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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.

Steps that Congress can take to modernizing spectrum policy

Happy Monday to all.  This morning I shared the following comments via a letter with the House Committee on Energy and Commerce.  I thought I’d share them with you as well.

An updated Act should not only provide broadband access to providers with clear guidance as to the rules of the road, but it should ensure that the road is not littered with debris from a 20th century regulatory framework.  Through legislation and rulemaking, Congress and the FCC have worked to increase the amount of spectrum available to commercial providers.

Now is the time for Congress to go another step further by ensuring that an update of the Act sends a clear message to the FCC to the take steps necessary for increasing the amount of commercially available spectrum to providers that are ready to put this finite and valuable resource to its best use.

Increasing the amount of spectrum available for commercial use should be viewed as an investment in the value the wireless industry brings to the American economy.  According to CTIA-The Wireless Association, in terms of contribution to gross domestic product, the wireless industry is now larger than the publishing, agriculture, hotels and lodging, air transportation, motion picture and recording, and motor vehicle manufacturing industry segments and rivals the computer system design services as well as the oil and gas extraction industries.

Job seekers have benefited from the growth and size of the wireless industry.  CTIA reports that the wireless industry gained 1.6 million new jobs between 2007 and 2011.  Meanwhile the rest of the economy saw private sector jobs fall by 5.3 million during what was arguably the worst economic downturn since the 1930s.

And while prices for wireless services have fallen 93% between 2008 and 2013, the United States, contrary to critics right here at home, leads the rest of the world in mobile broadband speeds.  Again, according to CTIA the average mobile broadband speed in the U.S. in 2012 was 2.6 Mbps, the fastest in the world, and double the speeds seen in Europe.

American enterprise is exceptional because of America’s exceptional emphasis on innovation.  The wireless industry helps to set standards of innovative excellence.  An example of this excellence is the wireless industry’s rollout of 4G Long Term Evolution (LTE) technology and the devices that use it.  According to data from CTIA, the number of 4G LTE-connected devices was 33.1 million devices in 2012.  That number represented a 273% increase in devices that year.   By the end of 2013, that number increased to 62.5 million.

This small sample of industry data supports the argument that there is a thirst for services provided by wireless carriers; that consumers place a value on the services they receive from all carriers, whether they be large national carriers such as AT&T, Verizon, T-Mobile, or Sprint, or smaller carriers such as Boost Mobile, Virgin Mobile, or C-Beyond. 

There is competition in the wireless eco-system, and consumer demand for innovative, flexible services, pricing, and data plans motivate a demand for spectrum that is just as value driven.  Any mechanism for providing wireless carriers with access to additional spectrum must recognize the value the market delivers to consumers and the initiatives carriers take to bring value to the market. 

One mechanism that will provide quality spectrum to wireless carriers is the pending incentive auction.  While the FCC has certainly conducted spectrum auctions before, it has never done one like this complex, two-sided auction. During the first part, or the reverse auction, television broadcasters will give up their licenses if they are confident that they’ll be adequately compensated for doing so.  Then during the forward auction, wireless carriers will bid on the spectrum.  Part of the proceeds from the revenue of the forward auction will compensate the broadcasters; hence their interest in a bidding process that maximizes revenue. However, carriers like T-Mobile and Sprint and their advocates have been advocating for restrictions on the amount of spectrum that AT&T and Verizon may bid on.  What would be the consequences of implementing a policy that restricts AT&T and Verizon’s participation in the auction?

One consequence would be less revenue, which translates into less money to compensate the broadcasters, less money for deficit reduction, and potentially not enough funding a long-awaited national broadband first responder network.  How big would the risk of leaving dollars on the table be?  If we use past auctions as examples, leaving AT&T and Verizon out would have resulted in revenues being 45% lower in the 700 MHz auction and 16% lower in the AWS-1 auction. 

