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FCC proposes new rules intended to protect wireless customers from "bill shock"
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Earlier this month, the FCC proposed a set of new rules (at CG Docket No. 10-207) "that would require mobile service providers to provide usage alerts and information that will assist consumers in avoiding unexpected charges on their bills." Responding to various horror stories about consumers who ran up charges of as much as $35,000 for roaming, texting, or web surfing, the Commission now proposes to require that wireless carriers provide customers with notifications that they are about to exhaust their monthly usage allowance, and that they also make available easy-to-use tools to enable customers to view and manage their usage, so that the consumer can be informed, before any additional charges are incurred, that further use of the service during that billing cycle will engender such added fees.
The Commission noted the opposition of wireless carriers to such requirements based upon the carriers' contention that "the [wireless] marketplace is competitive, creating incentives for providers to make available consumer information and usage tools without regulatory mandates" but nevertheless concluded that "mobile service providers are not providing consumers with complete information concerning the tools available to manage their usage and control their costs" and that "[t]o the extent that providers offer methods to monitor and cap usage to avoid bill shock, consumers are often unaware of these tools." While the FCC's initiative is certainly to be applauded and may well help some consumers avoid receiving wireless bills of biblical proportions, for others the FCC's proposal may be more like those health warnings on packages of cigarettes that are largely ignored by hard-core smokers. The real source of the bill shock problem is the enormous market power held by the two largest wireless carriers – AT&T and Verizon – that collectively control some 61.2% of the US wireless market.
Bill shock arises from the proliferation of complex and confusing rate plans – something that could not happen if effective competition were actually present in the wireless market. Carriers have developed the myriad of pricing plans as a means for segmenting the market to support a general strategy of market segmentation – charging different prices to different customers or groups of customers for what is essentially the same product or service. In so doing, a carrier can capture the highest revenue from those customers who place the greatest value on the service and thus exhibit the highest willingness-to-pay. A key factor in the success of any market segmentation strategy is the ability of the provider to prevent customers falling into segments deemed capable of supporting relatively high price levels from accessing lower prices being targeted to customers in other segments. Airlines, for example, accomplish this by imposing advance purchase requirements as a means for separating pleasure travelers from business travelers willing to pay more for a ticket for a short-notice trip. In the case of wireless services, one widely-used method for forcing customers' to remain within their "assigned" segment is to create barriers aimed at limiting existing customers who subscribe to a relatively high-priced plan to switch to an alternate at a lower price. This result may also be achieved by limiting the dissemination of information on new, lower-priced plans beyond the targeted market segment.
For example, when wireless carriers introduce new pricing plans or promotions, they typically apply these only to new customers while "grandfathering" their existing customers under the customers' preexisting plan. If the new pricing plan is less expensive than the plan being provided to an existing customer, in order to obtain the benefit of the lower price the existing customer must affirmatively ask to be shifted to the new offering. The carrier will usually accede to such a request, but may require that the customer enter into a new two-year contract and be subject to a new early termination liability. And if that doesn't discourage the customer from shifting to the new, lower priced service package, the carrier may also impose an "activation charge" even though the customer's handset is already activated on the carrier's network.
Carriers typically offer "block-of-time" pricing plans where for a specified monthly charge the customer is provided with a certain quantity of minutes. If that quantity is exceeded in any given month, "overage" charges are applied, but at a considerably higher rate than under the basic plan. For example, a carrier might offer a block of 400 minutes for $40 per month, but then charge $0.40 or $0.50 for each "overage" minute above the 400. The effective price per minute is thus minimized at precisely 400 minutes of use – any usage above or below 400 leads to an increase in the average per-minute price.
Block-of-time pricing of this type requires that the customer guess, in advance, the level of usage he or she is likely to make. If the consumer is relatively risk-averse – and many, perhaps even most, are – he is more likely to overestimate his expected usage, and thus subscribe for a larger-than-necessary rate plan. AT&T offers its customers the ability to "bank" unused minutes in any given month to be applied against overtime minutes in subsequent months. But no other wireless carrier in the US currently offers this "rollover" feature, such that in low-use billing cycles the unused minutes are forfeited, whereas in high-use periods the excess minutes are subject to high overtime charges.
One recent "bill shock" situation that received a lot of publicity arose when Verizon changed a customer's rate plan from unlimited to measured-use data and, according to the customer, did not provide adequate notice, or any notice at all, of the change. By the time that the customer had become aware of the problem, some $18,000 worth of data use charges had accumulated. Verizon eventually backed down from its demand that the bill be paid in full, but not until the customer had managed to get local and ultimately national media coverage of the dispute.
The very existence of "bill shock" is compelling evidence that the wireless market is far from competitive. If it were actually competitive, customers would be able to rapidly and costlessly shift from one carrier to another in response to price changes, and would be assured access to full, complete and accurate information upon which to make such choices. In reality, of course, such information is not readily available, and cross-carrier comparisons are often difficult to make. The lack of effective competition in the US wireless market is further demonstrated by the persistent failure of the two dominant wireless carriers to respond to more aggressive pricing plans offered by their smaller rivals – Sprint, T-Mobile, and Metro PCS, among others. Until the FCC either finds ways to advance the development of competition in this sector, or to foster pricing regimes that are transparent and readily understandable to all wireless consumers, problems like bill shock are likely to persist.
For more information on this subject, please contact Colin B. Weir at cweir@econtech.com
Read the rest of Views and News, October 2010.
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About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services. |
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