Results tagged “backhaul”

October 19, 2011 12:06 PM

Even Whales Get the Blues . . .

We all have bad days, or even bad weeks; that's just the human condition.  You know what I'm talking about, right Coco?  As a late friend of mine best put it, "sometimes your horse is supposed to lose."  But, let's say that you lost a whole lot . . . like, maybe close to all of your credibility . . . in just 6 or 7 weeks?  You'd probably wonder whether it was bad luck, or something you were doing--perhaps even suffering the consequences of hubris (in the Greek tragedy sense of the word).  

Well, this is exactly the problem encountered by our friend Sprint (a/k/a "the Whale").  On August 31st, Sprint's credibility was at its apex--when they convincingly "sold" their version of the AT&T/T-Mobile merger story to the Antitrust Division of the U.S. Department of Justice.  About a week earlier, on August 23rd, your humble blogger outlined a coherent merger strategy for Sprint, giving Sprint's prior statements every benefit of the doubt and allowing it to keep its public voice consistent without being any worse off.  

Did Sprint take my advice?  Of course not!  But let's look at what Sprint actually did in the subsequent several weeks (post 8/31) and you tell me whether they are victims of bad luck, or are suffering something akin to the proverbial tragedy that follows hubris?  

Hubris or Bad Luck?

1.)  September 6th.  Sprint files its own Complaint seeking to enjoin the AT&T/T-Mobile merger.  Sprint also sought to be included, for discovery purposes, as a party in the United States' case--a request the court denied.

Hubris?  Yes.  Given that the DoJ had already filed, Sprint had nothing more to gain by filing its own case.  It was an unnecessary and reckless risk.  The best they get is a few days of headlines, the worst is that Sprint's credibility comes under scrutiny, as their claims get dismissed.

Consequences.  Filing a private merger suit alone is risky enough; no one has ever won this bet.  But seeking joinder with the government, even for discovery purposes?  As explained in an earlier post, this tactic was contradictory, absurd, and doomed Sprint's private standing.   Moreover, even before Sprint's Complaint was filed, one of its allegations of harm (concerns over a failure to get access to popular handsets) had started to unravel by the announcement that Sprint would get the new iPhone at the same time as AT&T and Verizon. 

2.)  September 22nd.  Sprint says only Sprint could buy T-Mobile.  Sprint "clarified" that the government is less concerned with the loss of T-Mobile as an alleged fourth "national" competitor than it is with the identity of the "national carrier" acquiring T-Mobile.  Sprint contends it is an acceptable acquirer, and AT&T is not.  One wonders if the government ever thinks, "with a complainant like this, who needs defendants?"

Hubris?  You bet.  I'm guessing both the United States and Sprint's lawyers could have done without Sprint revealing its self-serving motives for opposing the merger.  Moreover, there is no evidence that the government agrees with Sprint's "clarification."   

Consequences.  Obviously, this little "clarification" by Sprint, purporting to disclose the "true concerns" of the government is more than a little contradictory to Sprint's economic arguments opposing the proposed acquisition on "consumer protection" grounds.  Worse still, it may have focused the attention of investors on whether Sprint really had the kind of money to buy T-Mo, causing a more general scrutiny of Sprint's financial health.

3.)  September 29th.  Three weeks earlier, according to its Complaint, the proposed acquisition posed an imminent threat to raise Sprint's costs for a critical input--wireless backhaul.  Yet, according to early reports regarding the results of the first stage of a nationwide RFP for upgraded, high capacity backhaul, the most competitive carriers (by share of spend) were AT&T, Comcast, and Time Warner Cable.  Curiously, AT&T wholesale was identified as the lowest cost provider.  The same source noted Sprint's prediction that it "will end up with '25 to 30 significant backhaul providers." 

Hubris?  No, just bad timing.  Sprint might reasonably view its intention to obtain a cheaper, higher capacity infrastructure for its network to be information that they should disclose to their shareholders.  

Consequences.  This was a publicly-announced "admission against interest."  In its Complaint, Sprint alleges that a "unique" harm it will suffer as the result of AT&T's proposed acquisition of T-Mobile is that AT&T and Verizon will control a duopoly in the market for backhaul transmission, and have a greater incentive and ability to increase prices, pari passu.  While Sprint never explained how this theory made sense, Sprint's actual recent experience directly contradicts this allegation.

