Minority Statement

• Ted Stevens

  Senator
  Read statement

  Minority Statement

  Ted Stevens

  TODAY’S HEARING PRESENTS AN IMPORTANT OPPORTUNITY FOR THE COMMITTEE TO EXAMINE THE CONSUMER EXPERIENCE RELATIVE TO MOBILE PHONE SERVICE.

  THE FCC’S ANNUAL REPORT TELLS US THAT MOBILE SERVICE IS THE MOST COMPETITIVE SECTOR OF COMMUNICATIONS.  THE FCC REPORT ALSO FOUND THAT CONSUMERS FREQUENTLY CHANGE SERVICES AND THAT NEW SERVICES ARE CONSTANTLY BEING INTRODUCED FOR CONSUMERS.

  I CERTAINLY UNDERSTAND AND EXPERIENCE THE FRUSTRATION THAT ALL CONSUMERS FEEL SOMETIMES WHEN DEALING WITH MASS PRODUCTS.  BUT I ALSO WORRY THAT IF CONGRESS ACTS TO RASHLY THE END RESULT COULD BE THAT CONSUMER PRICES WOULD GO UP, OR THAT SOME CONSUMERS WOULD BE FORCED INTO LESS ATTRACTIVE WIRELESS PLANS.

Testimony

• Mr. Patrick Pearlman

  Consumer Advocate

  Public Service Commission of West Virginia
  Read statement

  Testimony

  Mr. Patrick Pearlman

  Testimony of

  Patrick Pearlman

  Deputy Consumer Advocate

  Consumer Advocate Division

  Public Service Commission of West Virginia

   

  Before the

  Communications Subcommittee

  Senate Commerce, Science and Transportation Committee

   October 17, 2007

   

  “Protecting Wireless Consumers And The Cell Phone Empowerment Act”

   

              My name is Patrick Pearlman. I am a Deputy Consumer Advocate with West Virginia Consumer Advocate Division.  My office is charged with the responsibility of representing West Virginia’s residential and small business utility ratepayers in state and federal proceedings that may affect such consumers’ rates for electricity, gas, telephone and water service.  My office is also a member of the National Association of State Utility Consumer Advocates (NASUCA), an organization of state utility consumer advocate offices from more than 40 states and the District of Columbia, charged with representing utility consumers before state and federal utility commissions and before state and federal courts.^[1]  I have been a Deputy Consumer Advocate since May 2003 and have represented NASUCA in proceedings before the Federal Communications Commission (“FCC”) and in federal courts involving both wireless and landline carriers’ billing practices, as well as proceedings involving wireless carriers’ early termination fees (“ETFs”) and related contractual issues.  I have previously addressed the FCC’s Consumer Advisory Committee and the National Association of Regulatory Utility Commissioners (“NARUC”) regarding such matters.  I greatly appreciate the opportunity to testify at this hearing regarding issues that affect wireless consumers and S. 2033, the Cell Phone Empowerment Act.

  I.          Introduction.

              For nearly twenty years, commercial mobile radio service (“CMRS”) providers’ (i.e., wireless carriers) billing and contractual practices have been largely unregulated.  This “hands off” approach may have made sense back in the day when a nascent wireless industry was struggling to establish itself as an alternative form of telecommunications service, subscribed to by a small minority of Americans, and needed protection from the monopoly-based regulatory regimes that applied to traditional landline service.  That approach – specifically with respect to the wireless industry – no longer makes sense in today’s telecommunications market.  And that approach makes no sense where, as here, market forces have failed to protect wireless consumers against various practices that, in other markets, would historically have been characterized as “unconscionable” or in violation of fundamental principles of contract law.

  II.        Background.

              Prior to 1993, land mobile radio services (as wireless was then called) were subject to two inconsistent regulatory schemes depending on whether the services were “public” or “private.”  Providers of “public mobile services” were treated as common carriers, subject to regulation by both the FCC and States.  “Private land mobile services,” in contrast, were exempt from common carrier regulation altogether.^[2] 

              In 1993, Congress altered this framework by amending Section 332(c) of the Federal Communications Act (“Act”).^[3]  Among other things, Congress:  (1) eliminated the disparate regulatory treatment of “private” and “public” mobile services by introducing the concept of “commercial mobile radio service;” (2) amended Section 332(c)(3)(A) of the Act to prohibit State and local governments from regulating “the entry of or the rates charged by any commercial mobile service or any private mobile service,” but expressly preserved States’ authority to regulate “other terms and conditions” of CMRS; (3) authorized States to petition the FCC for authority to regulate CMRS rates where the service is a replacement for landline service and the market fails to protect consumers from unjust and unreasonable rates; and (4) authorized the FCC to forbear from applying most provisions in Title II of the Act to CMRS and CMRS providers, which the FCC promptly did in 1994.^[4]          Congress made clear, however, that the amendments were intended to give the nascent wireless industry time and space to grow, by eliminating the disparate regulatory treatment of “private mobile” and “public mobile” wireless services, while providing consumers with needed consumer protections.^[5]

              Yet in the wake of Congress’ 1993 amendments, and the FCC’s orders implementing those amendments, many States ceased utility regulation over wireless carriers’ “other terms and conditions” of service.  In other States, some commissions adopted exemptions or greatly relaxed standards for, among other things, wireless billing and other business practices.  Despite these actions, however, generally applicable State consumer protection laws and laws regulating the formation and enforcement of contracts continued to apply to wireless carriers.  Since 1993, such laws have become a significant source of State efforts to restrain unfair billing and other, unreasonable non-rate practices of wireless carriers. As a result, the wireless industry has enjoyed huge Federal financial support based on technology-neutral rules governing universal service, while at the same time enjoying relative freedom from regulation based solely on their particular (wireless) technology.

  III.       Wireless Industry’s Efforts To Preempt State Law.

              Even the minimal oversight States retain under the Act has been too much for the wireless industry.  Over the past two decades, the wireless industry has vigorously sought to avoid virtually any State regulation of carriers’ contractual, billing and related business practices on the theory that such laws are preempted “rate” regulation.  Wireless carriers have sought to invalidate State laws governing:

  •           Late payment penalties/fees.^[6]

   

  •           Municipal right-of-way and other assessments.^[7] 

   

  •           State universal service fund assessments.^[8]

   

  •           Unilateral contractual provisions (e.g., pre-printed contract terms limiting the carrier’s liability, allowing carriers to change material terms without notice, requiring arbitration).^[9]

   

  •           Deceptive advertising of rates and charges.^[10]

   

  •           Early termination fees.^[11]

   

  •           Regulatory fees and assessments.^[12]

   

              While wireless carriers have often failed to convince State and Federal courts that virtually any State law regulating their billing, contractual and related practices is preempted, the industry has been more successful selling this argument to the FCC.  For example, purportedly in reaction to NASUCA’s March 2004 petition for declaratory ruling that various “regulatory” line item charges imposed by wireless and landline carriers violated the FCC’s Truth-in-Billing and other orders, the FCC in a 2005 order declared all State laws requiring or prohibiting line items included on wireless carriers’ monthly bills to be preempted “rate” regulation.^[13]  I say “purportedly” because neither NASUCA’s petition, nor the FCC’s public notice regarding that petition, ever suggested preemption was an issue.  In fact, the FCC’s 2005 order candidly acknowledged that preemption arose in wireless carriers’ reply comments or ex parte presentations after comment closed.^[14]  Moreover, in that same order the FCC initiated a rulemaking and sought comment regarding its proposal to adopt more stringent Truth-in-Billing regulations in response to evidence of significant consumer complaints and confusion regarding carriers’ bills, but then, paradoxically, sought comment regarding its tentative conclusion to preempt all State non-rate regulation of carrier billing practices.^[15]  The FCC has not yet adopted final rules or adopted its tentative conclusions regarding such preemption. 

              Nor has the FCC ruled on two petitions, filed by the wireless industry’s trade association and a wireless carrier, seeking a declaratory ruling that early termination fees (“ETFs”) are “rates” that States cannot regulate.  However, press reports suggest Chairman Martin is leaning toward preemption.^[16]

  IV.       Continued State Regulation Of Wireless Practices Is Needed.

              Consumer advocates are concerned that the wireless industry will use S. 2033 to achieve ends counter to the bill’s goals, much like the wireless industry used NASUCA’s petition to tighten up the FCC’s Truth-in-Billing rules as an opportunity to further its effort to preempt State laws.  We hope that will not be the direction in which the Senate moves because State consumer protection laws need to continue to apply to the wireless industry. 

              A.        Wireless Carriers’ Unreasonable, Anti-Consumer Practices.

              About the only thing that keeps pace with the rapid changes and developments in wireless services and technologies is the ingenuity and creativity of wireless carriers in adopting a variety anti-consumer billing, contractual and related practices, including but not limited to those discussed below.        

                          1.         Line Item Charges.

   

              Wireless carriers continue to include a variety of line item charges and fees on consumers’ monthly bills that primarily recover ordinary costs of doing business, such as complying with government laws and regulations.  While some carriers pass along their cost of complying with State and Federal laws in their rates, others have adopted numerous line item charges in addition to their rates for service, often denominated in such a way as to suggest that the charge is imposed by the government rather than the carrier, and which are typically not advertised and disclosed, if at all, in the very fine print of the carrier’s service agreement or other materials.  Such line item charges are nothing more than hidden rate increases. In this era of mergers and consolidations, wireless carriers have often simply continued the line item charges of the carriers they have acquired.  For example, AT&T Mobility (formerly Cingular) charges either pre-merger Cingular’s “Regulatory Cost Recovery Charge of up to $1.25”^[17] or pre-merger AT&T Wireless’ Regulatory Programs Charge of $1.75.  Potential customers have no way of knowing which charge applies, and in areas served by both carriers pre-merger, either charge could apply.  Nor are customers likely to find out what costs each charge recovers, since both purportedly serve the same ends despite originating with different carriers and different networks.^[18]      

              Likewise, Sprint Nextel continues imposing line item charges adopted by the pre-merger carriers, Sprint and Nextel.  Customers will find it difficult to determine what those charges will be since Sprint Nextel’s “Terms and Conditions of Service” simply advise customers that their “[r]ates exclude taxes and Sprint Fees, such as a USF charge, cost recovery fees, and state/local fees that vary by area.”^[19]  Much further into Sprint’s Nextel’s contract, the carrier describes surcharges (“Sprint Fees”) that may apply to customers as “including, but not limited to:  Universal Service Fund, E911, Federal Programs Cost Recovery, Federal Wireless Number Pooling and Portability, and gross receipts charges.”^[20]  Customer bills, however, do not provide any itemization of these surcharges but rather simply provide a single line for “Taxes, Surcharges and Fees.”

