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Mandatory bans on bundling of handsets with wireless service – referred to by many as “wireless Carterfone (News - Alert)” – could be the result of a new proceeding the Federal Communications Commission already has directed staffers to open. That will result in higher upfront device costs for all consumers, as the trade off for service without contracts.

 

Acting FCC (News - Alert) Chairman Michael Copps, in fact, says he already has authorized FCC staffers to open an inquiry into the handset subsidy issue, and that the commission will “take action if required.”

 

The noble goal of furthering consumer choice and ostensibly fostering faster innovation is the objective. But will that be the result? Some aren’t so sure.

 

Higher handset prices are almost inevitable under such a plan, since mobile service providers will have no incentive to subsidize new handsets if they cannot recover the cost of the subsidies through multi-year service contracts, says George S. Ford, Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies.

 

And though the intended benefit of prohibiting bundling of handsets with service contracts is faster innovation, some might argue that slower innovation is equally possible. The reason is that subsidized handsets result in faster replacement of devices, meaning there is a robust market for introduction of smarter devices on a rapid scale.

 

One might point to the use of unlocked devices on GSM networks as an example of how bundling devices with contracts affects user behavior. By definition, 3G networks already are open to the use of GSM-compliant handsets. But not many people buy their own unlocked phones at full retail and then sign up for service with a GSM provider. Most users appear to prefer the lower costs of contract-plus-phone packages.

 

Now that smartphones cost between $400 and $700, bundling bans would likely have the effect of inhibiting purchases of new and more powerful devices. So mandatory bans on device and service bundling would reduce the velocity of introduction of new and better devices, and slow the speed with which handset manufacturers introduce more powerful devices.

 

That might be the opposite of what wireless Carterfone backers want, but it is likely to happen as service providers lose the incentive to subsidize purchases of new devices.

 

One of the reasons the wireless industry has been so innovative, despite the complaints one always hears, is that device turnover is so high, spurred by the relative affordability of new handsets in a subsidized device regime.

 

“The typical consumer wants a free or very low cost cell phone, and mandatory wireless Carterfone rules would eliminate the incentive to offer such discounts,” says Ford. “That will have consequences: all consumers will pay higher prices, while only the few more sophisticated users would likely receive any benefit from such regulations.”

 

Carterfone-style regulations explicitly lower the complementarity between handset and service sales and also lower the incentive for wireless providers to offer handset subsidies. As a result, should policymakers impose wireless Carterfone obligations, consumers would pay more for mobile handsets, the Phoenix Center economists argue.

 

Nor does it appear there are many serious problems in the wireless market, as a consumer welfare matter.

 

Over the past five years, the average price for a wireless voice service has declined 16 percent annually in real terms, or about 80 percent over the past five years. Subscribership has risen 14 percent annually, with 100 million subscribers added from 2002 to 2006.

 

Total usage has more than doubled over the past five years, with an annual growth of 37 percent. Productivity, measured as dollars generated per industry employee, has risen by an average of 18 percent per year over the last half decade.

 

Among developed countries, the mobile market in United States has the lowest level of economic concentration, the highest calling volume, and some of the lowest prices. At last count, 95.5 percent of Americans could choose among three or more wireless providers.

 

“Many nonetheless assert that mobile providers in the United States, through term contracts, early termination fees, and allegedly restrictive handset certification and support policies, abuse their position in the market in order to lock customers into service contracts, limit consumer choice, and hinder mobile handset innovation,” says Ford.