Competition

by Roger Entner

All the while when we were trapped in the Title II News Blizzard that made any other topic seem small and irrelevant, the FCC has been conducting an auction of wireless spectrum. This wasn’t supposed to be the big auction – that honor was reserved for the incentive auction, in which broadcasters would sell spectrum they hadn’t deployed since the digital TV transition consolidated things. This was just an auction for “AWS-3” spectrum, Advanced Wireless Service frequencies in a high band that wasn’t expected to pique much carrier interest. The FCC had set a reserve price of $10.6 billion.

The auction has netted more than $43 billion and counting. Or, as the House Energy and Commerce leadership put it, “BOOM!”

The success of the AWS-3 auction has amazed the press and pundits alike. In fact, FCC Chairman Tom Wheeler has observed that “The AWS-3 auction is at these incredible levels … despite the fact that I’ve been talking about Title II all along.” While I don’t want to debate the FCC Chairman, it would seem a stretch to claim that the huge dollars being bid for AWS-3 spectrum are because the carriers embrace a particular regulatory framework. To the contrary, it appears the cold, hard reality of needing a key input for the business is driving the eye-popping bids. The auction seems to be exceeding everyone’s expectations in spite of the threats of extending Title II to wireless data (Title II currently applies to wireless voice, not data as some have alleged). The holiday season is a time of hope and clearly, the companies bidding in this AWS-3 auction are hoping that government regulation of wireless won’t render their investment null and void.

From a business perspective, the top reasons AWS-3 is blowing away its progeny are:

  • The AWS-3 band is used everywhere on earth. It’s the only band out of more than 50 that can make that claim. If you’re a carrier with customers that travel the world, and you want your customers to enjoy 4G LTE, this is the band to have. Without AWS-3 spectrum, carriers have to resort to guesswork to determine which three or four bands will be sufficient for their customers to have global coverage.
  • According to Mike Rollins at Citi Research, the 10×10 MHz J-block is trading at a 15% valuation premium compared to the average of the 5×5 MHz blocks. The valuation validates the engineers, industry analysts like me and international auction designers who have been saying that wider channelization and mid to high band spectrum combines to create the new beachfront spectrum. One can only hope that Auction 97 puts to rest the erroneous notion that lower band spectrum is somehow more valuable than higher band spectrum. The Mhz/pop values in Auction 97 are significantly higher than that in Auction 66, even adjusted for inflation. In a world where we have 99% 4G LTE coverage, the propagation advantages of lower band spectrum are being nullified by the need for smaller cells to provide more capacity. In an urban area, a 700 MHz network looks no different than 2500 MHz network – and a lot more people live in urban areas than in rural areas.
  • Operators are scared by the delay in the ultra-complicated, one-shot-only incentive auction. That delay is a decidedly mixed blessing, because when reading the tea leaves, it quickly becomes apparent that at this point in the process, there aren’t enough broadcasters willing to part with their licenses to make this auction a success. The NAB’s lawsuit delays the auction and gives FCC the opportunity to make the auction more attractive and provides more time to convince more broadcasters that it is actually in their best interest to put up their licenses for auction.
  • Historically low interest rates make the assumption of debt a viable means to pay for spectrum acquisitions. Just like home buyers can afford to spend more money on their new home due to lower mortgage rates, operators can afford to spend more on spectrum when they can borrow money to do so and do it cheaply.
  • Spectrum is a finite, essential resource that drives the business. This means that as long as there is an ongoing and increasing in demand for it, spectrum increases in value over time.
  • Auction 97 is here, it’s happening, and the frequencies are for real. The prospect of more spectrum in the foreseeable future is rather slim. The promised 500 MHz of spectrum for wireless is increasingly looking like a mirage in the desert. Contrary to what some people think, the bidding in Auction 97 seems to reflect the evaporated trust in the ability of the government to provide access to more spectrum in the future. They’re reflective of a flight into quality spectrum assets today, not a sign of trust in what the future will bring.

