Regulation and Capital Spending

At the recent Mobile World Congress, FCC Chairman Ajit Pai said that one of his reasons he wants to reverse Title II regulation is that it has had a drastic impact on capital spending by ISPs. He says that the new regulations have been a disincentive for the ISPs to invest in broadband.

The Chairman bases that position on statistics provided by USTelecom which are based upon work done by Hal Singer, a Senior Fellow at GW Institute for Public Policy. Mr. Singer created the following table that shows the domestic capital spending for the big ISPs for 2014 through 2016. And indeed, this table shows a 5.6% drop, or $3.6 billion a year from 2014 to 2016 – which Mr. Singer attributes to Title II regulation.

2014

2015

2016

AT&T $21.1 $17.3 $17.8
Verizon $17.2 $17.8 $17.1
Comcast $6.4 $7.1 $7.7
Sprint $3.8 $3.9 $1.4
Time Warner Cable $4.1 $4.4 $3.8
T-Mobile $4.3 $4.7 $4.7
CenturyLink $3.0 $2.9 $3.0
Charter $2.2 $1.9 $3.1
Cablevision $0.9 $0.8 $0.6
Frontier $0.6 $0.7 $1.3
US Cellular $0.6 $0.5 $0.5
Suddenlink $0.3 $0.4 $0.3
   Total $64.6 $62.4 $61.0

But like with all statistics, it’s not hard to draw different conclusions from the same set of numbers. For example, all of the drop in capital spending can be attributed to AT&T and Sprint. Taking those companies out of the table shows that capital spending for the other big ISPs is up $2.1 billion or 5% from 2014 to 2016.

So what’s going on with AT&T? There are a number of reasons for their change in capital spending:

·         During these same years the company made massive capital investments in DirecTV ($3 billion over the last few years) and also on the company’s purchase and expansion of its cellular network into Mexico ($3 billion over 4 years). Those numbers are not included in the above table and it’s easy to argue that the company just set different priorities and diverted normal domestic capital to these two giant ventures. If you add those capital expenditures into the table then AT&T’s capital spending has grown – just not their ‘domestic’ spending on traditional broadband.

·         AT&T has been making a huge effort to update its cellular network using software defined networking (SDN) as described at this AT&T website. They have been decommissioning traditional hardware at cell sites and installing much less expensive, off-the-shelf routers that can now control the cell sites from centralized data centers. They have already converted over half of their cell sites and this upgrade means vastly reduced spending on traditional cell site electronics. The company has been bragging about this shift to investors for several years.

·         AT&T has also retracted from expanding traditional big tower cell sites. For a number of years AT&T has been spending money to get fiber to its more remote cell sites, and that upgrade is largely done.

Sprint can also be easily explained. This is a company in trouble and that has been well documented over the last few years. A number of attempts to find a buyer has fallen through. What’s not shown on this table is that in 2013 (the year before the table begins) Sprint spent $6.4 billion on capital in a massive system-wide upgrade to LTE. Since then the company has very publicly stated that they are cutting capital spending to conserve cash. The company is only expanding now with carefully selected small cell deployments. But the company is clearly in network maintenance mode and is spending only what is needed to keep the cell sites functioning. Also included in the drop in spending is a change in the way that Sprint treats leased cellphones – they used to capitalize the phones and they now expense them.

There are going to be further decreases in future telecom capital spending across the industry. I expect capital spending for all four big wireless companies to keep decreasing due to efficiencies from SDN. We are now seeing a burst of spending from cable companies due to upgrades to DOCSIS 3.1, but when that’s done I would expect a significant decline in their capital spending as well. We are entering a time when improvements in software will lower the need for new hardware – not just in telecom, but in many other sectors as well.

I have always been annoyed when statistics are used to falsely justify public policy. There is no evidence that the big ISPS have changed their spending habits in any drastic way due to Title II regulations. The argument that Title II has affected capital spending comes directly from constant press releases from USTelecom, and the FCC Chairman should be above repeating arguments from lobbyists. If the FCC wants to undo Title II then it should just do it – there are a number of valid reasons why this might be good policy. But it’s disingenuous to cook up false reasons for why the change is needed.

