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SEN. JOHN ROCKEFELLER, JR. (D-WV): I'd just like to start off with a kind of a mood setter. (Laughter.) I've been in the Senate for 24 years, and I've never used a chart on the floor of the United States Senate. So my record is intact.
However, this is special. This is wireless broadband, if you can see, and if you can't, I will make it clear. This, as you know, is not the whole United States. It's the eastern part of the United States. This is called Appalachia. This is called Northeast.
This is called Maine. It is white. White means nothing there. This is called West Virginia. That means nothing there. And then a little bit in Ohio. That's here. Oh, no, that would be Kentucky.
But it makes a very powerful point to me, and it makes a point that resonates emotionally very, very deeply with me, and that is we may have hills, Vermont may have some hills and great beauty, as we do, but they also have people, and they count just as much as anybody living at the most fancy address in New York City.
So that picture -- white Maine, what West Virginia, me here, Olympia over there -- it's just something to think about, just a mood setter. That's all it was. It was a mood setter, nothing more than that.
So, throughout the last decade, consumers have grown to rely on the mobility, convenience, and safety that wireless service can and does provide. Ten years ago, less than 100 million consumers had wireless phones. Today, the wireless industry counts more than 270 million Americans who have that. Evidently, not all of them, however, in at least two states.
However, in light of this success, we have a serious responsibility to ask what the consequences are for an industry that has grown up so fast and in such a short period of time. Usually, things don't emerge that quickly without having problems, and so we're going to discuss some of them.
Have our regulatory models kept up? Yesterday, I had the chairman of the FCC for a nomination hearing, and I said if he didn't fix his shop, we were going to do it for him. It was a stupid thing for me to say because the guy is so good, he'll have it fixed in three months. He's brilliant. But this I'm saying to an industry. Our regulatory models, our methods are, I think, wholly insufficient, if they exist at all.
If consumers choose to make their wireless phone their only phone, then do they get the service quality they need for such an essential service? Is the phone as good? Does it work as well? Is it as clear? That's important to them. I, for one, have some concerns about this and more.
I have concerns that too many consumers are bound to confusing contracts, I mean, brilliantly constructed, but not funny and not amusing to people who don't necessarily spend all their time reading the fine print on prescription drugs or on what you may put out with your product.
So I have concerns that too many consumers are confounded by the charges on their wireless bills and the way that those charges are delineated, explained or not explained. I have concerns that the Federal Communications Commission gets so many consumer complaints about wireless service, but then does so little about those complaints.
And I am extremely concerned, as I've indicated, I think, six or seven times, for my great State of West Virginia, that we have second- class wireless service in too many rural communities throughout America. I broadened it to include the entire country.
So all of this is very unacceptable to me, and I look forward to making it better with you.
Let me illustrate. The map I've shown you and the gap in coverage is extraordinarily difficult.
I know you have a witness that you can't stay for it, but you want to be able to say something about him, and -- but you can't say --
SEN. ROGER WICKER (R-MS): Thank you. No. Mr. Chairman, you go right ahead. I --
SEN. ROCKEFELLER: I'm not going to interrupt myself.
SEN. WICKER: Okay. Fine. (Laughter.)
SEN. ROCKEFELLER: But I've been -- but when the moment comes, you're welcome to do that.
SEN. WICKER: Okay. Very good. Well, you proceed in your own fashion. I'll be fine.
SEN. ROCKEFELLER: Okay. In my own fashion.
So, when people tell me that wireless service is ubiquitous, I have my doubts, and that's what this hearing is about.
I didn't even see what Alaska looked like.
SEN. ROCKEFELLER: Yeah. I worry that rural states like West Virginia will be left behind, and I simply will not stand for that. We can remedy that on this committee, they can remedy that at the FCC, or you can remedy it, but one of the three is going to happen. One of the three is going to happen.
We're a fair country. We don't treat people unequally and particularly in something which is growing so fast. I mean, if you were a diminishing industry and you had all kinds of problems, then, you know, I still wouldn't have that much sympathy, but you aren't. You're growing faster than any industry on the face of the earth.
With that said, I'm grateful to all of our witnesses for being here today.
John Kerry is going to take the second part of this hearing, as he's very deeply and expertly into this area.
I thank you for your willingness to participate in what I hope will be a frank and a fair conversation about the consumer benefits of wireless service, the viability of our existing regulatory models, and the pros and cons of handset exclusivity, which will be part of the second panel.
I look forward to your testimony.
I do not have a ranking member, and I'm sorry about that because she's very good.
So, Mr. Goldstein, the floor is yours.
MR. GOLDSTEIN: Thank you, Mr. Chairman and members of the committee. I'm pleased to be here today to discuss wireless consumer issues.
The results I will share with you come from GAO's ongoing work to examine the quality of wireless phone service and related FCC and state oversight efforts. Some of the findings I'll discuss are based on our recent nationwide survey of wireless phone service users.
The use of wireless phone service in the United States has risen dramatically during the past 20 years. Industry data show the number of wireless phone service subscribers has grown from 3.5 million subscribers in 1989 to 270 million subscribers today. Americans increasingly rely on wireless phones as their primary or sole means of communication. Over one-third of households now use only or mostly wireless phones instead of land lines.
Concerns have been raised in recent years about the quality of this phone service. My statement today will focus on consumer satisfaction and problems with the wireless phone service and FCC's efforts to assist wireless consumers with complaints.
First, according to the preliminary results of our national survey, most consumers are satisfied with their wireless phone service, but some have experienced problems. Specifically, we estimate that about 84 percent of wireless users are very or somewhat satisfied with their service. However, we also estimate that 10 percent, roughly 20 million people, are very or somewhat dissatisfied.
Looking beyond the overall numbers, we asked users about their satisfaction with five key aspects of wireless service, which were billing, the terms of service contracts, the carrier's explanation of their service at the point of sale, call quality, and customer service.
Similar to our overall results, we estimate that users' satisfaction with each of these aspects range from about 70 to 85 percent. However, we also found that the percentages of those users vary who are somewhat dissatisfied with these specific aspects range from about 9 to 14 percent.
When examining some specific problem areas, our survey results indicate that some users have recently experienced problems with billing, contract terms, and customer service. For example, we estimate that about one-third of those users who are responsible for paying for their service experience problems at least some of the time understanding their bills or have unexpected charges. Additionally, among those users who wanted to switch carriers within the last year, about 42 percent did not do so because of the early termination fee they would have to pay. Finally, among those users who contacted their carrier's customer service about a problem, 21 percent were dissatisfied with how their carrier tried to address their concern.
In response to these types of consumer problems noted above, wireless carriers have taken a number of actions. For example, the major carriers now prorate their early termination fees so such costs decrease over time. Carriers also offer service options that do not require contracts, and the industry spends billions of dollars each year on infrastructure to improve call quality and coverage.
Second, FCC assists wireless consumers by handling thousands of their complaints about carrier service every year, but consumers may lack awareness of this process and its intended outcomes. Consumers can complain to FCC through various means, including contacting FCC by phone or using the agency's Web site to submit complaints. FCC reviews these complaints, forwards them to a carrier for response, and reviews whether the carrier responded to the concerns the consumers' raised.
When considering that, as our survey suggests, some consumers are dissatisfied even after contacting their carrier for help, FCC's efforts to handle complaints are an important means by which consumers may be able to seek relief. However, our survey results suggest that most consumers do not know they can complain to FCC. Specifically, when asked where they would complain if they had a problem that their carrier couldn't resolve, only about 13 percent of wireless users said they would complain to FCC. Further, we estimated about 34 percent do not know where they would complain. That is roughly translatable to about 66 million people.
Third, FCC lacks goals to clearly identify the intended outcomes of its consumer complaint efforts. For example, it is not clear if the intended outcome of FCC's complaint process is resolving consumer problems or fostering communication between consumers and carriers.
The agency also lacks measures to demonstrate how well it is achieving its intended outcomes. For example, FCC has a goal to improve the customer experience with its call centers and Web sites, but it lacks measures of customer service.
Consequently, consumers may not understand what to expect from FCC's complaint process, and the effectiveness of FCC's efforts appear unclear. They do not, for instance, measure the effectiveness of their own complaint process and how consumers are responding.
We intend to complete our work on this engagement for the committee this fall, which will include examination of FCC's oversight of wireless phone service and the extent to which state utility commissions provide oversight and assist customers. We should have recommendations for FCC when we complete our work.
Mr. Chairman, this completes my remarks, and I'd be happy to answer any questions you or members of the committee have.
SEN. ROCKEFELLER: Thank you, Mr. Goldstein. You're right on time.
MR. GOLDSTEIN: Thank you, sir.
SEN. ROCKEFELLER: We don't know how to address that around here. (Laughter.)
MR. GOLDSTEIN: I have done this before.
SEN. ROCKEFELLER: I want to beg my two colleagues, Senator Begich and Senator Warner, that Senator Wicker has to go to an important meeting, but he has somebody who is in the second panel from his state that he wishes to introduce, and I want to give him the chance to do so.
SEN. WICKER: Actually, I think what I'll do -- I appreciate that, Mr. Chairman -- is I'll attend a very brief meeting and come back, and I think I'll be able to mention my constituent from Mississippi at that point.
Thank you, sir.
SEN. ROCKEFELLER: Well, at least everybody knows how gracious I am. (Laughter.)
SEN. WICKER: We've known that for quite a number of years, Mr. Chairman.
SEN. ROCKEFELLER: Senator Begich?
SEN. MARK BEGICH (D-AK): Thank you, Mr. Chairman, and I will be leaving in a few minutes. I have to preside on the floor.
So, if I can, I have a couple of questions about the survey. And thank you for doing this work on behalf of the committee.
You had indicated in October you'll be completed and final with recommendations?
MR. GOLDSTEIN: We expect by November, sir.
SEN. BEGICH: By November. I'm sorry.
MR. GOLDSTEIN: Yes.
SEN. BEGICH: But with recommendations?
MR. GOLDSTEIN: That's correct.
SEN. BEGICH: Will that be -- you had mentioned recommendations, I think, to FCC, but also will you have any legislative recommendations, or is it really just focused on regulatory changes within the FCC?
MR. GOLDSTEIN: It's too early to really tell the nature of the changes. We will clearly have recommendations, I suspect, for FCC, but depending on the nature of our findings and results, we might have legislative recommendations as well. We sometimes do.
SEN. BEGICH: And can you tell me that -- just remind me from the report -- the universe of survey that you used? In other words, what size of group and how did you do that just very quickly?
MR. GOLDSTEIN: This survey was based on a national sample of 1,143 randomly chosen Americans, all adults who use cell phones.
SEN. BEGICH: Okay. In your process, did you identify within the survey sample the -- I'm trying to figure out how to say this. You know, when you do a survey sample from a political one, you're trying to get the demographics. In this case, the demographics are user -- or types of companies that they use. Did you have any of that demographic data that you could use in this 1,100-plus sample? In other words, could you tell, you know, it was predominantly one company that -- or was it smaller companies or anything of that nature?
MR. GOLDSTEIN: We did not include in our survey any questions about specific companies that the consumers used. It was more to get at the quality experience they've had in dealing with calls and locations and billing and things like that. We did not specifically discuss companies.
