The economics of "wireless net neutrality"

Journal of Competition Law and Economics

Volumn 3, Issue 3, 2007, Pages 399-451

  Hahn, Robert W ^a   Litan, Robert E ^a   Singer, Hal J ^b  

^a AEI Brookings Joint Center

^b Criterion Economics ^*

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[No Author keywords available]

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EID: 46149108151     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhm015     Document Type: Article

References (218)

1. Jon M. Peha, The Benefits and Risks of Mandating Network Neutrality, and the Quest for a Balanced Policy (Carnegie Mellon University Working Paper, September 2006)
2. Rob Frieden, Network Neutrality or Bias? Handicapping the Odds for a Tiered and Branded Internet (Pennsylvania State University Working Paper, September 2006)
3. Barbara van Schewick, Towards an Economic Framework for Network Neutrality Regulation, 5 J. TELECOMM. & HIGH TECH. L. 329 (2007).
4. See, for example, Christopher S. Yoo, Network Neutrality and the Economics of Congestion, 94 GEO. L. J. 1847 (2006)
5. Bruce Owen, The Net Neutrality Debate: Twenty Five Years after United States v. AT&T and 120 Years after the Act to Regulate Commerce (AEI Brookings joint Center Working Paper 07-03, February 2007)
6. Alfred E. Kahn, Network Neutrality (AEI Brookings Joint Center Related Publication 07-05, Mar 2007)
7. J. Gregory Sidak, A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet, 2 J. COMPETITION L. & ECON. (2006)
8. Robert W. Hahn & Robert E. Litan, The Myth of Network Neutrality and What We Should Do About It (AEI-Brookings Joint Center Working Paper No. RP06-33, November 2006)
9. Robert E. Litan & Hal J. Singer, The Unintended Consequences of Net Neutrality, 5 J. TELECOMM. & HIGH TECH L. 329 (2007)
10. Hal J. Singer, Net Neutrality: A Radical Form of Non-Discrimination REG. 533 (2007)
11. William J. Baumol, Martin E. Cave, Peter Cramton, Robert W. Hahn, Thomas W. Hazlett, Paul L. Joskow, Alfred E. Kahn, Robert E. Litan, John W. Mayo, Patrick A. Messerlin, Bruce Owen, Robert S. Pindyck, Vernon Smith, Scott J. Wallsten, Leonard Waverman & Lawrence J. White, Economists' Statement on Network Neutrality Policy (AEI-Brookings Joint Center Working Paper No. RP07-08, March 28, 2007).
12. Id.
13. In re Skype Communications S.A.R.L. Petition to Confirm A Consumer's Right to Use Internet Communications Software and Attach Devices to Wireless Networks, Dkt. No. RM-11361, February 20, 2007, at 13 [hereinafter Skype Petition] ("For the vast majority of U.S. wireless consumers, carriers sell phones that are highly subsidized and mask the true cost of the device. Consequently, the market for wireless devices is unusual and distorted. This market distortion is of increasing concern as handsets become more versatile and are used to access a broader array of functions and services.") (citation omitted).
14. See Tim Wu, Wireless Net Neutrality: Cellular Carterfone on Mobile Networks (New America Foundation Wireless Future Program Working Paper No. 17, February 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027&high= %20net%20neutrality. By March 11, 2006, a little over one month after its initial posting, Wu's paper had been down-loaded over 1,700 times, making it the second most popular paper among all SSRN postings between January 10, 2007 and March 11, 2007. By April 2, 2007, the paper had been down-loaded 1,961 times.
15. See Skype Petition at 12 n. 21, 13 n. 22 (citing Wu).
16. We define economic welfare as the sum of producer surplus and consumer surplus. Profits are a good proxy for producer surplus. Consumer welfare is equal to the difference between a consumer's willingness to pay for a good and the price summed across all consumers. Economists may disagree on whether regulatory policy should focus on consumer surplus only. We focus on consumer surplus here because that seems to be a concern of Wu.
17. Wu identifies some other practices that he also finds objectionable, such as failing to disclose key information to consumers. These other practices are considered here as well.
18. Shype Petition at 1.
19. Id. at 25-28.
20. Id. at 28-30.
21. See, for example, Kenneth J. Arrow, Maureen L. Cropper, George C. Eads, Robert W Hahn, Lester B. Lave, Roger G. Noll, Paul R. Portney, Milton Russell, Richard Schmalensce, V. Kerry Smith, & Robert N. Stavins, Is There a Role for Benefit-Cost Analysis in Environmental, Health, and Safety Regulation?, 272 SCIENCE 221-222 (1996).
22. FCC, Eleventh Annual Report to Congress on the State of Competition in the Commercial Mobile Radio Services (CMRS) Industry, WT Dkt. No. 06-17, released September 29, 2006, Appendix A Table 10 [hereinafter Eleventh CMRS Report]. The numerator in the average price per minute is average revenue per subscriber, which is collected by CTIA. Tlese values are given in nominal terms rather than real terms. The FCC shows that the "Cellular CPI," as recorded by the Bureau of Labor Statistics, declined by 35 percent from December 1997 to December 2005.
23. See id. at Appendix A Table 9. Thus, cellular prices have declined in real terms.
24. Skype basically proposes Wu's policies in its FCC petition. Thus, our analysis of Skype's proposal would be no different from our analysis of Wu's proposal.
