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Your Turn: Look to markets for next-gen success

by david sosa
September/October 2001

Conventional wisdom holds that the United States has fallen behind Europe and Japan in rolling out next-generation wireless services due to a standards “war” and a spectrum shortage.

These concerns are misplaced. Although U.S. carriers are constrained by flawed spectrum policy, which limits the amount of new spectrum for mobile data and voice services, federal regulators have unleashed the powerful forces of competition. These forces have created a dynamic domestic wireless market where most consumers have the choice of four to six service providers and prices are among the lowest in the world. In contrast, most European and Asian countries have taken a central-planning approach that places technical decisions in the hands of regulators, limiting the number of competitors and resulting in higher prices. Competition will spur a faster and more efficient deployment of 3G networks in the United States than bureaucratic processes in other countries, even if spectrum policy reform remains stalled in Washington, D.C.

Pundits have argued that the United States is doing something wrong because wireless penetration is lower here than in other industrialized countries. However, wireline rates and account set-up charges elsewhere are generally higher. Lower U.S. penetration rates, relative to Europe and Asia, reflect greater competition between wireless and other communications services, not a failure of public policy or poor execution by service providers.

The Japanese success with i-mode frequently is invoked to suggest that next-generation wireless is thriving outside U.S. borders. But i-mode is not an advanced wireless data service nor is it likely to be replicated here. Rather, it has been successful in large part because wireline Internet penetration in Japan is low–19th among all countries, well behind the United States and Western Europe. The low-speed i-mode service has substituted for wireline Internet among users, 85 percent of whom have no other access to the Internet.

Those who argue that the U.S. wireless industry and consumers would benefit from a single, government-mandated technical standard overlook two important facts.  First, liberal policies on technical standards remain a strong asset for service providers, equipment manufacturers and consumers. In U.S. markets, technical strategy is critical to business success. A carrier’s chosen standard determines service characteristics and product offerings, and a multistandard environment enables carriers to exploit the strengths of their own standard and the weaknesses of rivals’ to differentiate their offerings. Second, simple solutions to incompatibility include national footprints and multistandard handsets. Domestic market forces have accomplished this.

In contrast, government-mandated technical standards discourage innovation and market development. This is evident in the deployment of next-generation networks. U.S. carriers are free to migrate gradually or all at once, to build out based on economics rather than regulatory edict and to otherwise revamp their technical strategies as needed. European carriers are constrained by rigid technical rules that preclude incremental strategies, make it difficult to finance new networks on the basis of existing cash flows and limit mid-course corrections in technical and business strategies. This centrally planned approach may rob European carriers of the flexibility to meet consumers’ needs.

Driven by consumer demand and market-determined cost structures, the deployment of new technology in the United States is a more efficient path to next-generation wireless services than the top-down European approach. Nevertheless, we must not excuse the FCC, Congress and the executive branch for their collective failure to reform spectrum management policy. Private industry, including the mobile communications sector, still needs an increased supply of spectrum.

David Sosa, a senior economist in the San Francisco office of Analysis Group/ Economics, advises telecommunications and Internet clients on economic and financial issues.