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In my days in the telecom industry, I dealt with one of the largest former deals of a carrier reselling spectrum branded through another carrier. For a short while, Qwest Communications had a deal with Sprint where Qwest would resell Sprint’s wireless service, branded as Qwest, using the Sprint spectrum. These are my own observations from that situation. Think of this post as a complement to the posts about how entry into the wireless market is very hard.
This was a nightmare (and killed the enterprise) for multiple reasons:
- The provision of service, and the perception of branding. Because the service was Qwest branded, people rightfully assumed that Qwest was the company they were receiving wireless service from. This means that Qwest had to invest in support for both technical and billing services. In practice, this was a disaster. Billing wasn’t a big deal, since Qwest had a very large billing apparatus at its disposal (arguably larger than Sprint’s). Wireline carriers have a comparative advantage in billing. However, technical support was a jumble between what Qwest could handle, and was Sprint needed to handle. Not to mention the fact that beyond that, phone manufacturers were another layer of bureaucracy. There was rarely a line drawn, and customers ended up frustrated by the fragmentation.
- The handset market. The United States is unique in the world in the way we use carriers as “gatekeepers”. That is, that handsets are carrier specific. This creates very large annoyances by itself, but in reselling service, it becomes a quagmire. Qwest had many problems keeping up with mobile phone demand, even before iPhone Android. The latest phones Sprint was offering would be late or never to arrive on the Qwest network, and would essentially pit Qwest in competition with its own partner. Is the convenience of a wireless bill coupled with your home phone/tv/internet bill really worth it if you don’t have access to the latest technology? Usually not.
- Large fixed costs in licensing which couldn’t be offset by the prices of wireless service. Qwest was amazingly ambitious with pricing in the beginning of their wireless enterprise. Pioneering such conveniences as “5% bundled discount”, “unlimited minutes at 7″ and “unlimited data”. This was a very large mistake that went out the window very quickly. These plans were arguably great for consumers, but they couldn’t be sustained in the arrangement Qwest had, because the costs of licensing the spectrum were too large. Qwest wanted to make a large splash, and they didn’t do a bad job…but the PR after they had to rescind these deals was very damaging. People just didn’t flock to Qwest Wireless, for obvious reasons of the cellular market being very sticky. It was a brilliant marketing move executed at the wrong time by the wrong player. They were expecting a larger migration…but large migrations are not characteristic of wireless service because of the fact that it is a rather fixed investment in the US.
Qwest (or CenturyTel) now resells Verizon, but simply deals with billing. That is, they include Verizon on their own bill, and offer a slight discount for bundled service. This is a much better arrangement given the realities of number one. However, Qwest was really done in by artificial scarcity of wireless spectrum and to a lesser extent the market structure. Licensing Sprint’s network was phenomenally expensive. The costs didn’t allow Qwest to differentiate their product, and make even a tiny splash in the broader wireless market. This could have been different had the costs of owning spectrum been lower…as they probably would be in a market, especially for higher frequencies.
It is interesting to note that US West owned a portion of very low frequency spectrum that they built out in certain markets for wireless service. US West used to offer cell phones that, in the 14 markets they covered, offered the best service anywhere (remember, this is the late 90′s). That spectrum was sold to Verizon.
The question in the title is a very ambitious question, and one that I don’t have the answer to. It has been a long time since I’ve spent any amount of energy studying the telecom industry from an investment and market perspective. Its something that I used to do when I worked for the “baby-Bell” Qwest (which has since been bought). However, I’ve always been interested in telecom, an interest that stemmed from my mother’s career with AT&T (then Northwestern Bell, then US West, then Qwest). However, no one cares about competition in wireline service anymore, almost to the point where TAP seems redundant. I once wrote an e-mail to the CEO of Qwest urging him to license their physical copper, and focus investment on FTTN and FTTH. That obviously didn’t happen. As a fun fact, if you’ve ever toured a telecom CO, it’s fairly appalling, dirty, and messy. Reflecting little ongoing investment in old technologies.
In any case, the AT&T/T-Mobile merger has caused quite a firestorm, with predictable lines being drawn. Someone else given the time and incentive will have to definitively answer the questions of the effects on competition, the consumer, and the relative market power granted by the deal. I’ll be honest, due to the sticky nature of the market, I have a vested interest in prices rising. I am grandfathered in at my contract rate, which includes unlimited data, and any extra revenue that I don’t have to give the company pays me dividends.
In any case, I see a much different problem that is at the core of this deal. AT&T has made it fairly clear that they are purchasing T-Mobile for their assets, most notably, their network technology…which actually means the spectrum bandwidth that T-Mobile owns. Now, AT&T along with Verizon own ~90% of the 700Mhz band in large markets. This is “good spectrum”, because lower frequency has an easier time penetrating things like cement and hills. However, most data seems to be carried on higher frequency spectrum, which obviously degrades signal. I’m not exactly sure of the spectrum that T-Mobile owns, but if it is lower frequency, it would actually be a boon for AT&T, which seems to have problems with data connectivity.
But the real problem is the FCC. The way in which we ration the wireless spectrum is abhorrent, and very political. Resale of spectrum is almost unheard of simply due to the one fact alone. If there was a market in spectrum usage, it is likely that AT&T wouldn’t need a deal like the one they are proposing, they could just strike a deal to either license or buy spectrum from someone else at a reasonable market price. The could bargain spectrum which doesn’t suit their needs so well for a range that does. There could be all sorts of highly beneficial transactions, if only there was market established. There is, of course, no market established…so the only cost-beneficial course for companies to take is to gobble eachother up in order to attain certain assets.
Wireline service was arguably a natural monopoly, and continues to be a largely geographic monopoly to this day. “Competition” in wireline service is one of the most confusing things you’ll ever peer into. This need not be so with something as modular as wireless, but the FCC is ensuring that wireline model is ported over to wireless service. THAT is what is hurting consumers. Perhaps regulators shouldn’t let this deal go through…but they should also realize that they created the conditions for this deal to be pursued in the first place. They’re setting the fires they subsequently try to put out. It seems like a lot of time and energy being spent to make us poorer than we otherwise would be with a simple free market.
It would also be an interesting twist for the FCC to tell AT&T to drop the deal and in return, they’d be able to license the extra spectrum they apparently need. That isn’t an optimal solution, but one I’d be interested to see unfold.