4.)  October 7th.  Sprint hosts an "Analysts' Day" and explains its optimistic future, with no reference to the proposed acquisition, or (curiously) any real discussion of the iPhone (click here for presentation).  Press reports suggest that analysts were a little upset (to put it lightly) by what they perceived as a lack of financial information regarding Sprint's future 4G plans.    While a little harsh, the Journal probably best captured reaction to Sprint's big analyst call, "[i]t's not good when they laugh."

Hubris?  Yes.  The analysts and reporters, for whom the presentations were developed, would likely consider an underestimation of their questions to be a bit grating.  Worse still would be if the guests thought that Sprint was being less than candid with them.  If Sprint expected the analysts to accept a "faith-based" approach toward its strategy discussion, it was wrong.  

Consequences.  Aside from financial market consequences, the presentation will not help Sprint's plea for a permanent injunction in its antitrust case.  Sprint makes no mention of the merger, and describes a generally optimistic view of its future--especially with regard to its recent performance versus both AT&T and T-Mobile--and its ability to reduce future roaming costs and cost per unit (the remaining allegations of harm in its antitrust complaint).

Tragedy:  The Toll of Hubris?

Oral argument on AT&T's Motion to Dismiss Sprint's private antitrust case will be heard next Monday, the 24th.  It is not at all unreasonable to expect a decision as early as the 31st.  Given this likelihood, coupled with the outbreak of corporate hubris preceding Halloween, should Sprint's executives be considering costumes based on prominent figures in Greek tragedy?

May 28, 2010 4:30 AM

Wireless Competition Report: The "Ugly"

Before I talk about some else's "ugly"--I'll 'fess up and say that last post was dry as dirt.  You know what's worse?  "The Ugly" isn't going to be any less ugly! 

So, let's just move through it.  The "ugly" part of the Wireless Competition Report is the adjacent market analyses--the "downstream" and "upstream" markets information.  While some of this data--meticulously compiled as it was--is . . . well . . . interesting, but its relevance to the state of competition in the mobile wireless services market is questionable.

Simply put, the adjacent market analyses were superfluous, almost by definition. Why?  Because, strictly speaking, the statutory language that mandates the preparation of the Report requires the FCC to report on the state of the mobile services market and the service providers that comprise that market--period.  This means that the market for which Congress seeks information on is the market to be isolated.  Congress did not require the Commission to Report on "downstream" markets, or any other ancillary markets.  

"Downstream" Markets

Strictly speaking, the "downstream" markets for devices, operating systems, and mobile applications seem almost too integrated with wireless service to be considered "downstream" in the production/distribution chain.  This is because it is not possible to receive any wireless mobile service without some sort of device.  Semantics aside, though, the Commission's data seems consistent with healthy competition in the wireless market--that is to say that output of handsets is increasing by number of manufacturers (which have doubled from 8 to 16 in the past 3 years), Report, 300, and the prices of handsets and smart phones have decreased dramatically in the past 3 years, Report 310.  

But, the chicken-egg problem still exists, with respect to being able to make any inferences regarding the state of mobile wireless service competition based on the "downstream" market data.  The largest carriers offer consumers the greatest choice of handset and smart phone models.  Report, 308, Chart 43.  However, one cannot say what this information means vis--vis the competition for mobile wireless services.  Do the largest carriers have the most customers because they offer the most handsets?  Or, can the carriers with the largest number of customers offer the greatest choice in handsets because they have diverse enough customer bases to support the most diverse number of handset models?  Is there another, more anticompetitive, theory to explain the relationship between "downstream" market devices and mobile wireless service competition?  We don't know.  No correlation between handsets and service competition is ever offered.  This is the "ugly."  Informative?  Sure.  Probative?  Of what?  Not clear.

"Upstream" Markets
 
The "upstream" market section of the Report suffers from the same problem--the difficulty of drawing a correlation between mobile wireless service competition and the "input" markets of spectrum, access to tower sites, network equipment costs, and backhaul costs.  As noted in one of the previous posts, I did "kind of" like the effort to look at inputs. . . at first . . . until I thought about it more.  On deeper consideration, it seems unlikely--given the economies of scale and scope that characterize wireless mobile networks--that this exercise is ever likely to produce any information that would not be potentially misleading.  Rather, it would seem that the large economies of scale and scope in the wireless network services market would simply indicate that (other things being equal) the carriers that serve the largest number of users (either directly, or through MVNOs) will have the lowest costs per user.

