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Caran Smith, manager of public relations for Verizon Wirelessí Georgia/Alabama region, displays high-end cell phones with Internet browsing capabilities. Bill Todd, a consultant to Verizon, is in the background.
DAILY Photo by John Godbey
Caran Smith, manager of public relations for Verizon Wirelessí Georgia/Alabama region, displays high-end cell phones with Internet browsing capabilities. Bill Todd, a consultant to Verizon, is in the background.

Free-market cellular
How much control should government exert over industry?

By Eric Fleischauer
DAILY Business Writer

eric@decaturdaily.com ∑ 340-2435

Verizon Wireless has some seriously cool cell phones. Those phones, and the service that comes with them, owe a lot to a relatively free market.

A free market can take cell phone coverage a long way, according to an expert in the field, but maximizing the societal benefit will require governmental intervention.

Back to the phones. They take pictures, browse Web sites, send e-mails, contain phone directories, display calendars, download from and upload to computers, perform equations, include detailed maps and give voice directions to guide you to your destination.

To what do we owe these technological marvels and the radio-wave signals that control them? Most economists say the free market.

George S. Ford, Ph.D., studies the economics of communication systems. Previously an economist for the Federal Communications Commission, the Birmingham resident now is chief economist at Applied Economic Studies, a think tank focused on economic issues in the communications industry.

"Wireless communications is an excellent example of the benefits of unregulated, competitive markets in communications," Ford said. "We've got substantial price decline, improvements in the quality of service, in the types of devices we can use and in the types of services we can use. It's been very successful."

Regulatory hurdles

A Verizon Wireless employee displays high-end cell phones that can browse the Internet and give audible directions to drivers. Such innovations have come about in part because of a lack of governmental regulations, but some economists say some governmental intervention is necessary to attain benefits for society as a whole.
DAILY Photo by John Godbey
A Verizon Wireless employee displays high-end cell phones that can browse the Internet and give audible directions to drivers. Such innovations have come about in part because of a lack of governmental regulations, but some economists say some governmental intervention is necessary to attain benefits for society as a whole.
Most of the few regulatory hurdles through which Verizon and other cell services must jump are inherent in their product. The radio spectrum is finite, so the FCC is aggressive in allocating pieces of that spectrum to avoid interference with other users.

Bill Brickel, director of system performance for Verizon's Alabama and Georgia region, explained that the shorthand used for describing cell-phone-dedicated frequencies — 850 megahertz and 1.9 gigahertz — is misleading.

The frequencies are broken down into much smaller increments, and each cellular carrier has a collection at its disposal.

One of the inefficiencies of the free market model is that cellular services can prevent customers from accessing competitors' frequencies. You can have a cell tower in your backyard, but if it is transmitting at Cingular's frequency and you have a Verizon handset, you are out of luck.

"Your handset is looking for the system identifier that tells it it's on the right system. It's also looking for signal strength," Brickel said. "It has a list of systems that it's going through and each system ID is at a given frequency."

By allocating blocks of frequencies, Ford said, the federal government effectively decided how many players would be in the cellular market.

"It turns out there was probably too much competition in the industry for a while," Ford said. "Allocation of scarce resources is something the government really does not do very well."

Don't fear, though, because competition is consolidating.

"The way to eliminate too much competition is to eliminate some of the players. We'll end up with better networks, maybe more innovation, and possibly marginally higher prices," Ford said.

Avoiding economic evils

Bill Wilkes, an economics professor at Athens State University, said the hoped-for result of unrestricted competition is to avoid two evils.

"You want the competition to produce a lot of very efficient providers, but competition also says that the strongest are going to survive," Wilkes said. "Therefore the strong will get bigger and buy the smaller guys out, and pretty soon you have a monopoly or an oligopoly. Then the government has to step in and regulate."

Wilkes and Ford agree that governmental intervention tends to muck things up, but does that mean all the ills of our wireless world are best solved through competition?

Not quite, suggests Ford.

Free enterprise works great until the desired benefit is societal, not individualized. Government intervention may be the only option available in attaining a societal benefit.

There is tremendous social value in universal connectivity, particularly when it comes to communications technology. We want cousin Ned in lower Alabama to be a part of our network; indeed, the value we place on our own participation in a network fluctuates depending on whether cousin Ned is a participant.

Recouping tower costs

Problem is, if cousin Ned has no close neighbors, Verizon cannot hope to recoup the cost of erecting a tower in his pasture. The social benefit of universal connectivity is best billed to society, which generally means a tax-funded subsidy.

"The private sector is going to build where demand is high and costs are low. (In rural areas) you're in a situation where a cost-benefit test may flunk. In the end, if a rural community wants to be on the network, then the rural community probably should be the one paying for it (through tax dollars). ... It's a question of what's the value and what's the cost."

Hurricane Katrina was a reminder of another category in which a desired social benefit cannot be attained through the free market alone.

The hurricane wiped out entire communications networks that rescuers and victims needed.

It was a shining moment for Verizon.

The company deployed mobile cell towers and built an entire microwave backbone network.

But Verizon is not in the business of altruism. Its post-Katrina efforts may have stemmed from its role as a good corporate citizen, but its efforts depended on high population density.

Verizon knew it could recoup its expenses. If disaster strikes an area in which Verizon cannot recoup its costs, we cannot expect it to shoulder the entire cost of the social benefit.

"That's when maybe there is a role for government to come in and construct a tower," Ford said.

Unadulterated capitalism works best in an environment where information flows freely. Think gas stations with the price posted high.

Consumers know what they are getting and how much it costs, so comparison-shopping comes easy.

Cell phone service is murkier.

First off, calculating the price of one minute of airtime is well nigh impossible. One company offers 500 free minutes, another offers 1,000. Calls to family members are free with one service, but not with another.

Then there's weekend calling, text-messaging charges, and roaming charges, all muddling any effort to identify a lodestar that permits comparison-shopping.

Signal strength

Even more befuddling is the cryptic of signal strength.

Verizon, while trumpeting the fact that it analyzes its own signal strength and that of competitors with specialized testing vehicles, will not tell consumers where their towers are located.

You may have three cell towers in your backyard, but you are out of luck if one of them does not happen to transmit the frequency your handset is seeking.

Even the bars — that's what Cingular claims in ads to be raising — mean little, according to Brickel.

"It's not the same across all handset manufacturers. You can be in a place like Interstate 65 heading south and be down to one bar and still have a perfectly good signal because there is not a lot of competing radio energy in the air," Brickel said.

"There are a lot of variables at play."

"Lack of disclosure is a problem," Ford said. "Information asymmetries are never good for the people who don't know much, which in this case is the consumer."

Broadband cellular

In Europe, broadband cellular coverage is common. It is only beginning to make inroads in the United States. Europeans can thank governmental regulations for the difference.

The regulations steered providers toward a common technological platform, so handset makers and service providers knew a market for broadband existed.

"In the U.S. we've been jumping around," Ford said. "We can't settle on any one protocol."

That regulatory gap may slow the development of cellular broadband availability, but it also avoided the possibility that the government would adopt the wrong protocol.

"There's arguments on both sides of the issue," said Ford. "We could have a government-mandated technology that turns out to be terrible. In fact, it's quite possible that Europe benefited from watching us engage in protocol competition."

The moral of the story, according to Ford and Wilkes, is that a free market can get us most of the places we want to go.

When our goals are societal rather than individualized, however, a free market is the wrong tool.

But don't knock free enterprise. It has produced some really cool phones.

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