Entries in Wireless Competition (5)

Wednesday
Dec212011
DateWednesday, December 21, 2011 at 4:30PM

May – July 2011: The Summer of Consensus and Questionable Reports 

Genachowski’s Potemkin Rural Visit; RLECs and ILECs Suck it up and Play Nice

Part 2 of “2011: The Regulatory Year in Review.” The summer months had a fairly slow start, with some tepid FCC activities and a short lull in the USF/ICC Reform chronicle.  Drama with AT&T/T-Mobile was ongoing, with controversies coming to light regarding AT&T’s paid-for support of the merger. Organizations completely unaffiliated with the telecommunications industry nevertheless waved the AT&T/T-Mobile flag with pride; which rose more than a few eyebrows and even led to a few shakeups and firings in said organizations.  Given the news yesterday that AT&T and T-Mobile will drop the merger completely, it is actually a little funny to look back at the year and all of the bickering and moaning that occurred over this doomed betrothal (more to come on that topic the next installment). The stand-out event of the summer was without a doubt the ILEC-RLEC “Consensus Framework” for USF/ICC Reform, which like AT&T/T-Mobile, seemed like a sure-bet to the parties involved at first but slowly dissolved largely due to the FCC’s stern agendas.

May 2011: May was a big month for USF/ICC Reform reply comments and ex parte filings, but little else. Republican FCC Commissioner Meredith Attwell Baker announced early in the month her intent to leave the Commission for a lucrative lobbying position at Comcast, just months after she voted in favor of the Comcast-NBCU merger. Naturally, watchdogs cried foul and even demanded a Congressional investigation. The “revolving door” is nothing new as prominent FCC staff circle back and forth around the DC telecom lobby scene, but Baker’s announcement definitely had a bitter taste given the large public opposition to the Comcast-NBCU deal.  In her official farewell statement, Baker explained that she had not been contacted by Comcast until mid-April, long after the deal was done, and “I have not only complied with the legal and ethical laws, but I have also gone further. I have not participated or voted any item, not just those related to Comcast or NBCUniversal, since entering discussions about an offer of potential employment.” Meanwhile, the revolving door keeps spinning…

Chairman Genachowski’s May 18 trip to Diller, Nebraska topped my Hot List for the year, but largely because I was endlessly entertained by the big kerfuffle made out of this beltway-insider visiting fly-over country for all of a couple hours. “It’s Nebraska, not the moon,” I said. In late 1700s Russia, the story goes that “Potemkin villages”—fake settlements with all the bells and whistles—were constructed for the sole purpose of impressing Empress Catherine II when she visited the rural countryside. Genachwoski’s visit was the opposite of a Potemkin village—it was a Potemkin visit. The whole ordeal seemed like the FCC’s way of satiating the rural telecom industry (and rural Americans) by saying, “Hey, we understand what you are going through every day, and your unique needs, because we visited one of your communities!” Personally, I saw right through the façade, but nonetheless it was a nice effort. Genachowski visited locally-owned businesses and an RLEC, where he even posed for photo-ops in the CO. His overall messages was that rural businesses require broadband in order to succeed, which is absolutely no surprise for the RLECs who have been providing broadband to local businesses for years.

June 2011: The month with the longest days can basically be summed up in one word: reports. In the span of a few weeks, the FCC released three “big” reports of varying significance and quality. The first, “Information Needs of Communities: The Changing Media Landscape in a Broadband Age” (by Steve Waldman), I admit I did not pay much attention to. The gist was that broadband is important for a vibrant media experience and “a free democracy comprised of important and empowered citizens.” In response to this report, resident media champion Commissioner Copps proclaimed that “it is imperative that the FCC play a vital role in helping to ensure that all Americans have access to diverse and competing news and information that provide the grist for democracy’s churning mill.” Copps zoomed in on an alleged “crisis” identified in the report that “more than one-third of our commercial broadcasters offer little to no news whatsoever to their communities of license.” Basically, we need more local news and more ways to protect local media from Big media—Copps explained, “Localism means less program homogenization, more local and less canned music, and community news actually originated in the market where it is broadcast.”

