusive agreements for the customer equipment. Since today's 
wireless devices are far more akin to computers than merely voice 
telephones, how does the myth of exclusivity driving innovation 
continue to persist?
1. iPhone
    While it is important to understand that the handset exclusivity 
issue is about far more than one device, the fact remains that Apple's 
iPhone crystallized the problem for consumers. Although AT&T touts this 
device as ``creating enormous benefits for all consumers'' \4\ the fact 
remains that millions of Americans do not benefit from the iPhone due 
to the limited scope of AT&T's network and its poor coverage in many 
areas.
---------------------------------------------------------------------------
    \4\ See the late-filed Written Statement of AT&T, Inc. before U.S. 
House of Representatives, Subcommittee on Communications, Technology 
and the Internet at 7 (no filing date given; May 7, 2009 hearing date) 
(emphasis added).
---------------------------------------------------------------------------
    According to AT&T, those customers who do benefit from the iPhone 
do so ``in no small part'' as a result of ``[t]he exclusive arrangement 
between AT&T and Apple'' that delivers ``spectacular public interest 
benefits.'' \5\ Although AT&T claims ``close collaboration and enormous 
investment,'' \6\ the level and timing of AT&T's collaboration has 
never been disclosed and it is widely assumed that much, if not all, of 
AT&T's investment was attributable to long-overdue network upgrades.\7\
---------------------------------------------------------------------------
    \5\ Id.
    \6\ Id.
    \7\ While early reviews of the iPhone were positive, the complaints 
about AT&T's slow network were too numerous to count. A quick Google 
search with the terms ``AT&T slow network iPhone'' returns 156,000 
results.
---------------------------------------------------------------------------
    With the release of the latest iPhone 3GS, AT&T continues to impede 
innovation by ensuring that Multimedia Messaging Service (MMS) will not 
be supported on AT&T's network until sometime this fall and that 
tethering \8\ will not be available until some undisclosed time in the 
future.\9\ This is hardly an example of a carrier driving innovation.
---------------------------------------------------------------------------
    \8\ ``Tethering'' is the capability to use the handset as a 
wireless modem by connecting it to a computer with a cord, so that the 
computer can access the Internet. This is especially useful in areas 
beyond the reach of wireline broadband connections and Wi-Fi networks.
    \9\ ``AT&T Lagging Behind in iPhone 3G Feature Deployment'' 
available at: http://www.neowin.net/news/main/09/06/09/att-lagging-
behind-in-iphone-30-feature-deployment (last visited June 14, 2009) 
(``Because of carrier exclusivity agreements it's the end user who gets 
harmed because they do not have the option of using a phone of their 
choosing on the network they prefer. All operators are guilty of 
exclusivity agreements, AT&T with the iPhone, Verizon with the 
Blackberry Storm, Sprint with the Pre and T-Mobile with the G1. 
Hopefully 1 day soon these contracts will be outlawed in favor of 
consumer choice, but until then, everyone must play the cards that have 
been dealt.'').
---------------------------------------------------------------------------
2. Netbooks
    As discussed above, Netbooks are the next emerging wireless market 
segment with the opportunity to change the way people look at their 
wireless device. Netbooks combine the functionality of a personal 
computer with greater portability than a laptop, and they approach 
price points comparable to many Smartphones on the market today. 
Netbooks represent a solution for businesspeople, students, travelers, 
and anyone else that values full connectivity in a compact yet 
functional device. This product offers an economical entry point for 
demographics that have been left on the wrong side of the ``digital 
divide.''
    Well-known computer manufacturers such as Dell are already in the 
Netbook market but, predictably, the largest carriers are now demanding 
exclusivity agreements simply because manufacturers of Netbooks have 
embedded wireless data cards--in addition to embedded Wi-Fi cards--to 
allow them to connect to the Internet. The largest carriers have not 
driven innovation in this market, yet they are able to extract 
exclusivity agreements--once again--because they have the market power 
to demand them. In the case of the most economical Netbooks on the 
market, Acer's devices, we have been told by that manufacturer that all 
of their Netbooks are under exclusivity agreements. These agreements 
effectively deny Netbooks to any American who could meet an entry-level 
price point but who does not live in the proper service area, or who 
wishes to connect the device to their carrier of choice.
3. True Innovation
    Our vision is to end big-carrier practices that prohibit every 
wireless consumer in the United States from being able to freely choose 
their own combination of attractive devices, relevant applications, 
quality coverage, and access to high-speed broadband networks, all with 
a rate plan that meets their budget. Now that's true innovation! As 
long as handset exclusivity agreements are allowed to exist, this 
vision for innovation will never be reached.
E. Attempts at Non-Governmental Solutions
    The situation with exclusivity agreements is bad and is only 
getting worse. Without action from Washington, there will be no 
solution. Cellular South and carriers like us have tried to find 
solutions to this problem without resorting to help from policymakers. 
We have attempted several solutions within the industry, but all have 
been fruitless insofar as resolving this problem.
1. Direct Contact with Large Carriers
    Cellular South, in conjunction with another regional carrier, had 
discussions with Verizon Wireless regarding the possibility of Verizon 
lifting its exclusivity agreements for regional and rural carriers. 
There was an initial oral agreement that would allow Associated Carrier 
Group (ACG) members and certain other regional and rural carriers to 
offer a limited number of Verizon's exclusive handsets from two 
manufacturers--LG and Samsung--six (6) months after Verizon launched 
the devices. It was understood and agreed to by Verizon and ACG that 
this would require access to the devices prior to Verizon's launch so 
that other carriers could begin optimizing and testing the devices, 
which is generally a nine (9) to twelve (12) month process. As a 
condition of this agreement, Verizon would determine which carriers 
would be allowed to be a part of the ACG buying group. ACG was willing 
to accept these terms because it represented a step in the right 
direction.
    Prior to the hearing on May 7 before the House Subcommittee on 
Communications, Technology and the Internet, Verizon advised ACG that 
it would not, in fact, allow the smaller carriers to have access to the 
devices or to work with manufacturers prior to Verizon's launch. This 
change had the potential to double the exclusivity period and thus 
terminated the deal. Without access to the devices in advance of 
Verizon's launch, ACG members and the other smaller carriers could not 
offer these devices for approximately nine (9) to twelve (12) months 
after Verizon's introduction. By this point, the devices are at or 
nearing the end of their life cycle and certainly are no longer the 
cutting-edge devices that consumers demand.
    Cellular South and other ACG members have been, and still remain, 
opposed to exclusivity agreements for any period of time. Verizon's 
actions clearly demonstrate the need for Congress to resolve this issue 
for consumers and competitors.
2. Device Manufacturers
    Our efforts with the equipment manufacturers have produced 
information, but no solution to the problem of exclusive agreements for 
devices. Manufacturers tell us that they would like to open their 
portfolios to us, but that they cannot show us a number of their 
devices--much less sell them to us--because the largest carriers will 
not allow it.
3. Industry Groups
    The Cellular Telecommunications and Internet Association (``CTIA'') 
convened a working group late last year in an effort to resolve the 
device exclusivity issue. CTIA brought large and small carriers to the 
table along with manufacturers, and the effort began with an early hope 
of promise. However, over the course of approximately 3 months, it 
became apparent that the largest carriers had no incentive to 
participate, the manufacturers remained virtually silent on the matter, 
and the effort proved futile.
4. Consolidation of Purchase Power
    One frequent response from the four carriers that profit from 
exclusive handset arrangements is the suggestion that smaller carriers 
should consolidate purchasing power in order to gain access to cutting-
edge devices. While that idea is good in theory, it does not work in 
practice.
    The Associated Carrier Group was formed a number of years ago for 
just this purpose. ACG has almost 30 carriers who, at this time, are 
exclusively CDMA service providers. For the past 2 years, 
representatives of ACG have traveled to South Korea to plead for access 
to cutting-edge devices from LG and Samsung, but South Korean 
manufacturers have made it clear that exclusive arrangements insisted 
upon by the Nation's largest carriers prevent them from selling the 
most appealing handsets to ACG members.
    It is commonly suggested that ACG should push for its own exclusive 
devices. Although ACG did have a device several years ago that was not 
sold by another carrier, the suggestion that small carriers join 
together for their own exclusive device ignores our belief that 
exclusives are not good for consumers or the industry. It is not our 
position that exclusives are bad because we don't have them--it is that 
exclusive agreements negatively impact consumers by unfairly impeding 
competition.
    Furthermore, it strains the limits of credibility to suggest that 
the smaller carriers can pool their purchasing power in order to 
acquire devices, because market power has been concentrated in the 
hands of the largest carriers over the past several years. As discussed 
previously, the largest four carriers have over ninety percent (90%) of 
the Nation's wireless service market, with AT&T Wireless and Verizon 
Wireless combining for approximately sixty percent (60%) of the market. 
These carriers have grown through acquisition after acquisition with 
seemingly no regulatory consideration given to market concentration. As 
a result, all remaining carriers regardless of technology have less 
than 10 percent (10%) of the market. If the largest carriers are 
allowed to continue using their market power to thwart competition, we 
will once again have a duopoly for wireless services.
    A second flawed argument is that there are plenty of device 
manufacturers from whom the smaller carriers can acquire handsets that 
are not bound by exclusivity agreements. This argument essentially 
boils down the concept that smaller carriers should offer the devices 
that the largest carriers do not want. If the non-exclusive devices 
were the type of cutting-edge, game-changing devices that attracted 
customers, you can be assured that the mega-carriers would be locking 
those devices up with exclusive arrangements.
F. Efforts at the FCC
    On May 20, 2008, Rural Cellular Association (``RCA''), of which 
Cellular South is a member, filed a Petition for Rulemaking 
(``Petition'') with the Federal Communications Commission 
(``Commission''), asking the Commission to investigate the widespread 
use and anticompetitive effects of exclusivity arrangements between 
commercial wireless carriers and handset manufacturers, and, as 
necessary, adopt rules that prohibit such arrangements when contrary to 
the public interest.
    Only the four largest carriers and one manufacturer expressed 
opposition to the RCA Petition. In contrast, over two hundred (200) 
parties representing the rest of the wireless industry and the public 
interest community expressed their unconditional support for RCA's 
petition either individually or through their trade associations. The 
message of the majority was clear: free market competition and 
innovation has been strangled by large carrier demands for exclusive 
access to the latest advanced devices.
    The market is distorted when a single carrier is allowed to have a 
monopoly on a device. Action is needed now to restore competition in 
the handset market and to ensure that consumers have the option to 
choose both the device and the service provider that they want.
II. Roaming
    On the topic of roaming, far and away the most important issue is 
that of automatic roaming for data services--specifically, roaming for 
high-speed data such as EV-DO, HSPA, and as we go forward, both WiMAX 
and LTE. An equally important aspect of roaming is the issue of 
interoperability which allows seamless transitions between networks.
A. High Speed Data Roaming
    When I began in this industry, roaming agreements were standard 
practice. As networks expanded across the country, consumers came to 
expect their device to work, wherever they happened to be, regardless 
of who they chose as their service provider. Roaming agreements for 
voice service could be negotiated and finalized in hours or days. 
Recently, the FCC mandated that all carriers enter into roaming 
agreements for voice services, but did not extend that mandate to data 
services.
    As technology has advanced in the industry, consumers now expect to 
be able to send and receive e-mail and access the Internet over their 
devices, again wherever they happen to be. In order to accomplish this, 
a roaming agreement that covers data services must be entered into 
among carriers seeking access to distant networks. Instead of data 
roaming becoming routine, some of the largest carriers have been 
refusing to enter into data roaming agreements--as a means to restrict 
competition. Today's wireless devices do so much more than just make 
phone calls, and new applications are being introduced every day. 
Consumers literally have access to the world at their fingertips with 
today's wireless services. However, this world is often unavailable to 
many consumers because the largest carriers refuse roaming agreements 
for high-speed data.
    Regional and rural carriers offer network access in areas that the 
largest carriers have not and, likely, will never build out on their 
own. These smaller carriers do not seek these roaming agreements as a 
means to actively market outside their footprint because: (1) that is 
not the goal in seeking roaming, and (2) even if that were the goal, 
roaming rates are too high to make an economic case for that type of 
growth. Our customers travel just like the customers of the big 
carriers and we believe that consumers should be able to use their 
devices wherever they may be. Besides, this is not a free ride for us--
we pay for the service that our customers use on distant networks.
    At the FCC, some Commissioners question whether they have authority 
to mandate data roaming. While we believe that the Commission has the 
power to resolve this issue, there is no doubt at all that Congress has 
the power to address high-speed data roaming obligations. By requiring 
carriers to provide automatic data roaming to requesting carriers that 
use a compatible technology, Congress can ensure that consumers never 
again find themselves unable to utilize the indispensable data features 
of their wireless device when traveling outside of their home carrier's 
footprint.
B. Interoperability
    A related matter in the roaming discussion is the issue of 
interoperability between wireless carriers. At its most basic, 
interoperability allows consumers to move seamlessly from one network 
to another. In other words, the networks are configured in such a 
manner that the consumer gets full access to the features on his or her 
device whether that consumer is at home, or traveling on the other side 
of the continent. The applications that are possible with interoperable 
networks are virtually limitless:

   Navigation--the ability to provide turn-by-turn directions 
        to end users outside the home footprint.

