Telecommunications: Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry
Published: 2010-07-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Americans increasingly rely on wireless phones, with nearly 40 percent of households now using them primarily or solely. Under federal law, the Federal Communications Commission (FCC) is responsible for fostering a competitive wireless marketplace while ensuring that consumers are protected from harmful practices. As requested, this report discusses changes in the wireless industry since 2000, stakeholders' perceptions of regulatory policies and industry practices, and the strategies FCC uses to monitor competition. To conduct this work, GAO collected and analyzed data and documents from a variety of government and private sources; conducted case studies in both rural and urban areas of four states; and interviewed stakeholders representing consumers, local and state agencies and officials, and various segments of the industry.
section_title: What GAO Found
paragraphs: The biggest changes in the wireless industry since 2000 have been consolidation among wireless carriers and increased use of wireless services by consumers. Industry consolidation has made it more difficult for small and regional carriers to be competitive. Difficulties for these carriers include securing subscribers, making network investments, and offering the latest wireless phones necessary to compete in this dynamic industry. Nevertheless, consumers have also seen benefits, such as generally lower prices, which are approximately 50 percent less than 1999 prices, and better coverage. While views differed among stakeholders, some carriers and consumer groups perceive certain FCC wireless policies as having prevented the entry and growth of small and regional carriers, though it is difficult to assess some of these issues without better data. In particular, many stakeholders outside of the top national carriers who we spoke with noted that policies for making spectrum available for commercial use, as well as policies governing some essential elements of wireless networks, favor large national carriers, potentially jeopardizing the competitiveness of the wireless industry. One such essential element is special access to infrastructure that connects cell phone towers to wireline phone networks. Better data on rates governing those elements would clarify the extent to which competition is hindered. Additional data are also necessary to determine whether consumers are hindered from moving between wireless carriers by particular industry practices. Many small carriers and consumer groups perceive early termination fees associated with wireless service contracts and exclusive handset arrangements as creating switching costs that serve as barriers to consumer movement. FCC uses three strategies to oversee and monitor competition in the wireless phone industry: reviews of proposed mergers, investigations of competitive challenges, and its annual wireless competition report to Congress. In assessing mergers, FCC balances potential public interest benefits and harms. FCC has also undertaken a variety of investigations and inquiries related to competitive challenges, generally in response to complaints. The primary tool that FCC uses is the annual wireless competition report. While FCC recently undertook steps that significantly improved this report, it still does not fully assess some key industry inputs and outputs. FCC generally has not collected data on many industry investments or consumer switching costs because of the complexity and burden associated with gathering these data. However, FCC has recently undertaken ad hoc inquiries to collect such data and, despite challenges and costs, this information could help FCC better fulfill its statutory reporting requirement. In particular, additional data could help assess the competitiveness of small and regional carriers, as well as shed light on the impact of switching costs for consumers. FCC should assess whether expanding original data collection of wireless industry inputs and outputs--such as prices, special access rates, capital expenditures, and equipment costs--would help the Commission better satisfy its requirement to review competitive market conditions with respect to commercial mobile services. FCC took no position on GAO's recommendation, but provided technical changes to this report that were incorporated as appropriate.

section_title: Letter
paragraphs: Wireless phone use in the United States has risen dramatically over the  last 20 years, and Americans increasingly rely on wireless phones as their  sole or primary means of telephone communication. According to industry  data, the total number of wireless phone service subscribers nationwide  has grown from about 3.5 million in 1989 to about 285 million by the end of  2009. Today, nearly 40 percent of households rely primarily on wireless  devices, and the industry generates revenues in excess of $150 billion a  year. Further, consumers use their mobile devices for more than phone  calls and text messages; devices are increasingly becoming a primary link  to the Internet. As consumer reliance on mobile devices for Internet  access (e.g., for e-mail and maps) grows, so does the need for wireless  data service. Indeed, the Federal Communications Commission’s (FCC)  National Broadband Plan noted that “mobile broadband is the next great  challenge and opportunity for the United States” and identified a goal of  making the United States the world leader “in mobile innovation, with the  fastest and most extensive wireless networks of any nation.”
Members of Congress and public interest groups have raised concerns  about the competitiveness of the wireless industry in recent years.  Consolidation through mergers and acquisitions has created a market for  wireless services in which four companies—AT&T Inc. (AT&T), Sprint  Nextel (Sprint), T-Mobile USA Inc. (T-Mobile), and Verizon Wireless  (Verizon)—have the vast majority of subscribers. Such consolidation has  created concerns that there may be a lack of competitiveness, which could  lead to deteriorating service and higher prices for consumers. Under  federal law, FCC is responsible for fostering a competitive wireless  marketplace while ensuring that consumers are protected from harmful  practices. FCC has generally taken a deregulatory approach to the wireless  industry in order to foster competition and innovation, though it monitors  the industry through its annual report on wireless competition. The  Department of Justice Antitrust Division, along with FCC, reviews and  approves wireless industry mergers and acquisitions.
In November 2009, we reported on the need for FCC to improve its  oversight of wireless phone service quality and consumer issues. In  response to your request, this report examines other changes and issues in  the wireless industry and whether there are additional actions FCC could  take to ensure effective competition. In particular, this report discusses (1)  the ways in which the wireless industry has changed since 2000 and the  implications of those changes on competition and consumers, (2)  stakeholders’ perceptions of the effect of various regulatory policies and  industry practices on the wireless industry and consumers, and (3) the  strategies FCC has employed to monitor and oversee competition in the  wireless industry.
To determine the ways in which the industry has changed since 2000, we  identified and analyzed quantitative data—such as the number of wireless  subscribers and prices—from UBS Investment Research (a financial  services firm); FCC; the Bureau of Labor Statistics; as well as survey data  collected by CTIA, an industry association; and data from a commercial  database. The metrics we used in this report are those that are commonly  used to discuss the state of competition in the wireless telephone industry  recommended by a variety of stakeholders with whom we spoke. Due to  the proprietary nature of some information, we were limited in the data we  could collect, which limited our ability to analyze competition in various  segments of the wireless industry. To complement these data, we  examined public comments submitted in response to FCC’s August 2009  Notice of Inquiry on its annual mobile wireless competition report. To  determine the implications for consumers and competition, as well as  stakeholders’ perceptions of the effect of various industry practices and  regulatory policies, we spoke with a variety of stakeholders in order to  gain a broad perspective on the issues; these stakeholders included all of  the 4 large national carriers, 11 regional and small carriers, 4 device  manufacturers and network operators, 3 tower companies, 7 industry  associations, 6 consumer groups, 8 academic and industry experts, and  numerous local and state officials as part of our case studies. We  conducted case studies in both urban and rural cellular market areas in  four states, as well as the District of Columbia, speaking with local  government officials, telecommunications and economic development  experts, and wireless companies. We selected the case study sites based  on population, the number of competing carriers, the number of wireless  carriers receiving Universal Service Fund (USF) High-Cost program  subsidies, and suggestions from experts. The case studies serve as  illustrative examples; they are a nonprobability sample and, therefore,  cannot be generalized to all cellular market areas. To determine the  strategies employed to oversee and monitor competition, we spoke with a  variety of FCC officials as well as the Department of Justice Antitrust  Division about their specific roles in the oversight of competition in the  wireless industry. We also reviewed FCC reports, orders, and merger  documentation related to the wireless industry. We also spoke with  stakeholders about the impact of FCC’s current strategies to oversee and  monitor competition in the industry.
We conducted this performance audit from August 2009 to July 2010 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. Appendix I provides a detailed discussion of  our scope and methodology.
subsections: section_title: Background
paragraphs: Components of a Mobile Phone System. Mobile phones are low-powered  radio transceivers (a combination radio transmitter and receiver) that use  radio waves (spectrum) to communicate with base stations. These  include traditional voice-only cellular phones, as well as “smart” phones  that generally have large viewscreens, along with enhanced data and  messaging capabilities. Wireless phone service carriers deliver mobile  phone service by subdividing large geographic areas into smaller  overlapping sections called cells. Each cell has a base station equipped  with an antenna to receive and transmit radio signals to mobile phones  within its coverage area. This area can vary in size from under a mile to 20  miles from the base station. A mobile phone’s communications are  generally associated with the base station of the cell in which it is  presently located.
