By Brendan McGarry

WASHINGTON, July 12, 2007 –Rep. Ed Markey, D-Mass., held up a shiny new iPhone during a hearing Wednesday on Capitol Hill to illustrate the dilemma facing millions of American consumers: the device only works on AT&T's cellular network.

Apple customers have had to shell out $500 to $600 for the sleek-looking phone – which doubles as a digital music player and Web browser – and sign a two-year service agreement with the phone giant that is estimated to cost $2,300 over the life of the contract. In addition, existing wireless customers will likely cancel their current contracts, paying a penalty of up to $175.

"This highlights problems with the current marketplace structure, where devices are provided by carriers, portability of devices to other carriers is limited or non-existent, and many consumers feel trapped having bought an expensive device or having been locked into a long-term contract with significant penalties for switching," Markey said.

Markey chaired Wednesday's House Telecommunications and the Internet Subcommittee hearing on wireless innovation and consumer protection. While he commended Verizon Wireless for recently deciding to pro-rate early termination fees, he said the top cellular companies still exert far too much control over consumers, device-makers and entrepreneurs who want to deliver new products and services over their nationwide networks.

Panelists debated the merits of putting wholesale and so-called "open access" provisions on a slice of spectrum the Federal Communications Commission is planning to auction in coming months. The provisions are designed to weaken incumbents' control over the kinds of devices and applications that are used on their networks.

Unlike in Europe and Asia, for example, in the United States the vast majority of cell phones are "locked" onto a network owned by one of nation's top carriers – AT&T, Verizon, Sprint and T-Mobile, which together control roughly 85 percent of the U.S. cellular market. The companies act as retailers, in addition to service providers.

"I'm an entrepreneur, and I'm mad as hell that I'm restricted to innovate," said panelist Jason Devitt, a Silicon Valley inventor who develops wireless products and services for consumer and small businesses.

The concept of open access is embraced by Web-dependent companies like Google and Skype, as well as consumer advocacy groups – but not by the incumbent phone and cable companies. They say they want control over the quality and service of their broadband and wireless networks.

According to reports published this week, FCC Chairman Kevin Martin has drafted rules for the upcoming auction that would put some form of open access requirements on more than two-thirds of the spectrum on the auction block. The new frequencies are being made available as broadcasters transition to digital television. The news of the open access rules met instant criticism from the wireless industry. Steve Largent, president of wireless association CTIA called the proposal "Silicon Valley welfare." The FCC is expected to release the spectrum rules in July or August.

Verizon attorney Steven Zipperstein testified that open access rules are unnecessary. He said that market forces would respond to customer demand. He pointed to the popularity of Motorola's RAZR phone, which debuted in the United States on the former Cingular's network (now AT&T) in November 2004 for $500. The price dropped to the point where carriers now give it away for free with a service plans. "We didn't need government to tell us to do that," he said.

Zipperstein said Verizon receives thousands of calls, e-mails and letters a day from customers with complaints and service suggestions – but not requests to attach other devices to its network. Nevertheless, he said his company has responded to the market by offering the Blackberry 8830, a CDMA device capable of roaming on the GSM network.

Markey said and other lawmakers asked the panelists whether policymakers should extend to wireless networks a 1960s-era FCC decision mandating the ability to use competing devices on the wire-based telephone network. Dubbed Carterphone after the name of the device, the decision effectively broke Ma Bell's monopoly control over its rotary phones and network. The historic decision paved the way for the development of electronic phones, fax machines and computer modems over wires.

Professor Timothy Wu, a copyright and telecommunications professor at Columbia Law School, said regulators should adopt rules that encourage device portability. He noted the uniqueness of American carriers' grip over cellular devices, and argued instead that cell phones are supposed to be the rightful property of the owner. "Imagine if you put this model on TV," he said, and your television monitor suddenly stopped working because you decided to switch cable providers.

Rep. Chip Pickering, R-Miss., pointed out the differences between open access and net neutrality – the concept of barring Internet service providers from offering expedited service to favored businesses. Pickering said the federal government has created successful wholesale markets in other industries, including energy. He described a wholesale business model as "the best way to ensure a non-regulatory solution."

But other Republicans scoffed at such provisions and underscored the success of the cellular market, which they described as one of the most competitive in the country.

Former House Speaker Dennis Hastert, R-Ill., said the number of cellular subscribers has leaped from 25 million in the early 1990s to 225 million today, while carriers' revenue per minute has dropped from nine cents per minute in 2004 to seven cents per minute in 2005. "The industry is incredibly competitive," he said.

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