Wireless Net Neutrality, Beta 1.1

I am finished the beta draft of Wireless Net Neutrality.

The paper examines the practices of wireless carriers with an eye toward their effects on consumers and innovation. The intro is posted after the jump.   This paper is being published by the New America Foundation, and we will release the paper next Wednesday, Feb. 14, in Washington DC, at the FTC hearings.

Get the full text here.

Wireless Net Neutrality

Tim Wu†

Over the next decade, regulators will spend increasing time on the conflicts between the private interests of the wireless industry and the public’s interest in the best uses of its spectrum. This report examines the practices of the wireless industry with an eye toward understanding their influence on innovation and consumer welfare.

In many respects the mobile wireless market is and remains a wonder. Thanks to both policy and technological innovations, devices that were science fiction thirty years ago are now widely available. Over the last decade, wireless mobile has been an “infant industry,” attempting to achieve economies of scale. That period is over: today, in the United States, there are over 200 million mobile subscribers, and mobile revenues are over $100 billion. As the industry and platform mature, the wireless industry warrants a new look.

This report finds a mixed picture. The wireless industry, over the last decade, has succeeded in bringing wireless telephony at competitive prices to the American public. Yet at the same time we also find the wireless carriers aggressively controlling product design and innovation in the equipment and application markets, to the detriment of consumers. Their policies, in the wired world, would be considered outrageous, in some cases illegal, and in some cases simply misguided.

Four areas warrant particular attention:

1. Network Attachments. Carriers exercise excessive control over what devices may be used on the public’s wireless spectrum. The carriers place strong controls over “foreign attachments,” like the AT&T of the 1950s. These controls continue to affect the innovation and development of new devices for wireless networks.

2. Product Design and Feature Crippling. By controlling entry, carriers are in a position to exercise strong control over the design of mobile equipment. They have used that power to force equipment developers to omit or cripple many consumer-friendly features, and also forced manufacturers to include technologies, like “walled garden” internet access, that neither equipment developers nor consumers want. Finally, through under-disclosed “phone-locking,” the U.S. carriers disable the ability of phones to work on more than one network. A list of features that carriers have blocked, crippled, modified or made difficult to use, at one time or another include:

* Call timers on telephones
* WiFi technology
* Bluetooth technology
* GPS Services
* Advanced SMS services
* Internet Browsers
* Easy Photo file transfer capabilities
* Easy Sound file transfer capabilities
* Email clients
* SIM Card Mobility

3. Discriminatory Broadband Services – In recent years, under the banner of “3G,” carriers have begun to offer wireless broadband services that compete with WiFi services and may competee with cable and DSL broadband services. However, the services are offered pursuant to usage restrictions that violate basic network neutrality rules, and pursuant to undisclosed bandwidth limits.

Most striking is Verizon Wireless, which prominently advertises “unlimited” data services. However it and other carriers offer broadband service pursuant to both bandwidth limits, and contractual limits that bar routine uses of the internet, including bans on downloading music from legitimate sites like iTunes, the use of Voice over IP, and on the use of sites like YouTube.

4. Application Stall – Mobile application development is by nature technically challenging. However, the carriers have not helped. They have imposed excessive burdens and conditions on application entry in the wireless application market, stalling what might otherwise be a powerful input into the U.S. economy. In the words of one developer, “there is really no way to write applications for these things.” The mobile application environment is today, in the words of one developer, “a tarpit of misery, pain and destruction.”

Most of the carriers adopt similar practices. However, in each area, there are variations between the four largest carriers: AT&T, Verizon Wireless, Sprint-Nextel, and T-Mobile. Speaking generally, Verizon Wireless and AT&T offer the most restrictive policies; Sprint is slightly less restrictive. The fourth and smallest competitor, T-Mobile, tends to be the least restrictive of consumers and application developers. The reliance on a fourth competitor for serious variation in industry practice must be kept in mind when considering any future consolidation.

The report makes four major recommendations:

1. Carterfone for the wireless world. The basic, and highly successful Carterfone rules in the wired world allow any consumer to attach any safe device to his or her phone line through a standardized jack. The same rule for wireless networks would liberate device innovation in the wireless world, and free equipment designers.

2. Basic Network Neutrality Rules. Today, the FCC has ordered broadband carriers to respect basic principles of network neutrality. Consumers have the basic right to use the applications of their choice and view the content of their choice. Wireless carriers who offer broadband services should respect the same basic freedoms.