Another consequence would be less spectrum available for commercial use.  Data referenced above points to the value of the wireless industry to the economy and to consumers.  Consumer demand for spectrum is rising and will continue to do so as mobile plays a bigger role in the education, healthcare, and energy sectors, not to mention our day-to-day personal and professional lives.  The industry needs more spectrum to serve its customers as their needs increase. 

Also, another mechanism that could provide quality spectrum to wireless carriers is a federal incentive auction as proposed in HR 3674, the Federal Spectrum Incentive Act.  The bill would create a spectrum fund, and proceeds from the fund could be used to offset sequester cuts, among other uses.  The bill has been with the House Sub-Committee on Intelligence, Emerging Threats, and Capabilities for three months, and it’s time to move it forward.

I believe the broadcast television incentive auction and the federal agency incentive auction as defined in HR 3674 are great opportunities to create pathways for wireless carriers to get access to spectrum.

I encourage you to let Congress know that broadband deployment in the mobile world will mean greater access to spectrum by all carriers.  Consumers shouldn’t be penalized by the implementation of spectrum caps simply because they chose service with a larger wireless carrier.

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The IP transition should have a positive impact on capital inflows

Capital flows to where it  can find the highest returns and in the broadband world, that area is internet protocol networks.  As Rick Boucher, honorary chairman of the Internet Innovation Alliance shared in a recent op-ed in The Hill:

“The dramatic shift toward broadband-based networks forecasts nothing less than the end of the aging telephone network first used in the era of Alexander Graham Bell. By the end of this decade, through a carefully planned process, all consumers will have transitioned to modern high-speed broadband networks.

Most consumers — essentially anyone who has a cellphone or who gets telephone service from a cable provider — have already made this switch without government action. Drawn in significant part by 4G wireless technology offering speeds comparable to the fastest wired broadband, consumers are fleeing the old network in droves. Today, less than one-third of the country uses it at all, and only 5 percent use it exclusively. It’s rapidly wearing out. Manufacturers don’t make new equipment for it, and the costs of maintaining it are skyrocketing. It’s a network with limited service functionality. As the transition to date underscores, consumers realize how broadband-based networks offer them far more. Driven by new technological opportunities, that’s the marketplace at work.”

Consumers here in the United States are ahead of the Federal Communications Commission when it comes to the realities of the broadband and information markets.  Consumers want data and content delivered quickly.  They are used to the simultaneous flow of text, voice, and data over their smartphones and tablets and are not about to go back to costlier old legacy alternatives that provide way less capacity needed to provide the benefits of convergence.

Remember the days of clicking back and forth on the telephone between two people in the same conversation?  Do you prefer that type of communication of yesteryear or do you like the capacity broadband enables for Google hangouts or talking to multiple people on Skype?

One example of capital seeking opportunity for high return I found way south of here in Jamaica.  Maybe it’s my homesickness combined with Atlanta’s recent two-inches of snow blizzard that guided me to this Capital Networks article.  The takeaway here though is that Jamaica’s information, communications, and technology infrastructure is an increasingly important asset and by description it is increasingly digital.  The strategic partnership between Capital Networks, a content provider, and broadband provider Flow Jamaica resulted in innovative services for the country’s tourist industry, and all on digital networks.

Here at home, Verizon provides an example of how broadband networks, particularly wireless networks, are being leveraged to attract financing from the capital markets.  In a recently issued prospectus for securities being issued to finance its buyout of Vodafone’s share of Verizon Wireless, Verizon wrote the following:

“Our strategy is to build upon the foundation and strength of our network assets as the platforms for future growth and innovation. We have a unique asset portfolio to drive continued growth and value over our networks and create an integrated experience for our customers. We are extremely well-positioned in the center of the trends that are driving growth in our industry – mobility, broadband, video, cloud services and security. Our portfolio of assets will enable us to better leverage our capabilities across the entire business.