Unlimited Cellular Data Pricing

SONY DSCI recently wrote a blog about how all of the cellular companies are now offering unlimited data plans. Today I’m going to look at their plans in some detail to discuss what they really mean by “unlimited.”

AT&T. AT&T now has two unlimited plans. Unlimited Choice starts at $60 for one phone with unlimited voice, text and data. It’s $55 for a second line and $20 each for lines up to ten. There is an extra fee of $5 per month for one line or $10 for multiple lines if the customer doesn’t elect autopay. Data comes with lots of limits. Video is capped at 480p standard resolution. Total download speed is limited to 3 Mbps with video capped at 1.5 Mbps, regardless of the quality of the 4G stream available. And while there is no data cap, AT&T starts throttling data speeds for the month when a customer hits 22 GB of download. And last – and what will be a killer for most potential customers – it doesn’t allow tethering.

The Unlimited Plus plan starts at $90 for the first phone. It also includes a penalty for not using autopay. It undoes all of the speed restriction of the choice plan and can stream HD video. It also allows up to 10 GB per month for tethering. It has the same monthly cap of 22 GB before the data gets throttled. This still is not an alternative for home use because of the 10 GB cap on tethering. But it’s a good business travel plan. And a home user with a tablet might find this to be a good, if expensive, broadband alternative.

Verizon. Verizon’s unlimited plan is $80 for the first phone, $60 for a second, $22 for a third and $18 for a fourth. This also has unlimited voice and text. The data has a very unusual daily cap and speeds get throttled after hitting 500 MB download in a day. There is also a monthly cap of 22 GB, after which all data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. Verizon allows HD video streaming.

T-Mobile. T-Mobile’s plan is priced at $70 for the first phone, $30 for a second, $41 for a third and $19 for a fourth. This also has unlimited voice and text. There is a monthly cap of 28 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. T-Mobile allows HD video streaming.

Sprint. Sprint’s plan is priced at $50 for the first phone, $40 for a second. But these are promotion prices and the company warns they will probably price to ‘market’ after March 31. This also has unlimited voice and text. There is a monthly cap of 23 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 2G (which has been discontinued in much of the country) after hitting that cap. Note that at 2G you can’t even read email, so this is effectively a hard cutoff.  Sprint allows HD video streaming capped at 1080p quality.

Various Issues. There are activation fees to consider with some of the companies. AT&T and Sprint charge $25 and Verizon $30. T-Mobile has no activation fee. T-Mobile also includes all taxes and fees in its price, something that can be fairly expensive in some parts of the country.

None of these plans is truly “unlimited” and I won’t be shocked to see the Federal Trade Commission going after all of these carriers for advertising them that way. Certainly none of these are going to be a good alternative for home broadband, except perhaps for rural customers with no better alternative. But I think even rural users will find the cap on tethering and the throttling after a fairly stingy amount of download to be impossible to live with. It’s a shame because many rural homes using traditional cellular broadband have monthly bills of $500 to $1,000.

Interestingly, I just saw yesterday that some Wall Street analysts are slamming Verizon because they fear that their network cannot handle these new ‘unlimited’ plans. But as you can see these plans are not unlimited. They are effectively capped at 2 – 3 times the size of existing family plans, that that assumes that customers will use all of the allotted data-  which many will not. There is already plenty of excess capacity to handle this at the vast majority of cell sites. And this isn’t going to much hurt the cell sites that are already over-busy.

For customers that routinely go over the current cellular data caps these might be a great alternative. Current cellular data is priced at $10 per gigabyte and these plans have reduced data prices to a more affordable price under $2 – $3 per gigabyte for somebody that uses the full allowance. But compared to traditional plans these plans all have hard monthly caps – and while those caps are at 22 GB or higher, they are effectively hard caps since data gets throttled and becomes largely unusable after hitting the cap. These plans will all tease you into watching a lot of video and then penalize you heavily for watching too much.

Unlimited Cellular Data

SONY DSCAll four major wireless carriers have been in the news recently concerning unlimited wireless data plans. The unlimited plans get even more intriguing when you consider that the upcoming FCC is likely to be hands off and may allow the carriers to have zero-rating plans. With zero-rating the carriers will give customers unlimited data for the carrier’s own content, but put limits on all other data.

