Regulation

Posted on by Roger Entner

President Trump’s re-election campaign recently spun the wireless industry into turmoil again. Kayleigh McEnany, national press secretary for President Trump’s 2020 reelection campaign, told Politico that “A 5G wholesale market would drive down costs and provide access to millions of Americans who are currently underserved. This is in line with President Trump’s agenda to benefit all Americans, regardless of geography.”

This new message comes after months of private comments by Trump 2020 campaign manager Brad Parscale and adviser Newt Gingrich that promoted a different plan for 5G, one that would have the federal government seize 5G spectrum from the Pentagon and give it to a private company to manage and lease to other, private companies for use. Enter Rivada, a company headed by Declan Ganley and backed by political heavyweight Karl Rove and venture capitalist Peter Thiel.

As the rumors about Rivada being “given” commandeered spectrum to manage a 5G network swirled, shares in Intelsat took a dive from $23.55 on Friday, March 1, 2019 to $17.76 on Tuesday, March 5, a 25% drop in just two trading days, shaving off $700 million in market cap. This reflects how concerned Wall Street is about the specter of a government-sponsored national 5G wholesale network.

Robert Spalding, a retired brigadier general and author of the now-infamous National Security Council memo suggesting the government create a government-controlled national 5G network, has not backed off his idea despite the swift and negative reactions the idea has spawned. Spalding reiterated in an interview discussing the potential Rivada 5G wholesale network that he still saw merits in a nationwide wholesale network. This was followed by an opinion piece by Kevin Werbach in The New York Times who advocated for a national wholesale network, arguing that it would magically reduce consumers’ mobile bills.

Oddly, Werbach advocates breaking the “wireless oligopoly” by replacing it with a monopoly. Mr Werbach concedes that there have been notable failures of government-controlled communications networks like Australia’s open access fiber network, but suggests that in the U.S. it will be a success with “careful oversight and a long-term commitment by the government.” This is a dog whistle for economic regulation at best and nationalization at worst.

This entire debate is happening against the backdrop of robust and methodical 5G build-out in the U.S. American mobile operators have already started building 5G networks, having engaged in the standards-setting process to make it a reality for years. Some operators are already up and running and in dozens of cities we will have mmWave 5G networks in only a few months. By the end of the year, wireless operators will use some of their existing wireless spectrum for 5G as well, which means we’ll have nationwide 5G networks by the end of the year, with larger and larger ultra-high speed areas in even more places. How can a state-sponsored 5G wholesale provider catch up to this reality when they are at least two years behind in building out the infrastructure, and their prospective customers all have their own networks?

When I take a step back and look at the entire hoopla, it appears to me that it is a solution that is looking for a problem. Rivada is looking for a business and its investors are looking for a payoff. In 2016, Rivada applied to become the wholesale broadband provider for Mexico’s Red Compartida, but was disqualified from bidding after failing to post a bid bond. In 2017, Rivada tried to become the nationwide FirstNet provider but lost out to a competing bid from an existing carrier. In both cases, Rivada sued the respective governments without success.

Each state in the United States had the choice to opt in or out of using FirstNet or pursue their own first responder network. Initially, New Hampshire chose Rivada to run its first responder network, but with hours left to make the decision, New Hampshire changed its mind and chose FirstNet. The push for a nationwide 5G wholesale network is Rivada’s third (or fourth) try to convince a government to give it spectrum for free. You can’t blame Rivada for a lack of trying, but just because Rivada is trying to make a buck does not mean its idea makes business sense, or is something the U.S. government should adopt at the expense of depriving existing 5G efforts of more spectrum.

Instead, like it has in the past, the U.S. should invest in its winning strategy of clearing more spectrum for commercial deployment, expedite the siting of 5G infrastructure, and allocate spectrum based on sound analysis of which companies are best positioned to use the critical input as efficiently and quickly as possible.

Posted on by Roger Entner

More spectrum! is the rallying cry among participants in the global race to be the first country to deploy 5G networks. Generally speaking, deploying more spectrum into a network means faster speeds and more capacity to handle consumer demands. But not all spectrum is created equal.

