Top Ten Pitfalls of Wireless Innovation Regulation

August 26, 2009

Analysis of the potential pitfalls of wireless innovation regulation is a necessary complement to the FCC’s upcoming Notice of Inquiries into wireless competition/innovation and the DOJ’s review of wireless competition, in order to ensure policymakers get a balanced view of the big picture.

What are the Top 10 Pitfalls of Wireless Innovation Regulation?

#1 Pitfall: Losing focus on universal broadband access.

“Wireless innovation” appears to be the latest rebranding iteration of “net neutrality” and “open Internet” as the net neutrality movement searches for more mainstream support of their views.

  • That’s because the American wireless consumer understands that the current wireless market in the U.S. is among the most innovative, fast-changing, competitive and consumer-responsive industries in the economy today.
    • Most consumers find themselves trying to keep up with the constant flow of new wireless innovations, not thinking “Gee… the wireless industry isn’t innovative enough.”
  • Having the Government investigate whether the current incredibly vibrant free market of wireless competition needs help from the Government to innovate is akin to the Government asking fish if they need help in learning to swim.
    • The whole premise that slow-moving Government regulation could be the enabling source of fast-paced market innovation defies both common sense and the vast evidence of the last fifteen years of fierce wireless competition in the marketplace.
  • Wireless innovation regulation is an unnecessary and counter-productive distraction from the primary unifying goal of promoting universal broadband access to all Americans.
    • Wireless broadband is among the most cost-effective and fastest methods to bring broadband access to those Americans who don’t yet have it.
    • Why discourage necessary wireless broadband deployment with unnecessary wireless innovation regulation?

#2 Pitfall: Undercutting the current consensus behind the universal broadband access.

Desperate net neutrality proponents appear intent on snatching defeat from the jaws of victory.

  • Currently there is strong bipartisan consensus for promoting universal broadband access to all Americans.
  • However, most everyone that has heard the term “net neutrality” knows that it is one of the most bitterly divisive communications/technology public policy issues in play today.
    • The goals of universal service and net neutrality are near polar opposite goals, because universal broadband is all about expanding “the pie,” and net neutrality is all about dictating allocation of the current pie pieces to ensure that no pie maker could make money off making more pies in the future.

#3 Pitfall: Thinking regulation somehow would put consumers in charge when competition already has.

The evidence shows overwhelmingly that U.S. wireless consumers are already in charge; prices are falling, choices are multiplying and innovation is flourishing.

  • In most every market there is a choice of 4 large, facilities-based national providers (Verizon, AT&T, Sprint, T-Mobile) and in many markets there is another facility-based provider like Leap or MetroPCS. And Clearwire is building yet another national wireless provider facility.
  • There are over 30 manufacturers offering over 630 choices of handsets.
  • There are at least 7 competing mobile operating systems: Symbian, Windows Mobile, Palm, RIM, Apple, Linux, and Android).
  • Ironically, the netopolies (Google with 70+% share of Internet advertising and eBay-Skype with 95% share of online auctions) which face the least relative competition in their market segments by far, are claiming the wireless market is anti-competitive and seeking the most new wireless innovation regulation of their competitors.

#4 Pitfall: Mistaking competitive exceptions as the rule requiring broad regulation.

  • After approving over 65,000 app choices for the iPhone, Apple reasonably denies one, Google Voice, which Apple maintains tries to supplant Apple’s core iPhone software design and functionality, and the FCC launches a net neutrality-related inquiry creating the alarming impression that anything less than approval of all applications may be presumed to be a violation of the FCC’s broadband principles.
  • With ~99% of texting on a unlimited flat rate plan, paying roughly a penny a text on average down from ~3 cents a text a couple of years ago, the text market is characterized by competition and falling prices not the 1% of the al a carte text segment with ~20 cent texts.
  • With over thirty manufacturers offering over 600 wireless handsets in the U.S., only a handful of the most expensive smart-phone handsets have handset exclusivity arrangements which require a particular device be sold only in conjunction with a particular carrier in order to ensure that marketing dollars benefit only the carrier that markets the device in a national campaign.  

#5

Pitfall: Defining consumer choice unworkably.

 

Wireless net neutrality proponents expect the FCC to interpret consumer choice as an absolute when there are always reasonable and legitimate trade-offs in producing a diversity of consumer offerings.

  • If a manufacturer or carrier does not have the business latitude to reasonably restrict applications to ensure they abide with contracted terms of use and a viable business model/offering, then a provider effectively would have no property rights per the U.S. Constitution, nor would a provider have any meaningful design, operating, or business role to differentiate their product or service from other competitors.
    • This app-centric view of consumer choice and wireless innovation would perversely undermine consumers’ diversity of choice by undermining manufacturers and ISPs incentive to innovate.
  • Wireless net neutrality proponents are trying to get the FCC to mandate unlimited app choice as an absolute entitlement and to brand as ‘anti-competitive” any imperfect outcome of a dynamic real-world competitive process.
  • Limitations on consumer choice for reasonable and legitimate economic, innovative, differentiation, and operational reasons are not anti-competitive, just the normal result of everyday competition and economics.

