What Customers Want

Google’s Experiment with Cellular Service

Wi-FiAs I’m writing this (a week ago), Google opened up the ability to sign-up for its Project Fi phone service for a 24-hour period. Until now this has been by invitation only, limited I think by the availability of the Google Nexus phones. But they are launching the new Nexus 5X phone and so they are providing free sign-up for a 24-hour period.

The concept behind the Google phone plan is simple. They sell unlimited voice and text for $20 per month and sell data at $10 per gigabit as it’s used. The Google phone can work on WiFi networks or will use either the Sprint or T-Mobile networks when a caller is out of range of WiFi. And there is roaming available on other carriers when a customers in not within the range of any of the preferred networks.

Cellular usage is seamless for customers and Google doesn’t even tell a customer which network they are using at any given time. They have developed a SIM card that can choose between as many as 10 different carriers although today they only have deals with the two cellular carriers. The main point of the phone is that a customer doesn’t have to deal with cellular companies any longer and just deals with Google. There are no contracts and you only pay for what you use.

Google still only supports this on their own Nexus phones for now although the SIM card could be made to work in numerous other phones. Google is letting customers pay for the phones over time similar to what the other cellular carriers do.

Google is pushing the product harder in markets where it has gigabit networks. Certainly customers that live with slow or inconsistent broadband won’t want their voice calls routing first to WiFi.

The main issue I see from the product is that it is an arbitrage business plan. I define anything as arbitrage that relies on using a primary resource over which the provider has no control. Over the years a lot of my clients are very familiar with other arbitrage plans that came and went at the whim of the underlying providers. For example, there have been numerous wholesale products sold through Sprint like long distance, dial tone, and cellular plans that some of my clients used to build into a business plan, only to have Sprint eventually decide to pull the plug and stop supporting the wholesale product.

I am sure Google has tied down Sprint and T-Mobile for the purchase of wholesale voice and texting for some significant amount of time. But like with any arbitrage situation, these carriers could change their mind in the future and strand both Google and all of their customers. I’m not suggesting that will happen, but I’ve seen probably a hundred arbitrage opportunities come and go in the marketplace during my career and not one of them lasted as long as promised.

It’s been rumored that Apple is considering a similar plan. If they do, then the combined market power of both Google and Apple might make it harder for the underlying carriers to change their mind. But at the end of the day only a handful of companies own the vast majority of the cellular spectrum and they are always going to be the ones calling the shots in the industry. They will continue with wholesale products that make them money and will abandon things that don’t.

There are analysts who have opined that what Google is doing is the inevitable direction of the industry and that cellular minutes will get commoditized much in the manner as long distance in the past. But I think these analysts are being naive. AT&T and Verizon are making a lot of money selling overpriced cellular plans to people. These companies have spent a lot of money for spectrum and they know how to be good monopolists. I still laugh when I think about how households that used to spend $30 to $50 per month for a landline and long distance now spend an average of $60 per family member for cellphones. These companies have done an amazing job of selling us on the value of the cellphone.

Perhaps the analysts are right and Google, maybe with some help from Apple, will create a new paradigm where the carriers have little choice but to go along and sell bulk minutes. But I just keep thinking back to all of the past arbitrage opportunities where the buyers of the service were also told that the opportunity would be permanent – and none of them were.

Regulation - What is it Good For?

Dropped Rural Calls

A lot of rural places in the country are having problems receiving calls. Calls will be placed to rural areas but are never completed. This is not a problem everywhere and it’s not a problem in urban areas, so most people have no idea this is happening.

Senators Amy Klobuchar, Jon Tester, and Jeff Merley introduced a bill in the Senate aimed to fix the problem. A similar bill was introduced last year that died in committee. This is not a new issue and the FCC has taken several steps in the recent past to try to fix the problem. In 2011 the FCC placed 2,150 calls to rural areas and 344 of them never reached the called party. Another 172 calls were of very poor quality and almost impossible to hear. That’s an astounding one fourth of the calls placed and either failed or didn’t work.

In 2012, in Docket CC 01-92 the FCC prohibited several practices by carriers that were resulting in huge delays in completing calls, in lost calls and in the poor quality. For example, they made it illegal to place a ring onto the phone of the calling party until that call has reached the called party. People making calls heard a long ring and were giving up on calls they placed to rural areas before the call even reached the other end.

That order also put a limit on the number of times that a given call could be handed from one carrier to another. That is something that is common in the world of least-cost call routing. Carriers have tables that choose one of many possible different carriers to send a given call based upon the price that carrier is going to charge them. But then the carriers they hand the calls to do the same thing and it’s possible for calls to be handed between carriers multiple times during the process.

This is a problem for calls made to rural areas because the access charges in those areas are higher than the charges for calling urban places. Access charges are the fees that a local telephone company bill to long distance carriers for using their networks. In a world of least-cost routing, many carriers don’t want to pay the higher cost to complete a rural call. The FCC has taken steps to remove the price barrier by phasing the access charges for terminating calls to zero. But even that isn’t going to completely eliminate the problem because there is also a mileage charge component to access charges, and so places that are far outside of cities will continue to cost more than calls to urban areas.