When a call is initiated, the base station assigns a radio frequency to the  mobile phone from among the group of frequencies that the station  controls. The number of frequencies available at a base station will depend  primarily on the amount of radio frequency spectrum obtained by the  carrier from FCC, the number of base stations in the carrier’s service area,  and the type of technology that the carrier uses. Each base station is  linked to a mobile phone switching office, which is also connected to the  local wireline telephone network. As a result, the majority of wireless  traffic actually flows over the wireline telephone system, with only the last  segment—traveling to and from mobile phones to towers—operating  wirelessly. The mobile phone switching office directs calls to the desired  locations, whether to another mobile phone or a traditional wireline  telephone. This office is responsible for switching calls from one cell to  another in a smooth and seamless manner as consumers change locations  during a call. Special access services are used to provide backhaul, the  wireline infrastructure that, among other things, connects cell phone  towers to switching stations and, ultimately, to other phones. Special  access services employ dedicated facilities that run directly from cell  phone towers to wireline networks. Figure 1 illustrates the components of  a mobile phone system.
Wireless Industry Background. In the wireless phone industry, four large  national wireless phone service carriers—AT&T, Sprint, T-Mobile, and  Verizon—currently operate alongside small and regional carriers of  various sizes. The four large, national carriers serve more than 90 percent  of wireless subscribers, though no single competitor has more than one- third of the market share of the national market. According to industry  data, currently more than 140 companies offer wireless services. Many  carriers, such as AT&T and Verizon, are considered “facilities-based” in  that they both own and operate elements of their wireless network. In  addition to these facilities-based carriers, the wireless industry includes  mobile virtual network operators (MVNO), such as TracFone. While many  wireless carriers acquire spectrum licenses from FCC, MVNOs are  resellers of wireless services; they do not hold spectrum licenses, but lease  network space wholesale from other providers. According to FCC, there  are currently at least 60 MVNOs in the United States.
To subscribe to wireless phone service, a consumer must select a wireless  phone service carrier and either sign a contract and choose a service plan  or purchase prepaid minutes and buy a phone that works with the prepaid  service. Most consumers sign contracts that specify the service plan, the  number of voice minutes, and the number of text messages the consumer  is buying for a monthly fee; consumers can also purchase data plans which  allow them to access the Internet for a monthly fee. New consumers who  sign contracts for wireless phone service sometimes pay upfront fees for  “network activation” of their phones and usually agree to pay an “early  termination fee” (ETF) if they should quit the carrier’s network before the  end of the contract period. In return for signing a contract, consumers  often receive wireless phones at a discount or at no additional cost. Some  carriers also permit consumers to purchase their own handsets without  requiring that they enter into long-term contracts. While there are a variety  of handsets consumers can purchase, some are exclusively linked to one  carrier.
Regulatory History. When establishing the rules for cellular service in  1981, the commission decided that it would only grant two licenses to  carriers in each cellular market to build facilities and offer cellular  telephone service. One license was reserved for the existing local  telephone company and the other was initially reserved for applicants that  were not affiliated with any wireline telephone carrier. The commission  relied on comparative hearings and lotteries to assign these licenses to  new carriers. However, in our 1992 report, we noted that this market  structure provided only limited competition. We recommended that FCC  consider establishing a policy that supports new entrants into the wireless  market by giving first preference to firms not offering cellular telephone  service when allocating spectrum. Later, when the FCC allocated more  spectrum, it opened the wireless market to more carriers.
In the 1990s, Congress enacted two laws—the Omnibus Budget  Reconciliation Act of 1993 (1993 Act) and the Telecommunications Act of  1996 (1996 Act)—that sought to increase competition among carriers  through a deregulatory framework. The 1993 Act preempted state and  local governments from regulating the entry of or the rates charged by  commercial mobile service carriers. In addition, the 1993 Act gave FCC  authority to set up spectrum auctions for the distribution of licenses,  replacing the lottery system. The purpose of the auction system was to  award licenses to those who would use them most efficiently. The 1993  Act also required FCC to provide annual mobile wireless competition  reports to Congress. In the 1996 Act, a law that deregulated various  aspects of the telecommunications industry, the Congress provided FCC  with additional tools that could be used to promote competition in the  mobile phone service industry. In order to enhance competition, the 1996  Act authorized FCC to exempt telecommunications carriers, including  wireless carriers, from any requirements that are not necessary to protect  consumers, ensure that service provided be just and reasonable, and not  unjustly or unreasonably discriminatory. The 1996 Act also required that  every 2 years FCC engage in a review of its rules, including those related  to mobile phone service, to determine whether any of them are no longer  necessary as a result of meaningful competition among carriers.
Ahead of the first spectrum auctions, FCC decided to introduce caps on  the amount of spectrum any one carrier could hold in a market (spectrum  cap) to ensure that a number of carriers would be able to compete in a  given market and that no one carrier would thereby gain dominant market  share. In 2001, the Commission decided to end the practice of spectrum  caps—phasing it out completely in 2003—in part, because it believed there  was general competition in the marketplace and that a case-by-case  approach to proposed transactions could protect competition while also  enabling greater economic efficiencies, which would benefit consumers.   Instead, the FCC began a practice of applying, on a market-by-market  basis, a two-part “screen”—examining (1) market concentration and   (2) the input market for spectrum—to determine whether a particular  proposed transaction required more in-depth, case-by-case review to  assure that no competitive harm would result (or to require divestitures  where necessary).
The 1993 and 1996 Acts led to other FCC actions as well. FCC has  traditionally regulated the rate ILECs can charge for special access  services. In 1991, FCC moved the Bell Operating Companies and GTE from  rate-of-return regulation to price-cap regulation and gave other ILECs the  option of moving to price-cap regulation. As noted earlier, wireless  carriers are one consumer of such special access services. These services  are generally provided by incumbent telecommunications companies,  which can be large, multistate firms (e.g., AT&T, Qwest Communications,  and Verizon). These incumbent firms have an essentially ubiquitous local  network that generally reaches all of the business locations in their local  areas. Because the 1996 Act encouraged a deregulatory approach to  telecommunications, the commission implemented the Pricing Flexibility  Order in 1999, which permitted the deregulation of special access rates in  metropolitan areas where local firms could show that certain “competitive  triggers” had been met and that there was competition for special access  services. FCC granting either partial- or full-pricing flexibility to the  price-cap incumbent carriers depends on the extent of competitive co- location of special access facilities in a particular metropolitan area.
section_title: Since 2000, the Wireless Industry Has Consolidated and Usage Has Increased, Creating Challenges for Small and Regional Wireless Carriers and Some Benefits for Consumers
paragraphs: A number of quantitative metrics demonstrate the evolution of the  wireless industry. Data show that the biggest changes since 2000 have  been consolidation among wireless carriers and increased use of wireless  services by consumers. Industry consolidation has created some  challenges for small and regional carriers to remain competitive; these  challenges include securing subscribers, making network investments, and  accessing handsets. While the industry has consolidated since 2000,  consumers have seen some benefits, such as lower prices and better  coverage.
subsections: section_title: Data Indicate that the Primary Changes in the Wireless Industry are Consolidation of Carriers and Increased Use of Wireless Services by Consumers
paragraphs: Consolidation of Carriers. The primary change in the wireless industry  since 2000 has been the consolidation of wireless carriers. The Herfindahl- Hirschman Index (HHI) is a commonly accepted measure of market  concentration used by both the Department of Justice Antitrust Division  and FCC. The average HHI score for the wireless industry, as calculated by  FCC, has increased by over 30 percent since first reported by FCC in  2004. This suggests that the market shares of the largest national carriers  generally have increased. In addition to changes in market shares, there  are other factors that could explain changes in the HHI score, including a  decrease in the number of carriers through mergers or other exits from the  market.