What is most exciting about the auction is yet to come – the build-out of the spectrum and expansion of existing networks. That will be the truly best outcome for American consumers and validation of the fact that spectrum auctions are the most efficient tool for allocating a scarce resource.

by Roger Entner

After several failed attempts to come up with a net neutrality proposal that reasonably addresses legal, industry and consumer advocate concerns around the optimal legal foundation for net neutrality, the FCC made public last week it wanted to pursue a new “hyrbrid” approach that would apply both Title II and Section 706 regulations on Internet providers. While the policy elite inside the Beltway pondered what a hybrid approach would look like and how it would operate, the White House ushered in yet another layer of political complexity and confusion to the debate. On Monday morning, in an unprecedented move, President Obama announced in a video address that he had asked the FCC to classify all internet services – mobile and fixed – as Title II under the 1934 Communications Act. Never before has a President publically directed the FCC, an independent agency, to do something this specific on a policy issue within the FCC’s oversight. While the President did note that the FCC is an independent agency and that ultimately the decision is theirs alone, his message couldn’t be any clearer. Anyone who is or ever has been in a relationship knows what the “the decision is ultimately yours alone” line really means.

The market response was swift, and predictable. The video address had the effect of resolving the uncertainty about whether the FCC was really, truly, seriously going to do Title II. Within hours of the announcement, the NYSE saw a drop of 4.5% to 7.6% in value among the largest ISPs by the close of the bell Monday. Some investment analysts such as Wells Fargo’s Marci Ryvicker estimate that the downside risk for cable stocks can be as much as 23% of their current value. And why did investors react so negatively to the President’s message? Simple. A Title II world minimizes future growth opportunities for ISPs. Equally scary to investors, a Title II world at this point in time spells regulatory chaos and legal wrangling for years to come, a scenario antithetical to low cost of capital and high investment.

President Obama’s foray into broadband policy could represent a major turning point in telecommunications and internet policy both for the United States and the world as a whole, if the FCC adheres to what the President requested. In a world where prices decline, services improve, and choices increase, this country’s most senior leader has decided that a heavy-handed regulatory framework developed 80 years ago is the right vehicle to grow jobs, attract investment and catalyze innovation in the digital economy. Unfortunately, the most likely scenario is that regulations designed for a monopoly world will bring us back to the regulated monopoly times where every incentive to exceed the government requirements was eliminated.

Governments in other countries, both democratic and less than democratic, will see this decision of the US government as an endorsement of their own efforts to more closely censure and close down the Internet within their borders.

By pursuing Title II, the government is hobbling a part of the most vibrant segment of the economy. How interfering into such an interdependent system with a bludgeon like Title II can lead to an improvement for the overall system is difficult to see. Title II was introduced into a steady-state, innovation-free system that did not change for the next 50 years as there was no incentive to change. The “strongest possible rules” that President Obama asks for is the same type of corset that will probably suffocate innovation and investment in mobile and fixed internet. For a thriving internet, both technologies and business methods of all players need to evolve, small and large alike. Innovation dies when it has to ask for regulatory approval. Adding insult to injury, Title II does not cure the alleged problem, paid prioritization. Title II does not prevent paid prioritization as long as the prioritization is available to everyone who purchases the exact same service.

The market has made it clear that it does not have an appetite for draconian government interventions here. Whether the FCC will appreciate the signals the market is sending is an open question, as is whether the FCC cares what the market thinks. For the record, the agency should care. Pushing out high speed broadband to more than 95% of the US population is a key objective of this Administration. A Title II world could very likely preclude that from ever happening if the market decides the regulatory risk is too high.

by Roger Entner

A raging debate over the future of the U.S. wireless industry has taken center stage in Washington, and attracted the attention of the Europeans whose own wireless industry is imploding.  The outcome of the debate will directly impact the US economy, shape US broadband technology and consumer trends for decades and could signal the US government wants to play a much larger role in the marketplace.

But first, a few words about the debate.  At this week’s Senate Commerce hearing, we heard evidence explaining why the most spectrum constrained companies – the companies with more demand on their network than they have capacity to support –need more spectrum and how that would benefit consumers and the US economy.  According to CTIA’s Steve Largent, citing Recon Analytics research, the U.S. wireless industry is responsible for 3.8 million jobs, directly and indirectly, accounting for 2.6% of all U.S. employment. The U.S. wireless industry created $195 billion economic activity around the world and would be the 46th largest economy if it would be a country. A total of $146 billion was retained in the United States.   The implication being if you feed more spectrum into the pipeline, these growth stats will grow even larger.  Representing the interests of smaller carriers, Steve Berry of CCA took a different view of things, and requested government help in improving the competitive positions of his member companies.  One of the big asks was for the FCC to ensure that future spectrum is steered away from the most spectrum constrained companies and into the hands of less spectrum constrained companies. In an interesting interjection Senator Warner countered the argument that barring Verizon and AT&T would enhance competition by stating that the only effect of such bidder restriction would be that T-Mobile and Sprint instead would beat the smaller competitors and nothing would have changed – convenient for T-Mobile and Sprint, but nobody else. Meanwhile, the cable companies made the case for making more unlicensed spectrum available and the equipment manufacturer Cisco reconfirmed that our wireless broadband networks are awash in mobile video and are about to collapse under the weight.

