April 1, 2013 12:04 PM16th Wireless Competition Report. Among the significant data collected and presented in this Report, there is one important, and growing, indicator of wireless competition that the FCC desperately needs to better understand: wholesale wireless competition.
Based on my experience at COMPTEL, I know that a healthy wholesale market is one big indicator of effective retail competition. Because, hey, anytime a retail competitor doesn't have to rely on regulatory compulsion to obtain wholesale access, that's a pretty good indicator that the facilities-based carrier doesn't think it has a whole lot of market power to protect.
The good news is in this Report is that the wholesale wireless segment is getting "healthier" at a faster rate than any market segment. While still a relatively small number of total wireless connections, wholesale connections grew at the fastest rate of any service type measured by the Commission--almost tripling in the 2 year period 4Q 2009-4 Q 2011. Rpt. para. 250.
The FCC's numbers are telling us that wholesale competition is on fire. But when you try to figure out what this really means, well . . . the Commission doesn't seem too sure.
Understanding Wholesale Wireless Competition
The FCC introduces us to the wholesale market in paras. 29-36, and it explains how it uses wholesale data for purposes of calculating market concentration in paras. 53, and 57. The largest use of wholesale wireless service is by mobile virtual network operators (MVNOs). These service providers rely on the facilities of other carriers for their mobile service, but handle every other aspect of the customer's account themselves.
Because wholesale wireless relationships are voluntary, we have to presume that both the buyer and the seller expect the relationship to be beneficial. That presumption alone, though, does not tell us too much about how wholesale sales affect retail competition. According to carriers, such as Verizon, a carrier's relationship with its MVNOs is fundamentally "arm's length." Report n. 102. And, why wouldn't it be? Wholesaling at arm's length has long been a routine part of the wired telecommunications world.
Wholesale Confusion--Some Say . . .
Well, the FCC's not so sure. Take a good look at the FCC's explanation of the wholesale industry (paras. 29-36), read all the footnotes, and it becomes clear that no less than two academic articles (cited in n. 109), and one report by an "industry analyst" (providing his "predictions" for 2011) (n. 110) characterize MVNO "competition" as something less than the real thing. The only one of these sources freely available on the Internet is the report by the analyst for the Yankee Group, available here.
The Yankee Group report is a relatively short article with some of the analyst's "4G" predictions for 2011, and a brief summary of the analyst's thinking in making the prediction. Although, the "predictions" don't seem to be much more than the author's personal opinions, the FCC cites the explanation behind a single prediction in order to characterize the nature of MVNO/network operator competition.
For example, in n. 110, the FCC cites this document as the basis for this insightful gem, "Like a small bird on an elephant's back, if an MVNO can establish a symbiotic relationship with its host and provide some direct commercial benefits, it can flourish." Yankee Group at 7. See also, n.123 "[I]t's critical the MVNO does not compete to any meaningful degree with the host." Id. MVNOs are also cautioned to never look the host carrier directly in the eyes, as this is seen as a sign of aggression by network operators.
With insights like these, I'm sure readers would like to know how this analyst's "predictions" for 2011 worked out. Well, the prediction backed up by the insights quoted above was this: "MVNO Hype Will Build, But Most of It Will Lead to Nothing."
In reality? MVNOs were able to increase connections by 182% between Q 4, 2010 (when the Yankee Group predictions were released) and Q 4, 2011. FCC Rpt, Chart 13, p. 159. This was the fastest one year growth in wholesale connections to date. Suck it, Yankee Group.
But, Maybe Not?
The FCC seems to regard MVNO competition as somewhere between the "franchisee" characterization of the non-industry sources, and the "real thing" characterization of some carriers. See, e.g., n. 125 where AT&T's assertion that competition between carriers for a portion of TracFone's 19 million customers has led to lower wholesale and retail prices is balanced against this quote from a 3 year old academic paper:
It is found that MNOs host MVNOs if and only if the latter do not exert a competitive constraint on MNOs' retail businesses. Thus, absent access regulation, MVNO entry may happen but is unlikely to reduce consumer prices.
Report, para. 35, n. 125. The problem here is not that the carrier disagrees with the theoreticians, or even that the theoreticians' point doesn't make a whole lot of sense for any wholesaler with less than a 50% retail share. No, the problem is that the FCC does not seem to have an opinion as to which is more credible.
* * * * *If you type the term "industry analyst reports" as a search term in the Report, it turns up four results. Each and every instance is the Commission relying on "industry analyst reports" as an excuse for why it is unable to account for MVNO competition. There is no excuse for the Commission not to try to understand and account for the competition provided by MVNOs in its next Wireless Competition Report. The public needs for the Commission to be the "expert agency" on all things wireless--but especially on the fastest growing customer segment in the wireless industry.