                          2.         Descriptions of Service Coverage.

   

              Consumers continue to have difficulty determining whether and where they will have wireless service.  It is generally understood that “dead spots” exist where a wireless signal may be lost, such as when a high hill or mountain blocks a driver’s signal and indeed, the FCC’s rules do not consider this a lack of service.  However, it has been my experience in West Virginia that some “dead spots” are very large and never appear on the coverage maps provided by carriers in their marketing or sales materials.  Another deficiency in coverage maps provided by carriers is the general lack of any information showing county boundaries, which is the sort of information that allows consumers to gain an accurate understanding of where they are likely to have service. We know that carriers have very detailed signal coverage maps but refuse to share them with customers, some going so far as to claim that the areas they actually serve constitutes competitively sensitive information.  This is but one practice that deprives consumers of vital information they need to make an informed, intelligent choices among wireless carriers – and to avoid the costs that flow from choosing a carrier who cannot provide adequate service at the price advertised.   

              More troubling, however, are those instances in which a wireless carrier targets its marketing efforts at consumers who are located in areas that the carrier does not, and cannot, serve.  Such efforts led the California Public Utilities Commission (“CPUC”) to fine Cingular $12.14 million, and to require the carrier to issue at least $18.5 million in refunds for ETFs collected from former customers who terminated their service from January 2000 through April 2002.^[21]  Similarly, wireless carriers’ exaggerated representations regarding coverage led the Attorneys General of 33 states to investigate the three largest wireless carriers (at that time) – Cingular, Sprint and Verizon Wireless – and to ultimately enter into settlement agreements (called “Assurance of Voluntary Compliance”) in 2004 that required the carriers to provide more accurate maps, disclaimers and to pay $1.66 million each to the States.  In NASUCA’s opinion, the AVC provisions regarding representations concerning service area would be a good model for either Congress or the FCC to build upon in addressing this issue.

                          3.         Early Termination Fees.

   

              Another issue that has generated considerable heat, if not light, is the widespread use of ETFs by wireless carriers in conjunction with one- or two-year service contracts.  The wireless industry asserts that ETFs are necessary in order to reduce, or subsidize, customers’ costs of wireless products (i.e., handsets) and services (rate plans) and to ensure that the carriers fully recover customer-acquisition costs, and claims consumers “prefer” long-term contracts coupled with ETFs in order to obtain lower cost service and equipment.^[22]  Such evidence as there is strongly contradicts these assertions.

              For one thing, evidence supporting the wireless industry’s claims about the extent to which equipment or customer acquisition costs are subsidized by ETFs is sorely lacking.  No independent authority has ever reviewed the cost of equipment in order to verify, let alone quantify, the wireless industry’s claims.  For its part, the FCC has not considered the issue since its 1992 determination that “subsidizing wireless phones” via ETFs, coupled with fixed term contracts “is an efficient promotional device which reduces barriers to new customers.” ^[23]  That determination itself was not based on a thorough review of such costs.  NASUCA called upon the FCC to revisit the issue in its comments in response to CTIA’s petition for a declaratory ruling preempting State regulation of ETFs,^[24] and recently adopted a resolution repeating that call.^[25]  To-date, the FCC has not responded. 

              In any event, the manner in which wireless carriers apply ETFs appears to undercut their assertions regarding the degree to which ETFs subsidize equipment and other costs.  Most ETFs range from $150 to $200 per line/handset and, except for Verizon Wireless, no major wireless carrier prorates the ETF over the life of the contract or any other period.[26]  Thus, a customer with a two-year contract who cancels service in the twenty-third month of the contract pays the same ETF as a customer with a similar contract who cancels service in the first month.  Nor do the ETFs vary by wireless rate plan or by equipment purchased by the customer.  If ETFs truly served to lower equipment prices and reduce customer acquisition costs rather than penalize customers for terminating service, one would expect ETFs to be prorated or to vary according to the equipment purchased or rate plan selected.  The fact that they do not strongly suggests something other than the discounting of service is at play and, again, the evidence appears to bear this out. 

              In fact, ETFs are decidedly anticompetitive since they appear to be primarily aimed at tying customers to their carriers and reducing customer “churn.”  An August 2005 report issued by the Massachusetts Public Interest Research Group (“MASSPIRG”) estimated that ETFs cost consumers $4.6 billion from 2002 through 2004 in penalties paid or foregone opportunities to obtain lower-cost services.^[27]  Moreover, a survey conducted on behalf of MASSPIRG found that, of the 775 wireless customers surveyed, 36% responded that ETFs had prevented them from switching carriers, while 47% indicated that they would “switch cell phone companies as soon as possible” or “consider switching cell phone companies” if ETFs were eliminated.^[28]  Only 10% of wireless customers surveyed responded that they had terminated service early at least once in the preceding three years (or roughly 3% per year) and had chosen to pay the ETF in order to switch, typically for either lower rates or better service.^[29] 

              Finally, even if equipment prices are lowered by ETFs and long service contracts, such measures reduce potential competition because such restraints on customer choice are coupled with carriers’ and manufacturers’ practice of physically locking handsets to the carrier’s service.  Thus, in addition to any ETF liability a customer is willing to incur in order to obtain cheaper or better service, the customer is forced to also incur the cost of a new handset as well as service activation or number porting charges.  Such practices are a dead-weight waste of resources and a brake on more vibrant competition.

                          4.         Independent Sales Agents’ ETFs.

              Another problem with ETFs, and the justification for them, is the fact that independent sales agents for wireless service and equipment also charge ETFs, oftentimes much higher than those charged by wireless carriers.  This problem was highlighted in the Utility Consumer Action Network’s (“UCAN”) comments to the FCC in response to the wireless industry’s petition to preempt State regulation of ETFs.  According to UCAN – and as found by the CPUC in the proceeding that led to the $12.14 million fine assessed against Cingular – independent sales agents in California tacked on additional ETFs of up to $550 per handset, in addition to Cingular’s ETF.^[30]  Since sales agents do not provide either the service or the equipment, there is no reasonable justification for such ETFs; the fees simply ensure the agents will be paid – either their commission if the customer remains with the carrier for the allotted time, or their ETFs if the customer terminates service before the allotted time has lapsed.  Independent sales agents’ ETFs also benefit the wireless carrier, by providing a strong disincentive to terminating service early.^[31]  Significantly, independent sales agents are not subject to regulation by the FCC, though State consumer protection laws might apply – if they are not preempted.

                          5.         Contracts of Adhesion.

   

              Under most wireless contracts, all the benefits flow in one direction (i.e., to the carrier), and for residential and small business customers there is no real prospect of negotiating over these terms.  Such contracts are adhesionary, especially when one considers that virtually all wireless carriers make use of such terms and conditions.

                                      a.         Unilateral modification of material terms.

   

              Most contracts allow carriers to unilaterally modify the material terms of service, with little or no notice.  For example, AT&T Mobility’s contract provides that the carrier “may change any terms, conditions, rates, fees, expenses, or charges regarding your service at any time,” merely by providing notice to the customer.  However, “changes to governmental fees, proportional charges for governmental mandates, roaming rates or administrative charges” require no notice whatsoever.^[32]  Customers can only terminate their contracts, without incurring ETFs, only for changes that “increase the price of any services . . . beyond the limits set forth in [the customer’s] rate plan brochure” or that “materially decrease the geographical area in which your airtime rate applies.”^[33] 

              Similarly, Sprint Nextel’s contract provides that it “may change any part of the Agreement at any time, including, but not limited to, rates, charges, how we calculate charges, or your terms of Service,” commits to provide notice of “material changes” but only “may” provide notice of “non-material changes.”^[34]  What constitutes a “material change that has a material adverse effect” on the customer, however, is solely within Sprint Nextel’s discretion.  Indeed, the inherently arbitrary power Sprint Nextel has in deciding what changes are “material and adverse” was highlighted twice in the past year when the carrier increased its text messaging charges.  When it first increased its text messaging charge (from $0.10 to $0.15/message) in October 2006, Sprint Nextel declared the change to be “material” and allowed customers to terminate service without incurring an ETF.^[35]  Yet when Sprint Nextel increased the same charge (from $0.15 to $0.20/message) again just 10 months later, it declared the increase to be “non-material” and that customers who terminated service in response would be subject to its $200 ETF.^[36]  Verizon Wireless’ contract likewise permits the carrier to make any changes it deems non-material.^[37]

                                      b.         Limits on legal remedies.

   

              Wireless carriers make extensive terms limiting customers’ legal remedies for any cause of action, again to the carriers’ benefit.  For example, AT&T Mobility’s contract requires customers to submit any dispute (“whether based on contract, tort, statute, fraud, misrepresentation or any other legal theory” and regardless of whether the dispute predates the contract) to binding arbitration.  Further, by signing up for service with AT&T Mobility, customers “waive their right to a trial by jury or to participate in a class action” and the carrier’s liability is limited to $5,000 or the maximum amount allowed in small claims court.^[38]  Sprint Nextel likewise requires customers to agree to settle any disputes by binding arbitration, to waive their right to trial or arbitration by jury, or to participate in a class action suit.^[39]  Verizon Wireless’ contract similarly requires customers to submit all claims to binding arbitration.^[40]

                          6.         Other Practices.

   

              Another wireless carrier practice merits consideration.  In July 2006, after its acquisition of AT&T Wireless, Cingular began notifying roughly 4.7 million former AT&T customers using older, TDMA technology that, effective October 1, 2006, Cingular would begin charging $5/month for each handset.^[41]  Customers could avoid the surcharge by upgrading their service to Cingular’s digital Global System for Mobile (“GSM”) service.  The surcharge came on the heels of a class action lawsuit, filed in Washington, alleging Cingular violated its merger commitment to maintain service to former AT&T customers by degrading their service to force them to move to Cingular’s GSM service.  According to that complaint, many of the 20 million former AT&T Wireless customers acquired by Cingular ended up paying $18 fees to switch service and were required to buy new phones and pay other fees to initiate service.^[42]  It appears Cingular did not consider the additional surcharge to be a service modification entitling customers to terminate service without incurring ETFs.  At roughly the same time, Cingular began terminating customers who roamed (i.e., made wireless calls carried on another carrier’s network) for more than 50% of their monthly usage.  The kicker here is that the coverage area for GSM service is typically smaller than that for analog or TDMA service, meaning that those former AT&T Wireless customers forced over to Cingular’s GSM service could end up either no longer having service (in which case they were probably locked in by Cingular’s ETF) or roaming more often (subjecting them to possible termination by Cingular, after spending the money to upgrade to GSM service).