The June 22 report, “Bringing Broadband to Rural America: Update to Report on a Rural Broadband Strategy” was more relevant to RLECs but generally lacked substance.  This 29-page document from the FCC and USDA was a Congressionally-mandated update to a much more comprehensive 2009 report “describing a ‘comprehensive rural broadband strategy.’” Again, the gist of this report was fairly straightforward—all Americans should have access to broadband, and we just aren’t doing a good enough job in rural America despite making “significant progress” in the last two years. The key take-away of this report was that it provided some extra ammunition for the FCC’s USF/ICC Reform decision, as it self-served the FCC’s reform principles of accountability, fiscal responsibility, and market-driven incentives.  Genachowski proclaimed that it was “not acceptable” that 28% of rural Americans lack broadband, as found in the report.

Ending the month was the ironically-titled “Fifteenth Annual Mobile Wireless Competition Report,” where the FCC made no definitive conclusion (in 308 pages) about the state of competition in a report where the FCC was explicitly directed to make a definitive conclusion about the state of competition in the wireless market…. So much for that goal… Nevertheless, the Big 4 (and others) used the report to prop up their own agendas—be it proof that the industry is totally competitive or totally not competitive. AT&T cherry-picked certain data from the report to depict a vibrantly competitive wireless industry to boost their assertion that the merger with T-Mobile would not be anticompetitive. Lack of conclusion aside, this report did contain some interesting factoids about the wireless market in general. (The ILEC Advisor: How do You Measure Wireless Competition?).

July 2011: July was all about reaching an industry consensus for USF/ICC reform. The FCC asked for it, and RLECs/ILECs delivered, albeit too late for the FCC’s impossibly high standards of time. At the beginning of July, it still appeared as though a consensus was a million light-years away—reply comments, ex parte filings, and a series of high-profile events on the topic in DC did little to ease my mind even though a comprehensive “Consensus Framework” kept being promised. Mid-month, the Rural Associations came out swinging with a far-reaching advocacy campaign called “Save Rural Broadband,” aimed at getting consumers to contact their Congressional offices  with their concerns about being left behind in the Great Broadband Race of the 2010s. (The ILEC Advisor: Comments Show Little Consensus on USF Reform Issues, Rural Associations Launch “Save Rural Broadband”).

On July 29, the long-awaited Consensus Framework was finally released for public inspection. Called America’s Broadband Connectivity Plan (ABC Plan), this proposal was the baby of the 6 largest price cap ILECs, but “supported” by the Rural Associations.  It presented what the involved parties believed was a reasonable and appropriate framework for price cap ILECs, if used in conjunction with the RLEC Plan for rate-of-return companies. Both sides made compromises—including the Rural Associations’ reluctant acceptance of a $0.0007 access rate. The ABC Plan was widely criticized by basically any party who wasn’t directly involved in its creation. (The ILEC Advisor: Price Cap Carriers Release “ABC Plan” for USF with Rural Support).

Finally, the FCC attended one of those pesky consumer issues in July- “mystery fees,” and “cramming”—“the illegal placement of an unauthorized fee onto consumer’s monthly phone bill.” The FCC proposed rules that would require telecommunications providers to clearly notify consumers how to block third-party charges on their bills, among other measures. Between the mystery fee crackdown, July proposals to improve VoIP E911 availability and reliability, and the December rules barring uber-loud TV commercials, the FCC certainly stepped up in response to various consumer pressures throughout the year.

Coming up next in “2011: The Regulatory Year in Review,” we will reminisce about all the fun we had in that tumultuous time between when the Consensus Framework was released and the USF/ICC Order was approved—you don’t want to miss this!

