Auditors question U.S. wireless competition

American wireless customers are paying less for cell phone service than they did a decade ago, but they have fewer choices of carriers, a report from the Government Accountability Office said Thursday.

The GAO is the audit arm of Congress, and in the report there was both good and bad news for consumers. The good news is that the average price for wireless services declined each year from 1999 to 2008, the GAO said, citing Consumer Price Index data. In fact, average prices in 2009 were half the prices in 1999, the report said.

"This illustrates that consumers are generally getting more wireless services (such as more voice minutes of use) for lower costs than they were 10 years ago," the GAO said.

CTIA, the trade group that represents the wireless industry, said the GAO's findings confirm that healthy competition in the wireless market exists and is benefiting consumers.

"In finding that wireless consumers are seeing 'lower prices and better coverage,' today's GAO report confirms what we've been saying for a long time--that the U.S. wireless industry is extremely competitive and continues to respond to increasing consumer demand by delivering real benefits for American consumers," CTIA president and CEO, Steve Largent said in a statement.

But the GAO didn't exactly say that the market was competitive. In fact, the report points out that consumers have fewer choices of service providers today than they did a decade ago. The report said that four major U.S. operators--Verizon Wireless, AT&T, Sprint Nextel and T-Mobile USA--dominate the market with about 90 percent market share. This leaves little room for regional companies to compete.

The GAO's findings are in line with a report the Federal Communications Commission issued earlier this year. For the first time, the FCC did not say the wireless industry was competitive, and instead said it had become concentrated. The FCC said 60 percent of the nation's subscribers and revenue come from the country's two largest wireless providers: AT&T and Verizon Wireless.

Consumer advocates say these findings are bad news for consumers because it allows the market to be controlled by a few major players.

"The GAO's findings, together with the FCC's recent report on wireless competition, paint a clear picture of an increasingly concentrated industry in which competitors and consumers pay high prices to pad the high profit margins of AT&T and Verizon," Chris Riley, counsel for the consumer advocacy group Free Press, said in a statement. "Inflated backhaul costs, misguided spectrum policies, and exclusive rights to popular devices have fostered an environment where companies cannot compete on a level playing field. With the lack of competition, consumers are paying the price through early termination penalties, hidden and vague usage restrictions, and nontransparent, nonsensical charges and fees."

The FCC has made spurring competition one of its goals as part of the National Broadband Plan. The agency is currently looking at ways to get more spectrum into the hands of wireless operators to feed demand for more mobile services, but the agency also hopes to attract new service providers to the wireless broadband market.

In the last auction, the FCC instituted a provision in the rules that required the winner of a certain block of licenses to make any network built with that spectrum to be open to other carriers and devices. Verizon Communications won that spectrum in the auction and is using it to build its 4G wireless network using a technology called LTE or Long Term Evolution.

The GAO's report could help shape policy going forward. It could influence future rules on wireless auctions. And it may influence policy makers and congressional leaders on Capitol Hill as the heated Net neutrality debate comes to a head.

Phone companies say they are willing to accept some rules or regulations for traditional wired broadband networks. But they say that wireless should be treated differently. In a joint proposal submitted to lawmakers and other policy officials, Google and Verizon argued that not only are wireless networks more constrained, but they are also more competitive than wireline networks.

This is true in the sense that most people in the U.S. only have at best two choices for broadband service. But most of the major markets in the U.S have only four choices for wireless service, a number that consumer advocates worry is too low to keep the industry in check.

The GAO report also found that wireless subscriptions have exploded in the last decade growing from 3.5 million in 1999 to 285 million at the end of 2009. Nearly 40 percent of U.S. households rely primarily on wireless service, the report found. And the report also noted that coverage has improved.

As for state of competition, the GAO said more information is needed.

"In particular, additional data could help assess the competitiveness of small and regional carriers, as well as shed light on the impact of switching costs for consumers," the GAO said in its report.

Rick Kaplan, chief counsel for FCC Chairman Julius Genachowski, said the commission will address the issues suggested in the GAO report.

"We agree with GAO that data-driven analysis of the wireless marketplace is essential for pro-innovation, pro-competition policies," he said in a statement. "The FCC has taken proactive steps to improve our data and analysis, including collecting new and better data for this year's Mobile Wireless Competition Report."