[Senate Hearing 111-496]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-496

 CELL PHONE TEXT MESSAGING RATE INCREASES AND THE STATE OF COMPETITION 
                         IN THE WIRELESS MARKET

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 2009

                               __________

                          Serial No. J-111-32

                               __________

         Printed for the use of the Committee on the Judiciary


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                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         JON KYL, Arizona
RICHARD J. DURBIN, Illinois          LINDSEY O. GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
RON WYDEN, Oregon
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
            Bruce A. Cohen, Chief Counsel and Staff Director
                  Matt Miner, Republican Chief Counsel
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
CHARLES E. SCHUMER, New York         ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon                    TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
       Carolina Holland, Democratic Chief Counsel/Staff Director
                 Jace Johnson, Republican Chief Counsel















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................    49
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
    prepared statement...........................................   121

                               WITNESSES

Itkin, Laurie, Director of Government Affairs, Cricket 
  Communications, Inc., San Diego, California....................     8
Kelsey, Joel, Policy Analyst, Consumers Union New York, New York.    10
Keshav, Srinivasan, Professor and Canada Research Chair in 
  Tetherless Computing, School of Computer Science, University of 
  Waterloo, Waterloo, Ontario, Canada............................     7
Milch, Randal S., Executive Vice President and General Counsel, 
  Verizon Communications, Inc., New York, New York...............     5
Watts, Wayne W., Sr., Executive Vice President, and General 
  Counsel, AT&T Management Services, Inc., Dallas, Texas.........     3

                         QUESTIONS AND ANSWERS

Responses of Laurie Itkin to questions submitted by Senator Kohl.    28
Responses of Joel Kelsey to questions submitted by Senator Kohl..    31
Responses of Randal S. Milch to questions submitted by Senator 
  Kohl...........................................................    37
Responses of Wayne W. Watts, Sr., to questions submitted by 
  Senator Kohl...................................................    43

                       SUBMISSIONS FOR THE RECORD

Itkin, Laurie, Director of Government Affairs, Cricket 
  Communications, Inc., San Diego, California, statement.........    50
Kelsey, Joel, Policy Analyst, Consumers Union New York, New York, 
  statement and addendum.........................................    61
Keshav, Srinivasan, Professor and Canada Research Chair in 
  Tetherless Computing, School of Computer Science, University of 
  Waterloo, Waterloo, Ontario, Canada, statement.................   111
Milch, Randal S., Executive Vice President and General Counsel, 
  Verizon Communications, Inc., New York, New York, statement....   123
Watts, Wayne W., Sr., Executive Vice President, and General 
  Counsel, AT&T Management Services, Inc., Dallas, Texas, 
  statement......................................................   141

 
 CELL PHONE TEXT MESSAGING RATE INCREASES AND THE STATE OF COMPETITION 
                         IN THE WIRELESS MARKET

                              ----------                              


                         TUESDAY, JUNE 16, 2009

                                       U.S. Senate,
        Subcommittee on Antitrust, Competition Policy, and 
            Consumer Rights,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Klobuchar, and Hatch.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good afternoon. This hearing will come to 
order.
    Today we will be examining the state of competition in the 
cell phone industry. The enormous growth in the use of cell 
phones means that maintaining competition in this industry is 
more important than ever. With more than 270 million 
subscribers, cell phones are a vital means of communication for 
the vast majority of Americans. Cell phones enable 
instantaneous communications for millions wherever they are 
located, whether at work, at home, away from home, in their 
car, or anywhere in between. Many Americans--over 20 percent 
now--have now discarded traditional land line phones and depend 
entirely on their cell phones. The ease, convenience, and 
universal nature of today's cell phone service would not have 
been imaginable just two decades ago.
    For many years as this industry developed, it was a 
competition success story--with many rivals and vigorous price 
competition. In recent years, however, the picture has changed. 
Consolidation has left this industry highly concentrated. Four 
national carriers now control over 90 percent of the cell phone 
market. Two of them--today's witnesses AT&T and Verizon--
combine to have a market share of 60 percent. Consumers' 
choices have become quite limited, and price wars seem to be a 
thing of the past. American consumers pay more for wireless 
phone service than most other developed nations--an average of 
$506 per year in the year 2007.
    Nowhere is the changed market for cell phones more 
noticeable than in text message service. These short, instant 
messages delivered via cell phones have become enormously 
popular. In 2008, more than 1 trillion text messages were sent, 
more than triple the number of just 2 years ago.
    As their popularity has grown, so has the price charged on 
a per message basis. From 2006 to 2008, the price of sending 
and receiving a text message among the four largest cell phone 
carriers increased by 100 percent--from 10 to 20 cents a 
message. The four companies increased their text messaging 
prices in two steps--first from 10 to 15 cents, and then from 
15 to 20 cents--within weeks or months of each other. These 
lockstep price increases occurred despite the fact that the 
cost to the phone companies to carry text messages is minimal--
estimated to be less than a penny per message--and has not 
increased.
    The phone companies defend these price increases by 
asserting that they have not been coordinated in any respect. 
They also point out that the majority of cell phone customers 
do not pay for text messages on a per message basis, but 
instead buy plans for ``buckets'' of text messages, typically 
starting at $5 for 200 messages. Nonetheless, these sharp price 
increases raise concerns.
    Are these price increases the result of a lack of 
competition in a highly concentrated market? Will consumers 
continue to see similar price increases for this and many other 
wireless services that they have become increasingly dependent 
upon, such as Internet connections and basic voice service? Do 
text message price increases represent a warning sign for the 
state of competition in the cell phone industry as a whole?
    The concentrated nature of today's cell phone market should 
make us wary of other challenges to competition in this 
industry. For example, smaller competitors raise serious 
questions about practices that prevent them from being able to 
fairly compete. These range from exclusive deals that deny 
competitors access to the most in-demand cell phones, to 
limitations on the ability of new competitors to roam on other 
providers' networks, to difficulties in obtaining needed 
spectrum. It is imperative that we work to remove undue 
barriers to competition to ensure consumers the best rates and 
services.
    We, therefore, urge the FCC to take all necessary action to 
remove each of these barriers to competition. Removing these 
barriers will ensure that the cell phone market is open to 
competition and prevent the large carriers from gaining a 
stranglehold on this market. We also urge the Justice 
Department to closely scrutinize future mergers and allegations 
of anticompetitive practices in this industry.
    Today's hearing thus comes at an important time for 
competition in the cell phone industry. We are looking forward 
to the testimony of our panel of witnesses on this important 
topic.
    Now, with respect to our panel, we will introduce our first 
witness, who will be Wayne Watts. Mr. Watts is Senior Executive 
Vice President and General Counsel of AT&T. Previously, Mr. 
Watts served as Vice President and Assistant Counsel for SBC 
Communications and worked as an attorney at Southwestern Bell 
Telephone Company.
    He will be followed by Randal Milch. Mr. Milch currently 
serves as Executive Vice President and General Counsel at 
Verizon Communications. He has been with Verizon since 2000, 
when he was appointed Senior Vice President and General Counsel 
of Verizon's domestic telecom business.
    Next, we will be hearing from Professor Keshav. Professor 
Keshav has been a professor at the School of Computer Science 
at the University of Waterloo since 2003. He has focused his 
research on tetherless computing, a broad research field that 
includes wireless networks and smart mobile devices, and he has 
received a number of awards for his research and his 
publications.
    And next we will hear from Laurie Itkin. Ms. Itkin has 
served as Director of Government Affairs for Cricket 
Communications for the last 9 years. Prior to joining Cricket, 
Ms. Itkin managed governmental relations for Sprint and served 
as telecommunications policy adviser to the Governor of Oregon.
    Finally, we will be hearing from Joel Kelsey. Mr. Kelsey is 
a Federal and international affairs policy analyst for 
Consumers Union. Before joining Consumers Union, he worked as 
the New York City Outreach Director for the New York Public 
Interest Research Group before joining Consumers Union.
    We thank you all for appearing at our Subcommittee's 
hearing. And after each of you give your testimony, we will 
proceed to ask questions.
    Would you now all rise and raise your right hand and repeat 
after me? Do you affirm that the testimony you are about to 
give will be the truth, the whole truth, and nothing but the 
truth, so help you God?
    Mr. Watts. I do.
    Mr. Milch. I do.
    Mr. Keshav. I do.
    Ms. Itkin. I do.
    Mr. Kelsey. I do.
    Chairman Kohl. Thank you. So we will start with you, Mr. 
Watts, and we hope you will hold your comments to 5 minutes.

