Entner: How competitiveness in wireless continues to evolve

Roger is Analyst and Founder of Recon Analytics. www.reconanalytics.comCongress requires the FCC to generate an annual report on the "competitive market conditions with respect to commercial mobile radio services" (CMRS). Last year the FCC broadened the scope of its analysis beyond wireless service providers to include infrastructure providers, tower companies, device manufacturers, operating systems, applications, content and mobile commerce.  Broadening the scope of analysis made sense because the wireless ecosphere now encompasses so much more than just wireless network providers; however, despite documenting more services, new entrants, more devices and declining prices, the FCC failed to find the industry to be competitive.

It was a curious conclusion, out of step with the prevailing view among investors that the industry is hyper-competitive. This disconnect can have far reaching and unintended consequences such as prompting the commission to impose regulations that could distort the U.S. mobile marketplace just as it ramps up for 4G network investment and innovation. I've put together a list of issues that I wish the FCC would focus on so that its Competition Report is a more useful capture of the state of play:

  • A deeper analysis of the interaction and change of relative power that has occurred with the emergence of smart phones and device ecospheres. There seems to be an interesting dichotomy between the belief of Silicon Valley that the wireless operators have become irrelevant and the belief among some inside the Beltway that the same wireless operators are too powerful and should be more heavily regulated.
  • Consideration of the revenue streams of the future--applications and mobile advertising. In only a few years, the operators have effectively been dis-intermediated from the mobile app purchase process. Apple and Google have become the dominant content aggregation and billing points for smart phones. Microsoft and Blackberry are working hard to catch up with Apple and Google and the operators are being relegated to bill processors, if they are lucky. The next multi-billion dollar revenue stream is mobile advertising. Google expects more revenue from mobile advertising than from the web, including more than $1 billion from it in 2010. What impact does the FCC think these new revenue streams will have on the industry? Only a few years ago, operators seemed destined to play a significant role in both of these rapid growth segments, but due to market forces operators are mere support functions today.
  • Recognition that the current state of inter-operator competition is due to operator decisions rather than the preordained result of size. A closer analysis of economies of scale among operators will show that most of them are already in the asymptotic part of the curve where the economic benefit of increased size is insignificant and is trumped by management decision. If size would have been the predominant factor, Sprint would be closer in size to AT&T and Verizon rather than T-Mobile. But AT&T and Verizon have separated themselves by outperforming Sprint and T-Mobile at time when Sprint had to solve problems from buying Nextel, and T-Mobile was playing catch-up after delaying its 3G rollout. Today, Sprint has fixed most of its internal issues and is growing again and T-Mobile is creating buzz with its new 4G network
  • Further analysis into MVNOs and their inclusion into market structure analysis. In the 14th CMRS report, the Commission concluded that MVNOs had a limited ability to compete against facilities-based providers. The disruptive success of TracFone, now the fifth largest service provider, speaks to the contrary. The company grew by 3.5 million subscribers from end of 2009 to the end of 2010 with innovative offerings like Straight Talk and Safelink. That growth outpaced Sprint, T-Mobile, U.S. Cellular, and MetroPCS combined. On a percentage basis, nobody grew faster than TracFone in the U.S. market.
  • In last year's report, the FCC began to focus on the different propagation characteristics of spectrum above and below 1 GHz, creating the impression that such distinctions are relevant to a company's ability to compete. At the initial stages of a network build out, propagation matters because the operator has only a few customers and must create maximum coverage with a minimal number of sites. As demand increases, more cell sites are built and propagation becomes less important. As Dr. John Saw, CTO of Clearwire has explained: "A loaded network using 700 MHz does not look significantly different from one using 2.4 GHz" due to the capacity constraints of the cell. Further, as the FCC observed in last year's Report, new entrants focus on urban areas to quickly generate significant return on their investment and make the propagation characteristics of its spectrum a minor issue. Furthermore, a simple analysis of minutes of use per cell site will show that it is the technology the operator uses to leverage its spectrum has significantly more impact than what spectrum it has in its ability to compete with its rivals.
  • The FCC's focus on profitability as a meaningful proxy for the state of competition seems out of step with the bulk of the economic and academic literature on the topic. More importantly, the FCC's line of analysis on this topic could be a signal that the FCC wants to cap profits. These profits are used to improve the customer experience by funding network improvements and expansion. Every company in this sector, incumbent and new entrant alike, has an obligation to maximize profit for its shareholders and investors. Any hint of a profit ceiling will dry up funding because every successful new entrant will inevitably become an incumbent, and become subject to the profit restrictions, which limits investors' upside potential. By altering the risk/reward ratio, this type of signal from the FCC will discourage new industry entrants rather than attract them

The CMRS Report, done correctly, is an invaluable guide to policymakers, analysts, and even consumers.  In the last 15 years, most experts have agreed that the wireless industry is a text book example of a rapidly evolving marketplace in which competition has successfully spurred new and better services and choices while driving prices down. Because of the critical role the wireless industry plays in driving innovation across the U.S. economy, the millions of jobs it supports both directly and indirectly and the tremendous consumer benefits it generates, it is imperative that this Commission not undermine the regulatory framework supporting these successes with misguided or outdated analysis of the state of the competitive markets for commercial mobile wireless services.  I look forward to reading the 15th Competition Report.

Roger is Analyst and Founder of Recon Analytics. www.reconanalytics.com

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