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The FCC should pay attention to the overall economy

Posted January 21st, 2016 in AT&T, Broadband, capital, economy, Verizon, Wall Street and tagged , , , , by Alton Drew

Yesterday at the World Economic Forum in Davos, Switzerland, AT&T chief executive officer Randall Stephenson shared with The Wall Street Journal his opinion on economic growth. Mr. Stephenson shared that he is not optimistic about growth in the economy. Expected growth of two percent is unacceptable, according to Mr. Stephenson. Tax policy changes are needed but there is no expectation that there will be any fiscal action this year.  Without fiscal action there is the potential of more downside than upside.

Mr. Stephenson added that lower oil prices were expected to lead to increased consumer spending but that has not panned out because consumers have been price conscious about mobile services. Discounts as  little as ten dollars could prompt a consumer to change mobile carriers.

There has been little if any evidence that the Federal Communications Commission is taking into account the state of the economy and its impact on consumer demand for broadband services. In comments before the Brookings Institution, FCC chairman Tom Wheeler argued that the success of broadband services leads to increases in demand for broadband which increases the incentive for competitive broadband.

Mr. Wheeler might not buy AT&T’s argument that lack of national economic growth is constraining carriers like AT&T. Mr. Wheeler believes that 75% of AT&T’s network will be controlled software by 2020. The replacement of hard physical switching systems by software is expected to reduce Verizon’s real estate costs by 80%, according to Mr. Wheeler. Powering a few computers can save up to 60% of energy costs versus endless hard switches, according to Mr. Wheeler. As the cost of delivering broadband goes down, says Mr. Wheeler, the opportunities for innovation increase. “This means we’re not going to let imaginary concerns about investment incentives and utility regulation cause us to let up on policies to encourage fast, fair, and open broadband.”

If the concerns are imaginary then maybe equity analysts are sleep deprived. We shared in a 28 December 2015 post that analysts believed that the wireless industry participated in a competitive market. The large wireless service companies are subject to pricing squeezes brought on by smaller entrants, analysts found, and extremely high prices for spectrum were further compounding pricing squeezes.

The reality of market concerns are further highlighted when one considers how much the information sector impacts gross domestic product. According to the U.S. Bureau of Economic Analysis, the information services portion of the economy has been playing an increasing role over the last three years. Information represented 9.3% of gross domestic product in 2013. By 2014 this percentage increased to 9.5%. At the end of the third quarter in 2015 the percentage has climbed to 9.6%.

Given Wall Street’s assessment of wireless markets and the impact information services plays on the overall economy, the FCC should look beyond the switch to software-based communications infrastructure when ascertaining the competitiveness.

 

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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.

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I don’t see the benefit of denying an AT&T, DirecTV merger

Posted May 1st, 2014 in AT&T, Broadband, DirecTV, spectrum, video and tagged , , , , , by Alton Drew

The Wall Street Journal today reported that AT&T and DirecTV are talking courtship.  This comes on the heels of a proposed marriage of Comcast and Time Warner.  I think the biggest difference between two mergers is that under the Comcast transaction you have  a formidable owner of content that also has distribution pipes seeking to combine with another significant provider of access.  AT&T and DirecTV don’t own any content to speak of and although, according to the article, they would rival a combined Comcast-Time Warner subscriber base with both companies providing broadband access to approximately 40 million plus subscribers, it’s still basically one video distributor getting together with a broadband company.

I don’t see how stopping the merger would improve broadband adoption.  Put another way, a merger would not prevent more people from signing up for broadband and I don’t see a combination as reducing the level of competition among broadband providers.  It should be seen by the FCC as the opposite of dampening competition.  Consumers will see two major brands combining forces to add choice in the broadband arena.

Maybe the companies can come up with some technological innovation that combines DirecTV’s satellite technology with AT&T’s fiber capability.  Dish Network chairman, Charlie Ergen, was quoted last year in Bloomberg Businessweek that a satellite company teaming with a wireless company would help meet consumer demand for seeing more video on wireless devices.  If the two combine, I would guess the next step will be a content play.  It would be the only way to truly keep up with a Comcast-Time Warner combination.

Besides, AT&T won’t hurt by having some of DirecTV’s spectrum.  No social policy violation here, FCC.  Go ahead and let it happen.

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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To get the best out of broadband, be extraverted

Posted March 14th, 2014 in Broadband, economy, employment, entrepreneurship, social network, urban and tagged , , , , by Alton Drew

Yesterday I met with my old friend Phyllis for lunch.  We met at Florida State and would meet at 5:30 in the mornings a couple times a week to play racquetball.  I think in 21 years I’ve only won two games against her.  In addition to friendship, as business people and lawyers, it’s also good to trade information and knowledge that may benefit both of us or someone we may know who is in need of help.

Yesterday’s lunch also helped me to put this article in to some better context.  Mashable.com’s Samantha Murphy Kelly wrote an article recently about who she describes as the world’s most connected man.  The subject of the article, Chris Dancy, reportedly has from 300 to 700 systems running at any given time, systems that constantly provide him with real time data.  The data gives him feedback on how well he’s sleeping, his fitness levels, etc. According to Mr. Dancy, ”I’m much more aware of how I respond to life and take steps to adjust to my environment. I’ve also formed better habits thanks to the feedback I’m getting.”

Wireless devices, mobile-ready websites, and consumer demand for data combine to create a bundle of personal information that either we use, as Mr. Dancy does, to determine where we are at and how well we are doing in order to get there.  We are creating and connecting to our digital mirrors, mirrors, ironically, that reflect a lot about ourselves to other people which raises privacy concerns.  I wonder, however, if we are using wireless broadband to meaningfully connect with others who may be able to share knowledge and information leading to economic opportunities?

Networking maybe an overused word.  I prefer connections, but focus on the concept is more important.  For minorities entering the labor market, skills may not be enough as Nancy DiTomaso pointed out in May 2013 in a piece for The New York Times.  Inclusion versus exclusion may be the problem for blacks and other minorities seeking higher-wage opportunities.  People tend to share information about jobs with their family and friends so if you are shut out of a network based on skin color the search for work becomes harder.

Is broadband a panacea, a quick fix?  No, it is not, but it provides access to other platforms that provide alternatives to the human social networks that minorities are shut out off.  Broadband access is also fundamental to creating independent social networks through which minorities can share information on job and entrepreneurial opportunities.

It’s time to divert that feedback loop of information we have on ourselves and use broadband to share it with the right people and develop strong connections.