   Tracking--the ability to track a device, package, or other 
        shipment nationwide instead of just inside the home footprint.

   Person finder--the ability to use a child's phone to find a 
        lost child outside the home footprint, or to use a wearable 
        device on a vulnerable adult to prevent them from becoming 
        lost.

   Weather Applications--the ability to passively provide the 
        current and forecasted weather conditions in the location where 
        the end user is currently located. This would include severe 
        weather alerts and warnings to move out of a storm's path.

    Each day, consumers rely more and more on the data capabilities of 
their wireless devices. As wireless providers deploy 3G and 4G 
technologies, we are entering a world where even voice communications 
are treated like data transmissions. It is not acceptable in this era 
of wireless technology that there would be a roaming requirement for 
yesterday's voice traffic, but not for the data services of today and 
tomorrow. Consumers need a solution and Congress is in the clearest 
position to provide it.
Conclusion
    As you can see, we are at a critical juncture in the wireless 
industry. Decisions made today will determine whether our industry 
becomes more consumer-friendly and innovative as a result of increased 
competition, or whether the trend toward a duopoly will continue and 
competition will be eliminated.
    Although the wireless industry may no longer be in its infancy, it 
is no more mature than a gangly teenager. There is much innovation left 
to be done. There are more people of all socio-economic backgrounds and 
geographic locales who have yet to benefit fully from the wireless 
experience. Before it is too late, Congress must step in and put an end 
to the largest carriers' stranglehold on devices, as well as ensure 
full roaming access. A light regulatory touch today will prevent the 
re-emerging duopoly in which two companies control all the customers, 
all the devices, all the prime spectrum, and become ``too big to 
fail.''
    Thank you again for the opportunity to be here today. I appreciate 
your time and your interest in these issues and look forward to 
discussing them here this morning. With that, I welcome any questions 
you may have.

    Senator Kerry. Well, thank you very much.
    We have some clear lines that have been drawn, and I'd like 
to kind of probe that a little bit, if we can here. And I 
invite a healthy back and forth, frankly. I don't like hearings 
where we just sort of, you know, constrain between the 
questions. So, if somebody wants to dig in, counter somebody, 
I'd like you to do that.
    Why--first of all, listening to you, Mr. Roth, and also Ms. 
Esbin, I accept the benefits that you articulated, but I'm 
having a difficult time trying to envision why an innovator, 
given the size of the market and the numbers of outlets, is not 
going to innovate in order to produce a product that is equally 
as competitive, that does all the whiz-bangs and gadgets and 
bells and whistles it has today, even more so, because it wants 
to appeal across different providers in order to gain as much 
market share of each of those providers that it can. So, I'm 
having trouble understanding why that innovation would be 
curbed. I just don't see that, given the size of the market 
here.
    Mr. Roth. I'd like to--I'd like to answer that. Because--I 
think there are two stories that might really help shed some 
light on that. The first is a colossal failure and the other 
one has been a real success.
    And I think I'll start with the failure. The first iPhone, 
the first attempt at a music-centric device, was this device I 
hold right here. And I know you can't see it from here, but it 
was the Motorola Rocker, and I don't know if you've all heard 
of the Rocker. It was our first attempt. Motorola, Apple, and 
AT&T went together in 2005 to create a device that we thought 
would cater to the music-centric. It was the predecessor of the 
iPhone, if you will, colossal failure. I still have them in 
inventory. And I don't hear Mr. Rooney or Mr. Meena asking for 
the Rocker. I have plenty to sell, still.
    But my point of that was, Motorola bore the brunt of that, 
so did AT&T. It was a huge risk for both companies. Large 
inventory commitments were made, production was--on a device 
that we thought would be successful, and it wasn't. So that 
type of risk is what manufacturers are looking for carriers to 
say, if you want to specify a device, you want to bring 
innovation that's not part of their product roadmap, then you 
need to share the risk with us.
    So I'll give you an example of a success, and I kind of 
look at the age of the group that sits behind you all. About 3 
years ago we saw texting as a trend that we thought would come 
to the youth of America. The Blackberry was the only texting 
device that existed. We go to Korea, and we do this every year, 
we travel the world. We go to Korea 24 months ago, and we sat 
down with them, and we talked to manufacturers about a low-cost 
device that had a ``qwerty'' keyboard for texting, and we 
wanted it for the teen market in the United States.
    We met with Samsung and we met with LG. That's not what was 
on their product roadmap, that was a significant risk for them. 
That wasn't the product that they planned on introducing on a 
global standard, but it's what we wanted. So, we went to them 
and we had to commit significant inventory, technical 
resources, marketing dollars, inventory space in our stores, in 
order to bring that product to market. We bore the risk of 
that. Unlike the Rocker, the little Samsung Propel, these 
little texters, enormously successful, and we've borne--we've 
borne the fruits of that.
    So, there's--I think that story--the tale of two cities 
kind of tells the story. Manufacturers want someone to share 
the risk, when what you're asking for is something that's not 
on their product roadmap.
    Senator Kerry. Now, Ms. Esbin, in her testimony, talked 
about how this would involve a particular model for a 
particular period of time. Is that in fact true, that--with 
respect to AT&T, the iPhone is for a particular period of time?
    Mr. Roth. Yes, sir, it is.
    Senator Kerry. And what is that period of time?
    Mr. Roth. The term of the agreement we've not disclosed. 
It's a confidential fact, but what we have said when we 
introduced the iPhone, is a multi-year deal that we signed with 
Apple.
    Senator Kerry. Well, in terms of our, sort of, thinking 
about marketplace power and access, is it important for us to, 
perhaps, have some sense of that time period?
    Mr. Roth. I think it's probably----
    Senator Kerry. Might that not weigh in to, sort of what the 
equities are here, as we look at this. Because, you have a 
legitimate point, I raised that very point with my own staff, 
and I ask it of Mr. Rooney and Mr. Frieden and Mr. Meena. Why, 
in the American way of doing business, does a company not have 
the right to go sit down with somebody, assume a certain amount 
of risk together, enter an exclusive arrangement to assume that 
risk, and if they come up with a successful product, why don't 
they have a right to market that product in this way? What 
distinguishes this from other exclusive arrangements in the 
marketplace?
    Mr. Rooney?
    Mr. Rooney. Two things, one, we do that all the time in 
other businesses, give people exclusive marketing rights for a 
period of time, and then after that, other businesses have 
access to it through licensing fees and other things.
    Senator Kerry. As they've said, it's for a period of time. 
I don't know what it is yet.
    Mr. Rooney. This is years, not months.
    Senator Kerry. So you think----
    Mr. Rooney. Here's the result.
    Senator Kerry. Isn't there a legitimacy to having a 
sufficient return on investment and taking a success story and 
riding it for a period of time?
    Mr. Rooney. With all due respect, here's the result. There 
are 14 new products out there right now, that are exclusively 
licensed to the Big Four. So that Mr. Meena and our customers 
have no access to these. What is happening is everybody now is 
going--and the Big Four is using their power to get exclusive 
rights to these phones. So, we're stuck with whatever comes out 
other than these. And it really puts a big dent in our ability 
to compete, it puts a big dent in our ability to supply these 
phones to areas of the country where we serve customers that 
the big guys don't.
    Senator Kerry. Now I'm going to be very provocative--I'm 
going to be provocative here on purpose and be a little bit of 
a Devil's advocate, because I want to get at this, but not 
because somebody represents where I've landed here.
    But some people might argue, hey, you guys are complaining 
because, you know, they've been more successful than you have, 
they've carved out a good concept, they have a good product, 
they created a joint effort. It's not as if people don't have 
access to the market. People can go and they can either do the 
Blackberry, they can get the phone, they can get the iPhone, 
they can have choices as to which combination of provider and 
product they want. Would you argue that there's insufficient 
availability to the consumer of those various combinations?
    Mr. Rooney. If you lived in Chicago or New York, I would 
agree with you. But if you live in rural Iowa or rural 
Wisconsin or rural Missouri, then you've got problems.
    Senator Kerry. Those can be very important to some of us 
here.
    Mr. Rooney. That's right, exactly. I know who's on this 
committee. So, I mean, it's a question here of--in terms of 
rural America, they really pay the price. In terms of urban 
America, there are more options, and yes--what it does is it 
hinders our ability to compete in those markets, but it doesn't 
eliminate completely the customer's choice.
    Senator Kerry. Mr. Frieden, is there something that makes a 
wireless network different from a cable network or a satellite 
network? Do we need to be thinking about the network itself, as 
a sort of, you know, public utility, in essence, and provide 
greater access to it, regardless of the innovative component 
that Mr. Roth appropriately talks about?
    Mr. Frieden. Yes, the Carterfone policy addressed a wired 
network. A wired network which doesn't use spectrum, can 
perhaps be more easily technically managed. But, I don't want 
to overstate the innovativeness of engineers to solve the 
spectrum issue. I mean, we have different cellular 
technologies, different cellular frequencies, different 
cellular transmission formats, and standards can be reached. 
So, I don't see the use of spectrum as preventing the ability 
of engineers to find interfaces that would make wireless 
Carterfone a possibility.
    Senator Kerry. Well, should we accept that wireless 
carriers can dictate to a consumer what technology they have 
to--they can and can't use to access a network?
    Mr. Frieden. Well, my concern is----
    Senator Kerry. Is there adequate competition among those 
networks, that we could allow that?
    Mr. Frieden. Where there are lies, damn lies and 
statistics. When you look at the wireless industry, there are 
two ways to examine it. You can say it's robustly competitive 
and the carriers certainly are advertising how great their 
service is and how reliable their service is and how nifty 
their new handsets are. But truly there are four major 
carriers. And if you look at the penetration statistics, 
they're sharing 90 or so percent of the market, with Verizon's 
acquisition of Alltel.
    Going back to innovation, there really are two types of 
lock-in and lock-out, both in terms of the handset and access 
to the devices of the handset and software. There's this 2-year 
service commitment, and now we're talking about a multiple 
year, indeterminate period in which Apple has an exclusivity 
arrangement. That may serve Apple's interest in cache, but in 
terms of promoting innovation and access to those innovations, 
you're really locking consumers to one carrier.
    Senator Kerry. Let me just ask a final question, because I 
want to get Senator Wicker in on this, and cede the chair to 
Senator Klobuchar.
    But, you have laid out some of the restrictions that are 
placed on handset technology, by a carrier like AT&T. For 
instance--and he said, Mr. Roth--Mr. Frieden is saying, that 
for competitive purposes, you are blocking out certain 
applications. For instance, Skype is blocked out on an iPhone, 
and obviously that has to do with the question of who pays for 
what, and with Skype you don't.
    Also Mr. Frieden points out how we, sort of, take for 
granted the right to own and attach a telephone or a TV or a 
computer to a network, without particularly worrying about the 
cable company or the telephone company telling us what kind of 
equipment we have to use. Why is this not completely analogous 
to that, and is there a detriment to the blocking out in that 
way? Or is that merely then a choice, if you don't buy an 
iPhone, you go somewhere else, I mean, what's your feeling 
about that?
    Mr. Roth. So--so, I don't think it's analogous to the 
television, the PC, or the home phone, for one primary reason. 
In the United States there are two very different technologies. 
There's the CDMA technology used by Mr. Rooney and Mr. Meena. 
There's GSM, which is the global standard that AT&T uses. I 
could give my iPhone to Mr. Rooney and tell him he could take 
it home, it's not going to work on U.S. Cellular's network. 
That's--they don't have the global standard. It's a VHA, Beta 
debate from a technology standpoint. So, we have two very 
different networks, there's the global standard, which most of 
the world uses. And there's CDMA, which, if you will, is the 
Beta version of the debate.
    The other thing is that--I want to clarify--we are open. 
You can download Skype and you can use it on an iPhone in a Wi-
Fi environment. You can--and I would encourage Skype to do what 
they've done in Europe. They actually have a phone they brought 
to the market, and they sell a Skype phone in Europe where you 
can do voice over Internet calls. The reason that we don't want 
a partner to offer Skype on the iPhone is we subsidize the 
iPhone. I don't want to--and Skype would be a direct 
competitor. There's no business logic in taking a Skype 
application on a phone that I subsidize, and then opening up to 
my competitor.
    But Skype could bring an--could bring their own phone to 
America, for $25 they could go to our store and buy a SIM card 
and use the GSM technology and standard to compete.
    Senator Kerry. So what you're saying is, that they may be 
blocked in one modality, but they're not really stopped from 
being able to access the market----
    Mr. Roth. Yes, sir.
    Senator Kerry.--or sell a product.
    Mr. Roth. Yes, sir. Our network is open. That's the first 
thing I want to communicate. Our network is open, and if you 
want to bring your own applications to our network, you can do 
that. But the devices we subsidize and buy down, sell below 
their cost, we don't want to enable a competitor to use those 
devices.
    Mr. Meena. Mr. Chairman, I'd like to respond to Mr. Roth's 
kind offer on the--offering us the iPhone. Last year we did a 
detailed study to look at what it would take to move to the GSM 
world, and we studied financial concerns, we studied device 
availability. And we found out the GSM world was more 
constrictive than the CDMA world in device exclusivity.
    And I can tell you there's one device we sure couldn't have 
gotten, no matter, he threw this thing over here at me, we 
would not be able to get an iPhone. We found that out in our 
research.
    Senator Kerry. Well, that's interesting. There are a lot 
more questions to exhaust this topic, obviously. I will rely on 
my colleagues to do that.
    We're going to leave the record open for a week, in order 
for colleagues to be able to submit questions in writing, which 
I'm confident a number of them will do. And I will submit some 
additional questions in order to fill out the record.
    I greatly appreciate your being here. I'm grateful to 
Senator Klobuchar for taking on the Chair.
    And I recognize Senator Wicker.

