Perspectives from FSF Scholars
February 26, 2019
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FCC Report Indicates a Competitive Communications Marketplace: Future Reports Should Make Cross-Platform Substitution Findings
by
Seth Cooper
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[Below is the
Introduction and Summary
to this latest FSF
Perspectives
. A PDF version of the complete
Perspectives
is
here
.]
Introduction and Summary
On December 26, 2018, the FCC released its initial
Communications Marketplace Report
. The report is the first to include data for video, mobile, satellite, and other services – including broadband services. A multiplicity of data points in the report reveal the innovative and competitive state of the communications market. The report also contains useful descriptions of intermodal competition within specific service sectors, along with insights about consumer choices among different technology platforms. However, the report comes up short by not offering any findings regarding the substitutability of cross-platform services such as wireless and wireline broadband.
To be sure, the FCC deserves credit for assembling this first consolidated report. However, the Commission should do more. The FCC's 2020
Communications Marketplace Report
, as well as its 2019
Broadband Deployment Progress Report
now pending a vote before the Commissioners, should offer findings about the substitutability or potential substitutability of different technology and service platforms, including wireless and wireline broadband Internet access services. And competition analyses contained in future
Marketplace
and
Broadband Deployment
reports should include the effects of cross-platform rivalries on pricing and consumer welfare.
In terms of the communications market's innovative and competitive conditions, report data indicates that at year-end 2017, about 92% of the U.S. population lived in census blocks with LTE coverage by at least four facilities-based mobile service providers. From first-half 2016 through first-half 2018, median LTE download speed rose from 12.8 Mbps to 19.5 Mbps, up 52%. Also, the report cited strong indicators of declining mobile prices in 2017. For instance, the Annual Wireless Telephone Services Consumer Price Index (CPI) decreased 11%. And average revenue per MB decreased approximately 10% to 29%.
For video services, the report found that at the end of 2017 all or nearly all U.S. consumers have access to three competing multi-channel video programming distributors (MVPDs). Some consumers had access to four. Furthermore, MVPDs lost subscribers to competing broadcast TV and – especially – to online video distributor (OVD) services. Whereas MVPDs lost 3.6 million video subscribers in 2017, a drop to 94 million, 16.6 million TV households (13.9%) relied exclusively on over-the-air (OTA) TV broadcast signals, up from 15.7 million TV households (13.2%) in 2017. Top three OVDs Amazon Prime, Netflix, and Hulu exceeded 125 million subscriptions in 2017, up from about 103 million in 2016. And "Virtual MVPDs" such as SlingTV and DIRECTV NOW climbed from 2.2 million subscribers to 4.8 million.
Additionally, fixed broadband deployment and speeds increased.
As of December 2017, fixed terrestrial service of 10 Mbps/1 Mbps was deployed to 97.3% of all Americans, up from 95.8% in 2016, and fixed terrestrial 50 Mbps/5 Mbps service was deployed to 92.3% of the population, up from 90.3% in 2016. Consumers also gained access to both fixed and mobile broadband in 2017.
About 306 million Americans, or 94% of the population, were covered by
both
25 Mbps/3 Mbps fixed terrestrial service and mobile LTE with a minimum advertised speed of 5 Mbps/1 Mbps, up from 91.7% in 2016. Plus "nearly all areas in the country have access to satellite broadband as an alternative" at both the 10 Mbps/1 Mbps and 25 Mbps/3 Mbps levels.
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The RAY BAUM's Act of 2018 relieved the FCC of responsibility to annually prepare separate reports on competition in markets for wireless, video, broadband, satellite, and other services. Instead, the Act requires the FCC to biennially prepare a single combined report that "shall consider… the effect of intermodal competition." A key benefit of this change in reporting is to facilitate analyses that better capture increasing cross-platform rivalries in communications services enabled by IP-based network technologies.