SEN. BEGICH: Through your process so far, do you think they're -- and I guess this is where I'm trying to get to -- the second panel will have more of this discussion, I think, because you have smaller carriers, smaller companies, and then large nationals. Will your survey show or have some discussion of any variance in how people feel about, you know, a national company versus a smaller company that they get service from? Do you see where I'm going? I'm trying to -- because if you don't have that differential, if 1,100 folks have been surveyed, 1,100 plus, but it's all from predominantly one company or two companies, they might have one view versus the larger spectrum.
MR. GOLDTEIN: I understand, Senator. Since it was random across the United States, they had an equal opportunity really of getting picked up, you know, with any particular carrier. I reckon that some carriers are larger and have more dominant positions, but we did not account for that in the survey itself.
SEN. BEGICH: Okay. Is that something as you get the analysis you kind of put in the back of your mind as you're seeing the final analysis if anything pops out of that nature, you know, even though you did it by geographic location, but in case something pops out, you know, for example, in the Western states or -- you know, I use Alaska, and the map is very interesting. It's very empty, but share that with you -- but I'd just be curious if you kind of keep that in the back of your mind as you're completing it, if there's any regional differentials based on customer response to your questions that you ask.
MR. GOLDSTEIN: Certainly. Well, we will probably be able to determine differences between urban and rural. The sample size population will not allow us to disaggregate to the state level, unfortunately.
SEN. BEGICH: No, but, I mean, like, you know, Western states, South, and so forth.
MR. GOLDSTEIN: We will go back and see what we can do about that.
SEN. BEGICH: Okay. And if it can be done.
You made me think of a thought here. You may not know this, but when the bills are sent out, is there a notification somewhere that says -- well, I can't even remember on my bill -- that if you have a concern or a complaint that you can go to the FCC? Is that a requirement? It's not a requirement, is it?
MR. GOLDSTEIN: I don't believe it is, sir.
SEN. BEGICH: Okay. Because your point was an interesting point that -- so they don't know where to go, but if we're not telling them where to go, then they won't know where to go.
MR. GOLDSTEIN: The --
SEN. BEGICH: That's my simplistic way to say it.
Mr. GOLDSTEIN: That's right. As I indicated, roughly 34 percent of the sample, about 60 million people or so, did not know where to go. They did not know that they could to anyone other than their carrier, and, interestingly enough, last year, we determined that 44 percent of the sample, which is roughly 90 million people, contacted their carrier with a problem last year.
SEN. BEGICH: Wow. So, again, in your recommendations, those are the kind of things you'll look for to say what do we do to inform the customer better, how do we deal with early termination fees, which tend to be a big complaint by people, even though you mentioned some things they are doing, some pro rata and some other things. But those are the efforts you'll lay out in your recommendations?
MR. GOLDSTEIN: That's correct, sir.
SEN. BEGICH: Very good.
Well, thank you very much, and I appreciate the time, and it is very interesting reading the data points that you've laid out in your testimony, in your report, also, at this point.
MR. GOLDSTEIN: Thank you.
SEN. BEGICH: Thank you.
SEN. ROCKEFELLER: Senator Warner?
SEN. MARK WARNER (D-VA): Thank you, Mr. Chairman.
Thank you, Mr. Goldstein, for your report.
I used to know a little something about cell phones and wireless industry. I have just a couple of follow-up questions from following on Senator Begich.
Do your sample files allow you to determine a respondent -- whether there were other wireless competitors? So, you know, was the incidence of complaints in terms of quality of service or billing higher in an area where there may only be a single provider as opposed to a variety of competitive providers?
MR. GOLDSTEIN: I don't think we determined it based on how many competitors.
We didn't get to a level that would allow us to determine how many specific competitors there were.
SEN. WARNER: Mr. Chairman, I think that would be -- you know, as we look at those areas, I know you've got quite a few, unfortunately, kind of blind spots in your state. We've got some in my state, in Southwest Virginia, where we don't have coverage. As I think we've often shown, where you don't have competition, the ability of a single provider to provide perhaps spotty service and spotty coverage is pretty high.
I'd be very interested in knowing, one, if there was any way -- and I guess you've already completed your survey, but I would have loved to have been in there on the drafting of, say, one of the questions being to anybody who takes the survey, "Did you have any other competitive options in your marketplace," number one.
MR. GOLDSTEIN: We are doing a companion job, Senator, that we're starting shortly looking at competition among cell phone providers, which may get into that specific area. But we tried to focus this particular work solely looking at the experience that customers had --
SEN. WARNER: But my point being --
SEN. WARNER: My point being that I would probably wager you a bet -- I haven't been in the business for 20 years, around the wireless industry -- that you only have a single provider, the incidence of customer complaints would probably be higher than if there was some competitor that you could go to. So I just think that would be a relevant fact.
MR. GOLDSTEIN: I think that's --
SEN. WARNER: The second issue and one of the things -- when I used to be in the business, there was a big move towards bundling the charges in a single billing instrument and, you know, kind of offering an all-you-can-eat package or, you know, a combined level of services that might be your wireless services and other communications or entertainment services in a single bill, being able to determine whether bundled billing packages had a higher level of complaints, or was there any kind of analysis done of what type of billing package they got?
MR. GOLDSTEIN: We, again, didn't get into that level of specificity just because we had quite a number of questions and wanted to -- we had to, obviously, limit the amount of time we could spend with any one consumer. So there were constraints to the number of questions that we could ask.
SEN. WARNER: And I know this is off subject, but I see that since you have a director of physical infrastructure, as we look at the development of the 700 megahertz bandwidth, which has, as we've seen, since a lot of that has been traditional television broadcasts, whether that might help us in terms of some of the underserved areas in terms of better coverage patterns, and I know Senator Rockefeller's got in his state some coverage gaps, as we've got in ours, but how we manage -- I don't know about the chairman, but one of my goals is to make sure that we get 100 percent wireless coverage in most of our communities, and I just wondered if you had any kind of comments or thoughts about the --
MR. GOLDSTEIN: Obviously, it's a very issue. I think it's something we will cover in this next part of our work on competition to try and understand just how this map -- I think the map that the chairman put up is very telling, and I think it will be a useful issue to focus on further, and I think we will.
SEN. WARNER: Right, because there is clearly within the existing wireless spectrum, you know, areas that are not -- areas with a lot of foliage have a higher coverage -- or higher coverage constraints whereas, I think, some of this new spectrum that's been allocated actually does a better job of penetration, and you might want to address that.
And thank you, Mr. Chairman, for bringing this hearing together.
SEN. ROCKERFELLER: Thank you, Senator Warner.
I'm going to take a dash at asking my questions which I've not asked yet.
I'm fascinated that you took a random survey in the first place. It seems to me that almost on its face a random survey of something called the United States of America, without differentiation between peoples, places, densities, all the rest of it, is almost worthless.
When you are trying to figure out what doctors should be reimbursed for Medicare, you study it very closely. You break the country down very closely. There is no such thing as a random survey, and there will not be in the future.
But a random survey on something which has grown so fast, which is so important to so many people, that maybe that you were just caught when you did your survey by the fact that it was going right past you and you couldn't see it or you didn't have a chance to see it.
Otherwise, it seems to me that it wasn't very good judgment because you can't tell anything from a random survey. You can only tell from the specifics, which is what Senator Warner was referring to.
MR. GOLDSTEIN: I understand your concern, Mr. Chairman. Our goal in doing this was -- it was our understanding, and I believe this is accurate, that there has never even been a random survey of Americans about the quality of their cell phone service and experience, that the information collected by FCC is insufficient to do that and that industry data is pretty much proprietary and that no one had even attempted, you know, the effort that we did here today, and so, from that perspective, we felt that it was useful to at least get a benchmark for how Americans felt overall.
There certainly can be additional efforts, but to achieve a random sample survey, we followed standard procedure that is done, and they typically are not broken out at this level for the purposes that you're suggesting, which I believe are, you know, obviously worthwhile and I think could be done. But -- and so that wasn't initially the purpose of this work.
SEN. ROCKEFELLER: You indicated you're going to -- you're undertaking another survey. Will that be --
MR. GOLDSTEIN: We're undertaking additional work. We have not determined yet -- and I think we will in discussing with your staff and committees in the House that we're also doing this work for -- exactly what the methodology we would use to do that, and it may be that we do a survey. Yes, sir.
SEN. ROCKEFELLER: Well -- but you said you were going to do a survey. You said you were going to -- in your testimony, you said you were going to do another survey.
MR. GOLDSTEIN: Not yet, sir. We have not made the decision. I don't think we've --
SEN. ROCKEFELLER: Well, then I think you should make that decision, and you should make that decision that it should be not a random survey, but a very specified survey --
MR. GOLDSTEIN: Okay.
SEN. ROCKEFELLER: -- based upon very obvious factors, that is people, their ages, their incomes, their locations, their -- you know, all the rest of it. It's not rocket science, but the results of it are incredibly important to telling the industry and the American people, should they be interested, if they want to complain, if they know where to complain, what they need to know.
For example, it's statistically sound on a national basis to do that, take a random, but are the results of the GAO representative of the experiences and opinions of residents of rural communities? You don't know the answer to that.
MR. GOLDSTEIN: That's correct. We do not know that. As I said, this particular survey was not designed to obtain that information.
SEN. ROCKEFELLER: Well, if by chance there is next one, which I hope there will be, please make it that way --
MR. GOLDSTEIN: Certainly.
SEN. ROCKEFELLER: -- or else we won't know what to do.
Just to finish up, according to your testimony, only 13 percent of wireless phone users would complain to the FCC if they had a problem their carrier could not resolve and 34 percent of people do not know where they would complain. Now that's a bit gloomy. So my question to you is to whom would the remaining 53 percent of the consumers turn? Where would they turn?
MR. GOLDSTEIN: We do have a short list of where they would turn. We did ask. Thirty-eight percent would complain only to their wireless carrier. Thirty-four percent did not know. Thirteen percent said they would complain to the FCC; 4 percent to the FTC, the Federal Trade Commission. Three percent named another federal agency without actually saying what it would be. Thirteen percent said they would complain to their state, 20 percent said the Better Business Bureau, and 4 percent said some other consumer organization.
SEN. ROCKEFELLER: But, on the other hand, I mean, I have read where people call up their radio stations and they call up their fire departments or their police departments trying to get help. Obviously, they're not going to find any help there. So they have to be the right kind of places, and only the right kind of places that can give them help, because if they don't get help in the first place, they're not going to try again, and where you have people with relatively low incomes in relatively hard-to-reach places, that's a very serious matter.
Well, I'm going to leave it there, but I think we have a lot of work to do. Again, I assume I'm right in saying this is the fastest- growing industry in the United States. Am I right?
MR. GOLDSTEIN: It's among the fastest. I could not say if it's THE fastest. But it's certainly rapidly growing. Just the numbers we've talked about indicate that.
SEN. ROCKEFELLER: So, it would seem to me that logically therefore, we would be at particularly and at this point, and hopefully before, having put in every single bit of focus onto how we can break this down to see if it's being done fairly. Or we have to do more work. Or we may have to cut out special efforts, or whatever. Don't you think?
MR. GOLDSTEIN: I think that's absolutely useful.
SEN. ROCKEFELLER: Thank you, sir. Senator Klobuchar.