AuthorCassandra Heyne | Comments Off |
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Monday
Oct312011
DateMonday, October 31, 2011 at 9:00AM

Energy Industry Boom Fuels Growth at ERF Wireless

Wireless Provider Taps Vertical Markets

As a wireless communications company boasting a 212% YoY growth in revenue, ERF Wireless stands out as a success story in today's difficult and competitive market. The key to the company's business plan lies in something we've been highlighting for a while: the power of vertical markets. According to ERF founder and ceo Dr. Dean Cubley, the company's strength is its diversified business, which supplies high-capacity wireless services to three main sectors—WISP services for rural business and residential customers, secure wireless communications services for the banking industry, and “nomadic communications solutions” for the energy industry. With this model, Cubley says growth in one sector can counter stagnation in another sector. Right now, ERF's sustained commitment to providing wireless communications services for the energy industry has allowed ERF to be profitable over the last two to three years. When so many other companies are reporting losses and laying off employees, Cubley says ERF is “just having a hard time keeping up with all of the business.”

Cubley founded ERF back in 2004, after decades in the wireless industry. Since then ERF has acquired 16 companies—mostly wireless companies in rural areas and, most recently, in oil and gas producing regions. Now, Cubley says, “anywhere there's oil and gas, we're interested in networks there.” Not only can ERF supply wireless to the energy companies, but as people come into the regions, rural banks and rural customers also look for services, which ERF can supply off of the same networks. “We use a little bit of everything: licensed spectrum, unlicensed spectrum, and what we use depends where we are,” Cubley said. The company uses 6 GHz licensed spectrum on the backbone, typically, but also uses 3.65 GHz in rural areas if there is interference on unlicensed spectrum.

Based in League City, Texas, ERF is well-positioned, geographically, to grow alongside the booming oil and natural gas industry. The nearby Permian Basin spans from west Texas into New Mexico and represents one of the largest oil and natural gas fields in the country. It's a 55-county area where the number of oil rigs has tripled in the last two years, where oil companies have rented hotel rooms a year in advance for their employees, and where the need for manpower seems insatiable. This surge in production and influx of people brings with it the need for wireless connectivity, both for day-to-day business operations and for personal communications. “Our customers operate in very remote areas,” Cubley says, “where it can be a hundred miles or more to the nearest landline, with no towers for wireless connections.” This is where ERF comes in, as a close partner supplying communications services to the oil and gas companies.

ERF operates about 150-200 mobile broadband trailers, each equipped with a 50-foot tower that can be erected by a technician. The trailers can be driven to any remote drilling site and, by connecting back to the company's network, enable powerful high-bandwidth, low-latency wireless broadband in any location. In the past, Cubley says that communications “had been provided by VSATs (satellite), but software designers have developed programs that will not run over VSAT. They [the programs used by oil and gas companies] need high capacity and low latency, and we can provide that kind of system at the same cost as a VSAT.”

Right now, ERF provides this “nomadic solution” in the Southwest and southern Midwest, but Cubley says ERF is opening an office in North Dakota next month. The Williston Basin region of the Dakotas is enjoying a similar (but more recent) energy industry boom, and Cubley said ERF's plan there is to build their own network. “We will be one of the first WISP networks in the area,” Cubley said, “and we chose to build our own network since there are none in the area to buy.”

Cubley said that ERF's business strategy has been to buy and then improve small wireless networks in rural areas—tapping into new sectors of business that can make the networks profitable again. “We can buy a company that is unprofitable and make it profitable almost overnight,” Cubley said. “One of our company's original goals was to set out to acquire wireless in rural areas and use it in ways it hasn't been used before,” with a prime example being wireless networks in oil and gas producing areas.

“We operate as a WISP and have thousands of residential customers scattered throughout the U.S., but that is only 50% of our revenue. For a lot of companies, that is the only thing they're doing. If that is your only service, you have to have extremely large networks, because the margins are so thin. If a company can improve its economies of scale, those margins are much better,” Cubley said. “We're not trying to be the largest network, but use the networks for different purposes to generate more revenue.” According to Cubley, “the margins are 80-90% for the energy industry” and a bit less for the supplying communications services to the banking industry, which ERF also does through its wireless CryptoVue network security system.

Although ERF is sometimes in direct competition with local ILECs and RLECs, Cubley said they do often partner with traditional telcos and small wireless companies. “If we can't buy it or build it, we'll contract for it,” he said. In most cases, ERF will buy wholesale broadband bandwidth and re-sell it to the energy industry. “The problem is,” Cubley said, “sometimes the energy industry has higher standards for capacity and latency, so in some cases we have to pay to upgrade existing carriers' networks.” Right now, ERF has 14 such contracts in the U.S. and Canada, with more likely in the future.

