[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
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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
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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\
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\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\
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\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.
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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.
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\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.
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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\
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\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\
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\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.
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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.
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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).
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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\
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\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).
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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.
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\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.
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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\
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\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'').
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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\
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\4\ CTIA Study at 4, 9.
\5\ CTIA Study at 3, 9; Thirteenth Report, 192.
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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.
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\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.
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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.
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\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.
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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).
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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\
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\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.