25. Consumer welfare is equal to the area under the demand curve bounded from below by price. Assuming linear demand, that area is equal to one half the product of the quantity of wireless subscriptions and the difference between the average monthly price and the monthly "choke price" or price at which the demand for wireless service would be zero. For example, using an elasticity ofdemand of - 1.2, an average monthly price ofroughly $50, and 213 million wireless subscribers, the monthly choke price for wireless service is roughly $91. Thus, the monthly consumer welfare is roughly $4.4 billion and the annual consumer welfare is roughly $53.2 billion. For an estimate of the elasticity of demand for wireless service, see Allan T. Ingraham & J. Gregory Sidak, Do States Tax Wireless Services Inefficiently? Evidence on the Price Elasticity of Demand, 24 VA. TAX REV. 249, 257 (2004) (generating estimates of -1.12 and -1.29).
26. For average monthly prices and total number of wireless subscribers, see Eleventh CRMS Report, supra note 12, ¶pa5, 155.
27. See, for example, Dennis Carlton, Antitrust Policy Toward Mergers When Firms Innovate: Should An8titrust Recognize the Doctrine of Innovation Markets?, Testimony before the Federal Trade Commission Hearings on Global and Innovation-based Competition (October 1995).
28. See, for example, Bruce Owen, The Net Neutrality Debate: Twenty Five Years after United States v. AT&T and 120 Years after the Act to Regulate Commerce (AEI Brookings Joint Center Working Paper 07-03, February 2007).
29. Of course, there are other important concerns, such as equity. We do not consider such concerns in the interests of brevity, though they can be important in selected instances.
30. See CARL SHAPIRO & HAL R. VARIAN, INFORMATION RULES: A STRATEGIC GUIDE TO THE NETWORK ECONOMY (Harvard Business School Press 1999).
31. Even where positive externalities exist, it may be difficult to implement regulation or subsidies that improve on the status quo
32. J.D. Power and Associates Reports: Wireless Call Quality Problems Continue to Decline as the Transition to 3G Networks Takes Hold, March 15, 2007, available at http://www.newscom.-com/cgi-bin/prnh/ 20050527/LAF028LOGO-a.
33. Eleventh CMRS Report, supra note 12, 1¶05.
34. Id. 1¶31.
35. Id. at Table 11.
36. id.
37. FCC, Auction 66 Advanced Wireless Services (AWS-1), All Bidders Spreadsheet, available at http://wireless.fcc.gov/auctions/66/ charts/66bidder.xls.
38. Id.
39. Cable Consortium Acquires Spectrum Licenses Covering National Footprint, PR NEWSWIRE, October 5, 2006, available at http://sev.prnewswire.com/entertainment/20061005/PHTH01505102006-1.html.
40. FCC Spectrum Auction Closes, T-Mobile Among Top Winners, XCHANGEMAG, September 19, 2006, available at http://www.xchangemag.com/hotnews/69h198599.html.
41. The FCC's Broadband Personal Communications Services auction (auction #71) is scheduled to begin in May 2007. See FCC, Scheduled Auctions: Auction 71 Broadband PCS, available at http://wireless.fcc.gov/auctions/default.htm?job= auction_summary&id=71.
42. See THOMAS WINTER AABO, US MOBILE VIRTUAL NETWORK OPERATORS 2007: THE DEFINITIVE GUIDE AND CRITICAL ANALYSIS OF THE US MVNO MARKET (Mind Commerce, March 2007).
43. Id. at 11.
44. Wu at 6.
45. Skype Petition at 23.
46. According to Baxter, regardless of the evidence of consumer harm, if "there is no assurance that appropriate relief could be obtained," then the government must question the value to consumers of imposing a remedy. In re Int'l Bus. Mach. Corp., 687 F.2d 591, 594 (2d Cir. 1982) (quoting William F. Baxter, Assistant Attorney General, U.S. Department of Justice)
47. Russ Mitchell & Marianne Lavelle, Road Runner v. Coyote: As Microsoft Case Shows, Markets Move Faster than Justice, U.S. NEWS & WORLD REP. 58, 59 (December 15, 1997) (quoting Baxter as saying that, in dynamic industries, "companies will compete for markets, rather than in markets").
48. For the seminal treatment of the role of innovation in the economy, see JOSEPH A. SCHUMPETER, THE THEORY OF ECONOMIC DEVELOPMENT (Oxford University Press 1949) (explaining how innovations by entrepreneurs disturb the static equilibrium and are the cause of all economic development).
49. Wu at 13 ("Two sets of consequences flow from the control that carriers exert on the marketing and attaching of mobile devices in the United States. One is a loss of product diversity. Of the many mobile devices sold even by major providers like Nokia and Motorola, only a fraction effectively make it to the U.S. market.").
50. Wu at 25 ("A more plausible explanation for the behavior seen here is this: Carriers believe it makes sense to block a feature to protect an existing revenue source, or to keep their own costs low, even if that behavior is bad for actors in the equipment and application markets and hurts innovation."). Wu fails to consider innovation by wireless network operators in his objective function.
51. Hahn & Litan, supra note 2.
52. For more examples of the interdependency between application innovation and network innovation, see Charles Jackson, Wireless Handsets Are Part of the Network, April 24, 2007.
53. See, e.g., Paul L. Joskow, Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks (AEI Brookings joint Center Working Paper 05-18, September 2005).