In wireless, we completed our 4G LTE coverage build and continue to invest in our network to take advantage of the significant opportunities enabled by this technology, as we innovate around our customer solutions. We have further strengthened our portfolio of enterprise strategic services with the development of a new cloud services product suite, the launch of a mobile healthcare platform, and several targeted acquisitions which will enhance our capabilities in mobile video delivery.

We are confident in our ability to take advantage of the growth opportunities in our key strategic markets. We will continue to invest in our networks as the platforms for future growth and innovation.”

Investment is flowing to high-speed networks.  If the FCC is concerned about continued innovation in the broadband markets and wants to help facilitate flows of capital to broadband providers, a thoughtfully planned by expedited IP transition trial is imperative.

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Why is DeKalb County making access to wireline broadband harder?

DeKalb County, Georgia is facing a lawsuit from T-Mobile over the county’s revocation of a land development permit months after the permit was apparently approved.  T-Mobile’s intent was to build a stand alone telecommunications tower for use in providing mobile service.

T-Mobile alleges that DeKalb County’s primary reason for doing a 180-degree turn on the permit was based on a policy by DeKalb’s interim chief executive officer and that the County’s actions were a violation of the Communications Act of 1934.

The complaint is filed in the United States District Court-District of Northern Georgia, Atlanta Division.  The case number is 1:13-cv-03447-TWT.

The county’s response to T-Mobile’s complaint was not what I would call responsive.  Spending 24 pages basically saying that we have no information upon which to base a response was disconcerting to say the least.  More important is what appears to be a total disregard for the impact the County’s revocation of a land development permit would mean for delivery of wireless voice and broadband services.

While acknowledging T-Mobile’s statutory authority under the Communications Act for filing the complaint, DeKalb County didn’t take the opportunity to rebut T-Mobile’s assertions that deploying this tower was part of the overall statutory mandate under Section 151 of the Act to provide a nationwide communications network providing universal access by all Americans.

As T-Mobile rightfully points out in its complaint, the penetration by wireless subscribers to our nationwide, private sector provided network is over 312 million subscribers, basically every man woman, and child in America.  These subscribers are accessing knowledge and information markets for a myriad of reasons including accessing basic news, learning about current events, purchasing educational services, , conducting commercial transactions, engaging in financial transactions, and transmitting health related data.

DeKalb County’s revocation of the land development permit means less access to increasingly scarce spectrum necessary for accessing and using broadband technology.

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Tier-2 carriers are 21st century re-sellers on steroids

Today the Federal Communications Commission released an order on interoperability in the lower 700mMHz band where smaller competitive wireless carriers can roam on AT&T’s wireless network. I look at the order as a quasi private-public partnership where the FCC met the industry half-way by reworking its power emission rules in the 700 MHz block while AT&T voluntarily agreed to let smaller carriers roam on its network.

The most apparent winner here is the consumer. The ability to enjoy a seamless call experience increases consumer welfare by providing the consumer with additional choice in carriers. Why leave Sprint if that carrier can provide true nationwide calling by leverage its ability to roam on another network.

That to me is the downside of the FCC’s push to increase the roaming capabilities of the smaller carriers. To me all we have here is a reseller agreement on 21st century steroids. Today’s order says that rather than pursue go old fashioned capital formation and leverage it into your own facilities-based networks, just do a B-52’s impersonation and “roam if you want to.”

AT&T’s cost-benefit analysis probably led the company to the conclusion that we’ll pick up a little roaming revenue, but with the tweak in the emissions rules, we’ll be okay. I think in the long run it sends the wrong message that rather than go into the markets and buy cheap money, just make some noise with the regulators.

Steve Berry, president and chief executive officer of The Competitive Carriers Association, recently opined on CSPAN-2’s The Communicators that consolidation was decimating the Tier-2 wireless carriers. Well expect the decimation to continue not primarily because of mergers and acquisitions, but because all these smaller carriers end up being are sources of customer lists because without the expanded facilities-based networks that’s the only value that they will be able to boast about.