SEN. AMY KLOBUCHAR (D-MN): Thank you very much. Thank you, Mr. Chairman, for holding this hearing. Mr. Goldstein, as you were running through people complaints, Senator Kerry just said and the rest complain to Amy Klobuchar. -- (Laughter) -- I do think as members of the Senate, we do get some of these stories, and we're well aware of some of the issues that come up that can go beyond what your survey results. And personal experiences, as Senator Warner was relating, in dropped calls, just this weekend I must have had probably five times when I was on the cell phone on major interstates where it dropped off.
So, when we had our original hearing on this, we actually had one of the CEOs of one of the companies. And I showed a billboard from their company showing that they would have service to connect people around the world. And he showed a cell phone with no bars. So, there are problems still. And I think that lack of competition, as Senator Warner was pointing out, can lead to issues that people don't really even realize they could get better rates or better service.
Following up on what the Chairman said, this industry has changed so greatly back from the time that Gordon Gekko in the movie "Wall Street" had a cell phone the size of a briefcase. And now there are 270 million subscribers, nearly 20 percent of the people in this country only have cell phones. Yet the rules really haven't changed. And that's why Senator Rockefeller and I introduced a bill last year on cell phones. We were very happy that some of the changes were made. I think one carrier changed their early termination policies on the eve of the hearing that we had on the bill, which we greatly appreciated.
I know there's clearly been some improvement since that time. But as the Chairman noted, I think there's a lot of work to be done. And we were always aware of this issue with consumers not knowing where to complain to or what to do. And I think that was helpful facts coming out of your survey.
The complaints that I continue to hear, as I said, is that this issue of early termination fees. I still hear it. I do note that according to your preliminary results, 42 percent of those surveyed who wanted to, but ultimately did not, switch services from ETF to be a problem. Were you surprised by that number, that it's that high?
MR. GOLDSTEIN: I was a little surprised by it. I thought that it would not be so. But, you know, as indicated, 19 percent of phone users wanted to switch their service. And among the reasons they did not was the ETFs. And that represents about almost 40 million people.
SEN. KLOBUCHAR: Exactly. And I think what happens sometimes, again it ties into that other issue of when you buy a phone, and you're not quite sure whether the service is going to work or not, which is why part of our bill is to try to improve the information that consumers get when they buy service. But the second thing is people move. They move jobs, and then suddenly their service doesn't work in that area, and it's very burdensome for them to try to change.
Now, we know that both Verizon and AT&T pro-rate new and renewed contracts by five dollars a month. And this would mean that with a two-year contract and a $200 ETF, a consumer would still have to pay $140 to get out of that contract after the first year. And I think if you wonder why people are concerned about it, it's still not really evenly pro-rated as we would like to have done. And, in fact, when you compare it to some local service, which for increasingly number of people it's their only phone, it's much more burdensome. So, that might be why you found that in your survey.
The other thing I wanted to ask you about was the filing of the complaint. Now, 21 percent of the phone users who contacted the carrier's customer service were dissatisfied with how the carriers addressed their concerns. Is that right?
MR. GOLDSTEIN: That's correct.
SEN. KLOBUCHAR: How do you think we should let consumers know that the FCC is an avenue open to them? Do you have ideas for that?
MR. GOLDSTEIN: At this point, we haven't completed the work, so I'm hesitant to talk about specific recommendations. But it's clear that as my survey indicated, the FCC is not tracking their own performance in this area. There are no measures that they use to determine how satisfied cell phone users are with their actions in trying to help with carriers. It's also quite unclear exactly what it is FCC is trying to do when you look at how they established their process and what they've told consumers. There are mixed messages on their web site and in other venues about what it is consumers can expect from the FCC. And then, again, we combine with the fact that they don't know how that process is working and how they're helping consumers. It's difficult to really get a handle on it,
I would also add that one of the actions the FCC has said they will do is act as mediators between cell phone users and carriers. However, this doesn't appear in the letters that users get or in any other place. So, it's a process that isn't working terribly well.
SEN. KLOBUCHAR: That must be why our staff's been doing that a lot. I know that we had a hearing yesterday with Julius Genakowski, and he talked about the fact that he wanted to make the web site more accessible. And I think we will add that to his list of things to do, which is to make this piece of it more accessible. It's clearly an issue, and I hope that that will be part of your recommendation.
But I also think you identified -- and I'm running out of time here -- but the fact that they weren't tracking which type of complaint, which would, again, be much more helpful as we shape policy on things like the dropped calls and the information. Because right now it's very difficult to track what exactly the problems are. It's just more our own problems that we have and what we hear from our constituents. Thank you very much.
SEN. ROCKEFELLER: Thank you, Senator Klobuchar. Senator Kerry. I really am fascinated by this FCC thing. I mean, you were asked what are you doing to let people know they should call. That's not your job. That's not your job. You fill out reports, you study things. You don't say take out TV ads, the rest of it. FCC has quite a lot of money, and that IS their job. It was like with the DTV thing. You were divided between them and TIA. And between them, they didn't do a horrible job, they didn't do a great job. But it could have been worse. Why do you think this is? It's going to change under Julius, I just know it is. I just know it is.
MR. GOLDSTEIN: Mr. Chairman, I would offer two points. We've done a lot of work on FCC over the years. And all of a sudden they send a report we do, and I don't think I'm exaggerating. We end up taking FCC to task for their planning and performance measure and data collection. Whether it's the enforcement program, whether it's strong facts, whether it's DTV, whether it's cell phone usage, FCC has not seemed in the years we've been following them to do a good job in collecting data and determining how to focus their mission and to plan.
I know under previous chairs, including the most recent chair, there was ambivalence out of that office as to what their role was with respect to consumers. And, so, I don't -- I think they don't and have not in recent years set themselves up to see data collection and strong performance measures and management and understanding the mission and the transparency of that role vis-a-vis the public to be terrible important. At least it isn't exhibited in the programs we've looked at.
SEN. ROCKEFELLER: Well, that certainly has to change. I believe there's one point where if somebody wants to write their carrier -- and the question is not spot on, in other words it doesn't locate exactly on some things which the carrier is prepared. They simply don't respond. They just don't respond. I mean, this whole thing has to be in this fast-growing industry where people communicate, the industry is depending upon it, the country depending upon it, the world depending upon it. We're just going to have do a lot better job.
With that I'm going to yield the floor to Senator John Kerry, who will continue this hearing.
SEN. KERRY: Mr. Chairman, thank you very much. I appreciate it. I think we're going to call the second panel up at this point in time. And I appreciate, Mr. Chairman, your holding this hearing. And the opportunity to focus on a particular aspect of the industry, the exclusive agreements in the wireless industry. So, if we could have the second panel just seamlessly -- seat at the table.
I'd like to ask each member of the panel if you'd summarize comments in about five minutes. And your fully testimony will be placed in the record as if read in full. While you take your seats, let me introduce this topic, if I can, for a moment. First of all, we have a very distinguished panel here to give testimony on an issue that grows in relevance as wireless services become a much bigger part of everyday American life.
Needless to say, amazing things are happening with wireless technology. My colleague on this committee, Senator Warner, who knows something about this field, tells a story about how when he was getting into the cellular business, all the big money and smart money was saying it was going to take 30 years to build a wireless network. And how at the end of that period, only three percent of the country was going to have wireless phones.
Well, obviously, that is not quite what happened. Today there are about 270 million cell phone subscribers in America. Eighteen percent of all households rely solely on a wireless phone to communicate. And wireless phones are fast becoming the primary and preferred method of communicating. And they are also becoming indispensable to American life and business.
The market share for smart phones, devices like the iPhone and the BlackBerry, has grown from 12 to 23 percent of all handset sales over just the last year alone. And these phones are, as we know, far more like computers in our pockets than like traditional telephones. And as this revolution continues, and as I listen to people in the field, it's clear that even further extraordinary things are going to happen. Ranging from just being able to come home and take your BlackBerry or iPhone or whatever it is and plunk it down in a port, and that port is going to manage a whole lot of things for you at home. Conceivably from the temperature of your home to the lighting of the fire to your bank accounts and a whole bunch of other things.
With that in mind, this panel is going to examine the growing trend of exclusive agreements that are being struck between the four largest wireless carriers in the manufacture of wireless handsets. These carriers account for roughly 90 percent of all wireless subscriptions. And as a result of these exclusive agreements, their customers enjoy access to the latest and the greatest smart phones.
Now, I assure you that what brings us to the hearing is a genuine desire to have legitimate questions answered. My staff came to me and a number of folks from different sectors of our economy came to me posing questions about this. Some suggesting that some kind of legislative fix might be necessary. Frankly, I really am not sure. I don't know the answers to some of the questions that are linked to these issues. And, so, this is really the best rationale for why we have hearings. It's to try to get those answers and to get them in a very public way.
At the heart of this, a whole bunch of questions. Is it better or worse for competition? Is it better or worse for innovation? Is it better or worse for the American consumer if the carrier controls the decision over what devices can and can't operate on their network. More than 40 years ago, the FCC decided in its seminal Carter phone case that AT&T should not have that kind of control. For those here in the room who are as old as I am and can remember it, before the Carter phone, you were stuck with the old black Western Electric rotary phone that you rented or bought from AT&T. And the Carter phone ruling opened the wire line network. And in the years following that, we saw an explosion of innovation that included the fax machine, the computer modem and the cordless telephone.
The Carter phone decision in the end was good for consumers. It was good for the country, it was good for business. It separated the network from end use technologies. Similarly today, when you sit down at a computer and you access a broadband connection. You're not told by your broadband provider that you have to have a Dell or you have to have an HP or an Apple in order to access the network. And when you purchase a wireless phone in Asia or Europe, you typically don't buy it through a wireless carrier. You purchase it separately from the manufacturer from an outlet.
So, the panel today is going to explore the issue of exclusive agreements in the U.S. market from both sides of the argument. And I want to thank our witnesses for their willingness to testify of this issue. I have to tell you, it was not easy to find witnesses willing to testify to the benefits of these exclusive arrangements. And, so, I greatly appreciate Mr. Roth's willingness to provide his perspective from AT&T, which has famously offered the iPhone exclusively on its network for several years now.
I will tell you that we extended an invitation to every major handset manufacturer. And we were unfortunately turned down in every case. That actually raises more questions than it answers. And I must say, not a smart way to send a signal, frankly. But it does send a signal and I've read it the way I've read it.
On Monday I sent a letter to the FCC to Acting Chairman Copps expressing concern over the issue. Joined by Senator Wicker, Dorgan, Klobuchar, all of whom serve on this committee.
And, so, we will take the testimony today with a view of really trying to learn about the impact on our economy and on competitiveness and innovation regarding these practices. And we look forward to your testimony. Mr. Chairman.
SEN. ROCKEFELLER: Senator Warner.
SEN. WARNER: I'm not going to be able to stay through the whole balance. I just want to thank you for doing this hearing, because as we think about the next round of spectrum allocations, and I think you accurately laid out the point that the benefits that the country had by having a common set of standards which everyone could work off of. And this balkanization that I think we're starting to see in this area, I think you appropriately raise a great concern. If we were to have the same kind of forethought, for example, in medi-related area and health care IT, we wouldn't have had the kind of balkanized systems that now is requiring us to kind of come in after the fact and try to create common standards for health care IT. And I would really hate to see us a few years from now ending up with a balkanized, system-driven set of wireless communications systems that I think would actually put as at a competitive disadvantage against folks across the world. So, I'm going to listen to as much of the hearing as I can, but I really appreciate...