54. See Paul L. Joskow & Robert Noll, Regulation in Theory and Practice: An Overview, in STUDIES IN PUBLIC REGULATION 1-65 (Gary Fromm ed., MIT Press, 1981)
55. George Stigler, The Theory of Economic Regulation, 2 BELL J. ECO. & MGMT. SCIEN. 3-21 (1971)
56. Sam Peltzman, Toward a More General Theory of Regulation, 19 J. L. & ECON. 211-40 (1976)
57. Richard Posner, Theories of Economic Regulation, 5 BELL J. ECON. & MGMT. SCIEN. 335-58 (1974).
58. See J. Gregory Sidak, Hal J. Singer & David Tecce, A General Framework for Competitive Analysis in the Wireless Industry, 50 HASTINGS L. REV. 1639 (2000).
59. See Allan T. Ingraham & J. Gregory Sidak, Do States Tax Wireless Services Inefficiently? Evidence on the Price Elasticity of Demand, 24 VA. TAX REV. 249-61 (2004) (showing that we find that reducing the taxation of wireless services by one dollar would improve economic welfare by between $1.23 and $1.95).
60. See Thomas W. Hazlett, Is Federal Preemption Efficient in Cellular Phone Regulation?, AEI Brookings Joint Center Related Publication 03-21 (September 2003) (explaining that contrary to arguments made by the California PUC, wireless rates did not rise with the elimination of state rate controls)
61. Jerry Hausman, Expert Declaration, in CTIA Petition for Expedited Declaratory Ruling on Early Termination Fees (explaining that such fees are part of a carrier's pricing structure for recovering revenues to offset costs).
62. Karen Brown, Breaking Dozon The Bill: New California Regulations Require Carriers to Beef Up Wireless Bill Information and That May Cause Them More Than a Few Headaches, WIRELESS WEEK, August 15, 2004, available at http://www.wirelessweek.com/article/ CA445086.html?text=bill+audit.
63. Jordan Robertson, California Regulators Pass 'Wireless Bill of Rights SACRAMENTO UNION, March 2, 2006, available at http://sacunion.com/pages/state-capitol/articles/7879.
64. Id.
65. Wu at 32.
66. Press Release, Sprint Nextel, Wireless Customers Now Have The Power Of Simplicity (April 03, 2007) (on file with author).
67. Because the cost faced by the retailer (the price charged by the wholesaler) is higher than the true cost to the wholesaler, the retailer's profit-maximizing calculus will cause it to purchase a quantity of the intermediate good from the wholesaler that is too low. The sum of the profits of the wholesaler and the retailer will be lower than the profit that would accrue to a hypothetical vertically integrated firm that fulfilled the roles of both wholesaler and retailer. By placing vertical restraints on retailers, a wholesaler can capture the benefits of a vertically integrated firm and thus obtain the largest possible profit.
68. JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 186 (MIT Press 1993).
69. Id. at 183. For example, consider the case of an intermediary that invests a significant amount of money educating end-users in a particular geographic market about a particular brand. If, as a result of these efforts of that intermediary, demand for that brand increases in the geographic market, the benefits from that increased demand would accrue to both that intermediary and to all other intermediaries that offer that brand but engaged in no efforts to develop the brand. Thus, intermediaries would have little incentive to engage in product development in the absence of exclusivity, which is why suppliers grant exclusive contracts.
70. Id. at 186.
71. Wu at 35 ("In other words, the other half of the price discrimination strategyis missing. Out of Superman is made Clark Kent, but without retaining Superman. That fact seems to raise doubts as to whether what the carriers are engaged in what can properly be called a price discrimination strategy."). Skype does not appear to consider efficiency justifications at all.
72. Id.
73. In re Wireless Telephone Services Antitrust Litigation, Opinion and Order, 02 Civ. 2637 (DLC) (2005).
74. Id. at 47.
75. For example, a Kyocera representative explained that a number of new manufacturers have entered the market by selling their products through an alternate distributor rather than a wireless carrier and by developing products that they then sold to other manufacturers that work with the wireless carriers such as Motorola or Nokia who could then provide it to the wireless carrier. Id. at 49.
76. In addition, the representative testified that the wireless carriers, when presented with an interesting product made by a manufacturer not under contract with that particular carrier, often encourage these handset makers to work through an existing supplier. Id.
77. In fact, an LG representative testified that there is nothing that would stop his company from selling directly to consumers in the United States; rather, his company simply chose not to. Id. at 52.
78. In 2006, Nokia opened a few retail stores in New York and Chicago, and it is experimenting with direct sales. See Press Release, Nokia, Start Spreading the News: Nokia Flagship Store Makes its Debut in New York City (August 1, 2006) (on file with author)
79. Press Release, Nokia, Nokia Flagship Stores to Offer Unique Wireless Shopping Experience for US Customers (June 19, 2006) (on file with author).
80. The Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, revised April 8, 1997, §1.2.
81. Wu at 10. The likely reason why Nokia does not sell its entire line of handsets in every geographic market is that the frequency bands and consumer preferences differ across markets.
82. This foreclosure share estimate assumes that the equipment provider sells handsets that can operate on both GSM and CDMA networks. If the equipment provider sold handsets that worked on one technology only, then the foreclosure share in the United States would be larger.
83. It is not clear why operators would want generally to foreclose the development of new handsets that could enhance the value of their networks.