STATEMENT OF WAYNE W. WATTS, SR, EXECUTIVE VICE PRESIDENT, AND 
 GENERAL COUNSEL, AT&T MANAGEMENT SERVICES, INC., DALLAS, TEXAS

    Mr. Watts. Well, good afternoon, Chairman Kohl, and thank 
you for the gracious introduction, and I appreciate very much 
your opening comments.
    The Subcommittee's apparent concern over prices for text 
messaging I believe is based on an overly narrow focus on the 
pricing trend of a single pricing option for text messaging 
services--the pay-per-use, or PPU, option. PPU refers to the 
charge for individual text messages that customers purchase on 
a single-message basis.
    AT&T's current price for PPU is 20 cents per text message. 
That rate did increase a little over a year ago, in March of 
2008, and prior to that, it was increased in January of 2007. 
So, it has been quite a while since those rates changed.
    However, the vast majority of AT&T's customers do not 
choose the PPU pricing option, and the PPU pricing option does 
not apply to the overwhelming majority of messages. In fact, 
less than 1 percent of AT&T's post-paid text messaging volume 
is handled on a PPU basis. Less than 1 percent of the messages 
that our customers send are paid for this way.
    Instead, the vast majority of our customers take advantage 
of AT&T's package pricing plans, including those that provide a 
package of messages for a flat monthly rate, and 99 percent of 
our messages are handled under these plans. These plans 
include: 200 messages per month for $5; 1,500 messages per 
month for $15, and unlimited messages for $20. Clearly, the 
price of messages under those plans are far below 20 cents per 
message. In fact, at AT&T, for $30 a month, a family of five 
can enjoy unlimited text messaging for the entire family. 
Clearly, very low rates per message.
    As a result of this customer interest in these lower-cost, 
higher-value package plans, in the last 2 years the price for 
text messages has fallen dramatically. Indeed, AT&T's average 
price for text messaging has dropped almost 70 percent in 2 
years. So that is 70 percent versus the suggestion that has 
been made that our prices per text message have gone up.
    At the same time, the volume of text messages handled by 
AT&T has grown exponentially. In January of 2007, AT&T 
processed 4.5 billion text messages for the month. In January 
of 2009, we processed a stunning 31.1 billion text messages. 
That is a nearly 600-percent increase in just 2 years in the 
volume of messages sent by our customers.
    Among the reasons for this dramatic increase in usage is 
the equally dramatic drop in prices paid by the overwhelming 
majority of our customers. Thus, the PPU price, which 
represents a minuscule portion of the total number of text 
messages has increased, albeit 15 months ago. But overall 
rates--the rates charged for 99 percent of our customers' text 
messages--have dropped dramatically.
    The background here is very instructive. In making these 
package plans the core of our text message pricing, we are 
delivering maximum choice and value to our customers. In our 
experience, the PPU pricing option often results in large and 
unpredictable swings in a customer's total bill, leading to 
significant customer dissatisfaction and complaints to our 
customer care line. Package plans, on the other hand, which I 
believe are increasing in importance to the customers as they 
find more and more the need to budget their expenses, ensure 
extremely low prices, choice--because we offer so many 
different plans--predictability, and easy-to-understand bills, 
and thereby greatly improve the overall customer experience. 
Our customers have voted with their pocketbooks as 99 percent 
of the text messages sent or received by AT&T customers are 
billed under one of our package plans.
    Of course, it should come as no surprise that the price of 
text messages has fallen off given the dynamic and competitive 
nature of today's wireless industry. More than 95 percent of 
the U.S. population lives in census blocs with at least three 
competing wireless carriers, and more than half the population 
lives in census blocks with at least five competing carriers. 
For these reasons, and many others, the FCC has confirmed time 
and again that the U.S. wireless marketplace is and will remain 
effectively competitive. Indeed, a recent Merrill Lynch report 
shows that the U.S. enjoys the least concentrated wireless 
industry of 26 major industrial countries based on its HHI 
index.
    Finally, against this backdrop, I have to pause to put to 
rest an underlying implication of the inquiry into this matter, 
and that is whether or not wireless providers have somehow 
conspired to fix prices for text messaging.
    As you know, a great deal of litigation has been filed as a 
result of these hearings and this particular issue, and I want 
to make it perfectly clear that AT&T sets the prices for all of 
its products on a unilateral basis, based on independent 
analysis. There is no evidence to support an accusation that 
anyone at AT&T engaged in any inappropriate, much less illegal, 
behavior as alleged in all these lawsuits that are pending 
today. There simply is none.
    I trust that this more complete picture puts to rest any 
concerns you may have about a single-pricing option, and I, as 
always, look forward to your questions, Mr. Chairman.
    Thank you.
    [The prepared statement of Mr. Watts appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Watts.
    Mr. Milch?

  STATEMENT OF RANDAL S. MILCH, EXECUTIVE VICE PRESIDENT AND 
 GENERAL COUNSEL, VERIZON COMMUNICATIONS, INC., NEW YORK, NEW 
                              YORK

    Mr. Milch. Good afternoon, Chairman Kohl. It is a pleasure 
for me to appear before you today on behalf of Verizon 
Wireless.
    We were brought here today to discuss industry pricing in a 
tiny segment of the burgeoning wireless texting, or SMS, 
market. Mr. Chairman, your letter of last year concerned 
pricing similarities in the so-called pay-as-you-go segment of 
the texting market, which involves only 1 percent of all the 
texts that Verizon Wireless customers send or receive. So let 
me respond directly to the underlying issue here.
    Verizon did not collude with its competitors on setting 
pay-as-you-go prices for text messages, and I believe all the 
evidence shows any suggestion like that to be baseless. Indeed, 
the evidence amply confirms that the U.S. wireless industry is 
robustly competitive in all of its aspects.
    Let me go through this with a little bit more detail.
    First, the tiny nature of this market makes any suggestions 
of collusion implausible. Only 1 percent of the customers' text 
messages are paid for on a pay-as-you-go basis, and Verizon 
customers in this category on average send or receive only 21 
texts per month. The other 99 percent of Verizon texts are 
covered by various bundles of services where the average price 
per text is less than a penny per text.
    In contrast to incidental texters in the pay-as-you-go 
category, text users in bundles average almost 1,000 texts a 
month. Because of this greatly increased usage, the overall 
price for text messaging has dropped precipitously. In December 
2006, the average price was about 3 cents per message. Since 
then, we have cut the average price by almost two-thirds, to 
about 1 cent per message.
    Second, I have provided some charts with my testimony that 
I have provided the Committee, and those charts show that there 
is a wide variation in the carriers' texting prices overall. 
Pay-as-you-go prices vary widely. Verizon prepaid customers are 
charged 1 cent or 5 cents or 10 cents or 20 cents per message, 
depending on the plan. AT&T's prepaid customers pay 20 cents a 
message. Sprint's prepaid customers pay 10 cents per message or 
have all text message included at no extra charge, depending on 
the plan. And T-Mobile's prepaid customers pay 5 cents on 
incoming messages and 10 cents on outgoing messages. And I 
noted from the LEAP testimony that they do not charge--they 
have yet different plans for their text messaging.
    There is no suspicious coincidence in the timing, Mr. 
Chairman, for these price changes. The different carriers 
changed their prices for this product for over a period of 
almost 2 years, and, indeed, in a competitive market, you would 
expect there to be some gearing up of competitive prices over 
time.
    The market evidence shows fierce competition across the 
wireless market. The FCC just this year reiterated that U.S. 
customers are seeing low prices, new technologies, improved 
service quality, and choice among providers from all the 
competition in the wireless marketplace. Using the most recent 
information available to it, the FCC found that the industry 
average revenue per minute fell from 47 cents in 1994 to 6 
cents in 2007, or a decline of 67 percent, while minutes of use 
have increased many-fold.
    American consumers fare far better than wireless customers 
across the globe. A recent study found that the average price 
per minute in the U.S. is lower than the 26 OECD countries, 
that U.S. customers have the highest minutes of use per month, 
and that the U.S. has the most competitive market in those 26 
countries.
    Mr. Chairman, I propose that Americans pay more for 
wireless usage only in the sense that they have more to buy.
    Finally, all this competition has been accompanied by 
increased customer satisfaction. Consumer Reports magazine for 
the past several years in a row has given Verizon the highest 
rating among all the wireless carriers for service quality. 
During each month in 2008, the rate for complaints from Verizon 
Wireless' customers has been about eight in every million 
customers, a rate of only 0.0008 percent.
    At the same time, the entire industry is doing better. Last 
month, the American Consumer Satisfaction Index issued a press 
release finding that, ``Customer satisfaction with wireless 
telephone service reached a new all-time high for the third 
consecutive year.'' Verizon Wireless and the whole industry 
continue to move in the right direction, Mr. Chairman.
    The American wireless industry, I suggest, Mr. Chairman, is 
and continues to be an American competitive success story. The 
wireless industry has been blessed by light-handed regulation, 
and I suggest, Mr. Chairman, that it is in the best interests 
of the American competitive telecom industry for it to stay 
that way.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of Mr. Milch appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Milch.
    Mr. Keshav?

