What’s Ahead for Network Operators?

When you look at the United States on a market-by-market basis it is clear that in most major markets there would still have been five or even six competitors fighting for customers.

AT&T has called off its merger with T-Mobile and paid T-Mobile $3billion in cash, plus spectrum in 128 markets, plus a roaming agreement with AT&T that would have provided T-Mobile with access to 50 million additional potential customers. The deal fell through because the FCC and the DOJ believe it would be anti-competitive, causing an increase in customer pricing and stifling innovation. As far as I can see, these determinations were not based on facts. They were based on the misconception that taking one of the four nationwide networks off the market would cause the problems mentioned above.

When you look at the United States on a market-by-market basis it is clear that in most major markets there would still have been five or even six competitors fighting for customers and both LightSquared and Dish Network have expressed a desire to enter the LTE market. Add to that the fact that Verizon has cut a deal with the major cable companies to not only purchase their spectrum but for these companies to become resellers on the Verizon network, and there are at least one if not two more competitors on the horizon.

Now mix in the fact that while the FCC has pledged to “find” an additional 500 MHz of spectrum that could be auctioned for wireless broadband services but the dysfunctional Congress did not include spectrum auctions in any of the end-of-year legislation, meaning that there will be another delay not only in making this new spectrum available but also in permitting the FCC to auction spectrum it has already identified. Even when this spectrum is finally released for auction it won’t be available for networks to build out for three to five years depending on how long it takes to “clear” (relocate) existing users of the spectrum identified.

An issue that has not been addressed is how many wireless network operators can thrive and survive in the United States. We are already near 100% saturation of the population and the growth of wireless is expected to move toward 300% penetration as we all opt for multiple devices and more devices are coming to us wirelessly enabled. The economics of entering a field that already has five or more competitors per market is tough. Building a network from scratch will cost $billions, the operational expenses (opex) associated with LTE, for example, are considerably higher than the opex for 2G and 3G systems because the backhaul from each site has to be high-capacity capable, meaning that it needs to be fiber or microwave and not the standard voice-grade telephone circuits used in the earlier systems.

This all comes back to how many competitors can survive in the market. The answer is unknown but if we look at China as an example, which is a much larger market than the United States, we see that what China did might be the correct way for us to move forward. A few years ago there were six competitors in China but today there are only three. The government decided (because it can there) that it would consolidate the six networks into three, giving each of the remaining three the ability to build out more cell sites since each site would have more customers, meaning that the networks could afford to build coverage in more areas of the nation. So far this plan has been working, and the price of wireless services in China continues to come down even with only three competitors in the market.

There is consolidation occurring in Europe as well. Some is due to the typical buy-outs or mergers of companies and some of it is companies coming together in joint ventures in order to be able to build a single network that two or more companies will share. Canada is doing the same thing.

If those making the rules (those in DC) better understood the dynamics of the growth in demand for wireless services and the competition that is already pushing the cost to customers down year over year, perhaps they would realize that market forces are more powerful than regulating competition. Clearwire is a perfect example of market forces at work. It has burned through a ton of money, and while its subscriber base is growing, it is not growing fast enough to stop the bleeding. Now Clearwire is being forced (by market circumstances, NOT regulations) to move to LTE in the hopes that such a move will help it gain more market share. Sprint is also moving to LTE, again, not because of regulations but because the market demands that it do so in order to keep its existing customers and gain additional customers.

Demand for broadband services is going through the roof and there will be no leveling off of this demand in the future. More smartphones are finding their way onto the wireless networks, more tablets, and now ultrabooks. People and companies trust the cloud to store their data and in some cases, applications, and the only way to access the cloud is via a broadband connection. Recent reports continue to show wireless broadband growth of triple digits, and the network operators are trying to figure out how to manage this growth.

Most network operators are engaged in a multifaceted plan moving forward. This involves the end of all-you-can-eat data plans and re-invokes usage-based pricing as a way to manage demand across the networks. It also includes building out more cell sites closer together (a two to three year task in many areas), off-loading broadband services to Wi-Fi, selling femtocells for use in homes and offices where the backhaul is provided and paid for by the customer, and trying to obtain more spectrum where it is needed.