AuthorCara Snider | CommentPost a Comment |
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Thursday
Jun302011
DateThursday, June 30, 2011 at 2:49PM

How Do You Measure Wireless Competition?

AT&T’s Read of FCC’s 15th Annual Report on CMRS Competition Doesn’t Tell the Whole Story

On Tuesday the FCC issued its 15th annual report on wireless competition.  On Wednesday AT&T (NYSE:T) proclaimed the FCC’s report clearly showed that the market for wireless services was robust and highly competitive (so it should, of course, be allowed to acquire T-Mobile).   The basis for AT&T’s claims is a chart showing that the percentage of Americans served by five or more wireless service providers rose from 74% in 2009 to almost 90% in 2010, an increase of nearly 44m people.  But does this fact, which the FCC caveats by saying that its estimates are overstated, mean that the market for wireless services is really competitive?

The answer to this question is largely a function of how you define the word ‘competitive.’  Implicit in AT&T’s statement is that competition is determined solely by the number of players in the game.  Count the number of companies offering service to a large percentage of the population and when that figure exceeds a certain threshold, in this case five, the market is competitive.  But the word competition implies something more than a simple number, it also implies something about quality play.  To have true competition each player must have at least a marginal chance of victory. 

The FCC’s report contains information beyond what AT&T has gleaned, though it does take slightly more work to unearth it.  For example, the report contains a wealth of information about net subscriber additions.  First, there are estimates of the total number of net subscriber additions realized by the wireless industry as a whole. Using this information we can construct a good view of how the market for wireless services has been changing with regard to customer acquisition.

According the information supplied in the FCC report, between 2006 and 2009 the combined share of net subscriber additions for AT&T and Verizon Wireless (NYSE:VZ) rose from 59% to 92%, implying a compound annual growth rate of 16% in net subscriber additions, and over the four years analyzed, the top-two carriers accounted for 71% of total net additions.  Figures like these speak for themselves.

This is just one example of many that contradictions found in AT&T’s hyperbolic statements about the nature of competition in the wireless industry.  Factoring in spectrum holdings, the ability to offer advanced 3G and 4G services and device availability only further dilute AT&T’s claims.  The fact is that the wireless industry is a practical duopoly and nothing AT&T or its numerous surrogates say can change that basic fact.   

AuthorDave Selzer | CommentPost a Comment |
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Tuesday
Jan252011
DateTuesday, January 25, 2011 at 12:24PM

Rural Telecommunications Group Opposes AT&T; – WIN Spectrum Deal

“Wireless Marketplace Slowly Devolving into a Duopoly at the Expense of Rural Mobile Consumers”

The RTG filed its opposition to AT&T's proposed acquisition from Windstream of six 700 MHz spectrum licenses in Pennsylvania.  In a strongly worded statement, Caressa Bennet wrote, “RTG strenuously disagrees with AT&T’s blanket assertion that competition will “enhance” after the deal closes and that the public interest will be served. On the contrary, were AT&T to add to its Lower 700 MHz Band spectrum holdings, it would severely impact the potential for industrywide LTE device interoperability, drastically reduce the number of potential roaming partners for rural carriers and the rural consumers they serve, and further consolidate the already scarce amount of spectrum below 2.3 GHz into the hands of the nation’s second largest mobile operator while simultaneously removing yet another potential competitor in rural markets that are already heavily-consolidated.

She added, “If the Commission approves this transaction, AT&T and Verizon Wireless will hold all of the paired spectrum in half of the markets being acquired in the highly-sought “beachfront” Cellular and 700 MHz bands. This transaction is further proof of a mobile wireless marketplace slowly devolving into a duopoly at the expense of rural mobile consumers.”

The RTG asked that the Commission deny approval of the deal at least until a determination on the proposed AT&T / Qualcomm spectrum deal is made, and that if it does approve the Windstream/AT&T deal, it should do so only in those markets where AT&T will control less than 110 MHz of spectrum below 2.3 GHz.  RTG also requested that the FCC impose conditions that will allow for data roaming, device interoperability and a prohibition on exclusivity agreements between carriers and device manufacturers.