              B.        The FCC’s Response Has Been Neither Timely Nor Adequate.

              The FCC has not responded to complaints involving wireless carriers’ billing and other practices, despite having ample authority to investigate and address unreasonable carrier practices under the Act.  It is not as though the FCC is unaware of consumer dissatisfaction or complaints regarding the wireless industry’s more egregious practices.  According to the FCC’s quarterly reports summarizing consumer complaints and inquiries received by its Consumer and Government Affairs Bureau, complaints regarding wireless carriers’ billing and rates, early termination fees, marketing and advertising practices (including alleged misrepresentations) have consistently been in the top five categories of complaints received regarding wireless service since the First Quarter of 2002.^[43]

              Despite the relatively high proportion of complaints involving wireless billing and rates (including line item fees and charges), ETFs and marketing practices, the FCC has not undertaken  a single enforcement action against any wireless carrier involving such complaints.  This is not surprising, given the similar lack of FCC enforcement against landline carriers for violations of its Truth-in-Billing rules.  The lack of FCC action was cited by none other than Commissioner Michael J. Copps in his dissent criticizing the agency’s 2005 decision to preempt state laws affecting wireless line items:

  The majority says that with the states preempted, the Commission will not hesitate to enforce its truth-in-billing requirements. But to date all the Commission has done is hesitate. In the six years since adoption of our truth-in-billing requirements, I cannot find a single Notice of Apparent Liability concerning the kind of misleading billing we are talking about today – the only ones I find involve slamming. Yet in the last year alone, the Commission received over 29,000 non-slamming consumer complaints about phone bills.^[44]

   

  Since Commissioner Copps wrote that dissent, the FCC has dramatically increased its enforcement tally – from 0 to 1.^[45]

              The wireless industry often cites the relatively low rate of complaints, as a percentage of total customers, received by the FCC as an indicator that there is no problem with its billing or other practices.  However, this is more likely due to consumers’ understanding that lodging a complaint with the FCC is largely a fruitless exercise.  For one thing, customer satisfaction surveys typically show that the wireless industry generally experiences high rates of customer dissatisfaction, yet customers switch carriers “surprisingly infrequently.”^[46]  Moreover, States’ experience suggests that consumers often do not register complaints unless they know regulators are investigating wireless carriers’ activities and the number of complaints lodged with State regulators is vastly outweighed by the number of complaints lodged with the carriers themselves.  For example, while only a few thousand consumers lodged complaints with the CPUC regarding the fraudulent service claims and marketing efforts that led to the $12 million fine against Cingular, the record showed that nearly 144,000 “trouble tickets” regarding such claims were opened by the carrier during the same period.^[47] 

              Similarly, a March 2007 report submitted by the Connecticut utility commission to the State’s legislature noted that its toll-free wireless complaint hotline registered over 19,000 calls in 2006 alone (more than the total number of informal wireless complaints received by the FCC during the same time period).  However, the report lamented the fact that only 507 callers registered their complaint – most callers aborting the process when they learned the agency had little ability to resolve their complaints.^[48]  Wireless carriers, naturally, disagreed with the State agency’s request for authority to enforce wireless consumer rights and service quality, and instead suggested that the competitive market, combined with state and federal consumer laws and FCC regulations (the same state laws wireless carriers have been trying to preempt), protects consumers sufficiently. 

              Consumers are not stupid.  They are unlikely to bother agencies to register complaints that they know the agencies cannot, or will not, take meaningful action to address.  NASUCA’s members understand this practical limitation on consumer complaint statistics very well.  It is also something FCC Commissioner understands as well:

  [NASUCA’s] petition was the ideal vehicle for the Commission to initiate a fresh dialogue on how to make bills more honest, readable and easy to understand. . . .  Yet we forge ahead [by preempting State laws], bypassing the opportunity NASUCA gave us to rein in incomprehensible bills. I'm afraid consumers will remember that when they called this Commission for help understanding their phone bills, we hung up.^[49]

   

  V.        Preemption Is Unnecessary And Will Harm Consumers.

   

              No doubt Congress will be told by the wireless industry that it must have preemption in order to flourish, that the cost of complying with 50 States’ laws increases the cost of wirelelss service, and that that it cannot innovate or offer customers lower rates or better quality services without eliminating State laws that apply to it.  Congress has heard this story before, and it is just that – a story.

              When Congress amended the Act in 1993, wireless service was primarily a novelty, subscribed to by relatively few Americans (16 million customers) and with a limited footprint (11,550 cell sites).^[50]  Conditions have changed radically since then.  According to the wireless industry’s trade association’s semi-annual survey, there were over 233 million wireless subscribers in the United States at the end of 2006, and 195,613 cell sites.^[51]  The wireless industry has experienced spectacular growth, posting double-digit growth in subscribership, revenues and usage virtually every year since 1993, all despite the application of the State laws wireless carriers are likely to claim must be preempted were in effect.^[52]            Moreover, while the wireless industry has experienced tremendous growth since 1993, it has also become increasingly concentrated.  According to the FCC’s most recent data, as of the end of 2005, the top four wireless carriers (AT&T Mobility, Verizon Wireless, Sprint Nextel and T-Mobile) held 86% of the wireless market.  If the fifth largest carrier, Alltel, is included then the top five carriers held over 92% of the market.^[53]  Two of these carriers – AT&T Mobility and Verizon Wireless – are subsidiaries of the two largest landline carriers nationally as well.  In other words, State laws that constrain wireless carriers’ billing or other business practices are unlikely to jeopardize such large carriers’ ability to provide service in the United States, or their relative profitability.

              Finally, wireless service has become, more and more, a true substitute for landline service.  While estimates vary, there is no doubt that a substantial number of traditional landline customers – especially those who are younger or with lower incomes – have “cut the cord,” terminating their landline service and relying purely on wireless to serve their telecommunications needs.  Moreover, wireless carriers themselves increasingly regard themselves in the same role as traditional landline carriers.  Wireless carriers have sought – and obtained – designation as “eligible telecommunications carriers” (“ETCs”) under Section 214 of the Act, thereby entitling them to subsidies from the Federal Universal Service Fund (“USF”), allowing them to collect over $1 billion in USF subsidies.  In fact, over 99% of the growth in federal USF subsidies is associated with subsidies to wireless carriers who have been designated as competitive ETCs. 

              The wireless industry is no longer a nascent industry that needs “kid glove” treatment in order to succeed, and wireless service has become, for all intents and purposes, a substitute for traditional landline service.  Nor is the wireless industry’s oft-cited evil of “Balkanized” regulation a legitimate basis for preempting long-standing State laws involving consumer protection, unfair trade practices, taxation, or other exercises of their historic police power.  Many national industries are similarly subject to dual state and federal regulation.  For example, automobile manufacturers, oil and gas producers and refiners, and other manufacturers must comply with both State and Federal environmental and workplace safety laws.  Similarly, insurers and lending institutions are heavily regulated through disclosure laws, agent licensing, bond requirements and other state-specific requirements.  Even so-called “borderless” industries like telemarketers and mail order houses must comply with State and Federal regulations on the time, place and manner of their contacts with consumers.

              Traditional landline carriers have long been subject to State laws of general applicability and regulation as utilities, at least with respect to their intrastate services.  As wireless carriers become more and more a substitute for traditional landline service, and hold themselves out to consumers and regulators as such, the argument for broad State preemption makes less and less sense.  In fact, the preemption the wireless industry seeks violates notions of competitive neutrality and may very well upset the balance between wireless and landline service as they become increasingly competitive with one another.

              The preemption the wireless industry seeks makes no sense from a public policy perspective either.  For one thing, States have often taken the lead in protecting consumers or establishing fair business practices long, with the Federal government following suit and establishing laws governing interstate service based on models previously established by States –usually years later.  This has proven to be the case time and again in telecommunications regulation.  For example, Congress amended Section 258 of the Act to address “slamming” and “cramming” practices by carriers in 1996, long after States enacted laws or adopted regulations prohibiting such unreasonable carrier practices.  Likewise, States were years ahead of the FCC and Federal Trade Commission in establishing “Do-Not-Call” registries to combat harassing telemarketing calls plaguing consumers.  Similarly, States led the way in addressing carriers’ misuse of customer proprietary network information, years before similar protections were enacted by Congress and implemented by the FCC.  With all due respect, State legislators and regulators are far more accessible to their citizens, can more readily understand and address relevant local considerations (e.g., geography and topography), and tend to respond more quickly to their citizens’ needs, than the Federal government. 

              The idea that a Federal regulator in Washington, D.C. can be the same advocate for a consumer in Wailuku, Hawaii, Brainerd, Minnesota, Eagle River, Alaska, or Mabie, West Virginia, or any of the myriad communities that State regulators call home is simply not credible.  Even when Federal regulators want to help, studies show that consumers in locales far-removed from Washington, D.C. typically contact local regulators and officials with their complaints and are far less likely to turn to Federal regulators for help.^[54] 

              Not preempting State laws governing wireless carriers’ non-rate practices makes sense from an economic standpoint as well.  Having State regulators and courts protect consumers from unreasonable business practices by wireless carriers or other utilities does not cost the Federal government a penny – and that strikes NASUCA as a pretty good deal for the Federal government.  If Congress preempts State laws in conjunction with enacting the sort of consumer protections envisioned in S. 2033, such action will require the allocation and expenditure of substantial resources (money, time, personnel) to implement a purely Federal response to the sort of wireless consumer issues that States can provide themselves – if consumer protection is to be anything more than a hollow promise. 

