- The Washington Times - Friday, August 7, 2009

ANALYSIS/OPINION:

Nearly 60 years ago, U.S. Supreme Court Justice Felix Frankfurter warned policymakers that they should not view competition in an “abstract, sterile way.” So when major news outlets recently reported that the Department of Justice might be launching a broad antitrust inquiry into common business practices of telecom companies — particularly into the highly competitive wireless sector — one has to wonder whether consumers will end up with the short end of the stick.

In particular, Justice purportedly is concerned with common practices in an industry that is producing a high degree of innovation at competitive prices for consumers. While a vigorous antitrust enforcement provides an important societal function, it is difficult to see how any of the conduct of which the industry is accused is a violation of the U.S. antitrust laws when applied to existing market conditions.

And what are the existing market conditions? Americans pay the lowest per-minute price for wireless calls in the industrialized world — a nickel. Moreover, more than half of us can choose from at least five wireless carriers, and 95 percent of us have a choice of at least three carriers.

If anything, there is a real possibility that the Department of Justice’s efforts in this area could actually backfire and result in higher prices for consumers, less innovation and fewer carriers. To wit, exclusive handset arrangements in a competitive market — epitomized by arrangements such as AT&T’s exclusive distribution contract for Apple’s iPhone; Verizon’s exclusive for the BlackBerry Storm, Sprint’s exclusive contract for the Palm Pre and T-Mobile’s exclusive contract for the Sidekick — are not generally unlawful under the antitrust laws. Pursuant to these arrangements, carriers provide the risk capital, marketing budgets and distribution channels necessary to design, manufacture and distribute new mobile devices.

This virtuous cycle of innovation and investment provides consumers with the newest mobile innovations at affordable prices. Indeed, consumers today can buy one of the most advanced, innovative devices on the market — the iPhone — for as low as $99. Moreover, while each of these firms may have an exclusive for a particular “hot” smartphone, all of these firms sell a wide variety of other phones with various service contracts and individualized pricing plans.

However, if exclusive contracts are declared unlawful, then there would be dire consequences for consumers: Not only would the incentive to innovate the next best smartphone be attenuated, but the price of phones will also rise and competition will likely turn exclusively to price. While an aggressive price war may sound great to a politician, it is lousy for a business characterized by high fixed and sunk costs like mobile communications because a price war shrinks overall industry profits and, by extension, the equilibrium number of firms the market can support.

As such, the government’s manipulation of the wireless industry may end up reducing, rather than increasing, competition by forcing one or more carriers to go bust and force more job losses.

The same could be said if the Department of Justice were to bring a case against the use of early termination fees for mobile phone contracts. Consumers basically have three ways they can buy a phone: On one extreme they can buy a brand new phone at full price from either the manufacturer or the carrier; on the other extreme they can go into the secondary market (e.g. eBay) and buy a lower-priced used phone.

However, in exchange for signing a contract with the carrier, they can get a brand new phone at less than full price — an option most folks generally prefer.

The point is consumers have a choice. However, if the Department of Justice successfully enjoins companies from offering these popular subsidy programs to American consumers, U.S. consumers are going to pay a lot more for their phones with very little, if any, reduction in the price of their service plan.

And what about the purportedly high cost of text messaging? Not only has the effective rate per message dropped nearly 70 percent since January 2007, but every single carrier has affordable plans for small, medium and unlimited text messaging usage. In other words, just like every other competitive market where volume discounts are common, the more you buy the more you save.

Moreover, focusing on a single product in a multiproduct setting makes little analytical sense and is not probative of anything. Despite the statements of gloom and doom from radical consumer advocates who never met a market they didn’t want to regulate, competition is working extremely well for consumers: Firms are investing billions into their networks and developing innovative new products, while Americans are benefiting from a wide range of products and service plans to suit their individual needs.

For this reason, any government intervention must pass through a stringent cost/benefit test. Let us hope the Antitrust Division sees it this way as well.

Lawrence J. Spiwak is president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a nonprofit research institute based in Washington. The views expressed in this article are his own.

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