The FCC further implemented new rules in 2013 (Docket WC 13-39) that give the FCC the ability to fine carriers who don’t properly complete calls to rural locations. But the problem still persists. The common belief in the industry now is that  some long distance carriers are just dumping rural calls and not handing them to anybody else. The proposed new laws would make it easier for the FCC to prosecute such carriers.

The problem that least-cost routing creates in the industry is that the margins on long distance calls are really slim for the intermediate carriers. For intermediate carriers that guarantee their rates to others, too many calls to rural places can put their profits underwater.

In the industry we call this sort of situation “arbitrage”. This arises when there are different costs for doing the same function in different ways. Arbitrage situations have always caused troubles. Carriers who can bill the higher prices in an arbitrage situation strive to bill for as many minutes as they can. And carriers who pay those higher prices look for alternatives to pay something less. A significant percentage of the carrier issues with long distance over the last few decades are the results of these arbitrage situations.

The problem the FCC faces is that it’s really hard to catch the carriers who are dropping calls. The whole phone network was established with an understanding that when a carriers is handed a call to that they always tried their best to complete it. That understanding is what made the US phone network the envy of the world. But generally there were not too many companies involved in a long distance call. Most calls years ago involved the local telco where the caller lived, one long distance carrier in the middle, and another local telco where the called party lived.

But today the least-cost routing tables and the fact that many calls are partially or totally VoIP calls makes it hard to even find out which carriers are in the middle of a given call. If a carrier is dumping rural calls, if they are smart enough to destroy any records that they ever received such calls, it’s very hard to definitely prove they are the culprit.

We are undergoing a transition over the next decade to an all-IP network between carriers. This might eliminate some of the problem if that reduces the need for intermediate least-cost carriers. But it also might not change anything, and as long as there is a price difference between completing a rural and an urban call, this problem is likely to remain.

Regulation - What is it Good For?

A New Form of Arbitrage

Ironically, the motivation behind the FCC’s access reform order of a few years ago in FCC 11-161A1 was to end arbitrage. The FCC defined arbitrage to mean that IXCs were trying to change the characteristic of minutes to save money. The classic example would be to define minutes as Interstate if that was charged at a cheaper rate than intrastate, and vice versa.

And largely the FCC has succeeded. They required carriers to bring state and interstate rates into parity to eliminate jurisdictional arbitrage. They outlawed phantom traffic where carriers were removing the details in the call records that made it impossible to bill for them. And they outlawed traffic pumping of various types that were charging very high amounts to carriers for some very dubious minutes.

And this was all driven by the fact that the FCC and state commissions were getting inundated by complaints from carriers seeking redress from parties on both sides of the transactions. So one of the motivating factors behind the new rules was to eliminate the number of complaints they were seeing, and it seems to have worked. There are certainly still things that carriers argue about, but to a large degree the arguments over rate arbitrage are over.

All except in one instance. There was one part of the ruling that actually is leading to a whole new rash of disputes between carriers and that will end at commissions in the form of disputes. In the same docket the FCC reminded us that cellular calls that stay within the same MTA are local calls. MTA are Metropolitan Trading Areas that are defined by Rand McNally and that generally define large circles of common economic interest. Some wireless licenses such as PCS were granted using MTAs as the boundaries.

So the FCC reminded us that calls that stay within an MTA are local (and always have been). This means that a call that goes from a south suburb of Chicago to a west suburb will be free for a wireless carriers but may be long distance for a landline carrier.

But the real world treatment of these calls has always been somewhat complicated. If a wireless carrier negotiated an interconnection agreement with a telco or CLEC, then reciprocal compensation was used to pay each other for handing off calls between the two networks. But if no such agreement was ever negotiated, then these calls were billed by access charges by the telco as if they were a long distance call. The cellular companies had interconnection agreements with all of the large telcos, but they often did not bother to ask for them with smaller companies due to the much smaller volumes of traffic.

The FCC access reform order says that cellular intraMTA calls are now to be settled only using reciprocal compensation instead of access. But the order then went on to say that the reciprocal compensation rate for terminating cellular calls is now zero. So cellular companies now get free termination of their intraMTA calls at telcos and CLECs.

This sounds pretty straightforward until you think about the nature of cellular traffic. It is nearly impossible for a telco to know which cellular calls are intraMTA because you can’t tell by the phone numbers. Cellular phones can roam anywhere and further, there is number portability between landline telephone numbers and cellular numbers.

Take the example of where I live in southwest Florida. In my town in the winter the population more than doubles and the area is flooded by cell phones that come from somewhere up north. When those people call a local business, those calls are going to be intraMTA, even though by looking at the two numbers one would think they are interstate.

If the cellular companies were honest about reporting the jurisdiction of these calls there would not be an issue. But the arbitrage comes in when the wireless companies hand these calls off to intermediate long distance companies who then try to claim that almost all of the calls they send should be terminated for free. That is a classic definition of an arbitrage situation and telcos are being asked to charge nothing to terminate any cellular calls. And they don’t have the facts to fight this. They can’t tell if a call from a New York number is intraMTA without knowing the cell site where the call was originated – which is something that is not included in the call detail record.

And so telcos and CLECs are losing a lot of legitimate access charges for cellular traffic because the carriers bringing them these calls are asking to terminating them for free and are disputing any charges. This is one area where there was not a lot of fights in the past, but the FCC has created a new arbitrage situation by not thinking through how difficult it is to know the jurisdiction of cellular traffic.

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