I struggled to find a good title for this post and eventually settled on that rather bland one, but what this is really about is the fact that telecoms competition centers on the core network in Europe and the access network in the US, and that this is a result of the very different regulatory approaches over the last 15 years or so.
In Europe, a level playing field based on regulated access to the incumbent’s network
European regulation has focused on regulated access to a single incumbent infrastructure with the goal of creating a level playing field for competitors such that they can provide services on equal terms with the incumbents’ own retail arm. This started with carrier selection and pre-selection in the voice world, and extended to local loop unbundling and bitstream access in the broadband world, finally to be followed by wholesale line rental back in the voice world. All of this – if regulated at the proper price – means a competitor can offer voice and broadband services at essentially the same cost as the incumbent without building out much infrastructure of its own at all.
In the US, a botched attempt at incentives to invest…
In the US, meanwhile, the model was set up somewhat clumsily (it didn’t help that the 1996 Telecoms Act was conceived when the Internet was a marginal force and implemented when it was clear it would be a major disruptive factor in the telecoms market). Broadband wouldn’t become widespread for several more years but would become the major thrust of regulation under the ‘96 Act. The regulation, as applied, essentially created a variety of ways for competitors to access the handful of incumbent networks in different parts of the US at regulated rates. Resale (which has equivalents in only some European countries), UNE-P (which is roughly analogous to bitstream access in Europe) and UNE-L (analogous to LLU) provided competitors with a ladder of options which they could make use of as they built out their own infrastructure. Resale would be the first rung on the ladder, and as the competitor won enough business on that basis they’d build out more infrastructure and start using UNE-P. Once that was successful they’d move on to UNE-L, having built out more infrastructure. It was like the European system with appropriate incentives.
…followed by inter-modal competition
It was a great theory, but the pricing was botched such that there were perverse incentives and many competitors got stuck on rung 1 or rung 2 rather than moving to UNE-L. Many competitors’ business models were also based on those fabulous Internet economics and thus went belly up when that bubble burst. Over time, the regulatory emphasis in the US shifted towards what is known as inter-modal competition – essentially relying on competition between competing infrastructures rather than regulated competition over a single infrastructure. The UNE-P rug was pulled out from underneath the few remaining services-based competitors, who now had to negotiate rates commercially, typically resulting in higher prices. But in most markets a cable operator and an incumbent telco duke it out for supremacy.
The resulting competitive environments are very different
The results of these two regulatory approaches couldn’t be more different. In Europe, competitors have largely had to compete on price and on the various bundles they can create around their offerings. Broadband speeds are typically in the single digit Megabits per second, with a high ratio of downstream to upstream speeds. It’s cheap, but bandwidth caps abound. Increasingly, it’s likely that competitive differentiation will have to shift to the core of the network, which is where the clever stuff will happen. Whether it’s IMS or some other technology, the key battle ground is not the access network, which is shared by all the major competitors in most countries.
In the US, meanwhile, the competition in broadband is all about the speeds. Verizon and AT&T’s fiber rollouts have enabled broadband speeds which lit a fire under the cable operators they compete against, who have returned in kind with higher speeds of their own. I live in an area where Verizon has recently made available a 25Mbit/s down, 15Mbit/s up broadband service for $65 a month (less as part of a bundled package). Cablevision, the local cable company, offers lower speeds, but they’re still much better than what most are seeing in the UK. There are no bandwidth caps (Time Warner Cable, the only company to really push in this direction, was scared off by the backlash), and there’s very little competition on anything other than speed. The access network is the source of differentiation in the US broadband market, and that’s unlikely to change. It’s only possible because there are two competing infrastructures, which itself is only possible because of the existing cable TV networks that predated the broadband market by many years.
Implications for future market development
What’s interesting is what this means for future market development. In Europe, alternative operators will continue to have to fight tooth and nail for whatever little differentiation they can find through service, bundling with other offerings, and core network enhancements that somehow improve performance or offer better integration with other services. All while being squeezed on margin because these things are all a tough sell when the basics are the same. In the US, meanwhile, we’ll see a speed race between the two sets of companies – less intense in AT&T territory (and even less so in Qwest territory) – but there nonetheless. I’d argue that this will benefit customers more because there will be real differentiation between the two on speed and constant upward movement in the maximum speeds, making possible more services. I don’t like the chances of the many alternative broadband providers in Europe, while the series of effective duopolies in the US looks likely to be a lot healthier.
I penned the piece below for our Straight Talk daily email the day after the US election. Since that time I’ve seen more and more articles springing up around this subject, some of them based on new news such as the appointments to the various Congressional committees overseeing aspects of telecoms. Some examples:
Here’s my piece from a few weeks ago. Also on the topic of regulation, the “5 things regulators can do to stimulate telecoms” I mentioned in this post will be published in the Straight Talk monthly publication in December – co-authored with Matthew Howett, who heads our regulation team.
