Archive for September, 2012
Today the commissioners of the Federal Communications Commission (FCC) are meeting to vote on two issues that will be pivotal to the future of the wireless industry: (1) whether to impose a “spectrum cap” on wireless providers, and (2) how to design the “incentive auction” of the broadcasters’ spectrum. There is a lot at stake for the U.S. economy in getting these policies right: A new analysis by Deloitte estimates that mobile broadband network investments over the period 2012–2016 could expand U.S. GDP between $73 and $151 billion, and account for up to 771,000 jobs.
A spectrum cap would prevent a single provider (say, Verizon) from acquiring more than a certain amount of the airwaves or “spectrum rights” in a given geographic area (say, Washington, D.C.). Spectrum is the most important input in the supply of wireless services—without it, a provider literally can’t compete. The objective of a spectrum cap is to prevent any single carrier from monopolizing a key input in the production process; more wireless entry means greater competition, which means lower wireless prices. So why is this idea so controversial?
The reason is that even carriers with significant spectrum holdings need more of it to survive. To make things concrete, compare the spectrum holdings of Verizon with those of Sprint and T-Mobile. According to Deutsche Bank, Verizon has about 18 percent of all available spectrum on a population-weighted basis (including the spectrum recently obtained from SpectrumCo), compared to about nine percent each for Sprint and T-Mobile. Yet Verizon is desperate for more spectrum because its subscriber base is larger than that of its rivals, and because today’s wireless customers are finding cool (and bandwidth-intensive) things to do with their new 4G phones, straining the capacity of its wireless network. According to one noted wireless analyst, the demand for mobile broadband will surpass the spectrum available to meet it in mid-2013. Even the Chairman of the FCC recognizes that “biggest threat to the future of mobile in America is the looming spectrum crisis.”
Reinserting the spectrum cap—it was sent to the regulatory dustbin several years ago—and setting it at say one-fifth of all available spectrum would effectively bar Verizon from acquiring any more spectrum, whether in an auction or through the secondary markets. And that means that Verizon’s customers would suffer a serious degradation in their wireless connections relative to a world in which Verizon could augment its spectrum capacity. As one Nobel laureate economist famously said, “there’s no such thing as a free lunch.” Taking away from Verizon to give to smaller carriers entails serious tradeoffs.
And to understand those tradeoffs, the FCC must think hard about what the ideal market structure of the wireless industry should look like. A spectrum cap equal to one-fifth of all spectrum implies that the ideal market structure is five national carriers. But even five might be too many given the evolving wireless technology: With the enhanced download speeds made available by 4G networks—Verizon’s 4G network is seven times as fast as its 3G network according to PC World—wireless consumers will be streaming high-definition movies and FaceTiming with their friends, placing even greater pressure for more spectrum. The FCC needs to come to grips with the fact that its policies are in conflict with these technological trends and the associated economies of scale in the supply of wireless services.
Five carriers might also be the wrong number when one considers the role of mobile broadband in the larger broadband market. According to the FCC’s Wireline Competition Bureau, as of mid-2011, 55 percent of all U.S. households relied on a single wireline broadband provider capable of meeting the FCC’s definition of broadband. This means that wireless 4G connections could serve as the second broadband pipeline in over half of U.S. homes. Given the competitive implications of moving from one to two broadband providers—cable modem prices have been shown to fall significantly in the face of competitive entry—the right number of wireless carriers might be closer to three.
But who really knows? The market should decide whether the optimal number of wireless carriers is three or four or five, not the regulators. If the FCC is worried about a single carrier buying up the entirety of the spectrum in the forthcoming broadcast spectrum auction, then a simple rule forbidding such an outcome in that auction is more efficacious than a clumsy spectrum cap. By micro-managing the structure of the wireless industry, the commission tasked with overseeing the communications industry risks making the wrong call.
The Federal Trade Commission (FTC) is in the final stages of conducting its Google investigation. As the agency contemplates whether Google is a monopolist in the ill-defined market for search, they may find the competitive ground has shifted beneath their feet in just the 15 months since they began investigating. While a year or two ago, Google’s main competition in search might have been Bing and Yahoo, today it’s Apple and Amazon, and tomorrow it may be Facebook. The market is almost certainly broader than general search engines as we normally think of them.
Just last week, the New York Times ran a story explaining that Google and Amazon are “at war to become the pre-eminent online mall.” The story cited survey data from two consultancies that should give the antitrust authority pause:
- Forrester Research found that a third of online users started their product searches on Amazon compared to 13 percent who started their search from a traditional search site; and
- comScore found that product searches on Amazon have grown 73 percent over the last year while shopping searches on Google have been flat.
These impressive statistics suggest that Google lacks market power in a critical segment of search—namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”
One senses that the FTC has not focused much on competition from Amazon in product search, or that they even think of Amazon as a search engine. Instead, antitrust agencies around the globe have fixated on helping middlemen comparison-shopping sites such as Nextag and PriceGrabber, most of whom charge retailers for listings. Google is taking heat from comparison sites for doing the same thing because Google is perceived to be the most important source for online shoppers. That regulators are willing to breathe life into these intermediaries implies they do not recognize the platform-based competition between Google and Amazon for product searches.
Amazon is not the only behemoth that competes with Google for search. Apple’s Siri can do search and whole lot more, from helping Samuel L. Jackson design the perfect dinner to making John Malkovich laugh to helping Martin Scorsese maneuver through New York. As search evolves from links into answers, services like Siri become highly valuable. And the ITunes App Store represents the launching pad for many searches that would otherwise start on Google. A couple in Virginia that enjoys winery tours might begin their search by installing “Virginia Wine in My Pocket” or “Virginia Wineries” on their iPhone rather than search the web. In March of this year, Apple announced that more than 25 billion apps had been downloaded from its App Store by the users of the more than 315 million iPhone, iPad, and iPod touch devices worldwide. One wonders whether any of these downloads are being counted by the FTC in their calculations of Google’s market share.
And now Facebook is getting into search. At a Disrupt conference last week, Mark Zuckerberg explained that search engines are evolving into places where users go for answers, and that Facebook is uniquely positioned to compete in that market: “And when you think about it from that perspective, Facebook is pretty uniquely positioned to answer a lot of the questions that people have. So what sushi restaurants have my friends gone to in New York in the past six months and liked? . . . . These are queries that you could potentially do at Facebook if we build out this system that you just couldn’t do anywhere else.”
It may not be natural to associate Amazon (an online retailer), Apple (a device maker), and Facebook (a social media site) with search, but in the technology industry, your next competitive threat can come from anywhere. Monopoly and the kind of robust platform competition between Apple, Amazon, Google, and Facebook are mutually exclusive portraits of reality. Will the FTC turn a blind eye toward this advanced form of competition?