Over the past 10 years, consolidation in the wireless industry has generally  been accomplished through a series of mergers and acquisitions. Figure 2  illustrates the major mergers and acquisitions among some of the major  wireless carriers since 2000. The major transactions that have helped  create the four large national carriers are Cingular’s acquisition of AT&T in  2004, Sprint’s acquisition of Nextel in 2005, AT&T’s acquisition of Dobson  in 2007, T-Mobile’s acquisition of SunCom in 2008, Verizon’s acquisition of  ALLTEL in 2008, and AT&T’s acquisition of Centennial Communications  Corporation (Centennial) in 2009. Many of the other transactions since  2000 have been larger carriers acquiring smaller competitors. As a result,  the market share of the large national carriers has generally increased, as  illustrated in figure 3. Indeed, one stakeholder mentioned that while he has  worked with several local cellular companies in the past, most of them  have now been bought by large, national carriers. In West Virginia,  according to state officials with whom we spoke, 90 percent of the  wireless market is held by five carriers, but of that, 44 percent is held by  one national carrier. In some cases, mergers have resulted in only one  carrier with extensive coverage in a particular market. In Northwest  Minnesota, according to some stakeholders with whom we spoke, Verizon  Wireless became the only carrier available to most of the population after  its purchase of the Rural Cellular Corporation, although other carriers  hold spectrum licenses. Nevertheless, national figures can sometimes  mask the regional strength of some smaller carriers, according to one  carrier with whom we spoke. U.S. Cellular, for example, has a relatively  large market share in some Midwest markets.
In addition to mergers, the acquisition of spectrum licenses through  spectrum auctions and license transfers has allowed large national carriers  to get bigger. License transfers can happen when carriers resell their  licenses or portions of their licenses to other carriers. For instance, AT&T  currently owns five licenses in the Minneapolis-St. Paul, Minnesota,  market, two of which it initially won in auctions and three of which it  acquired through other transactions. Such transactions can facilitate the  growth of carriers by allowing them to construct and operate larger  networks, thereby supporting more subscribers and market share. License  transfers can also happen in order to secure merger approval from the  Department of Justice (DOJ) and FCC. For example, before merging in  2008, Verizon and ALLTEL were required by FCC to divest their assets in 5  markets and in another 100 markets by DOJ, based on the conclusion that  the merger would decrease the level of competition in those markets.  MetroPCS, nTelos, and a number of other small and rural carriers filed  Petitions to Deny the license divestiture procedures, urging FCC to take  steps to ensure that small and rural carriers and new entrants had  opportunities to gain the divested spectrum licenses. FCC denied all  petitions to set conditions on license transfers stating that applications for  license transfers were required to be individually reviewed, decreasing the  potential for competitive harm. DOJ further stated that the carrier that  purchased the license needed to be an “effective competitor.” However,  some stakeholders referred to the results of such divestitures as “spectrum  swapping,” with licenses simply being transferred from one large carrier to  another. Since the 2008 divestiture of Verizon and ALLTEL spectrum  assets, many of the licenses are being transferred to a subsidiary of AT&T.
Increased Use of Wireless Services by Consumers. Since 2000, the number  of wireless consumers has increased significantly. One measure of  consumer use is the wireless “penetration rate,” generally defined as the  number of wireless subscribers as a percentage of the total U.S.  population. Based on industry data, the penetration rate, as of December  2009, was 91 percent. As figure 4 shows, the wireless penetration rate  was only 38 percent in 2000, showing that wireless use has grown  significantly in the past decade. Furthermore, the percentage of  households that are wireless-only has been steadily increasing. The  number of adults living in households with only wireless telephone service  has increased from less than 5 percent in 2003 to nearly 23 percent in 2009.  According to one study of wireless use, wireless connections in California  now exceed the combined connections of both wireline and broadband  services. Our data also show that, as the penetration of wireless services  has grown over the past few years, the growth in the number of new  wireless subscribers has slowed. As a result, carriers are now mainly  competing for existing subscribers because there are few potential new  subscribers available.
The number of wireless subscribers who use prepaid services has  increased. In the wireless market, it is possible for consumers to purchase  services with a contract (postpaid subscribers) or without, simply  purchasing services month-to-month (prepaid). The number of prepaid  subscribers, as a portion of all wireless subscribers, has grown in the past  five years (see figure 5). New prepaid cell phone subscribers accounted  for nearly two-thirds of the 4.2 million net subscribers added by U.S.  phone carriers in the fourth quarter of 2009. According to some analysts,  this recent trend has been driven by a desire for flexibility on the part of  consumers as well as economic issues. This increase in prepaid  subscribers has taken some subscribers away from the large, national  carriers that have traditionally relied on postpaid subscribers, according to  industry analysts with whom we spoke. The four largest national carriers  are now present in the prepaid market, as well as the postpaid market.
The increase and change in the use of wireless services by consumers is  evidenced not only by a change in the number of subscribers, but also the  changes in the average use of voice minutes and use of data services.  While average voice minutes used has decreased recently, data usage is  increasing, both in the number of users of data services and the amount  being used. From 2000 until 2007, the average number of voice minutes  used per month increased from approximately 250 minutes to over 750  minutes. In recent years, though, voice minutes have decreased slightly  (see figure 6). On the other hand, data use, including text messaging, as  well as accessing the Internet, has been increasing. For instance, there  were over 152 billion text messages sent in December 2009, compared to  over 110 billion messages in the month of December 2008. This shift to a  datacentric market has been driven, in part, by the increase in the number  and popularity of smart phones.
section_title: Industry Consolidation Has Made it More Difficult for Small and Regional Carriers to be Competitive
paragraphs: Through their growing share of the overall wireless market, large national  wireless carriers have been able to exploit significant economies of scale.  While these economies of scale can facilitate the continued growth of the  top carriers, they can also create challenges to the growth and  competitiveness of small and regional carriers. In particular, small and  regional carriers, as well as other stakeholders, noted their difficulties in  securing subscribers, network investments such as chipsets, and handsets.
Subscribers. Due in part to the consolidation of carriers and spectrum, the  top national carriers have increasingly dominated the acquisition of  subscribers. One metric of competition is net adds, or the change in the  number of subscribers a carrier has within a specific period, which takes  subscriber turnover into consideration. Figure 7 illustrates the net adds, by  carrier, since 2005. These data show that over the past 4 years, net  subscriber additions have primarily and consistently accrued to the top  national carriers. Data from the second quarter of 2009 alone show that  the top national carriers accrued about four times the number of net adds  as the next carrier. Indeed, some stakeholders stated that a reason for the  high number of net adds is because the large national carriers have  exclusive handsets and consumers are choosing those carriers because of  their offerings. Without net adds, small and regional carriers can face  challenges securing investments because non-negative net adds are  indicative of a steady revenue source.
The trend in subscriber turnover, though incorporated into net subscriber  additions, on its own also indicates that subscribers are mostly accruing to  the top national carriers. Subscriber turnover is most commonly measured  as the churn rate, which is the number of subscribers disconnecting from  service during a given period as a percentage of the average total number  of subscribers for a carrier. As the penetration rate moves past 90 percent,  there are fewer new consumers to gain. The difficulty for small and  regional carriers is retaining the subscribers that they have. As figure 8  indicates, the top two national carriers have generally had lower average  monthly churn rates than the next two national carriers, as well as small  and regional carriers. While a low churn rate could be due to a number of  different factors, these data indicate that over the past three years, small  and regional carriers as well as some national carriers have had difficulty  retaining subscribers.
