Cellular national phone plan

Questions about the competitiveness of the cellular industry--a subject of continuing concern--were once again raised by cellular resellers in a recent letter to Communications Subcommittee Chairman Sen. Daniel Inouye (D-Hawaii). The National Cellular Resellers Association (NCRA) believe that more than two cellular operators in each market would create a more competitive marketplace and benefit cellular consumers. To support its case, NCRA said the FCC did not release a report that allegedly concluded "by bringing greater competition to the [cellular] industry, service rates could be reduced by as much as 25 percent."

The alleged report does not exist. The FCC's unreleased report turned out to be a theoretical analysis paper presented at the Annenberg Center in Washington, D.C., in April 1991. The paper was prepared by John Williams, industry engineer at the FCC's Office of Plans and Policy (OPP), and Evan Kwerel, OPP senior staff economist.

One section of the paper used a theoretical model and data from other industries to calculate the social benefit of reallocating one UHF channel in Los Angeles to a third cellular operator. Williams and Kwerel concluded "we would expect cellular prices to fall approximately 25 percent as a result of the introduction of a third competitor...a net social value gain of $754 million."

Although the NCRA is willing to use theoretical analysis and results to prove cellular is not competitive, the cellular industry will not accept theory in place of empirical evidence.

"The most important fact for policymakers is that real life will soon replace theory when a third mobile telephone provider (Fleet Call) begins operations in Los Angeles and other major markets [in late 1993]," said Thomas Wheeler, president of the Cellular Telecommunications Industry Association (CTIA).

Meanwhile, the General Accounting Office (GAO), also concerned with cellular marketplace competition, recently released a study calling the FCC to task for overlooking the lack of competition in the cellular industry. The study examined 30 cellular metropolitan market areas and concluded that many characteristics of the cellular marketplace, including the duopoly structure and lack of available substitutes for cellular service, could reduce the likelihood of competition. It determined that in about two-thirds of the 30 cellular markets examined, prices did not vary between carriers (MPN, July 2, p. 10).

...Checking One Pricing Plan Is Not Enough

"Checking the price on one type of service--that does not mean anything," said John Defeo, president and chief executive officer of U S West. Defeo added cellular involves many different marketing focuses which cause competitive pricing in target markets. This fact would not necessarily appear in the GAO study, as it only examined "a given package of cellular services."

GAO official Kenneth Mead testified before a Senate subcommittee supporting the need for more information. "Even in markets where prices were nearly identical, additional information would be needed to conclude that noncompetitive pricing practices had occurred."

Defeo added cellular prices have come down between 27-30 percent since cellular was introduced 10 years ago--and "considering no one is making money, and we still have all this investment ahead of us--I think that illustrates the power of a competitive market."

Mead pointed out that although the average prices for cellular were fairly constant between 1985-91, "taking inflation into account, there were real price decreases of about 27 percent across the 30 largest markets," Mead said.

...Cellular Competition Will Be Provided by PCS, FCC Says

"The FCC believes that concerns about the lack of competition in the cellular service industry should be resolved through the introduction of new personal communication services [PCS] in the near future," said Mead. An FCC official backed this statement, stating the FCC recognizes the benefits of a competitive marketplace and believes PCS will provide competition for cellular.

However, the GAO voiced concerns about the time frame in which PCS would be available, citing problems with spectrum reallocation. In light of these problems, the GAO recommended that "if the new services [including PCS] are not available within the time frames that the FCC currently envisions, the FCC should begin evaluating the status and development of competition in the cellular service industry."

Additionally, the GAO recommended that "the FCC should consider establishing a policy that gives first preference to firms that are not current cellular providers in a given market." However, the FCC has been reluctant to leave cellular operators out of PCS development, as indicated by its recent refusal to follow the Office of Plans and Policy's suggestion to prohibit cellular operators from obtaining PCS licenses. Instead, the FCC asked for comments on the issue in its recent Notice of Proposed Rule Making proceedings (MPN, July 30, pp. 2-3).