Monday, January 18, 2016

A Passing Thought on Cell Phones

I was speaking to my son today about cell phones. A friend had told him some study said the average American spent 2.7 years of their entire life on a cell phone, and -- apparently having inherited my skeptical nature -- he was dubious, asking me how long cell phones had existed. I explained that, in this case, no doubt they were taking current usage data, based on the past year, or several recent years, and extrapolating. However, his interest had now shifted from the specific question to a more general interest in the history of the cellular phone, and so I told him about car phones, and "bricks", the 90s flip phones, and my phone that was about the size of two largish TV remotes glued together, as well as the old Motorollas with the "walkie talkie" function, and the yellow-and-black displays which served as the first attempt to move beyond simple telephone services.

What struck me as I told the story was how long cell phones, or their car phone predecessors, had existed prior to their explosion into the mainstream, and, even more fascinating, how long the technology had existed which would have allowed some form of cellular phone1, and yet remained unexploited.

And then it struck me, the beginnings of the cell phone explosion took place not too long after the break up of the phone monopoly2. Before anyone accuses me of over-simplification, I agree that this is not the whole story, nor is it the single cause for the sudden growth of cell phones. However, if we look at the technology, most of the tech used in early cell phones was available a decade earlier. Perhaps in the early to mid 1970s, and certainly in the 1960s, the devices would have been far too bulky in pre-transistor days. (Or at least in the days when transistors were more costly and less reliable.) But by the mid-1970s, the car phones could have been moved out of the cars and into the users' hands if there were an impetus to do so.

So, why was the force lacking which would have inspired this innovation?

I would argue it is, quite simply, the lack of competition. The government so often tell us of the problems of trusts and monopolies3, and yet, when government regulations create these monopolies, they seem to forget their own warnings4. And yet this example gives a perfect example of the way a coercive monopoly (see n. 3) produces the very same negative effects the government -- and much of conventional economics -- ascribes to all monopolies.

The first thing we have to examine, to understand why a monopoly would work against innovation is that government created monopolies usually have their rates, fees and other sources of income set by statute or some regulatory body. I suppose this is the one concession the government makes to recognizing that the monopolies they create might have negative consequences5. As a result, the utilities and other monopolies cannot count upon being able to turn a profit on their services, or, if they can be sure of some modest profit, they cannot count upon rates being set in such a way that the profit provides a particular rate of return.

We can see the consequences of this quite clearly in the case of cell phones. I know I said the technology existed, and I stand by that argument, at least in so far as the essential elements existed. However, there was a lot of innovation that would still have been required to both make cell phones portable enough to attract users, and cheap enough to make it a service for the masses. Prior to this, where a private firm would have marketed it as a luxury service,  with the high price being used to provide funds for future innovations, a public utility would be on uncertain ground. Perhaps regulators would allow them to charge enough, perhaps not. Nor is that early innovation the only worry. Besides developing new technology, there is also considerable infrastructure as well. There are new towers, new DDD services, capable not only of standard routing, but of finding the identity of the incoming caller. This is very costly to develop, to build, to test, and, beyond those initial costs, also costly to maintain. And thus the phone company must be guaranteed that, at every step of the way, regulators will allow them to charge enough to pay for all this research and infrastructure, as well as provide a buffer in case income falls short at some time. That is a very uncertain proposition. A private firm would simply set the price, and, if the product could not support the price, then discontinue -- as such problems would become obvious early in the process. But when prices are set by regulators, there is no way to know if prices might suddenly change at some future point.

Of course, it was risky for private firms as well, especially in the early days of cell phones, but they also had a reason to assume that risk. With phone companies vying for customers, anything which attracted them to your lines was a boon, and providing the best cell service was one of those ways to attract customers.

But for a monopoly phone service there was no such incentive. If customers did not have cell phones, they would use one of the pay phones you also owned. Or call from home, or the office, again, using your service. Granted, the convenience of call phones might have been worth a slightly higher fee6, but there was, as we stated before, no guarantee cell phone service would be priced high enough to make it worth the risk. And thus, in the end, a monopoly phone service had little reason to bother developing cell phones.

I know some will doubt this argument, thinking it overly simplistic, or thinking I underestimate the technical requirements, but I disagree. Yes, it would have required some innovation, but with sufficient incentive it would have been quite possible. Of course, I would never say the monopoly was the sole factor preventing cell phones from seeing widespread use, but I would argue it was a significant factor.


1. In essence, there is little difference between a cell phone and the radio phones used by the military for a very long time. To push the most extreme requirements, once phone technology allowed for automatic DDD rather than switchboard operators, the technology for basic cell phones was in place. And we can see this, as the pager is basically a cell phone minus voice. The same technology that carried signals to pagers could easily carry audio. And to reverse the process, allowing outbound calls, and identifying the caller, involved no more than the call routing technology that replaced the operator. I grant, there is a bit more to it, but not very much. Basically, the requirements for developing a primitive (and admittedly bulky) cell phone system were certainly available by the 1960s, and probably could be argued to have existed in the 1950s, at least in some more developed areas (DDD having been first implemented in a handful of New York exchanges in 1951).

2. To clarify, when I say "cell phone explosion" I am referring tot he first of two explosions. Many recall more clearly the more recent one, taking place between 2000 and 2010, when cell phones began to take over the functions once performed by PDAs, as well as incorporating ever more feature-rich web applications. The explosion to which I refer is the earlier one, which happened between, approximately, 1985 and 1995 (more or less, maybe 1987 to 1997 if we want to keep it a decade long), when cell phones replaced pagers as the basic form of mobile communication, when "car phones" vanished, and cell phones stopped being a luxury item and became a -- still somewhat expensive -- commonplace, at least in most urban areas.

3/ I would not entirely agree with the state in this regard, even though I am writing about the harm done by a monopoly. You see, I believe monopolies can be harmful, but only when they are coercive, uncompetitive monopolies; that this, when a monopoly is forced upon the market by the power of government or some other coercive force. If a monopoly were to be formed due to the competitive ability of a firm, if it were to drive out all competitors because of its ability to deliver cheaper and better service, then there is no harm done. It is only when the monopoly is created by non-competitve forces. (See "Imperfect Competition, Abstraction and Anti-Trust", "The Problem of Antitrust", "Consumer Protection, Cartels and the Failure of Regulation", "The Basics" and "Competition".)

4. See "The Difference Between Public and Private, Or, The Real Monopolies and Cartels". See also "Government Quackery", "With Good Intentions", "The Endless Cycle of Intervention", "The Cycle of Compassion", "Sleight of Hand", "The Secret of Success, or, Why Government Fails", "When Help Hurts", "When Help Hurts II", "Denying Reality" and "The Gadarene Swine Fallacy".

5. Oddly, this is not universal. For example, the sport franchise monopolies (eg MLB), which the government ignores, in exchange for being implicitly granted a greater say in operations than would be normal, does not have any government body overseeing prices. I am not sure exactly why this is, but I shall examine it in the future.

6. Also recall that, even as late as the breakup of AT&T, many people would rent the physical devices rather than buy them. Thus, it is likely cell phones would have been leased under a similar program, cutting off one possible means of deferring costs, and an especially important one early on when hardware was a significant part of the cost of the service.



After writing this, I wondered if I might not be jumping to conclusions, makiing assumptions based on coincidences of dates, along with a theoretical framework explaining those coincidences, which was not valid. So I looked up articles on this topic, and, surprisingly, found several essays (here and here) where those with much more knowledge than myself came to the same conclusions.

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