February 19, 2013 New York Times - By Brian X. Chen

Using the Internet or a cellphone keeps getting more expensive. But for network providers like AT&T and Verizon Wireless, new technologies have made services cheaper to deliver. So why the higher prices?

Susan P. Crawford offers one point of view in her new book “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age.” Ms. Crawford, a law professor who served as special assistant to President Obama for science, technology and innovation policy, says mergers in the American broadband and wireless industries have stifled competition, which hurts the consumer in the end.

In an interview, Ms. Crawford explained the highlights of her book. An edited version of the transcript follows.

Q.

What is the main message behind your book, and why did you decide to write it?

A.

I wrote “Captive Audience” because I saw that years of deregulation and a wave of mergers had left America with neither competition nor adequate oversight when it comes to high-speed Internet access. Based on how people actually use these connections and how much they are required to pay, we are being gouged: We are all paying too much for services that are both uncompetitive and second-class, and not enough Americans are being served adequately by reasonably priced, world-class services.

This problem isn’t just affecting social equality and fairness, although those effects are important; the middle class is tightly squeezed and poor and rural people are relying on public libraries and McDonald’s for free, inferior Wi-Fi access. Because high-speed Internet access is our century’s version of electrification, it’s also likely affecting our nation’s economic growth.

I focused on the Comcast/NBCUniversal merger as a lens for the book because that gigantic deal touched on all parts of the telecommunications industry at the same time that it merely reflected how bad things had gotten. The monopoly power of local cable incumbents over wired access is striking. The big cable players, Time Warner Cable and Comcast, never enter each others’ territories.

I wrote “Captive Audience” because we cannot afford to put this problem on the too-hard pile. We are slouching toward the past, and failures of government policy have gotten us in this position. Comcast, Time Warner Cable, Verizon Wireless, and AT&T aren’t evil; they are serving their shareholders’ interests by dividing markets, picking targets, and making more money from the same number of subscribers. But where are the policies that are going to unleash competition in urban areas and require world-class network coverage everywhere else? The book is aimed at encouraging leaders across the country to take on this challenge.

Q.

What are the unique problems or challenges that the American wireless industry faces compared to other countries?

A.

Wireless access is not only a separate market, it’s also a highly concentrated market in America. Verizon Wireless and AT&T, who together account for about two-thirds of U.S. wireless subscribers, can raise prices with impunity and often appear to act in lockstep: Both companies introduced “share everything” plans within about a month of each other and announced they would phase out unlimited use data plans. Their average revenues per household or per user continue to climb; in Europe, where wireless carriers face much more competition, average revenues per user have fallen by 15 percent over the past five years.

To add color to this picture, the kinds of high-speed wired Internet access connections sold by cable incumbents aren’t up to global standards. In Asian countries, Northern Europe, and even Australia, fiber optic connections to homes and businesses exist or are planned to carry virtually unlimited communications that are symmetrical, allowing for an equal ability to publish data as well as passively watch it. Our cable systems aren’t built to provide that kind of equal upload capacity. We are paying much more than people in other countries for inferior service.

The wireless industry claims that there is extensive competition in the U.S., including four nationwide operators and seven providers, each serving more than four million subscribers, but that’s like claiming that the New York Giants and the Tappan Zee High School team both play football. The players other than AT&T and Verizon Wireless aren’t on the same level. Scale and spectrum holdings matter a great deal in this industry.

Q.

Why do we face these issues? What happened?

A.

In a word: Consolidation.

When the cellular phone emerged as a consumer product in the 1980s, it operated in 800 MHz frequencies, for which the F.C.C. initially gave away two licenses for 40 MHz of spectrum in each of the 306 market areas in the United States — one to a wireless provider and one to a wired provider. Small-market licenses frustrated the buildup of viable nationwide wireless infrastructure; companies in urban areas had only a few voice channels, which wasn’t enough capacity to serve demand, and companies in rural areas couldn’t produce enough revenue to survive. No one could operate at the scale needed to make the business worthwhile.

The 1980s licensing process led, predictably, to quick consolidation and market-division agreements among the applicants. This desirable “beachfront” low-frequency spectrum — so-called because these frequencies travel well over long distances and inside buildings, which means operators have to build just a third or a fourth as many towers as they do in areas where they’re using higher frequencies — went to the corporate ancestors of today’s AT&T and Verizon.

In some ways the wireless marketplace is even worse than the wired market: It has been a concentrated field since 1995, and it is growing more concentrated more quickly each year. Verizon (32%) and AT&T (31%) divide the vast majority of the market between them in terms of both spectrum holdings and revenues, with Sprint (17% market share) and T-Mobile (11%) barely hanging on as distant third and fourth players, with uncertain ability to constrain the prices charged by Verizon and AT&T.

Q.

The carriers always seem to complain about a looming “spectrum crisis” threatening the quality of our wireless services. Is there truly a spectrum shortage threatening the quality of our services?

A.

In my view, the duopoly players, Verizon Wireless and AT&T, have plenty of spectrum. If they wanted to increase data capacity, they’d build more towers and feed them with fiber. But that would be expensive, and it’s in their interest to keep expectations low and scarcity in place. I’d like to see real nationwide competition; to get there, T-Mobile would need to have access to low-band spectrum. Wireless is just the last 50 feet of a wire, and what we really need is wholesale, reasonably priced fiber running deep into neighborhoods and business districts around the country. If that facility is in place, you’ll see lots of wireless competition.

Q.

There is chatter that you could be a potential successor to Julius Genachowski as the F.C.C. chair. What would you be seeking to change if you were given that role?

A.

In any F.C.C. chair, we should be looking for someone who will vigorously fight for communications policy that can help us as a nation achieve our boldest aspirations. We need a bolder vision and bigger action for a brighter high-speed Internet access future. Over all, I think history will find that Julius Genachowski has done a good job. But if we really want to be the nation that leads the world in 21st century technologies, then we need a chairman — whoever that may be — who is willing to tackle the hardest of challenges and understands how to harness the power of competition, innovation, and investment to break through today’s bottlenecks.

I think that means lowering barriers to the installation of wholesale fiber rings across the country, so that cities can use control over their rights-of-way to mandate the kind of inexpensive basic facility their citizens need. It means ensuring that competitive retail fiber providers are able to get access to these wholesale facilities and to programming they need to serve Americans. It means making low-interest, long-term financing available to new entrants, as well as subsidizing new facilities where appropriate in rural areas. The whole country needs a fiber upgrade. We need to ensure that everyone has cheap, fast, abundant connectivity, and without dramatic changes in policy we won’t get there.

"This problem isn’t just affecting social equality and fairness, although those effects are important; the middle class is tightly squeezed and poor and rural people are relying on public libraries and McDonald’s for free, inferior Wi-Fi access." -Professor Susan Crawford