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. Well thank you, Senator Kerry.
    Before I ask a question, of course we're always glad to see 
witnesses come from the various states.
    Mr. Meena is a constituent of mine, from Bridgeland, 
Mississippi. As you know, he is CEO of Cellular South. And it's 
one of the largest privately held wireless providers in the 
Nation, with 900 employees, a good many of them in Mississippi. 
And, Mr. Meena, I believe you have your family here with you.
    Mr. Meena. I do. I have my two oldest sons, and my wife is 
here today.
    Senator Wicker. Great, well we're glad to have them.
    Mr. Meena. Thank you.
    Senator Wicker. You've been itching to get into this 
debate, here. What about the point that Mr. Roth makes, that 
time and money used to develop the next breakthrough device, 
and he says AT&T is entitled to a return on the investment that 
his company legitimately made in the iPhone. So, I want to give 
you an opportunity to respond to that claim.
    Mr. Meena. Their primary investment in the iPhone was in 
the network. We put in--we put in a 3G network without any 
guarantee from Apple or any other manufacturer that we would 
have access to a latest technology device. I don't know why 
they have to be guaranteed success when we don't--we're not 
guaranteed success. We're willing to get out there, put our 
capital to work, put in 3G speeds throughout the State of 
Mississippi and other places, and be able to compete in the 
marketplace. It does make it tough though, when you cannot have 
access to the latest and greatest technology.
    Senator Wicker. You know, I see the commercials for 
Cellular South, when I'm home in Mississippi. You're proud of 
the coverage that you have.
    Mr. Meena. Yes, sir.
    Senator Wicker. And, would you--is it your feeling that 
there's better coverage for Cellular South in the State of 
Mississippi than any of the other providers?
    Mr. Meena. No question about it. We have better urban 
coverage and better rural coverage. We have taken the 
opportunity to drop leaky coax down hospital elevator shafts to 
make sure that urban hospitals are covered. We cover out in 
rural areas, we cover the Mississippi delta extensively. We 
cover Rena Laura, Mississippi, as well as we do Memphis, 
Tennessee. It's just part of--it's just part of who we are and 
what we do.
    And that's why it's so frustrating for the consumers. 
There's no reason, in this day and time, for consumers to not 
have access to the best network and the best devices, and the 
best applications, and high-speed. We can do that as an 
industry. Why not do it?
    Senator Wicker. So, that 18-year-old kid that's hunting out 
in the woods near Rena Laura, he might like to have an iPhone. 
But if he doesn't have coverage, really that consumer is 
prevented from having the consumer choice that we kind of like 
to talk about in the United States.
    Mr. Meena. That's correct. If he has an iPhone and if AT&T 
does not have coverage there, that's not doing him a lot of 
good out on the deer stand.
    Senator Wicker. Now, do I understand that--that we don't 
know how long this device exclusivity with AT&T and the iPhone 
is. Is that correct?
    Mr. Meena. I don't know for sure. I have heard 5 years, but 
I can't say that I have.
    Senator Wicker. Yes, I've heard 5 years, too. Maybe 
someone--maybe our two researchers could tell us where we got 5 
years. But I'm interested, from any member of the panel. Now, 
is it a fact that most exclusive arrangements last only 6 to 12 
months?
    Mr. Meena. No, sir, that's--that used to be the fact. And 
we moved from a time period where the exclusivity period was 90 
days to 180 days to measure in years and now there are lifetime 
exclusives on devices. And, so that's why it has become more 
and more and more unacceptable to those of us----
    Senator Wicker. So, we didn't have a lot of complaints when 
there was a reasonable short period of time to get a product 
going?
    Mr. Meena. There were some complaints, but not like it is 
today.
    Senator Wicker. Now Mr. Frieden, you heard Ms. Esbin's 
testimony. What's wrong with her research?
    Mr. Frieden. I'd like to think great minds can think 
differently, but--it probably gets down to how you define the 
market. I mean, I do research on market competition. I look at 
the wireless industry and I see four carriers with a 90-plus 
percent market share. I know they compete vigorously on 
television. I know they tell me how great their service is. And 
I know they certainly want to showcase their telephones, but I 
don't see the robust competition and the pushing of innovation 
as could be.
    Going back to, sort of a historical analogy, when I hear 
about exclusivity, on one hand, there's something called a 
``Colgate Doctrine'' and Colgate can sell toothpaste to 
anybody. But we're talking about an essential resource that's 
really part of our DNA, part of what makes our global 
information age work. And, in the past when we've had----
    Senator Wicker. And that is choice.
    Mr. Frieden. Yes, choice, but bringing it back to 
telecommunications, we had a time when there was a telephone, 
and that telephone accessed AT&T. And if you wanted to access 
MCI, you got inferior interconnection or you had to dial 27 
digits instead of 7 digits or 10 digits. And that exclusivity 
was something that the courts and the FCC ultimately found 
illegal and inappropriate. The choice was to have multiple 
carriers via the same telephone.
    Senator Wicker. Ms. Esbin, where did Mr. Frieden go wrong 
there?
    Ms. Esbin. Well, I think it's reasonable minds may 
disagree. I think your mind is great, too.
    But, I think the problem is one of perspective rather than 
the data. Compared to the wireline world, having the original 
two cellular carriers per market--local market, looked like a 
great leap forward, and the FCC was able to find, based on the 
record at the time, in 1992, that there was enough competition 
that they could permit exclusive handset agreements.
    Following the Budget Act of 1993, when more spectrum was 
opened up and the regulatory framework for commercial mobile 
radio services was established, the idea was to introduce more 
competition into the market and reduce economic regulation. And 
I think that the results have been pretty good. As I said, it 
is not perfectly competitive, you won't find that in a 
networked industry like communications. But if you compare it 
to the local wireline phone market, which today has more 
competition, but still not at the level of the wireless market. 
I think the wireless market was always held up at the FCC as a 
poster child for competition and a light touch approach to 
regulation.
    And I believe that part of the problem is, what is the 
correct market definition, and the FCC has looked at it from 
the local market, how many competitive choices do I have where 
I live, not how many competitors are competing nationally.
    Senator Wicker. Madame Chair, I think the clock has gone a 
little haywire, but if I could ask one more question.
    And to Mr. Frieden and Ms. Esbin, what's going to happen to 
Mr. Rooney's company and Mr. Meena's company if these 
indefinite 5-year-plus exclusive agreements continue? Are they 
going to be able to survive? And will that be good for 
competitiveness?
    Mr. Frieden. I think they are going to be able to survive, 
but is the Nation going to suffer a disadvantage when this 
digital divide extends into wireless? Wireless is certainly 
that third wave, that third screen. Increasingly we look to 
wireless to access the Internet. Congress has legislated a 
mandate to the FCC to promote access to the Internet, to 
promote ubiquitous access to advanced telecommunication 
services, and increasingly that's going to be a wireless 
technology that gets there. So, if we continue to have a 
broadening of this digital divide between urban and rural, when 
you serve rural areas with inferior service, rural areas will 
suffer comparatively and competitively with their urban 
counterparts who have much better choices, much faster access 
to the Internet and the like.
    Senator Wicker. Ma'am?
    Ms. Esbin. I tend to look at this more as a lag than an 
unbridgeable divide. My own research has indicated that the 
period of time for the exclusives that we're probably talking 
about here, the iPhone and some similar products, is under 5 
years, and is more in the nature of 1 to 2 years. I've read a 
number of analysts--industry analysts reports, and they seem to 
believe that the period is quite a bit shorter than 5 years.
    The other point I would make about the iPhone in particular 
is, this is Apple's choice and I don't believe the carriers 
were calling the shots with Apple on this particular device.
    In conclusion, I fully expect Mr. Meena and Mr. Rooney's 
companies to not only survive, but thrive in the future. I just 
don't think that this one device is the key to their survival.
    Senator Wicker. What about the huge list that Mr. Rooney 
held up? It's not one device.
    How long was that list, Mr. Rooney?
    Mr. Rooney. Fourteen.
    Senator Wicker. Fourteen devices.
    Mr. Rooney. Currently.
    Mr. Meena. And nine of the top ten selling devices now are 
under exclusives, as well.
    Mr. Rooney. And the other side of this coin is, it's the 
customer that suffers, not my company. I can't--there are areas 
that I serve, and we're probably, in terms of geography, you 
know, 50/50 between rural and urban areas. And, we've got areas 
where we're the only carrier. I don't know where all these 
statistics about 12 carriers in an area are. I don't know of 
any of those areas.
    But the point is, we serve many areas where we're the only 
carrier to build cell sites in the area. And those customers 
cannot get any of those phones. So, when we talk about using 3G 
to access broadband in rural areas, which is probably the most 
economic way to do it, we are working at a disadvantage.
    Senator Wicker. Well, Senator Klobuchar, thank you for--no, 
I'll shut up for a while.
    But, I have to agree with Senator Kerry, there are--it's a 
complicated issue and there are a lot of questions to be 
answered. I'd--it does seem to me that the consumer and the 
ability of the consumer to have access and choices should be 
paramount.
    But thank you and I'll--I'll listen to your questions, 
ma'am.
    Senator Klobuchar [presiding]. OK. Thank you very much, 
Senator.
    Thank you to our panelists. I'm going to try to follow up 
on some of the initial comments of Senator Warner. I figure he 
did pretty good in this business. I was a telecom lawyer for 13 
years, he did a little better.
    So, I'm going to follow up--he was asking the Balkanization 
of this and his concern that if you start having these 
exclusive arrangements, you could potentially have AT&T with 
the iPhone, you have Verizon with someone else, and it just 
leads to the situation where, if we had done this in the past 
with say, in the computer area, it would be like Microsoft and 
IBM having an exclusive deal, and you would actually never have 
had a Google, because who would have wanted to make deals with 
some of these start-up companies that might not have had much 
promise.
    So, I have a big concern there about the innovation, as 
well as the long-term effect this could have on the pricing. 
And we already have concern on pricing with text messages and 
other things that we--actually, in the Judiciary Committee we 
had a hearing on this yesterday.
    So, I want to start with you, Mr. Meena. In your testimony 
you say that device manufacturers would like to open their 
portfolios, but they cannot do so because the largest carriers 
will not allow it. Could you expand on what the dealer said?
    Mr. Meena. Yes, we have been--we formed a buying group, 
associated carrier group several years ago. We have been to 
Korea, we've tried to meet with manufacturers in Korea about 
purchasing the latest and greatest devices. And it's hard to 
get a straight answer when we talk to them about those devices. 
They--it seems like they would be able to make the decision as 
to whether they could sell their product to us, but they're 
checking back with somebody, and we think we know who it is.
    Senator Klobuchar. What did the dealers allege the largest 
carriers would do if you--they started doing business with you?
    Mr. Meena. I guess they would cut off business with those 
manufacturers is my--that's my guess. I don't know that for 
sure.
    Senator Klobuchar. You're just having trouble getting any 
kinds of these devices?
    Mr. Meena. We can get--we can get some of the lower-end 
devices. When it comes to the higher--the high-tech, latest and 
greatest, touch screen type devices, we really struggle in 
doing that, the type of devices that the market is demanding 
today.
    I'm often asked, since we serve a lot of rural areas, ``Mr. 
Meena, what is it that your customers want?'' Our customers 
want the same thing in rural areas, what their urban customers 
want in metro areas. That's exactly what they want and we want 
to be able to provide those types of devices and services and 
have done it for many years in our network, and want to 
continue to do so with the devices and applications that we 
offer.
    Senator Klobuchar. Mr. Rooney, have you had similar 
experiences?
    Mr. Rooney. We have not had that type of similar 
experience, but we know that we have 14 on my little list here, 
that I can't get a hold of. So, when you're sitting there 
trying to build your portfolio, you're already stopped from 
getting--as he pointed out--as has been pointed out by Mr. 
Meena--nine of those fourteen are the top-selling devices. So, 
we can't get them.
    Senator Klobuchar. And I think Mr. Meena was referring to 
the largest carriers demanding and receiving long-term 
agreements from the manufacturers.
    Mr. Rooney. Well, all I can tell you is what's going on. I 
judge what's happening in the world by the results, not 
necessarily----
    Senator Klobuchar. Do you think that--so do I--do you think 
that manufacturers feel obligated to grant these exclusive 
deals for fear of being locked out of an American market, if 
they don't acquiesce with----
    Mr. Rooney. I don't think they're going to be locked out, 
but let's put it this way, they maybe have more favorable 
access.
    Senator Klobuchar. Mr. Frieden, do you want to comment on 
that?
    Mr. Frieden. Yes, ma'am. These statistics are very hard to 
come by, because they are largely trade secrets. But I 
understand, from credible statistics, that a major carrier like 
Verizon looks to get 65 percent or so of its handsets sold, 
bundled with the handset from a Verizon store. And then you 
have to add about 20 to 25 percent for big box retailers like 
Wal-Mart and Best Buy. The vast majority of sales of the 
handset is coming from that one single business model, so the 
big carriers have substantial buying power, and the fact of the 
matter is, we don't have a manufacturer here, perhaps because 
of that.
    Senator Klobuchar. Mr. Roth, as we look at this competition 
issue--and I listened with interest to your--the innovation 
argument. I can actually see this as a start-up model. I could 
see, you know, the early days of TV, that they might have had a 
deal to innovate and do something differently, but I'm just 
trying to figure out how it is good for competition if the most 
popular devices that are rolling off the product lines are 
gobbled up by just a few large companies in exclusive deals. 
How can that be good in the long term?
    Mr. Roth. Well, as I'm listening today, there are two 
misperceptions that are starting to brew, and it's real 
important for me to take issue with both of them. One has to do 
with rural Americans and their access, and the other has to do 
with exclusive devices.
    Let me start with, 35 percent of AT&T's portfolio is 
exclusive, 65 percent of our portfolio is not. Let's start with 
how exclusive devices actually come about. The manufacturer 
doesn't fly over from Korea or fly in from Canada and open up a 
suitcase, and say which one of these do you want to buy and 
monopolize in the U.S.? That's not the way it happens. You can 
buy what they want to sell. They come over with a suitcase, 
they'll show you the devices, and you can buy what they want to 
sell you. Or you can sit down with them and say, ``I want a 
touch screen device, when no one has a touch screen device,'' 
or, ``I want a two-way slider device that allows someone to 
text, and I want this chipset in it, and I want it in this 
color, and I want it at this price.''
    So, the exclusivity starts with the carrier sitting down 
with the manufacturer and saying, ``I want you to produce 
something that's not on your product roadmap.'' And the 
manufacturer says, ``There's significant risk in me doing that, 
you need to share that risk with me, volume commitments.'' You 
can't make a volume commitment if it's suddenly going to be 
available to everybody if it's wildly successful. You won't 
achieve your volume commitments back to the manufacturer. So 
that's one of the risks associated with that.
    Another thing--I really want to talk about this rural 
America. AT&T today serves over 90 percent of the U.S. 
population, with the divested assets that we're trying to 
purchase through Alltel, it will be 95 percent. We spent $2.3 
billion buying the assets from Verizon, largely to serve areas 
that are rural.
    We spent $8 billion in the 700 megahertz auction to fill in 
the rest of the United States, to bring places like North 
Dakota, South Dakota, Wyoming, and Montana. AT&T competes as 
aggressively in rural America, whether it's Mississippi or 
whether it's Michigan. We compete as aggressively in rural 
America as we do in major metro markets. And, our history of 
buying companies like Dobson and bringing the iPhone to Alaska, 
buying rural, parts of rural and bringing the iPhone and other 
devices to Maine and New Hampshire. You pull all that together, 
we have a history that says we're very much interested in 
serving all of America.
    So there are two misperceptions, one, how exclusive device 
deals start, and two, that we're somehow rural Americans who 
are disadvantaged. I don't disagree that small carriers or 
rural carriers might be disadvantaged. I'm not in their 
business, I don't run their business models. But rural 
Americans are not disadvantaged.
    Senator Klobuchar. But don't you think having competition 
with people being able to choose their own carrier can be good 
for prices and good for our country? And if they can't compete 
equally because they don't have access to the same equipment, 
you might not have an equal playing field for competition.
    Mr. Roth. I don't disagree with what you're saying, but 
there's a difference between having no competition--there are--
95 percent of Americans have three carriers today to choose 
from, 95 percent of Americans. And with the build-out of the 
700 megahertz auction, that's going to--that number is clearly 
going to go north of 95 percent.
    So----
    Senator Klobuchar. It's just my own experience and I want 
to kind of get off the rural issue for a little bit. In the 
rural areas, you can have--on our campaign we carried three 
different phones with three different services, because it 
isn't quite true because you can have areas of dropped calls 
and very problematic service with one of the large carriers----
    Mr. Roth. And you can.
    Senator Klobuchar.--in rural areas.
    Mr. Roth. You can. I mean, let's take Minnesota, we bought 
Dobson so that we could get 850 megahertz spectrum in places 
like Minnesota. We've had it a year and a half. We bought a 
fixer-upper. Some of our networks like Miami or Dallas, we've 
owned for 25, 26 years, they're a much better performing 
network. The areas that we bought in upstate Maine, New 
Hampshire, and Minnesota, we're putting money into it and we 
continue to improve it, but they're 21 years, 22 years behind 
some of the markets we started.
    Senator Klobuchar. You know, Verizon just went on to a 6-
month exclusivity contract for two of its models. This came out 
at our hearing yesterday. Would that be something--are you 
doing that with some of your models, or are they down to lower, 
or have you gotten rid of exclusivity, not including the 
iPhone.
    Mr. Roth. So, 35 percent of our portfolio is exclusive as I 
sit here today. Some of those--some of those terms are as 
little as 6 months, some of them are longer. Sixty-five percent 
of our portfolio is not exclusive.
    Mr. Meena. But it's the 35 percent that's attractive, the 
most attractive part of the market.
    Mr. Roth. That's not a true statement. The number one 
selling device we have is not an exclusive device. Our top 
selling device is the GoPhone. It's the $19.99 phone that you 
can buy in Wal-Mart in a little round box. That's our top 
selling device, it's not exclusive. That's our number one 
selling device.
    Senator Klobuchar. There are a few people shaking their 
head no, they don't think that's----
    Mr. Roth. That's our number one selling device.
    Senator Klobuchar. Mr. Meena?
    Mr. Meena. I'm all for not having exclusive devices. The 
Blackberry Curve is a non-exclusive device that we all have 
access to. It's the number one selling device in the country. 
But the facts state that nine out of the top ten--top selling 
devices are under exclusive arrangements.
    And I want to say something about the 700 megahertz 
auction. We participated in the auction as well. We were----
    Senator Klobuchar. So what--I'm just--Mr. Roth said 
something--you're saying nine out of the top ten selling 
devices in the country are under exclusive arrangements?
    Mr. Meena. Yes, ma'am.
    Senator Klobuchar. And is that not true, Mr. Roth?
    Mr. Roth. That's not true in my company. I don't know where 
Mr. Meena is getting his data----
    Mr. Meena. That is an industry----
    Mr. Roth.--but in my company----
    Mr. Meena. That is an industry statistic.
    Mr. Roth. Well, the number one selling device in AT&T is 
the GoPhone. It's the number one selling----
    Mr. Meena. The GoPhone is a phone that's targeted to a 
certain segment of the market. We're talking about all segments 
of the market, and we know that certain segments of the market 
are interested in the devices he has under exclusivity.
    Senator Klobuchar. You know, in your testimony, Mr. Meena, 
you suggested that smaller carriers haven't been able to 
consolidate purchasing power to gain access to these devices. 
While it may be true that manufacturers can't sell you devices 
under exclusive arrangement, why can't they design new handsets 
for you? What's the issue, do you think?
    Mr. Meena. I don't know why they do, I don't know why they 
can't. I may--it could be a volume issue, it could be that they 
don't want to infringe the type of devices that the larger 
carriers are selling.
    Mr. Rooney. I can shed a little light on that. If you took 
all the sets sold by the non-top four suppliers, so you take 
out Verizon, the rest of them, we couldn't even equal one of 
the Verizon or AT&T's volume. So, you know, it's a volume game, 
so if you want to consolidate, you've got to have enough volume 
to justify the consolidation, and it's just not there.
    I mean, these guys have, basically they've gobbled up all 
the spectrum, they've gobbled up all the--they control the 
manufacturing side of the business. You're building an 
oligopoly there, and, you know, it has already happened. So--
and all this exclusivity does, is it effectively causes more 
difficulty in terms of trying to compete against that 
entrenched group.
    Senator Klobuchar. OK.
    In comments filed yesterday with the FCC by a consortium of 
consumer groups, the--it was stated that, ``Handset 
manufacturers in Asia and Europe are able to sell 70 to 80 
percent of devices independent of exclusive deals with service 
providers.'' And a 2008 article in Wired recently noted that 
handsets in Japan have been the envy of consumers in the United 
States, whereas cell technology has trailed the Japanese 
handset market by an estimated 5 years or more.
    In light of these statements, can you explain, Mr. Roth, 
why this exclusive handset deal is necessary in the U.S.?
    Mr. Roth. So I'm not familiar with this study that you're 
referencing. So, I would tell you that it is my view that the 
U.S. lagged the world, so I believe the information you say is 
true, but I don't believe it's true of today. I think that was 
true 5 years ago, but that's not true today.
    I mean, iPhone came first to the U.S. The Blackberry Storm, 
the Palm Pre, these are devices that are hitting the U.S. 
first, and I think they're hitting the U.S. first because we 
finally have the ability to compete on a world level with 
Deutsche Telecom and Vodaphone and other major carriers who can 
go to manufacturers and can do the same thing as we're doing.
    So, I believe that you also find, that on a cost-per-minute 
and cost-per-megabyte, which is how we measure data, the U.S. 
has--has the lowest rates. So, I think we have the most 
innovation. I think we have the lowest rates. And I think we 
have the most choices for consumers.
    Senator Klobuchar. It just seems when you have--I think 
it's what, 270 million consumers, and I think the Chairman 
remarked, the fastest growing market, that there would be a 
demand for these products in the United States. And that's what 
I'm trying to deal with here, is, you know, you have carriers--
I don't want to be stuck with one kind of service if I want one 
kind of phone. And I think that's how a lot of consumers feel. 
And, there are problems, as Mr. Rooney and Mr. Meena pointed 
out, in certain areas of the country where a certain kind of 
service won't work, so then you can't have--have your phone.
    And while I believe that there may be arguments for the 
start-up piece of this and for some limited exclusivity 
arrangements, my concern is, if they go on too long, we are 
really going to be hurting competition and we're really going 
to be hurting the prices. If you just want to comment on that 
as the end to this. I think Mr.--I am the last one here as the 
Chair wielding the gavel, but if each of you just wants to 
comment on that near the end.
    Mr. Roth, if you want to start.
    Mr. Roth. For me there's a track record that says the 
United States--that since the iPhone was launched in June 2007, 
what we've seen is a greater pace of innovation that we have 
ever witnessed in this industry's history. The 30 new devices 
that have come out, the 30 new smartphones that have come out 
to challenge the iPhone are a direct response to the fact that 
not all carriers have it, in fact only AT&T has it. So in order 
to compete, other manufacturers and other carriers had to 
partner to race innovation out to the market. It think it's 
working, I think it's working extraordinarily well.
    And as I talked about with the iPhone, three new models 
have come out while it has been exclusive for AT&T. The price 
has dropped three times since it has been exclusive with AT&T. 
I think consumers have benefited. And when you look at the 95 
percent of the market that we'll serve this time next year, and 
more as we build out to 700 megahertz auction--from 700 
megahertz, I think consumers are really benefiting at a point 
where now we're the envy of the world. We no longer lag the 
world.
    Senator Klobuchar. Mr. Rooney?
    Mr. Rooney. I think that the facts tend to speak for 
themselves. We have four dominant carriers. They control the 
supply chain, they control a good part of the spectrum, they 
control the industry. And it's a very difficult industry for 
those of us that are not in the gargantuan size, to participate 
in. And it's--we love to participate. I think that there's a 
mythical aura to the idea that there's competition. I mean, 
it's not technical competition when you get a hold of the 
technology--somebody else's technology and don't allow it to be 
disseminated to anybody else. That says, I'm technically good 
and the rest of you are technically bad, or I have a better 
deal with Apple than you can ever get.
    So, you know, what we're dealing with here is a series of 
complex issues about whether we're going to have robust 
wireless industry that is going to serve all the country or are 
we going to have a continued concentration of issues here, and 
we're going to have an oligopoly, which I will tell you, in 
most text books I've ever read, says pricing is going to 
become--and competition will hurt.
    Senator Klobuchar. Thank you.
    Mr. Frieden?
    Mr. Frieden. Yes, I'd frame this in terms of innovation and 
incentives. When you have these exclusive dealing arrangements, 
the incentive is to lock down the handset and the intention is 
to recover the subsidy. I've no problem with the subsidy 
mechanism, but it does affect incentives and it does affect 
innovation.
    Look at what Apple does: Apple upgrades the phones, sends a 
firmware upgrade, and that disables some of these self-help 
activities. Now the self-help activities might violate the 
warranty, violate the contract, but the fact that consumers are 
resorting to self-help at the risk of ``bricking'' the phone--
rendering the phone disabled, tells you something about how 
they feel about those restrictions. When you lock out a 
consumer, when you deny access, when you limit the versatility 
of the handset primarily to cover the recovery of the subsidy, 
innovation suffers.
    Senator Klobuchar. Thank you.
    Ms. Esbin?
    Ms. Esbin. I think there's obviously a great difference of 
opinion on whether the glass is half empty or half full in the 
wireless industry. I don't really have anything more to add 
about that.
    Senator Klobuchar. Would you worry though, if this just 
kept on and you'd have certain, you know, one kind of 
technology hooked in only with one service, and--for the 
biggest carrier and then you'd have another technology and then 
you'd have a bunch of people that couldn't--that wouldn't have 
the choice of their carrier because they wanted a certain 
phone?
    Ms. Esbin. I think--it's really an illustration of the fact 
that competition in this industry is--I don't know if the word 
is messy or lumpy--it is not perfect and not everyone in the 
country has every choice available to them. I'm not sure that 
we want to mandate a world in which every single service 
offering is identical. I tend to think----
    Senator Klobuchar. Oh, I don't--I don't think anyone up 
here wants to do that. We just want to make sure that we're 
putting the consumers in the middle here and picturing what may 
happen, and being concerned about it as this goes on.
    Ms. Esbin. I understand. I think, at this point, it appears 
to me that consumers generally are being well served. I think 
the duration of the exclusives is--is an issue.
    Senator Klobuchar. Thank you.
    OK, Mr. Meena?
    Mr. Meena. Let's go back to the auctions of the late 1990s. 
We basically created seven national companies. And then we kind 
of got down to six, and then five, and then after last year, 
Alltel acquired by Verizon, we're down to four. Rumor has it we 
might be even down to three by the end of the year. Of course 
you still have rural carriers and regional carriers like 
ourselves, like our company and like Mr. Rooney's company that 
are out there trying to create a competitive landscape for the 
consumers.
    But if we don't watch out, we're going to not be able to 
create that competitive landscape for the consumers, by the 
fact of all the consolidation of the spectrum, and the control 
over devices, and access to roaming, access to back haul, and a 
whole host of issues that are going on through the duopolistic, 
oligopolistic, however you want to describe the world that we 
find ourselves today. And I think that would be very 
detrimental to the consumer, if vibrant competition is not 
nurtured and remains live and well in the wireless space in 
America.
    Senator Klobuchar. And I think the argument there, for that 
in a bigger term is--you know, in the old days when we just had 
the local telephone companies, they were heavily regulated, the 
rates were regulated, all these things like early termination 
fee--everything was regulated. Then you go into a competitive 
environment with cell phones, where they really don't have that 
kind of regulation at all, because the argument that this is a 
highly competitive market, and it's new, there's innovation.
    But then if you start Balkanizing it, as Senator Warner 
said, then you--then you have no regulation, no protections, 
and if the environment starts heading that way, where people 
don't have that kind of choice, I think that is the concern, if 
I can be so bold of a number of us up here, that these 
exclusive arrangements are what concerns us.
    [Whereupon, at 4:35 p.m., the Committee was adjourned.]
                            A P P E N D I X