              Finally, preempting State laws in favor of a single, one-size-fits-all Federal program overlooks the valuable role ordinary citizens play as private attorneys general in bringing to government’s attention, through actions seeking legal and equitable relief in State courts, business practices that are unreasonable, deceptive, misleading or fraudulent.  If Federal legislation deprives consumers of this role altogether, or forces them to seek redress only in Federal courts that are more expensive and more intimidating to consumers than state courts because they are more removed from the local community and citizens’ experience, then this valuable tool of government is lost.

              As Justice O’Connor noted, the Republic’s Founders fully appreciated these realities:

  This federalist structure of joint sovereigns preserves to the people numerous advantages. It assures a decentralized government that will be more sensitive to the diverse needs of a heterogenous society; it increases opportunity for citizen involvement in democratic processes; it allows for more innovation and experimentation in government; and it makes government more responsive by putting the States in competition for a mobile citizenry.^[55]

   

  Preempting State laws as industry is likely to urge is analogous to combating rising crime by taking the local cop off the beat and makes about as much sense.

  VI.       Conclusion.

              NASUCA certainly supports the goals and objectives embodied in S. 2033.  The bill represents a good first step toward reining in a host of anti-consumer, anti-competitive practices that have been allowed to flourish in the wireless industry, and makes it clear that State laws that are more protective of consumers are not preempted.  NASUCA hopes the goals and objectives of S. 2033 will not be subverted by arguments that preempting State laws is the price that must be paid to give consumers greater protection from such practices.

  
  

  ---

  ^[1] In most respects, my testimony reflects positions taken by NASUCA, although there are some areas where NASUCA has not yet reached a consensus position.

  ^[2] See Pub. L. 97-259, 96 Stat. 1087, 1096, § 120(a) (1982).

   

  ^[3] See Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312, § 6002(b)(2)(A) (1993). 

   

  ^[4] See In re Implementation of Sections 3(n) and 332 of the Communications Act, Regulatory Treatment of Mobile Services, Second Report and Order, 9 F.C.C.R. 1411, 1418, 1478, ¶¶14 & 174 (1994); see also 47 C.F.R. § 20.15(a) & (c).

   

  ^[5] H.R. Rep. No. 103-111, 103rd Cong., 1st Sess. (1993) reprinted in 1993 U.S.C.C.A.N. 378, 587 (emphasis added). 

   

   

  ^[6] See Brown v. Washington/Baltimore Cellular, Inc., 109 F.Supp.2d 421 (D. Md. 2000).  

   

  ^[7] See AT&T Communications of the Pac. NW v. City of Eugene, 35 P.3d 1029, 1048-51 (Ore. Ct. App. 2001).

   

  ^[8] See In re Pittencrieff Communications, Memorandum, Opinion and Order, 13 F.C.C.R. 1735, 1742-43 ¶¶16-17 (1997), aff’d sub nom. CTIA v. FCC, 168 F.3d. 1332 (D.C. Cir. 1999); see also Mountain Solutions, Inc. v. State of Kansas, 966 F.Supp. 1043, 1048 (D. Kan. 1997), aff’d sub nom. Sprint Spectrum v. State of Kansas, 140 F.3d 1058 (10th Cir. 1998); Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999).

   

  ^[9] See, e.g., Moriconi  v.  AT&T  Wireless  PCS,  280  F.Supp.2d  867,  873-78  (E.D.  Ark.  2003).

   

  ^[10] See State ex rel. Nixon v. Nextel West Corp., 248 F.Supp.2d 885, 890-93 (E.D. Mo. 2003); Fedor v. Cingular Wireless, 355 F.3d 1069 (7th Cir. 2004); see also In re Wireless Consumers Alliance Petition for Declaratory Ruling, Memorandum, Opinion and Order, 15 F.C.C.R. 17021 (2000).

   

  ^[11] See Esquivel v. Southwestern Bell Mobile Systems, Inc., 920 F. Supp. 713 (S.D. Texas 1996); Iowa v. U.S. Cellular Corp., 2000 U.S. Dist. LEXIS 21656 at * 4-6 (S.D. Iowa 2000); Cedar Rapids Cellular Telephone, L.P. v. Miller, 2000 U.S. Dist. LEXIS 22624 (N.D. Iowa 2000); Phillips v. AT&T Wireless, 2004 U.S. Dist. LEXIS 14544 (S.D. Iowa 2004).

   

  ^[12] See In re Wireless Telephone Federal Cost Recovery Fees Litigation, 343 F.Supp.2d 838 (W. D. Mo. 2004); NASUCA v. FCC, 457 F.3d 1238 (11th Cir. 2006), pet. for cert. pending sub nom. Sprint Nextel v. NASUCA, No. 06-1184 (U.S., filed Feb. 27, 2007).

   

  ^[13] In re Truth-in-Billing and Billing Format:  NASUCA Petition for Declaratory Ruling, 2nd Report & Order, Declaratory Ruling, and 2nd Further Notice of Proposed Rulemaking, 20 F.C.C.R. 6448, 6462 ¶30 (2005).

   

  ^[14] At least two FCC commissioners filed strong dissents to the preemption determination, pointing out the lack of notice that preemption was afoot, as well as the harm the order did to the successful federal-state cooperation in consumer protection efforts.  See 20 F.C.C.R  at 6500-04 (dissenting comments of Commissioners Michael J. Copps and Jonathan S. Adelstein).  The FCC’s order was vacated on appeal by the Eleventh Circuit, though a petition for review by the United States Supreme Court is still pending.  See NASUCA v. FCC,  n. 12, supra.

   

  ^[15] See 20 F.C.C.R. at 6473-74, ¶¶49-51.

   

  ^[16] See, e.g., TechLawJournal, “Martin Discusses FCC Activities,” TLJ News from Jan. 16-20, 2007 (Jan. 17, 2007), available at http://www.techlawjournal.com/home/newsbriefs/2007/01d.asp; Telecommunications Reports – TR State Newswire, “Martin Hopeful That Talks on ETFs Produce Agreement” (March 28, 2007), available at www.tr.com/insight2/content/2007/in032807/In032807-02.htm.\

  ^[17] The “up to” language is misleading itself since, in NASUCA’s experience, this charge is never less than $1.25.

   

  ^[18] AT&T Mobility claims the charges “help defray costs incurred to comply with State and Federal telecommunications regulations, such as E911 deployment, State and Federal Universal Service, and other government mandates on AT&T Mobility.”  See http://www.wireless.att.com/learn/articles-resources/wireless-terms.jsp.  State and Federal universal service costs are not the costs of the federal universal service program;  those costs are recovered through separate, specifically authorized surcharges.  Moreover, whether a charge imposed on customers nationwide should recover State-specific universal service costs is also open to question.

   

  ^[19] See  http://www.wireless.att.com/learn/articles-resources/wireless-terms.jsp.

   

  ^[20] Id.  The Federal Programs Cost Recovery Fee was Nextel’s $1.75 line item charge.  Sprint imposed a line item charge for number portability, E911 and number pooling that originally was $1.10/month but was later, after NASUCA filed its Truth-in-Billing petition with the FCC,  reduced to $0.40 and then $0.25/month, in June and November 2004, respectively.  See http://www.washingtonpost.com/wp-dyn/articles/A52986-2004Nov15.html.

   

  ^[21] See Jeff Silva, “AT&T settles CPUC claims, agrees to pay $30M,” RCR Wireless News (March 16, 2007).

   

  ^[22] See “Early Termination Fees – CTIA Position,” http://ctia.org/industry_topics/topic.cfm/TID/41/CTID/12 (accessed Feb. 5, 2007)); see also In re CTIA Petition for Declaratory Ruling, WT Docket No. 05-194, Petition of CTIA, Executive Summary 1 & pp. 1-2 (March 15, 2005).

   

  ^[23] See In re Bundling of Cellular Customer Premises Equipment and Cellular Service, Report and Order, 7 F.C.C.R. 4028-30 (1992).

   

  ^[24] See In re CTIA Petition for Declaratory Ruling, WT Docket No. 05-194, NASUCA Comments, pp. 32-33 (Aug. 5, 2005); available at  http://fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518135277.

   

  ^[25] NASUCA Resolution 2007-03, “Calling for FCC Reexamination of Wireless Carriers’ Early Termination Fees” (June 12, 2007); available at http://www.nasuca.org/res/#tele.

   

  ^[26] According to their websites, the major wireless carriers’ impose the following ETFs:  AT&T Mobility ($175); Verizon Wireless ($175, with ETFs prorated for service initiated after Nov. 16, 2006); Sprint Nextel ($150 for service initiated before May 21, 2006 and $200 for service initiated thereafter); Alltel ($200); T-Mobile ($200).

  ^[27] See Edmund Mierzwinski, “Locked in a Cell:  How Cell Phone Early Termination Fees Hurt Consumers,” MASSPIRG Education Fund, pp. 20-21 (Aug. 2005); http://www.uspirg.org/uploads/6K/L1/6KL1e4XLElQZgyFz7hpKKQ/lockedinacell05.pdf. 

   

  ^[28] Id. at 13-16, 24-27.

   

  ^[29] Id. at 14, 24-25.

   

  ^[30] See In re CTIA Petition for Declaratory Ruling, WT Docket No. 05-194, UCAN Comments, pp. 15-19 (Aug. 4, 2005); available at:  http://fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518129555.

   

  ^[31] Id. at 15.

   

  ^[32] See AT&T Mobility Wireless Service Agreement, Changes to Terms and Rates; http://www.wireless.att.com/learn/articles-resources/wireless-terms.jsp (accessed October 12, 2007).

   

  ^[33] Id.

   

  ^[34] Sprint Nextel Terms and Conditions, “Our Right To Change The Agreement & Your Related Rights;” http://nextelonline.nextel.com/NASApp/onlinestore/en/Action/DisplayPlans?filterString=Individual_Plans_Filter&id12=UHP_PlansTab_Link_IndividualPlans.  Sprint Nextel’s contract further provides that customers may terminate service, without liability for the carrier’s $200 ETF, only if “a change . . . is material and has a material adverse effect on you,” and only if the customer calls Sprint Nextel within 30 days of the change’s effective date (regardless of when the bill is received) and “specifically advise[s] that you wish to cancel Services because of a material change to the Agreement that we have made.”  Most customers are not lawyers and are unlikely to jump through all the hoops necessary to effectively terminate service without incurring the ETF, even where such action would be allowed under the contract.