Network Investments. The size and scale of large national carriers gives  them the advantage of being able to deploy faster networks ahead of their  competitors, thus reinforcing their competitive advantage. Developing and  expanding networks require significant capital investment. Without  pressure to keep their networks and, therefore, their services competitive,  carriers may not be willing to undertake this investment. Therefore, capital  expenditure is one way to measure the level of competition in a given  market. We encountered divergent views on the extent of investment  being made by wireless carriers. While some stakeholders maintained that  their investment in wireless networks remains a significant portion of their  costs, others pointed to data showing that some wireless carriers do not  appear to be investing aggressively, based on capital expenditures as a  percentage of revenue. According to some industry analysts, carriers  generally continue to invest significant capital in networks, despite the  recent economic downturn. In the past 3 years, large national carriers have  been able to invest more money in their networks than other carriers.  AT&T and Verizon, for example, both spent over $2 billion in the fourth  quarter of 2009, representing about two thirds of total industry  expenditures. U.S. Cellular and Leap Wireless each spent under $200  million in the same time frame. However, as the data in figure 9 show, the  capital investments of some large national carriers have been smaller  portions of their service revenue than investments on the part of some of  the smaller regional carriers. For instance, even though it spent  approximately 18 times less than AT&T on total capital investments, Leap  Wireless spent more as a proportion of its service revenue.
The acquisition of spectrum and access to equipment is also necessary for  carriers to expand networks and develop faster networks, making the  carrier a more attractive choice for consumers. As noted above, small and  regional carriers generally have fewer resources to draw upon than large  national carriers, making it difficult for these carriers to expand and  develop their networks as quickly. For example, because of their scale,  large national carriers can purchase necessary network equipment, such  as chipsets, before their smaller competitors. Small and regional carriers  generally do not have the number of subscribers necessary to obtain, at  any price, the necessary equipment. As a result, this equipment is often  only designed to utilize the large national carriers’ spectrum holdings.  Large national carriers, for instance, have been able to provide 3G  networks, and are poised to deploy new 4G networks, before small and  regional carriers.
Handsets. Advanced handsets, or “smart” phones, are a growing source of  revenue for the industry. The economies of scale produced by industry  consolidation have allowed the large national carriers to gain large  subscriber bases, which according to stakeholders, have allowed those  carriers to enter into exclusive contracts with handset manufacturers for  the latest, most advanced handsets. As a result, regional carriers have not  been able to take as much advantage of new data revenue streams because  of their lack of access to the latest handsets, jeopardizing their  competitiveness in an industry where handsets are of growing importance.  Figure 10 shows the average monthly revenue for the industry overall,  from voice services only, and from data services only over the course of  each year. Since 2004, the industry’s Average Revenue per User (ARPU)  for voice services has been in decline. In that same time period, there has  been an increase in the revenue received for data services. This is true  more so for the top national carriers than for small or regional carriers.  Verizon and AT&T each reported data ARPU in the fourth quarter of 2009  in the mid-teens, whereas nTelos and U.S. Cellular both reported data  ARPU of about $10.
Stakeholders consistently noted that consumers are increasingly basing  their wireless decisions on the availability of particular advanced  handsets. According to stakeholders with whom we spoke, competition in  the wireless industry, which traditionally centered on network quality and  price, has shifted to handset devices, which small and regional carriers  cannot access quickly. One regional carrier mentioned that though the  time between when new devices are launched and their availability to  small and regional carriers has shortened, by the time small carriers are  able to offer the handset in their store, a newer version is usually being  offered by the large national carriers. According to one stakeholder, some  consumers do not consider these small and regional carriers as options  because of the exclusive arrangements that large, national carriers have  for these advanced handsets.
section_title: Wireless Prices have Declined Over the Last Decade and Coverage has Improved
paragraphs: Although consolidation has increased the difficulty for small and regional  carriers to compete in the wireless industry, a high concentration of firms  in an industry does not necessarily mean that the interests of consumers  are poorly served. In particular, by enabling large national carriers to  exploit economies of scale, consolidation can create greater productivity  and economic efficiency. This industry consolidation may have especially  improved the efficiency of the large national carriers, allowing them to  offer more wireless services for similar or lower prices. Indeed, one way  that wireless carriers can compete is through differentiated price plans.  The Consumer Price Index, which shows the changes in the average prices  of goods and services, indicates that the overall average price (adjusted for  inflation) for wireless services declined each year from 1999 to 2008 (see  figure 11); the average price for wireless service in 2009 was  approximately 50 percent of the price in 1999. This illustrates that  consumers are generally getting more wireless services (such as more  voice minutes of use) for lower costs than they were 10 years ago.
A few stakeholders with whom we spoke noted that national wireless  networks, which some carriers have developed through mergers and  acquisitions, can provide benefits to consumers. First, they can provide  smoother, more uninterrupted service. In northern Minnesota, an area  with low population density, economic development officials noted that  since the area has consolidated under one carrier, there have been fewer  “dead spots” in the coverage. Second, national price plans have become  commonplace, and all of the national wireless carriers offer unlimited  voice plans. Further, according to one stakeholder, consumers have also  seen a reduction in roaming fees with the advent of national networks and  pricing plans.
section_title: Some Stakeholders Perceive Certain Regulatory Policies and Industry Practices Jeopardizing the Competitiveness of the Wireless Industry
paragraphs: While views differed among stakeholders, some carriers and consumer  groups perceive certain FCC wireless policies as having prevented the  entry and growth of small and regional carriers, though it is difficult to  assess some of these claims without better data. In particular, many  stakeholders outside of the top national carriers with whom we spoke  noted that spectrum and special access policies favor large national  carriers, potentially jeopardizing the competitiveness of the wireless  industry. Better data on special access rates, in particular, would clarify  the extent to which these policies hinder competition. Additional data are  also necessary to determine whether consumers are hindered from moving  between wireless carriers and services by particular industry practices.  Many small carriers and consumer groups with whom we spoke perceive  early termination fees and exclusive handset arrangements as creating  such anticompetitive switching costs. Most stakeholders also noted that  local government policies and procedures for constructing infrastructure  can delay the development of wireless networks.
subsections: section_title: Many Stakeholders Outside Top National Carriers Maintained that FCC Wireless Policies Have Hindered the Competitiveness of Small and Regional Carriers
paragraphs: Spectrum Auction Policies. As an essential input necessary for wireless  services, FCC has developed a variety of mechanisms to ensure wide  distribution and effective use of spectrum. FCC has auctioned spectrum  licenses covering a variety of geographic areas, attached construction  benchmarks to those licenses, provided auction bidding credits to certain  entities, and in the past capped the amount of spectrum any one entity  could hold in a region. However, many stakeholders outside of the top  national carriers with whom we spoke expressed concern that, despite  these FCC policies, the processes for making spectrum available for  commercial use have facilitated consolidation, prevented new carriers  from entering the market, and hindered the growth of small and regional  carriers.
According to some small carriers and other stakeholders with whom we  spoke, the size of spectrum blocks has had the effect of pricing small and  regional carriers out of recent auctions, making it difficult for these  carriers to enter into new markets or expand their services. FCC auctions  licenses for the exclusive use of frequencies in a variety of designated  geographic regions. As figure 12 shows, there are different ways in which  FCC divides the country into spectrum licenses, including relatively small  multicounty areas (Cellular Market Areas) as well as large multistate  regions (Regional Economic Areas). Though large national carriers have  won a significant portion of licenses in recent auctions, it is not clear if  this is because of the license sizes. For example, in the most recent large  wireless spectrum auction, Verizon and AT&T won 336 of the 1091  licenses. Though these represented 31 percent of the available licenses,  they covered nearly the entire country and were viewed by stakeholders as  some of the most valuable licenses available. Additionally, Verizon won all  of the licenses covering Regional Economic Areas in the continental  United States, despite bids from smaller entities. However, both AT&T and  Verizon also purchased numerous licenses covering Cellular Market Areas,  the smallest license size available. One small carrier with whom we spoke  said that auctioning spectrum in smaller blocks has not necessarily helped  small carriers because they are still competing with large carriers that  have significantly more resources. In the aforementioned auction, Verizon  and AT&T spent $9.4 billion and $6.6 billion, respectively, much more than  other carriers. Nevertheless, according to one association with whom we  spoke, a consequence of having some licenses cover large regions is that  carriers who want spectrum to build out metropolitan areas must  purchase a license covering entire regions and states. As a result, the  association noted that some of these carriers leave the rural, underserved,  or unserved areas of their licenses unbuilt. According to one regional  carrier with whom we spoke, this trend will have negative consequences  for wireless service in rural areas, as large national carriers will not have  an incentive to continue to provide extensive or up-to-date coverage in  areas with low population density. Some small and regional carriers with  whom we spoke also said that they would further develop their networks  in those rural and underserved areas, but are prevented from doing so by  their inability to afford the entire spectrum license. Some carriers, though,  are already offering some service in rural areas. Indeed, as the FCC  showed in their most recent mobile wireless competition report,  approximately 98.5 percent of the U.S. population living in rural census  blocks have one or more different carriers offering mobile telephone  service where they live.