Spectrum is the currency of the wireless network operators. Going back in history, most of the mergers and acquisitions were about spectrum—who had it and who needed it. Spectrum is a finite resource and while Congress and the FCC are trying to figure out the spectrum auction deals, the network operators need more spectrum. After blocking the AT&T/T-Mobile deal, today the Department of Justice said it would investigate the recent deals Verizon made with some of the major cable companies. As you might recall, Verizon bought these cable companies’ spectrum assets but it also set up a resale deal so the cable companies can resell on the Verizon network.

Congress should ask the cable operators why they were so willing to sell this spectrum. The answer is simple. They bought it at auction because wireless is the future. Then they ran the numbers and found out how expensive it would be to build out and operate their own networks, to come to terms with other networks for roaming agreements, and the marketing dollars it would take to compete. Based on this, a few continued with their existing deal to resell on the Sprint network and had little success. Cox was in and out of the Sprint resale deal within six months because the uptake of its service was disappointing and the phones it had available were not competitive with those of the larger or even regional network operators.

After the cable companies did the math it was obvious that they needed to bail out of the do-it-yourself wireless network business. Verizon wanted the spectrum and offered the cable operators cash for the spectrum plus the ability to resell on the Verizon network, which, I assume, also means a lot more phones and other devices will be available through the cable operators. In my opinion the deal makes sense all around. It is a market-driven deal and should stand as made.

In the United States we pay some of the lowest prices for both wireless voice and broadband services. Our coverage has improved, and both AT&T and Verizon have pledged to and are working at extending their networks or their reach with partnerships to cover more of rural America and the market-based approach to competition and services continues. There is a saying that “if it isn’t broken don’t fix it.” In this case, the wireless market in the United States is not broken so the government should be leaving it alone—not tweaking it or trying to fix it.

Andrew M. Seybold

6 Comments on “What’s Ahead for Network Operators?”

  1. Martyn Roetter says:

    Andy, I have to disagree fundamentally and completely with your comment about the AT&T/T-Mobile merger. There is ample and well documented evidence that the assertions presented by AT&T about both its needs for and the benefits that it claims would flow uniquely from this transaction are bogus. My colleagues and I have caught out AT&T in multiple contradictions in its statements and have found no support for its propositions. AT&T has responded to these criticisms not by refuting our (and others’) refutations but simply by calling into question our (and others’)competence and accusing us and other opponents of ideological biases. AT&T has proceeded on the assumption that if a lie is repeated often and loudly enough it will come to be accepted as truth. A review of AT&T’s behavior and actions over many years in both the U.S. and abroad (see in particular its appalling behavior in South Africa) demonstrates that this once global iconic leader in telecom has sunk to the level of a greedy, self-interested corporation for which the interests of customers and the public interest play a very minor role in the choices of its management (which I distinguish from the qualities of its many dedicated employees) compared to their own highly personal incentives and motivations. The only motivation for this move was to remove a competitor from the market. Check out the extraordinary and arrogant pronouncements of its executives most notably its CEO and Senior Executive Vice President for External and Legislative Affairs. Bad regulations are harmful but so is the unrestricted and unregulated freedom by large corporations to do whatever they want. The most fruitful period of innovation that benefited customers took place after AT&T was broken up by regulators and application of basic legal principles, not when some mythical set of “market forces” were allowed to operate without any enforceable boundary conditions. On a final note perhaps indeed 3 competitors may be enough to ensure competitiveness but unfortunately the #3 competitor in the U.S. (Sprint) has regularly and consistently been eager to identify and then seize opportunities to make major strategic and tactical mistakes with a very high batting average (close to 1,000), so to rely on the Big 2 + Sprint to sustain a competitive market strikes me pragmatically and unfortunately as unrealistic.

  2. So Martyn, I know you are a consultant but I have to ask if one of your clients is Sprint? You are giving me exactly the same rethoric that Sprint has been using regarding the merger of AT&T and T-Mobile. If you consult for Sprint then I think that you should include that along with your comments.