SEN. ROCKEFELLER: Well, I appreciate that, particularly coming from you, Senator Warner, because you've got a lot of background in this and knowledge about it. So, I appreciate your participation and your comments.
If we could begin, Mr. Roth. If you'd begin and just run down the table. And, again, we're very greatly for you being here. This is inquisitive. And I look forward to good, healthy discussion. Mr. Roth?
SEN. KERRY: Let me just say also, and I apologize. But I have a previous commitment that's going to require me to leave around four o'clock, and Senator Klobuchar has graciously accepted to chair at that point in time. So, we'll try to get as much in as we can prior to that.
MR. PAUL ROTH: Thank you, Senator Kerry. My name is Paul Roth, and I'm the president of retail sales and service for AT&T. And I do thank you for the opportunity to testify here today. I've been in the wireless industry for about 23 years. And that experience is the basis for my belief that exclusive device deals are really good for consumers. Although much of the interest in my testimony is going to be related to the iPhone, I would direct most of my comments in that area.
I believe that consumers benefit from exclusive device deals in three specific ways. Benefit from innovation, lower cost and more choice. And in my five minutes, I'll expand those, and I'll be happy to answer your questions. First, exclusive deals lead to innovation of both devices and applications. In 2005, when FCC Chairman Martin challenged the U.S. industry, he challenged the industry saying that it lagged European and Asian nations in bringing innovation to the United States.
And since we've introduced more exclusive deals. What we've seen is that the U.S. has become the leader in producing innovative devices, YPI phone and others. That phone is now sold in more than 70 countries worldwide. But it launched first in the United States in June of 2007, more than a year before it showed up in other countries. And innovation has been more than just devices. Apple's App Store on iTunes has allowed consumers to personalize their devices and their lifestyle with more than 30,000 applications created. And more than a billion have been downloaded in less than a year.
People quickly went from, is that an iPhone to what's on your iPhone? It has reflected the consumer's ability to personalize the device for their own use. And other innovative high speed, touch screen devices entered the market in response to the iPhone. I don't believe any of this competitive response would have occurred had it not been the exclusive device deal.
Second, exclusive device deals lead to lower prices. Consumers pay well under what AT&T paid to Apple for the iPhone. It's a standard U.S. industry practice where the device is sold below its cost in return for a two-year agreement. With a subsidy that made the initial price possible is recovered over the term of the agreement. In the past two years that the iPhone has been exclusive to AT&T, the price of the iPhone has gone from $399 to $199, and just last week to $99. All while exclusive to AT&T. And with the iPhone at $99, prices of other devices, including other exclusive devices will drop, have dropped and will continue to drop in response to that.
And exclusive device deals create competition and choice. I want to be clear. AT&T has an open network. You can bring any GSM-based device to the AT&T network today. We'll sell you a SIM card for $25, and you can work that device on our network. But we also traveled the world seeking partners who will create innovative devices and bring those to the U.S. We often ask for innovative features or design which requires a manufacturer to create an entirely new product. And our requirements are often the catalyst for innovation.
To build really new and innovative devices creates risk for manufacturers. And the manufacturers are seeking a partner to share that risk with them. They ask us to commit both technical and financial resources and make volume commitments. All without the assurance that the device will be a success. AT&T competes with foreign carriers like Deutsch Telecom and Vodaphone for the attention of these manufacturers, to bring innovative devices first to consumers in the United States. It's not an accident that the iPhone launched first in the United States.
We took a risk with Apple on the iPhone that it would be a big success for consumers. And consumers were the ones who benefited from that. Because these innovative devices are exclusive, competitors are forced to innovate or risk losing customers. It's a cycle where consumers reap the benefits, and carriers and manufacturers carry the risk.
There have been over 30 new smart phones that have hit the market to challenge the original iPhone since it debuted in 2007. Let me repeat that again. There's more than 30 new smart phones, some dubbed "iPhone killers" in direct response to the iPhone. And Apple, who started it all, with the original 2-G iPhone in June of 2007 followed in 2008 with iPhone 3-G and just followed this last week with the iPhone 3-GS. Each version better, faster and less expensive than its predecessor. All are exclusive deals with AT&T.
So, some will frame this issue as whether it's fair to have exclusive deals, or for how long they should be exclusive, as if these iPhone or other innovative devices would have occurred anyway. Without exclusive deals, the iPhone and whatever follows next may not have occurred. And I think consumers are the ones ultimately who would suffer from such a policy that would put those restrictions in place. Thank you for the opportunity to list my comments, and I welcome your questions.
SEN. KERRY: Thank you very much, we appreciate it. Mr. Rooney.
MR. JOHN ROONEY: Good afternoon, Mr. Chairman. It's a privilege to appear before you and the Committee today. My name is John Rooney, and I'm the president and chief executive officer of U.S. Cellular. We are the fifth largest wireless carrier in the United States, serving over 6.2 million customers. I'm here to talk about the wireless industry's current reality. Four wireless carriers have hijacked consumer access to handset technology. These dominant wireless carriers are leveraging their economic might to obtain from handset manufacturers for right to be exclusive distributors of the handsets most desired by consumers.
These arrangements deny consumers the ability to select a handset, access popular software applications and use it on a network of their choosing. The biggest problem is the market for higher end, iconic phones and smart phones that are essentially a little computer in your hand, such as BlackBerry Storm and the iPhone. Smart phones represent the fastest growing segment of the industry. As our nation commits itself to an aggressive deployment of broadband to serve all Americans, it is vitally important that we get the issue of access to mobile wireless handsets right.
Exclusive arrangements are especially damaging to rural citizens.
Because oftentimes the biggest carriers don't offer any service at all. And, so, the product is unavailable to that consumer. When rural consumers buy an exclusive phone from one of the bigger carriers, they frequently must accept an inferior network as a trade-off. A trade- off no consumer should be compelled to make.
There is harm in urban areas as well. Consumers who desire an iPhone or BlackBerry Storm smart phone cannot use it on our network, even if they prefer our service. We do not understand how the public can possibly be served by such a practice. If you take away nothing else from this meeting, I want you to understand a central role of policy-makers should be to enable consumers to buy the handset they want and choose the service that best suits their needs.
We think the anti-consumer effects of handset exclusivity must be examined in a broader context to include the entire relationship between these dominant carriers and their handset manufacturers. Even without exclusiveness, the ability of the dominant carriers to manipulate the handset manufacturers through their purchasing power to the detriment of all consumers should be of concern to the committee.
Under the Telecommunications Act, it is illegal for carriers to engage in unreasonable and discriminatory practices. We ask you to direct the FCC to use these tools you have already given them to protect consumers from the harms created by exclusive arrangements. Monday's bipartisan letter was a good start.
Now let me address a few of the objections addressed in this problem that I've heard from the biggest carriers. I have heard that exclusive arrangements drive innovation. This is counter-intuitive. Every manufacturer desires to sell its product to the widest possible audience. If handset exclusivity did not exist with manufacturer refused to invest in great devices knowing that there's currently a handset market of nearly 300 users in the United States.
Any handset maker that invents a great device receives intellectual property protection. And that confers a tremendous financial incentive to build a winning product. Others have argued that removing handset exclusivity will kill the incentive to invest risk capital in the handset market. I cannot identify a single market as large as the U.S. wireless handset business that needs exclusive dealing to attract risk capital on investment. When you overlay both European and Asian markets available, the handset manufacturers, this answer becomes even more problem.
Turning to the iPhone, Apple did not require their customers to connect to their computers only to the ISP or the manufacturer's choice. And who would accept such a proposition for their laptop or personal computer? Well, that's precisely what's happening in this sector. We should not approve of arrangements that limit a wireless consumer's ability to choose what is essentially a handheld computer.
I've been part of the mobile wireless industry for over 15 years. And until recently, both carriers and handset manufacturers thrived without exclusive arrangements. I believe it is no coincidence that the growth in exclusive arrangements occurred in concert with the acquisition binge of this decade. And the resulting consolidation of market power in the hands of a few.
In closing, we understand that simply banning exclusivity arrangements is not the complete answer. We ask you to look carefully at the bigger picture. The fact that the wireless industry consolidation enables the largest carriers to dominate the product supply chain in ways that harm consumers. Mr. Chairman, thank you for your interest in this important issue. And I'm happy to answer any questions.
SEN. KERRY: Thank you, Mr. Rooney, we appreciate it. Mr. Frieden.
MR. FRIEDEN: Senator Kerry and members of the committee, thank you for inviting me to contribute to this discussion about the consumer wireless experience. I hold the Pioneers Chair, and serve as a professor of telecommunications and law at Penn State University. As a teacher, researcher and cell phone subscriber, I am working to understand the potential for wireless handsets to stimulate innovation; particularly as these devices become even more widespread and essential.
Three major developments in the wireless marketplace have the most significant impact on consumers and innovation. First, wireless handsets will provide a third screen for users no less important than what the first screen television; and the second screen the personal computer monitor have provided. Wireless handsets have started the evolution to become a much more diverse Swiss army knife collection of features and functions. But the scope of innovation in handset design depends on the difficult balancing between the sometimes divergent interests of consumers, carriers and handset makers.
Second, near exclusive reliance by wireless carriers and their agents on a single business model, which combines wireless service and handsets used to access this service strongly influences what kinds of services the handset can perform, and what kinds of software the subscriber can download. This combination of handset and service also creates incentives for carriers to secure exclusive distribution rights for choice devices such as the Apple iPhone. It motivates carriers to favor ways to recoup their handset subsidies rather than to concentrate on offering unconditional access to the features within the handset; or services available by downloading software and content to the handset.
Third, even if some subscribers resort to self-help strategies to remove these limitations, legislation should direct the Federal Communications Commission to ensure non-discriminatory access to wireless networks and services, including the elimination of handset exclusivity arrangements. Forty years ago, the FCC established the Carterfone policy which specified the right of consumers to own phones; and to attach them in other devices such as fax machines and modems to the wired-telephone network.
This policy made it possible for consumers to decide what type of devices and functions would best serve their needs. More fundamentally, separation of service and equipment allows consumers to decide how to use the telecommunications and information services available for wireless handsets now and in the future. We take for granted the right to own and attach telephones to the wired network. And that freedom should extend to wireless networks subject to legitimate and readily addressed network management and spectrum interface concerns.
Television broadcasters have no right to restrict consumers from watching cable and DVDs. Likewise, no personal computer manufacturer or software vendor can regulate what consumers see on their monitors; and what services they can access. Applying the Carterfone policy to wireless would stimulate innovation in handset design, promote competition; and motivate carriers to make their networks more accessible. Remarkably, the 270 million wireless cell phone subscribers in the United States do not have the same freedoms for their third screen as they do for television sets, consumer monitors and wired telephone service.
If the wireless handset marketplace worked like its wired counterpart, carriers would derive limited benefit from exclusivity -- exclusive handset distribution agreements; and it would not program restrictions on the limited types of phones they make available. Manufactures would have great reluctance in disabling features or refraining from devising new ones that carriers do not want consumers to have. Applying the Carterfone non-discrimination policy does not impose new or additional regulations. Cell phone companies operate as telecommunication service providers already obligated by law to comply with FCC common carrier regulations.
Wireless handsets use radio spectrum subject to the FCC's jurisdiction. The FCC has applied its widely respected Carterfone policy in many ways and for many different types of competitive industries since 1968, including cable television. Most recently, the commission included the Carterfone open access policy in its 2005 policy statement on what freedoms consumers have a right to expect when accessing the Internet.