Stakeholders had differing views on the effectiveness of FCC’s efforts to  ensure spectrum is utilized efficiently. In order to prevent spectrum from  remaining unused, particularly in rural and underserved areas, FCC told us  that they have attached construction benchmarks to all 44,229 licenses  auctioned since July 1994. For example, spectrum auctioned in 2006 only  required that there be “substantial service” by the end of the license term  in 2021. FCC officials noted that substantial service is difficult to define  and it has not had an opportunity to interpret it yet since these licenses  have yet to come to term. The most recent large wireless spectrum auction  included more specific benchmarks such as 35 percent geographic  coverage within four years. According to FCC’s electronic reporting  system, most license holders have met these benchmarks to date.  Nevertheless, some small and regional carriers and other stakeholders said  that these requirements have been too lenient. They maintained that some  carriers have been able to satisfy the construction benchmarks by building  out only in densely populated metropolitan areas and along highways,  leaving much spectrum underutilized, and coverage relatively poor in  some rural areas. For example, many officials we spoke with in Minnesota  maintained that many rural areas of Minnesota, such as stretches of roads  between towns, lack wireless coverage because of lenient build-out  requirements and economic limitations to building out in these areas.
Some stakeholders we interviewed, particularly small carriers and  consumer groups, said that a spectrum cap should be reinstituted in some  form, preventing carriers with large amounts of spectrum from  participating in certain auctions. According to these stakeholders, limiting  the amount of spectrum any one entity can hold in particular markets can  create opportunities for small and regional carriers to obtain spectrum. In  2001, FCC began eliminating its practice of spectrum caps in order to  facilitate greater economic efficiencies. While FCC told us it is difficult to  identify the specific impact of eliminating the caps, some stakeholders we  spoke with said that it has facilitated the consolidation of spectrum with  the large national carriers. Other stakeholders, particularly large national  carriers, maintained that spectrum caps were an artificial barrier to the  growth of the wireless industry. In particular, they noted that as the need  for more wireless capacity grows, networks require greater amounts of  spectrum. Therefore, a spectrum cap could stifle innovation by precluding  the deployment of next generation networks that provide faster  connections to the Internet, but require large contiguous blocks of  spectrum. Designing a practical spectrum cap could also be challenging.  Not all spectrum is of equal utility to wireless carriers, since some  frequencies travel farther distances and can better penetrate buildings,  making those frequencies more valuable than others. Nevertheless, in  response to the concerns of small carriers and consumer groups, the Rural  Telecommunications Group petitioned FCC in 2008 to reimpose a  spectrum cap (see figure 13 for an illustration of this proposal). In October  2008, FCC sought comments on the petition for rule making, and it  continues to review these comments. As the Congressional Research  Service recently reported, implementing spectrum caps as a tool for  regulating competition would represent a significant shift in policy for  FCC, were it to take that course.
According to some stakeholders, including wireless carriers of various  sizes with whom we spoke, spectrum auction bidding credits have been  ineffective to date, partly as a result of their poor implementation. Bidding  credits are a percentage discount applied to the high bid amount for a  license if the bidder meets specific designated entity criteria—designed to  make spectrum available to new entrants—established in the auction  rules. Some stakeholders said that, in the past, large national carriers have  used entities eligible for the credits as proxies, allowing eligible entities to  win certain licenses and then acquiring the desired licenses from them  later. For example, according to one small carrier with whom we spoke, a  large regional carrier used a proxy with bidding credits to secure many  spectrum licenses covering Iowa in a recent auction. This could result in it  being even more difficult for the small carriers in Iowa to compete. In  2006, in part to address criticisms and concerns that FCC’s policies for  awarding auction bidding credits were being manipulated to allow larger  entities to finance smaller businesses as fronts to obtain access to  spectrum at discounted rates, FCC strengthened its rules. These changes  were designed to better achieve a balance between preventing the use of  proxies and providing eligible entities with reasonable flexibility to obtain  needed financing from investors. However, many midsized and regional  carriers cannot use these bidding credits because, according to one  stakeholder, they are not small enough to qualify, though they lack the  resources to make them competitive with large national carriers. Finally,  some new entrants into wireless markets have been unable to effectively  utilize their spectrum. One new carrier that won spectrum licenses  through its use of bidding credits declared bankruptcy shortly after  winning the licenses. The Supreme Court later ruled that those licenses  could not revert back to FCC to be reauctioned.
Special Access Policies. Many stakeholders outside of the top national  carriers with whom we spoke expressed concern about the  competitiveness of the market for special access services, a critical input  for the provision of wireless services. Many wireless carriers are reliant on  the special access capacity of a single provider in some markets in which  they operate. In some cases, this provider is also a competitor in the  wireless industry. As noted above, starting in 1999, FCC permitted the  deregulation of special access rates in metropolitan areas where local  firms could show that certain “competitive triggers” had been met. While  competitors have entered segments of the special access market with their  own wireline networks, our past work, as well as many stakeholders with  whom we spoke, noted that competition has not expanded significantly in  the wake of deregulation of special access markets. Indeed, we  previously reported that competitive alternatives for special access have  declined in some metropolitan areas since the removal of price caps. As a  result, according to some stakeholders with whom we spoke, the current  structure of the market for special access services has a significant  negative effect on competition in the wireless industry, particularly for  carriers that rely on other companies to provide special access services.  Some of these stakeholders told us that they are charged high special  access rates or provided substandard service. However, industrywide data  on the location, quantity, and capacity of available special access facilities  and applicable rates are not consistently available, and would help to  provide a factual basis for the extent to which, or whether, wireless  competition is hindered by the market for these services.
According to some stakeholders with whom we spoke, there is a notable  lack of competition for special access in rural areas. However, it is not  clear whether the resulting high prices of special access services in rural  areas are due solely to the low population density and long distances  between facilities and, therefore, high costs of providing the services, or  whether they also reflect excessively high special access prices as some  parties have alleged. For example, stakeholders with whom we spoke in  northern California stated that special access services can be of poorer  quality for the incumbent’s competitors, and competitors pay five times as  much for services from Humboldt County to the city of Santa Rosa (north  of San Francisco) as from Santa Rosa to San Diego. Some carriers have  opted to self-provision through microwave backhaul facilities rather than  use existing wireline infrastructure. One carrier stated that they have a  department that seeks backhaul alternatives in each market due to the  high special access rates.
section_title: Some Stakeholders Noted that Consumer Switching Costs May be Exacerbated by Particular Industry Practices
paragraphs: A key element of competitive markets is that consumers will switch among  competitors in response to differences in services. In this regard,  competition that benefits wireless users depends upon the likelihood that  consumers can and will switch their service provider. However, according  to some small carriers and consumer groups with whom we spoke, the  process of switching wireless service providers can be an expensive process  that deters consumers who might otherwise consider changing to a new  carrier. Consumer switching costs, generally defined as the actual or  perceived costs that customers associate with the process of changing from  one carrier to another, occur in many markets and for a variety of reasons.  In examining this issue, FCC has concluded that “consumers continue to  pressure carriers to compete on price and other terms and conditions of  service by freely switching providers in response to differences in the cost  and quality of service.” FCC cited customer churn and the implementation  of wireless local number portability (LNP) as the basis for its conclusion.  Though LNP removed an important impediment to switching wireless  carriers, it does not necessarily mean that customers are able to switch  freely among carriers. Indeed, some stakeholders with whom we spoke  perceive early termination fees and exclusive handset arrangements as  creating such anticompetitive switching costs. However, additional data are  needed to fully assess the extent to which consumers are hindered from  moving between wireless carriers.