    • Martyn Roetter says:

      It is not just Sprint that opposed this transaction and in my opinion they were far from being its most effective opponent. Ironically I and colleagues tried to persuade Sprint to hire us to help them oppose the AT&T/T-Mobile merger pointing out that they should be careful about what they say because it would be easy (as it was) for AT&T to discredit them as an opponent given their own well documented series of major strategic and tactical mistakes (Sprint cannot even manage its own subsidiary and has driven its cable MSO partners into the arms of Verizon). But they refused to listen. I would be happy to send you the document I co-authored that was filed with the FCC by Public Knowledge (who did engage us after seeing earlier work we had done expressing grave concerns about this proposed acquisition’s consequences) in opposition to the AT&T/T-Mobile transaction as well as other articles relevant to this issue. No doubt AT&T spent far more money on its economists-for-hire and others as well as on lobbying and contributions to special interest groups and politicians to present its case. My own comments, far from being rhetoric, are research-, evidence- and fact-based in contrast to much of what AT&T wrote and said. I commend to your attention for example the non-redacted letter leaked presumably accidentally by AT&T’s own lawyers (Arnold & Porter) which exposed one of its “deliberate misrepresentations” (and confirmed one of our main points), namely the claim that the only way AT&T could expand its planned LTE coverage into rural areas was to acquire T-Mobile (a strange assertion indeed, since T-Mobile holds effectively no frequencies below 1 GHz).

      All the best for 2012,


  3. sverbil says:

    Andrew, mark me down as someone else who is not swayed by AT&T’s arguments. While it’s arguable that the efficiencies gained for AT&T by the merger would be a positive for them, I think all of us are jaded enough to see that the evidence is clear: those benefits will not flow to the customers – that’s just not in the corporate DNA. And, while the engineer in me sides with you on the efficiency issue, I think from the political and fiscal point of view we need to side with more competition, not less – even if it’s messier and slows things down.

    And I would never – never – no matter how many caveats you fence it in with – use the “People’s Republic” of China as an example of how the telecommunications market should be ordered. Right now, China Telecom and China Unicom between them control more than 2/3 of the Chinese broadband market. As you would expect, they are exercising monopoly-like control of broadband prices in China. Not my words – it’s China’s National Development and Reform Commission (NDRC)that’s making the charges. I guess it’s good news that someone there is investigating, since the version of capitalism they’re practicing looks more like the wild west than anything we’d be comfortable with.

    Happy Holidays!


  4. Martyn and Steve–the purpose of my blog is to express my thoughts and that is what I did, and I expect others to chime in with their own thoughts. So your comments will remain as part of this post for others to read. We have a difference of opnion to be sure and Martyn at least one of your comments makes not sense: “AT&T could expand its planned LTE coverage into rural areas was to acquire T-Mobile (a strange assertion indeed, since T-Mobile holds effectively no frequencies below 1 GHz).” Since both AT&T and Verizon have stated that they will also deploy LTE on thier AWS-1 spectrum. Therefore, gaining access to the T-Mobile 1900 and AWS-1 spectrum could permit them to build in rural areas, yes they would need a few more cell sites but it can and is being done.

    Happy Holidays to you and to all of our readers

    • Martyn Roetter says:

      Andy,I absolutely agree that differences of opinion are healthy to express and can foster a mutually productive dialog. I greatly appreciate your open mindedness in that regard. With respect to AT&T’s statements about rural coverage: 1.AT&T stated it was not economic to expand its LTE coverage into rural areas to reach 97% coverage of U.S. POPs. 2.Yet it is AT&T which holds both 850 and 700 MHz frequencies that are the most economical bands in which to do this, not AWS-1 or 1900 MHz. 3. AT&T could also have partnered with rural carriers (but has refused to do so)in the same way that Verizon is doing to share the costs and deliver mobile broadband more economically than on a stand-alone basis. 4. I therefore concluded -which of course you may disagree with – that AT&T was being disingenuous when it claimed that ONLY by gaining access to T-Mobile’s frequencies (which by the way did not increase in any significant way the geographic coverage of its portfolio of frequencies)would it be able to afford to expand its LTE coverage to 97% of the U.S. population, up from 80%. I chose this example as but one of the many assertions made by AT&T that upon analysis proved to be completely unjustified and misleading (another one being its claims of creating many thousands of jobs).

      all the best for 2012 – I wait to see what AT&T will do now and can think of several alternatives, as well as better options for T-Mobile.


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