Low frequency spectrum, below 1 GHz, typically travels further and more easily penetrates walls and buildings better than higher frequency spectrum, above 1 GHz. Mid-band frequencies, between 1 GHz and 2.1 GHz, radio signals travel about two thirds as far frequencies below 1 GHz and have a harder time penetrating structures. While people can use their wireless device in the home, reception in inside rooms or the basement could be more difficult. High frequency spectrum – between 2.1 and 6 GHz – has a hard time penetrating walls. And spectrum above 6 GHz, called mmWave (millimeter Wave) spectrum, does not travel far and has an even harder time penetrating structures.

Licenses to use spectrum are typically awarded by the Federal Communications Commission based on defined geographic areas and for specific amounts of spectrum. Engineers typically refer to the specific spectrum licenses as “channels” or “carriers”.

Regulators can opt to allocate spectrum for large or small geographic areas, e.g., nationwide versus an economic area, and for bigger or more narrow channels, e.g., a 5 MHz channel versus a 20 MHz channel. Licenses covering smaller geographic areas and for smaller amounts of spectrum are attractive to smaller providers who are willing to sacrifice peak data speeds for coverage. The question is what do regulators want? More bidders in a spectrum auction that provide slower speeds or fewer bidders that can then offer faster speeds?

Spectrum in the United States is highly fragmented and therefore does not yield the technically optimal speeds that could be achieved across the various spectrum bands described above. The FCC has licensed 22 5×5, three 6×6, four 10×10, one 11×11, three 15×15 MHz and one 20×20 MHz licenses. The optimal channel size for 4G, a technology we started to implement in 2011 is 20×20 MHz. Prior FCCs have unfortunately allocated spectrum in ways that make it impossible to provide the fastest possible speeds in the US. There is one exception to this trend – the FCC’s decision to allocate MSS satellite spectrum in a 20×20 MHz channel.

Sprint is probably best positioned to leverage high band spectrum for maximum speed due to its high band spectrum holdings. The 2.5 GHz band has 194 MHz that is dynamically shared for upload and download and is owned by one operator, Sprint. Where it is available Sprint utilizes three 20 MHz channels combined for ultra-fast downloads, the big caveat here is “where it is available.” Sprint is still lagging behind in the availability of high speed 4G internet and the limited range of 2.5 GHz is hampering its availability in rural America. Hopefully the FCC will allocate the mmWave spectrum (24 GHz and higher at this time even though technically mmWave starts at 30 GHz), where a multiple amount of spectrum of what has been licensed today for wireless is available, in 100 MHz or larger channels. Remember, the wider the license/channel, the faster the speed.

European regulators are increasingly allocating their spectrum in larger channels and in some countries the auction process aggregates the licenses won into larger channels to maximize the benefit of having larger channels. One example is in Switzerland which uses a process called Combinatorial Clock Auction (CCA) to achieve maximum channel sizes. Due to that Switzerland is regularly among the five fastest countries for mobile internet. The FCC should consider CCA in its upcoming high band and mmWv band auctions to maximize the opportunities for carriers to obtain wide channels. This will also help the agency prevent individual bidders from buying discrete, small channels solely to prevent competitors from creating wide, contiguous channels. DISH Network and its bidding partners Northstar Wireless and SNR Wireless did exactly this when it strategically purchased licenses to create fragmented channels in 2015 during auction 97. This increases the value of the blocking licenses if DISH and its bidding partners want to sell the license again.

New smartphones have the capabilities to use several channels at the same time, creating faster downloads by essentially gluing different pieces of spectrum together. In late 2016, the first smartphones with 3 Carrier Aggregation, or the ability to use three license/carrier simultaneously came to market. For example, the iPhone 7 and the Samsung Galaxy S7/S8 could use 3 Carrier Aggregation, the iPhone 8 could use 4 Carrier Aggregation. The new Samsung Galaxy S9 can use up to 7 Carrier Aggregation.

