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Morningstar report shows that wireless environment is competitive

This morning I came across an analyst report on Morningstar.com that described how Verizon is under more competitive pressure from wireless rivals such as AT&T, Sprint, and T-Mobile.  Analyst Ryan Knutson wrote the following:

“Verizon is under more pressure from rivals now than at any time in years, especially as Sprint Corp. recently began aggressively cutting prices and AT&T Inc. has been reacting to T-Mobile US Inc.’s continued momentum. Verizon has lowered its prices and mimicked some of Sprint’s offers to increase the size of data buckets. So far, it seems to have helped it avoid customer losses. An important metric to monitor is churn, or the percentage of customers leaving each month. Verizon has done well keeping that percentage below 1%. A figure much higher than that is a sign things are getting tougher.”

Mr. Knutson went on to say that while Verizon was still adding more post-paid subscribers than losing them and that the company’s churn rate (percentage of customers leaving the service) was below 1%, the company is being challenged by T-Mobile which added 1 million subscribers in this quarter.  Mr. Knutson also estimated that Verizon plans to spend approximately $10 billion in upcoming spectrum auctions.

Mr. Knutson’s report supports an argument made earlier today by Verizon’s Libby Jacobson.  Ms. Jacobson, in describing the competition Verizon faces in wireless, stated:

“One of the hallmarks of the wireless industry – from devices to applications to service plans — is the broader range of choices available to consumers enabled by the various differentiated arrangements and business models in the competitive and still-rapidly-evolving wireless business. Such flexibility is particularly important so that wireless services can continue to develop into a more full-throated competitive option to the higher speed wireline services that, in many places, may only be available from cable operators.”

In a competitive marketplace, we should expect to see changes in the relationship between wireless services consumers and producers of those services reflected in pricing, notably price decreases.  In the classic Hoteling example, we should see firms moving closer together in prices and services as they try to persuade more consumers to buy their product.  We are seeing that in the wireless space, but wireless report after wireless report, the Federal Communications Commission refuses to draw the conclusion that the market for wireless services is a competitive one.

Would making a declaration that the market for wireless services is competitive somehow undermine the Commission’s role in communications?  Given the light touch treatment extended by the Commission on to the wireless industry, saying that the market is competitive would be the scissors that cuts an umbilical cord that quite frankly has not been needed for decades.  The fear that somehow wireless providers would reverse course by taking actions that would make the wireless market less competitive should also go the way of the Dodo bird.

Hopefully Verizon’s wireless video service won’t raise a net neutrality stink

The Wall Street Journal yesterday reported that Verizon could create and deploy a digital video service that could rival Netflix or Hulu. Quoting Verizon chief executive officer Lowell McAdam, the Journal reported “the carrier has much of the technology ready to launch the service and is nearing agreements with major content companies, which until recently were more skeptical of licensing content for delivery over the Internet.  The need to connect with millennials who want to view TV shows and movies over the Internet is changing the tone of the discussions.”

The Journal also reported that Verizon has been receiving an increasingly warm attitude from content providers to the idea of supplying content for over the Internet consumption.

Content would be delivered from major broadcasters and live sporting events to smartphones via a technology called “multicasting.”  Muticasting avoids congesting the network because it allows the carrier to broadcast content over a single stream of airwaves that consumers can tune into.

In addition, the Journal reports that Verizon is open to expanding FiOS into more markets.

Net neutrality advocates may decide to raise red flags and voice concerns about Verizon potentially throttling the speed of a Netflix or Hulu in order to better promote the mobile broadband provider’s own video service.

The view may be buttressed by allegations made earlier this summer that Verizon was throttling Netflix’s speed and that this throttling forced Netflix to enter an agreement with Verizon that ironically provide Netflix’s video service.

Even without rules in place, the Commission may attempt to use the authority it has under section 706 of the Telecommunications Act of 1996 to investigate claims that net neutrality principles were violated.

In the end investors should view this potential regulatory overhang as a speed bump down the road toward competition in the video-over-the-internet market.

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No response to Wheeler’s response on wireless

There was no appreciable response to Federal Communications Commission chairman Tom Wheeler’s comments at the CTIA show in Las Vegas mentioning that the FCC may reconsider the distinction between fixed broadband and wireless broadband as it draws closer to issuing new rules on net neutrality or the Open Internet.