Limitations on access can frustrate consumers, stifle innovation in wireless services and software applications; and adversely affect the international competitiveness of U.S. equipment and services. The potential for Swiss army knife versatility in handsets diminishes when carriers and handset manufacturers agree on exclusive handset distribution deals, locks on what functions handsets can perform; and locking out consumers from downloading software and other content. Mandating consumer access freedom supports development of separate wireless handset and service markets.
This will create incentives for wireless equipment manufacturers to offer customized solutions to diverse user requirements. Additionally, it will create incentives for wireless carriers to come up with innovative service plans and to compete based on how many different services wireless devices can access. I appreciate the opportunity to share my views with the committee and to participate in a discussion about this important issue. Thank you very much.
SEN. KERRY: Thank you very much. We appreciate it Mr. Frieden.
MS. ESBIN: Thank you, Senator Kerry and members of the committee for the opportunity to testify on the issue of wireless handset exclusivity. My name is Barbara Esbin. I am a senior fellow at the Progress and Freedom Foundation, a think tank focused on the digital economy. My research indicates that exclusive handset arrangements have brought palpable benefits to both consumers and competition within the wireless sector. Because both the wireless services and handset markets are robustly competitive and show no evidence of market failure, a regulatory prohibition on such exclusive arrangements would be ill advised.
Consumers will remain protected from demonstrable anti- competitive activity or unfair and deceptive practices in this sector by our antitrust and consumer protection authority. The FCC has repeatedly found the wireless marketplace to be effectively competitive, not perfectly competitive, but effectively competitive. The most recent report found that over 90 percent of U.S. residents live in areas served by four or more mobile carriers. And that quote, "consumers continue to reap significant benefits including low prices, new technologies, improved service quality, and choice among providers of commercial mobile radio services."
The level of concentration in the U.S. wireless carrier market is below that of other nations; and below the usual level of concern for the antitrust authorities. The wireless handset market is even more robustly competitive. There are hundreds of models sold in the U.S. manufactured by 33 companies. No single firm appears to have market power in the handset market. And certainly, no single firm may be viewed as the sole source of innovation.
The typical exclusive handset agreement grants the carrier an exclusive distribution right for a particular handset model or set of features for a limited period of time. Carriers are willing to pay for exclusive arrangements because offering subscribers a hot, new handset is a way to differentiate their service. The FCC has acknowledged that product differentiation is a natural competitive response by carriers to customer churn.
Churn itself is a sign of competition and the exclusive arrangements are simply a feature in an intensely competitive market. Handset manufacturers benefit from the exclusives by being able to develop the initial version of a device for one type of network, ensuring both speed to market and some control over the user experience. Guaranteed minimum order from the manufacturer, another common feature, can remove some of the risks associated with a new product offering, thus permitting riskier and more innovative design.
Each side of the exclusivity transaction benefits, but more importantly, consumers benefit in terms of gaining innovative handset features, applications and services. Analysts have noted that the exclusives are fairly good from the consumer's standpoint because guaranteed distribution incentivizes the carriers to heavily promote the product; and offer subsidies to lower the price of the phone for consumers. Prohibiting such arrangements and effectively mandating that all offerings look the same, would leave the carriers with fewer options to attract customers.
Over the long term, it would likely lessen rather than enhance competition and consumer welfare. Indeed, since 1992 when there were only two mobile carriers per region and far fewer equipment manufacturers, the FCC has permitted exclusive handset arrangements in light of competition in the relevant market. Today's wireless carriers facing far greater service competition and increased numbers of suppliers, have even less economic power to stop equipment manufacturers from working with other carriers.
In the case of the iPhone, for example, it was Apple, a new entrant, with a single handset who sought exclusivity; and tightly controlled product development rather than AT&T. Exclusivity is far from a rarity in the world of cell phones; and is not a practice limited to large carriers. Even some mobile, virtual network operators, have successfully obtained such agreements, which one would not expect if these arrangements were the result of the exercise of market power.
The dynamic created by exclusive handset arrangements has allowed equipment manufacturers and carriers to bridge the gap between the technologies of today and the disruptive innovations of tomorrow. Were exclusive arrangements to be prohibited today, we run the risk that all Americans will miss out on the dramatic benefits of innovations tomorrow. The standing exclusive arrangements would effectively spite all consumers by ensuring that if some consumers can't have the fruits of device innovation immediately then none may.
I respectively submit that upon further development of the record, neither Congress nor the commission will find the need for additional action on the matter of exclusive handsets. Thank you again for the invitation to testify; and I welcome any questions.
SEN. KERRY: Thank you Ms. Esbin very much.
MR. MEENA: Good afternoon, Mr. Chairman and members of the committee. My name is Hu Meena I am president and CEO of Cellular South. Thank you for this opportunity to testify today on behalf of Cellular South, our customers and consumers everywhere who want more choices when it comes to their wireless plans and devices. Wireless has experienced a golden age and offers the opportunity to engage with the world as never before.
We see this golden age coming to an end as the largest wireless carriers engage in anti-competitive and anti-consumer practices, such as exclusivity agreements with wireless device manufacturers. Today AT&T and Verizon Wireless have over 60 percent of the national wireless market share; and roughly 90 percent of the wireless market is in the hands of those two plus Sprint and T-Mobile. Instead of fostering innovation and offering consumers the best range of choices, the largest companies are using their power to demand and to receive long-term, exclusive agreements with device manufacturers.
These long-term agreements essentially put the best, most powerful and most popular cell phones -- Smartphones and other wireless devices out of the reach of millions of consumers. If you live in New York City and want a touch screen BlackBerry Storm; then you will be a Verizon Wireless customer whether you want to be or not. If you live in Washington, D.C. and want an iPhone; then you are obligated to be an AT&T Wireless subscriber even if they do not cover your metro route.
If you live in Laurel, Mississippi and want to subscribe to a 3G network, you will be limited to only devices that Cellular South is allowed to offer. Of course, the nation's largest carriers aren't limiting their use of exclusive arrangements to wireless handsets. These carriers have already begun using exclusive arrangements in the Netbook market -- I hold one here. The device is smaller than a laptop, a little larger than a PDA.
Will Congress sit by and allow the largest carriers to lock the most attractive Netbooks into exclusivity agreements before this segment of the market is -- fully emerges. Left unchecked in this segment of the PC market, the largest wireless carriers will gain control and begin to restrict PC innovation and distribution; just as they have wireless handsets. Furthermore, the claim that exclusivity agreements drive innovation is completely unfounded in this segment of the market. Companies like Dell, Acer and others were advancing the Netbook market well before the largest carriers got involved. How then can the largest carriers claim a divine right to exclusivity on Netbooks?
The situation with exclusivity is bad and only getting worse. Cellular South and carriers like us have tried to find solutions to this problem without resorting to help from policymakers.
We've attempted several solutions with industry, including fruitless direct talks with the large carriers, and indirect talks with the CTIA. We have tried to entice device manufacturers to sell us the latest technology by forming a buying group, and consolidating the purchasing power of 27 regional carriers. But we have not been able to capture their attention -- the manufacturers' attention, as they consistently look over their shoulders for approval from the largest carriers of what they might be allowed to sell to us.
The big wireless carriers argue that device manufacturers cannot innovate and offer new devices without the help of funding generated by exclusivity agreements. Yet, long before the Razor, before the iPhone or the Storm existed, consumer electronics manufacturers had established an almost 30-year record of innovation. And European and Asian consumers enjoy a broad source of innovative devices; 70 to 80 percent of which are available independent of any network operator.
In short, what we are witnessing is a strategy by the largest carriers to limit consumer choice and undermine competition. Our vision is to allow all consumers in the U.S. to freely choose their own combination of attractive devices, relevant applications, quality coverage, access to high-speed broadband networks, all with a rate plan that best fits their needs and their budget. Now, that's true innovation. I hope that our vision is the one that policymakers will embrace before consumers find themselves in a wireless dead zone of limited choice. Thank you for your time today.
SEN. KERRY: Well, thank you very much. We have some clear lines that have been drawn. And I'd like to try to probe that a little bit if we can here. And I invite a healthy back and forth, frankly. I don't like hearings where we just sort of, you know, constrained between the questions. So if somebody wants to dig in and counter somebody, I'd like you to do that.
Why -- first of all, listening to you Mr. Roth and also Ms. Esbin, I accept the benefits that you articulated. But I'm having a difficult time trying to envision the -- why an innovator, given the size of the market and the numbers of outlets, is not going to innovate in order to produce a product that is equally as competitive, that does all the wiz (ph), bangs and gadgets and bells and whistles it has today even more so; because it wants to appeal across different providers in order to gain as much market share of each of those providers that it can.
I'm having trouble understanding why that innovation would be curbed. I just don't see that given the size of the market here.
MR. ROTH: I'd like to answer that because I think there's two stories that might really help shed some light on that. The first is a colossal failure; and the other one has been a real success. And I think I'll start with the failure.
The first iPhone, the first attempt at a music centric device, this is the device I hold right here. And I know you can't see it from here, but it was the Motorola Rokr. I don't know if you all heard of the Rokr. It was our first attempt -- Motorola, Apple and AT&T went together in 2005 to create a device that we thought would cater to the music centric. It was the predecessor of the iPhone, if you will -- colossal failure.
I still have them in inventory. I don't hear Mr. Rooney or Mr. Meena asking for the Rokr. I have plenty to sell still. But my point of that was Motorola bore the brunt of that, so did AT&T. It was a huge risk for both companies.
Large inventory commitments were made, production was -- on a device that we thought would be successful; and it wasn't. So that type of risk is what manufacturers are looking for carriers - (inaudible). If you want to specify a device, you want to bring innovation, that's not part of their product roadmap; then you need to share the risk with us.
So I'll give you an example of the success. And I kind of look at the age of the group that sits behind you all. About three years ago, we saw texting as a trend that we thought would come to the youth of America. The BlackBerry was the only texting device that existed.
We go to Korea, and we do this every year, we travel the world. We go to Korea 24 months ago. And we sat down with them and we talked to manufacturers about a low-cost device that had a QWERTY keyboard for texting. And we wanted it for the teen market in the United States.
We met with Samsung, and we met with LG. That's not what was on their product roadmap. That was a significant risk for them. That wasn't the product that they planned on introducing on a global standard; but it's what we wanted.
So we went to them and we had to commit significant inventory, technical resources, marketing dollars, inventory space in our stores; in order to bring that product to market. We bore the risks of that. Unlike the Rokr, the little Samsung Propel this little - (inaudible) - enormously successful; and we've born the fruits of that. So there's -- I think that's the tale of two cities kind of tells the story. Manufacturers want someone to share the risks when what you're asking for is something that's not on their product roadmap.
SEN. KERRY: Now, Ms. Esbin in her testimony talked about how this would involve a particular model for a particular period of time. Is that in fact true, that with respect to AT&T, the iPhone is for a particular period of time?
MR. ROTH: Yes, sir, it is.
SEN. KERRY: And what is that period of time?
MR. ROTH: The term of the agreement we've not disclosed. It's a confidential fact. But what we have said, when we introduced the iPhone, it's a multi-year deal that we signed with Apple.
SEN. KERRY: Well, in terms of our sort of thinking about marketplace power and access; is it important for us to perhaps have some sense of that time period?