 STATEMENT OF SRINIVASAN KESHAV, PROFESSOR AND CANADA RESEARCH 
  CHAIR IN TETHERLESS COMPUTING, SCHOOL OF COMPUTER SCIENCE, 
       UNIVERSITY OF WATERLOO, WATERLOO, ONTARIO, CANADA

    Mr. Keshav. Good afternoon, Chairman Kohl. My name is 
Srinivasan Keshav. I am a professor of computer science and a 
Canada Research Chair at the University of Waterloo in Ontario, 
Canada. My area of research is computer networking and, more 
specifically, mobile and wireless networks. I have been 
studying cellular phone technology for the last 5 years.
    I was asked by your office to give my opinion on two 
questions. First, what is the cost to a carrier to transmit a 
text message? Second, are the recent price increases for text 
messages sent by consumers who are not subscribed to a text 
messaging plan cost-justified?
    Based on an analysis that is detailed in the written 
testimony, my answers are as appears as a submission for the 
record.
    First, I believe that the cost to a carrier to transmit a 
text message is very unlikely to exceed 0.3 cents.
    Second, the price increase is not cost-justified.
    Let me justify my conclusions. I will first address the 
cost of a text message.
    To avoid making a loss, the average revenue a carrier makes 
on a text message must exceed its cost. In their written 
testimony, representatives from both AT&T and Verizon indicate 
that the average revenue from a text message is around 1 cent-
1.04 cents for Verizon and 1.4 cents for AT&T. Thus, the 
maximum cost of a text message is around 1 cent. In my written 
testimony, I have come to the same conclusions using 
independent evidence.
    A second way to estimate the cost of a text message is to 
cost out each component of the underlying technology. To carry 
a text message requires many resources, such as the wireless 
channel, the wired network backbone, billing systems, storage 
systems, and special control messages. Each of these costs 
money. In my written testimony, I have estimated the cost of 
each component. My analysis indicates that the two dominant 
costs are those for the wireless path and the billing systems. 
Let me address each in turn.
    To estimate the cost of a wireless path, I established that 
in 1 minute a wireless path can equivalently carry either one 
voice call or about 80 text messages. The price of a voice call 
in the United States is about 7 cents a minute, on average. 
This means that the cost to the wireless for a text message 
should be 7 cents divided by 80, or about 0.1 cents, roughly-a 
tenth of a penny.
    Estimating the billing cost is difficult. A rule of thumb 
in the telecom industry is that billing costs for a voice call 
should be at most the same as the cost to carry the call 
itself. As a conservative estimate, I, therefore, assume that 
the cost of billing a text message is twice the cost of 
actually carrying it. That would make the cost of a text 
message 0.3 cents.
    I should point out that this portion of my analysis makes a 
strong assumption about billing costs. Nevertheless, I have 
tried to account for it by being conservative in my 
assumptions.
    To sum up, the cost of a text message is certainly smaller 
than 1 cent based on testimony from AT&T and Verizon that we 
just heard. In my opinion, it is likely to be smaller than 0.3 
cents based on my analysis of the underlying technology that 
you can find in the written testimony.
    I will now turn my attention to the second question. That 
is, are the recent price increases cost-justified? I believe 
that the only possible technical reason to raise the price per 
message would be if the amount of radio spectrum used by the 
text messaging traffic was so great as to cause network 
congestion. In this case, the price increases, also called 
``congestion pricing''--would dampen demand and reduce load. 
However, the total worldwide traffic of 3.5 trillion text 
messages carried in 2008 account for the radio spectrum 
available to just a few hundred cell phone towers. In my 
written testimony, I had estimated 28. I was off by a factor of 
10. It is exactly 280. However, in 2008 alone, 300,000 such 
towers were sold. So it is very unlikely that text message 
traffic is congesting the network and the available spectrum. 
And, therefore, the price increases cannot be cost-justified.
    To sum up, I have tried to answer the questions posed to me 
to the best of my abilities. My analysis has made use of 
publicly available data as well as a few clearly stated and 
conservative assumptions. I would like to thank you for giving 
me a chance to present my conclusions. I also welcome input 
from technical experts that will help me refine my analysis and 
correct any mistakes.
    Thank you.
    [The prepared statement of Mr. Keshav appears as a 
submission for the record.]
    Senator Kohl. Thank you, Mr. Keshav.
    Ms. Itkin.

  STATEMENT OF LAURIE ITKIN, DIRECTOR OF GOVERNMENT AFFAIRS, 
      CRICKET COMMUNICATIONS, INC., SAN DIEGO, CALIFORNIA

    Ms. Itkin. Thank you, Mr. Chairman, for the invitation to 
testify today. For the record, my name is Laurie Itkin, and I 
am with Cricket Communications. Cricket has been around for 
about 10 years, and we have grown to become the seventh largest 
facilities-based carrier in the United States, and what that 
means, facilities-based, is that we have invested billions of 
dollars in building out our own network. We current have over 4 
million subscribers in 32 States.
    Cricket serves consumers who have been left behind by the 
larger carriers. Our customers tend to be more ethnically 
diverse and lower-income than the larger carriers' consumer, 
and Cricket pioneered the unlimited, flat-rate, all-you-can-eat 
service with no long-term contract, no credit check, and really 
most importantly, no early termination fee. Our customers talk 
and text much more than the industry average, and I think that 
is what happened when you offer all-you-can-eat pricing.
    For an example, our $40 plan includes unlimited local and 
long-distance calling and unlimited incoming and outgoing text 
messages. And I also really want to state that I believe that 
Cricket puts pricing pressure on carriers in every market we 
enter. And I am pleased to announce that next week Cricket will 
be launching service in D.C. and Baltimore.
    The subject of this hearing is text messaging, and I think 
we can all relate to the story of hearing a parent's shock as 
she opens up her wireless phone bill to see a $600 charge when 
her adolescent child has discovered text messaging for the 
first time and goes into a frenzy.
    We also have heard of consumers that are concerned that 
they are receiving unsolicited text messages, which is called 
``spam,'' and they are actually being forced to pay for an 
unsolicited text message that they did not want.
    These situations would never happen with Cricket. Since its 
inception, Cricket has never charged its consumers a penny to 
receive an incoming text messaging.
    Cricket believes the best regulator of prices is a 
competitive marketplace, but despite our rapid growth and, Mr. 
Chairman, as you stated in your opening comments, we are still 
a very small carrier in comparison to the four largest carriers 
who control 90 percent of the market.
    So the question is: How do we create a robust, competitive 
environment nationwide so all consumers can benefit from 
innovation of new entrants like Cricket? What is preventing 
that dynamic from occurring?
    Well, we think there are two policy issues that need to be 
addressed, and they are spectrum constraints and roaming 
policy.
    First of all, we need more spectrum. The wireless industry 
needs more spectrum, and I think every panelist here today will 
agree on that point. The problem is that the two carriers 
sitting to my right have won the lion's share of spectrum in 
FCC auctions over the last few years, and they have also 
gobbled up smaller competitors.
    Mr. Chairman, Cricket shares the concerns that you 
articulated in your September 2008 letter to the CEOs of the 
four largest carriers, and you stated that you were concerned 
regarding ``consolidation and increased market power by the 
major carriers.'' So Cricket's concern with market power is 
that it gives carriers the ability to engage in anticompetitive 
practices such as we are facing with roaming.
    No wireless carrier has ubiquitous coverage. We all have to 
use each other's networks to provide seamless coverage to 
consumers. Cricket's experience is that the rates that carriers 
charge for roaming minutes is directly correlated to their size 
and market power.
    One particularly anticompetitive practice that Cricket 
faces in many areas of the country is that one large carrier 
prohibits Cricket customers from roaming at all. With all the 
consolidation, such as Alltel being purchased by Verizon, 
Cricket has fewer and fewer roaming partners available. In many 
cases, our customers are stranded without service and cannot 
use their phone at all.
    Now, I ask you: How can that be allowed to happen when 
service is available?
    So I will close by saying that there are currently three 
proceedings roaming pending at the FCC, and I would be happy to 
go into more detail in the Q&A. Cricket believes spectrum and 
roaming policies are the foundations for national competition. 
All consumers, regardless of where they live, work, and travel, 
should have access to affordable and innovative options for 
service, such as the value-rich services that Cricket provides.
    Thank you, Mr. Chairman. I will be happy to answer 
questions later.
    [The prepared statement of Ms. Itkin appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Ms. Itkin.
    Mr. Kelsey.