84. Einer Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REV. 253-344 (2003).
85. Wu at 1 (emphasis added).
86. See Ronald Coase, The Nature of the Firm, 4 ECONOMICA 386-405 (1937).
87. Continental T.V., Inc. v. GTE Sylvania, 433 U.S. 36, 55 (1977) (asserting that vertical restraints have "redeeming virtues" in that they can induce downstream firms to engage in promotional marketing efforts that would otherwise be precluded by the free-rider effect).
88. Wu at 17.
89. Eric Benderoff, White Pearl Added at T-Mobile, CHI. TRI., January 16, 2007, at 2.
90. Eric Benderoff, Cingular Places its Bet on BlackJack as Smart Phone Sales Increase, CHI. TRI., November 14, 2006.
91. See, for example, David Pringle, Cell Division: After Long Peace, Wireless Operator Stirs Up Industry - U.K's Vodafone Is Dictating Handsets' Look and Feel; Nokia Tries Resistance - Hiding the Logo on the Back, WALL ST. J., November 12, 2004, at A1.
92. Benderoff, White Pearl, supra note 69.
93. Phone interview with Verizon Wireless representative Sharine (ext. 5545) on March 21, 2007.
94. Id.
95. In its petition to the FCC, Skype notes that an installment contract is a legitimate reason for phone locking. See Skype Petition at 17 ("While regulators in most countries do not prohibit handset locking outright, they typically ensure that locking is done for legitimate purposes only - such as to prohibit theft or fraud and the enforcement of a rental or installment contract, rather than for anti-competitive reasons - and that consumers are made aware of handset locks and how to unlock them.").
96. Wu at 10.
97. Id. at 11.
98. Id.
99. Id. at 4 ("In Washington, D.C., the wireless world is sometimes described as a nirvana for consumers brought on by competition and enlightened government policy. Some consumers and groups depict a very different story: A 'cell hell' of 'dropped calls, dead zones, billing errors, and unexpected fees and charges.' The truth lies somewhere in the middle.").
100. See Yoo, supra note 2 (showing that when transaction costs render metering network-usage uneconomical, imposing restrictions on bandwidth-intensive activities may well enhance economic welfare by preventing high-volume users from imposing uncompensated costs on low-volume users).
101. Although VoIP may not be considered a bandwidth-intensive application, unless all related network components (for example, the compression settings) are optimized to handle VoIP, VoIP traffic can consume significant bandwidth. Thus, for all intents and purposes, VoIP can be fairly characterized as a bandwidth-intensive application.
102. T-Mobile Website, Feature Summary, available at http://support.t-mobile.com/knowbase/root/public/tm22892.htm#top. "GPRS speeds up to 56 kbps."
103. See, for example, AT&T Wireless Website, Laptop Connect, available at http://business.cingular.com/businesscenter/ solutions/wireless-laptop/laptop-connect.jsp. "BroadbandConnect compatible devices that are backward compatible with EDGE Network, Average download speeds of 70-135 kilobits per second"
104. T-Mobile Website, Feature Summary, available at http://support.t-mobile.com/knowbase/root/public/tm22892.htm#top. "EDGE speeds up to 240 kbps."
105. Verizon Wireless Website, BroadbandAccess/NationalAccess, available at http://support.vzw.com/capability/broadband_access_propup.html. "Using one of our wireless PC cards or Broad-band Access Connect capable wireless devices with your laptop, you can connect to the Internet, corporate intranet, check your email and download attachments with average download speeds of 400-700 kbps."
106. Sprint Website, What is Mobile Broadband?, available at http://support.sprint.com/doc/sp9807.xml?id16-kbps. "EV-DO Rev 0: Download: 400-700 kbps average, 2.4 Mbps peak; Upload: 50-70 kbps average, 153 kbps peak."
107. Sprint Website, What is Mobile Broadband?, available at http://support.sprint.com/doc/sp9807.xml?id16-kbps. "EV-DO Rev A:DOwnload: 600-1400 kbps average, 3.1 Mbps peak; Upload: 350-500 kbps average, 1.8 Mbps peak."
108. Wu at 13-14 ("Developers report that carriers have often forced them to remove or limit 'call timers' from their phones. Call timers can keep track of the length of individual phone calls, and can also keep track by month, year, or in total. The carriers, reportedly, are concerned that consumers might easily develop an independent and possibly different record of their mobile phone usage.") (emphasis added).
109. Id. at 12.
110. Id.
111. Preventing a handset from functioning on a rival's network does not likely harm customers due to the relatively short useful life of a handset. Consumers tire of their handset models roughly every 18 months with improvements in battery life, weight, and additional features prompting them to buy newer models. Indeed, consumers likely perceive the contract's expiration as an opportunity to purchase a new handset and dispose of their outdated version. Thus, preventing customers from keeping their outdated handsets is akin to preventing them from exercising an option that is out of the money at expiration.
112. Wu at 13 ("Developers report that carriers have often forced them to remove or limit 'call timers' from their phones. Call timers can keep track of the length of individual phone calls, and can also keep track by month, year, or in total. The carriers, reportedly, are concerned that consumers might easily develop an independent and possibly different record of their mobile phone usage. While it is clear that destroying an independent record simplifies billing practices for carriers, it is less clear how that serves the interests of consumers.").
