What's Better for Wireless, Faster Infrastructure or Lower Prices?

A Vodafone store in London Photograph by Jason Alden/Bloomberg

AT&T wants to buy Vodafone, as Bloomberg News reported through leaks yesterday. Not a huge surprise to see new flesh on an old rumor, but one detail in the story sticks out:

Finding a new home for some of Vodafone’s diverse assets would be a priority for AT&T, which is less interested in Africa and India than in Europe’s developed markets, the people said.

AT&T doesn’t want Vodafone. It wants a way in to the European market. International telecom mergers tend not to go well. Regulations vary wildly among states, and wireless telecoms in particular are so reliant on such heavily regulated goods as spectrum and tower sitings. As Deutsche Telekom found trying to get its investment in T-Mobile in the U.S. market right over a decade, there are no efficiencies between two different companies facing two different regulators.

AT&T’s model in the U.S. has been to build expensive, fast networks, then charge a lot for them. That’s impossible in the highly competitive, price-sensitive, high-churn emerging markets where Vodafone has subsidiaries. In the developed, four-carrier European markets, however, it’s merely unlikely. So AT&T appears to have set itself a goal: It can make money in Europe if it can turn European regulators into American regulators.

In October, Randall Stephenson, AT&T’s chief executive officer, gave a speech at a conference in Brussels. European carriers, he pointed out, are behind their American counterparts in rolling out the latest, fastest data standard, LTE. This is objectively true. According to a report compiled by the GSM Association, a wireless industry group, average wireless data speeds in North America last year were 75 percent faster than in Europe, a difference expected to increase over the next three years. Wireless customers are more likely to browse the Web on their smartphones in the U.S. They’re more likely to stream music, watch TV, and even have a mobile data plan in the first place.

It’s easy to see why. Capital expenditure in the U.S. on wireless networks in the U.S. is 174 percent of what it was in 2007. In Europe, it has dropped to 97 percent. American carriers are spending a lot more on their networks. Prices in Europe for consumers, though, are much cheaper. In Europe, carriers earn $38 per subscriber per month. In the U.S., they earn $69.

For various reasons, European carriers earn less off of each customer and consequently have less capital to spend on upgrades to newer technology. This situation is intolerable to Stephenson and the GSMA. They would like it to be intolerable to Europeans, too.

Stephenson would like the European Union to harmonize its spectrum policy, auctioning larger geographic blocks across a wider territory, for a longer period. This would create transnational markets comparable in size with the U.S. market and, says Stephenson, encourage more capital investment. Faster networks. More mobile video watching. Everybody wins.

There’s a problem with both the logic and the assumptions behind the speech and the paper. Starting with the logic, a step is missing. For most of the past five years in the U.S., almost all that investment came from the two largest companies, Verizon Wireless and AT&T mobility. To spend that kind of money, a company has to do two things: get big and charge high prices. And that can be done only in a less competitive environment: more mergers, fewer players, easy-to-trade signals, and tacit, everybody-wins agreements on price. Stephenson is saying that Europe needs to create an environment in which consumers pay more for faster service.

He’s not saying why. The GSMA report takes a stab at it, checking Robert Solow’s seminal economic work on economic development and arguing that ultimately it is innovation that allows economies to make huge steps in growth. First, it’s hard to compare LTE wireless service with the kind of life-altering innovations that Solow was talking about, such as indoor plumbing and the printed word. And it’s also possible to consider universal access, which is easier with lower prices, which is just as fertile ground for innovation as higher speeds.

But second, there’s a kind of condescension here that markets don’t know what’s good for them and have to be encouraged to pay more—or else they’ll never know the benefits of faster service. The regulators who manage spectrum want the fastest service they can get, available to as many people as possible, as affordable as possible. All three goals are important, but regulators should listen more closely to the demand side of the market than the supply. Carriers come up with a lot of reasons why faster speeds should be the most important consideration. Ultimately, though, they can be encouraging it for only one reason: It’s good for the carriers. If not, they’re wasting their lobbying dollars.

It makes sense to auction larger swatches of spectrum within the European Union. A single market for goods and services should be a single market for spectrum, too. But the EU should be wary of Randall Stephenson’s generous advice. He wants to build a big, fast, expensive network of his own. The benefit to AT&T is clear. Why this is better for consumers, other than “faster is better,” is a case he still has to make.

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