The goal of the Open Internet proceedings “is to establish rules of the road for Internet openness that will provide certainty in the market place and facilitate the continuation of the virtuous cycle of investment and innovation”, Mr. Wheeler said.

Consumers are increasingly relying on mobile broadband, noted the chairman, and acknowledged the wireless industry’s position that mobile broadband carriers face constraints that their fixed broadband cousins do not.

AT&T(T:NYSE); Sprint (S: NYSE); and Verizon (VZ: NYSE) saw their share values fall today but it wasn’t clear from media headlines whether the fall was in response to the possibility that fixed and mobile may be treated the same under net neutrality rules or his policy of challenging wireless broadband company mergers such as the attempted AT&T-T-Mobile combination or the more recent attempt by Sprint to acquire T-Mobile.

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Fred Campbell points out flaw in FCC “pick winners” strategy

If the Federal Communications Commission is really interested in ensuring the deployment of broadband, its broadcast spectrum policy of allowing Sprint and T-Mobile to get more low band spectrum in hopes of getting broadband rolled out to rural customers may be dead on arrival.  That’s my takeaway from a blog post by Fred Campbell of the Center for Boundless Innovation in Technology.

Mr. Campbell highlights Sprint and T-Mobile’s earlier conclusions that deploying mobile rural broadband is an expensive proposition.  having spectrum is one thing.  Building the actual infrastructure is another.  Deployment is still about the bottom line and building towers and laying cabling over less densely populated areas relative to urban areas is still not cost effective.  Quoting Mr. Campbell:

“As a result, Sprint and T-Mobile have chosen to rely primarily on roaming agreements to provide service in rural areas, because it is cheaper than building their own networks. The most notorious example is Sprint, who actually reduced its rural coverage to cut costs after the FCC eliminated the spectrum exemption to the automatic roaming right. This decision was not driven by Sprint’s lack of access to low frequency spectrum — Sprint has held low frequency spectrum on a nationwide basis for years.”

I would go one step further.  By taking away from AT&T and Verizon the opportunity to get more lower frequency spectrum and shifting it to Sprint and T-Mobile, broadband deployment suffers a double whammy.  Not only will rural customers not see additional mobile broadband deployment from Sprint and T-Mobile, rural and urban consumers won’t see additional broadband deployment by AT&T and Verizon either.  All this picking and choosing does is erode AT&T and Verizon’s ability to grab a little more market share while serving their current customers and adding new urban and rural consumers.

This is not how you enhance a competitive environment in wireless.

 

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I expect an unrestricted auction to help promote broadband deployment

Posted April 24th, 2014 in AT&T, Broadband, spectrum, T-Mobile USA, Verizon, wireless communications and tagged , , , , by Alton Drew

The Federal Communications Commission places a lot of emphasis on competition in the broadband access provider space; too much I think.  Regarding the reverse incentive auction for broadcast television spectrum, the competition narrative highlights the number of wireless broadband providers being able to bid for spectrum.  I’ve opined before on the FCC’s bottleneck status as gatekeeper to the airwaves.  As the monopoly supplier of licenses it won’t and should not be expected to parcel out spectrum to the lowest bidder.  On the contrary, economic logic says that the FCC should create an environment where it gets and takes the highest bid.

Getting the highest bid, optimizing its market power over licenses, won’t happen if the FCC forces AT&T and Verizon to sit on the sidelines.  A recent finding by The Phoenix Center states that including AT&T and Verizon in the reverse incentive auction won’t have the effect of driving out smaller wireless carriers as bidders.  Inclusion of AT&T and Verizon in the auction is expected to increase overall revenues and facilitate the revelation of auction values held by other bidders.  Using the 2006 AWS-1 auction as a basis for determining performance and outcomes in the upcoming reverse auction, the Phoenix Center determined that AT&T’s participation added a 21% premium to auction prices ” above and beyond the revenue effect of the typical bidder.”

There were 168 bidders in the AWS-1 spectrum auction and 104 bidders won spectrum.  Combined, AT&T and Verizon walked away with 61 licenses, but T-Mobile ( you know, one of the little guys) walked away with 120 licenses.

While the report did not speak specifically about broadband, it seems like an unrestricted spectrum auction, like the 2006 AWS-1 auction, would give large and small carriers access to the airwaves necessary for building out more facilities.