113. J.D. Power and Associates Reports: The Number of Call Quality Problems Experienced with a Wireless Service has Declined for a Second Consecutive Year, March 16, 2006, available at http://www.jdpa.com/pdf/2006037.pdf.
114. A walled garden refers to providing access to content from affiliated providers only, in contrast to content from both unaffiliated and affiliated content providers. The classic case in dial-up Internet access was America Online. See Robert W Crandall & Hal J. Singer, Life Support for ISPs, REG. (Fall 2005).
115. Skype Petition at i ("The Commission should act now to enforce Carterfone and unlock the full benefits of wireless price competition and innovation.").
116. Use of the Carterfone Device in Message Toll Telephone Services; Thomas F. Carter v. AT&T, Dkt. Nos. 16942 and 17073, 14 F.C.C.2d 571 (1968).
117. Id. at 571.
118. 47 C.F.R. 68.3. To be classified as customer premise equipment - and to attain the associated rights of network attachment - the equipment must not present a risk of any one of four specified harms: (1) electrical hazards to operating company personnel; (2) damage to network equipment; (3) malfunction of billing equipment; and (4) degradation of service to customers other than the user of the customer premise equipment and that person's calling and called parties.
119. Wu at 9-10.
120. Id. at 9.
121. The functionalities of the fax machine and the answering machine have moved to the network. Skype also refers to the "celebrated Carterfone decision." See Skype Petition at 4.
122. The closest Wu comes to making this comparison occurs on page 9: "Carterfone freed innovators to invent the personal modem, and then ever faster versions of the personal modem, without seeking approval from the owners of the telephone lines. In the wireless world, the Carterfone rule does not exist. Instead, like in the pre-Carterfone world, innovative companies must seek the permission and cooperation of the carrier oligopoly."
123. See generally Dennis W Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal - Why Aspen and Kodak Are Misguided, 68 ANTITRUST L.J. (2001).
124. See, for example, Einer R. Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REV. 253 (2003).
125. See ROBERT W CRANDALL, AFTER THE BREAKUP: THE U.S. TELECOMMUNICATIONS INDUSTRY IN A MORE COMPETITIVE ERA 17 (Brookings Institution 1991) ("After Congress liberalized the antimerger law for telephone mergers in 1921, AT&T increased its share of the local exchange business to 80 percent of the country's telephones.").
126. Wu at 9; Skype at 21 ("One basic change has been in the structure of the wireless marketplace; following consolidation, there are a smaller number of carriers in the market, a market many regard as oligopolistic.").
127. Oligopoly simply means an industry that is supplied by a small group of firms, often characterized by entry barriers. See, for example, DENNIS CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 7 (Addison-Wesley 3d ed.). Given the significant fixed costs in wireless telephony (acquiring spectrum and building a network), marginal-cost-based pricing - a result of perfect competition - could not be maintained.
128. See Hal J. Singer & J. Gregory Sidak, Vertical Foreclosure in Video Markets, REV. NETWORK ECON. (forthcoming 2007).
129. CRANDALL, supra note 103, at 33-4 ("All telephone sets, private branch exchanges, and other standard equipment used by residences or businesses were owned and leased by the telephone company. Nearly all of AT&T's customer premises equipment was manufactured by Western Electric and sold to the operating prices not subject to competitive bid.").
130. Id. at 38 ("After several months of deliberation, the justice Department and AT&T announced their agreement to settle the case. AT&T would divest itself of all [local service] operating companies but retain its Western Electric and long lines Divisions.").
131. Among the major equipment vendors, the only "cross-ownership" issue that we could identify was between Motorola and Sprint. Motorola owned shares in Sprint, but according to Motorola's SEC filing, Motorola sold its remaining shares in late 2006. See Motorola, Inc., Annual Report (Form 10-K), at 41 (February 28, 2007) ("In 2006, the $41 million of net gains primarily reflects a gain of $141 million on the sale of the Company's remaining shares in Telus Corporation, partially offset by a loss of $126 million on the sale of the Company's remaining shares in Sprint Nextel Corporation ('Sprint Nextel').").
132. Even if all wireline broadband providers opted not to support VoIP applications, the collective foreclosure across wireline and wireless network owners would still not be anticompetitive foreclosure: Although VoIP providers may be harmed, the price of voice service in the United States would not likely be affected by the elimination of VoIP providers. In conclusion, in the single application in which wireless network owners could be said to compete with unaffiliated upstream suppliers, there is no need for regulation.
133. Wu at 10 (emphasis added).
134. Skype Petition at 13.
135. Wu at 7.
136. Amol Sharma, Nick Wingfield & Li Yuan, Apple Coup: How Steve Jobs Played Hardball In iPhone Birth, WALL ST. J., February 17, 2007, at A1.
137. Id.
138. Leslie Cauley, Verizon Rejected Apple iPhone Deal, USA TODAY , January 29, 2007.
139. Sharma, Wingfield & Yuan, supra note 114, at A1.
140. Cauley, supra note 115.
141. Id.
142. Id.
143. See for example, Patrick Greenlee, David S. Reitman & David S. Sibley, An Antitrust Analysis of Bundled Loyalty Discounts (Economic Analysis Group, Discussion Paper No. 04-13, October 30, 2006), available at http://ssrn.com/abstract=600799.