The calmly delivered testimony belied the intense policy debate raging through the halls of the FCC and Congress.  The FCC and DOJ’s antitrust division have made it clear they would like to manage market share in the industry by restricting spectrum ownership.  The two companies the government is eager to help manage are naturally a bit less than enthusiastic about the idea.  Competitors of the two companies are of course thrilled with the concept.  Three questions seem to be lost in the fury.   What is the problem the FCC and DOJ want to solve?  Will the proposed solution actually resolve the stated problem?  How will consumers be impacted?

The FCC and DOJ are fearful that the two largest companies today may continue to be the largest in the future and prices will go up.  Staff at both agencies indicate a concern with an industry where market share is not “more equally” distributed among the multiple providers.  The DOJ’s suggested remedy is to limit the amount of spectrum the two largest providers can use to support their networks.  As the New York Times put it, the DOJ is suggesting that the FCC limit competition in order to expand competition.

The theory seems to rest on the notion that customers of spectrum constrained companies will experience degraded service quality and higher prices over time, prompting the customers to defect to other providers, presumably the ones with more spectrum and fewer customers.  Or perhaps the theory is that steering spectrum away from some of the companies that need it, and into the hands of others that may not need it as urgently, will slow the growth of the larger companies and enable the smaller competitors to essentially catch up.  Either way, having a policy that effectively curtails the growth of some companies could certainly shift market share in the industry, but would it produce prices lower than they are trending today?  Would it produce more investment in faster build-out of 4G?  Would it catalyze the mobile app economy?  Would it give the American consumer a better value package than they are currently receiving?

Basic economies of scale and a quick review of recent history tell us that prices are lower when you have an abundance of a resource.  Prices are higher when resources are in short supply.  Apply that basic concept to spectrum and the US wireless industry and it holds true.  Prices for services have declined as more spectrum has come into the marketplace.  Just since 2005, prices for voice dropped by roughly 10 percent, prices for data by 90 percent, and for text messages by 85 percent.  Billions in investment has poured into the networks in the last 5 years alone – more than $140 billion. In this time of industry consolidation, text book economics predicts a decline in investment, but instead both in absolute numbers and in capital investment per subscribers, we are at or near historic highs. In 2012, wireless carriers invested $1,106 in capital investment per subscribers, a figure that was only higher between 1985 and 1993, when subscriber numbers and wireless networks were in their infancy.  And the FCC sped things along by holding spectrum auctions and enabling secondary market transactions, infusing the industry with more spectrum.

Americans have bigger, faster and more capable wireless broadband networks than their European counterparts.  Already today, Verizon Wireless is close to covering 90% of Americans with LTE, AT&T has about 65% and both AT&T and T-Mobile expects to have 90% LTE by the end of 2013. Sprint is not far behind and even regional carriers such as US Cellular have launched extensive networks. What are the European carriers doing? Most are launching their first networks in 2014 or 2015 as there are held back by regulatory dictates. It comes as no surprise then that more than half of all LTE subscribers are in the United States. More than a third of American households have found their wireless connection so useful, reliable and affordable that they have completely cut the cord.  According to an ITIF report[i] , US wireless broadband networks “speeds are higher than generally thought”, being “ranked 8th tied with Denmark” for average speed but “less well provisioned with spectrum” than those in other countries, reaffirming again the spectrum shortage the U.S. is already experiencing.

Regulators and policymakers are right to keep a close and careful eye on the sector.  But managing market share by restricting spectrum ownership seems a risky experiment, and one that should be catching the attention of industries beyond wireless.  If the US government finds it appropriate to cap a company’s growth at specific market shares when there are no indications of anticompetitive behavior or rising consumer prices, what is to stop the government from looking at all sectors of the US economy and jumping in with vigor to manipulate specific company’s growth prospects?

