The smart phone-tablet explosion began in a radically different environment, however. In early 2007, the FCC deregulated the Internet access services they provide. Wireless voice services are still formally provided on a common-carriage basis, but the FCC has avoided imposing on them most of that regulatory scheme — particularly price regulation.
Since then, Verizon and AT&T have found a variety of ways to ensure that only smart phones and tablets they approve can be used on their networks, that each device is tied to a particular subscriber, and that no device can easily be used on any other network.
Wireless can never match wired in capacity to download a lot of data — for instance, to make a video call; because of interference and other constraints, there’s only so much data that can be sent through the air. A fiber-optic or cable wire is 20 to 100 times as fast as a 4G wireless connection, and as those wireless connections are shared by more people, they only get slower. Wireless carriers can’t add more spectrum, because relevant frequencies have already been allocated to others. They could speed things up by building more cellular towers, but that would be an enormous expense — one that a provider with no competition is not eager to undertake.
In any case, the telephone companies are not trying to compete with wired Internet access. Even though most of their business assets are wires, Verizon and AT&T are focusing wholly on wireless. As Americans have dropped their land-line phones, and as the moat around the cable companies’ high-speed wired data-distribution has grown wider, there’s little payoff in digging up streets to lay fiber-optic cables.
Given the inherent capacity limitations of wireless networks, Verizon and AT&T will claim (and have claimed) that it is essential that they prioritize the tidal waves of data flowing to users’ handsets. They have to be choosy, they say, because their networks can handle only so much video traffic. This is why Verizon fought so hard in late 2010 against extending network-neutrality mandates to wireless Internet access; if the company had to treat all bits of data equally, it couldn’t charge for online video and other premium services.
And so, in the wireless world, as in the cable-distribution marketplace, the carriers can favor some kinds of data over others — and get two streams of revenue. Subscribers pay fees not only for service and content but also for things such as network activation and early termination. And programmers will pay for the right to reach those subscribers.
Just one other oligopolist keeps the carriers on their toes: Apple, which takes a 30 percent cut of the revenue generated by its preapproved applications.
AT&T has enough subscribers to demand (at least in limited ways) that Apple treat it well. From 2007 to 2011, AT&T was able to use its enormous number of wireless subscribers to get an exclusive on the iPhone. The company also spent a great deal of money subsidizing iPhone purchases so that consumers would lock themselves into long-term contracts.
At the same time, publishers of newspapers, music, films, books and games have come to see the iPad, iPhone and similar devices as potential saviors — as a way to reintegrate their content with a guaranteed delivery network that can track, bundle and charge for access. Between 2010 and 2011, revenue from mobile apps for the iPad tripled, to $15 billion, according to marketing research firm Gartner Inc., and will climb to almost $60 billion by 2014.