Existing and prospective rural wireless operators have become increasingly concerned at the lack of equipment and devices for certain bands of the 700 MHz spectrum, as well as the lack of oversight on data roaming issues.  Meanwhile, Verizon Wireless and AT&T Mobility seem to be consolidating all of the most desirable spectrum… We expect to hear a good deal more on this issue in 2011.

AuthorRichelle Elberg | CommentPost a Comment |
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Monday
May312010
DateMonday, May 31, 2010 at 1:29PM

FCC's Annual Report on Mobile Wireless Competition

FCC Weighs in on Wireless Competition

The FCC, on May 20, 2010, released its Annual Mobile Wireless Competition Report to Congress. As part of the Telecommunications Act of 1996, Congress instructed the FCC to report on the state of competition in the mobile services market on an annual basis.  According to the FCC, this year’s report, the FCC’s 14th annual report on competition in the wireless marketplace, “goes beyond previous reports in reflecting the transformative importance of mobile wireless broadband, which has resulted in a shift from devices that can place traditional phone calls to pocketable devices that can access the entire Internet.” 

This year’s report highlights the wireless industry’s maturation and its move towards a more data-centric business model.  The report also acknowledges the impact of industry consolidation, both in terms of market share and the concentration of spectrum holdings.  The following is a summary of significant wireless market trends noted by the FCC. 

Maturation of the Mobile Voice Segment 

The FCC noted that, as of the end of 2008, 90% of all Americans had a mobile wireless device and used these devices to talk an average of 708 minutes each month.  Usage statistics had generally increased over time but the 2010 report marks the first instance of reduced voice usage.  The FCC suggests that the decrease in voice usage is perhaps due to increased reliance on text and multimedia messaging. 

Morgan Stanley has estimated that 96% of all 18 to 24 year olds have a cell phone.  That percentage stays above 90% for all age groups except 65 and over, of which 89% own cell phones.  According to the Pew Internet & American Life Project, 75% of all 12 to 17 year olds owned a cell phone, up from 45% in 2004. 

Transition to a Data-Centric Market 

The increasing popularity of smartphones such as the iPhone, Android, and the Blackberry has fueled a significant increase in data consumption per device and overall data traffic.  The FCC notes that with overall revenue per mobile customer generally remaining flat over the past several years, revenue from newer data services is replacing revenue from traditional services. 

According to statistics included in the FCC’s report, during the period 2004 through 2008 average revenue per user (ARPU) decreased from $49.41 per month to $47.09 per month.  Voice ARPU declined from $47.23 to $36.98 while text ARPU increased from $0.63 to $3.55 and data ARPU increased from $1.55 to $6.56. 

In 2005, the average user sent 476 texts message.  By 2008, the average user sent 4183 text messages.  Average revenue per text message fell from 3.7¢ in 2005 to 1.1¢ in 2008. 

According to the CTIA, total U.S wireless industry revenues increased from $104.2b in 2004 to $150.6b in 2008, but annual percentage increases have continued to decline.  Total revenues increased 16% in 2004 but only 6.8% in 2008. 

Proliferation of Devices and Applications 

The FCC cites the introduction of a growing number of smartphones that provide mobile Internet access and other data services, and use operating systems that provide many of the functionalities of personal computers. 

An estimated 42% of all cell phone users owned a smartphone as of the end of 2009, up from 15% at the end of 2006.  Credit Suisse has estimated that as of the end of 2009 there were 180m mobile data subscribers, or about 63% of all mobile subscribers.  That’s up from 21.6m mobile data subscribers as of the end of 2000, or 19.7% of all subscribers. 

Continued Industry Concentration 

The FCC notes that, over the past five years, concentration has increased in the provision of mobile wireless services.  According to the FCC, AT&T (NYSE:T, “AT&T”) and Verizon Wireless (NYSE:VZ, “VzW”) control 60% of both subscribers and revenue and accounted for 12.3m net additions in 2008 and 14.1m during 2009.  T-Mobile USA and Sprint Nextel Corp. (NYSE:S, “Sprint”), the nation’s third and fourth largest wireless carriers, had a combined 1.7m net loss in subscribers in 2008 and gained 827k subscribers in 2009. 

