The Apple iPhone 3GS (“S” for speed, although Apple doesn’t disclose a speed and the network is far more variable than the phone) was announced Monday, and with its launch came the annual discussion of the US mobile phone industry’s bizarre practices.
In case you had not noticed, the US is the one major mobile market (our little buddy Israel does it too) where the operators do not utilize the same network technologies. AT&T and T-Mobile use GSM, while Verizon and Sprint use CDMA. This is actually an improvement over the days when AT&T was on TDMA, Nextel was on iDEN, Voicestream was on GSM, Verizon and Sprint were on CDMA, but who is counting? In theory, the switch to 3G (originally called “UMTS”) was supposed to mark the convergence point in the two technologies (that’s the “universal” in Universal Mobile Telecommunications System), but the US network operators decided they would just as soon not have competition, so they never aligned their networks. Now we’re told it’s going to happen with 4G networks (LTE). Don’t count on it.
The proliferation of networks is either a strength or a weakness of the American system. In Europe, regulators very quickly forced all operators to work with GSM. Today – and, indeed, for more than a decade – all European phones are can operate on any European network. Furthermore, since GSM phones are based on removable SIM cards that tell the network who is calling, some people have multiple SIM cards (for example, one for work and one for personal, or one with very cheap night rates and high day rates, used only at night, and one with more consistent rates, used during the day).
In the US, where regulation is only for those not man enough to handle sewage in their food, the FCC allowed any network that functions technically to be built. So each operator built a proprietary network. Since each operator had to convince new customers not only to enter the mobile phone market but to make the specific leap to its network, the operators got in the habit of giving away the phones (network-specific, after all) and signing people to long-term contracts (to ensure people stuck around long enough to earn an economic return on the phone). Essentially, the subscriber acquisition cost in the US was several times higher than in Europe (all the same annoying TV ads, plus a new piece of consumer electronics).
A few odd things came out of this. While you might expect that the US would end up with a better network (all that competition among networks), it turned out that the technology is a pretty small part of what makes a good system. Since each operator was forced to cover the entire country on its own, nationwide coverage was dramatically slower than pan-European coverage (even adjusting for density and topography – sorry, Four Corners). Since the market for any given handset configuration was dramatically smaller than GSM (especially before AT&T switched over), all handsets in the US were inferior to phones in Europe. Either regulatory choice – GSM or CDMA – would have been better than no choice at all.
Beyond this, the game of I-give-you-a-phone, you-promise-to-use-my-network was about as perverse as baseball’s old reserve clause (it was absurd before number portability, but luckily the regulators eventually caught that one). Let’s think of the information asymmetry:
- There is no liquid retail market for phones, since phones are sold paired with networks. So customers have a poor idea of what the phone is “worth.”
- The carrier has extensive information about the useful life of a phone: unit-specific work on reliability and degradation, information on upcoming product introductions, population studies of loss/destruction. With the possible exception of the last one (you have a decent idea if you are prone to losing or breaking things), there is no way for a customer to have similar information.
- The carrier knows its future pricing plans and network offerings; in fact, it controls them. The customer does not.
Why would a reasonable mobile communications market develop under these circumstances? The carriers have the whip hand (especially since consolidation has driven the market towards a AT&T/Verizon duopoly). The customer needs to evaluate a purchase decision based on a two-year forecast of phone quality, network quality, recurring pricing plans, early termination fees, subsidized and unsubsidized unit costs…
Think of the alternative: the government mandates that in a relatively short period of time (2-3 years) all networks are interoperable. This is less difficult than it sounds; it took only around three years for AT&T to move from TDMA to GSM. Hell, offer stimulus funding in exchange for equity in the operators if they say it’s such a hurdle. At the merge date, require that any phone sold in the US be fully capable of operating on any network, and ban phone contracts. What happens?
Initially, handset prices go up – there is no network subsidy. But soon enough, competition works on them the same way it works on all other consumer electronics. Meanwhile, mobile networks now have only two variables on which to compete: product quality (calls, billing, coolness – whatever constitutes “quality” in the consumer’s eye) and one transparent, combined price. The market is healthier with regulation.
A similar example of greater efficiency through a reduction in variables is discussed in James Kwak’s post at Baseline on the credit card industry. By eliminating most fees (cash advance, forex, etc) you can force the credit card companies to compete on an integrated bill that it understandable: how much are you going to charge me for short term unsecured credit? Or, in the air travel industry, what does it mean to have a fare and then separately security charge, fuel surchages, etc?
The most obvious area for improvement, though, is right at the store: sales tax. Sales tax is not an optional extra. You cannot get to the register and choose not to pay it. So why aren’t merchants required by law to display the total price for an item? A small step for consumer protection, a giant leap for transparency in commerce.
[...] going to get rid of the private health insurance industry. But we can make for some far more transparent competition if we began to cut down the number of variables and allowed people to understand exactly what the [...]