There has also been a lot of talk this year in the industry that people are dropping landline data plans and migrating back to cellphone data. But when you look at the plans available to customers it’s hard to see any of these plans being competitive with good landline data (emphasis on good). Here are the unlimited data plan options of the four big wireless carriers:

Verizon is the easiest to understand and they hate unlimited data plans. They had unlimited plans years ago and worked hard to migrate customers off unlimited data. But about 1% of Verizon customers are still on these plans. The company recently notified customers who actually use their unlimited data that they are going to be disconnected unless they migrate to a suitable plan. And by suitable, the company offers a plan with 100 GB of download for $450 per month. This means that only a customer who doesn’t use their unlimited plan will be allowed to keep it.

AT&T introduced a new unlimited data plan this year, but it has a lot of strings attached. For example, customers of this plan are not allowed to create mobile hotspots for their laptop or tablets. For anybody that travels a lot like me, this is my primary use of mobile data and there are still many hotels around where the bandwidth is barely adequate to read emails. The AT&T unlimited plan also allows the company to throttle customers in two instances – if they are in a congested area or if they exceed 22 GB per month of download. To put that into perspective, my family of three cord-cutters used 660 GB of data last month – so it’s hard to think of 22 GB as ‘unlimited.’ AT&T’s plan is not cheap and costs $60 for the data plus $40 per phone, meaning it costs $100 per month for a single user.

Sprint and T-Mobile both came out with unlimited plans at the end of the summer. Sprint’s ‘Unlimited Freedom’ plan costs $60 for the first line, $40 for the second and $30 per additional line up to ten lines. Sprint’s unlimited plan doesn’t allow HD video and streams all video in standard definition. They also restrict music steaming to 500 kbps and gaming to 2 Mbps.

T-Mobile’s unlimited plan costs $70 for the first user, $50 for the second and $20 after that up for to eight users. T-Mobile is probably the least restrictive of the four companies. Their only restriction on the unlimited data is that they stream video in standard definition. But for $25 more per month customers can get HD video.

The big caveat on all of these plans is that LET data speeds in the US are among the slowest among developed countries. The OpenSignal report this year ranked the US at 55th in the world, placed between Russia and Argentina, at an average speed just under 10 Mbps.

I read a lot of news articles on my phone when traveling using Flipboard – a news site that lets me customize my news feed. Reading articles on my smartphone is the one part of my digital world that is still agonizingly slow. I often have to wait for 30 seconds or more for a news article to open – and it reminds me of the days when trying to open files back in the dial-up days.

The restrictions on these plans really highlight the hypocrisy of zero-rating. These carriers don’t want you to use their cellular data because they say it harms their network. And yet they are perfectly okay with letting customers view company-supplied content all day without restriction. This, more than anything, tells us that cellular data caps and other restrictions are all about making money and not about the network.

It’s still hard to think of any of these plans as a substitute for a landline connection. A cellular data plan like T-Mobile’s might make sense for somebody who is always on the go and not physically in one place very often. These plans are not cheap and I can certainly see households having to make a choice between a landline connection and a cellular plan. My gut tells me that any migration of landline customers to mobile-only data is probably a lot more about family economics than it is about being happy with one of these cellular data plan.

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.

WiFi to Challenge Cellular?

Wi-FiIt’s a rather new phenomenon, but we are seeing the beginning of a shift to making more voice calls on WiFi networks than on cellular networks. As Americans have become more conscious about making data connections on WiFi they have opened the door to using WiFi for their voice usage.

The trend of using WiFi for voice, as it matures, could really shake up the cellular industry. The AT&T and Verizon cellphone plans are among the most profitable products sold by any corporation and that makes them a target for competitors, and a place for consumers to save money.

It’s funny how the industry has changed so much. I remember twenty years ago going to state commissions and asking, and being rejected, for $2 rate increases in local telephone rates because the regulators feared that people couldn’t afford to pay it. And yet a decade later families went from having a $30 home phone to paying three and four times that much for cell phone plans.

There are several companies that have been selling WiFi calling for the last few years. FreedomPop, which started in 2012, offers a product that uses a network of over 10 million hot spots in places like McDonald’s or Starbucks. FreedomPop’s phones will automatically join WiFi networks much like a normal cellphone automatically connects to a cell tower. Their rates are really low and for $5 a month a customer can have a WiFi-only plan that connects to the network of WiFi hot spots. There are other slightly more expensive plans that use a combination of WiFi hot spots and Sprint’s cellular network when WiFi isn’t available.

