My email to Gordon Cook, who runs one of the most influential insider lists in communications space. I'm usually fairly active, but dropped off for a bit because of pressures of work. A good friend asked me to blog this so he could write about it. So here you go:
From: Gordon Cook <cook@cookreport.com>
Date: Thu, 20 May 2010 17:17:26 -0400
To: Economics of IP Networks
Subject: [Arch-econ] new FCC report on the entire mobile wireless ecosystem hat tip erik cecil
Erik Cecil asked me to take him off list about a week ago. BUSY!
But today he sent me this material. This document is a veritable BOOK -250 pages and nearly 1000 footnotes.
FCC dings wireless industry for having no competition - news report here: http://www.fiercewireless.com/story/fcc-dings-wireless-industry-competition/2010-05-20
300 page report here: https://www.fcc.gov/14report.pdf
p.s. some of the key quotes from the FCC's Wireless Competition Report ...
"This Report also goes beyond previous reports in reflecting the transformative importance of mobile wireless broadband, which has resulted in a shift from devices that can place traditional phone calls to pocketable devices that can access the entire Internet. Because each of the interrelated segments of the mobile wireless ecosystem has the potential to affect competition, this Report analyzes competition across the entire mobile wireless ecosystem, including, for the first time, in-depth analyses of "upstream" and "downstream" market segments, such as infrastructure and devices."
"The two largest providers, AT&T, Inc. (AT&T) and Verizon Wireless, have 60 percent of both subscribers and revenue, and continue to gain share (accounting for 12.3 million net additions in 2008 and 14.1 million during 2009). The two next- largest providers, T-Mobile USA (T-Mobile) and Sprint Nextel Corp. (Sprint Nextel), had a combined 1.7 million net loss in subscribers during 2008 and gained 827,000 subscribers during 2009. One widely-used measure of industry concentration indicates that concentration has increased 32 percent since 2003 and 6.5 percent in the most recent year for which data is available."
"Especially as mobile wireless data usage grows, spectrum becomes an increasingly pivotal input. In particular, lower-frequency spectrum possesses superior propagation characteristics that create certain advantages in the provision of mobile wireless broadband service, especially in rural areas. Lower-frequency spectrum potentially allows for a higher quality of coverage with fewer cell sites, when compared to other frequency bands used to provide mobile services. Conversely, higher-frequency spectrum may be effective for increasing capacity, particularly within smaller, more densely-populated geographic areas. Recent auctions reflect that lower frequency bands are more highly valued than higher frequencies. A significant portion of spectrum below 1 GHz is held by the two largest providers: 67 percent of the 700 MHz band, and 91 percent of the Cellular band, based on megahertz-POPs (MHz-POPs).
"While the seven largest mobile wireless service providers all had EBITDA margins over 20 percent during the second quarter of 2009, only four - AT&T, MetroPCS, T-Mobile, and Verizon Wireless - had EBITDA margins greater than 30 percent, and the two largest providers had the highest EBITDA margins. In addition, these two providers had the highest EBITDA minus CAPEX per subscriber of the top four providers in 2007 and 2008." VERIZON WIRELESS HAD 46.3% EBITDA MARGIN IN 2009!
Erik writes: Keep reading the report; it just keeps getting better. I am thrilled; this is the best piece of work I've seen out of the FCC in more than a decade. (my emphasis.... other emphasis is eriks) I don't know how or why the wake up call came, but finally, I think they get it. (And this is good fact-based stuff, not to mention that for once in their existence they see the market as an inter-related whole. The numbers tell the story we've discussed on list forever - the age of selling hand-held minute vending machines and set-top channel vending machines is over.) What this country must do is move from subsidizing infrastructure via these older business model paradigms and shift to one where infrastructure is more directly subsidized while, at the same time, freeing ALL businesses to innovate as they please over the top of that. The first step will be to fund the newest forms of business and technology; the second step will be to fund pure infrastructure. The sooner we get out of minute wars and content wars, however, the better. Even in an over the top world, however, regulation will still be required - mostly in the form of Title II-lite - i.e. real Title II, but zero state involvement in unnecessary details like minutes, local calling areas, and the arcana of bell monopoly-isms, with actual, direct, and meaningful antitrust enforcement where simple rules of the road are not enough to constrain bad behavior. (all telecom, all 100% interstate; voice is interstate telephone exchange service; forbear from the ancient requirements, but apply things like 911, CALEA, etc. even-handedly across networks; eliminate rate arbitrage with a single unitary rate.)
What would be interesting on a going-forward basis is to see what comes out on the wireline side, then examine this, the wireline piece, and your work, and others like it, including the stuff that Tim, Paul and others have come up with to see if from all of that we cannot craft a single, sensible, integrated picture of how this Internet machine should work for the next 20 years or so. If that were possible, I think that seeing whether your list - . . . . - could come up with some consensus policy recommendations would be very powerful indeed.
There are, b/t/w, more surprises coming. Cycles of consolidation will roll on for another year or so before private equity (as well as last century's subsidized cash-rich behemoths) have little left to consume but themselves. Nevertheless there is still a zeitgeist out there that says companies can acquire their way to profitability, which, if we were to continue the deregulatory course may be true - VZW did hit nearly 50% margin in 2009 - after swallowing up every wireless network AT&T didn't gobble up - still, that kind of money is a strong incentive.
Provided this is truly a sea change, provided we have new thinking and not old thinking warmed over, provided the administration is seeing just how pissed off every day Americans are about politicians being too close to corporations (something I wrote about more than a year ago), then we're headed in a better direction. Meanwhile, keep your eyes open; we're navigating some very difficult national and global waters, but at least, finally, it appears that the FCC has found its rudder and is actually steering the ship.
Well, back to work; I'm swamped.
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