   

  ^[35] Kelly Hill, “Sprint ups text messages to 15 cents,” RCR Wireless News (Oct. 16, 2006).

   

  ^[36] Kelly Hill, “Sprint Nextel hikes text fee again, ETF remains in effect,” RCR Wireless News (Aug. 21, 2007).

   

  ^[37] Verizon Wireless, Customer Agreement, “Our Rights to Make Changes”; http://www.verizonwireless.com/b2c/globalText?textName=CUSTOMER_AGREEMENT&jspName=footer/customerAgreement.jsp (accessed Oct. 12, 2007).

   

  [38] AT&T Mobility, Wireless Service Agreement, “Arbitration Agreement,”  n. 33, supra. 

   

  [39] Sprint Nextel, Terms and Conditions, “Instead Of Suing In Court, We Each Agree To Arbitrate Disputes;” “No Class Actions;” “No Trial By Jury.”

   

  ^[40] Verizon Wireless, Customer Agreement, “Dispute Resolution and Mandatory Arbitration.”

   

  ^[41] Bruce Meyerson, “Cingular to impose $5 surcharge on customers with older phones,” USA Today (July 31, 2006); http://www.usatoday.com/tech/news/2006-07-31-cingular-surcharge_x.htm.

   

  ^[42] “Cingular Adds Surcharge For Old Phones,” CBS News (Aug. 1, 2006); http://www.cbsnews.com/stories/2006/08/01/business/main1854442.shtml.

  ^[43] The FCC’s quarterly reports on informal complaints and inquiries, going back to 2002, are published on the agency’s website at http://www.fcc.gov/cgb/quarter/welcome.html.  The FCC’s reports provide only aggregate totals and do not identify carrier-specific information, nor do the FCC’s report provide any information regarding the resolution of informal complaints submitted to it.

  ^[44] 20 F.C.C.R. at 6499.

   

  ^[45] See In re TalkAmerica, Inc., Order, 21 F.C.C.R. 15148 (2006).  Ironically, TalkAmerica’s misleading surcharges were brought to the FCC’s attention in NASUCA’s petition for declaratory ruling, which the FCC denied in conjunction with its preemption decision.

   

  ^[46] Vivian Witkind Davis, “Consumer Utility Benchmark Survey:  Consumer Satisfaction and Effective Choice for Cellular Customers,” National Regulatory Research Institute, NRRI 03-15, pp. iii and 1 (Nov. 2003); see also, e.g., Christopher A. Baker and Kellie K. Kim-Sung, “Understanding Consumer Concerns About the Quality of Wireless Telephone Service, AARP Public Policy Institute Data Digest No. 89, p.4 (July 2003); “Attorney General Cox Announces 2004 Top 10 Consumer Protection Issues,” US State News (Feb. 3, 2005) (telecommunications category which includes cell phones was 2nd from the top); Rick Barrett, “Cell phones ring up more complaints: Airlines, hospitals also at bottom of survey,” Milwaukee Journal Sentinel (June 13, 2005)(Am. Soc. For Quality in Milwaukee survey); Kimberly Morrison, “Group lists top 10 consumer grips,” Detroit Free Press (Feb. 12, 2005) (National Assoc. of Consumer Agency Administrators survey found complaints about cell phone contracts and solicitations are rising quickly).

   

  ^[47] Investigation  to Determine Whether Cingular Has Violated the Laws, Rules and Regulations of this State in Its Sale of Cellular Telephone Equipment and Service and its Collection of an Early Termination Fee and Other Penalties From Consumers, 2004 Cal. PUC LEXIS 453, slip op. at 53-65, 69 (2004).

   

  ^[48]DPUC Implementation of Public Act 05-241, Docket No. 05-08-11, Decision, pp. 4-5 (March 7, 2007); available at http://www.dpuc.state.ct.us/dockhist.nsf/f5c4efacb773316a8525664e0049ea32/9b49d442637ad4b3852572d700510499?OpenDocument&Highlight=0,05-241.

   

  ^[49] 20 F.C.C.R. at 2499.

   

  ^[50] See CTIA Semi-Annual Wireless Industry Survey; http://files.ctia.org/pdf/CTIA_Survey_Year_End_2006_Graphics.pdf.

   

  ^[51] Id.

   

  ^[52] The FCC order preempting state laws affecting wireless line items, and the Eleventh Circuit’s subsequent vacatur of that order, not surprisingly, did not have any impact on the wireless industry’s growth.  From March 2005, when the FCC’s preemption order was released, until July 2006, when it was vacated, wireless subscribership grew 12.8% (adding 25 million subscribers) and revenues grew 9% ($5 million).  Since the Eleventh Circuit’s decision in July 2006, wireless subscribership grew at an annualized rate of 11.9% (13 million subscribers over six months), while revenues grew at an annualized rate of 8.3% ($5 million over six months).

   

  ^[53] See 11th Annual CMRS Report, FCC Wireless Telecommunications Bureau, Table 4, p. 102 (Sept. 29, 2006).  In calculating the carriers’ share of the market, NASUCA included the number of subscribers served by separately listed carriers acquired by Sprint Nextel and Alltel (Nextel Partners, Alamosa PCS, and Ubiquitel for Sprint Nextel; Midwest Wireless for Alltel).  NASUCA did not include in its calculation subscribers associated with iPCS, which is a Sprint affiliate.  Id. at 103, Notes.

   

  ^[54] A nationwide survey of wireless customers indicated that only four percent of survey respondents indicated that they would contact the FCC with service complaints.  Baker & Kim-Sun, “Understanding Consumer Concerns About the Quality of Wireless Telephone Service” AARP Public Policy Institute (June 2003); available at http://research.aarp.org/consume/dd89_wireless.html.

  ^[55] Gregory v. Ashcroft, 501 U.S. 452, 458 (1991) (citations omitted).

• Mr. Lowell McAdam

  CEO

  Verizon Wireless
  Download Testimony (1.64 MB)

• The Honorable Lori Swanson

  Minnesota Attorney General
  Download Testimony (131.48 KB)

• Mr. Mike Higgins

  West Central Wireless
  Read statement

  Testimony

  Mr. Mike Higgins

  Statement by

  Michael Higgins, Jr.

  Chief Executive Officer

  Central Texas Telephone Cooperative, Inc.

  Goldthwaite, Texas

   

  Before the

  United States Senate Committee on Commerce, Science and Transportation

  Hearing on Consumer Wireless Issues

   

  October 17, 2007

   

  Hello, and thank you for the invitation to speak here today.  My name is Michael Higgins, Jr. and I am the Chief Executive Officer of Central Texas Telephone Cooperative, Inc. (Central Texas) in Goldthwaite, Texas, and the President of its subsidiary, C T Cube, L.P. d/b/a West Central Wireless (West Central Wireless) in San Angelo, Texas.  Central Texas, through its subsidiaries, holds spectrum licenses in and provides various wireless services, including mobile voice, high speed data, and wireless video, to rural regions of the central part of the state of Texas.  I am also the President and Chairman of the Board of the Rural Telecommunications Group, Inc. (RTG), [1] and Central Texas is a member of the National Telecommunications Cooperative Association (NTCA).[2]

   

  I am here today to talk to you about some of the challenges rural consumers face in obtaining quality wireless services.  Very often, rural consumers are at the mercy of large nationwide carriers that choose to focus the build out of their networks in urban areas and along highways connecting urban and secondary markets.  For most rural consumers living outside these highway corridors, coverage is reliable only if they obtain their service from a local rural wireless carrier. Rural wireless carriers provide critical coverage in rural and remote areas.  While the cost of providing service in rural areas is generally higher, rural carriers work hard to provide service on the same prices, terms and conditions as their urban counterparts in order to stay competitive.  However, in doing so, rural carriers must operate on very small margins and must continually look for ways to cut costs and be innovative with technology.  The cost per subscriber of providing reliable wireless service for small carriers is much higher than that of nationwide carriers.

   

  Recently, the Honorable Senator Klobuchar and the Honorable Senator Rockefeller introduced a consumer protection bill (S. 2033).  S. 2033 is admirable in its effort to help consumers receive fairer terms and conditions by prohibiting certain carrier practices like onerous early termination fees and extensions of contracts without prior notification -- as well as investigating a large carrier practice known as “handset locking.”  However, there are certain unfunded government mandates in the form of  regulatory reporting requirements and changes to billing software that  would cause undue hardship on rural carriers by increasing costs that would ultimately have to be passed on to rural consumers.  I think the last thing we want to do in enacting legislation is to increase the cost to the consumer when there are other means of approaching the problems identified in the proposed legislation. 

   

  Small and rural companies have an incentive to make sure their rural customers are pleased with the quality and terms of their service.  In most cases, we live and work in the communities we serve.  As a result, we hear immediately when our customers are not happy about our service coverage or any of our billing practices.  When a customer is not happy, we bend over backward to make sure we accommodate them because we cannot afford to lose the support of our community stakeholders.  We also make sure that the communities we serve have good quality coverage.  Without good quality coverage, our rural consumers and small businesses suffer and in turn harm rural economic development in our rural communities.  Central Texas and West Central Wireless are deeply concerned with and devoted to the economic development of the rural communities we serve.  If they do not flourish, we cannot flourish.  In today’s interconnected global village, advanced wireless services are a must for rural consumers and our rural communities.

   

  Rather than heaping more regulations and requirements on wireless companies, I have a number of recommendations for encouraging companies to deploy broadband wireless service to rural areas and to ensure that rural carriers and small rural businesses—major sources of innovation and competition—are able to play a role.  As CEO of a small business serving rural communities, I understand the challenges of bringing broadband and innovative wireless services to those communities.  I also understand how critical it is to the economic and social lives of such communities that they have the same access, through wireless services, to an interconnected world as urban communities.   I believe that it is small and rural companies that are the most willing and able to provide service to their rural communities.