Early Termination Fee Practices. Stakeholders with whom we spoke had  divergent views on the benefits and harms of ETF associated with wireless  service contracts, with some expressing concern about the costs they  impose on consumers. Some large national carriers maintained that ETFs  are essential for carriers to be able to offer advanced handsets at lower  upfront prices. Other stakeholders noted that ETFs are important  enforcement mechanisms for wireless contracts; without such penalties,  carriers would not be able to offer the latest handsets at low upfront costs  and would not be able to recoup their handset subsidy costs. For example,  the Nexus One, a smart phone introduced in early 2010, was initially made  available for $530 without a contract or for $180 for those signing a 2-year  contract with T-Mobile. As part of that contract, though, consumers were  initially subject to a $350 “equipment recovery fee” from Google and a $200  fee charged by T-Mobile when breaking a contract within the first few  months of service. Google later lowered its fee to $150. Some carriers have  begun to prorate their ETFs. However, according to consumer groups with  whom we spoke, lengthy standard contracts containing high ETFs present  substantial obstacles for consumer movement between carriers. Officials  with whom we spoke in Iowa noted that consumers are now facing higher  than ever ETFs, which “take people out of the market” by locking them in  to specific carriers. One consumer group with whom we spoke also noted  that many consumers are unaware when their contracts are renewed or  whether they are even under a contract. Similarly, our previous work  suggested that some wireless phone consumers have experienced  problems with billing, certain service contract terms, and customer  service. Specifically, our previous survey results indicated that about 34  percent of adult wireless phone users responsible for paying their bill  received unexpected charges and about 31 percent had difficulty  understanding their bill at least some of the time. Among wireless users  who wanted to switch carriers during this time but did not do so, we  estimated that 42 percent did not switch because they did not want to pay  an ETF. A recent FCC survey also found that a majority of personal cell  phone users said the ETF was at least somewhat influential in keeping  service with their current carrier. Such obstacles can limit the choice and  movement of consumers, lessening the competitive pressure on these  large carriers while also making it difficult for small and regional carriers  to secure new subscribers. Several state consumer advocates with whom  we spoke also noted that consumers often are unaware of the ETFs they  are subject to, and generally find the terms and conditions of wireless  contracts confusing. FCC recently announced that it is exploring whether  wireless carriers should be required to warn subscribers when they are  incurring roaming charges or overage fees. Furthermore, in response to  specific concerns with Verizon’s ETFs, FCC sent a letter of inquiry to the  company in fall 2009. Not satisfied with the response, FCC sent out more  letters in late January 2010 to the large national wireless carriers and  Google, asking for detailed information and data on ETFs. FCC received  responses in February 2010 and is currently examining that information in  preparation for a Notice of Proposed Rulemaking dealing with a number of  consumer issues, including ETFs.
Exclusive Handset Practices. Stakeholders, particularly economists and  some large carriers, with whom we spoke maintain that exclusive handset  arrangements benefit consumers by facilitating innovation. For instance,  when a carrier can guarantee a particular sales volume to a manufacturer, it  facilitates that manufacturer’s investments in research and development.  Carriers can also contribute to innovation through direct collaboration with  manufacturers on design elements. Exclusive contracts may also help provide  better services to consumers by ensuring that carriers invest in specific  facilities or human capital needed to support new devices. Additionally, such  deals, and the close collaboration that results, may also facilitate the  coordination of marketing efforts and assurance of product quality.
Other stakeholders disputed the notion that carriers contribute much to  the innovation and quality of new wireless devices when entering  exclusive arrangements with manufacturers and said that such deals can  hinder competition. For example, one manufacturer stated that such  contracts only help them determine when they will enter the U.S. market,  as they conduct research independently and operate on a global scale.  According to some small carriers and other stakeholders, exclusive  handset deals are largely the result of the largest carriers’ ability to exploit  their market power in the mobile wireless market by requiring that device  manufacturers enter into exclusive arrangements. Others noted, though,  that manufacturers can be the ones to exert market power when offering  popular and innovative devices that carriers would like to offer. The lack  of availability of particular handsets to all consumers can also have the  practical effect of limiting competition, especially from small and regional  carriers, since these carriers are forced to offer handsets to consumers  that may not provide as much functionality as those offered by the large  national carriers. Finally, many consumer groups with whom we spoke  noted that such deals hinder consumer choice by limiting particular  handsets to specific carriers.
section_title: Local Government Policies Can Delay the Development of Wireless Networks
paragraphs: According to many national wireless carriers, tower companies, and other  stakeholders with whom we spoke, the most common barrier to building  out a wireless network is local zoning policies and procedures which can  delay or otherwise hinder the physical construction and improvement of  wireless networks. Wireless carriers must generally obtain state and local  zoning approvals before building wireless towers or attaching equipment  (co-location) to preexisting structures. Although these zoning processes  do not always pose a challenge to wireless carriers and tower companies,  in some instances they can encumber buildout by denying zoning permits  or by making the process for constructing cellular towers and antennas  cost prohibitive. Many stakeholders with whom we spoke said that in  California, for example, there continues to be significant public concern  over the aesthetic and health impacts of wireless infrastructure. As a  result, locating wireless facilities can be challenging in cities such as San  Diego and San Francisco. Other stakeholders told us that, as wireless  networks have expanded into residential areas, residents have raised  concerns about aesthetics and safety, making it difficult to provide the  capacity necessary to serve the growing demand for wireless services.  Washington, D.C., and other cities with unique or historic buildings and  skylines can also impose limitations on network build out, such as height  restrictions on towers.
Local jurisdictions with whom we spoke noted their obligation to balance  their communities’ desire for wireless coverage with aesthetic, historical,  environmental, cultural, and health priorities. While improved wireless  coverage is a desire of many areas, the perceived impacts of wireless  infrastructure and services can be concerns of local residents. Such  concerns can, in some cases, outweigh the benefits of wireless coverage,  particularly when there are other options for locating infrastructure.
Local governments and wireless entities have generally been able to reach  agreements on the conditions of wireless network construction, despite  the challenges noted above. Some local jurisdictions have developed  ordinances specifically for wireless infrastructure in order to make their  preferences and requirements clear to carriers and tower companies.  Carriers have also developed and adopted a variety of disguising or  “stealthing” technologies that help mask towers and other infrastructure.  Figure 14 shows a stealth tower in Eureka, California, where the antennas  were hidden inside a bell tower on church grounds. In San Francisco, to  avoid aesthetic concerns and procedural challenges, wireless carriers have  developed Distributed Antenna Systems in recent years. Instead of using  large towers or antennas on buildings, these systems involve a series of  small antennas, deployed low to the ground, often on utility poles, that  together provide wireless coverage.
Some wireless carriers and tower companies maintained that national  efforts, to date, to facilitate the siting of wireless infrastructure have been  of limited utility. The National Broadband Plan noted that securing rights  to telecommunications infrastructure is often a difficult and time- consuming process that discourages private investment. It calls for the  government to do more to reduce the costs incurred by private industry  when using public infrastructure. To encourage the expansion of wireless  networks, Congress has required local jurisdictions to act “within a  reasonable period of time” on zoning requests. FCC recently defined time  frames for such action on wireless facilities siting requests, while also  preserving the authority of states and localities to make the ultimate  determination on local zoning and land use policies. This “shot clock”  ruling found that a “reasonable period of time” for a state or local  government to act on a personal wireless service facility siting application  is 90 days for infrastructure being placed on existing structures and 150  days for new facility applications. State or local governments must also  declare an application “complete” within 30 days. The lack of a decision  within these time frames constitutes a “failure to act,” based on which a  wireless carrier may commence an action in court. However, this recourse  can be very expensive, according to some stakeholders. Some  stakeholders praised this ruling, but said that they expected it to have little  impact, either because local processes already fell within these time limits  or because local jurisdictions would find other ways to delay or deny  wireless infrastructure applications. Some local jurisdictions also noted  that the ruling fails to recognize the role carriers play in delays and  challenges associated with infrastructure. For example, inflexibility on the  part of carriers or incomplete applications can hinder zoning decisions.