MR. ROTH: I think it's probably --
SEN. KERRY: Might that not weigh in to sort of what the equities are here as we look at this, because you have a legitimate point. I raised that very point with my own staff. And I'd ask it of Mr. Rooney and Mr. Frieden and Mr. Meena.
Why in the American way of doing business, does a company not have the right to go sit down with somebody, assume a certain amount of risks together; enter an exclusive arrangement to assume that risks. If they come up with a successful product; why don't they have a right to market that product in this way? What distinguishes this from other exclusive arrangements in the marketplace?
MR. ROONEY: Two things, one we do that all the time in other businesses -- give people exclusive marketing rights for a period of time. And then after that, other businesses have access to it through licensing fees and other things --
SEN. KERRY: As they've said, it's for a period of time. I don't know what it is yet.
MR. ROONEY: This is years not months. Here's the --
SEN. KERRY: So you think --
SEN. KERRY: Isn't there a cost there -- isn't there a legitimacy to having a sufficient return on investment; and taking a success story and riding it for a period of time?
MR. ROONEY: With all due respect, here is the result. There are 14 new products out there right now that are exclusively licensed to the big four. So that Mr. Meena and our customers have no access to these. What is happening is everybody now is going -- and the big four, is using their power to get exclusive rights to these phones. So we're stuck with whatever comes out other than these. And it really puts a big dent in our ability to compete. It puts a big dent in our ability to supply these phones to areas of the country where we serve customers that the big guys don't.
SEN. KERRY: Now, I'm going to be very provocative here on purpose and be a little bit of a devil's advocate; because I want to get at this. But not because it necessarily represents where it landed here. But some people might argue -- hey, you guys are complaining because, you know, they've been more successful than you have. They've carved out a good concept, they got a good product; they created a joint effort.
It's not as if people don't have access to the market. People can go and they can either do the BlackBerry, they can get the phone, they can get the iPhone. They can have choices as to which combination of provider and product they want. Would you argue that there is an insufficient availability to the consumer of those various combinations?
MR. ROONEY: If you lived in Chicago or New York, I would agree with you. But if you live in rural Iowa, or rural Wisconsin, or rural Missouri; then you've got problems.
SEN. KERRY: Those can be very important to some of us here, okay.
MR. ROONEY: That's right, exactly. I know who is on this committee.
SEN. KERRY: Right.
MR. ROONEY: So I mean, it's a question here of -- in terms of Rural America, they really pay the price. In terms of Urban America, they have a little more options. And yes, what it does is it hinders our ability to compete in those markets; but it doesn't eliminate completely the customer's choice.
SEN. KERRY: Mr. Frieden, is there something that makes a wireless network different from the cable network or a satellite network? Do we need to be thinking about the network itself as a sort of, you know, public utility in essence, and provide greater access to it; regardless of the innovative component that Mr. Roth appropriately talks about?
MR. FRIEDEN: Yes. The Carterfone policy addressed a wired network -- a wired network, which doesn't use spectrum can perhaps be more easily, technically managed. But I don't want to overstate the innovativeness of engineers to solve the spectrum issue. We have different cellular technologies, different cellular frequencies, different cellular transmission formats; and standards can be reached. So I don't see the use of spectrum as preventing the ability of engineers to find that interface that would make wireless Carterfone a possibility.
SEN. KERRY: Well, should we accept that wireless carriers can dictate to a consumer what technology they have to -- they can and can't use to access a network?
MR. FRIEDEN: Well, my concern is that --
SEN. KERRY: Is there adequate competition among those networks that we could allow that?
MR. FRIEDEN: Well, there are lies, damn lies and statistics. And when you look at the wireless industry, there are two ways to look at it. You can say it is robustly competitive and they certainly are advertising how great their service is, and how reliable their service is and how nifty their new handsets are. But truly there are four major carriers; and if you look at the penetration statistics, they're sharing 90 or so percent of the market with Verizon's acquisition of Alltell.
Going back to innovation there really are two types of lock in and lock out, both in terms of the handset and access to the devices of the handset and software. There's this two-year service commitment and now we're talking about a multiple year, indeterminate period in which the Apple iPhone has an exclusivity arrangement. That may serve Apple's interest in cache, but in terms of promoting innovation and access to those innovations, you're really locking consumers to one carrier.
SEN. KERRY: Let me just ask a final question because I want to get Senator Wicker in on this and then cede the chair to Senator Klobuchar. But you have laid out some of the restrictions that are placed on handset technology by a carrier like AT&T. For instance, and you said Mr. Roth, Mr. Frieden is saying that for competitive purposes, you are blocking out certain applications, for instance Skype is blocked out on an iPhone. And obviously, that has to do with the question of who pays for what -- in Skype you don't.
Also, Mr. Frieden points out how we sort of take for granted the right to own and attach a telephone or a TV or a computer to a network; without particularly worrying about the cable company or the telephone company telling us what kind of equipment we have to use. Why is this not completely analogous to that? And is there a detriment to the blocking out in that way? Or is that merely then a choice -- you don't buy and iPhone; you go somewhere else. What is your feeling about that?
MR. ROTH: So, I don't think it's analogous to the television, the PC or the home phone for one primary reason. In the United States, there are two very different technologies. There is the CDMA technology used by Mr. Rooney and Mr. Meena. There is GSM, which is the global standard that AT&T uses. I could give my iPhone to Mr. Rooney and tell him he could take it home. It's not going to work on U.S. Cellular's network. They don't have the global standard. It's a VHS- Beta debate from a technology standpoint.
So we have two very different networks. There's the global standard, which most of the world uses; and there is CDMA, which if you will, is the Beta version of the debate. The other thing is that we -- I want to clarify, we are open. You can download Skype and you can use it on an iPhone in a Wi-Fi environment. You can -- and I would encourage Skype to do what they've done in Europe. They actually have a phone they brought to the market and they sell a Skype phone in Europe where you can do voice over Internet calls.
The reason that we don't want our partner to offer Skype on the iPhone is we subsidize the iPhone. I don't want to -- and Skype could be a direct competitor. There is no business logic in taking a Skype application on a phone that I subsidize and, then opening it up to my competitor. But Skype could bring their own phone to America. For $25 they could go to our store and buy a SIM card; and use the GSM technology in standard to compete.
SEN. KERRY: So what you're saying is that they may be blocked in one modality. But they are not really stopped from being able to access the market or sell a product.
MR. ROTH: Yes, sir. Yes, sir. Our network is open, that's the first thing I want to communicate. Our network is open. And if you want to bring your own device, and your own applications to our network you can do that. But the devices we subsidize, the devices we subsidize and buy them, sell below their costs, we don't want to enable a competitor to use those devices.
MR. MEENA: Mr. Chairman, I'd like to respond to Mr. Roth's counter offer on the -- offering us the iPhone. Last year, we did a detailed study to look what it would take to move to the GSM world. And we studied financial concern; and we studied device availability.
And we found out the GSM world was more constricted than the CDMA world in device exclusivity. And I can tell you there is one device we sure couldn't have gotten no matter how -- if he threw this thing over here at me; and we would not be able to get an iPhone. We found that out in our research.
SEN. KERRY: Well that's interesting. There are a lot more questions to exhaust this topic obviously. I'll rely on my colleagues to do that. We're going to leave the record open for a week in order for colleagues to be able to submit questions in writing; which I'm confident a number of them will do. And I will submit some additional questions in order to fill out the record.
Greatly appreciate your being here. I'm grateful to Senator Klobuchar for taking on the chair. And I recognize Senator Wicker.
SEN. ROGER WICKER (R-MS): Well thank you, Senator Kerry.
But before I ask a question, of course, we're always glad to see witnesses come from the various states. Mr. Meena is a constituent of mine from Ridgeland, Mississippi. As you know, he is CEO of Cellular South, and it's one of the largest privately held wireless providers in the nation with 900 employees, a good many of them in Mississippi.
And Mr. Meena, I believe you have your family here with you.
MR. HU MEENA: I do. I have my two oldest sons and my wife is here today.
SEN. WICKER: Great. Well we're glad to have them.
MR. MEENA: Thank you.
SEN. WICKER: You've been itching to get into this debate here. What about the point that Mr. Roth makes that time and money used to develop the next breakthrough device. And he says AT&T is entitled to a return on the investment that his company legitimately made in the iPhone. So I want to give you an opportunity to respond to that claim.
MR. MEENA: Their primary investment in iPhone was in the network. We put in a 3G network without any guarantee from Apple or any other manufacturer that we would have access to a latest technology device. I don't know why they have to be guaranteed success when we're not guaranteed success. We're willing to go out there, put our capital to work, put in 3G speeds throughout the state of Mississippi and other places, and be able to compete in the marketplace.
It does make it tough though when you cannot have access to the latest and greatest technology.
SEN. WICKER: Uh-huh. (Affirmation.) You know, I see the commercials for Cellular South when I'm home in Mississippi. Now you're proud of the coverage that you have.
MR. MEENA: Yes, sir.
SEN. WICKER: And is it your feeling that there's better coverage for Cellular South in the state of Mississippi than any of the other providers?
MR. MEENA: No question about it. We have better urban coverage and better rural coverage. We have taken the opportunity to drop leaky coax down hospital elevator shafts to make sure that urban hospitals are covered. We cover out in rural areas. We cover the Mississippi Delta extensively. We cover Rena Lara, Mississippi as well as we do Memphis, Tennessee. It's just part of who we are and what we do.
And that's why it's so frustrating for the consumers. There is no reason in this day and time for consumers to not have access to the best network and the best devices, and the best applications and high speed. We can do that as an industry. Why not do it?
SEN. WICKER: So that 18-year-old kid that's hunting out in the woods near Rena Lara --
MR. MEENA: Yeah.
SEN. WICKER: He might like to have an iPhone, but if he doesn't have coverage, really that consumer is prevented from having the consumer choice that we kind of like to talk about in the United States.
MR. MEENA: That's correct. If he has an iPhone, and if AT&T does not have coverage there, that's not going to do him a lot of good out on the deer stand.
SEN. WICKER: Now, do I understand that we don't know how long this device exclusivity with AT&T and the iPhone is? Is that correct?
MR. MEENA: I don't know for sure. I have heard five years, but I can't say that I have --
SEN. WICKER: Yeah, I've heard five years too. Maybe someone, maybe our two researchers could tell us where we got five years. But I'm interested from any member of the panel, you know. Is it a fact that most exclusive arrangements last only six to 12 months?
MR. MEENA: No, sir. That used to be the fact. We moved from a time period where the exclusivity period was 90 days to 180 days to measured in years. And now there are lifetime exclusives on devices. And so that's why it has become more and more and more unacceptable to those --
SEN. WICKER: So you didn't have a lot of complaints when there was a reasonable short period of time to get a product going?
MR. MEENA: There were some complaints, but not like it is today.
SEN. WICKER: Mm-hmm. (In acknowledgment.) Now, Mr. Frieden, you heard Ms. Esbin's testimony. What's wrong with her research? (Laughter.)
MR. FRIEDEN: Well I like to think that great minds can think alike. I like to think great minds can think differently, but it probably gets down to, you know, how you define the market. I mean, I do research on market competition. I look at the wireless industry and I see four carriers with a 90-plus percent market share. I know they can be vigorously on television. I know they tell me how great their service is, and I know they certainly want to showcase their telephones. But I don't see the robust competition in the pushing of innovation as could be.
