Only decisive spectrum policies will save US from a return to Ma Bell

Rethink IT, Jan, 2006

The concept of the competitive carrier is almost a dead one in the US now. While the wireline CLEC (competitive local exchange carrier) has struggled for years, and been dealt a body blow by recent FCC decisions, it seems on the surface that the wireless version is in a far stronger position.

The FCC has been far kinder to independent wireless service providers than to wireline challengers, and two key developments have put new weapons into their hands--the rise of the MVNO (mobile virtual network operator) approach and the emergence of WiMAX-style technologies that allow operators to bypass the incumbents' copper in the last mile. But the FCC's kindness has been mainly aimed at the rural market, which remains problematic in terms of profitable business models, while in the most attractive sectors, challengers will need spectrum rights to offer services that support a serious growth model. And while the legendary shortage of telecoms spectrum in the US is something of a myth, it is true that the vast bulk of the useful bands are held by a few large companies--companies that will increasingly consolidate among themselves, and wipe out smaller players in their path, in their quest to control the balance of power.

As SBC completed its acquisition of AT&T, and took the venerable, if tarnished, name for itself, an extreme scenario was no longer looking far-fetched--that the battle for the US market, now defined in terms of the 'screen' rather than the 'line', would be fought between just two Bell operators, AT&T and Verizon, plus the cabal of major cablecos, with Sprint Nextel the arbitrator.

With the exception of Clearwire, the major potential disruptive force because of its huge spectrum ownership, the only genuinely independent forces would be have to be in unlicensed frequencies which, while they can support localized businesses and creative approaches to the market, come with all kinds of downsides, notably interference. Even the much discussed challenge from the Google business model will be severely limited by the restrictions that unlicensed spectrum will put on the real usefulness of the services it can deliver.

There will be far more brands for consumers to choose from, that is true, at least in the short term, because of the MVNOs, but these are totally reliant on the spectrum holders, notably Sprint Nextel, in the same way that the CLECs were on Bellco copper. And the MVNOs are facing their own consolidation too.

The power to change this depressing scenario lies primarily with the FCC, which gained a new commissioner recently. There needs to be new spectrum allocated that supports competitive services and comes in large enough chunks, and with low enough prices, to support a major competitive challenge--but which also carries safeguards against interference. Whether this means adapting the rules proposed for the 3.65GHz band, making some brave decisions on the 700MHz analog TV frequencies and the 2GHz satellite communications territory, or accelerating the introduction of effective anti-interference laws into unlicensed bands, clear statements of direction will be needed before next year is out.

While the regulatory policies, state and federal legislation and lobbyists' arguments will be slow to agree, the Regional Bell operators and Sprint Nextel have shown remarkable swiftness of action recently and will seek to shift the goal posts as far as possible to their own advantage before another, and more pro-competitive, sea change can occur within the FCC.

CONSOLIDATION

While all the politicians' talk regarding telecoms is about promoting increased competition, in reality this has not led to significant additional consumer choice of suppliers, although it is having some impact on expanding broadband and triple play (voice, video and high speed data) services to rural and other underserved communities. But in the attractive markets--the densely packed urban and affluent suburban communities plus the enterprise--the story has all been about consolidation on a massive scale.

At the top end of the market, in little more than a year we have seen the six major cellular operators reduced to four; and two of the long lines operators, AT&T and (soon) MCI snapped up by Bellcos. This has had a trickle-down effect, with an ongoing wave of mergers between tier two and three wireless and wireline operators, the latest example being Alltel's purchase of Midwest Wireless. The same trend is affecting the larger wireless ISPs, as all companies recognize that survival is largely about scale--in terms of negotiating power with equipment makers and spectrum or wireline owners, and brand recognition among customers.

Brand is the main advantage that the MVNOs have, but even before most of them are officially launched, there are signs of shake-out in that sector too, and fresh doubts over which companies, apart from Sprint Nextel, the main leasor of spectrum, will really cash in.

Even among the largest players, the mergers and acquisitions may not have ended yet. In particular, there has been intense speculation for months that SBC, now that its purchase of AT&T has finalized, will put in a bid for BellSouth--one that might well be countered by the other major Bellco, Verizon. Given that the current regulatory climate might actually allow such a deal to go through, this must be an option SBC is considering. It certainly has to do something about Cingular, its cellular joint venture with its fellow Bell. This was fine when cellular operations were entirely separate from wireline ones, and when the Bell operators were confined to their own territories.