What the US election means for telecoms
The Dow Jones stock index dropped around 5% on Wednesday in an apparent response to the election of Barack Obama as the next president of the United States. Some investors fear an increase in regulation and taxation and a negative impact on businesses under an Obama administration. Telecoms operators should start thinking about what an Obama presidency will mean for their businesses too.
A deregulatory FCC administration comes to a close
The accepted wisdom appears to be that the Chairman of the FCC, Kevin Martin, will step down following the election of Barack Obama, and will likely be replaced by a Democrat nominated by the incoming president. This will shift the balance at the FCC from a 3-2 Republican majority to a 3-2 Democratic majority for the first time in eight years. As the terms of the other commissioners expire over the next few years there may be further changes in the composition of the commission.
The Martin FCC and the regime of his predecessor, Michael Powell, have taken a largely deregulatory, hands-off approach to the US telecoms sector. They have given the green light to large mergers such as Deutsche Telekom’s acquisition of Voicestream, SBC’s acquisition of AT&T and AT&T’s subsequent acquisitions of BellSouth and Cingular, Verizon’s acquisition of MCI, and just this week the acquisition of Alltel by Verizon Wireless and the merger of Sprint’s WiMAX assets with Clearwire. As such they have presided over a significant thinning of the major players in the US market, leaving four major wireless operators and three major wireline carriers (with Verizon and AT&T making up two of the members of both camps).
At the same time, regulations have been rolled back in a number of areas, reducing the reporting and network access requirements imposed on the RBOCs and focusing on facilities based competition as the preferred alternative to regulation-dependent, service based competition. This has resulted in an effective duopoly between cable companies and telcos in the consumer market and an oligopoly in the large enterprise market, with only the small and medium sized business market seeing a significant number of competitors.
Larger operators likely to suffer most, but broader repercussions likely
The incoming FCC is likely to take a different approach, much more sceptical of further concentration of market power in the hands of a small number of players, and much less likely to lift regulation. Indeed, it is also much more likely than the outgoing administration to finally tackle the issue of net neutrality decisively, something the Martin administration dodged for a long time and then handled only half-heartedly earlier this year.
As such, the large operators which have done so well under President Bush are likely to find life rather harder under President Obama, while smaller players and consumer groups are much more likely to have their voices heard. The change at the FCC is likely to be echoed in other government institutions too, such as the Federal Trade Commission and the Department of Justice, both of which have roles to play in regulation competition and merger activity in the telecoms sector too.
On top of all this, broader changes in the government’s approach to regulating business will impact the telecom sector too. The Obama adminstration’s likely focus on environmental issues may lead to more stringent emissions standards, for example, something which hits telcos with their large fleets of specialised vehicles particularly hard. Tax rates on corporations may have to be raised to pay for some of the income tax cuts and increases in spending proposed by the Obama campaign.
At the same time, the drive towards sustainability should also provide opportunities for telcos, which stand to gain from efforts to substitute telecommuting, TelePresence, telemedicine and other innovations for their less carbon friendly current incarnations. If the Obama campaign makes good on its promise to invest in clean energy and other technology to reduce emissions, telcos may be the beneficiaries of some of this spending too.
Larger telcos are likely to feel the impact of the change in adminstrations more than their smaller brethren, but all telcos are likely to have to make some adjustments and concessions under the new regime.
Ed Markey’s at it again, this time meddling in the wireless services market. He has a new bill out which is aimed at wireless carriers primarily (see my post on his previous effort here.)
From the preamble, which lays out the context for the proposed legislation:
(2) Wireless service has become a replacement for traditional telephone service for millions of consumers in the United States.
(3) As wireless service is increasingly used and relied upon by residential and business consumers, such consumers will increasingly depend on Federal and State authorities to apply and enforce essential consumer protections applicable to such service in a manner commensurate with the role such authorities have played in ensuring consumer protection with traditional telephone service.
So, the key argument here is that, since wireless services are replacing wireline services for at least some people, the same (or similar) “consumer protection” provisions are required for wireless services as have previously been made for wireline services. Before I got to the second half of (3) above while I was reading it, I assumed it was going to say “the same protections as are applied to other commercial businesses under existing US law.” Because that’s the logical thing to say: wireless consumers should be subject to all the same consumer protection provisions as consumers of any other product or service. Why do we need special rules for wireless services?
In Section 101 (a) (1) we get to the meat of the matter. The Bill proposes that carriers should have to disclose to consumers the complete terms of any plan they’re signing up for, including the duration of the plan, the number of minutes included (although no mention of data transfer), any trial period, “the terms of subsidizing any wireless customer equipment” (whatever that means), and information on early termination and other non-recurring fees. Carriers also have to disclose up front any and all charges, including taxes (which could be tricky since they change from time to time, as do charges).Now, in and of itself, this is reasonable enough, but isn’t the bulk of it covered by existing consumer protection laws? And if not, why does the wireless industry have to be different from other industries?
