1. 4-7 Sept 2004ITS Biennial Conference, Berlin1 Usage Substitution Between Mobile and Fixed Telephone in the U.S. Michael R. Ward University of Texas at Arlington Glenn A. Woroch University of California, Berkeley ITS Biennial Conference—Berlin, Germany 4-7 September 2004

2. 4-7 Sept 2004ITS Biennial Conference, Berlin2 Fixed-Mobile Substitution 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.

3. 4-7 Sept 2004ITS Biennial Conference, Berlin3 Policy Issues 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?

4. 4-7 Sept 2004ITS Biennial Conference, Berlin4 The US vs. Elsewhere 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

5. 4-7 Sept 2004ITS Biennial Conference, Berlin5 The Data 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.

6. 4-7 Sept 2004ITS Biennial Conference, Berlin6 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.

7. 4-7 Sept 2004ITS Biennial Conference, Berlin7 Trends in Mobile Pricing Big buckets –Larger usage allowances –Longer off peak hours Bundling –Mobile to mobile, LD included. Expanded service –Large home zones or no roaming charges

8. 4-7 Sept 2004ITS Biennial Conference, Berlin8 Summary Statistics

9. 4-7 Sept 2004ITS Biennial Conference, Berlin9 Source: ReQuest Survey

10. 4-7 Sept 2004ITS Biennial Conference, Berlin10 Source: ReQuest Survey

11. 4-7 Sept 2004ITS Biennial Conference, Berlin11 Source: ReQuest Survey

12. 4-7 Sept 2004ITS Biennial Conference, Berlin12 Source: ReQuest Survey

13. 4-7 Sept 2004ITS Biennial Conference, Berlin13 Source: Bill Harvesting data

14. 4-7 Sept 2004ITS Biennial Conference, Berlin14 Source: Bill Harvesting data

15. 4-7 Sept 2004ITS Biennial Conference, Berlin15 Source: Bill Harvesting data

16. 4-7 Sept 2004ITS Biennial Conference, Berlin16 Demand Estimation Estimate LA/AIDS demand “system” for each of IntraLATA, InterLATA Intrastate & Interstate. Share =  +  m ln(P m ) +  w ln(P w ) +  “U” +  Consistent with utility theory (Hicksian). Flexible functional form. Unit of observation is LATA. Use total calling as “U” constant.

17. 4-7 Sept 2004ITS Biennial Conference, Berlin17 Prices 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.

18. 4-7 Sept 2004ITS Biennial Conference, Berlin18 Source: Bill Harvesting data

19. 4-7 Sept 2004ITS Biennial Conference, Berlin19 Results

20. 4-7 Sept 2004ITS Biennial Conference, Berlin20 Results

21. 4-7 Sept 2004ITS Biennial Conference, Berlin21 Interpretation

22. 4-7 Sept 2004ITS Biennial Conference, Berlin22 Implications 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.

23. 4-7 Sept 2004ITS Biennial Conference, Berlin23 Predictions? 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.

24. 4-7 Sept 2004ITS Biennial Conference, Berlin24 Conclusions 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?