It’s that time of year again. The FCC has to develop its next annual report to Congress on the state of competition in the U.S. wireless industry. In the last few years, the FCC has done a good job of expanding the scope of information it analyzes to inform its opinion. The agency’s focus on the wireless industry value chain–from network infrastructure, to over the top operators, to device manufacturers–is a very good trend, but there is room for improvement. 2011 was a year of dramatic regulatory activity with the denial of the AT&T/T-Mobile merger and the proposed acquisition of the cable companies’ idle spectrum by Verizon Wireless. How will these watershed events be analyzed in the next competition report? I hope the FCC will generate a dispassionate, objective and fact-based report on the state of the industry. The analysis and utility of the report could improve if the FCC took the following into consideration:
- The FCC must recognize the fact that wireless carriers are no longer the “Masters of the Universe.” Although they remain the core of our entire wireless-enabled ecosystem, they are no longer able to chart their own course due to competitive pressures being imposed by other parts of the ecosystem. Paradoxically, however, the FCC is intervening in the activities of the network operators more than it ever has before. It would be very helpful to have the FCC explain this dichotomy, and make clear how it figures that more regulatory hurdles for network operators would grow the ecosystem and serve consumers.
- For customers, the wireless experience is so much more than just their service provider. If the FCC is going to craft sensible policies based on its wireless competition reports, the agency must adopt a holistic view of the sector and consider how application providers, operating systems and device makers inform and influence the industry’s competitive dynamic, including the consumer impact of over the top providers competing with network operators. Services ranging from WhatsApp to iMessage are competing with services offered by the carriers. This reality could relegate operators to being dumb pipes. Is this a good thing for consumers and the sector overall? Rendering a dynamic growth sector to a stagnant set of dumb pipes doesn’t sound terribly consumer friendly.
- The FCC must recognize that it needs to view the sector through a clear lens, not one clouded by regulatory hubris. Google and Apple play an extremely powerful role in the wireless ecosphere now. For example, Apple has truly become a king maker in the wireless industry, highlighting how quickly the competitive dynamic changes in this space. If you are a wireless carrier and don’t have the iPhone, you are losing postpaid customers. And if you get the iPhone, your profitability takes a serious hit. In the fourth quarter of 2011, Sprint spent about $500 million on iPhones, which represented about one-third of its OIBDA profits. Despite this significant impact on profitability, the company felt it had no choice but to accept Apple’s terms. Fortunately, for US Cellular and many other providers, Google offers Android as the chess proverbial Queen to handset providers that lets them compete on an almost even footing with Apple. All the while, Google makes more than a billion dollar from mobile advertising through Android handsets. If the FCC fails to take this competitive dynamic into account, any policies it adopts will be immediately outdated and likely to distort the market.
- The FCC must accept the fact that every wireless operator needs more spectrum. The more successful the operator, the more spectrum it needs, as more customers use more spectrum. Trying to hold up network upgrades and capacity enhancements by some operators as a way to help less successful carriers is a policy that will doom everyone, including the less successful players. Introducing spectrum restrictions on larger operators is, in the long run, akin to managing market share. When the larger, more spectrum-constrained operators have reached their respective spectrum wall, quality declines and prices rise, prompting customers to leave and join other less spectrum-constrained operators. Those networks then become spectrum constrained, leaving customers with nowhere to go for high-quality, low-cost services. The best approach is making more spectrum available to all, and quickly.
- The FCC has to recognize that all spectrum allocated to CMRS is useful in a loaded network. Below 1 MHz spectrum offers immaterial advantages over above 2 MHz spectrum in a loaded network. At the same time, the FCC should elaborate on why it counts only half of Clearwire’s spectrum in its spectrum screen calculations. If half of Clearwire’s spectrum is unsuitable for mobile broadband service, then it should say so and take the necessary steps. If it is suitable, then it should include it in the spectrum screen since counting only half distorts the level playing field.
- Contrary to what many want you believe, the market became even more competitive among operators in the last year. The resurgence of Sprint from its near-death experience when it acquired Nextel is living proof of a resilient wireless carrier ecosphere. Sprint is gaining subscribers from all of its major competitors as evidenced by the net positive porting numbers from those operators.
- Reseller and Mobile Virtual Network Operators are more important than ever. Tracfone is the 5th largest service provider in the country. With a smart-tiered product portfolio, Tracfone demonstrates to the industry how profitable prepaid can be if it’s done right. Page Plus has carved out a healthy niche, and new entrants like Net Zero are planning to shake up the industry. Don’t expect all of them to survive; it’s a competitive market after all.
- Side-entrants such as Amazon are also making a major impact. Over the course of the last year, Amazon has become the go-to place to get mobile devices and services. Not only does it resell service from all major operators, but it is providing its own hardware. It will be very interesting to see if a 4G Fire tablet will make the same impact on wide-area connected tablets as the Wi-Fi version has made on the local-area wireless tablet market.
We can only hope that the FCC recognizes that it is overseeing a vibrant market that is driven by consumer demand for more and faster mobile capabilities, and it is shaped by competitive forces. The FCC should expand its focus even further to give each part of the value chain the necessary attention it deserves.