   

  The large carriers will not build rural sites.  The large carriers have to maximize stock prices, so if they have a choice to build a site in or near a metropolitan area which will do a million minutes a month or a rural site connecting two rural towns which will log only 50,000 minutes a month, the rural site will not get built.  Rural carriers do and will continue to build those sites because our few customers need them, and we will find a way to live off the crumbs the large carriers will pass up.  In the heart of Texas, Brady Texas, there is no CDMA coverage today. Verizon and Sprint customers can't talk there driving from San Antonio to Abilene.  GSM coverage, however, is provided all over counties in central Texas even though the customer counts are small and the operating profits even smaller.  We provide the service because these are our neighbors and this is our trade area and home. 

   

  Rural telecommunications carriers serve less densely populated areas and work to provide service throughout their entire license areas.  These rural carriers already have the basic telecommunications infrastructure in place, the local expertise, and trained employees to make serving high cost rural areas economically feasible.  As residents of the regions they serve, small rural wireless carriers are also motivated by the public interest and not just profit when deciding where to provide service. 

   

  Rural wireless carriers also are a major source of innovation because they are nimble and responsive to local demand.  At West Central Wireless, we have had to become innovative in lowering our costs to provide high quality service to our customers.  With all of the unfunded government mandates such as CALEA, CPNI, E-911, as well as the high cost of switching equipment – we don’t get the volume discounts larger carriers get – we have pooled our resources to provide services to other smaller rural carriers and offer switching to them as well as CALEA, CPNI and E-911 solutions.  But West Central Wireless and Central Texas are not alone in this.  Rural wireless carriers in general are a major source of innovation and the carriers willing to serve otherwise difficult to serve areas. 

   

  Accordingly, in order to encourage the deployment of wireless services to rural areas, and to promote innovation and competition, Congress and the FCC should ensure that small and rural companies have a meaningful chance to participate in such services.  As I will discuss below, the government can do this by making sure that wireless customers are able to roam as widely as possible on the technically compatible networks of other carriers at reasonable rates.  In addition, small companies must have access to the spectrum and equipment necessary to provide services, and the government (the gate-keeper of spectrum) must ensure that this public resource is not hoarded by a few large companies.  Finally, in general, Congress and the FCC must ensure that regulations, however well intentioned, do not unduly burden and pull small carriers under.

   

   I’ll begin by addressing the latter concern -- that of the cost and burden of complying with an ever increasing array of unfunded government mandates and regulatory requirements such as those contained in S. 2033.  Rural wireless carriers are already required to comply with such mandates as CALEA, CPNI, E-911, and hearing aid compatibility; yet, rural wireless carriers lack a huge customer base over which to spread the cost of these mandates.  Heaping the additional unfunded government mandates contained in S. 2033 such as (1) a specially itemized and formatted invoice (that will require extensive and expensive billing software changes); (2) the production and delivery to consumers of updated quarterly maps that show each customer whether there is service currently available at their residence; and (3) the filing of semi-annual reports detailing lost calls, coverage gaps and dead zones, is simply not going in the right direction.  While the mandates are well intentioned, the actual benefit to the public is significantly less than the substantial cost of compliance.  Moreover, these mandates are often applied with one size fits all blinders.  We estimate that the cost of complying with the legislation’s mandates will raise prices to consumers in rural areas by $1.50 -- $3.50 per month based on recurring and non-recurring costs (spread out over a five-year period) depending on the customer base of the rural carrier. 

   

  Now, in addition to federal mandates, the threat of state and local regulation of wireless services is a growing concern.  Up to now, Congress, largely and wisely has allowed wireless services to develop under a single regulatory framework.  This has lead to explosive growth of wireless services and lower costs to customers.  We are concerned, however, that increasing state regulation of wireless services will lead to a maze of conflicting regulations without corresponding benefit to the public.  In general, rural carriers are more flexible in dealing with subscribers than their nationwide counterparts and do not resort to unfair early termination fees and sneaky contract extensions.  Our relationship with our customers is a close one.  We work to resolve issues.  There is no need to impose additional burdens on small carriers, particularly inconsistent and conflicting regulations, to protect consumers.  Congress should be careful in its efforts to protect consumers from the questionable practices of large, wireless carriers not to unfairly and unnecessarily burden small carriers.  To the extent that there is a need for additional rules to protect consumers, the rules should be developed on a national basis under the auspices of the FCC, with recognition of the differences between small and large carriers and the economic realities of the former, and not by individual states.  In developing any such rules, the FCC must be mindful of it obligations under the Regulatory Flexibility Act (RFA) that the requirements that apply to large carriers may not be necessary or appropriate to apply to small carriers.  All of the regulations designed to benefit wireless customers are meaningless if those customers can’t get coverage.     

   

  While it is our goal to have fewer regulations, there is one area where consumer regulation is sorely lacking.  If Congress is really interested in helping both rural and urban consumers then it should focus its attention on existing large carrier roaming practices.  Customers of rural carriers need fair, low cost roaming when they leave their home-based rural carrier.  Likewise, urban consumers need to be able to roam on the networks of rural carriers who have coverage instead of being “locked out” by their national carrier.  Specifically, the customers of rural wireless carriers must be able to roam on the networks of the large nationwide carriers at reasonable rates.  The FCC’s August 16, Roaming Order, FCC 07-143, although well intentioned, severely restricts the obligations of large carriers to provide roaming to smaller carriers at just and reasonable rates.  Under the FCC order, a large carrier is not required to provide roaming at reasonable rates in a particular area if a small carrier holds any wireless license in that area that “could be used to provide CMRS [commercial mobile radio services].”  The FCC refers to this as “in-market roaming.”  While this might make some sense if two carriers have fully built-out competing networks in the given market, the FCC order limits a large carrier’s obligation to provide roaming even if the small carrier has not built out a market, or even if the small carrier is using its license to provide a completely different service, such as fixed wireless Internet access.  This exception to the obligation to provide reasonable roaming deters innovation and creates a strong disincentive for small carriers to attempt to acquire wireless licenses to deploy various services.  The prohibition on in-market roaming creates significant barriers to entry and deters the very facilities-based competition the FCC is seeking to create.

   

  Even where a small carrier is building out a network to offer competitive service, in-market roaming must be allowed when such a small carrier licensee is just getting started.  A small carrier cannot instantaneously build-out a network throughout its license area or areas.  Accordingly, at a minimum, even where a small carrier is constructing a network to provide a competing service, in-market roaming should be allowed during a ramp up period of at least five years from the date its license is issued.

   

  Urban consumers also are being harmed by the FCC’s lack of regulation of roaming practices.  Larger carriers often prevent their customers from roaming in rural areas by implementing various restrictions, such as restrictions on Location Area Codes (LACs), so called LAC restrictions.  This often denies service to their customers even if though a rural carrier may be operating a technically compatible network on which the customer could otherwise roam.  Denying customers roaming service prevents the consumer from having access to ubiquitous nationwide service thereby harming both the consumer trying to access the available service and the rural carrier who is ready, willing and able to provide it.  Accordingly, the FCC should not permit large carriers to block their customers from roaming in rural areas on the technically compatible networks of rural carriers that offer reasonable roaming rates.

   

  As long as customers are allowed to leave their home areas and roam on other compatible networks at just and reasonable rates, wireless services, including broadband applications, will be available to all citizens at all times and will develop and thrive.  Thus, requiring unfettered roaming, including data and high speed application roaming, will broaden consumer choice and open up the wireless broadband market to new and unforeseen possibilities.

   

  While reducing regulatory burdens and facilitating unfettered roaming are extremely important, the single most critical action to promote the deployment of wireless services in rural areas is ensuring that small and rural companies have reasonable access to spectrum.  Section 309(j) of the Communications Act, as amended, directs the FCC to adopt rules that promote the deployment of service to rural areas and disseminate licenses to a wide variety of applicants including small businesses and rural telephone companies.  See 47 U.S.C. § 309(j)(3)(A)&(B).  It also directs the FCC to adopt performance requirements “to ensure prompt delivery of service to rural areas, [and] to prevent stockpiling or warehousing of spectrum by licensees or permittees….” 47 U.S.C. § 309(j)(4)(B). 

   

  The FCC, however, typically licenses spectrum in gigantic geographic areas which small companies have no chance of acquiring.  Central Texas cannot possibly hope to acquire a license for the entire southwest region of the U.S.  Similarly, the FCC’s performance requirements and service rules do not require large companies to deploy service in rural areas or to work with small companies that are willing to deploy in rural areas.  Large companies can meet population-based performance benchmarks by serving only the urban and densely populated areas, leaving rural and secondary markets unserved.  Accordingly, we typically see large, nationwide telecommunications carriers winning most of the licenses at auction and then overlooking rural towns and their outlying areas, and instead deploying service to the most profitable, highly populated pockets of their vast license areas. 

   

  Unfortunately, I fear that we are about to see the upcoming 700 MHz auction roll down this well rutted track.  This is particularly unfortunate because 700 MHz spectrum is ideally suited to provide service to rural areas.  Because of its favorable propagation characteristics—it can go out a long way—and capability of delivering large amounts of data at high speeds, I believe it will be economical to deploy wireless broadband services to many rural areas that would otherwise be uneconomical to serve with other spectrum bands.  But I am afraid that this wonderful opportunity to serve rural areas will be lost since the FCC’s 700 MHz rules present only limited opportunities for small businesses to participate.    

   

  The Upper 700 MHz spectrum will be auctioned in huge areas or on a nationwide basis.  Moreover, the Upper 700 MHz C block licensee will be able to meet the applicable population-based benchmark by serving urban and dense areas.  Accordingly, small and rural carriers have virtually no opportunity to participate in the provision of the anticipated high speed (e.g., 4^th Generation) services to be offered on the Upper 700 MHz C block spectrum.  Since the “open platform” requirements apply only to the C block licenses, the open platform requirements may be of little benefit to small carriers. 

   

  Even the Lower 700 MHz licenses present little meaningful opportunity for rural carriers.  Only one paired block of spectrum will be auctioned on the basis of cellular market areas (CMAs), and one paired block on the basis of Economic Areas (EAs).  Because only a handful of applicants will be able to compete for the huge Upper 700 MHz licenses, the myriad of large, medium, small and regional bidders will be competing for the CMA and EA licenses.  In addition, with AT&T’s announced purchase of Aloha—the largest holder of the previously auctioned Lower 700 MHz C block licenses—AT&T undoubtedly will be acquiring the adjacent Lower 700 MHz B block licenses.  Accordingly, small companies will have little opportunity to acquire licenses in the upcoming 700 MHz auction.