144. CRANDALL, supra note 103, at 24-5 ("The formula - the subscriber plant factor - used in allocating the local loop costs was changed twice more, in 1965 and 1969, in each case raising the interstate share of local costs")
145. Nicholas Economides, Telecommunications Regulation: An Introduction September 2003, available at http://www.stern.nyu.edu/eco/wkpapers/working-papers03/ 03-22Economides.pdf ("In the 1960s regulators did not let prices of basic local service rise in their attempt to achieve 'universal service,' i.e., including as many households as possible in the telecommunications network, on the basis that this was desirable even if it were allocatively efficient.").
146. Using a Coasian framework, Thomas Hazlett explains that limits imposed by carriers are not necessarily anticompetitive: "Every supplier of goods or services must make basic choices about the scope of its enterprise. How much of the final product it seeks to create, and what components it purchases from other suppliers, entail complex trade-offs that lie at the heart of economic organization. This choice-making process applies with equal force to contracts that define options for consumers to substitute other components in place of those selected or produced by the firm." See Thomas Hazlett, Wireless Carterfone: An Economic Analysis, Working Paper, May 2007, at 3-4.
147. Id. at 16.
148. Verizon Wireless Website, Samsung SCH-a990, available at http://www.verizonwireless.com/b2c/store/controller?item= phoneFirst&action=viewPhoneDetail&selectedPhoneId=2406./ The functionality of the Bluetooth printing is confirmed in a Cnet review. "Alternatively, you can take advantage ofthe SCH-A990's TV-out capability to display photos on your TV, or you can send them to a Bluetooth-enabled printer right from your phone."
149. Bonnie Cha, Samsung SCH-A990, CNET.com Review, July 20, 2006, available at http://reviews.cnet.com/Samsung_SCH_A990/ 4505-64547-31968249.html.
150. SprintPower Vision Phone M610 By Samsung Not Your Average Mobile Phone, PC TODAY.COM, Vol. 5, Issue 5, available at http://www.pctoday.com/Editorial/article.asp?article=articles/2007/ t0505/30t05/30t05.asp&guid=.
151. RIM PRESS RELEASE, NeedTEXT Attachment Opener Chosen by Leading Law Firms for Wireless Users on RIM BlackBerry (May 2, 2002), available at http://www.rim.net/news/partner/2002/ pr-02_05_2002.shtml.
152. See, for example, Jaclyne Badal, TechnoLggy (A Special Report): Office Technology - Goodbye Briefing Book; A Paperless Board Meeting? It's Starting to Happen, WALL ST. J., October 23, 2006, at R11.
153. Detailed instructions on printing an address book can be downloaded from Microsoft's website, available at http://office.microsoft.com/ en-us/outlook/HP030656981033.aspx.
154. Cingular sells cables to sync phones, such as the LG C2000, with computers. Cingular Website, available at http://cingular.scp4me.com/ItemDetail.aspx?ItemNo=81571CW&make= LG&model=C2000&ProductClass=DATA (last accessed March 26, 2007).
155. See also Kent German, Weekend Project, Sync your cell phone with your computer, ZDNet.com, January 23, 2006, available at http://review.zdnet.com/4520-11400_16-6416968-1.html?tag=bnav.
156. Wu at 17.
157. Id. at 19.
158. Id. at 19. By advocating a "friendly wireless network," Wu appears to demand a network that allows users to do virtually anything they want. Under Wu's vision, wireless users could download any bandwidth-intensive content, attach any foreign device, and make phone calls - the lynchpin of any wireless service - for free. In the absence of market failure, the interests of wireless carriers generally coincide with the interests of their customers. It is not necessary to seek regulation that would alter the behavior of wireless operators for the sake of promoting the interests of VoIP providers only.
159. Id. at 17.
160. Skype points to the terms of service for Verizon and AT&T, arguing that their terms go beyond prohibiting activities that might harm the network. See Skype Petition at 19.
161. Verizon Website, available at http://www.verizonwireless.com/b2c/ store/
162. See also Cingular Website, available at http://www.cingular.com/cell-phone-service//cell-phone-plans/ laptop-connect-plans.jsp.
163. Vonage Website, http://www.vonage.com/services.php?lid=nav_Services. Vonage also offers a plan with 500 minutes, but this plan is not economically viable at any usage level. Id.
164. Skype Website, available at http://www.skype.com/ ($29.95 yearly cost divided by 12).
165. Eleventh CMRS Report, supra note 12, at 106.
166. The numbers used in this example are likely to be conservative for several reasons. First, by removing restrictions on usage, the cost of data services would almost surely increase, raising the cost of the
167. Cingular Website, Phones and Devices, available at http://www.cingular.com/cell-phone-service/cell-phones/ pc-cards.jsp?zipPass=true. Fourth, Vonage's unlimited plan states that Vonage can discontinue service for usage above acceptable levels: "We reserve the right to immediately disconnect or modify your Service if we determine, in our sole and absolute discretion, that your use of the Service or the Device is, or at any time was, inconsistent with normal residential usage patterns." See Vonage Terms of Service, available at http://www.vonage.com/ features_terms_service.php. It is not clear whether Vonage would consider three times the average cell phone usageto be "inconsistent with normal residential usage patterns."
168. In-Depth Analysis: Consumer Demand for Cellular/Wi-Fi Services, Mindbranch Research Summary, December 2006, available at http://www.mindbranch.com/Consumer-Demand-Cellular-R97-2670/ ("Instead, the more frugal customers who may be limiting their usage and spending to avoid unexpected bills are a more important - but difficult to identify - market.").
