What’s Ahead for Network Operators?
12.22.2011 by Andrew M. Seybold
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