STATEMENT OF JOEL KELSEY, POLICY ANALYST, CONSUMERS UNION, NEW 
                         YORK, NEW YORK

    Mr. Kelsey. Chairman Kohl, thank you for the opportunity to 
testify before you on behalf of Consumers Union. In my 
testimony, I plan to cover four areas: First, I would like to 
give the consumer perspective on text messaging. I will then 
talk briefly about the consolidated market structure in which 
we see this behavior occurring. Third, I would like to cover 
briefly some other limitations that we see consumers face in 
this marketplace. And, last, I will offer a few solutions that 
we believe will help introduce more competition into the 
marketplace and ultimately lower consumer prices.
    Since 2005, every major carrier has at least doubled its 
price for text messaging from 10 cents to 20 cents per message. 
However, this is a head-scratcher to consumers because these 
rising costs are not at all related to the price incurred by 
the carrier.
    Text message files are very small, and the price of their 
transmission is negligible for the provider, as we have heard. 
To put this in perspective, consider that it would take 600 
text messages to equal 1 minute of voice. At 20 cents per text, 
that is the $120 data equivalent of a 1-minute phone call. 
Rather than a true reflection of the cost of service, we 
believe the purpose of high individual text messaging is to 
herd or price consumers into large monthly plans with more 
minutes or texts than a consumer will need or use. And if they 
go over that allotted number of texts, they are back to paying 
20 cents to send and receive. No matter what the cost, these 
monthly plans are protection money that consumers pay so they 
do not have to face sky-high text message rates.
    This is not the bellwether of a competitive market; rather, 
to us this represents parallel behavior among four national 
providers that seems to indicate inadequate competitive 
pressures in the wireless world.
    These price increases are occurring against the backdrop of 
a consolidating market structure. Collectively, as we have 
heard, the four national carriers represent just over 90 
percent of the subscriber based, and the two largest represent 
over 65 percent. Additionally, the two largest providers--AT&T 
and Verizon--have been able to capture much of the spectrum in 
this country, the air waves that make communications wirelessly 
possible. These spectrum holdings, combined with their 
ownership of the wire line infrastructure allow the two top 
providers to control the on ramps to the Internet. They use 
this control to set high barriers to entry and charge their 
competitors exorbitant special access fees in order to offer 
mobile Internet services. Consumers are paying the price.
    As we have heard, U.S. mobile phone subscribers pay more 
annually than customers overall and most other developed 
nations. The $506-a-year figure that you mentioned in your 
opening statement can be compared to the United Kingdom at $374 
or consumers in Spain at $293.
    Within this consolidated context, we continue to see 
questionable behavior that is locking consumers in and locking 
competitors out. Here are three examples.
    First, consumers face limited access to cell phones because 
carriers demand that cell phone makers sign exclusive 
contracts. This precludes them from offering their phone on any 
other network. This has the multiplied effect of not only 
limiting consumer choices, but it also raises a barrier to 
entry for smaller competitors that cannot get their hands on 
the kinds of phones that consumers demand.
    Yesterday, Senators Kerry, Wicker, Dorgan, and Klobuchar 
sent a letter to the FCC addressing this, and we commend them 
for doing so.
    Second, after signing lengthy contracts for bundled 
service, if a consumer is dissatisfied with their service, they 
cannot easily switch providers. They face high early 
termination fees that are punitive in nature, and if the phone 
they bought is locked to that particular carrier, when they 
switch they end up with an expensive brick in their hand rather 
than a cell phone.
    Third, customers face prices for their data plans that, 
just like text messaging, seem far removed from any possible 
cost, indicating a stark absence of provider rivalry over data 
pricing. I provided several examples in my written testimony of 
consumers that signed up for monthly service for their data 
plan and ended up with a bill that was several thousand dollars 
more than they expected. And even when they do pay for their 
data services, consumers are not getting the full experience of 
the Internet; rather, they are being served up the ``Internet 
Lite'' because wireless providers and cell phone makers are 
blocking popular software applications like Skype from being 
accessible to consumers.
    So what are the solutions? As more Americans are cutting 
the cord and switching from wired to wireless services, as you 
noted in your opening statement, increasing costs are reaching 
deeper and deeper into the pocketbook of Americans. More 
oversight is needed. This hearing, and many others like it, is 
an excellent start. However, formal inquiries and 
investigations have continued to determine whether Government 
intervention is necessary.
    For example, the GAO could look at the barriers consumers 
face when they want to switch service and what overall impact 
that has on the market force of consumer demand. And, last, 
regulators, like the FCC, should take up several different 
efforts, for example: one, opening a rulemaking on handset 
exclusivity; two, fixing the in-market exception for voice 
roaming that we heard Ms. Itkin speak of; and, last, begin a 
rulemaking on data roaming.
    Thank you. With that I will end, and I look forward to any 
questions you have.
    [The prepared statement of Mr. Kelsey appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. Kelsey.
    For both Mr. Milch and Mr. Watts, both Verizon and AT&T 
have defended their text messaging price increases on the 
grounds that both companies made independent decisions in 
response to market conditions. Yet neither of your companies 
has made any effort to undercut your competitors on price. A 
brief review of the history of these price increases makes this 
very clear.
    Why didn't either AT&T or Verizon resist these per message 
price increases or at least raise your price increase by less 
than the other one in order to undercut your competition, which 
is what we always do in a marketplace and try and gain market 
share? This is the way businesses normally compete, 
particularly when you offer fairly identical services. So why 
did you each go up by the same amount? Why didn't you go up 
less than your competitor and get some business by so doing? 
Mr. Watts?
    Mr. Watts. There are a number of factors to your question, 
but let me first point out that there was not a coincidence in 
time in the price changes, and while you constantly hear the 
suggestion that these occurred simultaneously, it simply is not 
the case.
    Most importantly, in looking at how the wireless world 
operates from the competitive standpoint, there are many, many 
places where each carrier hangs its hat to differentiate itself 
from its competitors. Ms. Itkin, for example, pointed out that 
her company has all-you-can-eat plans, and that is a perfectly 
fine plan for them. They have made a business decision with 
which they are comfortable to try and grow their business.
    We have looked at a variety of places where we have chosen 
to compete. We want to make sure a couple of things: One, there 
is not a plan out there where we do not have a competitive 
price. And on a pay-per-usage plan, where you are paying a 
price per message, we have a competitive price. It is a price 
that is not undercut by our competitor.
    We have focused our attention in many cases on places that 
really move the needle. As I said, less than 1 percent of the 
text messages are sent by customers on a per message pricing 
basis.
    We have focused on our attention on the other 99 percent 
where we have made enormous strides to lower the prices and 
compete very aggressively both on the voice side, the text 
side, the message side, the video side, the phone side. You go 
on and on and on. And that is where we have focused our efforts 
to differentiate ourselves in this particular wireless market.
    Chairman Kohl. Mr. Milch?
    Mr. Milch. Mr. Chairman, from our point of view, the 
decision that a customer makes to go with Verizon or AT&T or T-
Mobile or LEAP is a complex one. It involves quite a few 
variables. It does not just involve the price for pay-as-you-go 
text service. So you are talking about issues that range from 
what kind of phone that you have, what are the various voice 
plans, what are the data plans, what kind of apps can you get 
on the phone.
    It seemed to us, Mr. Chairman, that the issue of whether we 
would be able to undercut AT&T or T-Mobile or Sprint or anyone 
else on the pay-per-text part of our service and thereby 
attract customers away from one of our competitors is very 
doubtful.
    So competing on a series of price issues and a series of 
differentiated service issues, phone issues, plan issues, is 
very alive and well. You just need to go into any store, look 
on the Internet, and see all the different kinds of plans as 
the various carriers try to compete with one another. But 
focusing on this part of the market, this less than 1 percent, 
or 1 percent of all the text messages that are at issue and 
believing that this is going to drive the competitive needle, 
that was not our marketing judgment, Mr. Chairman.
    So if we were to cut the price, we do not think we would 
attract anybody to our market, because if they are a heavy text 
user, they are not paying 20 cents a text. They are in a plan, 
they are paying a penny a text. If they are a light text user, 
why would they change carriers based upon the pay-as-you-go 
text price?
    So, Mr. Chairman, we do not believe as a marketing matter 
or as a competitive matter that this is a focus where we can 
draw customers away from our competitors.
    Chairman Kohl. But look, guys, back in October of 2006, 
Sprint raised the per message text price from 10 to 15 cents. 
Within months, both Verizon and AT&T also raised their price by 
that amount.
    Then in October of 2007, Sprint again raised the per 
message text price, this time from 15 to 20 cents. That was in 
October of 2007. And by March of 2008, both Verizon and AT&T 
once again matched this price increase within only weeks of 
each other.
    Now, you say it really had nothing to do with people either 
subscribing to your service or not subscribing to your service. 
Ms. Itkin, Cricket does not charge anything. Do you think that 
is a competitive enticement to customers?
    Ms. Itkin. Thank you for the question, Mr. Chairman. Yes, 
Cricket has pricing plans whereby, as I mentioned in the 
testimony, incoming messages are--there is never a charge to 
receive them, and starting in very low-price plans, you receive 
unlimited text messaging. And, sure, we find that we have had 
opportunities to be innovative in our pricing, and I think in 
today's economy that is very important for consumers to have an 