Republic Wireless has a similar set of products. For $5 a month, customers can make calls or connect to the Internet solely over WiFi. For $10 a month, they can use both WiFi and Sprint’s cellular network. Republic Wireless has developed a technique that lets customers roam between hot spots (but this roaming is more suited to walking than driving in a car).

Scratch Wireless has an even more aggressive plan and using their WiFi network for voice, text, and data is free as long as you buy their $99 Motorola Photon Q phone. They then sell pay-as-you-go access to voice on Sprint’s cellular network starting as low as $1.99 per month.

These companies are growing rapidly. FreedomPop says it is doubling its customer base roughly every four to six months; Republic Wireless says its customer base is growing 13 percent a month. But both companies are still really tiny compared to the big carriers and are mostly catering to those who live mostly around WiFi and who are cost conscious. From what I can see, both companies get rave reviews from their customers.

Cablevision recently announced a WiFi-only plan for $30 a month for non-cable customers but only $10 for bundled customers. I don’t understand their pricing, which obviously is not going to be very attractive to non-Cablevision customers. Cablevision operates an extensive network of hot spots in New York, New Jersey, and Connecticut.

The real disruptor might be Google. They announced that they are going to be offering cellular phone plans and the industry seems to think that they will be WiFi-based. Certainly in the markets where they have fiber networks they could saturate the market with outdoor WiFi hotspots and offer a true competitor to cellular. Google has always said that they think bandwidth ought to be ubiquitous, and since they don’t own cellular spectrum, they are going to have to go the WiFi route and also make a deal for off-network minutes from Sprint or T-Mobile.

One also has to think that Comcast has their eye on this. They certainly are rolling out a huge WiFi network as they turn customer routers into public hot spots.

And so the phenomenon is starting to grow. The large cellular companies say they aren’t worried about this, but one has to think that in the Boardrooms they are keeping an eye on this trend. For now there are issues with using these products. One is data security as it’s fairly well known that public WiFi hot spots are loaded with danger for users. This has to be the case whether you are hitting a hot spot with a PC or a cellphone.

I know that personally I will probably stick to a bigger company plan. When I travel it is more often to out-of-the-way places than to big cities. And those kind of places generally have coverage of some sort by the big carriers, but are often uncovered by smaller carriers like Sprint and T-Mobile. I would not like to find myself in a small town for a few days with no cellphone coverage. Other than that travel, I work at home and could easily use my own WiFi rather than pay for cellular.

For the product to be competitive, it’s also going to have to be usable on the major phones being sold. Not having this product for the iPhone or Samsung Galaxy limits the target audience. For now the small carriers like Republic load their own proprietary software on the phones they sell to users. But as that turns into a downloadable app I could see this product picking up a lot of traction in cities.

AT&T and Verizon are right to not be worried about this today. But if you look forward a few years this could grow into a significant competitor to cellular. Which, even if it doesn’t mean a loss of a lot of customers for the big companies, will mean overall lower prices for cellphone plans. That is something they ought to be worried about.

 

Will Net Neutrality Kill Telecom Investment?

Numismatics_and_Notaphily_iconThe big telcos keep saying that the proposed net neutrality rules will kill their desire to make investments in broadband networks. Is there anything about the proposed rules that would give them reason to say that, or is this just political maneuvering to try to defeat the ruling?

Verizon is still claiming that net neutrality is going to force them to cut their investments in broadband, even though last month their CFO was quoted as saying that it wouldn’t. AT&T made the same claims in December, even though they have backed off a bit.

But for every company that has complained about Title II regulation there are others who have said it is no big deal. In the fiber world Google has said that the rules don’t seem to give them any problems and they like the fact that it would give them easier access to poles. And Sprint has come out supporting the net neutrality rules as a wireless carrier.

I have a hard time thinking that net neutrality rules are going to somehow make broadband unprofitable. I saw just this past week that Time Warner claimed in their annual report that their broadband product has a 97% margin. That surprised me a bit, since it’s the highest margin I have ever seen claimed, but many of my smaller clients have 90% margins on broadband products. Perhaps Time Warner’s higher margin comes from the economy of scale of having millions of customers. I would think that margins that high would make telcos want to expand their networks regardless of regulatory rules.

