DSL Prime Editorial: Enable $19.95 Per Month Cellular

Recent disasters have shown that people die when they cannot communicate in an emergency.

by Dave Burstein of DSL Prime and Future of TV [December 5, 2005]

DSL Prime Editorial:
Drop Mobile to $19.95 with Auction Rules
Change the whole market at minimal cost
Reserving a small bit of spectrum auction for a $19.95 basic service could dramatically reduce the price of mobile service. Several countries charge half of the U.S. $40 to $60 basic rates. People die because they can't communicate in an emergency, making bringing down basic costs a priority. Fortunately, in wireless the costs to build a network have come down so much that much lower consumer prices can be profitable. Perfectly adequate cellphones from Motorola and others now sell for less than $50. Base stations and other network components have also come down dramatically in cost, with companies like Ericsson and Nokia bidding lower than Huawei to selected customers.

Consider offering perhaps 12 MHz of the spectrum in the next auction with the buyer required to offer a reasonable quality $19.95 wireless service. The bids for that spectrum might be a little lower, but the consumer surplus would make up the public loss ten times over within a few years.

International experience proves it's possible to offer, say, 400 daytime minutes, 1500 evening and weekend, and 200 short messages at that kind of price. The other typical abuses of cell phone companies can be restricted; the auction requirements could prohibit phony ad pricing with fees in the fine print, inaccurate coverage maps, phones that become worthless if you switch service, and similar. A few other changes in rules, especially eliminating the cell site connection monopoly of the incumbents, would give American consumers a new choice. Of course, the auction winner should not be allowed to prohibit other services with minimal interference, including ultra wideband and well-defined cognitive radio.

Consider the advantages. Significant new competition without a municipal build or regulations imposed on anyone except a willing bidder. The existing companies will probably choose to lower prices to compete, so a greater consumer surplus will result. Since most of the spectrum was awarded in the U.S. without charge, especially to the Bells, no one can complain a new carrier has an "unfair" advantage. Verizon is carrying $40B as the book value of spectrum, but only a fraction of that was paid to the government in an auction.

In the U.S., Washington doesn't realize that how profoundly wrong it was to approve the Sprint Nextel merger, as well as SBC/AT&T Wireless before that.

Wall Street knows better. David Janazzo and Glen Campbell of Merrill Lynch published an important analysis of wireless market structure. What jumps out from their work is the "clear correlation between margins in a market and the number of operators." In "a market with two or three well-behaved operators with market shares that are similar ... oligopoly pricing should prevail." They plot a 5 percent difference in EBIDTA margins if a market reduces from 6 to 4 competitors. That corresponds to what I've been observing. With 6 carriers, wireless pricing was far more aggressive. With the Cingular/AT&T and now Sprint/Nextel deals, margins and profitability have improved dramatically. That's been the driving force in the bottom line of the Bells the last year.

A policy of a designated competitor with a price cap makes sense anywhere wireless competition is too weak. Before the news of the $600 competition fines hit, I wrote, "the French wireless market, for example, suggests de facto collaboration to hold prices high" based on another Merrill analysis. Time to bust some cartels.

Copyright 2005 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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