I mean, going back to sort of a historical analogy, I mean, when I hear about exclusivity, I mean, on one hand, you know, there's something called the Colgate doctrine, and Colgate can sell toothpaste to anybody. But we're talking about an essential resource that's really part of our DNA, part of what makes our global information age work. And in the past, when we had --
SEN. WICKER: -- And that is choice.
MR. FRIEDEN: Yes, choice. But bringing it back to telecommunications, we had a time when there was the telephone and that telephone accessed AT&T, and if you wanted to access MCI you got inferior inter-connection, or you had to dial 27 digits instead of seven digits or 10 digits, and that exclusivity was something that the courts and the FCC ultimately found illegal and inappropriate. The choice was to have multiple carriers via the same telephone.
SEN. WICKER: Ms. Esbin, where did Mr. Frieden go wrong there?
MS. ESBIN: (Laughs.) Well, I think it's reasonable minds may disagree. I think your mind is great too, but I think the problem is one of perspective rather than the data. Compared to the wire line world, having the original two cellular carriers per market, for local markets, looked like a great leap forward, and the FCC was able to find, based on the record at the time in 1992, that there was enough competition that they could permit exclusive handset agreements.
Following the budget act of 1993 when more spectrum was opened up and the regulatory framework for commercial mobile radio services was established, the idea was to introduce more competition into the market and reduce economic regulations. And I think that the results have been pretty good.
As I said, it is not perfectly competitive. You won't find any networked industry like communications. But if you compare it to local wire line phone market, which today has more competition but still not at the level of the wireless market, I think the wireless market was always held up at the FCC as the poster child for competition and a light touch approach to regulation.
And I believe that part of the problem is, what is the correct market definition. And the FCC has looked at it from the local market -- how many competitive choices do I have where I live, not how many competitors are competing nationally.
SEN. WICKER: Madam Chair, I think the clock has gone a little haywire. But if I could ask one more question and to Mr. Frieden and Ms. Espin.
What's going to happen to Mr. Rooney's company and Mr. Meena's company if these indefinite five-year-plus exclusive agreements continue? Are they going to be able to survive? And, will that be good for competitiveness?
MR. FRIEDEN: I think they are going to be able to survive, but is the nation going to suffer a disadvantage when this digital divide extends into wireless? Wireless is certainly that third wave, that third screen. Increasingly we look to wireless to access the internet.
Congress has legislated a mandate to the FCC to promote access to the internet, to promote ubiquitous access to advanced telecommunication services. And increasingly that's going to be a wireless technology that gets there. So if we continue to have, or if we have a broadening of this digital divide between urban and rural, when you serve rural areas with inferior service, rural areas will suffer comparatively and competitively with their urban counterparts who have much better choices, much faster access to the internet, and the like.
SEN. WICKER: Ma'am?
MS. ESBIN: I tend to look at this more as a lag than an unbridgeable divide. My own research has indicated that the period of time for the exclusives that we're probably talking about here, the iPhone and some similar products, is under five years, and is more in the nature of one to two years. I have read a number of analysts, industry analyst reports, and they seem to believe that the period is quite a bit shorter than five years.
The other point I would make about the iPhone in particular is, this is Apple's choice, and I don't believe that carriers are calling the shots with Apple on this particular device. In conclusion, I fully expect Mr. Meena and Mr. Rooney's companies to not only survive but thrive in the future. I just don't think that this one device is the key to their survival.
SEN. WICKER: What about the huge list that Mr. Rooney held up? It's not one device. How long was that list, Mr. Rooney?
MR. ROONEY: Fourteen.
SEN. WICKER: Fourteen devices.
MR. ROONEY: Currently.
MR. MEENA: And nine of the top 10 selling devices now are under exclusives as well.
MR. ROONEY: And the other side of this coin is, it's the customer that suffers, not my company. I can't, there are areas that I serve, and we're probably, in terms of geography, you know, 50-50 between rural and urban areas. And we have areas where we're the only carrier.
I don't know where all these statistics about 12 carriers in an area are. I don't know of any of those areas. But the point is that we serve many areas where we're the only carrier to build cell sites in the area. And those customers cannot get any of those phones. So when we talk about using 3G to access broadband in rural areas, which is probably the most economic way to do it, we are working at a disadvantage.
SEN. WICKER: Well, Senator Klobuchar, thank you for, you know -- I'll shut up for a while, but I have to agree with Senator Kerry there. It's a complicated issue and a lot of questions to be answered. It does seem to me that the consumer and the ability of the consumer to have access and choices should be paramount. But thank you, and I'll listen to your questions. Thank you, Madam.
SEN. KLOBUCHAR: Okay. Thank you very much, Senator. Thank you to our panelists. I'm going to try to follow-up on actually some of the initial comments of Senator Warner. I figure he did pretty good in this business. I was a tel-com lawyer for 13 years. He did a little better.
So I'm going to follow up. He was asking about the balkanization of this and his concern that if you start having these exclusive arrangements, you could potentially have AT&T with the iPhone, you have Verizon with someone else, and it just leads to the situation where if we had done this in the past, we would say, in the computer area, what it would be like, Microsoft and IBM having an exclusive deal. And you would actually never have had a Google, because who would have wanted to make deals with some of these start-up companies that might not have had much promise.
So, I have a big concern there about the innovation as well as the long term effect this could have on the pricing. And we are ready, I have concern on pricing with text messages and other things that we actually, in the Judiciary committee we had a hearing on this yesterday.
So I want to start with you, Mr. Meena. In your testimony you say that device manufacturers would like to open their portfolios, but they cannot do so because the largest carriers will not allow it. Could you expand on what the dealer said?
MR. MEENA: Yes. We have been, we formed a buying group, associated carrier group several years ago. We have been to Korea. We have tried to meet with manufacturers in Korea about purchasing the latest and greatest devices. And it's hard to get a straight answer when we talked to them about those devices. They, it seems like they would be able to make the decision as to whether they could sell their product to us. But they are checking back with somebody, and we think we know who it is.
SEN. KLOBUCHAR: What did the dealers allege the largest carriers would do if they started doing business with you?
MR. MEENA: I guess they would cut off business with those manufacturers, is my, that's a guess. I don't know for sure.
SEN. KLOBUCHAR: You're just having trouble getting any kind of these devices?
MR. MEENA: We can get some of the lower end devices. When it comes to the higher, high tech, latest and greatest touch-screen type devices, we really struggle in doing that, the type of devices that the market is demanding today. I'm often asked, you know, since we serve a lot of rural areas, Mr. Meena, what is it that your customers want?
Our customers want the same thing in rural areas what their urban customers want in metro areas. That's exactly what they want, and we want to be able to provide those type of devices and services and have done it for many years in our network. We want to continue to do so with the devices and applications that we offer.
SEN. KLOBUCHAR: Mr. Rooney, have you had similar experiences?
MR. ROONEY: We have not had that type of similar experience, but we know that we have 14 on my little list here that I can't get a hold of. So when you are sitting there trying to build your portfolio, you're already stopped from getting, as was pointed out by Mr. Meena, nine of those 14 are the top selling devices. So we can't get them.
SEN. KLOBUCHAR: And I think Mr. Meena was referring to the largest carriers demanding and receiving long-term agreements from the manufacturers.
MR. ROONEY: Well, all I can tell you is what's going on. So, you know, I judge what's happening in the world by the results, not necessarily --
SEN. KLOBUCHAR: So do I. Do you think that manufacturers feel obligated to grant these exclusive deals for fear of being locked out of an American market if they don't acquiesce with their --
MR. ROONEY: I don't think they're going to be locked out, but let's put it this way, they maybe have more favorable access.
SEN. KLOBUCHAR: Mr. Frieden, you want to comment on that?
MR. FRIEDEN: Yes ma'am. These statistics are very hard to come by because they are largely trade secrets. But I understand from credible statistics that a major carrier like Verizon looks to get 65 percent or so of its handsets sold, bundled with the handset from a Verizon store. And then you have about 20 to 25 percent from big box retailers like Wal-Mart and Best Buy.
So the vast majority of sales of the handset is coming from that one single business model, so the big carriers have substantial buying power. And the fact of the matter is that we don't have a manufacturer here perhaps because of that.
SEN. KLOBUCHAR: Mr. Roth, as we look at this competition issue, and I listen with interest to your innovation argument, I can actually see this as a start-up model.
I could see, you know, the early days of TV, that they might have had a deal to innovate and do something differently, but I'm just trying to figure out how it is good for competition if the most popular devices that are rolling off the product lines are gobbled up by just a few large companies in exclusive deals. How can that be good in the long term?
MR. ROTH: Well, you know, as I'm listening today, there are two misperceptions that are starting to brew, and it's real important for me to take issue with both of them. One has to do with rural Americans and their access. And the other has to do with exclusive devices.
Let me start with, 35 percent of AT&T's portfolio is exclusive. Sixty-five percent of our portfolio is not. Let's start with how exclusive devices actually come about. The manufacturer doesn't fly over from Korea or fly in from Canada and open up a suitcase and say, "Which one of these do you want to buy and monopolize in the U.S.?"
That's not the way it happens. You can buy what they want to sell. They come over with a suitcase. They'll show you the devices, and then you can buy what they want to sell you. Or you can sit down with them and say, "I want a touch screen device," when no one has a touch screen device, or "I want a two-way slider device that allows someone to text, and I want this chip set in it, and I want it in this color, and I want it at this price."
So, the exclusivity starts with the carrier sitting down with the manufacturer and saying, "I want you to produce something that's not on your product road map." And the manufacturer says, "There is significant risk in me doing that. You need to share that risk with me." Volume commitment. You can't make a volume commitment if it's suddenly going to be available to everybody if it's wildly successful. You won't achieve your volume commitments back to the manufacturer.
So that's one of the risks associated with that. Another thing I really want to talk about is rural America. AT&T today serves over 90 percent of the U.S. population. With the divested assets that we're trying to purchase through Alltel it would be 95 percent. We spent $2.3 billion buying the assets from Verizon, largely serve areas that are rural. We spent $8 billion in the 700 megahertz auction to fill in the rest of the United States, to bring in places like North Dakota, South Dakota, Wyoming, Montana.
AT&T competes as aggressively in rural America, whether it's Mississippi or whether it's Michigan. We have competed aggressively in rural America as we do in major metro markets. And our history of buying companies like Dobson and bringing the iPhone to Alaska, buying Rural, parts of Rural, and bringing the iPhone and other devices to Maine and New Hampshire.
You put it all together, and we have a history that says we are very much interested in serving all of America. So there's two misperceptions. One, how exclusive device deals start. And two, that somehow rural Americans are disadvantaged. I don't disagree that small carriers or rural carriers might be disadvantaged. I'm not in their business. I don't run their business models. But rural Americans are not disadvantaged.
SEN. KLOBUCHAR: But don't you think that having competition with people being able to choose their own carrier can be good for prices and good for our country? And if they can't compete equally because they don't have access to the same equipment, you might not have an equal playing field for competition.
MR. ROTH: I don't disagree with what you are saying, but there's a difference between having no competition. There are, 95 percent of Americans have three carriers today to choose from. Ninety-five percent of Americans. And with the build out of the 700 megahertz auction, that number is clearly going to go north of 95 percent. So, today --
SEN. KLOBUCHAR: This is my own experience, and I don't want to kind of get off the rural issue for a little bit. In the rural areas, you can have -- on our campaign, we carry three different phones with three different services because it isn't quite true, because you can have areas of dropped calls and very problematic service with one of the large carriers --
MR. ROTH: And you can.