Today, the big carriers claim to be making major investments in broadband. For instance, the USTelecom web site says that the wireline, wireless, and cable industries together spent $75 billion on broadband in 2013, which was up 10% over 2012. It’s worth noting that $33.1 billion of that number was spent by the wireless carriers, and we can debate all day if wireless data is really broadband and if that should count as broadband investment.

I took a hard look at the proposed net neutrality rules to see if I could figure out which part of it would make Verizon and AT&T cut back on building infrastructure. Here are a few things the new rules won’t do, and I assume that the ISPs view these as positive:

  • The new rules impose no new taxes on the carriers or on their customers. Broadband will not be taxed by the Universal Service Fund. And there won’t be any future taxes unless Congress someday has a change of heart about taxing the Internet (and note that Congress could decide to tax broadband even without Title II).
  • Broadband won’t be subject to any of the rules that are a regulatory burden for big telcos – no tariffs, no rate approval, no unbundling, no administrative burdens or accounting standards.

But there are a few new rules that will enforced with net neutrality and it must be one of these that makes the carriers not want to not build new networks:

  • No blocking of access to legal content on the Internet.
  • No throttling of Internet traffic on the basis of content, applications, services, or devices.
  • No paid-prioritization which would favor some Internet traffic over other content.

These rules basically stop the big companies from devising schemes to bill customers extra to get access to content that they have already paid for in their base rate. The carriers that are against net neutrality must not be happy with a data product with a 90%+ margin and they want to impose rules that will let them charge customers even more.

There is another rule coming out of the order that they also might not like: the FCC will have the ability to intervene in disputes between ISPs and content providers concerning interconnection. This provision means that ISPs cannot extract extra payments from companies like Netflix to deliver their content. I can see why carriers wouldn’t like this, because they want to charge at both ends of the network – to companies like Netflix when content enters their network and to customers when content leaves their network.

The final rule from the order just reiterates one that was passed a few years ago but that has never been fully enforced. It has to do with transparency. Under these rules ISPs are supposed to disclose things to customers like the real data speeds they are delivering. I can see why carriers don’t like this because it will stop them from advertising one speed but delivering something much slower.

But I don’t see anything in those rules that would stop an ISP from investing. That is of course unless an ISP was counting on making a whole lot of money from charging companies like Netflix for bringing content and then charging customers a lot more to get that same content. Any ISP that delivers the speed that a customer purchases regardless of the source of the content is not going to see drastic changes, or even what I would consider as annoying changes from these new rules. So I guess the ISPs who say the new rules will force them to reduce network investments are the ISPs who were planning to screw their customers. That’s what I always figured, but looking at the proposed rules confirms it.

What Makes Cellphone Coverage Vary?

HTC-Incredible-S-SmartphoneIt seems I have been writing about cellphones for a few days, so I thought I would cover a question that I have been asked many times. I travel a lot and it’s not unusual to sit next to somebody and note that the two of you are having a very different cellular experience. One of you may be getting one bar for data and voice while the other might be getting four, sitting only a few feet apart. What explains this difference in cellular performance? I will start with the obvious explanations, but sometimes the differences are due to more subtle issues.

Who is your carrier? Both people might have an iPhone, but if one has Verizon and the other has AT&T the experience is different because both are connected to completely different technologies and totally separate networks. AT&T and T-Mobile use GSM (Global System for Mobile) technology, the technology that is used in most of the rest of the world. But Verizon and Sprint use CDMA (Code Division Multiple Access) technology. These technologies are so different that a handset that is made only for one technology won’t work on the other. This is why you can’t take your Verizon handset to most of the rest of the world when you travel.

Who’s on the nearest tower? I’ve often been driving with somebody and hear them be glad to see an upcoming cell tower because they assume this means they’ll get better coverage. But you can’t assume this because not every carrier is on every cell tower. There are a large number of cell towers in the country. Some of these are owned by the wireless carriers but many are leased. The cellular companies look at available towers and then cobble together the combination of towers that make the most effective and cost-efficient network for them.