American regulators and critics of the US mobile industry have long judged the US harshly as compared to its European counterparts.  But the current reality of the European mobile marketplace provides a stark reminder that theoretical niceties of competition policy have precious little to do with getting networks built, increasing capacity and driving prices down. Billions and billions of investment in the networks are what build the networks, drive consumption and reduce prices.  Preventing billions of investment from being made would seem the exact wrong policy to pursue in the U.S.

While Washington wrestles with theories of competition and ideal market structure, companies like Softbank and Dish, and the recently refreshed T-Mobile, are actively jockeying for position to take on the largest two providers just as companies are ramping up their build of 4G.   The next few years hold tremendous promise for consumers, the industry, and the US economy.  Let’s hope Washington doesn’t limit competition in the name of promoting it before this happens.


[i] ITIF, The Whole Picture: Where America’s Broadband Networks Really Stand, February 2013.

by Roger Entner

Dish Network just threw its hat into another merger ring with its $25.5 billion bid to acquire Sprint. This follows Dish’s bid to purchase Clearwire, which Sprint was already in the process of purchasing. Dish’s announcement followed Friday’s news that Verizon Wireless is offering to purchase some spectrum from Clearwire, all while Crest Financial is adamantly opposing Sprint’s proposed  purchase of Clearwire. It looks like Sprint can’t catch a break here. Lets look at how the different constituents – Sprint shareholders, Sprint as the company, Sprint’s customers, Sprint’s competitiors, and the regulator – are affected:

Sprint shareholders are going to get more money. The Softbank offer values Sprint at slightly over $20 billion, while Dish’s offer values Sprint at over $25 billion. It is quite possible that Softbank will sweeten its offer to top that of Dish Network.

Sprint as a company is going to experience a longer phase of uncertainty. The company’s direction, while not in in limbo, will remain on the same course as it is now so as to preserve the opportunity to change direction for the new owners. Unfortunately for Sprint the current course includes postpaid customer losses and a course adjustment is very much needed. This is especially the case since T-Mobile has just announced a brand new positioning and Sprint as the other nationwide value leader brand needs to respond to it. The increased ability to bundle products with Dish could help make Sprint an integrated media company, an idea former Sprint CEO Gary Forsee always championed – unfortunately before its time. Maybe the time is right for Charlie Ergen? What speaks for Softbank is its expertise in running wireless networks and its deep pockets. Bringing Sprint’s network up to par after years of underinvestment will require significant financial resources which Softbank has in abundance.

Sprint customers might be the big winners when it comes to the ways Dish could bundle its offers with that of Sprint. How much can be bundled with linear television is yet to be seen after the MediaFlo flop. On-demand video on the other side is the major source of data consumption on wireless networks, but mostly short-form content rather than the movies that Dish has available through Blockbuster. With the huge infusion of additional spectral capacity, the post-merger company could support very high quality, very fast mobile video and other mobile data applications.  Dish’s traditional cost-cutting measures and low prices would make Sprint a solid value player. Dish is also known for its good customer service so customers would continue to benefit there. At the same time, they would forgo new impulses from Japan where customer service and network performance is legendary.

Sprint’s competitors, especially T-Mobile, will see this as a welcome development. As T-Mobile is going through a merger itself and is repositioning it as the “uncarrier” it benefits the most when its direct competitor for the value segment among the nationwide carriers has to battle warring suitors. Verizon and AT&T are probably standing by watching the spectacle in amazement. If Dish were to acquire Sprint, the combined company would hold more than double the amount of spectrum held by AT&T and Verizon, catapulting Sprint ahead of its competitors in terms of capacity to support intensive data use by subscribers.

Regulators must be feeling a tad embarrassed to be overtaken by events so quickly, yet again. Just last week the Department of Justice argued to the FCC that the agency limit AT&T and Verizon access to more spectrum in the upcoming incentive auctions and instead get the spectrum into the hands of the “smaller” national providers on the theory that the “smaller” providers needed the infusion of spectrum to compete.  Not even a week later, the proposed DISH/Sprint/Clearwire merger would create an operator that has 2.5-times as much spectrum as Verizon or AT&T. No fictional play could have made the Department of Justice’s position more untenable, more quickly. As the regulators desperately try to engineer the birth of another nationwide carrier, they forget how poorly such machinations have worked in the recent past. Terms like NextWave and LightSquared, seem to have evaporated from recent memory inside the Beltway. It will be interesting to see how this proposed transaction will be evaluated by the regulators, assuming the Sprint shareholders allow it to proceed. If nothing else, it’s another reminder that the wireless sector has a way of working issues out a lot faster than Washington.