Carriers double down on network investments, but need regulator support

The world is going wireless in every way possible. Wireless connections are at an all-time high–both globally (with more than 6.8 billion connections) and domestically (with more than 320 million connections). More than 50 percent of Americans use their mobile device exclusively to make phone calls; about a third have completely cut the wire.

The way in which consumers want to be served is changing. Innovation has enabled us to deploy different networks, providing different services, serving different customer demands. The FCC acknowledged that the investment in two competing network technologies is not optimal and that focused investment in one network is yielding better results for consumers and the country as a whole. State regulators are increasingly recognizing this and are regularly granting wireless the status as carrier of last resort. Verizon has arrived at such understandings in several states, most recently in Pennsylvania, and one would expect that AT&T would follow with agreements of its own now that it has announced the Velocity IP program. The fundamental basis of AT&T’s decision to invest an incremental $14 billion over the next three years is a focus on the segments where regulatory clarity exists (i.e., wireless and landline IP services). What would help to unleash even more investment is regulatory clarity that drives investment rather than is a barrier to investment.

AT&T’s incremental $14 billion investment brings its annual capital expenditures over the next three years to $22 billion per year, after which it will go back to its more traditional $16 billion per year. Telecom and especially wireless is one of the most dynamic and competitive markets where companies must constantly innovate and invest or face extinction. I remember having a discussion with senior managers at BellSouth about innovation and their decision not to follow Verizon’s and SBC’s lead of deploying fiber to the premises or even to the node. Their reasoning was that it would impact their margins–to which I just replied, “You will have that as your epitaph on your corporate tombstone: ‘We had great margins.'” Two years later SBC acquired BellSouth. This is a clear lesson that operators have to invest or they will perish.

The two largest capital investors in wireless are AT&T and Verizon and both have grown, whereas those who have underinvested are struggling. Indeed, the more an operator invested, the better it performed in the market. Both Sprint and T-Mobile have recognized this and are investing more heavily in their networks and hope to profit from it. After the approval of using the WCS spectrum for 4G LTE services, AT&T has finally sufficient spectrum in rural areas to be able to expand 4G LTE coverage to 90 percent of Americans. AT&T is putting its money where its mouth is, outspending Verizon Wireless to improve its network with the goal of catching up to (if not supplanting) Verizon Wireless as the provider with the best wireless network. The clear winner in this capital expenditure race is obvious: The American customer, who will get better, faster, more powerful wireless services in more places.

In addition, AT&T is investing more heavily in its landline business, creating an all-IP backbone that fits with its wireless all-IP backbone, rapidly moving away from an aging and increasingly obsolete TDM backbone, which was first deployed in the 1950s. In addition, more and more of the copper that is being used to connect people via landlines is being replaced by fiber connections that have by far more capacity to carry voice and data traffic. The benefits of new technology come to consumers and businesses alike as these new technologies will be used to bring more advanced and competitive services. The number of Americans who will receive a choice for TV services will increase substantially. For example, within AT&T’s U-Verse footprint and Verizon’s FiOS footprint, many customers have chosen these fiber-based solutions and switched from cable. Furthermore, over the course of the next three years, consumers and businesses in rural America that currently has only one choice, will receive better and more powerful services, and in all likelihood will have the choice between multiple providers.

This all brings me back to a new regulatory scheme that is not tied to technology of the early to mid 20th century with a focus on technology. Rather, new regulation should not play favorites, which enables regulatory arbitrage. We need to move from technical regulation to functional regulation. After all, how people use technology is more important than the particular technology they happen to be using.