   

  AT&T’s acquisition of Aloha also illustrates the increasing concentration of spectrum in the hands of a few companies and problems with the overall consolidation of wireless providers.  Because of a variety of factors, not the least of which was uncertainty about when and if the DTV transition would ever occur, many small companies were able to acquire 700 MHz C block licenses in Auctions 44 or 49 at the time that Aloha acquired its vast 700 MHz holdings.  Unlike Aloha, however, AT&T will not work with small carrier licensees.  Small carriers have little chance of partnering with AT&T, for example, in the provision of mobile video or multimedia services.  AT&T also has the weight to disregard contracts and the legal muscle to stiff-arm small companies into capitulation.   For example, Neatt Wireless, LLC, a minority owned and managed wireless operator in Arkansas has filed a complaint against AT&T with the FCC and DOJ alleging that AT&T engaged in illegal conduct and behavior that resulted in Neatt’s failure to compete in the markets it acquired from AT&T in Northeastern Arkansas in connection with AT&T’s merger and divestiture of certain wireless assets.  Neatt has alleged that AT&T’s actions resulted in Neatt being forced to sell back to AT&T, at distressed prices, all of the subscribers Neatt acquired from AT&T in Northeastern Arkansas.  Neatt alleges that AT&T’s actions violate public policy, good business practices, the intent of Congress, and the antitrust provisions of the laws of the U.S., as well as the order of the FCC allowing the merger of AT&T Mobility and AWS.  In addition, several of RTG’s and NTCA’s members who had been long standing partners of AT&T have had their agreements ignored leaving these carriers with huge operating losses on businesses that at best operated on slim margins. 

   

  But it is not just AT&T.  The bottom line remains, fewer and fewer large companies hold increasingly large concentrations of spectrum.  Fewer companies means fewer competitors, and fewer carrier partners with which small carriers can work.  It also means less innovation and fewer opportunities.  If the government wants to foster competition, encourage innovation and promote the deployment of services to rural areas, it should limit the amount of spectrum that the nationwide companies can hold in any one geographic area.  This is particularly the case with spectrum below 1 GHz that is prime for providing service to rural and difficult to serve areas.

   

  Handset locking is another component of S. 2033.  In this instance the proposed legislation does not go far enough.  It merely requires the FCC to develop a report to Congress on the practice of handset locking and its impact on consumers and portability.  Locking a handset to a particular network may be practical if the handset is subsidized by the carrier, but what would be far better is for Congress to study the tying of the handset to the carrier through the relationship the carrier has with the handset vendor.  It is common practice for handset vendors to cut special exclusive deals with large nationwide carriers.  Steve Jobs is not going to make an iPhone just for West Central Wireless.  This practice puts rural carriers (and rural consumers) at an extreme disadvantage because they are unable to gain access to the popular handsets.  Rural consumers have to decide between a low end handset and good rural coverage or a high end handset and little coverage.  Typically, small carriers have access to a much more limited choice of handsets and devices and typically must wait up to two years to get newer models.  The lack of access to new devices harms consumers in rural areas and dampens competition.  Accordingly, there is a need for requirements to enable the customers of small and rural carriers to acquire the latest handsets and devices. 

   

  Finally, while implementing the above suggestions will go a long way to getting wireless deployment and handsets to rural areas, there still may be some areas that need extra help.  Unquestionably, it is more expensive to deploy services in rural areas.  As the Federal State Joint Board on Universal Service has recognized, there may be some areas where a support mechanism will be necessary in order for mobile broadband services to be viable. 

   

  As I have discussed here today, small and rural companies play a vital role in driving innovation and providing service to rural and otherwise underserved areas.  To enable small and innovative companies to continue to provide wireless services, policy makers should: (1) license spectrum in smaller geographic areas; (2) limit the amount of spectrum that the nationwide carriers may hold, particularly in rural areas; (3) adopt performance requirements that promote deployment to rural areas and encourage partnering with small companies; (4) adopt rules to foster nationwide roaming on reasonable rates; (5) adopt requirements so that individuals residing in rural areas have access to the latest devices and technologies; (6) seriously assess the impact of prospective regulation on small businesses under the RFA; (7) where necessary, support rural wireless services with universal support mechanisms; and, (8) use innovative and targeted licensing approaches, such as the licensing of TV White space for fixed backhaul applications in rural areas.[3] 

   

  In closing, I want to circle back to where I began with the need to avoid and eliminate regulations that burden small companies without corresponding benefit to the public.  It is critical that the FCC and other government agencies take seriously their obligations to assess the impact of proposed regulations on small businesses under the Regulatory Flexibility Act.  The FCC virtually always merely “cuts and pastes” boiler plate language in its rulemaking proceedings that finds no disproportionate impact on small businesses.  Instead of rubber stamping regulations and discouraging small businesses, the FCC and other government bodies should carefully study the impact of their regulations on small businesses, and should ensure that their rules and policies encourage small and rural businesses to deploy innovative wireless services. 

   

  By instituting the suggestions I have outlined today, I am confident that policymakers can encourage the deployment of innovative wireless services, including wireless broadband connectivity, to rural citizens and rural businesses, supporting the economic and social health of such communities.  Thank you for your time today.  

  
  

  ---

  [1] RTG is a Section 501(c)(6) trade association dedicated to promoting wireless opportunities for rural telecommunications companies through advocacy and education in a manner that best represents the interests of its membership.  RTG’s members have joined together to speed the delivery of new, efficient, and innovative telecommunications technologies to the populations of remote and underserved sections of the country.  RTG’s members provide wireless telecommunications services, such as cellular telephone service and Personal Communications Services, among others, to their subscribers.  RTG’s members are small businesses serving or seeking to serve secondary, tertiary, and rural markets.  RTG’s members are comprised of both independent wireless carriers and wireless carriers that are affiliated with rural telephone companies.

   

  [2] NTCA is a 501(c)(6) industry association representing rural telecommunications providers.  Established in 1954 by eight rural telephone companies, today NTCA represents 575 rural rate-of-return regulated incumbent local exchange carriers (ILECs).  All of its members are full service local exchange carriers, and many members provide wireless, cable, Internet, satellite and long distance services to their communities.  Each member is a “rural telephone company” as defined in the Communications Act of 1934, as amended.  NTCA members are dedicated to providing competitive modern telecommunications services and ensuring the economic future of their rural communities.

   

  [3] In a recent White Paper, RTG noted that there may be 50 megahertz or more of TV white space spectrum in rural areas that could be used for licensed backhaul services without creating interference problems.  See Ex Parte Filing by FiberTower Corporation and the Rural Telecommunications Group, Inc., ET Docket Nos. 04-186, 02-380, “Optimizing the TV Bands White Spaces: A Licensed, Fixed-Use Model for Interference-Free Television and Increased Broadband Deployment in Rural and Urban Areas.”

• Dr. Jerry Ellig

  Senior Research Fellow, Mercatus Center

  George Mason University
  Download Testimony (200.80 KB)

• Mr. Chris Murray

  Senior Counsel

  Consumers Union
  Read statement

  Testimony

  Mr. Chris Murray

  Testimony of

   

  Chris Murray

  Senior Counsel

  Consumers Union

   

  On behalf of

   

  Consumers Union, Consumer Federation of America, and Free Press

   

  Regarding

   

  “Wireless Consumer Issues”

   

  Before the

   

  U.S. Senate Committee on Commerce, Science and Transportation

   

  On

   

  October 17, 2007

   

   

   

  
  

  Chairman Inouye, Vice Chairman Stevens, and esteemed members of the Committee, thank you for the opportunity to testify again before you on behalf of Consumers Union (CU)[1] (non-profit publisher of Consumer Reports), Free Press, and the Consumer Federation of America. 

  Consumers are not as satisfied as they should be with the wireless industry as a whole.  In an annual consumer satisfaction survey[2] of 20 industries conducted by our magazine, Consumer Reports, we see that “cell-phone service” ranks near the bottom of the list (18 of 20), with only “computer makers’ tech support” and “digital cable TV service” receiving lower marks. 

  According to the OECD,[3] U.S. subscribers also pay more per month than wireless subscribers in other countries.[4]  The average U.S. subscriber pays $506/year, well above the OECD average of $439/year, and significantly above countries such as Sweden ($246) and Germany ($317). 

  Consumers Union endorses the legislation proposed by Senator Rockefeller and Senator Klobuchar, the Cell Phone Consumer Empowerment Act of 2007.   We think that the aim of this bill is on target—to provide consumers more fairness in the marketplace and to provide them with better information about the cell phone service they are buying.  Markets work best with good information, and this bill aims to get real information into consumers’ hands while also prohibiting some of the more egregious practices of the wireless industry.  Disclosure alone is rarely sufficient to protect consumers, particularly if carriers engage in the same practices—consumers can’t vote with their feet when they have no alternatives.  

  Today I would like to raise three pocketbook concerns with the wireless industry:

  1)                          Early Termination Fees that companies are charging consumers (especially when subscribers are not receiving any subsidy for new phones);

   

  2)                          The pernicious practice of handset locking, causing consumers to throw perfectly good phones in the trash if they want to switch carriers (or causing them to pay extra for phones “affiliated” with the network); and

   

  3)                          The tight control wireless companies are exercising over applications development (such as mapping applications, ringtones, etc.), which causes consumers to pay higher prices for services and stops innovation from reaching the market.

   

  But looking beyond these consumer cost issues, I also want to highlight some very serious free speech issues raised by an incident a few weeks ago between Verizon and NARAL, where political messages were prevented from reaching subscribers by actions of the network operator.  Outside the U.S., text messaging (also called SMS, for “Short Message Service”) has been called the most important technological development for political advocacy in the last five years,[5] with activists using text messaging to monitor elections (e.g. Nigeria), and encourage political change (Phillipines and Ukraine).  We have even seen allegations of governments blocking text messages (Belarus, Cambodia and Albania) to thwart political protest or ensure activists did not have “improper” influence over elections. 

  Surely blocking political messages would not be tolerated from the U.S. government—but do we have any enforceable protections against a wireless network operator?  If this were a phone call being blocked, the non-discrimination provisions of the Communications Act would prevent this practice[6]—why should we abandon this policy for data? 