    Response to Written Questions Submitted by Hon. Mark Warner to 
                             Mark Goldstein
    Question 1. I understand that several consumers have complained 
about poor wireless coverage in rural areas. Could you tell me more 
about the nature of their complaints?
    Answer. While reviewing the quality of wireless phone service, we 
met with representatives of various consumer, industry, and state 
groups. Among these groups were national consumer organizations; 
industry associations and carriers; and state governments, including 
national organizations that represent state officials and officials 
from state utility commissions, offices of attorneys general, and 
offices of consumer advocates in California, Nebraska, and West 
Virginia. These representatives discussed concerns about wireless phone 
service that consumers have had in recent years, including concerns 
about coverage in rural areas. They cited geographic factors that 
contribute to coverage problems in rural areas. Specifically, consumers 
may experience more coverage problems in mountainous areas, since 
mountains block the radio signals wireless phones use to communicate. 
Wireless tower antennas are unable to serve as large an area in 
mountainous regions, since they rely on having a clear ``line of 
sight'' between the tower and the wireless user. Additionally, in areas 
with low population density where consumers live far apart, carriers 
may not have installed enough towers to provide full coverage over a 
large geographic area. According to one consumer group, carriers do not 
have an economic incentive to pay for more towers in areas with a small 
customer base. In either case, whether poor coverage is due to blocked 
signals or not enough towers to cover a large area, call quality 
problems, such as dropped calls, may result.