3. Disclosure. Consumer disclosure is a major problem in the wireless world, and better choices come from more information. Carriers should disclose, fully, prominently, and in plain English, the following information:

* Limits on bandwidth usage;
* Devices that are locked to a single network;
* Important limitations placed on features;

In addition to the disclosure of areas lacking coverage and rate-plan information.

3. Standardize Application Platforms. The industry should re-evaluate its “walled garden” approach to application development, and work together to create clear and unified standards to which developers can work. Application development for mobile devices is stalled, and it is in the carriers’ own interest to try and improve the development environment.

* * *

In Washington D.C., the wireless world is sometimes described as a nirvana for consumers bought on by competition and enlightened government policy. Some consumers and groups depict a very different story: a “cell hell” of “dropped calls, dead zones, billing errors, and unexpected fees and charges.” The truth lies somewhere in the middle. Relative to its history, the state of the wireless industry is greatly improved. Since the 1990s, when the Federal Communications Commission began to auction wireless spectrum suitable for telephones and other devices, wireless telephony has taken off. But now, in the late 00s, the industry is no longer an infant. As mobile platforms mature, and as consumer markets reach saturation, the state of the wireless world warrants greater scrutiny.

The later parts of this paper addresses several economic puzzles raised by this study of the mobile wireless industry. One puzzle is this: why would a carrier want to cripple products in the first place? Companies usually like to sell the best product possible. If a phone with WiFi is a better phone, why not sell that?

This paper introduces three possible explanations. The first is that the carriers are engaging in a form of price discrimination—crippling products so that they might sell the crippled product at a cheaper price to poorer customers. Crippling so practiced can be defended as a matter of social welfare. The problem with this explanation is that the carriers do not also make available a fully capable product for a higher price. Instead, we see half a price-discrimination strategy: the cripple, but no superman.

That suggests two other explanations. First, the carriers may be acting to protect existing revenue streams. If a feature like WiFi might endanger 3G or voice revenue, the carrier may block it to protect its income. That behavior is an example of a negative spillover or externality: behavior that helps the carrier, but hurts society.

Second, in some instances the carriers may simply be making the wrong decisions. For example, when it comes to software development, the carriers and some equipment manufacturers have pursued a quixotic strategy. They have failed to standardize, and have placed controls on software development that reflect an interest in maximizing control over any services that arise. That strategy, according to many developers, has inhibited the development of a strong mobile software market. Companies and industries do make mistakes, and the current application strategy may simply be an error.

Next, some observers argue that the oligopoly structure of the wireless market makes scrutiny of the industry unnecessary, because any anti-competitive or anti-consumer behavior will be quickly self-correcting. Boiled down: there is no cell phone monopoly, and therefore attention to these issues is unwarranted. Part III of the paper addresses these issues directly. In short, the carrier market simply not an open market. Entry is not impossible, but under current conditions requires multi-billion investments. The consequence is a spectrum-based oligopoly, not the highly competitive market that is sometimes portrayed. The wireless market may be competitive by the standards of the telecommunications industry and other regulated industries. But it is not like the market for blue jeans or vodka, and it is a mistake to so pretend.

If it is accepted that the wireless industry warrants attention, several important justifications are usually raised for the industry’s practices. It is often asserted that industry practices are made necessary by spectrum scarcity and the need to maintain network security. These arguments are important—no one wants a world of blocked calls or widespread identity theft practiced through cell networks. Yet, critically, the arguments cannot be accepted as a blanket justification for any and all carrier practices. Just as the network security and quality claims made by AT&T for much of the 20th century, were eventually questioned, the claims today made by the carriers must be examined far more closely.

The historic parallel is instructive. Wired voice telephone networks had more or less reached their full potential under AT&T by the 1960s. To reach the next stage, the most important steps were not technological but deregulatory—destroying impediments created by AT&T that restricted innovation and competition. To reach the “next stage” in wireless communications, the most important step may be opening the networks to true competitive entry. This paper specifies how that could happen.

One point should be clear. This paper is written to examine what carrier practices may be harmful for consumers or society. It is intended to shed light on practices that might, for one thing, be dissipated by consumer pressure and competition, and to raise questions for the carriers themselves. It is absolutely not a call for comprehensive regulation or nationalization of the wireless industry. The perspective is that regulation, if necessary, should be a last resort.

About wu

Visit www.timwu.org for more information.
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