#6 Pitfall: Assuming early adopters are representative of average consumers.

Early adopters and tech elitists bloggers that scream for perfect user or edge control, basically want to be their own integrator, where they can buy most any component part at a wholesale piece-part rate so they can assemble/integrate their perfect personalized device/product/service.

  • Early adopters are already largely, but not perfectly, able to be their own integrators in today’s marketplace.

The problem is that early adopters are not representative of mass-market consumers.

  • Most of the mass-market consumer population wants products/services that are largely integrated and easy to use.
  • Average consumers pay providers to save them hassles and time in using their device/service.
  • The average consumer can then personalize their specific service greatly with easy-to-use integrated features.

#7 Pitfall: Innovation chauvinism, that one industry’s innovation is, and will always be superior to another’s.

  • The netopolies (Google/eBay-Skype) maintain that the application market is where most all the innovation occurs and:
    • Not in devices (ignoring Apple’s iPhone/iPod innovations for instance);
    • Not in ISPs (ignoring Verizon’s MiFi innovation for instance); and
    • Not content providers (ignoring Time Warner/Comcast’s TV Everywhere innovation for instance.)
  • The reality is that the market and consumers want/need innovation throughout the ecosystem not just from one favored market segment.
  • A policy that favors innovation in one segment at the expense of other technological segments is by definition a zero-sum innovation policy, not a growth policy.

#8 Pitfall: Wireless innovation regulation is a slippery slope.

Does wireless net neutrality mean that application design trumps device or network design?

  • If the FCC somehow determines that Apple does not have the property-right to own and design wireless handsets or software — if it limits any third-party application — the FCC will chill manufacturing innovation, entrepreneurship and risk-taking resulting in a big net loss in innovation and growth in the economy.
  • As more and more smartphones, netbooks, notebooks and laptops are wireless broadband enabled, where would the line logically be drawn where FCC’s wireless innovation regulation would stop?
    • If Apple cannot prevent a competitor like, Google-Android, from effectively taking over the design and functionality of the iPhone by supplanting the iPhone’s proprietary innovation with Google’s Google Voice innovation, why should any investor invest in building in any device if the FCC expects the value from the manufacturing innovation can only be harvested ultimately by application providers or Google?

#9 Pitfall: Little regulatory humility about the limits of Government wireless regulation.

Government wireless innovation regulation has had a humbling track record.

  • Even though cellular phone technology was invented in 1960, it wasn’t allowed by the FCC to be effectively commercialized until over twenty years later.
  • Serious FCC errors in the PCS auction implementation meant Nextwave’s licensing of 30Mhz (1/4 of the prime PCS spectrum that was supposed to be auctioned and put to work in the marketplace) laid fallow in legal limbo for several years.
  • Eight years after 9-11, the FCC has not been able to get workable interoperable spectrum implemented so first responders can seamlessly communicate and coordinate during an emergency.
    • The FCC’s over-regulation of the “D” Block auction of 700 MHz spectrum for Public safety failed to attract the minimum bid because the FCC’s model was deemed unworkable by the marketplace.
  • And municipal WiFi mesh networks have consistently proven to be more technically and operationally difficult to operate than Governments’ have routinely thought.
  • While well intentioned, Government, like competition, has a less than perfect record in keeping up with or meeting consumers’ evolving wireless demands.

#10 Pitfall: Thinking Government somehow can pick technologies consumers want better than consumers can.

Why the current technology-neutral innovation policy has been so successful is that innovation flourishes best in a consumer-driven market without Government economic or technology-specific regulation that tries to pick technology winners and losers far in advance.

  • The Government learned the hard way that slow-moving government processes generally are antithetical to creating an innovation environment, and that allowing consumers to choose the best technologies — by voting everyday with their pocketbooks in the fast-paced marketplace — fuels the most innovation.
  • One of the surest ways to undermine innovation is for Government to stand on the competitive scales to favor one technology over another; lessening free-wheeling competition lessens free-wheeling innovation.
  • Moreover, examining wireless innovation outside of the context of other competitive broadband technologies is not technology neutral.
  • Furthermore, picking winning technologies by favoring application innovation over device/bandwidth innovation… and picking de facto winning “National Champions of innovation,” by favoring the vocal netopolies, Google and eBay-Skype, over other competitors or technologies… runs the risk of an international trade war with other countries who may feel compelled to pick and protect their own “national champions.”

Conclusion:

Just like fish don’t need the Government to teach them to swim, the current vibrantly competitive wireless marketplace does not need the Government to teach it to innovate.

  • Universal broadband is simply too important to the nation’s future to ignore the many pitfalls of regulating broadband under the guise of “innovation regulation.”

 

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