    Question 2. What does the FCC do with complaints from rural 
consumers?
    Answer. FCC follows the same process for handling consumer 
complaints, no matter where the complainant is located. This process 
includes several steps. After reviewing a complaint received, FCC 
responds by sending the consumer a letter about the complaint's status. 
If FCC determines that the complaint should be forwarded to the carrier 
for a response, the agency sends the complaint to the carrier and asks 
the carrier to respond to FCC and the consumer within 30 days. Once FCC 
receives a response from the carrier, the agency reviews the response, 
and if FCC determines the response has addressed the consumer's 
complaint, marks the complaint as closed. FCC officials told us they 
consider a carrier's response to be sufficient if it responds to the 
issue raised in the consumer's complaint; however, such a response may 
not address the problem to the consumer's satisfaction. When FCC 
considers a complaint to be closed, it sends another letter to the 
consumer, which states that the consumer can call FCC with further 
questions or, if not satisfied with the carrier's response, can file a 
formal complaint. FCC officials also told us that if a consumer is not 
satisfied, the consumer can request that FCC mediate with the carrier 
on his or her behalf; however, the letter FCC sends to a consumer whose 
complaint has been closed does not indicate this is an option. 
Additionally, most consumers may not know they can complain to FCC 
about a problem with their wireless phone service that their carrier 
could not resolve to their satisfaction. Specifically, we estimate from 
our consumer survey that only 13 percent of consumers would contact FCC 
about such a problem, while another 34 percent would not know where to 
complain. FCC reports quarterly on the number and largest categories of 
wireless consumer complaints the agency receives, but does not report 
more detailed information, such as which states complaints come from.