The disadvantage of carrier aggregation is that it uses more of the device’s battery power by having multiple radios (transmitters/receivers) active at the same time and because the phone has to periodically check if the different spectrum bands are actually available, which in turn reduces battery life. While having the ability to aggregate more channels is welcome, the less often the band-aid technology is needed the better. The better method is to create larger channels in the first place and if larger channels are aggregated the resulting speed is even higher with less impact on the battery life of the phone.

In a nutshell, the FCC needs to put a framework together that facilitates the creation of the largest possible channels to create the fastest possible mobile internet that incidentally will also have the least impact of the battery life of smartphones. Having to aggregate several small channels puts the US at a significant comparative disadvantage vis-à-vis other countries allocating spectrum for much wider channels. The FCC should either allocate spectrum in the high and mmWave bands in larger blocks across larger geographic areas, or employ a Combinatorial Clock Auction system that gives both the benefits of having potentially more license winners with the advantage of having the largest possible channel sizes for superior speed. Only then will the US have a chance of keeping pace with other countries and maybe even having the world’s fastest mobile internet.

Posted on by Roger Entner

Posted on by Roger Entner

On November 27, 2017 Recon Analytics convened a panel of esteemed legal, policy and regulatory experts to discuss the Federal Communications Commission’s (FCC) Restoring Internet Freedom Order. The discussion focused on the investment and innovation implications of the FCC treating broadband as a Title I information service; how proponents of Title II may react and the arguments they may raise on appeal; and how all of this will work to either attract or repel additional investment in the sector for years to come.

Posted on by Roger Entner

The IAB just published its 2016 advertising revenue figures. It was a banner year with record setting revenues of $72.5 billion, 22% higher than last year. This makes digital advertising the number one advertising medium in the United States as TV advertising according to eMarketer came in at $71.3 billion. Seventy-five years after the first TV commercial and 25 years after television became the largest advertising medium, a new king of advertising has been crowned. We cannot underestimate the significance of this event. Advertisers demanding efficiency and effectiveness measurements have voted with their wallets to make digital advertising the biggest spend category. But even within digital advertising, we are seeing major shifts away from “traditional” desktop and fixed digital advertising towards mobile advertising. Growing from basically nothing ten years ago, mobile advertising is now a $36.6 billion segment and represents 51% of digital advertising

Ad Format in millions
2015 Revenue
2015 Share
2016 Revenue
2016 Share
Growth
Growth percentage
Search
$20,481
34.4%
$17,756
24.5%
($2,725)
(13.3%)
Classified & Directory
$2,757
4.6%
$2,345
3.2%
($412)
(14.9%)
Lead Generation
$1,756
2.9%
$1,989
2.7%
$233
13.2%
Mobile
$20,677
34.7%
$36,641
50.5%
$15,964
77.2%
Display
$13,881
23.3%
$13,790
$19%
($91)
(0.6%)
Total
$59,552
 
$72,521
 
$12,969
21.7%

Source: IAB 2017
What is hidden beneath the numbers is that mobile advertising is taking more than the entire growth of digital advertising. Advertising is clearly going where Americans are spending more and more of their time and where most of the data traffic is being consumed. Advertising is also moving into the segments dominated by Google and Facebook, which are dominating mobile advertising to a much greater extent than the fixed internet.
As we can see below, the combined share of Google and Facebook increased from 2015 to 2016 from 67.4% to 71.2% as the mobile strategy of both companies paid off. Google and Facebook, the two largest players, represented a combined 89% of the entire growth of the digital advertising market. The Herfindahl-Hirschman Index (HHI), a commonly used metric to measure market concentration, is well north of 3,000. Markets with an HHI of 2,500 or higher indicate high concentration. If the current trend continues, Facebook will have a higher market share by the end of 2017 for digital advertising than all remaining competitors, excluding Google, combined.

