There are two major signs of market failure in the wireless industry right now: Service quality is often poor, and service price is always excessive. Brand a scarlet letter on AT&T and Verizon, the two biggest incumbents.

Too often, these problems are blamed on others –sometimes even on the public -- but the fault lies with the network operators alone. AT&T’s wireless network just isn’t very good, and it’s not because of insufficient spectrum or too many iPhone users. It’s because of market failure, the result of an environment where AT&T doesn’t have to invest aggressively to gain and keep customers. At the same time, wireless carriers routinely raise the prices and fees associated with their services, because they can safely do so without losing business, especially when the pricing practices of the two industry behemoths, AT&T and Verizon, are exactly the same for voice, data and text services.

This pattern of poor service quality and high service price, despite above average operating margins in poor economic climates, should be a clarion call to the FCC, which is currently preparing its fourteenth report on competition in the wireless market. All is not well, and something needs to be done.

Failures to build good wireless networks

Washington Post reporter Cecilia Kang recently described service quality problems with AT&T. At the Consumer Electronics Show in Las Vegas, Kang interviewed several iPhone users reporting major problems with connectivity – from 15-minute delays in checking e-mail to complete nonfunctioning of applications. At the bottom of the article is a gem -- a few quotes from Dick Lynch, chief technology officer for Verizon Wireless. Lynch reported no problems with Verizon, saying, “What we have done and continue to do is have a buffer of capacity above what our demand is at any given point in time. When we see consumer demand begin to feed into that capacity, we scurry out there to add more capacity.”

We’ve filed comments (p. 17-25) in the past demonstrating AT&T’s failures to build its network to accommodate iPhone users. We pointed to evidence that AT&T anticipated the growth in usage – some sources say they expected it to be even greater – and ultimately chose not to invest enough to meet that demand. This isn’t a problem with the iPhone. And it isn’t a spectrum crisis. It’s an “AT&T’s network sucks” crisis. And consumer studies are backing this up, whether from Consumer Reports or from Zagat.

Now more people are realizing what consumers and consumer interest groups have long been saying. PC World details an analysis of AT&T’s network and the company’s business behavior, courtesy of TownHall Investment Research. According to TownHall, AT&T gets 57 percent of its revenue from wireless, but only allocates 34 percent of its capital expenditures for maintenance and buildout of its wireless network. TownHall’s conclusion: AT&T needs to invest a lot more money in its wireless network if its customers are going to have a satisfactory experience.

As we move toward next-generation wireless networks over the course of the next decade, will we eventually need more spectrum? Probably, yes – and it’s wise for the FCC and NTIA and Congress to look now for ways to get spectrum down the road when it’s needed. But the problems of service quality right now aren’t a result of spectrum limitations but of bad business decisions.

Failures to fairly charge consumers

The market doesn’t look any better on the price side. Yes, AT&T and Verizon recently lowered their prices for unlimited voice service by $30 per month, but after steady talk of raising rates on data usage and moves by both carriers to impose data plans on more users, it’s clear to reporters and policy folk alike that the adjustment isn’t so much a price cut as a price reallocation.

The price shift for high-end services affects only a few users, and the ones who already pay the most for voice service. The rest of us, who choose not to spend hundreds of dollars per month on our service and who don’t use that many voice minutes, won’t see any benefit. In fact, our bills will go up when Verizon and AT&T raise data rates. Total revenue for the companies is projected to increase, not decrease, as a result of these adjustments. But total revenue might increase for Verizon and AT&T even before they raise their data rates, because consumers like unlimited service plans, and some who are currently purchasing the next level down of service will upgrade even unnecessarily, to avoid the risk of overages.

In fact, as we have argued before, wireless network operators set the individual use price of voice minutes, data transfers,and text messages artificially high, to deliberately inject fear of overages into the minds of consumers, and to get them to pay for more than they need to. As with other pricing tactics, this is not a charitable move by the incumbent carriers. It’s just a ploy, plain and simple.

And, if Verizon and AT&T can afford to chop $30 off their high-end service price, why can’t they reduce it even more? The analysis of service plans from BillShrink shows exactly identical service offerings and prices from Verizon and AT&T. Game theory tells us that as long as Verizon and AT&T don’t underbid each other, both are better off, and as soon as one breaks from the trend and underbids the other, the resulting price war will hurt their 30 percent profit margins – though it certainly would help consumers.

The FCC can make this market better, but it has to look at more than spectrum to do so.