    Question 3. What do you think the FCC could do with these 
complaints to improve their telecom policy, particularly with respect 
to rural services?
    Answer. As part of our ongoing review, we are examining how FCC 
oversees the services wireless phone service carriers provide to 
consumers, including how the agency monitors wireless phone service 
consumer issues to identify trends or problems that may indicate the 
need for a change in policy. FCC's consumer complaint data are one 
potential source of information the agency may be reviewing as part of 
its monitoring efforts. We plan to report on FCC's oversight in this 
area when we issue our product based on this work in the Fall.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Tom Udall to 
                               Paul Roth
    Question 1. New Mexico is a rural state where most areas have just 
one or two cell phone providers. This situation already limits consumer 
choices. People in rural areas with few wireless companies to choose 
from have even fewer options for phone handsets due to exclusivity 
arrangements between carriers and phone manufacturers. This exacerbates 
the digital divide between urban and rural areas.
    With traditional wireline service, one can take any telephone to 
any home or office and just plug it in to make calls--no matter who the 
service provider is. Yet if one changes wireless carriers, one often 
has to buy a new phone. This seems wasteful and unnecessary. What 
policies will you implement that will increase the availability of 
smartphones to consumers, particularly those that live in rural states?
    Answer. AT&T already is the industry leader in making the most 
innovative devices available to consumers throughout the country. We 
maintain this leadership in two fundamental ways. First, we have made 
significant investments to deploy one of the most ubiquitous and 
advanced wireless networks in the Nation. We are today able to provide 
service to approximately 90 percent of American consumers--whether they 
live in urban, suburban or rural regions of the country. That 
percentage will increase to approximately 95 percent once we complete 
our pending transactions with Centennial Wireless and Verizon Wireless 
(whereby we have agreed to purchase certain of Verizon Wireless's rural 
assets). Moreover, our 3G wireless broadband network represents the 
first widely available service in the world to use High Speed Packet 
Access technology, and it has been rated the fastest 3G network in the 
Nation. Our 3G footprint now includes over 350 major metropolitan areas 
in the U.S., including the Albuquerque metroplex.
    Indeed, AT&T's commitment to providing next-generation capabilities 
to as many consumers as possible is evidenced in New Mexico. From 2006 
to 2008, AT&T's capital investment in New Mexico was more than $85 
million, which included 102 new cell sites and 115 site upgrades to 3G 
service. Our 2009 expansion effort includes three new cell sites and 51 
site upgrades to 3G service.\1\ And, some of the assets that we are 
purchasing from Verizon Wireless are located in rural areas in the 
northwest, southwest and southeastern regions of New Mexico; once we 
obtain and upgrade those facilities, residents in these rural areas 
will enjoy the benefits of our Nation's-fastest 3G broadband service.
---------------------------------------------------------------------------
    \1\ AT&T's U.S. capital budget is the single largest of any 
American company in any industry. In fact, we will spend between $16 
billion and $17 billion in capital 2009.
---------------------------------------------------------------------------
    Second, through our collaborations with handset manufacturers, we 
have made available to U.S. consumers the most advanced devices in the 
world at distinctly affordable rates. That is, we have taken real risks 
and incurred enormous costs--in the form of technology development, 
marketing and retail discounts, just to name a few--to bring innovative 
devices to the marketplace. The currently most notable of these 
collaborations is our partnership with Apple in connection with the 
iPhone, which has provoked an unprecedented competitive reaction. The 
marketplace is now awash with next-generation devices that allow 
consumers to do things that no one even imagined just a year or two 
ago, and that cost consumers less than previous, less capable devices. 
The ultimate result of AT&T's investments here: AT&T is the leader in 
the smartphone segment, with twice as many smartphone users choosing 
AT&T as compared to our competitors.
    In short, we intend to continue these successful strategies; in 
doing so, we will give our rural customers the greatest possible choice 
and access to the most cutting edge services and devices.

    Question 2. Why should consumers be forced to purchase new phones 
when switching carriers?
    Answer. AT&T does not force customers to purchase a new device when 
switching service to AT&T from a different carrier. AT&T's wireless 
network employs GSM technology--the global wireless standard. Because 
we use the global standard, we are able to support a particularly wide 
array of devices. Thus, while AT&T offers customers a variety of ways 
to sign up for service (e.g, by purchasing a handset for a discounted 
price and signing a one or two year agreement promising to pay a 
monthly fee for service), we also allow a customer to bring any GSM-
capable device to our network and establish service.
    The other major wireless technology used in the U.S. is CDMA 
(employed by, for instance, Verizon Wireless and Sprint). GSM-capable 
devices do not operate on CDMA networks and CDMA devices do not operate 
on GSM networks, including AT&T's. Thus, the only time that a new 
customer would be required to obtain a new device when signing up for 
service with AT&T would be if the customer has only a CDMA-capable 
device. Fortunately, as discussed above, AT&T makes available an 
industry-leading lineup of innovative devices at affordable, usually 
discounted prices.

    Question 3. Should public policy mandate that wireless networks 
allow any new handset to connect to it, similar to the existing 
situation with wireline service since the Carterfone decision?
    Answer. The Carterfone paradigm is not a relevant touchstone for 
today's wireless industry. As an initial technical matter, as discussed 
above, not every wireless device will work with every wireless network. 
Beyond this, the competitive environment in which wireless carriers 
operate today bears no similarity to the market structure for landline 
voice service that was central to the Carterfone decision. At the time 
of Carterfone, voice telephony essentially was provided by a monopoly 
that not only provided service, but also manufactured the phones. There 
was, thus, no meaningful competition that constrained the provider's 
practices and no demonstrable technical impediments to allowing other 
devices to attach to the landline telephony network. In that context, a 
regulatory solution arguably was appropriate.
    In stark contrast, the American wireless industry of today is a 
model of competitive dynamism, with nine independent companies each 
serving more than four million retail customers. More than 95 percent 
of the U.S. population--those living in urban, suburban and rural 
America--are served by at least three competing carriers, and more than 
half live in areas served by at least five.\2\ Eight years ago there 
were 100 million U.S. wireless customers. Today, there are more than 
270 million, and in 2008 they used more than 2.2 trillion minutes--a 
tenfold increase since 2000. At the same time, prices have declined 
precipitously. Revenue per minute has fallen 89 percent since 1994, and 
U.S. wireless prices are much lower than in any other major 
industrialized country. And, while AT&T and Verizon are currently the 
two largest wireless providers, the next two largest, Sprint and T-
Mobile, have a combined 82 million customers, and the carriers that 
round out the top 10 have another nearly 20 million customers among 
them. Against this backdrop, there can be no serious argument that 
regulatory mandates could more effectively govern this marketplace than 
can these powerful competitive forces.
---------------------------------------------------------------------------
    \2\ Contrary to the suggestion in the question, there is no lack of 
competition in New Mexico, which is served today by at least five 
competing providers: AT&T, Verizon Wireless, Sprint, T-Mobile and 
Plateau Wireless. While there may be pockets in New Mexico where there 
are relatively fewer alternatives, most consumers in New Mexico enjoy a 
wide variety of choices for wireless service.
---------------------------------------------------------------------------
    Indeed, the true victims of the mandate suggested in the question 
would be consumers, as they would see less innovation, fewer choices, 
and significantly higher prices for wireless handsets. The U.S. model 
for handset development and deployment--whereby carriers and 
manufacturers collaborate to share the enormous risks and costs of 
bringing an inventive but unproven new device to market--have provided 
U.S. consumers the most advanced devices in the world at distinctly 
affordable rates; quickened the pace of technological advancement; 
incentivized carriers to offer even greater handset subsidies to their 
customers; and shifted the center of handset innovation from Europe and 
Asia--where it rested for years--to the United States. Now, the U.S. 
leads the world, with the best devices being designed and manufactured 
by American companies and American consumers often enjoying the 
earliest--and cheapest--access to them. There is no compelling argument 
that this wildly successful system should be scuttled through legal or 
regulatory fiat.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Warner to 
                             John E. Rooney
    Question. I understand your plight that many rural consumers cannot 
purchase popular handsets because they reside in areas not served by 
the one carrier offering the desired handset (and the one carrier 
typically prohibits its subscribers from using more than 40 percent of 
their airtime roaming on an alternative network). Your firm, and rural 
carriers, contend that virtually all high-end handsets are subject to 
exclusives, limiting access to advanced telecommunications services and 
creating a ``digital divide'' between people who can get a phone or 
high-end Blackberry and those who cannot.
    I've also heard from the larger wireless carriers. They contend 
that, absent exclusives that guarantee volume and term commitments, 
manufacturers would have to devote scarce resources to marketing--an 
expenditure that carriers typically assume under an exclusive 
contract--which reduces the amount of money available to develop 
technologies. Is there any compromise?
    Answer. To preface my answer Senator, I believe the factual 
statements we have provided to date concerning the difficulty that 
consumers have in accessing devices and the high number of handsets 
subject to exclusivity, are largely undisputed. The claims of other 
parties that manufacturers would have to devote scarce resources to 
marketing are largely unsubstantiated in several respects. 
Manufacturers such as Sony, Nokia, LG, and Samsung have plenty of 
resources to market their products. Does the fact that Nikon cameras 
are available in almost every camera store imaginable deter Nikon from 
marketing? Moreover, without exclusive arrangements, carriers would 
still market phones to consumers, as they do today. Before exclusive 
arrangements became the norm, carriers purchased handsets from 
manufacturers and marketed them to consumers under the same 
distribution system in effect today.
    We have learned over the past several years that no workable 
compromise is forthcoming from the large carriers without action from 
Congress or the FCC. Congressional leadership on this issue has been 
instrumental to activating limited industry talks, however to date I am 
unaware that such talks have led to any meaningful progress toward 
industry-wide compromise. I urge you to inquire of the ``Big Four'' 
carriers for answers on where compromise might exist because to date 
none has been offered to U.S. Cellular. The recent unilateral action by 
Verizon Wireless to modify its policies amounts to crumbs for most 
industry participants and it does nothing to address the fundamental 
concerns of the 6.2 million customers we serve. We will consider any 
reasonable industry-wide proposal that puts these handsets in the hands 
of all customers that want them but we can't negotiate with ourselves.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Tom Udall to 
                             John E. Rooney
    Question 1. New Mexico is a rural state where most areas have just 
one or two cell phone providers. This situation already limits consumer 
choices. People in rural areas with few wireless companies to choose 
from have even fewer options for phone handsets due to exclusivity 
arrangements between carriers and phone manufacturers. This exacerbates 
the digital divide between urban and rural areas. With traditional 
wireline service, one can take any telephone to any home or office and 
just plug it in to make calls--no matter who the service provider is. 
Yet if one changes wireless carriers, one often has to buy a new phone. 
This seems wasteful and unnecessary. What policies will you implement 
that will increase the availability of smartphones to consumers, 
particularly those that live in rural states?
    Answer. Senator, let me be clear at the outset that we don't 
believe that substantial new regulatory structures are needed to 
increase the availability of smartphones and modern telecommunications 
technology to consumers in rural areas. I recommend two remedies.
    First, as the testimony at the Committee's June 17 hearing 
reflects, exclusive arrangements harm rural consumers because while 
rural carriers such as U.S. Cellular have competitive, and sometimes 
superior networks in rural areas, rural consumers oftentimes must 
choose between our high-quality networks and a desirable smartphone.
    We compete against the four largest carriers in rural areas at a 
substantial disadvantage because of their enormous access to low-cost 
capital, their national advertising budgets, and their ability to offer 
the most desirable handsets. No market participant can reasonably ask 
regulators to level the playing field with respect to the first two 
factors, however the third factor is not one that has been fairly 
conferred in the marketplace.
    Exclusive arrangements have grown solely as a result of FCC-
sanctioned merger activity that has concentrated enormous power within 
the largest carriers, causing significant adverse effects on rural 
consumers. For example, until recently there were entire states, such 
as Vermont, where Apple's iPhone could not be used because AT&T 
Wireless had no facilities.
    Put simply, in order for the many rural consumers to have access to 
the latest and most desirable devices, exclusive arrangements must be 
prohibited.
    Our second remedy involves universal service. In 1996, Congress 
amended the telecommunications act to allow Federal universal service 
funds to be used by competitive carriers to deliver to rural consumers 
access to modern telecommunications services that are reasonably 
comparable in quality, and at reasonably comparable prices, to those 
available in urban areas. As you know very well in New Mexico, there 
remain substantial parts of rural America where citizens' access to 
high-quality wireless networks is absent. The phone works in some 
places, but not others. Large dead spots remain, despite the fact that 
the FCC has licensed nine carriers throughout the country.
    Today, we are investing in new wireless towers throughout the areas 
where we have become eligible to draw Federal universal service funds 
and as a result of our investments we have network service quality that 
is superior to our competitors in most of the areas where we have 
invested these funds.
    That is potentially an enormous benefit to rural citizens. I say 
potentially because when Congress spoke of delivering modern 
telecommunications technology to rural areas, I'm certain they did not 
intend for our modern networks to be broadcasting wireless signals to 
an area where consumers cannot choose the best devices that handset 
manufacturers are offering in urban areas through the largest carriers. 
Nor did Congress intend for consumers to be forced to choose between 
the most desirable devices and a superior network.
    In order to improve rural consumers' access to high-quality 
devices, Congress must ensure that wireless carriers can to build out 
their networks and deliver high-quality service that will make the 
devices useful. If handset exclusivity is prohibited, but the phone 
does not work well in rural areas, then the prohibition will not 
deliver the intended benefits.
    Over the past year, some large carriers have walked away from 
universal service funding in rural areas. They have decided that they 
would rather not be obligated to deliver high-quality wireless services 
in rural areas, and instead construct cell sites only where it is 
profitable. They have the right to do that, however some of these same 
carriers continue to advocate for a return to monopoly-era regulatory 
structures that will raise barriers to competitive entry in rural areas 
by carriers such as U.S. Cellular. I object to these efforts. Rural 
citizens deserve competitive options in telecommunications services and 
the universal service mechanism was written with the intention of 
breaking down barriers to competitive entry, not erecting them.
    In sum, Congress must continue to ensure that universal service 
funding is being used to build mobile wireless networks in rural areas 
where our citizens desperately need access to modern and high-quality 
service that they can depend on. These high-quality networks are 
critical to rural consumers having the ability to make useful the 
devices that we are attempting to make available to them.