This task has gotten hard for the carriers because of the fact that cellphones now carry data. The original cell tower network with all of the giant towers was created back when cellphones only carried voice. But now that the networks are deploying data and using higher frequencies it turns out that a more ideal network would place the towers closer together than the traditional locations. This is causing massive reconfigurations of the networks as the carriers try to improve data reception.

Cell sites get busy. Or said another way, any one carrier on a tower might get busy while another carrier might not be busy. As cell sites get busy they do a couple of things to handle the excess traffic. Most carriers still give preference to voice over data, so as more voice calls are added to a network the amount of bandwidth allocated to data is often choked down (but not always). And eventually the tower site refuses to add new customers. But when sites get busy the performance normally degrades.

You might be roaming. Roaming is when a customer is riding a different network than the one to which they subscribe. If you are an AT&T customer and are roaming on a T-Mobile site, you will not get the same priority as a T-Mobile customer. This might mean getting slower data speeds if the site becomes busy, and it could also mean being booted from the site as it becomes full.

Spectrum is not created equal. There is not just one spectrum being used for cellular data. There are already nearly a dozen different slices of spectrum being used and the FCC is going to be auctioning more over the next two years. Every time you move to a different cell site you might be changing the frequency you are using. Carriers not only cobble together a network of the ideal cell sites, but they also play a chess game of deciding which spectrum to deploy at each tower. None of the carriers owns all of the different spectrum available, and the spectrums they own in different cities can be drastically different. This means getting four bars at your home might not give you the same experience as getting four bars when you are traveling.

What your phone allows. Perhaps one of the biggest differences in reception is that each cellphone maker decides what spectrum a given handset is going to receive. It costs a lot of energy, meaning battery time, for a phone to always search on all of the different frequencies. So different handsets allow different frequency bands. This is why LTE coverage differs so widely because there are many sets that don’t even see some of the LTE frequencies. All handsets look for the basic cellular bands, but only the most expensive sets are designed to look for almost everything out there. And as more cellular bands are allowed into the mix this will get more pronounced. Of course, you have to read very deep into the specifications of your phone to understand what it does and does not receive. Good luck asking that question at the cellphone store.

Plain old interference. Every cellular frequency has a different propagation characteristic. If you and the guy next to you are talking on different frequencies then you each will be dealing with a different set of interference. This is one of the reasons that cellular coverage is so wonky in complicated buildings like airports and hospitals. Each cellular frequency is likely to find a different set of problems in a complex environment and one frequency might get killed in a given part of the airport while another is fine. This is why you might find yourself walking around trying to find a signal while people around you are still talking.

It’s Hard Being Number 3

Cell-TowerSprint might be the most interesting carrier in the market today in either the mobile or landline industry. They have done one of the biggest turnarounds ever in the telecom world. In 2008 Sprint was by far the least popular wireless carrier. They got really low marks in customer satisfaction surveys, far below the other three carriers. This was partly due to poor customer service, but also do to their launch of WiMax in 2008 that never worked as well as the LTE being launched by the other carriers.

But Sprint has turned it around. They had hired Dan Hesse as CEO in 2007 and Sprint now ranks equal to AT&T and Verizon in terms of customer satisfaction. This goes to show you that a big company can change their customer experience if they decide that it is a priority. I just wrote last week how Comcast has been at the bottom of customer service rankings for years and how they don’t seem to be concerned about it. But Sprint decided that poor customer service was holding them back and they fixed their many problems.

Sprint has also undertaken steps to leapfrog the other carriers in terms of data performance. Sprint spent a lot of money to buy Clearwire, mostly to get their spectrum. They plan to combine the 2.5 GHz spectrum they got from Clearwire with the 1.9 GHz LTE spectrum they bought in auctions to create significant data pipes. This will give them two separate 60 MHz blocks of spectrum that will perform well both close to a cell site and some distance away. They are shooting to have this all deployed by the second quarter of 2015, which will give them the ability to offer LTE speeds up to 150 Mbps download

Sprint also has been doing other interesting things. For instance, they had a promotion for most of 2013 that would give free service to any student who brought their own handset. This free service came with unlimited voice and texting and 1 GB of data. For only $10 a month a student could get unlimited data. One looks at that sort of plan and wonders how it could possibly benefit them to have a lot of customers that are not paying for service. But I think it’s a brilliant long-term strategy, and we don’t see a whole lot of long-term thinking in the carrier world that is measured by the earnings in the latest quarter. But think back a few decades when Apple was putting free, or nearly free computers in schools across the country. In doing so they raised whole generations of kids to like the Apple brand and this is part of the reason why they have exploded in popularity in recent years. Sprint is building the same brand name identity and loyalty of a whole new generation of cellular customers.