Section 102 deals with early termination fees. The first requirement is:
each commercial mobile service provider to offer a wireless service plan for which there is no early termination fee;
Which would presumably be covered by prepaid plans, now offered by all major carriers. Which makes this a bit of a hollow provision. Section (2) adds:
that if a commercial mobile service provider offers such plans with subsidized wireless customer equipment, such provider shall offer to consumers the opportunity to purchase subsidy-free wireless customer equipment in return for the ability to secure service, without a long-term wireless service plan, at a price no higher than a comparable wireless service plan offered with subsidized wireless customer equipment;
Now, some people have assumed this means that AT&T would have to offer unsubsidized iPhones. I’m not sure it does, since it doesn’t specify that customers shall get the same “wireless customer equipment”. At the very least, this is an easily exploitable loophole. But it’s not clear that Markey’s intention is even to force de-subsidization of all handsets, just the option to buy one or more handsets in this way. Of course, Verizon Wireless has already announced that it plans to allow customers to attach any phone that meets basic requirements to its network, and AT&T and T-Mobile as GSM carriers offer this option by default.
Section (3) requires that early termination fees (ETFs) must be prorated over the life of the contract, and that the proration is just based on the cost of subsidizing handsets (which suggests that ETFs should be different for each handset rather than standardized).
Then we get onto wireless coverage maps, which must be provided by each carrier, and which must depict sufficient detail that they show
(A) generally geographic areas where commercial mobile service is not predicted to be regularly available; and
(B) whether or not a consumer is predicted to receive commercial mobile service in the general geographic area in which such consumer’s primary residence is located, to the extent prediction of reception in such area is feasible using the formats specified in paragraph (1).
“General geographic area” is just vague enough to be completely useless. All carriers provide some kinds of maps for coverage – see:
These tend to provide enough detail to see if your street gets coverage, and that’s about all that can reasonably be expected. So what’s the point of this provision? To be really useful, these maps need to tell you whether you can get coverage inside your house (which is where most people have problems) but that’s impossible. So again, this feels pretty pointless, especially given the fact that the carriers are already providing such maps without legislation requiring them to.
Markey also wants the carriers to do the government’s dirty work for it:
to require that any charge specifically required by a Federal, State, or local statute, rule, regulation, or order to be collected from a subscriber be listed in a separate section of each bill sent to a subscriber and itemized separately in clear and plain language;
Section 105 is the “create employment in the wireless industry section” (not really, but it could be), since it requires potentially huge amounts of disclosure on the part of the carriers about their coverage, signal strength and other items. This seems to be covering more or less the same ground as the mapping question, but could potentially go a lot further in the hands of an interventionist FCC.
Now onto contract extension. The bill requires that customers not be provided contract extensions unless:
the subscriber agrees to extend such plan by providing express consent to such extension
Cue angry customers a few months from now wondering why the heck their cellphone service has been cut off when they pay their bill every month, because the alternative to extension is cessation of service, and we all know a lot of customers won’t respond in time.
We now get to the Verizon clause. Apparently, the fact that Verizon has offerered a 30-day trial period (its “Worry Free Guarantee“) means not that the market will take care of this on its own, but that everyone should be forced to do it. At least the bill doesn’t require carriers to pay back any fees racked up during those 30 days as Verizon has willingly agreed to do.
This Worry Penalty Free option is pretty ironclad:
a wireless service plan may be canceled upon the request of a subscriber for any reason during the 30-day period that begins on the date on which such plan was executed.
Note: “for any reason” – i.e. just if they feel like it, or if they enjoy hopping from carrier to carrier just to drive them nuts and cost them money by forcing them to restock used devices and sell them at a discount. And this next point is not quite clear either:
If a subscriber exercises the right to cancel such plan under paragraph (1), a subscriber shall receive a pro rata refund of the charges, if any, paid for wireless customer equipment used in conjunction with such plan if such equipment is returned during such 30- day period.
What’s pro rata about buying a phone? If they mean that carriers can charge a reasonable re-stocking fee, that seems sensible, but there’s nothing pro rata about that.
I’m not going to dwell on the wireless broadband stuff or the spectrum efficiency stuff at the end but might come back to that later.
Overall, this feels like more intervention in a market which has generally done very well by consumers in terms of providing good service at declining prices and offering compelling devices and services. Yes, there are transparency issues, and yes, there are misunderstandings about contracts, but I believe these can be addressed under existing laws and through market-based incentives (just look at that Verizon Worry Free Guarantee and the presence of coverage maps on all the major carriers’ sites as examples). We really don’t need more legislation in this area.
