The Federal Communications Commission (FCC) has released its 16th annual “Report and Analysis of Competitive Market Conditions with Respect to Mobile Wireless”. Verizon recently published a blog post cataloging the high levels of competition and consumer value the FCC’s report found that the mobile wireless sector has consistently been producing.
But there is another dimension to competition that the report does not explain or analyze, which is: how competition throughout the Internet ecosystem is generating innovation, leading to new choices for consumers, and promoting even fiercer competition. Mobile broadband providers are part of a kaleidoscope of companies – from device manufacturers, to apps makers, to software providers, to content and online services providers – that both collaborate and compete with one another in the Internet ecosystem. Competition is healthy in the mobile wireless sector, but the story of how competition works in the broader ecosystem deserves attention as well.
Then and Now
Recent papers by Jeff Eisenach [PDF] and Jonathan Sallet (a former Reagan Administration economist and Clinton Administration official, respectively) explain that competition among mobile wireless carriers has evolved from where it was just a few short years ago. As recently as 2007, a customer walking into a wireless store would choose among devices, apps, services and network offerings that were under the province of the carriers. Few customers even knew or cared what operating system was on their mobile phones. The carriers packaged most of the services and products consumers could choose from.
Contrast that with today, where consumers drive the process. There are many choices in terms of devices, operating systems, apps, networks and services. Companies like Apple offer “platforms” of services that include its apps store and iTunes for content, its operating system and hardware. Google has chosen a different strategy, but it too offers a platform consisting of its many services (search, Gmail, YouTube and the like), an operating system that is used in dozens of mobile devices, as well as its own devices like Chromebooks, Nexus devices, and Motorola handsets. Mobile carriers like Verizon partner with device makers, but also offer a variety of pricing options and packages including voice and texting services, as well as apps (like Navigator) and cloud storage.
In this dynamic market, companies collaborate, compete and partner in a wide variety of ways to reach the consumer. Consumers are at the center of this market, as wireless carriers, operating system makers, device makers, and apps developers vie for their attention. Competition is not just within sectors – such as wireless carriers – but also between and among sectors, or intermodal. Cross-sector competition is vibrant and affects every player in the Internet ecosystem. Companies cooperate and compete against one another to provide consumers competing packages of value. And innovation is a relentless force in this marketplace – it’s how companies differentiate their offerings.
Where the FCC Almost Nails It
Interestingly, the FCC report reflects data that supports the notion that dynamic competition in the Internet ecosystem is a major driver of this market. Yet, the report fails to connect the dots and explain how this competitive dynamic drives value to the consumer. Here is an example from the report including a diagram explaining the market as the FCC sees it:
“This Report analyzes competition across the entire mobile wireless ecosystem, including the ‘upstream’ and ‘downstream’ market segments, such as spectrum, infrastructure, devices, and applications. As discussed in detail below, this Report’s detailed assessment of competitive market conditions required by statute considers developments across the entire mobile wireless ecosystem.”
The report goes on to note that some of these segments (particularly those in the “upstream” segment, including spectrum or backhaul) can affect entry, competition, output, or prices in the provision of mobile wireless services. But it does not spend much time considering the very important impact “downstream” segments like devices, operating systems or apps have on other parts of the ecosystem, such as wireless carriers. They even affect the way services are offered by carriers and the market for the services.
I am not saying the report entirely ignores the evolution of competition in the Internet economy. Indeed, these passages from the report do suggest the FCC clearly understands that intermodal competition does have impacts:
“The report does note Consumers are increasingly substituting among voice, messaging, and some data services, and, in particular, are willing to move from voice to messaging or data services for an increasing portion of their communication needs. Because consumers view these other services as interchangeable with or substitutes for certain CMRS services, service providers compete for these customers using CMRS services as well as non-CMRS services . . . The existence of Internet-based messaging services may also be encouraging consumers to substitute Internet applications for mobile voice calls and traditional text messaging . . . These [text messaging services] include device-specific services like BlackBerry Messenger (“BBM”) for Blackberry smartphone users, and a number of downloadable third-party applications such as GroupMe, TextPlus, WhatsApp, Kik and Pinger. Analysts predict that these new services will cut into service providers’ text messaging revenues and profits by encouraging subscribers to bypass their providers’ text messaging offerings. In combination with the recent declines in the price per megabyte of mobile data services, these texting services may be encouraging subscribers to substitute data services for mobile voice service.” [Emphasis mine].
What I’m suggesting is the report spends very little time examining these factors or analyzing how they impact competition. It also does not analyze the major shift in the role of the consumer that is suggested by this dynamic competition model. Instead, it continues to presume a linear model, where the consumer has less of a role in driving competition and is not at the center of the market. This is important because under the dynamic competition model, virtually every player in the Internet ecosystem is trying to reach the consumer, creating an ever more innovative and competitive industry.
Source: Jonathan Sallet “Broadband Value Circle”, 2011
The FCC’s report pulls together lots of data demonstrating how competitive the wireless industry is in its own right. But a very important aspect of how competition has evolved is the emergence of the dynamic competition model. When seen from this view, mobile competition is even healthier than it seems when focusing on the wireless sector itself.