Ad Revenues in millions
2015
2015 Share
2016
2016 Share
Growth
Share of Growth
Google
$31,300
52.5%
$37,600
51.8%
$6,300
49%
Facebook
$8,900
14.9%
$14,100
19.4%
$5,100
40%
Everyone Else
$19,400
32.5%
$20,800
28.6%
$1,400
11%
 
$59,600
 
$72,500
 
$12,900
 

Source: Digital Content Next
Just as a comparison, another other big internet company, Netflix, had $5.1 billion is US sales in 2016 – the same amount by which Facebook grew in just one year – from 2015 to 2016. This demonstrates how significant advertising-driven digital businesses are in the TMT sector. Google and Facebook capture 89% of all growth in digital advertising, which impressively counters the Google narrative that “competition is only a click away.” While this might be true in theory; in reality when a company grows as fast as all other competitors combined, the narrative sounds hollow and self-serving. This is especially true when the only competitor that is half way keeping pace with Google – Facebook – does not rely on search engine recommendations for its traffic.
Even more concerning is the loss of diversity of sources of advertising revenues. In 2007, Google generated just over 60% of its advertising revenue from its own sites, showing a reasonably healthy advertising ecosystem when one considers that most of its advertising revenues came mostly from search. Ten years later, Google derives more than 80% of its advertising revenues from its own websites and services.

Global Revenue in Millions
2014
2015
2016
Google Properties
$45,085
$52,357
$63,785
Google Network Members
$14,539
$15,033
$15,598
Total
$59,624
$67,390
$79,383
Google Properties Percentage
75.6%
77.7%
80.4%

Source: Alphabet
The increasing percentage of Google’s revenue being derived by its own properties combined with very lackluster growth for non-Google properties raises questions of potential search engine bias or a precipitous decline in the ability of Google Network members to monetize their sites. Either way, it is not a healthy trend
As they have become increasingly successful and dominant, Google and Facebook have been able to increase their revenue per user. Google has increased ARPU by about a third, whereas Facebook has been extremely successful by more than doubling ARPU in the US and Canada within 24 months.

US/Canada ARPU
2014
2015
2016
Google
$9.59
$10.68
$12.76
Facebook
$9.00
$13.70
$19.28

Source: Facebook, Alphabet
Especially Facebook, which now considers all of its customers to be wireless users, has increased its ARPU into the range of a traditional prepaid wireless subscriber. We should consider these significant monetization advances by Facebook and Google combined with their wireless overlap. Verizon is planning to emulate this with its new Oath business unit – the combined AOL and Yahoo properties. Verizon will have the same reach as Google or Facebook with a programmatic advertising engine. The fundamentals are in place for Verizon to become a serious competitor to Google and Facebook. It all comes down to execution now.

Posted on by Roger Entner

The FCC is seeking to more closely regulate a key tactic in mobile carrier marketing—their performance and speed claims.

The commission already does this for fixed broadband and has proposed to use crowd data to set the upper limit for carrier marketing claims.

But here’s the problem: There are significant differences between crowd and scientific testing.

Crowd testing is easier to conduct but tough to draw out any useful conclusions, while scientific testing takes significant resources to conduct but provides easy-to-understand and useful results based on a methodical process that is accurate and enables apples-to-apples comparisons. As a result, the FCC, in taking a shortcut with crowd testing, will not present the full or fair picture of the performance and speed of mobile providers.

Although the differences between crowd and scientific testing could just be chalked up merely to competition, with both sides advocating their approach, a major government agency has decided to throw its lot in with a crowd tester. Such an approach will provide a limited view of the mobile consumer experience and won’t provide an accurate reading of the service providers’ strengths and weaknesses.

In this report, we provide an overview of both scientific and crowd testing and provide a number of observations on the right policy direction.

