Michael R. Ward
University of Texas at Arlington
Glenn A. Woroch
University of California, Berkeley
4-7 Sept 2004
ITS Biennial Conference—Berlin, Germany 4-7 September 2004
ITS Biennial Conference, Berlin 1

• Both provide phone access (dialtone, phone number) and usage (outgoing local and LD, termination, calling features) – Main differences are mobility and clarity.
• Replacement of fixed line – “Cutting of the cord” has plateaued at about 5% of adults in U.S., 6% in U.K.
– Role of DSL, fax, number portability.
• Shifting of minutes to mobile – Mobile carving into fixed LD, and growing termination.
– Growth of mobile calls and mobile-to-mobile calling.
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• Does mobile service constrain fixed line pricing?
– Should local service rate regulation be relaxed?
– Is concern over leveraging fixed network exaggerated?
• Should mobile count toward universal service?
– Should USO subsidies target fixed line only?
• How assess fixed-mobile integration?
– Allow bundling of fixed and mobile services?
• Is there a need to promote more competition?
– Further unbundling of fixed network, or more spectrum?
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The U.S.
• Mobile – Cellular party pays – Rapidly moving to flat rate – Predominantly subscription – Multiple standards – Intense competition – Negligible SMS • Fixed – Flat rate local service – Short wait times – Some local competition, Intense long distance competition – DSL, CM for second fixed lines Europe, Asia, etc. • Mobile – Calling party pays – Low recurring, high usage rates – Explosive growth of pre-paid – Uniform standards – Mild domestic competition – SMS very popular • Fixed – Measured service – Long(er) wait times – Limited local, LD competition 4-7 Sept 2004 ITS Biennial Conference, Berlin 4

• TNST’s ReQuest® Market Monitor Database – Nationwide, 30K+ per quarter, 10 quarters (3Q99-4Q01).
– Survey responses and demographics from omnibus.
• TNST’s Bill Harvesting® Database – Fixed and mobile bill harvesting (25% response rate).
– Not a panel but some re-sampling (about 10% of bill submitters).
• Sampling Problems – Households, not individuals.
– Some bias (skews older, white, lower income).
– Voluntary bill submission causes data headaches.
– Bills mask crucial information.
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Mobile Access and Usage 1999-2001 • Increased mobile access – Number of cellphones in U.S. increased from 76 to 128 million, while number of all (second-line, CLEC) fixed residential lines has fallen from 190 to 188 million.
– Percent of multiple cellphone HHs went from 15% to 25%.
• Increased mobile usage – Average minutes per line increased from 120 to nearly 300 per month.
– LD minutes per HH on mobile increased 400% while fixed LD per HH usage fell 14%. – Also, steady shift from peak to off-peak usage.
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• Big buckets – Larger usage allowances – Longer off peak hours • Bundling – Mobile to mobile, LD included.
• Expanded service – Large home zones or no roaming charges 4-7 Sept 2004 ITS Biennial Conference, Berlin 7

IntraLATA InterLATA Intrastate InterLATA Interstate Number of Calls Wireline Mobile Percent of Calls Wireline Mobile Percent of Expenditures Wireline Mobile 148,124 148,124 23.9% 76.1% 42.4% 57.6% 70,410 34,543 67.1% 32.9% 80.0% 20.0% 139,891 98,371 58.7% 41.3% 67.4% 32.6% Note: IntraLATA wireline calls only include calls for which toll charges would apply while IntraLATA Mobile calls include all calls placed.
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4-7 Sept 2004 ITS Biennial Conference, Berlin Source: ReQuest Survey 9

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: ReQuest Survey 10

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: ReQuest Survey 11

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: ReQuest Survey 12

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: Bill Harvesting data 13

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: Bill Harvesting data 14

4-7 Sept 2004 ITS Biennial Conference, Berlin Source: Bill Harvesting data 15

• Estimate LA/AIDS demand “system” for each of IntraLATA, InterLATA Intrastate & Interstate.
• Share = a + g m ln(P m ) + g w ln(P w ) + b “U” + e.
• Consistent with utility theory (Hicksian).
• Flexible functional form.
• Unit of observation is LATA.
• Use total calling as “U” constant.
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• Wireline easy – linear pricing.
• Mobile hard – non-linear pricing.
– Conditional expected price per min. – Versus avg. rev. per min. (ARPM).
– Versus simulated two-part pricing.
• Aggregate up to the LATA.
• IVs (LATAs and period dummies) to account for measurement error & possible endogeneity.
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4-7 Sept 2004 ITS Biennial Conference, Berlin Source: Bill Harvesting data 18

Table 2 LA/AIDS Estimates with Trend Dependent Variable: Wireline Share of Minutes Ln Wireline Price -0.090** -0.014
Ln Mobile Price 0.02
-0.011 -0.064** -0.012
0.138** -0.015 0.124** -0.013 0.142** -0.013
Total Duration Quarterly Trend Intercept 0.048** -0.006 0.034** -0.008
0.011
-0.006
-0.006* -0.003 -0.010** -0.003 -0.027** -0.002
-0.009 -0.046 0.814** -0.056 0.648** -0.055
Observations Adjusted R2 IntraLATA InterLATA Interstate Coef. Std. Err Coef. Std. Err Coef. Std. Err 1450 0.15
1349 0.14
1512 0.19
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Table 3 LA/AIDS Estimates without Trend Dependent Variable: Wireline Share of Minutes Ln Mobile Price IntraLATA InterLATA Intrastate Interstate Coef. Std. Err Coef. Std. Err Coef. Std. Err Ln Wireline Price -0.083** -0.014 0.027* -0.011 -0.028* -0.013
0.160** -0.012 0.153** -0.011 0.229** -0.012
Total Duration Intercept Observations Adjusted R2 0.050** -0.006 0.037** -0.008
-0.013 -0.046 0.786** -0.057 0.702** -0.062
1450 0.14
1349 0.09
0.01
1512 0.22
-0.006
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With Trend Mobile Price Wireline Price
Table 4 Elasticity Estimates from LA/AIDS Estimation InterLATA IntraLATA Mobile Usage Wireline Mobile Usage Intrastate Usage Wireline Usage Interstate Mobile Usage Wireline Usage -1.19
0.19
0.26
-1.26
-1.52
-0.03
0.13
-0.99
-1.42
0.21
0.20
-1.10
Without Trend Mobile Price Wireline Price -1.23
0.18
0.31
-1.25
-1.73
0.01
0.18
-1.00
-1.69
0.11
0.33
-1.05
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• Discernible moderate substitution – Cross-elasticities are almost always positive.
– Strongest results with best data (interstate).
– Cross-elasticities there are 0.20-0.33.
– Imply own-elasticity for good of -0.3, -0.7 & 0.7.
– Thought experiment: What if no mobile price decline? If mobile price 100% higher, then wireline minutes 20-30% higher. 4-7 Sept 2004 ITS Biennial Conference, Berlin 22

• Are mobile usage prices likely to continue falling?
– Mobile usage growing for non-price reasons.
– High FC, low VC technology.
– Prices track falling AC.
• More or less cross-elastic?
– Reached limits to call substitutability? (cut cord) – Mobile neophytes becoming experienced.
– Greater incorporation of mobile into lifestyle.
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• Some Usage Substitution – Surveyed consumers think this is big.
– Estimates indicate moderate.
• Policy Implications – Estimated substitution not yet competitive constraint. Access & interconnection revenues are vulnerable.
– Mobile-fixed integration could alleviate inefficient down-stream decisions of “variable proportions” consumer.
– More spectrum: more competitors or more services?
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