Challenges to wireless network buildout in rural areas tend to be more  financial than procedural. For example, most of the local government  officials with whom we spoke in West Virginia said that they encourage  co-location of wireless antennas on existing structures, as this process is  simpler and less disruptive than building a new tower. However, they and  others in rural markets maintained that, in general, they welcomed new  wireless facilities and the coverage they bring. In Red Lake County,  Minnesota, companies can simply build towers where they want because  the county, and its cities and townships, have no ordinances or procedures  for tower construction. Nevertheless, many local government and other  officials with whom we spoke in rural areas said that a major challenge for  building wireless networks in these areas is the cost. Constructing and  maintaining the infrastructure can be cost prohibitive due to low  population density, difficult topography, or lack of existing infrastructure  such as power sources and wireline infrastructure. In West Virginia, for  instance, one of the biggest issues limiting the provision of wireless  service is the mountainous terrain, because most wireless service depends  on line-of-sight. Two carriers told us that, in effect, they subsidize this  infrastructure with revenues generated in metropolitan areas. When it is  not possible or desirable for a carrier to build out in these areas, coverage  can be inconsistent or nonexistent. To address this challenge, the state of  West Virginia, for example, has established a fund for subsidizing wireless  infrastructure projects in underserved areas. Subsidies from the Universal  Service Fund High-Cost program, which helps carriers provide services to  rural and high-cost areas, have also helped some wireless carriers provide  services in unprofitable areas, according to some stakeholders. For  example, one carrier with whom we spoke said that these subsidies have  made it possible for it to build out its network in rural Iowa. Without such  funds, the infrastructure in these areas would not be sustainable.
section_title: FCC Employs Various Strategies to Monitor Competition in the Industry, but Its Annual Report Is Missing Some Data on Inputs and Outputs
paragraphs: FCC uses three strategies to oversee and monitor competition in the  wireless phone industry: its annual wireless competition report to  Congress, its review of proposed mergers, and its investigations of  competitive complaints. The primary tool that it uses is the annual mobile  wireless competition report, which relies on limited data sources and does  not assess some industry inputs and outputs. In assessing mergers, FCC  balances potential public interest benefits and harms. Generally in  response to complaints, FCC has also undertaken a variety of  investigations and inquiries related to competitive challenges.
subsections: section_title: FCC Conducts Annual Reviews of Competition Based Primarily on Third- Party Data, But Does Not Collect or Assess Detailed Data on Some Inputs and Outputs
paragraphs: In the Omnibus Budget Reconciliation Act of 1993, Congress established  the promotion of competition as a fundamental goal for wireless policy  formation and regulation. To measure progress toward this goal, the 1993  Act required FCC to submit an annual report that analyzes competitive  conditions in the wireless industry. This report remains a key basis on  which federal wireless policies and regulations are developed and the  primary tool used by FCC to monitor competition in the wireless industry.  As discussed above, the cost and challenges associated with investments,  including special access, capital expenditures, and equipment, could affect  the prices charged to consumers and the number of competitors in the  wireless industry. For its latest annual report, released in May 2010, FCC  undertook a process that significantly improved its report. For example,  FCC based its analysis of competitive market conditions on a range of  indicators, including some new data on “downstream segments” of the  industry, such as spectrum and equipment. However, FCC collects little  original data on some industry inputs and consumer switching costs,  generally using third-party data to report on industrywide trends. This  hinders FCC’s ability to examine the extent of competition in specific  markets and sections of the industry. By collecting and analyzing more  detailed data on industry outputs (such as prices) and inputs (such as  special access rates), FCC could better assess competition in the wireless  industry. Indeed, the recently released National Broadband Plan calls for  collecting, analyzing, benchmarking, and publishing “detailed, market-by- market information on broadband pricing and competition.”
We identified four industry measures that lack original data collection on  the part of FCC:    Prices. As discussed earlier, the prices of wireless voice, text, and data  services are indicators of competition. As noted above, the Consumer  Price Index indicates that wireless prices have generally declined since the  late 1990s. However, this industrywide data masks variations in wireless  plan prices. A more detailed analysis of prices charged could help better  measure competition and efficiency in the market.
Special Access. Rates for special access are a significant expense for  wireless carriers because connections to backhaul provided by special  access are an integral component of wireless networks. While FCC  acknowledges that it has authority to collect special access rate data, it  does not regularly monitor and measure the development of competition  for special access. However, FCC is examining the current state of  competition for special access services to determine the level of  competition and ensure that rates for these services are just and  reasonable. To the extent rates are not just and reasonable, special  access may serve as a barrier to entry and growth for some wireless  carriers. As noted above, the current structure of the market for special  access services may have significant negative effect on competition in the  wireless industry. Without data on these rates, it is difficult to assess the  extent to which the special access market creates barriers to entry and  growth.
Capital Expenditures. Without better information on carrier investment in  networks and innovation, it is difficult to determine whether markets are  truly competitive and growing, or dominated by large carriers facing little  competitive pressure to invest. Additionally, better data on capital  expenditures could help identify underserved areas, such as rural markets  receiving little new wireless construction.
Devices and Equipment. Because the cost and availability of this  equipment is a challenge for small and regional carriers, it may create  barriers to entry and growth since these are critical inputs to the industry.  Obtaining more data to gain a better understanding of the role equipment  costs and ETFs play in making carriers competitive and hindering  customers’ movement between carriers is important.
In the past, FCC has generally not collected data on many industry  investments and metrics because of the complexity and burden associated  with gathering this data from wireless carriers. Additionally, FCC has  generally taken a deregulatory approach to the industry, imposing few  reporting requirements on wireless carriers. FCC officials stated that they  must balance the benefit of collecting detailed industry data with the  burden it places on carriers. Nevertheless, in August 2009, FCC released a  Notice of Inquiry on its annual mobile wireless competition report seeking  to expand and enhance its analysis of competitive conditions, both to  improve its assessment of the current state of competition in the entire  mobile wireless marketplace and to better understand the net effects on  the American consumer. FCC received a variety of comments from  industry stakeholders and incorporated new data into the latest mobile  wireless competition report on spectrum holdings, wireless usage  (including messaging and data services), devices, and expenditures. FCC  has also undertaken ad hoc inquiries, described later, that have resulted in  some original data collection. These actions illustrate that FCC is  rethinking the relative benefits and costs of data collection. However, FCC  still lacks detailed data on prices charged and costs incurred by wireless  carriers. Without such information, FCC is missing important information  that can shed light on the state of competition in the wireless industry,  which can ultimately lead to missed opportunities to protect and enhance  consumers’ experience in the market.
section_title: FCC Considers Potential Benefits and Harms to the Public Interest When Assessing Mergers
paragraphs: In evaluating proposed mergers involving transfers of control of spectrum  licenses, FCC conducts a “public interest” inquiry to assess whether the  public interest, convenience, and necessity will be served by a proposed  merger as part of its duties to monitor the wireless industry. The public  interest inquiry is informed by, but not restricted to, traditional antitrust  principles. According to FCC officials, through this test, it seeks to  understand how the transaction will benefit the public. More specifically,  FCC first assesses whether the proposed transaction complies with the  specific provisions of the Communications Act, other applicable statutes,  and the Commission’s rules. If the transaction does not violate a statute or  rule, FCC next considers whether it could result in public interest harms.  FCC then employs a balancing test weighing any potential public interest  harms of the proposed transaction, such as a reduction in the number of  competitors in a particular market, against any potential public interest  benefits, such as enhanced wireless coverage and efficiencies. Under the  Commission’s review, the burden is on the applicants to show that the  transaction will serve the public interest. FCC’s public interest evaluation  includes, among other things, a preference for preserving and enhancing  competition in relevant markets, accelerating private sector deployment of  advanced services, promoting a diversity of license holders, and generally  managing the spectrum in the public interest. As part of its considerations,  FCC puts all proposed mergers out for public comment.