Download the Report Now

 

 

Posted on by Roger Entner

Earlier this week the International Telecommunication Union (ITU) reported the results of its annual global survey. Mobile broadband connections (47.2% of the global population) have now overtaken households with internet access (46.2%) not to mention fixed broadband connections (10.2%) In terms of the ITU’s Internet Development Index, the US remains among the 15 most developed countries. While some alarmist consider that a poor showing, they do not take into account the differences in size, both population and geography, as countries such as Hong Kong (31 square miles and is part of China) as well as Iceland (200,000 inhabitants) and Luxemburg (543,000 and smaller than Rhode Island) are ahead of the US. The US improved in the rankings again this year. Can the US do better with an investment-friendly policy frame work? Yes, it can.

Later in the week, the Center of Disease Control (CDC) just released an update to their recurring wireless substitution report documenting the shift away from landlines to mobiles. Now you may ask why the CDC does a wireless study: The answer is easy. As part of its National Health Survey, it added a question if respondents have wireless phones, landline phones or both and combined with all the other demographic information it collects, the survey has become the definitive source for  tracking cord-cutting trends.

For the first six months of 2015, 47.4% of the respondents said they had a wireless phone but no landline anymore, i.e.; people we consider cord cutters. For families with children, this number has risen to 55.3%. Initially, cord cutting was accelerated due to the 2005 introduction of a wireless option to the Lifeline program, but in recent years the general population has caught up. While in 2012, only 30.7% of the non-poor Americans had cut the cord, this has increased to 45.7% in 2015, whereas for poor Americans the cord cutters only increased from 51.8% to 59.3%. Employed Americans have increased their cord cutting from 38.4% to 52.7%, whereas unemployed American cord cutting is a lot lower, increasing from 23.6% to 32.7% in the same time frame.

The biggest difference in the adoption of cord cutting depends on where Americans live and their age. Americans in the Northeast are substantially less likely to have cut the cord (31.6%) than Americans in other parts (47.1% to 51.9%.) This does not mean that Northeasterners are immune to cord cutting as the number of cord cutters increased by 50% in the last three years, but is more due to their historically slower start. Not surprisingly, Americans over 65 have the lowest adoption of cord cutting, but never the less almost doubled the cord cutting over the last three years from 10.5% to 19.3%. Never the less, this is still substantially less than the next lowest cord cutting adoption age segment of 45-65 with an increase of 25.8% to 40.8% over the last three years.

As wireless substitution becomes the norm, in-building wireless usage becomes critical as the mobile phone is increasingly becoming the only communications device Americans rely on. The onus lies on local planning boards to do their part to enable wireless network infrastructure to be built quickly. The FCC has introduced a 60-day and 150-day shot clock for collocated or small sites and new cell sites respectively. Local municipalities must now react more quickly on requests for permission to build new cell locations so that Americans can reliably use their mobile phones while at home, just as they do while en route, whether it’s to  check their sports scores on a Sunday afternoon, calling or texting their friends, or to call 911 in a case of emergency.

Posted on by Roger Entner

Five years after the FCC called for data on the state of the special access marketplace from just a portion of the providers offering special access, the agency appears poised to modify contracts and embark on a new round of rate regulation based on market data from 2010 to 2012. This would not be a concern if in fact the market for special access services had stagnated in 2012 with prices and providers remaining constant; however, that is not the case. Why should we care if the FCC premises a new set of pricing regulations on outdated information? Let me explain.

Special access refers to the dedicated data connections that physically connect a business, an office park, a government building, a cell site, or other man-made structure to the larger public switched telephone network and the Internet. The number and kinds of companies offering special success services has increased substantially in the last few years. When Sprint issued RFPs for backhaul related to its Network Vision program, more than 20 providers responded. The pricing was so competitive – so low – that even at the most hard-to-reach sites where competitive pressure should be the smallest, at least one potential bidder decided not to submit a bid because they were unable to provide the service profitably.

There is much debate about the reality of the market for special access and market data is hard to get, but not impossible. Zayo is the largest stand-alone backhaul and special access providers in the country (it’s one of T-Mobile’s backhaul providers), and provides very timely pricing trend data. In its Q4 2015 Pricing Trends document, which Zayo publishes with its earnings release, we can follow the prices Zayo is charging in the market place. Traditional DS1 revenues have declined from $1,147 per DS1 (also known as T1) to $783 per DS1. For DS3s (also known as T3) revenues have declined in the same time period from $4,081 to $3,269. Just to put this in context, a DS3 has 28-times the throughput of a DS1, for roughly four times the cost.

