Saturday, July 25, 2009

The Cellphone Oligopoly

David Pogue, of The New York Times, points out that the misdeed of handset exclusivity that the United States Senate has begun to investigate is hardly the cellphone industry’s only or even most egregious sin. Mr. Pogue identifies five offenses specifically:

  1. Text-Messaging Fees
  2. Double Billing
  3. The Subsidy Game
  4. International Calling
  5. 15-Second Instructions

Mr. Pogue calls on Congress to act:

Right now, the cell carriers spend about $6 billion a year on advertising. Why doesn’t it occur to them that they’d attract a heck of a lot more customers by making them happy instead of miserable? By being less greedy and obnoxious? By doing what every other industry does: try to please customers instead of entrap and bilk them?

But no. Apparently, persuading cell carriers to treat their customers decently would take an act of Congress.

There certainly is much about the American cellphone industry that requires rectification. And, sadly, it very likely will require an act of Congress to force the American cellphone companies to pay more attention to the needs of their customers. Underlying all of this, however, is another question that deserves just as much, if not more, attention: Just how did we get to this point in the first place?

Mergers and Acquisitions

The big four American cellphone companies have seen plenty of natural growth over the years. Most of this natural growth, however, has come from customers new to the cellphone market, buying a cellphone for the first time. This kind of growth has benefited each of the carriers more or less equally. In order to gain an advantage over the others, these carriers have looked to more artificial means of obtaining new customers: mergers and acquisitions.

The coalescence of companies (including a number of former Baby Bells) that eventually gave rise to the current AT&T was famously parodied by Stephen Colbert. Verizon is similarly rooted in the joint ventures and eventual mergers of former Baby Bell companies. Sprint Nextel, of course, was formed by the 2005 purchase of Nextel by Sprint, two companies that by then were already conglomerations in their own right. T-Mobile was fashioned by the amalgamation of Powertel, Voicestream and Western PCS, among others. These already mammoth corporations have continued to consume whatever remaining regional companies they can get their hands on: In November of 2008, AT&T acquired Centennial Wireless and in January of this year, Verizon acquired Alltel Wireless.

The salient point, here, is that this is exactly the kind of industry consolidation that anti-trust laws were created to prevent. All of the mergers listed above, along with countless others in the industry, have somehow passed muster with various regulatory agencies ranging from the Justice Department to the Federal Trade Commission. Of course, these agencies like to make a show of being tough—of appearing to consider the consequences of such mergers. Usually, this comes in the laughably ineffective form of requiring the acquiring company to sell off operations in certain markets. These sales, quite naturally, are almost always to one of the other major carriers and thus serve to perpetuate consolidation rather than prevent it.

The Resultant Tetrarchy

Today, the American cellphone industry is a near-textbook match for the definition of an oligopoly. Gartner estimated in 2008 that the top four U.S. carriers—AT&T, Verizon, Sprint Nextel and T-Mobile—accounted for 84.4% of the market. The advantage that an oligopoly affords its participants is that of implicit collusion. Of course, these companies generally don’t actually collude; they don’t gather in one of those proverbial smoke-filled rooms to discuss how best to extract money from their hapless customers. That would be illegal. Why risk legal action when a perfectly legal wink and nod will accomplish just as much?

As Mr. Pogue points out, the four major cellphone carriers in the U.S. all raised their text messaging rates at roughly the same time. They almost certainly didn’t agree to do this or even speak about it beforehand. There was no need. All that was required was for one company to announce that it would do so and the rest dutifully followed suit.

In an oligopoly, each company’s self-interest is best served by matching the price increases of the others. Long-term contracts make matters even worse: if any of the major carriers did precipitously drop prices in order to attract new customers, it would have to wait for months or even years to see a significant increase in customers as potential switchers would have to wait for their current contracts to expire. In the mean time, revenues would drop due to the lower prices. No, even for the smaller carriers, Sprint and T-Mobile, it’s best not to rock the boat that much. Their best interest is served by pegging their prices only slightly behind that of their larger competitors and trying not to get too far behind in the acquisition game.

The Call to Action

The cellphone industry’s tetrarchy is now a fait accompli. Only an AT&T-style breakup (ooh, the irony here is rich) could possibly reverse the gains the Big Four have made and such efforts by the government are few and far between for monopolies, let alone oligopolies. More often, regulation is the government’s answer to these situations and cell phone users like me would undoubtedly benefit from some consumer-minded oversight.

As the old saying goes, however, an ounce of prevention is worth a pound of cure. What Congress really needs to do is overhaul our nation’s anti-trust laws. Far too much consolidation happens in the current system and regulators are far too willing to go along with it. Consumers inevitably pay the price. This overhaul needs to happen now, before the next industry degenerates into an oligopoly, duopoly or monopoly.

In my opinion, the default stance of the regulators for any merger should be disapproval, except perhaps in cases of bankruptcy.