affordable option.
    Chairman Kohl. Well, now, you do not think she is right, 
that price--she says price is an issue. And you are saying 
whether you charge 10 cents, 5 cents, 15 cents, or 20 cents for 
a text message, the individual one, is not a big issue.
    Mr. Watts. For our customers----
    Chairman Kohl. That is what you are saying. And it is 
pretty hard to believe, because if it is not a big issue, what 
are you in business for? Price is a part of your whole 
business. It is a part of how you get customers and keep 
customers.
    If they had not gone up to 20 cents, you would not have 
gone up to 20 cents. Had they gone down from 10 cents to 5 
cents, perhaps you would have done that--if nothing else, not 
to get, you know, beat out on something. That is the way 
business is. And what we are suggesting to you is a clear 
indication, at least on the surface here, that when one went 
up, the next one went up. And, you know, whether or not that 
was done after consultation or before consultation, it clearly 
is not to be doubted to any extent whatsoever.
    Mr. Watts. I am sorry. Was there a question there that you 
would like for me to address? I would be happy to try to 
address that.
    If I might, there is implicit in this entire conversation 
that if two competitors charge the same price for something, 
they must not be being competitive, and there are a number of 
faults with that. Set aside--there is case law after case law 
that says you cannot draw that conclusion from parallel 
pricing. The United States Supreme Court has made that clear. 
Economists would say that does not indicate anything.
    But the real-world economy does not indicate that either. 
You can find businesses after businesses, particularly when you 
have businesses like ours, the wireless carriers who offer a 
broad range of services, features, capabilities, where if you 
go into our pricing sheets, you will find hundreds of examples 
where the prices we charge are markedly different from each 
other. Will you find an example where the price may be the 
same? Yes, of course you will. But, you know, you will find 
that in every single business out there.
    We just happened to do a few little quick checks this 
afternoon of places you can find the common price. Home Depot 
charges the same price for a particular barbecue grill that 
Lowe's does. They charge $960 each for a barbecue grill. Does 
that indicate they have conspired somehow or they are not 
competing. Of course not. They have thousands of other products 
and services that they offer. They compete on another price. 
For some reason--I cannot tell you why--they chose on that 
particular component to charge that price. It does not mean 
anything other than that.
    You can find the same example where Foot Locker and Champs 
Sports charge the same price for a basketball. You say, ``Big 
deal. It is a basketball.'' But it is one thing they offer out 
of thousands of products and services. Does the fact that they 
charge the same price for that basketball mean they do not 
compete on other things? Of course not. And that is exactly 
what we have here.
    We have an example that has been pulled out of hundreds if 
not thousands of different prices, products, services, and you 
say, ``Gee, that is the same price charged here. There must be 
something wrong.''
    But we have to come back to who is using that, and less 
than 1 percent of our text messages are at this price, and 
businesses are simply not going to spend enormous resources in 
a highly competitive environment like we have today in an area 
where there is such a small amount of usage. We focus our 
attention on many other things to differentiate ourselves. And 
that is what has happened here. It is nothing more.
    Chairman Kohl. What is the percentage of your customers 
that use the individual text message, not the percentage of the 
total volume but the percentage of your customers? It is more 
than 1 percent, isn't it?
    Mr. Watts. Would you like to try that?
    Chairman Kohl. Mr. Milch?
    Mr. Milch. Certainly, Mr. Watts. For Verizon, yes, it is, 
Mr. Chairman. It is more than 1 percent. About 26 percent of 
our customers do not use any text messages at all. So we do not 
put together something where they are paying for text messages 
in some sort of a bundle or plan if they do not want to use 
text messages. So they do not need a bundled price or text 
bundled into their cost.
    Of the remaining, of the 74 percent who do text, about 17 
percent total--I do not want to give you the wrong numbers 
here. It is 17 percent of all of our consumers, a little over 
20-odd percent of the 74 percent--do incidental texting and pay 
on a pay-as-you-go basis.
    Chairman Kohl. Thank you.
    Mr. Watts. And our numbers are comparable to Mr. Milch's.
    Chairman Kohl. Yes, that is what I thought.
    I would like to call now on the Ranking Member of this 
Committee, Senator Orrin Hatch.
    Senator Hatch. Thank you, Mr. Chairman. I welcome all of 
you to the company, and this is an interesting subject to me. I 
am sorry I am late, but I have been so involved in the health 
care matters that I have to run back and forth between 
committees to do it, also Intelligence.
    Mr. Kelsey, if the accusation that cellular companies have 
undue market power is true, why then do we see higher prices in 
only one extremely small sector of the texting business? Now, 
customers who pay for each specific text message, called pay-
for-use, or PPU--you have already brought this out, I am sure--
make up less than 2 percent of the texting volume for many 
cellular providers.
    Now, is there really that much profit to be made in that 
subsection of the market as compared to the market as a whole?
    Mr. Kelsey. Well, I think it is important to note that, 
yes, this is one example, but this is one example that is 
similar to other individuals services that wireless providers 
offer--for example, data plans and also voice plans--and 
pricing those individual services high is a way to herd 
consumers into the monthly plans that may result in more 
minutes than a consumer will use or need.
    Alternatively, they may buy a 200-texts-a-month plan, and 
then once they pass that limit, or they have a teenage daughter 
or son that passes that limit, they are then paying 20 cents--
they are back to paying 20 cents to send and receive a text 
message.
    So for us, you know, we are not alluding to any collusion 
here, but we are saying that people do not need to sit in a 
room and come up with a plan from the consumer perspective to 
see the same harm exist in the marketplace.
    The point is that when individual text messaging now, 
consumers are being charged the maximum amount that they are 
willing to pay rather than the lowest cost that a carrier can 
provide it for.
    Senator Hatch. Let me go to Mr. Watts and Mr. Milch. What 
would be your respective companies' profit margin for the PPU 
market? And what percentage of your texting process comes--or 
profit, excuse me, comes from the PPU business? Do you want to 
start first, Mr. Watts?
    Mr. Watts. I do not have the exact number for that. I can 
tell you that because--you could assume that because 99 percent 
of our text messages are on the rate plans, that certainly a 
substantial portion of our profits and revenues come from that 
same percentage of usage.
    I cannot break this down by a particular unit like that 
because our networks are not constructed to provide a 
particular service, pay-per-use versus bundled. I simply cannot 
break it down that way. So, unfortunately, I do not have that 
statistic for you, Senator.
    Senator Hatch. Okay. Mr. Milch.
    Mr. Milch. Ranking Member Hatch, the only statistics I have 
for you is the one that I recall was at our--and it is not 
precise--is that the percent of revenue that Verizon Wireless 
gets from the pay-per-use category of customers is absolutely 
minuscule. It is in the similar percentage rate as the 
percentage of customers that use the plan. So it is a very, 
very small percentage of our revenues.
    I do not have the profit margin broken out the same as Mr. 
Watts does.
    Senator Hatch. Well, Mr. Keshav, are their statements 
consistent with--their statements on profit margin, are they 
consistent with your sly?
    Mr. Keshav. Sir, they did not reply to your question of the 
profit margin. My analysis indicates that if a text message is 
priced at 20 cents, the cost of carrying that is roughly one-
third of 1 cent, so the profit margin is approximately 19.7 
cents on the 20 cents.
    Senator Hatch. Mr. Watts, PPU prices are going up. How can 
you argue that AT&T is not exerting undue market power in the 
PPU market if prices continue to rise and your companies are 
charging comparably higher rates?
    Mr. Watts. When you say market power, that suggests that 
one company can dictate a price in the marketplace, and we 
simply do not have that ability in such a highly competitive 
environment. Most importantly, what you can see is that AT&T 
competes with all the wireless carriers across a very broad 
spectrum of products and services, and we have different 
prices, different offerings. We differentiate ourselves in a 
variety of different ways. And in this case, with pay-per-use 
text messaging, it is an area where we have not chosen to focus 
our attention to differentiate ourselves, but we are charging a 
rate that is a competitive price, because there is no one in 
the market that has a significantly lower price with the 
exception of companies such as Cricket, and they have a 
different marketing effort. That is great for them. That is a 
perfectly fine business decision for them to make. But we have 
simply chosen to focus our attention in other areas.
    Senator Hatch. Mr. Milch, I understand that you have stated 
that Verizon is attempting to steer its customers toward 
bundled plans. Now, could one do this in a truly competitive 
market devoid of undue market power? That is a question that I 
think needs to be asked, if it has not already been asked.
    Mr. Milch. It has not been, Senator Hatch. Of course, we 
believe we can do this. We believe, as Mr. Watts stated 
earlier, that customers in bundled plans are far more 
satisfied. They have far more predictable bills every month, 
and it is very important for them. It reduces our costs because 
we have lower customer service complaints, and we have much 
more satisfied customers.
    The question of whether we can offer our customers a bundle 
with significantly lower prices and give them the opportunity, 
if they do not want to use very many messages to pay as they 
go, or to opt into a bundle, it seems to me that this is 
perfectly consistent with a competitive market. There is no 
aspect to offering a series of choices within our own plans, 
looking at the plans of our competitors, that suggests that 
there is any market power in the texting market overall, let 
alone as pay-as-you-go market, which I am not quite sure is a 
separate market that has to be considered for whether there is 
undue power in it.
    This is a very broad market. There are billions and 
billions of text messages. As everyone has pointed out, this is 
a market where output has skyrocketed and average prices have 
declined. Those are not the markers of a non-competitive 
