Wireless Competition Report, Part 2: The Bad

In all fairness to the Commission, the mobile wireless market is undisputedly complex, and the Commission notes the difficulty in analyzing this market.  Yet, this is precisely the "Bad" part of the Commission's Wireless Competition Report: the information provided, to the extant it is relevant to competition in the mobile services market, is frequently presented in an incorrect, or otherwise misleading, manner.  Here are some areas of potential bias that deserve an "on the other hand."

Concentration.  Both the Commission, and the Department of Justice, have stated that the HHI is just a starting point for a competitive analysis.  The Commission makes a point that the "weighted average" HHI (relying on data not available for public inspection) is over the FCC's self-imposed "highly concentrated" threshold of 2800 for the first time since 2003.  Report, ¶51.  The FCC also notes that, in a merger review, it would have to see an HHI of 2800 with a delta of 100 before becoming concerned about concentration.  The current "weighted average" HHI is 2848 . . . phew (a delta of less than 100)!  While some of the concentration has occurred "organically", with the networks with the highest CapEx investment getting the most customers, much has undoubtedly come from mergers that the Commission found to be in the public interest.

The HHI the Commission used was based on a "weighted average" of market shares, based on past market share as defined by dollar sales revenues of the market participants.  However, the Merger Guidelines allow for HHI calculation by unit sales, relative share of capacity, or even a "bid model", which means that "[w]here all firms have, on a forward-looking basis, an equal likelihood of securing sales, the Agency will assign equal market shares." Guidelines § 1.41, n. 15. 

It seems like the mobile wireless service market is a market where all competitors would have, on a forward-looking basis, an equal likelihood of securing sales.  For example, while the FCC notes early in its Executive Summary, p.6, that "net adds" for the top two firms vs. "the next two" are asymmetrically high, a closer inspection reveals that only one of "the next two" top national firms experienced net losses over the last 2 years, p.9, and that firm's losses were only severe in 2008.  Moreover, absent data-skewing due to a merger, three of the four national firms had positive net adds over the last two years, and a much less dramatic disparity in percentage increases. 

Thus, considering that all firms seem to have an equal chance of gaining new sales, it would probably be safe to include the 5 firms listed in Table 4 of the Report (which cover around 75% of the population) in this "1/n" market share assignment, because "nationwide" firms do not appear to geographically price discriminate. Report, Table 10.  Whether one uses 5 firms, or 4, the HHI is appreciably less than 2800 (either 2000 with 5 firms, or 2500 with 4 firms).  Similarly, if one were to take capacity as being the defining factor for competitive advantage, the HHI would still come out less than 2800 (top 5 firms have 80% of nationwide spectrum).

HHI Does Not Indicate Diminished Market Performance At An Index of 2800.
Appendix C, Table C-3 of the Report lists 14 markets with the highest penetration rates in the country (from 98% to105%).  These are the markets characterized by the highest "output" levels (high output is a performance characteristic of competitive markets).  Of these, only 6 were below 2800, and only 2 were below 2500.  Moreover, the number of wireless-only households continues to climb (now over 20%).  Report, Chart 46.

Exclusion of MVNOs. If the Commission is going to use sales of facilities based mobile wireless providers in its HHI calculation, it is only logical to include "nationwide" MVNO sales as well.  Why?  Because these carriers are getting sales and satisfying consumer demand.  The success of the MVNOs indicates competitive market performance, because these sales represent excess capacity that is being put into the market, and not being withheld from the market in order to increase prices. 

The Commission concedes that Tracfone would be the 5th largest nationwide provider, and that Tracfone's "Straight Talk" offer is carried on the Verizon Wireless network. Report ¶101.  The Commission further notes that Verizon Wireless is the leader in industry performance.  Report, ¶223, n.634.  If Verizon Wireless is enabling an MVNO to come out with a $30 prepaid "all you can eat" voice product, and a $45 data product, and MVNO sales accounted for almost half of Verizon's net adds in the 4th quarter '09, then why would the FCC want to misleadingly use these MVNO sales "against" Verizon?  Sprint has a CDMA network, too.  And, with their 4G rollout, they should have just as much chance as Verizon of picking up Tracfone's contract if Verizon fails to provide superlative service.

Profitability. In order to justify "profitability" analyses as evidence of (or even relvant to) "market power", the FCC uses a "perfect competition" (i.e., price should equal marginal cost) definition of market power in ¶12 of the Report ("the ability to profitably charge prices above cost for a sustained period of time"), but later, buried in ¶55, the FCC uses the correct definition of market power for a firm competing in a "real world" less-than-perfectly-competitive market ("the ability to charge prices above the competitive level for a sustained period of time"), which is also the definition used by the DoJ and FTC. 

CapEx: Industry Size/Investment.  The Commission clearly thinks that industry, and firm-specific, CapEx investment over the years seems to have some relationship with the level of competition in the industry.  While it is not surprising that the two largest firms also have the highest levels of CapEx, it is unclear whether their investment gave them a better product with which to get more customers, or whether their large customer bases have forced greater CapEx in order to maintain service levels. Report, Chart 33.  However, it is never clear from the Commission's discussion what, if anything, these figures mean.  For example, if you are a carrier that is not investing in CapEx are you at over-capacity, or, are you losing customers due to poor customer experience?  If you are such a firm, would increasing CapEx get you a better network/level of service? 

Bottom Line:  There are significant areas of the Report that could be interpreted as implying that a reader could reasonably conclude that the wireless mobile services market is not competitive, and is becoming less so.  If the Commission explicitly stated that this was its assessment in its Report to Congress, then people could argue about the conclusions.  However, the Commission's decision to not include certain information, or to include concededly-irrelevant information, and to present this information in a manner that implies only one conclusion, can only be regarded as troubling.