Also, the Report failed to describe to what degree, if any, these costs were competitively significant.  In other words, to some degree or another, all carriers must deal with the "role of spectrum", obtaining tower space, network equipment, and backhaul from their cell sites or other points of aggregation.  It was unclear from the Report whether any carriers face input costs that cannot be overcome by superior competitive performance.

Role of Spectrum.  Here the Commission posits that some firms (the first movers on cellular spectrum in the 1980's, and the winners of the 700 MHz auction) have better spectrum than others, in that it is cheaper to build out--due to its superior propagation properties.  However, the Commission also notes that this "lower build-out cost" spectrum costs more to buy than the more expensive to build-out, higher frequencies. Report, 271.  This seems like the classic "operating leverage" concern confronting all firms in all industries. 

A higher initial fixed cost, can frequently yield very high profits--past a given output level.  Conversely, a lower initial cost of entry is often associated with higher variable costs.  Neither is necessarily best.  For example, many MVNOs probably outperformed many facilities-based networks over the past few years.  Will MVNOs, with their low cost of entry and high variable costs, always outperform the same facilities-based carriers?  Who knows?

Other Infrastructure Costs.  Costs associated with tower site acquisition, and associated network equipment, seem to favor the firms with the largest established customer bases.  This is because it costs less to incrementally add sites than it is to build a network starting with a low customer base.  Again, while this suggests that the wireless mobile market is characterized by high fixed costs, it does not explain whether "newer" entrants--with less investment in legacy network design, equipment, and reliance on traditional forms of backhaul (copper DS1s and DS3s)--are able to compensate for these higher costs of initial entry with greater capacity, lower operating costs for a given number of subscribers, and greater revenue opportunities (for example, through offering higher-speed broadband services through newer network design). 

Backhaul.  It is, likewise, unclear to what degree backhaul costs effect competition in the mobile wireless industry, or the degree to which wireless demand affects competition in the backhaul market.  The Commission notes that "traditional" copper backhaul is quickly losing ground to fiber-based backhaul.  Report, 294.  However, the Commission also suggests that "unaffiliated" (with an incumbent LEC) wireless carriers may be at a disadvantage to "affiliated" wireless carriers, due to the costs of special access backhaul (traditionally provided by the incumbent LEC).  Report, 295-296.  On the other hand, given that the largest two wireless networks are also the largest purchasers of "other" incumbent LEC backhaul, it would be helpful to know whether these two carriers have a greater incentive/propensity to differentiate their costs by devoting more "spend" to out-of-region competitive fiber providers--thus promoting backhaul competition. 

Another problem with the "backhaul" section is that it never attempts to quantify backhaul costs in absolute terms, or as a percentage of annual costs or revenues.  The only reference it makes is to a study in Verizon Wireless' NOI Comments, stating that backhaul was expected to increase from a $3 billion market now (2008 total mobile wireless revenues-$150 billion (Report, 201)) to an $8-10 billion market in the next 5 years).  Report, 296, n.785.  Assuming an industry cost of backhaul at $3 billion, this would put backhaul costs at slightly less than advertising costs, at around $3.4 billion for the most recent year.  Report, 128. 

It might be the case that backhaul costs, and the other "upstream" input costs discussed in the Report, are a competitive concern, but the Commission didn't support this rhetoric with data.  Again, misleading, and, therefore a little "ugly" . . . . 
 
April 8, 2009 2:25 AM

Broadband Map? Makes Me Want to Take a Nap . . . Instead, Let's Make It a Treasure Map!

It's been said that, "[a] movie scene depicting Chuck Norris losing a fight with Bruce Lee was the product of history's most expensive visual effect. When adjusted for inflation, the effect cost more than the Gross National Product of Paraguay."  If this is true, and I'm not saying it isn't, history's second most expensive visual effect might be the $350 million broadband map that the NTIA is charged with creating under the ARRA See p. 14.  In all the discussions of how to spend the broadband stimulus money, very little attention has been devoted to what is potentially "history's second most expensive visual effect."  I'm not saying the broadband map is destined to earn this title, but the NTIA and the FCC owe the broadband map some thoughtful, up-front attention--even before money starts to be distributed--in order to maximize the broadband stimulus grants.  However, it's easy for me to say the map deserves some serious attention, but the real question here is how do you make a map produce $350 million in value to American taxpayers?


Continue reading Broadband Map? Makes Me Want to Take a Nap . . . Instead, Let's Make It a Treasure Map!