FCC is able to attach conditions to approved mergers. Such conditions  are tailored to address the anticipated public interest harms based on  economic analysis, examination of documents submitted in response to  FCC inquiry, and public comments contained in the record. The conditions  can include divestiture of spectrum licenses in particular markets or other  requirements designed to mitigate public interest harms. For example,  while FCC approved AT&T’s acquisition of Centennial in November 2009,  it concluded that the “transaction would likely pose significant  competitive harms in seven local mobile telephony/broadband services  markets” and that these “potential harms would not be outweighed by the  proposed transaction’s alleged public interest benefits.” FCC required  AT&T and Centennial to divest Centennial’s assets in those seven markets.  The Commission also required that AT&T honor all of Centennial’s  existing roaming services agreements with other carriers.
FCC enforces merger conditions in various ways. To ensure proper  divestiture of assets, FCC imposes time limits on the sale of spectrum  licenses. It also individually reviews and approves these transactions. FCC  officials told us that, to date, all such applications have been approved.  When other requirements are imposed, such as roaming conditions, FCC  relies on complaints from wireless carriers to identify failures to comply  with merger conditions. One regional carrier with whom we spoke noted  that roaming conditions placed on a carrier they worked with were not  being honored in a timely manner, creating challenges for its business in a  particular area. While the carrier said that it brought this issue to the  attention of FCC, the Commission maintained that it received no  complaints concerning this matter.
section_title: FCC Has Undertaken a Variety of Investigations of Competitive Challenges
paragraphs: A third means by which FCC monitors competition is its ability to conduct  investigations of practices that may affect competition in the wireless  industry, as well as resulting enforcement actions. These investigations  can be self-initiated or undertaken in response to complaints from  consumers or the industry. FCC Enforcement Bureau officials told us that  they worked on over 2,300 wireless-related investigations between January  2008 and April 2010. Most of these investigations were based on  complaints, though about 8 percent were self-initiated and about 12  percent were referrals from other FCC bureaus. Such investigations can  involve technical issues such as spectrum interference, as well as  anticompetitive practices and consumer concerns. These investigations  can result in actions against specific entities or findings of no harm  caused. While it cannot conduct investigations itself, the FCC Wireless  Bureau has carried out requests for information in order to determine  whether investigations or rule makings are needed. As noted above, FCC is  currently examining information collected about ETFs in preparation for a  Notice of Proposed Rulemaking.
section_title: Conclusions
paragraphs: FCC’s annual mobile wireless competition report is the main vehicle by  which it monitors the wireless industry; as such, it is the primary source of  information and analysis of competition in the retail market for consumers  and wholesale markets for carriers. Concerns have been raised about the  competitiveness of these markets in recent years, and changes in the  industry such as consolidation have created new issues and challenges for  consumers and carriers. Recognizing these concerns and changes, FCC  recently undertook a process that significantly improved its annual mobile  wireless competition report. However, FCC could do more to examine  whether or not there is effective competition in the wireless industry. By  collecting and analyzing more detailed data on industry inputs and outputs  that reflect industry dynamics, FCC could better assess competition  conditions throughout the industry. Specifically, FCC could collect more  detailed data on such issues as prices, special access rates, and capital  expenditures and include analysis of that information in its annual report.
These metrics help measure the competitiveness of small and regional  carriers, can shed light on the impact of switching costs for consumers,  and are, therefore, relevant to monitoring competition in the industry.  Despite challenges and costs in gathering these data, such information  could help FCC better fulfill statutory reporting requirements. With  consumers increasing reliance on wireless services as their primary  telephone and Internet connection, more is needed to ensure that FCC and  the Congress have sufficient information to make policy decisions  concerning the wireless industry.
section_title: Recommendation for Executive Action
paragraphs: FCC should assess whether expanding its original data collection of  wireless industry inputs and outputs—such as prices, special access rates,  capital expenditures, and equipment costs—would help it better satisfy its  requirement to review competitive market conditions with respect to  commercial mobile services.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FCC for its review and comment. FCC  took no position on our recommendation but provided technical changes  which were incorporated as appropriate.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  from the date of this letter. The report also is available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the ways in which the industry has changed since 2000, we  identified and analyzed quantitative data from a commercial database  purchased from SNL Kagan, as well as data from the Bureau of Labor  Statistics, UBS Investment Research’s March 2010 Wireless 411 report,  and the year-end 2009 CTIA semiannual survey of wireless carriers. Due to  the proprietary nature of some information about the wireless industry  and specific carriers, we were limited in the data we could collect and  publish. Where there were data available from multiple sources, we  combined data (noted in the figures) to provide as complete a picture of  changes in the industry as possible. We first determined, however,  whether there were any inconsistencies between the data sets. Working  with a design methodologist we developed a decision rule to use when  attempting to combine data from the different data sets. If there were  inconsistencies but the percentage difference was below 10 percent, we  combined the data; if the difference exceeded 10 percent we did not use  the secondary data set. We took several steps to ensure the reliability of  the data including determining where the original data came from, and the  procedures and controls for ensuring the accuracy of the data available.  As our primary data source, we also obtained a copy of SNL Kagan’s data  collection procedures. As part of our data reliability assessment, we found  that the multiple data sets corroborated each other and all of the data to  be sufficiently reliable for our purposes. To complement the quantitative  data, we analyzed public comments submitted in response to the Federal  Communications Commission’s (FCC) August 2009 Notice of Inquiry on  the annual mobile wireless competition report.
To determine the implications of industry changes on consumers and  competition, as well as stakeholders’ perceptions of the effect of various  industry practices and regulatory policies, we interviewed a variety of  stakeholders. These stakeholders included FCC Wireless  Telecommunications, Wireline Competition, and Enforcement Bureau  officials, device manufacturers, tower companies, industry associations,  consumer groups, and academic and industry experts. We also interviewed  the top seven wireless carriers, by subscribers, smaller carriers operating  in or near our case study markets, and some regional carriers  recommended to us by experts and associations. These stakeholders are  listed table 1; this list does not include government officials with whom we  spoke, such as FCC representatives and local planning departments. Many  of these stakeholders, as well some our internal stakeholders, provided us  with relevant literature on the wireless industry, including studies of  spectrum policies and handset exclusivity.
We also conducted case studies in both an urban and rural cellular market  area in four states as well as the District of Columbia (see table 2). In these  case study markets, we spoke with regional representatives of some large  carriers and tower companies, city and county government officials, state  utility commissions and consumer groups, telecommunications and  economic development experts, and some small wireless carriers. Because  local jurisdictions do not have the authority to regulate wireless services,  our case study interviews primarily focused on tower permitting processes  and officials’ perceptions of the local manifestation of national trends in  areas such as consolidation and special access services.
The case study sites were selected based on the following criteria:    Population (to identify sparsely and densely populated areas);    Number of competing carriers (to identify areas with many and few    Number of carriers receiving Universal Service Fund High-Cost program  subsidies (to identify areas with few eligible telecommunications carriers  and many); and    Suggestions from experts (to utilize their understanding of unique  challenges in different regions of the country).
The case studies are illustrative examples that provide in-depth descriptive  information about challenges identified through other sources. Because  the case study selection is based on a nonprobability sample, they cannot  be generalized to all cellular market areas.
To determine the strategies employed to oversee and monitor competition,  we interviewed FCC Enforcement, Wireless, and Wireline Competition  Bureau officials about what strategies they use to monitor and oversee  competition. We also met with the Department of Justice Antitrust  Division officials to discuss their specific role in the oversight of  competition in the wireless industry. Furthermore, we interviewed the  stakeholders mentioned above about the impact of FCC’s current  strategies to oversee and monitor competition in the industry. In addition  to interviews, we reviewed relevant portions of the 1993 Omnibus Budget  Reconciliation Act and the 1996 Telecommunications Act.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michael Clements, Assistant  Director; Pedro Almoguera; Kyle Browning; Swati Deo; Colin Fallon; David  Hooper; Sara Ann Moessbauer; and George Quinn made key contributions  to this report.