Sprint has also seriously been aggressively pursuing a merger with T-Mobile. They were told late last year by the feds that such a merger was probably going to be opposed. However, the current thinking in the industry is that if the government let’s Comcast buy Time Warner that it’s then going to be very hard to say no to a Sprint – T-Mobile merger. I think such a merged company could be powerful. Sprint has a vision that cellular data needs to be unlimited, or with very high caps in order to be relevant a decade from now. When you look at combining the spectrum and customer bases of the two companies, along with Sprint’s new focus on customer service you could have a true third competitor to AT&T and Verizon. Today neither Sprint nor T-Mobile can be considered as real rivals. T-Mobile has been buying customers at the bottom of the market using low-cost specials, and as good as Sprint is, they are just not in the same stratosphere as the big two.

The End of Special Access?

Image representing EarthLink as depicted in Cr...

Image via CrunchBase

For those not familiar with the term, special access refers to selling traditional data pipes on the TDM telecom networks. These are circuits like T1s and DS3s. While one might think the world had transitioned to ethernet circuits there are still huge numbers of these traditional circuits being sold in the world.

In many cases the traditional circuits, especially T1s are being sold because of lack of fiber in the distribution plant. TDS data circuits can still be delivered over copper in many cases and often are the only way for a business stuck on copper to get faster data speeds.

AT&T recently announced that they were going to do away with all of their long-term discounts on these traditional TDM circuits. Customers and other carriers have been used to buying these products with a significant discount for signing up for long periods of time. There have been discounts offered for agreements to buy for up to seven years. And these discounts have teeth since there are significant penalties for breaking the contracts. As of November 9 AT&T will not be signing any contracts with terms longer than three years.

AT&T says the reason they are doing away with the discounts is due to the fact that they are going to be discontinuing TDS special access by 2020. However, that rings untrue since somebody can still sign a 5-year or 7-year contract today and still have that contract finished on or before 2020.

Some of the competitors of AT&T filed a letter of complaint with the FCC this month complaining about the cessation of the term discounts. This included Sprint, tw telecom, CBeyond, EarthLink, Level3 and Megapath. These carriers say that eliminating the discounts is anticompetitive since they are the in direct competition with AT&T and they are the primary purchasers of special access circuits.

Sprint says that eliminating the term discounts will increase the prices they pay and ultimately affect what customers pay. They say that in the worst case examples that their costs will rise 24%.

If you have been following this blog I have reported that AT&T has been positioning itself to get out of the TDM business. They want to convert all data circuits to ethernet as part of their ‘Project VIP’ initiative. But they also want to get homes and small business off of copper and in many cases replace them with cell phones. The FCC has not given AT&T the permission to do this anywhere, yet they keep moving towards that goal.

The biggest problem I see with trying to eliminate TDM data circuits, particularly T1s, is that the customers who use them often are in parts of the network that don’t have fiber alternatives. It’s nice for AT&T to be able to talk about offering only ethernet, but in many cases this is going to result in customers losing what little data they are able to buy today.

There are still huge numbers of T1s that are used to support PBXs and small company WANs for functions like data back-up. It’s hard to picture what a customer will do if the copper goes away and they are expected to somehow perform those functions using cellular data – with data plans that are likely to be capped. We tend to think of a T1 these days as a small data pipe. But if you are using it for data backup, a T1 can transmit a lot of data during a month’s time.

The FCC is in the middle right now of looking at special access issues. They have issued a request for data from the industry that will hopefully help them understand the state of the current TDM data market. I think they are going to find that the market is still a lot larger than AT&T wants them to think.

Spectrum Winners and Losers

AT&T posted a short statement on their public policy blog called ‘Inconvenient Facts and the FCC’s Flawed Spectrum Screen’. In that blog post they complained that the FCC had failed to apply the spectrum screen to Softbank’s acquisition of Sprint and Sprint’s acquisition of the rest of Clearwire. And AT&T is right. The FCC has been incredibly inconsistent in the way it looks at wireless acquisition and mergers.