169. Wu at 17. Wu notes two exceptions in his footnotes, saying that the iPhone and the Dash will both feature Wi-Fi.
170. Id. ("AT&Twill soon offer the Apple iPhone, which has Wi-Fi capabilities. Also, since October 2006, T-Mobile has offered a plan in the city of Seattle whereby consumers can use a hybrid telephone, sold by T-Mobile, in T-Mobile's 'hotspots,' although this feature also entails an extra monthly fee. In addition, also in October 2006, T-Mobile began to make available the 'Dash' smartphone with Wi-Fi capabilities. Users can also buy Wi-Fi phones in Europe or Asia and import them.").
171. Id. at 35.
172. Wu at 17 (Wu cites an MSN columnist saying that "What some carriers fear most is the e61's ability to handle VoIP calls when you're near a friendly wireless network. Tlat's why we won't see Wi-Fi on the e62.") (emphasis added).
173. Mike Hughlett, Batteries Hit Their Boundaries; Engineers are Working To Make Fuel Cells Fit in Cell Phones, Laptops and More, Giving Users More Juice and Time, CHI. TRIB., November 3, 2006, at 1 ("The battery craftsman is the cold voice of reality, reminding gadget designers that there are limits. 'There's an old maxim that engineers will consume all the energy you give them and scream for more,' Howard said.").
174. See, for example, Walter Mossberg, BlackJack Beats Out Palm 750, but iPhone May Well Top Both, WALL ST. J., January 11, 2007, at B1 ("Also, the BlackJack claims 38% better battery life than the Treo, and it runs on a faster data network than the Treo.").
175. Arjun Anand, Constantine Manikopoulos, Quentin Jones, and Cristian Borcea, A Quantitative Analysis of Power Consumption for Location-Aware Applications on Smart Phones, Department of Computer Science, Electrical and Computer Engineering, and Information Systems, New Jersey Institute of Technology, at 4, available at http://web.njit.edu/~borcea/papers/isie07.pdf.
176. Nokia UK Website, e61 Page, available at http://www.nokia.co.uk/ A4221032 (last accessed March 28, 2007).
177. Nokia US Website, c62 Page, available at http://www.nokiausa.com/ phones/E62/0,7747,feat:1,00.html (last accessed March 28, 2007).
178. Cingular Website, Cingular 8525, available at http://www.cingular.com/cell-phone-service/cell-phone-details/ ?q_list=true&q_phoneName=Cingular+8525&q_sku=sku310005 (last accessed March 27, 2007).
179. T-Mobile Website, T-Mobile MDA, available at http://www.t-mobile.com/shop/phones/Detail.aspx?device= 8802ddeb-1ee4-477a-9608-d9cd1e2a903f (last accessed March 27, 2007).
180. Verizon Wireless Website, Verizon Wireless XV6700, available at http://www.verizonwireless.-com/b2c/store/
181. Sprint Website, Sprint PCS Vision Smart Device: PPC-6700, available at http://www1.sprintpcs.com/explore/PhonesAccessories/ PhoneDetails.jsp?navLocator=%7Cshop%7CphonesAccessories%7CpdaPhones% 7C&selectSkuId=sprintppc6700&FOLDER%3-C%3Efolder_id= 1476427&CURRENT_USER%3C%3EATR_SCID_ECOMM&CURR-ENT_USER%3C% 3EATR_PCode=None&CURRENT_USER%3C%3EATRtState=group (last accessed March 27, 2007).
182. Alltel Wireless Website, UTStarcom PPC6700, available at http://www.alltel.com/phones/audiovox/6700.html (last accessed March 27, 2007).
183. In-Depth Analysis: Consumer Demand for Cellular/Wi-Fi Services, Mindbranch Research Summary, December 2006, available at http://www.mindbranch.com/Consumer-Demand-Cellular-R97-2670/ ("There is strong consumer interest in the types of billing and service plans that VoWLAN/cellular converged services could provide. However, there is little interest in the actual technology requirement for special mobile phones and a Wi-Fi connection to an existing broadband service.").
184. See also In-Depth Analysis: Consumer Demand for Cellular/Wi-Fi Services, In-Stat Mobile Consumer Catalog, December 2006, available at http://www.instat.-com/catalog/ wcatalogue.asp?id-231.
185. Id.
186. Wu at 14.
187. Id. at 14.
188. Id. at 15.
189. Terry Mason, Smile! Phone Takes Nice Pix, SEATTLE TIMES, August 28, 2006, at E2 ("On the bottom, there's a slot for a micro SD card to store images, which can also be stored on the phone. You'll want to use that memory card to transfer the photos to your computer.").
190. Sascha Segan, Camera Phone; We take our Best Shot at Helping You Pick the Right Camera Phone, PC MAGAZINE, June 20, 2006 ("If you intend to use your phone's camera frequently, make sure it has removable memory. That way, you can pop a mini-SD or micro-SD card into your phone, take some pictures, pull it out and drop it into a PC card reader-just as you would with a 'real' digital camera.").
191. Jessica Vascellaro, News Picture Changes With Cellphone Video, WALL ST. J., January 3, 2007, at D4 ("Carriers also are making it easier for customers to send videos straight to Web video sites. For example, Verizon Wireless recently announced that subscribers to its $15 a month V CAST service will soon be able to upload their video clips directly to video-sharing sites YouTube and Revver Inc. from their phone. Doing so is expected to cost 25 cents a clip, unless photo and video messages are covered by their messaging plans.").
