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Corruption Is Responsible for 80% of Your Cell Phone Bill

In the case of Big Telecommunications, buying politicians pays off handsomely by killing the competition.

Last year, a new company called Lightsquared promised an innovative business model that would dramatically lower cell phone costs and improve the quality of service, threatening the incumbent phone operators like AT&T and Verizon.  Lightsquared used a new technology involving satellites and spectrum, and was a textbook example of how markets can benefit the public through competition.  The phone industry swung into motion, not by offering better products and services, but by going to Washington to ensure that its new competitor could be killed by its political friends.  And sure enough, through three Congressmen that AT&T and Verizon had funded (Fred Upton (R-MI), Greg Walden (R-OR), and Cliff Stearns (R-FL)), Congress began demanding an investigation into this new company.  Pretty soon, the Federal Communications Commission got into the game, revoking a critical waiver that had allowed it to proceed with its business plan.

And so Americans continue to have a small number of expensive, poor quality cell phone providers.  And how much does this cost you?  Take your phone bill, and cut it by 80%.  That’s how much you should be paying.  You see, according to the Organization for Economic Cooperation and Development, people in Sweden, the Netherlands, and Finland  pay on average less than $130 a year for cell phone service.  Americans pay $635.85 a year.  That $500 a year difference, from most consumers with a cell phone, goes straight to AT&T and Verizon (and to a much lesser extent Sprint and T-Mobile).  It’s the cost of corruption.  It’s also, from the perspective of these companies, the return on their campaign contributions and lobbying expenditures.  Every penny they spend in DC and in state capitols ensures that you pay high bills, to them.

This isn’t obvious, because much of how they do this has to do with the structure of the industry.  Telecommunications isn’t like selling apples, where you have a lot of buyers and sellers.  In a business like buying or selling apples, all you need is an apple tree to get into the business.  Cell phones aren’t like that.  It’s a business where you sell services on top of a network of cell phone towers that can transmit phone calls and data, and these networks cost tens of billions of dollars to build.  But even if you have the money to build one, you still might not be able to, as the Lightsquared example shows.  These networks all use public airwaves, or “spectrum”, and you need government permission to use it.  Remember the electromagnetic spectrum you learned about in school?  The government literally leases that out to companies, and they make radios, microphones, wifi routers, and cell phones that use it.

This has implications for your cell phone bill.  Once AT&T or Verizon has paid for its network and licensed spectrum from the government, the cost of adding an additional customer is very low.  That means that the biggest providers with bigger networks and more licensed spectrum make more money.  It’s not only that their costs are lower, but also because they can keep other players out through control of the political system.  That is, they can move towards monopoly in the industry. And monopoly means higher prices for you, and more profits for them.  Here’s the data.

Verizon and AT&T’s Average Revenue Per User (ARPU) are substantially higher than any other national carrier’s. Verizon’s wireless profit margins (EBITDA) are substantially higher than all other carriers except AT&T.  And Verizon and AT&T together control four-fifths of the entire wireless industry profits, the only two major carriers to control double-digit shares of the industry’s total profits.  Over the past 3 years Verizon and AT&T’s share of total industry profits has steadily increased while everyone else’s declined.

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