So what is the spectrum screen? The spectrum screen is a set of internal rules at the FCC that they use to determine if any wireless carrier owns too much spectrum in a given market. Historically the FCC had a generic rule that said that no one company could own more than one-third of the spectrum usable for wireless in a given geographic area. This spectrum screen was applied both to attempts of wireless carriers to buy new spectrum or to mergers between wireless carriers.

The FCC has been very inconsistent in the way they apply the existing screen. Last September they announced that they were going to look at the way the spectrum screen ought to work. But meanwhile, during the last year the screen has been applied (or ignored) in the following ways:

  • When the FCC looked at the proposed AT&T / T-Mobile merger they rejected the merger in part because they said that the acquisition would fail the screen test in 274 CMAs that covered 71 of the top 100 markets and 66% of the US population. However, the FCC fudged the spectrum screen in coming up with those numbers. At that time the spectrum screen set the maximum amount that any one carrier could own in one market at 95 MHz, which was one-third of the spectrum available for wireless carriers. However, in coming up with their conclusion the FCC lowered that threshold to 90 MHz in judging the merger. That might not sound like a big difference, but it lowered the number of markets affected by the merger by 84 and reduced the overall problem to less than 50% of the top 100 markets and 50% of the US population. That is still a lot of places where the proposed merger would have failed the spectrum screen, but AT&T had announced plans to divest of bandwidth as needed to meet the FCC test. The FCC made this change in the spectrum screen without any public input.
  • When Verizon acquired spectrum in the 1.7 to 2.1 GHz band the FCC applied this fully to their spectrum screen band. They did the same when AT&T acquired 2.3 GHz spectrum.
  • And then there is the recently announced approval for Softbank to acquire Sprint and Clearwire spectrum. The Clearwire spectrum at 2.5 GHz is right next to the 2.3 GHz spectrum recently acquired by AT&T. While the FCC fully counted the spectrum AT&T purchased against the spectrum screen, in the Softbank acquisition the FCC counted only 55.5 MHz of the Clearwire spectrum against the new Softbank spectrum screen even though there is an average of 140 MHz available in most of the Softbank markets.

So AT&T has a legitimate gripe. The FCC seems to apply the spectrum screen to get the results they want. It looks a lot more like the FCC is picking market winners and losers than they are protecting the public. The spectrum screen was established in the first place to promote competition. The FCC wanted to make sure that a given carrier did not get so much spectrum in a major market that they could effectively close out competition. They also didn’t want carriers to be able to hoard spectrum for future use. But the FCC no longer seems to be using market protection as the criteria of deciding who can and cannot merge.

It’s clear that the FCC didn’t want AT&T and T-Mobile to merge. They thought that it was bad for competition to lose one of the major carriers in the country. But it was wrong for them to fudge the spectrum screen as a way to justify their position rather than just oppose the merger on pure competitive grounds.

And in the case of Softbank they are going in the opposite direction. They obviously want a new competitor to AT&T and Verizon and they are ignoring the spectrum screen to make sure that happens.

Why does all of this matter? Like anything else it’s a matter of money. Wireless carriers have two ways that they can address congested conditions. They can just add more cell sites, closer and closer to the old ones. In effect spectrum is reusable and each new cell site uses the original spectrum freshly. The other solution is to just layer on a new spectrum in a crowded area so that no new cell sites need to be constructed. That is much cheaper than building cell sites, and so carriers want more and different spectrum in major markets to meet the seemingly insatiable and rapidly growing demand for mobile data.

The issue is going to get a lot worse. President Obama announced a new policy that will release up to 500 MHz of new spectrum for wireless use over the next five years. So there is going to be a new land grab by all of the carriers and the FCC needs to get ready.

It just seems to me like the FCC needs to toss out the spectrum screen and come up with a new way to determine the right amount of competition. In the two biggest merger cases before them in the last few years they blatantly ignored their own spectrum screen rules to get the result they wanted. That is evidence enough that we need to stop having the fiction of a spectrum screen. If the FCC wants to be in the game of picking market winners and losers they just need to be upfront about it.