DOJ Says Wireless May Offer Limited Competition in Broadband Market

“Wireless may be a very attractive alternative for consumers who greatly value mobility and for consumers who do not place much value on the highest speeds (e.g., consumers who do not want advanced services, such as HD video streaming),” the department said. “It appears to offer the most promising prospect for additional competition in areas where user density or other factors are likely to limit the construction of additional broadband wireline infrastructure.” The department warned, “we do not yet know … whether wireless broadband offerings will be able to exert a significant degree of competitive constraint on cable modem, DSL or fiber optic-based services.”

Emerging 4G services may offer “an alternative sufficient to lead a significant set of customers to elect a wireless rather than wireline broadband service,” the department said. It cited the success of Clearwire, which has begun WiMAX service in about 25 markets, and Verizon Wireless’s commitment to begin offering LTE technology this year. “Within the next several years, however, the limits of wireless broadband will be tested, including the actual delivered speeds, adequacy of in-building coverage, and ability of the networks to accommodate large numbers of users,” Justice said. “In addition, unanswered questions remain as to whether these services will be offered at prices and on terms that make them attractive to wireline users.”

Spectrum constraints are a “fundamental obstacle” that should be addressed by the FCC, the filing said. The department appeared to agree with CTIA, CEA and wireless carriers which all portray the lack of adequate spectrum as the biggest obstacle wireless carriers face in competing with wireline services. Putting more spectrum into play could drive down the cost of wireless broadband, Justice said. “Reallocating spectrum that is being underutilized would encourage the deployment of wireless services and could help to make such services more competitive with wireline offerings,” the department said. “We urge the Commission to give priority to making more spectrum available to wireless broadband providers so as to maximize their potential to compete against the established wireline ones.” But Justice warned that auctions pose their own set of risks. In theory, spectrum licenses would be purchased by carriers who place the most value on them, the filing said. An auction “can go wrong in the presence of strong wireline or wireless incumbents” who see the most value in freezing other competitors out of the market, which it called “foreclosure value.”

“Absent evidence that the incumbents have a high use value (e.g., they are already using their existing spectrum licenses effectively and their networks are still capacity constrained), we would normally expect the highest use value for new spectrum to come from actual or potential rivals who are strong in adjacent product markets and/or adjacent geographic markets and also have relevant expertise,” the department said.

Justice also stressed the importance of “transparency” in broadband offerings, so subscribers know what they're getting for their money. “The Commission is uniquely situated to ensure more effective public disclosure of such data and should use its authority to do so,” the filing said. “To the extent is does so, private parties, non-profits, and researchers can creatively use such information to provide not only greater awareness of the options available, but also valuable insights and analyses.”

Justice also warned against imposing regulation too quickly even in markets that are not currently competitive. “Although enacting some form of regulation to prevent certain providers from exercising monopoly power may be tempting with regard to such areas, care must be taken to avoid stifling the infrastructure investments needed to expand broadband access,” Justice said. “In particular, price regulation would be appropriate only where necessary to protect consumers from the exercise of monopoly power and where such regulation would not stifle incentives to invest in infrastructure deployment.” The department said it’s not “especially helpful” for the FCC to develop “some abstract notion” of whether broadband markets are competitive. “Such a dichotomy makes little sense in the presence of large economies of scale, which preclude having many small suppliers and thus often lead to oligopolistic market structures,” it said. “The operative question in competition policy is whether there are policy levers that can be used to produce superior outcomes, not whether the market resembles the textbook model of perfect competition.”

The filing is signed by Christine Varney, assistant attorney general in charge of the Antitrust Division, Philip Weiser, deputy assistant attorney general and former professor of law and telecommunications at the University of Colorado, Gene Kimmelman, chief counsel for the division and former lobbyist for Consumers Union, and others.

NTIA picked up on many of Justice’s arguments in a separate letter to the FCC, stating administration policy. “The economics of providing wireline broadband Internet access service suggest that market forces alone may not produce additional entry,” NTIA said. “A key question looking forward is whether emerging ‘fourth generation’ wireless services will have price and performance characteristics that might make them a viable alternative to wireline services for a significant number of customers.” The next few years “will test the limits of wireless broadband, including the adequacy of in-building coverage and the ability of wireless networks to accommodate large numbers of data-intensive users,” NTIA said.

NTIA agreed that making more spectrum available is critical. “The Administration supports exploring both commercial and government spectrum available for reallocation, and favors a spectrum inventory to determine how radio frequencies are currently being used and by whom,” NTIA said. “The Commission and NTIA also should explore ways to create incentives for more efficient use of limited spectrum resources, such as dynamic or opportunistic frequency sharing arrangements in both licensed and unlicensed uses.”

NTIA also counseled against price regulation. “We urge the Commission to examine what in many areas of the country is at best a duopoly market and to consider what, if any, level of regulation may be appropriate to govern the behavior of duopolists. In so doing, however, the Commission should eschew price regulation, whether as a means of controlling retail rates or as a means of giving entrants access to the incumbents’ broadband facilities. In view of the difficulty that government has in determining efficient prices, price regulation is likely to stifle investment in broadband infrastructure or to discourage broadband service innovation.”

“Impending” technological convergence means concerns about monopolies will soon disappear, said Professor Christopher Yoo of the University of Pennsylvania in a paper released Monday by the Free State Foundation. “The fact that transmission technologies that once were separate now compete in the same product markets creates intermodal competition. Although such competition is likely to remain oligopolistic, it may nonetheless be sufficiently vigorous to protect consumers better than the imperfect process of agency regulation.”