  While I am glad that Verizon changed its policy rapidly to ensure no further blocking would occur, why did this require a policy shift in the first place?  Is the new policy permanent, or can it change as rapidly as their Terms of Service, with little or no notice to subscribers?  Does this new policy have the force of law, or the enforceability of a pinkie swear?  The FCC has told the policy community that if any kind of blocking incident occurs they will deal with it rapidly.  Yet so far the response from the Commission has been radio silence. 

  Consumers have an expectation that their phone calls will not be tampered with by the phone company, and an expectation that text and data should be protected in the same manner as a voice call.  The details of the Verizon text message blocking incident are not clear; what is clear is that this warrants further scrutiny and we encourage this Committee to hold hearings on this important matter. 

  While the wireless industry will argue that non-discrimination with the force of law is unnecessary because policymakers should rely on the force of competition to police bad behavior in this arena—yet at every turn the industry is operating to throw gravel in the gears of competition, with Early Termination Fees, handset locking and other practices that increase switching costs.  They cannot have it both ways. 

  Early Termination Fees (ETFs) are ubiquitous in the wireless industry, with some carriers charging as much as $200 if a customer would like to leave before their (generally two-year) contract is completed.  Verizon (and as of yesterday, AT&T) should be lauded for adopting a policy of pro-rating[7] these fees, but the other carriers have not taken this common sense, pro-consumer step.  And let us be clear, it was “encouragement” from policymakers and lawsuits regarding these unseemly and unfair contracts in certain states that are helping pressure the carriers into pro-rating ETFs.  That is why we applaud Senator Rockefeller’s and Senator Klobuchar’s bill which would require all carriers to pro-rate ETFs.   

  Early Termination Fees make it expensive for a wireless subscriber to vote with her pocketbook and switch carriers—and the justification for charging these penalties seems to be evaporating.   The iPhone offers the clearest example—AT&T subscribers who want the iPhone will receive not one thin dime of subsidy, yet they will be charged a full $175 penalty if they want to leave before their contract is up.  The story the wireless industry had been telling us about ETFs used to be “subsidy, subsidy, subsidy.”  We have yet to hear a convincing new story. 

  Imagine the shock of a consumer who buys a family share plan from a wireless company and then tries to terminate that plan—the account holder will be liable for an ETF for each line in the plan.  For instance, let’s say a family of five wanted to leave for another carrier with better service.  That family could face $1000 or more in termination penalties if they haven’t completed their two-year contract.  This is certainly a strong deterrent to competition. 

   

  Another problematic practice—and the practice our survey results[8] tell us users hate the most—is when carriers extend contracts for any change in service plan—whether the change benefits the wireless carrier or not.  In other words, if I am a wireless customer and I decide to increase my bucket of minutes, my carrier may automatically extend my contract for another year or two, and saddle me with another Early Termination Fee if I decide to leave before the contract is up. 

   

  Mobile phone “locking” is another area of concern for consumers.  In Europe, phones work seamlessly between networks and carriers do not exercise control over which phones subscribers can use.  This has created a robust, independent market for mobile phones where users have far greater choice than U.S. subscribers.  In the U.S., analysts estimate that 90 to 95% of handsets are sold by the wireless carriers, whereas in some Asian markets approximately 80% are sold independently from the carrier.[9]    

  There are two basic kinds of mobile phone locking:[10] software locks (which actually disable the phone when the user leaves), and “approved phones only” policies (which do not allow users to activate phones they purchase through the network operator, even when independent phones are technologically compatible with the network).

  Imagine that a consumer purchased an expensive new television set and decided to switch cable or satellite providers, but the provider said “I’m sorry, your new TV will not work on our cable system, you’ll have to purchase a new one.”  Policymakers would not tolerate this behavior for long, yet this practice has been pervasive in the wireless industry for several years now.  CU is grateful to Senator Klobuchar and Senator Rockefeller for requiring in their proposed legislation that the FCC study this issue of mobile phone locking.     

   

  Application and functionality blocking is another practice that costs consumers money, and denies our economy the dynamic benefits of innovation.  As a recent Wall Street Journal article[11] notes, handset manufacturers have been trying to offer consumers services for free on new handsets, but network operators such as AT&T and Verizon have said “no” to those free services because they compete with services that the wireless carriers want to charge for. 

  According to the article, RIM (manufacturer of the Blackberry) wanted to offer a free mapping service to customers who buy the Blackberry, but AT&T said no, because they had a service that they wanted to charge users $10 a month for.   

  Another example is Verizon’s Worldphone by RIM, which has the capability built in to work on cellular networks in Europe, as well as to work on other GSM networks here in the States.  Yet Verizon locks down the device so that they can charge users extra fees for the privilege of phones working as they were actually designed to work.  That is, the GSM capability built into the $600 handset simply won’t work unless a user pays Verizon for a more expensive “international plan.”  As a user who does a lot of international travel, I don’t need their international service plan—I just need my phone to work as it was designed.

  Yet another instance of troubling conduct is the slow rollout of mobile phones that also do Wi-Fi—these phones allow consumers to use the Internet when they are near a Wi-Fi Internet “Hotspot.”  Most U.S. carriers are not making these phones available to consumers, although T-Mobile is currently offering them.  But as the Chairman of the FCC noted in a recent USA Today article,[12] “[i]nternationally, Wi-Fi handsets have been available for some time, . . . but they are just beginning to roll out here.. . . I am concerned that we are seeing some innovations being rolled out more slowly here than we are in other parts of the world.”  

  We can do better.  It’s not that consumers have no choices in this market; the issue is that they have fewer choices without openness and they would have more choices with it. 

   

   Today, Consumers Union would like to issue three broad challenges to the wireless industry: 

  1. Stop charging consumers undue Early Termination Penalties.   Early Termination Penalties should be eliminated or pro-rated across the industry immediately, and the fees should be reasonable in the first instance.  Pro-rating an already unreasonable fee doesn’t address the underlying concern that the fees are excessive and unrelated to any damages the carrier may incur from early cancellation.
  2. Stop crippling mobile phones.   Consumers who pay hundreds of dollars for a new phone should fully expect that phone to do all the things the manufacturer designed it to do.  Network operators who lock down the functionality of mobile phones to better suit their business interests should be scrutinized by the FCC and Congress.
  3. Stop preventing new applications from reaching consumers.  Wireless carriers are locking out competitive applications because they don’t want “revenue leakage.”  This kind of anti-innovation protectionism flies in the face of a century of open communications policymaking. 

   

  Wireless Internet services will increasingly become the way that consumers connect to the Internet.  If we allow anti-innovation practices to continue, we should expect our international broadband rankings to continue to slide, innovation to be less robust, and our mobile phone markets to continue to lag behind Europe and Asia. 

  In contrast, by embracing openness, policymakers have an opportunity to save consumers money, get exciting new applications to market, regain our standing as a world leader in broadband, and provide citizens with a new wireless “town square” that is open and democratic.  Consumers Union fervently hopes that policymakers will choose the latter.   

  Mr. Chairman and Mr. Vice Chairman, I’m grateful for the opportunity to testify before your Committee today.  Thank you.

   

  
  

  ---

  [1] Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance.  Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees.  In addition to reports on Consumers Union's own product testing, Consumer Reports (with approximately 4.5 million paid circulation) regularly carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions that affect consumer welfare.  Consumers Union's publications carry no advertising and receive no commercial support.

   

  [2] Consumer Reports, “Upfront:  News, Trends, Advice,” p. 8 (October 2007).

  [3] Organization for Economic Co-operation and Development, “OECD Communications Outlook 2007”

  [4] The industry is quick to note that on a per minute of use basis, U.S. consumers are better off, because U.S. wireless subscribers use 800 minutes/month on average, and their European counterparts, only 200 minutes/month.  But if this is a high fixed-cost industry as the companies have claimed elsewhere, metrics based on minutes of use should matter less and aggregate numbers matter more.  

  [5] Ethan Zuckerman, “Mobile Phones and Social Activism:  Why cell phones may be the most important technical innovation of the decade,” white paper available at MobileActive.org:  http://mobileactive.org/mobile-phones-and-social-activism-ethan-zuckerman-white-paper (May 9, 2007).

  [6] Either blocking data is a violation of the communications act, or it is not.  The idea that this can issue can live in some sort of regulatory limbo forever is folly.  The industry would have us believe that we do not require enforceable non-discrimination because of a vague notion that “consumers will never stand for blocking.”  Perhaps what they mean is that as long as it is a story for the Wall Street Journal, New York Times, or Washington Post, then there is some form on discipline on this kind of conduct.  However, at a certain point if blocking data is not declared to be a violation of the Communications Act, it ceases to be remarkable and therefore ceases to be a story.  But if it would be a clear violation of the Act for a company to block a phone call on political grounds, there is no reason it should be acceptable for that company to block our political messages or any other legal data.

   

  [7] Verizon’s ETF discount is not exactly a “pro-rate,” which by definition would mean a fee reduction proportionate to the amount of time a subscriber has spent with the company—i.e. halfway through the contract should be a 50% reduction in ETF.  Verizon reduces its $175 ETF by $6/month, resulting in a $72 ETF discount at the end of the contract’s first year; the subscriber would still pay more than 50% of the ETF halfway through the contract.   

  [8] Consumer Reports, “Annual Cell Phone Survey” (Dec. 2007).

  [9] Marguerite Reardon, “Will ‘unlocked cell phones’ free consumers?” CNET News.com, January 24, 2007, available at: http://news.com.com/Will+unlocked+cell+phones+free+consumers/2100-1039_3-

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  [10] For more information on mobile phone locking, see Professor Wu’s paper, “Wireless Net Neutrality:  Cellular Carterfone and Consumer Choice in Mobile Broadband.” New America Foundation Working Paper #17, Wireless Future Program (February 17, 2007).

  [11] Jessica Vascellaro, “Air War:  A Fight Over What You Can Do on a Cell Phone – Handset Makers Push Free Features for Which the Carriers Want to Charge.” Wall Street Journal (June 14, 2007).

  [12] Leslie Cauley, “New Rules Could Rock Wireless World:  Consumers, not carriers, may get to choose devices.”  USA Today, (July 10, 2007).