192. Id. ("Bluetooth file transfer, though, is overrated; it's more complicated to use than either of the other two options.").
193. James Granelli, Picture Gets Clearer for Cellphone Camera Users; The Industry Improves Photos' Quality and Makes It Easier to Move Them to a PC or Printer, L.A. TIMES, December 28, 2006, at C1 ("About 40% of cellphone customers have cameras in their handsets, according to a survey by Forrester Research Inc. But 30% of them never use the camera and 46% say the photos they take have never left their phones."). Multiplying the percentage of subscribers with camera phones (40 percent) by the percentage of those users who use their camera phones (70 percent) equals 28 percent.
194. Id. Multiplying the percent of users who use their camera phones (28 percent) by the percentaage of those users who transfer photographs from their camera (100-46=54 percent) equals 15 percent.
195. Sarmad Ali, Three Phone Makers Point to Advances in Camera Cellphones WALL ST. J., May 25, 2006 ("Camera phones are steadily improving, but my guess is that most consumers use them as backup cameras. They prefer digital cameras for big events, such as weddings and vacations.").
196. One important impediment to transferring other types of content from a wireless handset relates to intellectual property rights. For example, if a network owner can demonstrate to a music label that a song can be listened to only once, then the network owners can negotiate a lower royalty rate. Wu fails to consider the role of property rights in the transfer of content from wireless devices.
197. Cingular Website, Phones and Devices, available at http://www.cingular.com/cell-phone-service/cell-phones/ cell-phones.jsp?startFilter=false&typcat1000=cat1000&allFeatures= on&mansamsung=samsung. Confirmed with call to Eric at Cingular Customer Service on March 23, 2007.
198. Wu at 35-6.
199. Verizon Communications Inc. v. Lazo Offices of Curtis V. Trinko is the most recent Supreme Court case on the duty to deal. It involved a claim against Verizon, an incumbent local exchange carrier, for failing to treat customer orders filed by a competitive local exchange carrier as well as it treated its own customers' orders. The Court held that Verizon did not have a duty to deal with its rivals because, as explained further below, Verizon did not discriminate against its rivals in favor of nonrivals but rather discriminated against everyone else in favor of itself. For a more detailed review of the implications of Trinko in broadband markets, see Sidak, supra note 2.
200. See Einer Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REV. 253, 308-10 (2003).
201. Id. For an example of a discriminatory refusal to deal in broadband, see Hal J. Singer, The Competitive Effects of a Cable Television Operator's Refusal To Carry DSL Advertising, 2 J. COMPETITION L. & ECON. 301-31.
202. For example, Verizon Wireless's customers who sign up for V CAST wireless Internet service are able to access "a sampling of the most popular videos" from YouTube. See Verizon to Offer YouTube Videos THE CONSUMERIST, November 28, 2006, available at http://www.consumerist.com/consumer/youtube/ verizon-to-offer-you-tube-videos-217818.php.
203. Wu at 3.
204. Id. at 10 (emphasis added).
205. Id. at 13 (emphasis added).
206. Id. at 14 (emphasis added).
207. Id. (emphasis added).
208. Id. (emphasis added).
209. Id. at 21.
210. Id. at 32.
211. The same arguments justify a DSL provider that offers high-definition video signals over a broadband connection - there is not sufficient capacity for the DSL provider to allow its customers to download multiple streams of HD video from multiple sources. Indeed, HD video over broadband was exempted from the net neutrality provisions in the AT&T-BellSouth merger agreement for this reason. See FCC Approves Merger of AT&T Inc. and Bellsouth Corporation, released December 29, 2006, available at http://hraunfoss.fcc.gov/ edocs_public/attachmatch/DOC-269275A1.pdf.
212. Hazlett notes that there are advantages to not requiring that a carrier accommodate all technologies: "In depriving [carriers] of choices [of adopting one mode of technology], it would pre-empt their opportunity to capture efficiencies gained by adopting one technology to the exclusion of others. ... Indeed, carriers have made multi-mode phones and services available. But the business they generate constitutes a small niche; the great majority of customers believing that their needs are better met using less expensive approaches. Carriers do not 'force' a technology on their subscribers; rather, they cater to their interests by offering cost-effective handsets. Forcing 'openness' would override these choices and reduce consumer welfare." See Hazlett, supra note 122, at 5 n. 125.
213. Wu at 32.
214. Verizon clarifies limit on "unlimited" data plan, April 4, 2007, available at http://www.uptilt.com/ c.html?rtr=on&s=691,rejj,8mg,rsv,cby1,27i2,k82z.
215. The exact language reads as follows: "Anyone using more than 5 GB per line in a given month is presumed to be using the service in a manner prohibited above, and we reserve the right to immediately terminate the service of any such person without notice." Id.
216. Id.
217. For example, mandatory disclosure has proven inadequate in the credit card industry. See General Accounting Office, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers GAO-06-929, September 12, 2006, available at http://www.gao.gov/new.items/d06929.pdf (explaining that "These weaknesses may arise from issuers drafting disclosures to avoid lawsuits, and from federal regulations that highlight less relevant information and are not well suited for presenting the complex rates or terms that cards currently feature").
218. Wu at 15 (emphasis added).