market. To the contrary, those are the markers of a competitive 
market where output goes up and prices decline.
    Senator Hatch. Mr. Kelsey, what is wrong with Verizon 
steering people, their customers, to bundled plans? I 
understand these type of plans are very popular and that they 
seem to have and offer better value.
    Mr. Kelsey. Well, from a consumer perspective, I think it 
is not--it is important not to confuse growth with competition. 
What is wrong is that Americans overall pay more than consumers 
in many other developed nations.
    You know, I would suggest that one of the reasons it is 
doubtful that pricing individual text messages lower as any way 
to get competitors from one or the other four national 
providers to switch is because once they are lured into that 
bundle, once they are lured into that contract, they face very 
high switching costs through early termination fees, which we 
believe are punitive in nature, and the fact that their 
handsets are many times linked or limited to the particular 
carrier that they are in a plan with. So it is very hard for 
consumers many times to vote with their feet when they are kind 
of shepherded into one of those longer-term contracts.
    Senator Hatch. Along a different line, Mr. Kelsey, handsets 
and the information they transmit and receive are becoming 
increasingly complex. More than ever, proper integration is 
vital to the successful launch of new cellular projects and 
features.
    For example, I understand that visual e-mail requires 
significant integration work between the headset manufacturer 
and the wireless provider. Therefore, are not exclusivity 
agreements in the long term in the best interests of customers?
    Mr. Kelsey. No, I do not think so. I think that if they 
were ever justified, it might have been very early on when the 
wireless marketplace was still an infant marketplace. Certainly 
now you see 87 percent of Americans have cell phone plans, and 
in a market where there is sufficient demands, we do not 
believe that exclusivity is necessary to boost innovation. 
Rather, I think handset exclusivity is more of a finance 
question. It is one of many ways to finance research and 
development. If you look at other markets like Asia and Europe, 
where close to 85 or 90 percent of the handsets are sold apart 
from the wireless carriers, it certainly, I think, offers a 
window into a different world that is kind of possible in this 
wireless marketplace. Also, if you look at other markets here 
in the United States, for example, handset exclusivity does not 
necessarily--if you look at other markets, for example, like 
computers and the Internet, your Dell does not exclusively work 
with Comcast or Apple does not exclusively work on Time Warner, 
for example. So I think there are plenty of other places where 
the device itself is divorced from the carrier, and that 
represents a boon to consumers because it is more choice, and 
also it provides lower costs.
    Mr. Watts. Senator Hatch, I apologize, but may I have a 
moment to respond to Mr. Kelsey's comments? I have to say, 
candidly, he could not be more wrong. There are so many reasons 
why handset prices are what they are in the United States 
today. And while we hear examples of other countries where you 
have phones that are untethered, what is left out of that 
debate is the effect on prices of the phones, the effect on the 
innovation that is engendered by those exclusive arrangements.
    First, prices of phones in the United States are cheaper 
than anywhere in the world, and they are cheaper for a very 
simple reason: because carriers have a tendency to subsidize 
those prices. They subsidize those prices because they have 
exclusive arrangements with vendors or they have the ability to 
incur--or drive down the cost of the phones that they buy. We 
have, obviously, one of the more popular phones in the arena 
today, and that is great for the American public.
    Recently, it was announced that Apple would charge $99 for 
an iPhone. That could not happen if that price was not 
subsidized by AT&T. We would not be inclined to subsidize that 
price if we did not have the ability to recoup the cost of that 
subsidy. That carries throughout the market.
    Other companies have exclusive arrangements where they have 
done exactly the same thing, and what that has done is hugely, 
hugely benefited the American public because they pay less for 
phones.
    On the innovation front, nobody had an idea about touch-
screen technology and all the things the iPhone did until it 
came out and until it was successful. And what has happened in 
response to that? Competition, competition, competition. Every 
phone manufacturer is spending enormous amounts of money to 
create the iPhone killer. If you go to the Internet and put in 
the phrase ``iPhone Killer,'' you will find millions and 
millions of hits for all the stories that have been written 
about people trying to respond. That is the essence of 
competition in this country.
    Senator Hatch. Well, thank you. I have a question for you, 
Ms. Itkin, and we will submit it in writing because I have 
taken more time than I should. And I know Senator Klobuchar has 
a limited time, so I will finish with that.
    Chairman Kohl. Thank you, Senator Hatch.
    Senator Klobuchar?
    Senator Klobuchar. Thank you very much. Thank you, Mr. 
Chairman, for holding this hearing. I am running back and forth 
as well to the Julius Genachowski confirmation hearing for the 
FCC, which is relevant here. Maybe I will ask some of the same 
questions there.
    But I will say that my focus in this area has been on the 
second part of the hearing that the Chairman has set up, and 
that is just the competition of the cell phone industry in 
general. And my impression has been that this industry started 
out with little regulation, understandably. It was back in the 
days when the movie ``Wall Street'' was out and Gordon Gecko 
had a huge cell phone the size of a briefcase, and we have now 
gotten to a point in this country that there are more than 270 
million wireless subscribers. Almost 18 percent of American 
households have only a wireless phones. Americans are using 
mobile Internet capabilities as never before. And as we have 
talked about, they are sending text messages at an amazingly 
high rate, more than a trillion messages last year.
    As we speak, I am sure about 50 of my colleagues have sent 
some kind of a text message.
    In the past few years, we have also seen this unprecedented 
consolidation in the wireless sector, and while this was 
occurring, as has been discussed already, we saw some dramatic 
increases in the prices of individual text messages.
    We also have other concerns, and I want to talk about that. 
I introduced a bill last year called the ``Cell Phone Consumer 
Empowerment Act'' with a number of my Commerce colleagues. And 
I am sure we are going to be reintroducing something like that.
    I have appreciated some of the changes that have been made, 
especially with the early termination fees. When we launched 
that bill, there was not much work done on that, and now there 
have been some dramatic changes with the early termination 
fees.
    Also, that bill focuses on automatic contract extensions 
and the lack of information about service coverage, and that is 
where I want to start today. Still having spent the weekend 
driving around my State on major roads, I can still tell you 
that in rural parts of our country--and Minnesota is not what 
my friend Senator Begich calls ``extreme rural,'' but there are 
rural parts, and these are major interstate highways where the 
cell phone coverage still goes bad. It is very frustrating for 
people in my State, and especially when they think they are 
getting a cell phone coverage that covers a certain area. And I 
think this hurts competition, if you want to talk about the 
competition generally, that people do not have full 
information.
    My feeling is that they do not have full information when 
they buy a cell phone of where the drop calls are and what the 
problems are, and that is why we want to get a handle on that 
with this bill. And I would like you to comment, whoever wants 
to, on this area about the rural phone service and the lack of 
phone service and how we have issues despite all this growth in 
the market with competition to serve these areas. Ms. Itkin.
    Ms. Itkin. Mr. Chairman, Senator Klobuchar, thank you for 
the question. I really think Cricket is an example of what can 
happen and what kind of services can be provided to consumers 
when we are allowed to compete. We do a lot of the things 
already today that you are trying to address in your 
legislation. Talk about disclosure, we want simplicity and 
predictability for our customers. They do not get surprise 
charges. They know what their monthly bill is going to be month 
after month. And since we do not have an early termination fee 
and we do not subsidize our handsets--we are one of the 
carriers that does not--we have to earn our customers month 
after month after month. They can leave, port their number, and 
go to a competitor.
    So it is very important because we are offering some of the 
most affordable rates and some of the most value-rich services 
today that Congress and the FCC ensure that some of the 
industry issues are there to promote competition today and into 
the future. And I have discussed some of those in my opening 
statement about the constraints on spectrum for small and mid-
size carriers as well as the roaming loopholes that are here 
today that need to be filled.
    Again, finally, if these issues, I think, are addressed, 
you are going to see more competition, and I think that if----
    Senator Klobuchar. So your argument would be you fix some 
of these roaming loopholes, and you would be able to better 
offer service in the rural areas?
    Ms. Itkin. Absolutely, because then we will be able to 
provide seamless coverage for consumers and provide head-to-
head competition every day to the Big Four.
    Senator Klobuchar. What we tend to do is take three 
different cell phones out with us because one will maybe work 
in a certain area, which is the problem, which is why I do not 
see this great competition in so many parts of our State.
    Mr. Kelsey.
    Mr. Kelsey. Sure. Thank you for the question. So there is 
some good news, I think, and you alluded to that earlier. You 
know, we have seen services--for the very first time, Consumer 
Reports this year reported that service itself has increased 
and consumer satisfaction is increasing.
    Senator Klobuchar. Right.
    Mr. Kelsey. At the same time, prices are going up and that 
is the new top concerns that consumers have. Prices are going 
up, and there are fewer market providers than ever before.
    So I think it is important to look at that and to also look 
at the barriers to entry that stop some of the smaller 
competitors from becoming bigger and going out to provide 
service to the few places that still do not have it in America, 
not only for voice is that--for voice we see that with the in-
market exception for voice roaming and also data roaming. But 
on the data question, in particular, which I think is extremely 
