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Universal service doesn’t encourage capital for entrepreneurs

Regulating commerce is one thing. Failing to encourage capital formation and distribution of capital to entrepreneurs cannot be acceptable. Section 214 of the Communications Act demonstrates how out of touch current law is with today’s technology and the entities that deliver that technology. The 115th Congress and the next Administration need to revamp universal service such that funding actually encourages new entrants into the broadband market and the innovations that come along with that entry.

Under section 214 of the Act, common carriers designated as eligible telecommunications carriers (ETC) qualify for receiving universal service funds. A common carrier is engaged in providing foreign or interstate communications by wire or radio.  The Federal Communications Commission revamped its 20th century based support program, originally designed to subsidize voice services, to now support deployment of broadband services in high cost areas, areas where broadband providers argue it is cost prohibitive to provide high-speed access services.

Among the criticisms of the program is its inefficiency. Specific concerns have been raised about funds supporting services in areas where competition already exists. On reflection why is this a problem? If a carrier sees the opportunity to take a single-digit percent of market share where garnering such a share covers her fixed and variables costs while generating a profit, so what if other choices already exists? New entrants enter the fray when they believe that they have an innovative way of providing services and eventually taking market share. This is part of the adventure of applying venture capital; digging in for a period of time a generating returns based on new ideas.

The Commission’s concerns about funding services in areas where there is already competition also stems from locking itself into an approach that results in common carriers being funded as opposed to wireless internet access providers. Again, current law paints a box where only common carriers can play. Wireless internet access providers may not want to build infrastructure for the purpose of being common carriers. It is too expensive and unnecessary to duplicate existing networks where instead their focus is rightfully on bringing value to those networks and consumers alike by providing alternative methods of accessing them. The Commission speaks of innovation too frequently to then turn around and pass up an opportunity to put its money where its mouth is.

Until the Commission decides to recognize the value that non-common carrier innovators bring to broadband deployment, the universal service fund as currently constructed will continue to be a pool of capital unavailable for use by certain new entrants.

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The reality for BDS is increased prices

The Federal Communications Commission, based on a review of its April 2016 order on tariffs and pricing methodology for business data services, doesn’t pay attention to pending decisions of its sister agency, the Federal Reserve. This Friday, Federal Reserve chairman, Janet Yellen, is expected to give a speech in Jackson Hole, Wyoming that may provide some signals on what the U.S. central bank may decide to do regarding its federal funds rate. The federal funds rate is the overnight rate banks assess each other when lending their reserves to one another.

The Federal Reserve has set a target federal funds rate between .25% and .50% and if there is to be a rate increase this year, it is expected to occur after the November general elections.  Raising rates, the theory goes, is a part of a central bank’s strategy for moderating the growth of a heated economy. Raising overnight rates incentivizes banks to keep their reserves in the Fed’s vaults thus limiting the supply of money. Following the laws of supply and demand, money gets more expensive because banks are lending less to the public.

What does this have to do with telecommunications services, particularly business data services? As a capital intensive industry, telecommunications providers will depend on the bond markets to finance the construction and deployment of facilities necessary for delivering future services. For example, Verizon, in its February 2016 10-K filing with the U.S. Securities and Exchange Commission, argues that adverse changes in the credit markets could increase its borrowing costs and access to financing. The company, as of December 2015, has $110 billion in debt. Verizon argues that an inability to retire debt could make it more difficult to access the additional financing necessary for obtaining working capital or making additional capital expenditures.

Placing restrictions on a telecommunications service provider’s ability to raise prices signals the markets that there is increased risk to the rate of return investors expect from selling money to telecommunications providers.  Pricing restrictions by the Commission combined with a Federal Reserve decision to raise the fed funds rate could work to reduce the supply of business data services, an outcome that runs counter to the Commission’s stated public policy of increasing choice for consumers of business data services.

The Commission should take the external economic environment into account, an environment heavily influenced by the Federal Reserve, when it considers going forward on regulating business data services prices.

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Nothing in Wheeler’s Aspen Institute Remarks sparked my investment juices

Posted August 16th, 2016 in Broadband, Federal Communications Commission and tagged , by Alton Drew

Yesterday, Federal Communications Commission chairman Tom Wheeler made remarks to the Aspen Institute. He focused on the evolution and importance of networks as conduits for social and economic growth. As usual his analysis was more consumer-centered than producer centered with no specific discussion of how the Commission would facilitate signals for domestic or foreign direct investment in the telecommunications sector. There was not much to note here at all other than subtle a couple swipes at the GOP mantra of “making America great again.” Mr. Wheeler reminded the audience that America’s greatness didn’t have to be rebooted but was going through continuous evolution.

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FreedomPop applies to FCC to resell services at all international points

On 29 July 2016, STS Media doing business as FreedomPop applied to the Federal Communications Commission to provide resold services from all international points. FreedomPop provides free mobile broadband plans, devices, digital services, and social sharing that allows its subscribers to share data across accounts.

The company was formed in 2011 and counts among its investors Mangrove Capital, DCM, and Atomico. According to its website, the company provides services in the United States and the United Kingdom and plans to roll out services to a dozen more countries this year.

FreedomPop uses Clearwire’s 4G WiMax data network and Sprint’s 4G LTE network.

The California-based start-up has avoided being acquired so far opting instead for raising private capital in a number of rounds. In June of 2015 it was reported that FreedomPop would invest $50 million in raised funds to invest in European and Latin American markets while expanding here in the United States.

STS Media’s application is filed under ITC-214-INTR2016-01757.

 

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The FCC to explore the Spectrum Frontiers

Yesterday Federal Communications Commission chairman Tom Wheeler channeled President John F. Kennedy in his announcement that the Commission will be issuing rules that release additional spectrum for use by 5 G devices and services. The release will also include 14 GHz of unlicensed spectrum. Mr. Wheeler wants to make 5 G a national priority given the role it plays as a platform for the internet of things. Mr. Wheeler did not come to this point overnight or by himself.

Working groups in the private sector have been making regulators aware of the spectrum requirements necessary for deploying effective 5 G networks. For example in August 2015, 4 G Americas, a wireless trade association, released a whitepaper identifying the best spectrum bands for 5 G. The paper makes the following key points:

  • “Mobile spectrum bands below 6 GHz will be valuable to allow the smooth integration of 4 G and 5 G systems.
  • Spectrum bands in the range above 6 GHz will offer technical challenges; however, capabilities for mobile services are possible in the higher band ranges with new radio solutions.
  • A variety of bands are needed to address both coverage and capacity needs of evolved 4G and 5G systems.
    • Lower frequencies have better propagation characteristics for better coverage and thus can support both macro and small cell deployments.
    • Frequencies beyond those traditionally used for cellular systems, especially those above 6 GHz are important to consider.
    • Higher frequencies can support wider bandwidth carriers due to large spectrum availability at millimeter-wave bands for providing very high peak data rates in specific areas where traffic demands are very high.
  • Action is needed by regulators to ensure that new spectrum needs are addressed for the evolution of 4 G and additionally to address the timely introduction of 5 G by identifying new spectrum ranges to be studied in the ITU- Radiocommunication Sector (ITU-R).” (Source: Yahoo! Finance)

The telecommunications services sector was in the positive this morning along with other sectors in the economy so saying that Mr. Wheeler’s announcement moved mountains much less the telecom sector would be a reach.Acting as a monopoly licensor of spectrum, I suspect that wireless companies will be seeking licenses at a premium given the scarcity of the resource. Mr. Wheeler admits that the emerging technology should be driving demand for spectrum. Fortunately in this case he appears willing not to hinder deployment but issuing new rules.