SEN. KLOBUCHAR: -- in rural areas.
MR. ROTH: You can. I mean, let's take Minnesota. We bought Dobson so that we could get 850 megahertz spectrum in places like Minnesota. We've had it a year and a half. We bought a fixer upper. Some of our networks like Miami or Dallas that we've owned for 25, 26 years, they are a much better performing network. But areas that we've bought in -- upstate Maine, New Hampshire, Minnesota -- we're putting money into it and we're continuing to improve it, but they are 21 years, 22 years behind some of the markets we started.
SEN. KLOBUCHAR: You know, Verizon just went onto a six-month exclusivity contract for two of its models. This came out at our hearing yesterday. Would that be something, are you doing that with some of your models, or are they down to lower, or have you gotten rid of exclusivities not crowning the iPhone?
MR. ROTH: Thirty-five percent of our portfolio is exclusive as I sit here today. Some of those terms are as little as six months. Some of them are longer. Sixty-five percent of our portfolio is not exclusive.
MR. MEENA: But it's the 35 percent that is attractive, the most attractive part of the market --
MR. ROTH: That's not a true statement. The number one selling device we have is not an exclusive device. Our top selling device is the GoPhone. It's the 19.99 (dollars) phone that you can buy at Wal- Mart in a little round box now. That's our top selling device. It's not exclusive. It's our number one selling device. It's not --
SEN. KLOBUCHAR: There's a few people shaking their head, no, they don't think that's -- (inaudible) --
MR. ROTH: That's our number one selling device.
SEN. KLOBUCHAR: Mr. Meena?
MR. MEENA: Yeah, I'm all for not having exclusive devices. The BlackBerry Curve is a non-exclusive device that we all have access to. It's the number one selling device in the country. But, the facts state that nine out of the top 10, top selling devices, are under exclusive arrangements.
And I want to say something about the 700 megahertz auction. We participated in the auction as well. We --
SEN. KLOBUCHAR: So what I -- Mr. Roth said something. You're saying nine out of the top 10 selling devices in the country are under exclusive arrangements.
MR. MEENA: Yes ma'am.
SEN. KLOBUCHAR: And is that not true, Mr. Roth?
MR. ROTH: That's not true at my company. I don't know where Mr. Meena is getting his data, but at my company --
MR. MEENA: That is an industry statistic.
MR. ROTH: Well, the number one selling device at AT&T is the GoPhone.
SEN. KLOBUCHAR: Okay.
MR. ROTH: It's the number one selling device.
MR. MEENA: GoPhone is a phone that's targeted to a certain segment of the market. But we're talking about all segments of the market. And we know that this, that certain sections of the market are interested in the devices that he has under exclusivity.
SEN. KLOBUCHAR: Okay. You know, in your testimony, Mr. Meena, you suggested that smaller carriers haven't been able to consolidate purchasing power to gain an access to these devices.
While it may be true that manufacturers can't sell you devices under exclusive arrangements, why can't they design new handsets for you? What's the issue, do you think?
MR. MEENA: I don't know why that is. I don't know why they can't. It may, it could be a volume issue. It could be that they don't want to infringe upon the type of devices that the larger carriers are selling.
SEN. KLOBUCHAR: Mm-hmm. (In acknowledgment.)
MR. ROONEY: I can shed a little light on that. If you took all the sets sold by the non top four suppliers -- so you take out Verizon and the rest of them -- we couldn't even equal one of the Verizon or AT&Ts to buy them. So, you know, it's a volume game. So if you want to consolidate, you got to have enough volume to justify the consolidation. And it's just not there.
I mean, these guys have -- basically, they have gobbled up all the spectrum. They've gobbled up all the -- they control the manufacturing side of the business. You're building an oligopoly, a monopoly there, and, you know, it's already happened. So, and all this exclusivity does is it effectively causes more difficulty in terms of trying to compete against that entrenched group.
SEN. KLOBUCHAR: Okay. In comments filed yesterday with the FCC by a consortium of consumer groups, it was stated that, and this is a quote, "handset manufacturers in Asia and Europe are able to sell 70 to 80 percent of devices independent of exclusive deals with service providers." And a 2008 article in Wired recently noted that handsets in Japan have been the envy of consumers in the United States where it's cell technology has trailed the Japanese handset market by an estimated five years or more.
In light of these statements, can you explain, Mr. Roth, why this exclusive handset deal is necessary in the U.S.?
MR. ROTH: Sorry, I am not familiar with that study that you are referencing. So I would tell you that it is my view that the U.S. lagged the world. So I believe the information you say is true, but I don't believe it is true of today.
I think that was true five years ago. But that's not true today. I mean, iPhone came first to the U.S. The BlackBerry Storm, the Palm Pre -- these are devices that are hitting the U.S. first. And I think they are hitting the U.S. first because we finally have the ability to compete on a world level with Deutsche Telekom and Vodafone and other major carriers who can go to manufacturers and can do the same things we're doing.
So I believe that you also find that on a cost-per-minute and a cost-per-megabyte, which is how we measure data, the U.S. has the lowest rates. So I think we have the most innovation. I think we have the lowest rates. And I think we have the most choices for consumers.
SEN. KLOBUCHAR: It just seems that when you have, I think it's, what, 270 million consumers -- and I think the chairman remarked, the fastest growing market -- that there would be a demand for these products in the United States. And that's why I'm trying to deal with here is, you know, you have carriers -- I don't want to be stuck with one kind of service if I want one kind of phone. And I think that's how a lot of consumers feel.
And there are problems, as Mr. Rooney and Mr. Meena pointed out, in certain areas of the country where a certain kind of service won't work, so then you can't have your phone. And while I believe that there may be arguments for the start-up piece of this and for some limited exclusivity arrangements, my concern is, if they go on too long, we are really going to be hurting competition, and we're really going to be hurting the prices.
If you just want to comment on that as an end to this, I think, Mr. -- I am the last one here as the chair wielding the gavel -- but if each of you just wants to comment on that, near the end. Mr. Roth, if you want to start.
MR. ROTH: For me, there's a track record that says the United States, that since the iPhone was launched in June of 2007, what we've seen is a greater pace of innovation than we have ever witnessed in this industry's history. The 30 new devices that have come out, the 30 new smartphones that have come out to challenge the iPhone are a direct response to the fact that not all carriers have it. In fact, only AT&T has it.
So in order to compete, other manufacturers and other carriers had to partner to race innovation out to the market. I think it's working. I think it's working extraordinarily well. And as I talked about with the iPhone, three new models have come out while it's been exclusive for AT&T. The price has dropped three times since it's been exclusive with AT&T. I think consumers have benefited.
And when you look at the 95 percent of the market that we'll serve at this time next year, and more as we build out the 700 megahertz auction, from 700 megahertz, I think consumers are really benefiting at a point where now we're the envy of the world. We no longer lag the world.
SEN. KLOBUCHAR: Mr. Rooney.
MR. ROONEY: I think that the facts tend to speak for themselves. We have four dominant carriers that control the supply chain, they control a good part of the spectrum, they control industry. And it's a very difficult industry for those of us that are not in that gargantuan size to participate in.
And it's -- we love to participate. I think that there's a mythical aura to the idea that there's competition. I mean, it's not technical competition when you get a hold of somebody else's technology and don't allow it to be disseminated to anybody else. That says, "I'm technically good, and the rest of you are technically bad." Or, "I have a better deal with Apple than you can ever get."
So, you know, what we're dealing with here is a series of complex issues about whether we are going to have a robust wireless industry that is going to serve all the country. Or are we going to have a continued concentration of issues here, and we're going to have an oligopoly, which, I will tell you, in most textbooks I've ever read, says pricing is going to become a -- and competition will hurt, so.
SEN. KLOBUCHAR: Thank you. Mr. Frieden.
MR. FRIEDEN: Yes, I'd frame this in terms of innovation and incentives. And when you have these exclusive dealing arrangements, the incentive is to lock down the handset, and the attention is to recovering the subsidy. I have no problem with the subsidy mechanism, but it does affect incentives, and it does affect innovation.
Look at what Apple does. Apple upgrades the phone, sends a firmware upgrade, and that disables some of these self-help activities. Now the self-help activities might violate the warranty, violate the contract, but the fact that consumers are resorting to self-help at the risk of breaking the phone, rendering the phone disabled, tells you something about how they feel about those restrictions.
And when you lock out a consumer, when you deny access, when you limit the versatility of the handset primarily to cover the recovery of the subsidy, innovation suffers.
SEN. KLOBUCHAR: Thank you. Ms. Esbin?
MS. ESBIN: I think there's obviously a great difference on whether the glass is half empty or half full in the wireless industry. I don't really have anything more to add about that.
SEN. KLOBUCHAR: Would you worry, though, if this just kept on and you'd have certain, you know, one kind of technology hooked in only with one service, and for the biggest carrier, and then you'd have another technology, and then you'd have a bunch of people that couldn't, that wouldn't have the choice with their carrier because they wanted a certain phone?
MS. ESBIN: I think it's really an illustration of the fact that competition in this industry is -- I don't know if the word is messy or lumpy. It is not perfect, and not everyone in the country has every choice available to everyone. I'm not sure that we want to mandate a world in which every single service offering is identical. I tend to think --
SEN. KLOBUCHAR: Oh, I don't think anyone up here wants to do that. We just want to make sure that we're putting the consumers in the middle here and picturing what may happen, and being concerned about it as this goes on.
MS. ESBIN: I understand. I think at this point it appears to me that consumers generally are being well served. I think the duration of the exclusives is an issue.
SEN. KLOBUCHAR: Thank you. Okay. Mr. Meena.
MR. MEENA: Let's go back to the auctions of the late 1990s. We basically created seven national companies. And then we kind of got down to six, and then five, and then after last year Alltel acquired by Verizon, we're down to four. Rumor has it we might be even down to three by the end of the year. Of course, you still have to have rural carriers and regional carriers like ourselves, like our company and Mr. Rooney's company, that are out there trying to create a competitive landscape for the consumers.
But if we don't watch out, we're going to not be able to create that competitive landscape for the consumers by the fact of all the consolidation of the spectrum and the control over devices and access to roaming, access to back haul and a whole host of issues that are going on through the duopolistic, oligopolistic -- however, you want to describe that world that we find ourselves in today. And I think that would be very detrimental to the consumer if vibrant competition is not nurtured and remains alive and well in the wireless space in America.
SEN. KLOBUCHAR: And I think the argument there for that in a bigger term is, you know, in the old days when we just had the local telephone companies, they were heavily regulated. The rates were regulated. All these things like early termination fees -- everything was regulated. Then you go into a competitive environment with cell phones, where they really don't have that kind of regulation at all because of the argument that this is a highly competitive market and it's new and there's innovation.
But then if you start balkanizing it, as Senator Warner said, then you have no regulation, no protections, and if the environment starts heading that way, where people don't have that kind of choice, I think that is a concern, if I can be so bold, of a number of us up here, that these exclusive arrangements are what concerns us. However, we're trying to do what's best for the consumers and we need to look at all the facts here.
So, I did want to thank all of you for being here. It's been a very interesting hearing. We've learned a lot, and thank you very much.