V. Where Competition Thrives

Chart 8: Increased Use of Cellular Service
Chart 8

The failure of state and regulatory policy to stimulate competition in wire line services does not mean that consumers lack for choices in local calling services. Seemingly by the day, affordable telecom technologies and new applications come to market.


Wireless telephony presents the greatest competitive challenge to wire line service. Cellular subscriptions have increased from just 92,000 nationwide in 1984 to more than 140 million today.[32]

Wireless telephony presents the greatest competitive challenge to wire line service.

A primary factor driving this extraordinary growth was the decision by Congress to relax the FCC’s grip on the broadcast spectrum. In the early 1990s, the FCC had restricted the number of wireless carriers to two per market. The 1993 Budget Reconciliation Act, however, forced the FCC to auction spectrum for up to six carriers per market. Consequently, by 2003, over 95 percent of the nation was served by at least three wireless services.[33]

This growth is entirely due to wireless carriers competing in the open market to build their own networks, with none of the regulatory management of growth that has characterized wire line competition.

Opening the market dramatically lowered prices. The average revenue for wireless service dropped from 47 cents per minute in 1994, before the spectrum auctions, to 29 cents in 1998; 18 cents in 2000; and 11 cents in 2002. Simply put, the average price per minute for wireless service decreased by more than 75 percent in the seven years after Congress reined in FCC regulators.

Chart 9: Cellular Service Gains on Wire Lines
Chart 9

During the same period, average monthly cellular usage by consumers rose from 119 minutes per month in 1994 to 427 minutes per month in 2002.

(See Chart 8.)

The explosive growth of wireless services has exposed the obsolescence of the regulatory distinction between local and long distance services. Free of the service restrictions imposed on local wire line services, AT&T Wireless in 1998 introduced a flat-rate plan featuring unlimited local and long distance calling. Other wireless carriers quickly followed suit, and customers have been utilizing more minutes at an increasing pace.

These single-rate plans have allowed subscribers to avoid costly rates on intrastate calling that have long been used to subsidize the actual cost of local wire line services. Unlike the “synthetic competition” of the forced-access regime, cellular service provides consumers with an actual service alternative.

Millions of Michigan consumers have exercised their choice, as shown in Chart 9. The number of local wire lines statewide remained roughly constant between 1999 and 2002 despite 2 percent growth in Michigan’s population and increased demand for fax and Internet lines. The lack of growth in wire lines can be explained by the increase in cellular subscriptions. There were 3.5 million wireless subscribers statewide in 1999, or slightly more than half the number of wire lines. By the end of 2002, wireless subscriptions had increased to more than 4.5 million, or two-thirds the number of wire lines.

If this trend continues, there will be more wireless subscribers than wire lines in Michigan by the close of 2007. This fact alone argues for elimination of the forced-access regime as unnecessary for providing consumers with choice.

Internet Telephony

Cable television companies and Internet Service Providers (ISPs) increasingly are adding telephony to their offerings. Cable telephony serves 33 million subscribers now, an increase of 33 percent since 2001.

Many cable firms initially invested in two-way transmission services to facilitate interactive programming and pay-per-view service. Upgrades to broadband for Internet access have made Internet telephony, known as Voice Over Internet Protocol (VOIP), more cost-effective.

Cable and Internet Service Providers enjoy a regulatory advantage over local wire line services because both have been relatively unregulated. Also, cable companies and ISPs can avoid interconnection charges imposed on wire line services if both parties connect to the call through the Internet.

Early VOIP was not commercially practical because placing a call required a third-party service to convert the digital transmission to voice. Via broadband, however, the conversion can now be accomplished through a simple adapter.[34] Features such as call waiting and caller ID are also available. Unlimited local and long distance calling are now priced around $40 a month.

Although VOIP currently accounts for only about 3 percent of calls worldwide, its market share is expected to grow quickly in the near future.[35] VOIP revenues are projected to grow from $2.2 billion in 2001 to $160 billion in 2007.

As with every technology, there are trade-offs. Because VOIP transmissions are digital, a single voice message can be easily transmitted to multiple destinations. But VOIP is also dependent on Internet access, which means that service could be more susceptible to power outages.

If left unregulated, most analysts regard VOIP as a viable option for consumers. But a recent court ruling threatens to inhibit broader rollout of the service. The Ninth Circuit Court of Appeals recently reversed the FCC’s classification of cable as an information service, instead declaring it a telecommunications service obligated to provide network access to competitors.[36]

If upheld, the Ninth Circuit ruling threatens to skew investment incentives in cable telephony just as forced-access regulation has undermined wire line investment. This would be unfortunate given the fact that cable telephony, along with wireless service, offers real choice to consumers and real potential for innovation.