The FCC used the Herfindahl-Hirschman Index (HHI) to measure market concentration.  HHI measures concentration on a scale up to 10,000, with the top of the scale representing a monopoly.  The HHI index for a hypothetical market in which there are four facilities-based providers with equal shares of subscribers is 2500.  The Department of Justice antitrust guidelines consider a market to be “highly concentrated” if the post-merger HHI exceeds 1800, with antitrust scrutiny applied to a merger if it would trigger an increase of in the HHI of 100 or greater when the post-merger HHI is between 1000 and 1800, and an increase of 50 or greater when the post-merger HHI is above 1800.  For wireless mergers, the FCC has previously used a higher screen, 2800 for the HHI and 100 for the change in HHI. 

As of the end of 2008, prior to VzW’s acquisition of Alltel Wireless on January 9, 2009 (The Deal Advisor, 2/09, p.12), the mobile wireless industry’s HHI index was 2848, up from 2674 at the end of 2007. 

Robust Capital Investment but Declining Relative to Industry Size             

According to the FCC, the wireless industry continues to spend between $20b and $25b in inflation-adjusted dollars into their networks each year.  However, because industry revenues have continued to increase, capital investment as a percentage of revenue has decline from about 22% in 2005 to 14% in 2008. 

During the period 1998 through 2008, the wireless industry invested an estimated $240b into their networks.  However, data from CTIA suggests that, while the mobile wireless industry has continued to invest in network expansions and upgrades, capital investment has been declining over the past four years.  CTIA reports that incremental capital investment by wireless operators totaled $20.2b in 2008, a 4.4% decrease from the $21.14b spent in 2007 and a 20% decrease from the $25.2b spent in 2005.  CTIA also reports that capital investment during the first half of 2009 totaled $8.9b, a 7.4% drop from the first half of 2008. 

Role of Spectrum for Mobile Broadband 

Spectrum is critical, particularly as mobile wireless data usage continues to grow.  The FCC notes that lower-frequency spectrum possesses superior propagation characteristics that create certain advantages in the provision of mobile wireless services, particularly in rural areas.  Higher-frequency spectrum is more effective for increasing capacity, particularly within smaller, more densely populated geographic areas.  The FCC also notes that a significant portion of spectrum below 1 GHZ is owned by AT&T and VzW – 67% of the 700 MHz spectrum and 91% of the cellular spectrum, based on megahertz-POPs.

A More than Highly Concentrated Market 

For some time now, we have been predicting that as the wireless sector matures, it will look to the wireline industry to find growth.  As evidenced by the latest study by the Centers for Disease Control and Prevention (see below), this prediction is clearly occurring in the voice market.  Given the LTE deployments scheduled to launch over the next few years (see related story at p.1), increased wireless penetration of broadband and data services is sure to follow. 

Attributing factors such as advances in technology and changes in consumer habits to the consequences of policies espoused by the FCC, it would appear that the Commission has been effective in encouraging intermodal competition.  However, the same cannot be said about the effectiveness of its policies with respect to competition within the wireless sector.  By the FCC’s own measurement – a HHI index of 2848 as of the end of 2008 – the wireless industry is more than “highly concentrated.”  It may not be a monopoly, but it is certainly a comfy duopoly with AT&T and VzW controlling 60% of the industry’s $150b of revenue, most of the available wireless spectrum under 1 GHz, and virtually all the industry’s net subscriber additions. 

It’s not like the trends noted in the FCC’s report come as a surprise.  Most anyone following the wireless industry would have noted all of these trends long ago.  And while the FCC doesn’t come right out and say that competition in the wireless industry has been impaired by the market dominance of VzW and AT&T, it dances all around that conclusion.  Hopefully it’s an initial step towards policies that provide both an incentive and a means for smaller providers to effectively compete against the now firmly entrenched wireless establishment.

AuthorBill King | CommentPost a Comment |
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