    Question 2. Why should consumers be forced to purchase new phones 
when switching carriers?
    Answer. As a general matter, consumers should not be forced to 
purchase a new phone when switching carriers. Let me discuss a couple 
of specific limitations, however. AT&T and some other carriers use a 
technology called GSM. Verizon and some other carriers (including U.S. 
Cellular) use a technology called CDMA. In either case, a consumer can 
call any other phone in the world that is connected to the public 
switched telephone network. However a GSM phone cannot place a call 
when it is in an area where the only network providing signal is CDMA, 
and vice versa. Accordingly, for example, when an AT&T subscriber 
wishes to switch to Verizon, they must purchase a new handset because 
their GSM phone will not work on Verizon's network. I note here that 
there remain millions of consumers still using Nextel's I-Den network, 
which was acquired by Sprint some years ago and those phones do not 
work on either a GSM or CDMA network.
    A second limitation involves software. Each carrier loads specific 
software into a handset to optimize it for that carrier's network. In 
addition, the software oftentimes includes applications that work 
solely on that carrier's networks. When a person changes carriers, the 
new carrier must wipe clean the software and attempt to load software 
that works with the new carrier's network.
    When a new customer brings a device to us that is the same model as 
one we sell, activating it is usually achievable. However, when a 
person brings in a handset from a manufacturer that we do not buy 
handsets from, it can be difficult if not impossible to adapt that 
device to our network. Carriers should however be prohibited from 
``locking'' devices such that they cannot be activated on another 
network even though they would otherwise function well from a technical 
perspective.
    GSM/CDMA limitations are unfortunate, but they are primarily the 
result of our Nation's decision to not mandate a single standard for 
wireless telephony. In the future, when most networks will operate on a 
technology called Long Term Evolution (``LTE''), these problems will be 
reduced, but not eliminated. Moreover, there are today a few devices 
that work on both CDMA and GSM networks, however no carrier has made 
them active on both networks.
    In an ideal world, wireless consumers would be able to plug their 
device into any network. Given the limitations expressed above, that 
ideal is not currently achievable in many circumstances. That said, it 
is important to note that whenever a consumer brings a compatible 
device to our network, we allow them to use it without purchasing a new 
device whenever that is technically possible.

    Question 3. Should public policy mandate that wireless networks 
allow any new handset to connect to it, similar to the existing 
situation with wireline service since the Carterfone decision?
    Answer. In light of the technical limitations set forth above, I do 
not believe that such a policy mandate is achievable at this time. I 
agree with the general proposition that a consumer should be able to 
purchase a device and connect it to the telephone network through their 
carrier of choice, as the FCC long ago decreed in the Carterfone 
decision. If you eliminate handset exclusivity and are vigilant in not 
allowing the largest carriers to dominate the handset supply chain, I 
believe you will go a long way toward improving the ability of all 
citizens to choose a device that best suits their needs and connect it 
to the telephone network on their carrier of choice.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Tom Udall to 
                           Robert M. Frieden
    Question 1. New Mexico is a rural state where most areas have just 
one or two cell phone providers. This situation already limits consumer 
choices. People in rural areas with few wireless companies to choose 
from have even fewer options for phone handsets due to exclusivity 
arrangements between carriers and phone manufacturers. This exacerbates 
the digital divide between urban and rural areas.
    With traditional wireline service, one can take any telephone to 
any home or office and just plug it in to make calls--no matter who the 
service provider is. Yet if one changes wireless carriers, one often 
has to buy a new phone. This seems wasteful and unnecessary. What 
policies should be implemented that will increase the availability of 
smartphones to consumers, particularly those that live in rural states?
    Answer. In the United States, the vast majority of wireless 
subscribers acquire handsets in a transaction with a wireless carrier, 
or its sales agent, that combines a subsidized phone with a one or two 
year service commitment. This business model reduces subscriber churn 
by locking consumers into a multi-month service term during which time 
the carrier recoups its handset subsidy through monthly rates and early 
service termination fees. In most nations, consumers can acquire 
handsets through a variety of distribution channels, including the 
ability to take service using an existing handset. U.S. subscribers, 
who forego the option of acquiring a subsidized handset, do not qualify 
for cheaper service rates. Wireless carriers apply the same rates they 
charge customers using subsidized handsets on a month-to-month basis.
    The top four wireless carriers have a market share of approximately 
90 percent.\1\ Because they combine handset sales with telephone 
service, these carriers also dominate the market for handset purchases 
directly from manufacturers. With the exception of Apple, wireless 
handset manufacturers have an inferior bargaining position with the 
major wireless carriers. The manufacturers perceive the need to ensure 
that they have shelf-space at the major carriers' retail outlets. 
Wireless manufacturers accept exclusive distribution agreements for 
their most attractive handsets, primarily to maintain favorable 
relations with a wireless carrier.
---------------------------------------------------------------------------
    \1\ See Federal Communications Commission, In re Implementation of 
Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, 
Annual Report and Analysis of Competitive Market Conditions With 
Respect to Commercial Mobile Services, Thirteen Report, DA-09-54, Table 
A-4: Top 20 Mobile Telephone Operators by Subscribers, 138 (Jan. 16, 
2009)(using 2007 data); available at: http://hraunfoss.fcc.gov/
edocs_public/attachmatch/DA-09-54A1.pdf (2007 data). See also, Leslie 
Cauley, iWeapon: AT&T Plans to Use its Exclusive iPhone Rights to Gain 
the Upper Hand in the Battle for Wireless Supremacy, USA Today, May 22, 
2007, at 1B. The top four carriers market share exceeds the FCC's 2007 
calculation, because of further industry consolidation including 
Verizon's acquisition of Alltel.
---------------------------------------------------------------------------
    Consumers may not enjoy all the potential benefits from wireless 
telecommunications and information services when carriers control how 
subscribers acquire handsets and what services these devices can 
perform and access. Bundling handsets and service, and securing 
exclusive distribution agreements, have an adverse impact on the 
aggregate level of innovation in both handset design and wireless 
services. Carriers' interests in recouping handset subsidies and 
manufacturers' interests in accommodating the interests of the Big Four 
wireless carriers combine to restrict what subscribers can do with 
their handsets.
    Carriers restrict subscribers from accessing services and software 
applications that might reduce carrier revenues. For example, AT&T 
blocks subscribers from launching the Skype voice over the Internet 
Protocol (``VoIP'') application and using the service via the AT&T 
network. AT&T wants to preserve its ability to restrict international 
long distance calling options, thereby ensuring that most calls trigger 
the high rates AT&T charges subscribers as opposed to the pennies Skype 
would charge. Wireless carriers regularly lock out subscribers from 
using features already installed in handsets, or available by 
downloading software. For example, AT&T does not make it easy for 
iPhone subscribers to use their phones as a modem for accessing the 
Internet via another device such as a personal computer.
    Wireless carriers can stifle innovation in handsets, because the 
carriers dominate the distribution chain for these devices. I do not 
believe Congress should prevent carriers from offering consumers the 
option of acquiring subsidized handsets. However, I do believe Congress 
should ensure that the FCC's venerable Carterfone policy \2\ apply to 
wireless carriers. Over forty years ago, the FCC determined that 
subscribers of wireline service had the right to attach any device, and 
access any service, that does not cause technical harm. This 
fundamental consumer freedom should also include the right to attach 
any wireless device to carrier networks, subject to easily managed 
spectrum and other technical interface issues. Wireless Carterfone 
would authorize consumers to attach any handsets and access any 
software application and service subject to a similar technical harm 
standard.
---------------------------------------------------------------------------
    \2\ In re Use of the Carterfone Device in Message Toll Tel. Serv., 
13 F.C.C.2d 420 (1968), recon. denied, 14 F.C.C.2d 571 (1968). See 
also, Rob Frieden, Wireless Carterfone--A Long Overdue Policy Promoting 
Consumer Choice and Competition (New Am. Found., Wireless Future 
Program, Working Paper No. 20), available at http://www.newamerica.net/
files/Wireless_Carterfone_
Frieden.-pdf. Rob Frieden, Hold the Phone: Assessing the Rights of 
Wireless Handset Owners and Carriers, 69 U. Pitt. L. Rev. 675, 720-25 
(2008).

    Question 2. Why should consumers be forced to purchase new phones 
when switching carriers?
    Answer. Subscribers need to acquire new handsets when switching 
carriers for a number of reasons. Because U.S. wireless carriers do not 
all operate on the same frequencies and do not use the same 
transmission formats, a switch in service provider will necessitate 
acquisition of a new device compatible with the new carrier's operating 
frequency and transmission format. For example, AT&T uses the Global 
System for Mobile communications (``GSM'') transmission format while 
Verizon uses Code Division Multiple Access, incompatible with GSM. When 
consumers shift between AT&T and Verizon, they will have to replace 
their existing handset that will not work on the replacement network.
    However, the need to have a compatible handset does not absolutely 
obligate subscribers to acquire a new device, one that has a financial 
subsidy, or one exclusively available from the new carrier. A 
subscriber could acquire a used handset, and manufacturers could offer 
handsets compatible with many carriers' networks. However, both 
scenarios have little likelihood of occurring in the current 
marketplace, because subscribers would not qualify for lower service 
rates if they forego the option of acquiring a subsidized, new handset. 
While wireless handset manufacturers do make devices that operate on 
different frequencies and transmission formats, so called dual-, tri- 
and quad-mode phones, wireless carriers do not want to offer handsets 
that can access the networks of competitors. Unlike the wired telephone 
marketplace, where subscribers can use the same phone when changing 
carriers, the FCC's failure to apply the wireless Carterfone policy all 
but guarantees that subscribers will have to purchase a new phone, or 
have every incentive to acquire a new one even if not absolutely 
required by carriers to do so.
    Ironically, the FCC has implemented a policy that was supposed to 
promote easy switching of carriers. The Commission requires both 
wireline and wireless carriers to support number portability,\3\ the 
right of telephone subscribers to keep an existing telephone number 
when switching carriers operating in the same locality. The FCC 
concluded that without number portability consumers would have greater 
reluctance to switch carriers even if doing so would qualify consumers 
for better rates, terms, and conditions.
---------------------------------------------------------------------------
    \3\ ``Local number portability (LNP) refers to the ability of users 
of telecommunications services to retain, at the same location, 
existing telecommunications numbers when switching from one 
telecommunications carrier to another. Thus, subscribers can port 
[i.e., interconnect and hand off traffic] numbers between two CMRS 
carriers (intramodal porting) or between a CMRS and wireline carrier 
(intermodal porting).'' Implementation of Section 6002(B) of the 
Omnibus Budget Reconciliation Act of 1993, Annual Report and Analysis 
of Competitive Market Conditions With Respect to Commercial Mobile 
Services, Eleventh Report, 21 FCC Rcd. 10947, 11005 (2006).