As part of the wireless industry’s drive to stay ahead of consumers’ appetite for high-capacity data services, building more backhaul has been essential. As Sprint has embarked on its Network Vision program, it has also revamped its backhaul provisioning. Gone are the days when Sprint was predominantly reliant on its direct competitors to provide backhaul; it now has a stable of thirty to forty alternative access providers, in addition to its own wireless backhaul in the 2.5 GHz range. T-Mobile has also been no slouch; almost all of its backhaul is now Ethernet fiber, which is part of the reason why its download speeds are so fast. The cost savings for both companies are substantial. In its Q4 2014 financial results, T-Mobile USA’s quarter over quarter cost of service was down 7.1% partially due to renegotiated backhaul contracts.

In addition to having a multiplicity of providers from which to obtain their special access lines, wireless companies continue to experiment with other solutions that can improve network performance and reduce cost. For example, companies are experimenting with self-backhaul where access and backhaul are part of the same system. This solution is intriguing but not currently viable in today’s spectrum environment due to the amount of spectrum needed to make it a reality. In the spectrum-constrained environment that characterizes the mobile market in the U.S., T-Mobile, AT&T and Verizon Wireless are all in the same boat. Because wireless self-backhaul could provide more options for carriers, this should be an additional reason for the government to redouble its spectrum clearing goals and aim for at least one gigahertz of spectrum for the wireless industry below 6 GHz.

It’s important to note that DS1 and DS3 lines are legacy products that are at the end of their technological life. As the industry has moved on to Ethernet connections, the number of DS3s sold by Zayo has declined from 3,569 in September 2013 to 2,772 in June 2015, a 23% drop in less than two years. For DS1s, that decline has been even more pronounced – from 3,569 to 2,772, a 38% decline from September 2013 to June 2015. It is perfectly understandable that the lack of new demand for DS1s and DS3s makes some providers hesitant about issuing new long-term contracts, as it would obligate them for many years to divert time and money to support a dying market. If we take Zayo’s data and project out the current decline rate then they will have stopped selling DS1s in three and a half years and DS3s in less than seven years. But these projections are deceiving, and likely too conservative, as declines are accelerating as the DS1/DS3 technology becomes increasingly obsolete.

Zayo’s data shows a massive shift to Ethernet connections, which are both faster and cheaper than DS1/DS3, and where the marketplace is essentially even as new entrants and incumbents are building capacity at the same time. Zayo’s data shows a steady increase in demand, as well as falling prices per unit. The way Zayo represents the data – grouped in 10 to 100 MB, 101 to 1000 MB, and above 1GB – shows that customers are buying larger and larger pipes for lower prices per unit, which is consistent with the commonly observed conditions in the marketplace. The market is so competitive that further industry consolidation among backhaul providers seems inevitable because so many competitors are barely, if at all, breaking even today.

Into this competitive dynamic steps the FCC which seems to want to set prices. But nobody, including the FCC, knows how low special access prices can continue to fall with means the agency runs the real risk of setting rates at an artificially high level. In international markets where regulators set termination rates, everyone charges the government-set rate regardless of the actual cost, especially when the cost is lower than the government mandated rate. In the United States, where operators can freely negotiate call termination rates, per minute prices are $0.0007. In countries where the regulator sets the rate, the rate is higher than in the U.S. and Canada , as a 2012 OECD report shows. In the lowest-cost government controlled market, France, the termination rate was almost 20 times higher than in the U.S., with $0.0139, going up to $0.0878 in markets like Estonia, where the government-set rate is 125 times the rate U.S. operators negotiated with each other. Canadian operators that can also set prices freely went even further than their U.S. peers and eliminated termination rates entirely.

