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56–833 2010

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 

( 

(II) 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

RON WYDEN, Oregon 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

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 

SHELDON WHITEHOUSE, Rhode Island 

RON WYDEN, Oregon 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

TOM COBURN, Oklahoma 

CAROLINA HOLLAND, Democratic Chief Counsel/Staff Director 

JACE JOHNSON, Republican Chief Counsel 

(III) 

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 

(1) 

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, 

2 

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 

3 

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 

4 

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, highervalue 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-tounderstand 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 

5 

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-asyou-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. 

6 

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-yougo 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.] 

7 

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. 

8 

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 facilitiesbased carrier in the United States, and what that means, facilitiesbased, 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 longterm 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. 

9 

For an example, our $40 plan includes unlimited local and longdistance 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? 

10 

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 

11 

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 inmarket 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. 

12 

[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 

13 

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 

14 

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? 

15 

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 

16 

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. 

17 

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 

18 

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 

19 

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 cusVerDate Nov 24 2008 11:47 Jun 28, 2010 Jkt 056833 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56833.TXT SJUD1 PsN: CMORC
20 

tomers 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 

21 

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 

22 

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 pricesensitive 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 

23 

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, highpaying 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 

24 

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 

25 

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 

26 

$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 ConVerDate Nov 24 2008 11:47 Jun 28, 2010 Jkt 056833 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56833.TXT SJUD1 PsN: CMORC
27 

gress 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 lessdense 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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