The report did provide some insights regarding intermodal competition for video services. For instance, it recognized: "The trend for MVPDs… is downward, while the trend for virtual MVPDs, OVDs offering VOD content, and over-the-air broadcast service is upward." However, the report declined make any findings as to whether video services such as MVPD services and OVD services – or OTA broadcast TV in combination with OVD services – are substitutes, potential substitutes, or even potential partial substitutes. Some finding regarding substitutability seems to follow from report data examining so-called "cord-cutting" of MVPD services, significant upticks in OVD services, and renewed consumer interest in OTA broadcast TV.
Observations regarding intermodal competition for voice services were also included in the report. For example,
"fixed retail switched-access lines declined over the past three years at a compound annual growth rate of 11%, while interconnected VoIP subscriptions increased a compound annual growth rate of 8%" with the latter outnumbering the former 64 million to 55 million in June 2017. And Centers for Disease Control and Prevention (CDC) survey data indicates 54% of U.S. households were wireless-only as of December 2017. Yet the report made no substitution findings regarding voice services.
The report did cite some data evidence of the substitutability of wireless and wireline broadband Internet access services, such as Pew's January 2018 report that
one in five American adults are "smartphone-only" Internet users and the U.S. Census Bureau's survey finding that, as of 2017, 11% of U.S. households subscribed to a cellular data plan with no other type of Internet subscription.
However, the report made
"no finding with respect to whether fixed and mobile broadband services are competitive substitutes." Instead, it invoked the Commission's
2018 Broadband Deployment Report
finding that "there are 'salient differences between the two technologies' and that mobile services are not 'currently full substitutes for fixed services.'"
It is clear that services provided through different technologies can serve as substitutes. As Professor Michael E. Porter explained
in the 2004 edition of his book,
Competitive Advantage,
identification of substitute services involves ascertaining services that perform the same or similar functions. Porter contrasted "the simplest form of substitution," in which "one product substitutes for another in performing the same function in the same buyer value activity" with "the more complex forms of substitution," in which "a substitute performs a different range of functions than an industry's product and/or affects buyer activities in a different way."
Both wireless and wireline services offer broadband Internet access, even though they rely on different network architectures, particularly over the last mile to consumers. "In identifying substitutes," Porter wrote, "it is necessary to include products that can perform functions in addition to those of an industry's product, as well as products that can perform any significant function among those the industry's product can perform." Importantly, wireless services can perform the same significant function – broadband Internet access – as wireline services.
By emphasizing what it calls "salient differences" between wireless and wireline broadband services, the Commission mistakenly stresses technological differences over functional similarities. Moreover, report data regarding smartphone-only Internet users indicates some consumers do, in fact, regard wireless broadband services as substitutes for wireline.
Deployment of 5G networks will substantially increase the availability and effects of wireless substitutability for wireline. According to Accenture Strategy,
5G networks promise average speeds about ten times LTE networks, with peak speeds exceeding LTE perhaps 100 times. Commissioner Brendan Carr recognized 5G's implications for wireless substitutability in his statement accompanying the report: "[T]
he many platforms we regulate are now locked in competition with each other. This only will increase with 5G." Consider also AT&T CEO and Chairman Randall Stephenson's statement to
media
and
investors in January: "Over time, three-to five-year time horizon, unequivocally, 5G will serve as a fixed broadband replacement product… I am very convinced that that will be the case."
Indeed, wireless/wireline substitution will become increasingly apparent as providers roll out 5G offerings.
AT&T's 5G deployment is in its early stages. Additionally,
reports
describe
Verizon's 5G Home
offering, launched in October 2018, as a replacement for residential high-speed broadband services. And if approved by the FCC and Department of Justice, the T-Mobile/Sprint merger will provide an accelerated path to a nationwide 5G network that will provide stiff competition to AT&T and Verizon.
In view of the competitive data trends, the next
Broadband Deployment
report and the pending
Communications Marketplace Report
should
include findings for the substitutability of cross-platform services and include analyses of their effects on prices and output.
* Seth L. Cooper is a Senior Fellow of the Free State Foundation, an independent
,
nonpartisan free market-oriented think tank located in Rockville, Maryland.
Read the complete
Perspectives
here
.
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here,
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here
.
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