 

If the FCC were to set a price level –even if it is meant to be a price ceiling – the market would take it as a benchmark for what it should charge for special access charges. The shake out would continue with the weaker competitors selling to the lower-cost providers, but at a lower competitive intensity level and higher prices than if the FCC would have not intervened. The winners would be the special access providers that are able to offer service above the cost of the most competitive players, but below the government-set rate. It’s a classic rent-seeking scenario where marginal players ask for government intervention to safeguard their survival and increase their profits at the expense of end customers. The losers would be the end customers: businesses that have to pay the government-mandated rate when competition would have driven down prices below what the FCC deemed appropriate.

The impact of FCC intervention would be analogous to rent control in the housing market, which Economics Nobel Prize winner Gunnar Myrdal called “the worst example of poor planning by governments lacking courage and vision.”

Posted on by Roger Entner

Another hot topic is the upcoming incentive auction. The amount of available spectrum per subscriber tells us how much capacity the carrier has to serve its customers and therefore what the theoretical upper limits of data speeds are. It also shows us how urgently the respective carrier needs more spectrum to serve its customers at par compared to their competitors.

The most spectrum constrained operators are Verizon Wireless with 1.02 Hertz per connection (Hz/c) and AT&T with 1.18 Hz/c. Verizon Wireless is definitely more constrained than 1.02 Hz/c as it only reports retail connections. Their per-connection stats do not reflect M2M or IoT connections that also use spectrum. T-Mobile, as it correctly boasts in its advertising, has more capacity per subscriber than Verizon and AT&T, with capacity per subscriber serving as a proxy for amount of spectrum the company has per subscriber. Specifically, T-Mobile has 34% more spectrum per subscriber than Verizon, and 16% more than AT&T. By comparison, Sprint has 2.6x to 3.6x times more than Verizon, AT&T or T-Mobile. Regional carrier US Cellular has 16% to 33% more spectrum per subscriber than AT&T and Verizon.

Exhibit 1: Q1 2015

Incentive Auction Exhibit 1

Source: The Companies and Recon Analytics analysis
Exhibit 1 helps us understand why Sprint and T-Mobile have decided not to participate in various auctions. Quite simply, neither company faced an immediate need for more capacity and could not make a business case for spending money to buy spectrum at the time various auctions were being held. Both companies’ share of spectrum ownership and market share are more closely aligned than that of their larger competitors. T-Mobile and Sprint famously sat out the 700 MHz auction for that reason and it was an eminently reasonable business decision; however, now comes both Sprint and T-Mobile asking the FCC to give them a guaranteed reduction in price for the spectrum the companies may be interested in buying in the upcoming incentive auctions. Despite Sprint’s comments on its fiscal first quarter 2015 investor call where it said it is still contemplating participating in the Incentive Auction, Sprint has little actual need for significantly more spectrum compared to its peers.Source: The Companies and Recon Analytics Analysis

Analyzing the competitive forces in a market often looks at market share as an important metric. By its nature, market share is a description of the competitive results of the past. In the past, AT&T and Verizon Wireless executed their business plans substantially better than Sprint and T-Mobile, resulting in more customers choosing them over the competition. Now, T-Mobile and Sprint want to use the results of the past to restrict their larger competitors today. As we see in Exhibit 2, AT&T and Verizon could not stop T-Mobile from growing faster than the entire market combined for 2014 and Q1 2015. Hardly the result of a duopoly having a strangle-hold on the market. When just looking at the carriers that grew customers, T-Mobile captured 70.2% of the growth in 2014, twice as much as AT&T and Verizon Wireless combined, and 99.7% of the growth in Q1 2015. For a duopoly that is a remarkably poor showing exhibiting none of the supposed power that would need to be restricted.

