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CHAPTER IX - Substitution and Competition

Device and service substitution can create significant competition incentives that foster greater choice of communications services for consumers. The Roundtable discussed the different types of substitution that occur in the telecommunication services industry. It further addressed how policy-makers should measure substitutability in this arena in ways that will allow providers to optimize the capabilities of the system while allowing consumers to optimize choice.

Robert Atkinson, President of the Information Technology and Innovation Foundation, suggested that substitution can occur on several different levels.

  • Device Substitution. In some instances consumers are using mobile devices, like a tablet, instead of a computer.
  • Architecture Substitution. Architecture substitution is rather narrow and generally consists of substituting voice over IP for PSTN.
  • Application Substitution. Application substitution usually occurs when consumers use a different medium to communicate other than voice, such as a video call.
  • Video Substitution. Video application substitution refers to consumers using alternatives to cable, like over the top services, for television.
  • Network Substitution. Network substitution refers to the broader substitution of wireless for wired. Within network substitution there are four types of wireless connection options:
    • Fixed wireless;
    • Mobile/cellular;
    • Untethered Wi-Fi in home; and
    • Untethered Wi-Fi outside the home.

There are reasons that substitution is beginning to be an attractive option for many consumers. Contemporary wireless technologies like 4G, LTE and LTE Advanced make services like video streaming over wireless comparable to video streaming over wired. Mobile devices, such as tablets, are now available with wireless plans built in and with the ability to offload to carrier supplied hotspots, as discussed previously. Additionally, the costs associated with wireless are increasingly manageable, especially if there is a family or business plan that only charges a small amount to add an additional line.

There are issues, however, that impede the complete substitution—many of these were discussed previously. Specifically, wireline networks can handle much more data more readily than wireless. To prevent wireless congestion, wireless carriers will sometimes institute usage caps or application restrictions. This inhibits the ability to substitute perfectly. There are also certain applications for which wireless may never be a suitable substitute. One example is a medical device that may require the stability of wired networks in order to remotely monitor a pacemaker. Although there may be wireless options available, people may not be willing to rely on wireless when relying is a matter of life or death.

Again, wired and wireless are not perfect substitutes—but there is certainly a degree of substitutability. As Rob Atkinson noted, “we're not talking about perfect substitution, or perfect competition, we're talking about good enough competition.” To the extent that there is some degree of substitutability and more competitive alternatives, these choices help consumers by creating a competitive restraint between wired and wireless. Michael Calabrese, Director of the Wireless Future Program at the New America Foundation noted that “there will be increasing competitive pressure that hopefully will put a check on prices or anti-consumer practices in either direction.”

Additionally, wireless has advantages over wired along certain dimensions. If and when these predominate—say, when a guaranteed connection even when away from home is more important than guaranteed perfect call quality—wireless will exert a stronger competitive effect on wired networks. Vice President of Regulatory Affairs and Governmental Relations for Time Warner Cable Terri Natoli said, “there are different levels of needs that people have and, depending on what those are, wireline, wireless services can be exactly substitutable.” While, as Harold Feld pointed out, imperfect substitution can be a real problem for some people, some of the time, as Rob Atkinson replied, the issues of imperfect substitution (and policy choices that may allow one option to disappear to the detriment of some small number of consumers) is really a social issue, not a competition issue: “It doesn't really matter from a competition perspective whether eight percent of the people or all of them don't care, and six percent of the people are behind a cell tower, that's not a competition issue as long as enough people can have a choice that disciplines the market.”

Terri Natoli went on to make another important point affecting the extent of competition between networks—or, more accurately, the extent of perceived competition:

One reason we may not recognize that we may have considerable competition from multiple services is because of archaic language in the statute that applies across the board and that was adopted at a time when we didn't even have VoIP. Hardly anybody would dispute the fact that VoIP is a substitute for traditional wireline services. Yet there are comparable provisions in state statutes to regulate VoIP. The statutes that govern these services don’t really seem to comport with where the technology has gone, the way services are going, and what substitutes for what, and these provisions impede the development and recognition of competitive alternatives.

As Charlie Firestone summed it up: “It’s a familiar theme, that the law hasn't quite kept up with the technology, nor can it ever, but it can be a real restraint on innovation.”

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