    Question 3. Should public policy mandate that wireless carriers 
comply with the Carterfone policy?
    Answer. I believe that the FCC's implementation of its longstanding 
Carterfone policy for wireless carriers would stimulate innovation and 
create market-driven incentives for carriers to promote network 
accessibility, both in terms of handset access and subscribers' 
opportunities to download software applications. Wireless devices, such 
as smartphones, have become the functional equivalent to personal 
computers. Personal computer users rightly assume that they have an 
unfettered right to attach their devices to any network and to download 
any type of legal software and content. Senators and Representatives 
would hear from many constituents if computer manufacturers, or 
Internet access providers tried to stifle such freedom. Yet currently 
wireless carriers can do just that. Computer users have access to 
millions of software applications and services, not the 30,000 selected 
jointly by Apple and AT&T.
    Requiring the FCC to apply its Carterfone policy to wireless 
carriers would not impose new regulations and costly burdens. The 
policy remedies carriers abuses that have worked to lock out 
innovations and stifle consumer freedom.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Tom Udall to 
                            Barbara S. Esbin
    Question 1. New Mexico is a rural state where most areas have just 
one or two cell phone providers. This situation already limits consumer 
choices. People in rural areas with few wireless companies to choose 
from have even fewer options for phone handsets due to exclusivity 
arrangements between carriers and phone manufacturers. This exacerbates 
the digital divide between urban and rural areas.
    With traditional wireline service, one can take any telephone to 
any home or office and just plug it in to make calls--no matter who the 
service provider is. Yet if one changes wireless carriers, one often 
has to buy a new phone. This seems wasteful and unnecessary.
    What policies should be implemented that will increase the 
availability of smartphones to consumers, particularly those that live 
in rural states? Why should consumers be forced to purchase new phones 
when switching carriers? Should public policy mandate that wireless 
networks allow any new handset to connect to it, similar to the 
existing situation with wireline service since the Carterfone decision? 
What policies should be implemented that will increase the availability 
of smartphones to consumers, particularly those that live in rural 
states?
    Answer. For the most part, we currently have the correct public 
policies in place to ensure the timely diffusion of smartphones to 
consumers, including those that live in rural states. Although 
exclusive handset arrangements between some wireless service providers 
and some handset manufacturers may mean that residents of some areas do 
not have immediate access to a particular handset, that does not mean 
that they are bereft of adequate choices of service plans and 
equipment. Today there are numerous vendors of smartphones, and many 
types and models of these handsets. Thus, there is less an unbridgeable 
``digital divide'' between urban and rural areas, than there is a lag 
in diffusion of certain technologies and equipment. This lag is due in 
part to the economic characteristics of serving sparsely populated 
areas, in part to the duration of exclusivity arrangements, and in part 
to other factors, include the size of the provider's customer base and 
the type of wireless broadband network offered by the provider. It is 
not different, in essence, from the lack of availability in rural areas 
of products and services typically found in densely populated urban 
areas.
    Prohibiting exclusive handset arrangements, as some rural carriers 
have requested, might speed the availability of some current generation 
of smartphones to some rural subscribers in the short term, but it 
would do so at a cost. Such a policy, by effectively mandating that 
handset manufacturers must design their products for use on all 
wireless networks, would mean that wireless service providers can no 
longer differentiate themselves and compete on the basis of handset 
offerings. Over the long term, this would lessen competition to design 
and market the next ``hot'' handset. No one company or carrier has a 
monopoly on innovation, and there is nothing to prevent smaller and 
rural carriers from forming a buying consortium of sufficient scale to 
contract with handset manufacturers to produce innovative products. In 
fact, at least one such group exists, and rural carriers have through 
it successfully developed and marketed such exclusive products in the 
past.
    Industry-led solutions to this problem are far more likely to 
provide consumer benefits than regulatory mandates. For example, by 
acting together, a group of 24 small wireless providers last year 
negotiated directly with Verizon Wireless for access to handsets 
exclusive to that carrier. More recently, Verizon Wireless has 
announced that ``for small wireless carriers (those with 500,000 
customers or less), any new exclusivity arrangement [it] enter[s] with 
handset makers will last no longer than 6 months--for all manufacturers 
and all devices.'' The carrier has also indicated that it will 
negotiate similar arrangements for larger, regional carriers on an 
individual basis. There is obviously a calculation made by the carrier 
and the handset manufacture as to the length of the exclusivity period 
necessary for each to earn the benefit of the risk and investment 
involved in bringing the device to market. A similar balancing of 
interests has been recognized by T-Mobile USA, according to Kathleen 
Ham, VP of Regulatory Affairs, who has stated that the carrier ``for 
the most part utilizes limited exclusivity arrangements that don't 
apply to the smallest carriers, but do incent us to invest, innovate 
and provide an alternative wireless experience to our consumers.'' 
Calculations concerning the size of carrier against whom the 
exclusivity arrangement will apply and length of time required to 
recoup the value of the investment in the subject device will 
necessarily differ among the wireless carriers, who, together with the 
handset manufacturers, are in the best position to make such 
determinations for any given device.
    Market-based solutions such as these are preferable to regulatory 
prohibitions on the exclusive arrangements because they preserve the 
wider societal benefits of such arrangements--intense competition 
between the largest carriers and handset manufacturers to develop the 
next ``must have'' device--while speeding the availability of more 
advanced handsets to customers living in rural areas served by regional 
and smaller competitors. Public policy should encourage such industry-
led solutions by saving the use of regulatory intervention for cases of 
demonstrable market failure and consumer harm.

    Question 2. Why should consumers be forced to purchase new phones 
when switching carriers?
    Answer. Unlike in Europe, where a single wireless interface 
technology--GSM--is employed, in the U.S. there are two predominant 
technologies used by wireless carriers: CDMA2000 and GSM. As a result, 
not every handset is designed to work on every network. The Apple 
iPhone, for example, was designed to work with a GSM network and cannot 
function on a CDMA2000 system. Thus, a subscriber switching from a GSM 
carrier to a CDMA carrier will have to purchase new equipment that is 
compatible with that carrier's network.
    Additionally, wireless network operations reflect not only 
technology choices (CDMA vs. GSM), but also spectrum band utilization 
differences (cellular vs. PCS), together with individual service and 
feature choices by the operator. In these respects, wireless handsets 
are unlike traditional landline phones. They are optimized for use on a 
given provider's network and designed to work on the spectrum that 
provider has available and the features and services that provider 
offers. For example, wireless providers have made various choices for 
provisioning E911 service, and the handset must be compliant with that 
choice to ensure the effective operation of the E911 service.

    Question 3. Should public policy mandate that wireless networks 
allow any new handset to connect to it, similar to the existing 
situation with wireline service since the Carterfone decision?
    Answer. As stated above, there are two predominant spectrum 
interface technologies used by U.S. wireless carriers: CDMA and GSM. 
Given this, a public policy mandate that wireless networks allow any 
new handset to connect to it would be impractical, if not impossible to 
implement without additional changes to the design of many wireless 
handsets. More importantly, imposition of Carterphone-like rules would 
require a radical shift for the wireless industry. Carterphone requires 
a standardized network, whereas the Federal Communications Commission 
has encouraged technology diversity among wireless networks in 
recognition that it is pro-competitive, pro-innovation and beneficial 
to consumers.
    Nor do market conditions warrant such a radical departure from 
established policy. The market conditions giving rise to the FCC's 
Carterphone decision couldn't be more different than those of the 
wireless market today. The Carterphone decision was rendered at a time 
when telecommunications services were provided on a monopoly basis by a 
landline telephone provider and the telephone monopoly was also 
vertically integrated in the telephone equipment business. Since 1992, 
when there were only two cellular carriers per market, the FCC has 
permitted wireless carriers to control the devices attached to their 
networks and offer bundled transmission and equipment services in 
recognition of the fact that the wireless handset market was vibrantly 
competitive and the wireless carrier market sufficiently competitive 
that bundling service and equipment would benefit, rather than harm, 
consumers. And the market today is even more intensely competitive with 
95.5 percent of the population of the U.S. living in areas served by 
three or more commercial mobile radio service providers and hundreds of 
handsets available from other 30 handset manufacturers. Significantly, 
wireless service providers do not own and are not otherwise vertically 
integrated with handset manufacturers. Since 1992, we have seen a 
steady trend of rising wireless minutes of use, a steady decrease in 
wireless service prices, and a steady increase in wireless service and 
equipment offerings. These are the indicators of a healthy and 
competitive market, where no single provider has and is abusing market 
power, rather than a failed market.
    Thus, from the perspective of economic theory, the competitiveness 
of the U.S. wireless market does not justify Carterphone-like 
regulation. Moreover, the goal of the Carterphone requirements was to 
introduce innovation in the consumer premises equipment market by 
permitting third-party manufacturers entry: a goal already achieved 
many times over by today's flourishing wireless handset market.
    This is not to suggest that wireless carriers should be free to 
impose any and all restrictions on equipment suppliers, application 
providers and end user customers, but it does suggest that calls for 
legislative and/or regulatory intervention be tested to determine if in 
fact, particular carrier practices are on balance anticompetitive and 
that consumers will be better served by before-the-fact regulation. 
Markets may be inefficient and imperfect in some respects, but 
regulation can be more so. Accordingly, in the absence of demonstrable 
consumer harms, regulatory intervention into effectively functioning 
markets should not be undertaken lightly and must rest on solid 
empirical evidence, rather than supposition or surmise. It is doubtful 
that such a factual basis for regulatory intervention into the wireless 
service market exists today.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Tom Udall to 
                         Victor H. ``Hu'' Meena
    Question 1. New Mexico is a rural state where most areas have just 
one or two cell phone providers. This situation already limits consumer 
choices. People in rural areas with few wireless companies to choose 
from have even fewer options for phone handsets due to exclusivity 
arrangements between carriers and phone manufacturers. This exacerbates 
the digital divide between urban and rural areas.
    With traditional wireline service, one can take any telephone to 
any home or office and just plug it in to make calls--no matter who the 
service provider is. Yet if one changes wireless carriers, one often 
has to buy a new phone. This seems wasteful and unnecessary. What 
policies will you implement that will increase the availability of 
smartphones to consumers, particularly those that live in rural states?
    Answer. Cellular South currently serves large portions of rural 
areas in all or part of five southeastern states. We are proud of our 
history of serving these areas with the philosophy of providing rural 
Americans with the same types of wireless services as those that are 
enjoyed by Americans in urban areas.
    Consumers in rural portions of Cellular South's service area have 
access to the same devices as consumers in other portions of our 
service area. Unfortunately, device exclusivity agreements limit the 
Smartphones and PDAs that we can provide to our customers.
    In many rural areas, Cellular South provides the most reliable and 
robust wireless service. Consumers in these areas often have to choose 
between having a device from Cellular South that works when and where 
they need it, or having a cutting-edge device offered exclusively 
through another carrier that does not always have coverage where the 
customer needs it.

    Question 2. Why should consumers be forced to purchase new phones 
when switching carriers?
    Answer. Cellular South believes that a consumer should have the 
ability to switch carriers without having to purchase a new device. 
Unfortunately, differences in technology can make this legitimately 
impossible today when a consumer switches between CDMA and GSM 
carriers. However, today's consumers should be allowed to use their 
existing devices when switching between carriers that utilize the same 
technology.
    When the largest carriers get exclusive agreements for devices, 
they typically ``lock'' those devices to their networks so that they 
cannot be used on other technologically-compatible networks. In most 
cases, consumers cannot ``unlock'' these devices without taking steps 
that will void the device's warranty.
    It is important to address this problem now because, as carriers 
deploy 4G technologies, the early indications are that most will choose 
LTE as their 4G technology. This will result in a common platform for 
most carriers which will allow the potential for customers of these 
carriers to move their device from one network to another more freely 
than they are able to do today.

    Question 3. Should public policy mandate that wireless networks 
allow any new handset to connect to it, similar to the existing 
situation with wireline service since the Carterfone decision?
    Answer. Cellular South believes that a consumer should be able to 
attach an FCC-certified wireless device to the wireless network of his 
or her choice, provided that the device does not harm the network. 
There is no compelling reason why consumers should be forced to buy 
wireless devices through wireless service providers. In fact, Cellular 
South would welcome an environment where wireless providers simply 
provide service and are not also device suppliers.
    While it may be some time before U.S. wireless consumers buy 
devices separately from wireless providers, Congress could make 
significant progress in this area by eliminating the use of exclusivity 
agreements between wireless device manufacturers and wireless service 
providers.

                                  
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