Exhibit 2: Q1 2015

Incentive Auction Exhibit 2

Source: The Companies and Recon Analytics analysis

T-Mobile and Sprint are trying to convince the FCC that it’s just not fair that other companies spent more money to buy and deploy spectrum and now have a more diverse spectrum portfolio. The two companies are also claiming that a guaranteed price reduction for them in the upcoming auction will somehow resolve the reality of AT&T and Verizon being larger providers with more customers. If one takes the advocacy at face value, one could believe both companies are struggling to stay alive and American consumers are suffering from soaring prices and deteriorating service absent FCC action.Source: The Companies and Recon Analytics Analysis

A key datapoint often used to convince regulators that the FCC should set aside spectrum for T-Mobile and Sprint in the upcoming incentive auctions is the amount of spectrum each major provider holds below 1 GHz. AT&T and Verizon, who bought most of their 1 GHz spectrum from other providers such as the successor of McCaw Wireless, US West and Alltel respectively, own roughly the same amount of spectrum as what one would expect considering their subscriber numbers. Sprint, largely through its acquisition of Nextel and the subsequent re-banding of the Nextel spectrum, owns slightly less than would be expected. T-Mobile, which chose not to participate in any low band spectrum auctions, now holds about 5% of the available low band spectrum through its acquisition of 700 Mhz A-band spectrum from Verizon. T-Mobile indicated that it would like to extend its 700 MHz spectrum holdings further. Interestingly, small rural telcos, which make up the Others category in Exhibit 3 below, control more low band spectrum than T-Mobile despite T-Mobile being 18-times larger.

Exhibit 3: Spectrum below 1 GHz

Incentive Auction Exhibit 3

Source: The Companies and Recon Analytics analysis

If the FCC is interested in having set-asides, perhaps a better idea than giving more spectrum to T-Mobile and Sprint at a discount, would be to make 20 MHz available for small rural operators. This would essentially triple the spectrum available to them and will allow them to be part of the same 600 MHz ecosphere as their larger brethren, while giving them approximately three to ten times more spectrum per subscriber than anyone else. When it comes to download speeds, US rural operators will be in a better position than anyone else to deliver the fastest possible speeds if the FCC were to set aside 20 MHz of spectrum.Source: The Companies and Recon Analytics Analysis

Whether the FCC should or should not grant T-Mobile’s and Sprint’s requests to be treated as special, protected entities just like small, rural operators is a matter of policy and politics but one should not be fooled into thinking that T-Mobile and Sprint are weak sisters who would not otherwise be able to compete. While Verizon, Sprint and AT&T are growing by selling more products and services to fewer customers, T-Mobile is growing by consistently adding new customers. T-Mobile has captured 99.7% of unique subscriber growth in the industry. Since it went public in May 2013, the stock price of T-Mobile USA has almost doubled, while its competitor’s share price has fallen. Sprint is not as successful as T-Mobile, but it is slowly working itself out of a disastrous network upgrade program that saw dead spots appear where there were none before. In a large number of markets, Sprint is now winning network accolades from third party measurement companies. Net Promoter Scores, a leading indicator, are improving, overall subscriber numbers and tablet sales to existing customers are increasing and phone customer losses are decreasing. Everything is pointing up as long as Sprint executes well.

There are various, competing priorities at play regarding the upcoming incentive auction. The stakes are particularly high because the auction was authorized by an Act of Congress without the option of a re-auction if it fails. Broadcasters want to be compensated, spectrum needs to be reallocated to use for wireless broadband, existing TV broadcaster operations need to be consolidated, and last but not least government revenues need to be maximized. The fewer the restrictions, the smaller the set-asides, the more revenue will be generated during the auction. This is a particularly important consideration for the incentive auction where the demands of the broadcasters will have to be met before the US Treasury will get its cut. The most recent government estimate of its revenue cut of the incentive auction is $10 billion to $40 billion. How the expected $80 billion auction total will be achievable from an industry that had 2014 operating income of just over $40 billion is difficult contemplate. The problems get compounded when roughly a third of the spectrum will be set aside for bidders claiming poverty and looking for a substantial discount but which already have vast amounts of spectrum in their portfolios. If the FCC decides to retain set-asides for the upcoming auction, it would be better served by making them available to small rural providers, not the large nationwide providers.

Posted on 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.

Posted on 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.