April 1, 2013 12:04 PM
About a week and a half ago, the FCC released its 16th Wireless Competition Report
. Among the significant data collected and presented in this Report, there is one important, and growing, indicator of wireless competition that the FCC desperately needs to better understand: wholesale wireless competition.
Based on my experience at COMPTEL, I know that a healthy wholesale market is one big indicator of effective retail competition. Because, hey, anytime a retail competitor doesn't have to rely on regulatory compulsion to obtain wholesale access, that's a pretty good indicator that the facilities-based carrier doesn't think it has a whole lot of market power to protect.
The good news is in this Report is that the wholesale wireless segment is getting "healthier" at a faster rate than any market segment. While still a relatively small number of total wireless connections, wholesale connections grew at the fastest rate of any service type measured by the Commission--almost tripling in the 2 year period 4Q 2009-4 Q 2011. Rpt. para. 250.
The FCC's numbers are telling us that wholesale competition is on fire. But when you try to figure out what this really means, well . . . the Commission doesn't seem too sure. Understanding Wholesale Wireless Competition
The FCC introduces us to the wholesale market in paras. 29-36, and it explains how it uses wholesale data for purposes of calculating market concentration in paras. 53, and 57. The largest use of wholesale wireless service is by mobile virtual network operators (MVNOs). These service providers rely on the facilities of other carriers for their mobile service, but handle every other aspect of the customer's account themselves.
Because wholesale wireless relationships are voluntary, we have to presume that both the buyer and the seller expect the relationship to be beneficial. That presumption alone, though, does not tell us too much about how wholesale sales affect retail competition. According to carriers, such as Verizon, a carrier's relationship with its MVNOs is fundamentally "arm's length." Report n. 102. And, why wouldn't it be? Wholesaling at arm's length has long been a routine part of the wired telecommunications world.Wholesale Confusion--Some Say . . .
Well, the FCC's not so sure. Take a good look at the FCC's explanation of the wholesale industry (paras. 29-36), read all the footnotes, and it becomes clear that no less than two academic articles (cited in n. 109), and one report by an "industry analyst" (providing his "predictions" for 2011) (n. 110) characterize MVNO "competition" as something less than the real thing. The only one of these sources freely available on the Internet is the report by the analyst for the Yankee Group, available here
The Yankee Group report is a relatively short article with some of the analyst's "4G" predictions for 2011, and a brief summary of the analyst's thinking in making the prediction. Although, the "predictions" don't seem to be much more than the author's personal opinions, the FCC cites the explanation behind a single prediction in order to characterize the nature of MVNO/network operator competition.
For example, in n. 110, the FCC cites this document as the basis for this insightful gem, "Like a small bird on an elephant's back, if an MVNO can establish a symbiotic relationship with its host and provide some direct commercial benefits, it can flourish." Yankee Group at 7. See also, n.123 "[I]t's critical the MVNO does not compete to any meaningful degree with the host." Id
. MVNOs are also cautioned to never look the host carrier directly in the eyes, as this is seen as a sign of aggression by network operators.
With insights like these, I'm sure readers would like to know how this analyst's "predictions" for 2011 worked out. Well, the prediction backed up by the insights quoted above was this: "MVNO Hype Will Build, But Most of It Will Lead to Nothing."
In reality? MVNOs were able to increase connections by 182% between Q 4, 2010 (when the Yankee Group predictions were released) and Q 4, 2011. FCC Rpt, Chart 13, p. 159. This was the fastest one year growth in wholesale connections to date. Suck it, Yankee Group. But, Maybe Not?
The FCC seems to regard MVNO competition as somewhere between the "franchisee" characterization of the non-industry sources, and the "real thing" characterization of some carriers. See, e.g., n. 125 where AT&T's assertion that competition between carriers for a portion of TracFone's 19 million customers has led to lower wholesale and retail prices is balanced against this quote from a 3 year old academic paper:
It is found that MNOs host MVNOs if and only if the latter do not exert a competitive constraint on MNOs' retail businesses. Thus, absent access regulation, MVNO entry may happen but is unlikely to reduce consumer prices.
Report, para. 35, n. 125. The problem here is not that the carrier disagrees with the theoreticians, or even that the theoreticians' point doesn't make a whole lot of sense for any wholesaler with less than a 50% retail share. No, the problem is that the FCC does not seem to have an opinion as to which is more credible.
* * * * *
If you type the term "industry analyst reports" as a search term in the Report, it turns up four results. Each and every instance is the Commission relying on "industry analyst reports" as an excuse for why it is unable to account for MVNO competition. There is no excuse for the Commission not to try to understand and account for the competition provided by MVNOs in its next Wireless Competition Report. The public needs for the Commission to be the "expert agency" on all things wireless--but especially on the fastest growing customer segment in the wireless industry.
May 25, 2011 12:37 PM
Since 1997, Congress has required the Federal Communications Commission to file annual reports that measure whether certain industries, such as mobile wireless services, are "effectively competitive." Every report the FCC has issued since 1997 has found the wireless market "effectively competitive," until 2010, when the Commission failed to make any finding at all for calendar year 2009. See 2010 Report
While it is not difficult to understand a bureaucracy's fear of commitment--making no judgment on one matter in the present seems to preserve all options for future matters. There are now news reports
, though, that the FCC might take the same "neutral" stance with respect to wireless competition that it took last year. This time, though, that course destroys, rather than preserves, options, and the Commission must reconsider its fear of commitment.
The article notes
that the Commission may be afraid of finding the wireless market to be "effectively competitive" for fear of limiting its options in reviewing the proposed AT&T/T-Mobile merger. If this report is correct, the Commission's reasoning is both specious, and dangerous to its present agenda regarding spectrum policy and incentive auctions--an issue that Chairman Genachowski has been aggressively, and correctly, pursuing since the beginning of the year.
Continue reading The Commission's Wireless Competition Conundrum: "Neutral" Is Not an Option
May 28, 2010 4:30 AM
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-à-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" . . . .