important, because data is the service that will drive wireless 
communications for the next 10 years, we see special access 
fees, which are the on ramps to the Internet, getting charged 
at, in our view, discriminatory rates on their competitors, and 
handset exclusives I would like to go back to, which really 
stop consumers from being able to choose a more rural or 
smaller provider because they do not necessarily have the 
phones that consumers want. And if a rural provider or a 
smaller provider cannot get those handsets, they cannot attract 
the customers that will buy the data service, and they cannot 
invest in their data infrastructure. And that is a big problem.
    Senator Klobuchar. And what do you think about this 
argument--you know, Senators Kerry, Wicker, Dorgan, and I just 
sent a letter to the FCC asking them to expedite their 
consideration of the handset exclusivity relationship. What do 
you see as this argument that was made by Mr. Watts, Mr. 
Milch--Mr. Watts especially--about this innovation, a response 
to that, the innovation that he says AT&T has been able to 
develop or that Apple has been able to develop because of the 
exclusivity relationship?
    Mr. Kelsey. Well, thank you for the letter, by the way. I 
think, you know, we very much support that action, and I had 
mentioned it in my spoken testimony.
    On innovation, you know, I think it is really important to 
note that it is not the wireless provider that is the innovator 
here. It is the device manufacturer that is the innovator. And 
we have seen devices where services have been crippled as they 
have come over or they have been developed in the United States 
marketplace. There is evidence of phone manufacturers coming 
out and saying, you know: Look, we had call timers that we 
wanted to offer consumers, but we have been told we should not 
roll those out. We have had GPS that we wanted to offer for 
free to consumers, but we were told we cannot role that out 
until the carriers figure out a way to ask consumers to pay for 
it.
    This week, we are going to see the iPhone 3GS, and some of 
the options available there with tethering and with higher 
speed services are available in Europe, but they are not yet 
available here in the United States.
    You know, I really do believe that innovation is--I really 
do believe that handset exclusivity is just one way to finance 
research and development. It is a finance question. It is not a 
necessary question, especially if you have a marketplace where 
there is lots of demand and consumers are clamoring for 
different types of phones. More options should be available at 
lower prices.
    Senator Klobuchar. Now, Mr. Milch, Verizon has announced 
that it is going to reduce the exclusive period it has over at 
least two of your phones--is that right?--to 6 months, so you 
are going to reduce that. Am I correct?
    Mr. Milch. Yes, Senator, we offered to the rural carriers 
that we would, for our LG and Samsung handsets, be willing to 
reduce the exclusive period to 6 months.
    Senator Klobuchar. And why those models? Why those phones?
    Mr. Milch. Those are our most popular models and phones, 
and that is why--they are the largest grouping. That is why.
    Senator Klobuchar. And so what do you think is the average 
life span of one of these phones in today's market until you 
can sort of give up the exclusivity arrangement?
    Mr. Milch. You know, I am not sure. I think that many of 
these phones go through major, major series of iterations, and 
many of them have been on the market for quite some time.
    I would also note that I think that the notion that all of 
a sudden getting rid of handset exclusives as a mandatory 
aspect, as Government intervention to outlaw certain types of 
contractual arrangement, with respect, I do not believe it is 
going to have any effect on the issues that Mr. Kelsey is 
speaking about. It is not going to put a single handset, 
getting rid of those exclusives, into the hands of another 
carrier. That carrier has to work with the device manufacturer 
to make sure that it works on their network.
    There is mutual development that goes on, and a great deal 
of mutual development. With all due respect to Mr. Kelsey, he 
does not know what he is talking about when he simply says that 
it is only the device manufacturer that innovates. It is a 
cooperative venture that results in innovation, and so if 
someone wanted the Verizon experience with a certain phone, I 
can tell you if they went to a different carrier, they would 
not get it because that Verizon----
    Senator Klobuchar. And how do you respond to what is 
happening in Europe?
    Mr. Milch. Well, I respond to what is happening in Europe--
I do not know which aspect of it. My view is that Europe has a 
paucity of handsets compared to the United States. For 
instance, we talked about the prices in the U.K. or what is 
available in the U.K. They have about 150 handsets in the U.K. 
We have over 630 different handsets available in the United 
States, and that is directly related to the innovation that is 
going on here. And I think that any view that there may be a 
different way to fund innovation is simply ahistorical. We have 
the evidence before us. We have years of innovation in handsets 
that has come about from a system where there are contracts 
between providers and device manufacturers that involve some 
period of exclusivity. It is the same theory that underlies the 
patent system in the United States, and it rewards innovation 
by providing a period of exclusive dealing.
    Senator Klobuchar. But yet with some of these handsets--
which is good, you are reducing that exclusivity period to a 
shorter period of time. And I think one of the things, as we 
saw with early termination fees, gradually sometimes the 
marketplace evolves. And arguments that can be made early on 
may be changed as the technology develops and there is more 
innovation out there and a focus then focuses on price, more of 
a focus on price and allowing consumers to get things at a 
better price.
    My concern here is more that for so many of my constituents 
now, this is becoming their only phone, and so they are very 
price-sensitive in a very difficult economic time. And they get 
locked into these contracts. So then we have to look at the 
early termination fees, like we did before, and they do not--
they try to buy the best phone for their service area, and then 
they figured out that what they read did not really cover that 
service area.
    So that is all we are trying to do here, is get more 
competition in some of these areas--what I am trying to do--so 
that they actually get service. I am here talking about areas 
that tend to have more drop call service. Maybe they have some 
service, but then you go one block out of town, and they do not 
have service.
    Mr. Watts.
    Mr. Watts. I appreciate you giving me an opportunity to 
address that particular issue. My company, AT&T, I believe is 
particularly committed to the rural markets, and we have 
demonstrated that commitment in a number of ways. We have 
demonstrated it with our dollars and cents. In the last few 
years, we have had a number of transactions where we have tried 
to go out and acquire additional spectrum network assets. That 
includes Dobson Wireless, which we acquired about 2 years ago; 
Centennial Wireless, which we have a pending contract to 
acquire; and we have recently entered into a contract to buy a 
number of assets from Verizon that they have to divest as a 
result of their acquisition of Alltel.
    One of the most common attributes of each of those three 
transactions I just described is the geographic area they serve 
would generally be described as rural. And we have taken that 
step and gone out and committed to spend billions of dollars to 
get into those markets so we can bring advanced features and 
capabilities to the very types of areas that you are talking 
about and you are focused on.
    So we have a very significant commitment to that, and it is 
not just words. I can point to those dollars and cents that we 
spent there.
    In addition, we are spending this year, AT&T's capital 
budget--and it is not just for wireless. Our capital budget as 
a whole is going to be between $17 and $18 billion in 2009. 
That is an enormous number. There are very few companies in 
this country or in this world who are making that kind of 
investment in this environment.
    There is another key factor I want to point out. When we 
make that investment, the work that is done on our networks is 
done by the largest unionized full-time workforce in America 
today. So we are not only investing in America, we are not only 
investing in rural America; we are creating and maintaining 
good, solid, high-paying positions, unionized workforce. We are 
the only wireless company that has any significant or any 
unionized workforce at all.
    So you put all that together, and the very concerns that 
you have expressed I believe we are addressing head on, and I 
appreciate you giving me the chance to point that out.
    Senator Klobuchar. Okay. Thank you very much. But I will 
bring you to Staples in a few of our other towns and see if the 
phones work. We still have some challenges. I appreciate that 
and look forward to working with you as we look at 
reintroducing this legislation.
    Thank you.
    Chairman Kohl. Thank you very much, Senator Klobuchar.
    Mr. Milch and Mr. Watts, a single text message is limited, 
as you know, to 160 characters and does not cost very much at 
all for your cell phone networks to carry this information. Was 
the doubling of text message prices on a per message basis 
between 2006 and 2008 in any way justified by increases in your 
cost?
    Mr. Milch. I will go first. Mr. Chairman, we are a multi-
product firm. Every multi-product firm has to recover all of 
its costs across its various products. There is no reason in a 
competitive market to believe that in any one particular point 
in time--at least as I understand the economics, Mr. Chairman--
that prices are going to come to cost. We do not base our text 
message prices on our cost in that sense. We certainly are 
mindful of our cost, but with respect to Professor Keshav's 
analysis or the analysis that it does not cost very much for 
our network to do it, to carry a text message, I think there 
are two important points.
    The first important point is that looking at the long-run 
incremental cost or some sort of cost that looks at the cost 
for putting the next text message on the network ignores the 
fact that you had to have the network in the first place. We 
had to make huge investments in spectrum, huge investments in 
computers and switching, in order to be able to carry even the 
first text message. And so those text messages have to carry 
all those shared and common costs along with every other 
service we have. That is the first issue.
    The second issue is, as I noted, I believe, quite frankly, 
Senator, that the question of cost is not relevant to this 
issue. We are not sitting here in a regulated industry, nor 
should we be, where the question is: What is your cost for that 
product? That is not the way that prices are set in a 
competitive industry.
    And so I believe, Chairman Kohl, that the cost issue is 
interesting but not relevant to the question of what our prices 
are.
    Chairman Kohl. Do you want to say something, Mr. Watts.
    Mr. Watts. If you do not mind, Mr. Chairman. I do want to 
point out that implicit in your question was an acceptance of 
some of the testimony that you have heard today that the 
increase in the quantity or the volume of text messages has not 
resulted in an increase in cost to a carrier. And with all due 
respect to Dr. Keshav, the network that he describes that can 
increase simultaneously the capacity to handle trillions of 
minutes of voice traffic and simultaneously handle billions, if 
not trillions, of text messages, and to suggest that that 
network exists that can do that without additional cost would 
be to describe a network that would be magical in its 
proportions. But it does not exist. That network is a myth.
    There are enormous costs incurred in building these 
networks. Mr. Milch went through some of those, and it goes on 
and on, from the spectrum to the carriers to the networks. And, 
most importantly, while you have heard that all of the text 
messages could be carried on only 280 cell sites in the world, 
that would be great if the entire world lived around 280 cell 
sites. But they do not. They live around all the world which 
takes, as Mr. Keshav said, 300,000 cell sites were built in the 
period of time he mentioned in his testimony. Why? Because that 
capacity had to be created. And to create that capacity you 
incur costs.
    So his fundamental premise is simply flawed, and I 
appreciate the opportunity to respond.
    Chairman Kohl. I appreciate that. You know, one of the 
purposes of this hearing today is hopefully to come up with 
more vigorous competition in the industry. And you can 
understand how we want to do that because we are here to 
protect consumers. We are not here to try and be destructive to 
you, but we are here to try and protect consumers. And we 
always assume that when you have a sufficient level of 
competition, that results in better deals for consumers. And I 
am sure you could understand our premise and why we are here 
today in that regard.
    Again, Mr. Milch and Mr. Watts, as you know, a consumer is 
charged both to send and also to receive a text message. And 
once a text message is sent to a consumer's phone, they are 
charged 20 cents, or whatever the plan is, regardless. So they 
have no way to decline a message.
    Do you have the technology to allow them to decline a 
message? And if you do, shouldn't they be allowed to decline a 
message and thereby save the cost?
    Mr. Watts. Well, let me go first because my answer is going 
to be short. I do not know. I very much hate to have to say 
that to you, Mr. Chairman, but I simply do not know the answer 
to that question. We will certainly try and find out, and we 
will get back to you.
    Chairman Kohl. Mr. Milch, you must know.
    Mr. Milch. Mr. Chairman, I wish I did. We do have the 
ability to provide our customers with the ability to receive no 
text messages. They can go on and, as a matter of customer 
care, elect to lock their handset out of receiving text 
messages entirely.
    On a message-by-message basis, Mr. Chairman, I do not know.
    Chairman Kohl. Mr. Keshav.
    Mr. Keshav. I believe that the existing text messaging 
standard does not have a message which could be sent by the 
consumer to say ``decline.'' That is not in the standard today, 
as I know it. That would be GSM standard 34, I believe. But you 
could always have some kind of billing system which would take 
care of it. It will complicate matters enormously. I do not 
think that would be a way I would want to go. As an engineer, I 
would not go there. That is my answer.
    Chairman Kohl. All right. Mr. Milch and Mr. Watts, wasn't a 
major motive for these price increases in text messaging to try 
and cause consumers to move to your plans which start at $5 a 
month? And didn't raising the price of text messaging have the 
intended effect of encouraging and pushing consumers into the 
bucket plan because the individual text message was going up 
and up and up? This is not necessarily something that is not 
legal, of course, but I just want to understand how your 
marketing plan works. The more it costs on an individual text 
message, the more likely it is that a consumer is going to go 
to a bucket plan, right?
    Mr. Milch. We believe so, Mr. Chairman, at Verizon.
    Chairman Kohl. Mr. Watts.
    Mr. Watts. I believe that is the case, and I believe our 
customers have voted with their pocketbooks and said that is 
where they get their most value, yes, sir.
    Chairman Kohl. Okay. Mr. Milch and Mr. Watts, one way that 
phone companies restrict competition is by locking in customers 
to 2-year service contracts. If a consumer wants to switch 
carriers in advance of the contract's expiration, then they 
must pay a hefty early termination fee, as you know, sometimes 
as high as $250.
    What is your policy for prorating the contracts where the 
fee is reduced to reflect the amount of time remaining on the 
contract? For your information, you both have prorated 
termination fees, but they are inadequate in the sense that if 
an AT&T customer cancels their plan only a month before the 2-
year contract is up, they still have to pay much more than a 
prorated amount to terminate. You understand that.
    Mr. Watts. I understand the question. Unfortunately, it is 
not accurate. It would have been true a year ago, but it is not 
true today. We have changed our early termination fee process 
where it does decline on a monthly basis. And if you get to the 
point that you just described, today you would pay basically, 
assuming a 2-year contract, \1/24\ of the contract price in 
early termination penalty. So that is no longer the case, but I 
concede it was at one time.
    Chairman Kohl. I hope you are right. According to my 
information, if they want to terminate just a month before, now 
it costs $60, which is not \1/24\. I could be wrong on that, 
but that is my information.
    Mr. Watts. Well, I will certainly confirm that, but my 
recollection is that we have changed it where it declines on a 
pro rata basis. And if that is not--I will get back to you 
either way, but I will certainly get back to you if I am 
incorrect.
    Chairman Kohl. All right. Anybody else have a comment that 
you want to make, some idea or some thought you want to 
express? Mr. Kelsey.
    Mr. Kelsey. Mr. Chairman, on early termination fees in 
particular, I would just add that, you know, from a consumer 
perspective, it is a huge barrier to switching carriers because 
that fee starts out at such a high level; and just because it 
goes down $5 a month, it does not seem to them to be linked to 
what the cost is to the carrier of that consumer then switching 
service. After they have been with a carrier for 18, 20 months 
and have paid back the subsidy on the phone, there is no reason 
that a consumer that wants to switch providers should not be 
able to and should not be able to also bring their phone with 
them.
    Thank you.
    Chairman Kohl. Ms. Itkin.
    Ms. Itkin. Thank you, Mr. Chairman. I just wanted to state 
that Mr. Milch and Mr. Watts talked about how much investment 
their companies were making. Well, Cricket has made billions of 
investments, too, in building facilities. We spent over $1 
billion on spectrum in the advanced wireless services, and we 
are putting people to jobs, to work today building out 
networks. And I think it is important we are able to offer 
affordable prices on our plans despite the kind of investments 
that we are putting into the network. And I think it is very 
important that we have reform for spectrum policy and roaming 
policy so that competitors like us can continue to be 
successful today and in the future.
    Chairman Kohl. Thank you.
    Mr. Keshav.
    Mr. Keshav. I would like to take a moment to respond to Mr. 
Watts and Mr. Milch on the points that they raised about my 
prior testimony. But first about the fact that the incremental 
cost is what I am considering and not the cost to build the 
network in the first place.
    I would like to point out that my analysis is looking at 
the cost--establishing equivalence between voice minutes and 
text message minutes, and the voice minutes also have to pay 
for the up-front cost. So I believe that my analysis is, in 
fact, accurate.
    Mr. Milch also made the point that cost is not relevant to 
the issue, that prices are not set that way. I completely agree 
with him. There need not be any relationship between price and 
cost, and my testimony is focusing purely on the cost. I have 
no comment to make about the prices.
    Finally, I would like to raise a point that Senator 
Klobuchar made about the rural areas. Rural areas always have a 
problem because the amount of revenue that can be derived per 
square inch in rural Minnesota is a lot less than what a 
carrier can derive per square inch in Manhattan. And if you do 
want equivalent quality of service in both areas, you have to 
do what was done by the Congress in 1920, which is the 
universal service obligation that AT&T took on, and put in some 
kind of obligation. But that means it will be a cross-subsidy 
from more expensive markets to currently less-dense markets. 
That will be something that needs to be decided by policy. It 
is not something that competition is going to fix, in my 
opinion.
    Thank you very much, sir.
    Chairman Kohl. Thank you.
    Mr. Milch.
    Mr. Milch. Mr. Chairman, thank you very much for the 
opportunity to appear here today. In conclusion, I would only 
reiterate my belief that the wireless market in America is a 
great success story, and it is a great success story that we 
need to look at and take a lesson from. That lesson is that 
under the current set of rules, which are very light-handed, 
there has been hundreds of billions of dollars of investment; 
many, many jobs that have been created and are still going to 
be created out of the wireless industry in this country, and 
that innovation has been startling and prices overall have gone 
down.
    So I believe that we have a situation that, with all due 
respect, we ought to be very careful if we are going to muck 
with it.
    Thank you, Mr. Chairman.
    Chairman Kohl. I thank you so much, and all the other 
panelists, for being here today. We are going to leave the 
record open for 1 week, and I believe that today's hearing 
demonstrates the importance of encouraging vigorous competition 
in the industry as well as focusing on text messaging pricing. 
We will continue to closely follow these issues on this 
Committee. I believe that the Justice Department and the FCC 
should be taking action to ensure that undue barriers to 
competition in the cell phone industry are removed, including 
by the FCC enacting the necessary regulatory reforms.
    As always, this Subcommittee is interested in encouraging 
competition in the interest of both capitalism and the 
consumers who support capitalism. So we thank you all for being 
here today.
    This hearing is concluded.
    [Whereupon, at 3:53 p.m., the Committee was adjourned.]
    [Questions and answer and submission for the record 
follow.] 

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