The latest wireless statistics submitted to the FCC today show that the U.S. leads the OECD in wireless competition, use and price; the U.S. is not falling behind.

  • These data show why:
    • Monopoly net neutrality regulations are unnecessary;
    • The U.S. leads the world in wireless broadband adoption and use; and
    • Broadband mobility is as important as broadband speed to U.S. consumers.

The CTIA study is based on Merrill Lynch’s research of OECD data. Please read the report’s summary findings below:

The price per minute of service in the United States is the lowest of the 26 OECD countries tracked by Merrill Lynch.

Consumers in the United States have the highest minutes of use per month of the 26 OECD countries tracked by Merrill Lynch.

The United States has the lowest HHI of the 26 OECD countries tracked by Merrill Lynch.

In the United States, the top four carriers represent 86% of the market, making it the most competitive market of the 26 OECD countries reviewed.”

First quarter financial results prove that the success of the broadband sector’s facilities-based competition, is an exceptionally strong foundation on which to build a National Broadband Strategy. (See 1Q09 results: AT&T, Verizon, Comcast and Time Warner Cable, companies are listed by revenue size.) The results show:

  • Rare financial/economic stability:
    • With the overall U.S. economy in greater decline than any time since the 1950′s, — a 6.1% decrease in GDP — the broadband sector is a rare brightspot — out-growing the overall economy by 6-11%.
  • Broadband penetration increasing strongly:
    • Reported broadband connections of the broadband bellweathers indicate the broadband industry added between 1.5-2.0 million new broadband users in the first quarter of 2009 alone — despite the worst economy and consumer spending in 50 years.
  • Speeds are increasing:
    • Speeds are increasing as cable is upgrading quickly to DOCSIS 3.0 which currently enables 50-100 megabit offerings and Verizon’s Internet FIOs had a record quarter in fiber to the home broadband additions.
  • Value is increasing:
    • Competition is driving increased value, (price per megabit) as broadband providers routinely increase speeds for the same price to retain customers.
      • Cablevision will be offering 100 Mbs downstream for $99.95 to its whole footprint in response to competition from Verizon FIOS.
      • And Sprint is offering deeply discounted data plans to stay competitive in wireless broadband.
  • Strong infrastructure investment/deployment:
    • The first quarter results also indicate that the broadband sector continues to invest more in infrastructure than any other industry in this severe economic downturn.
    • Investment and deployment of next generation infrastructure, Wimax, LTE, DOCSIS and Fiber also remain strong relative to the rest of the economy, which has drastically reduced investment in innovation because of the deep recession.
  • Sustaining other sectors:
    • Finally, in further evidence of the competitiveness of the sector, broadband companies continue to advertise at a very high rate, which is a rare bright spot in the advertising sector.
    • This leading adverising spending by broadband providers is also a key economic lifeline to many struggling newspapers and broadcasters ravaged by the collapse of other traditional big advertisers — autos and housing.

In sum, broadband is not a sector that is failing, underperforming, or in need of government assistance or intervention.

Facilities-based broadband competition is succeeding in all the measures that matter: economic growth; jobs stability with above average pay/benefits; broadband penetration, investment, and deployment; and increased speed, value (price per megabit) choice.

  • Broadband is a shining success story of stability, growth and value during one of the toughest economic periods since the Great Depression.

In addition, the broadband sector continues to be a consistent and positive partner in solving many of the nation’s most pressing problems — by helping lower the costs of education and health care and by helping reduce energy use and pollution, through increased telecommuting.

The FCC’s pending National Broadband Strategy should build upon the strong foundation of broadband competition and economic growth.

FreePress in petitioning the FCC to apply its Broadband Principles to wireless (because they currently do not apply to wireless) effectively has conceded that broadband is not the duopoly market they have long alleged, but is a competitive marketplace.

  • This is a fundamental concession of fact and a belated recognition of market reality by FreePress, the leading advocacy group pushing for net neutrality. Free Press previously had maintained that it was a lack of broadband competition and consumer choice that justified the imposition of new net neutrality legislation/regulation.
  • Given FreePress’ official wireless petition, FreePress can no longer credibly maintain that the four national wireless broadband services (Verizon, AT&T, Sprint and T-Mobile) are not competitive substitutes to cable modems and DSL/fiber now that FreePress argues that wireless and cable-DSL/fiber are effectively equivalent services for regulatory purposes.
    • Intended or not, FreePress has effectively eviscerated its own longstanding policy case, legal justification, and political argument for mandating net neutrality by abandoning the factual predicate for their case, justification and argument.
  • While FreePress may not appreciate the legal and policy precedent significance of the Supreme Court’s Brand X Decision and the FCC’s 5-0 Broadband Policy Statement, the FCC, and the three branches of Government certainly do.
    • The FCC stated that information service providers, i.e. broadband, “are not subject to mandatory common carrier regulation under Title II.”
  • If FreePress is no longer challenging the underlying premise of broadband competition which is the foundation of current law, and also the Court/FCC’s interpretation of it — what is FreePress’ new rationale/justification warranting new net neutrality regulation? They have not provided a new one.
  • In short, to warrant change in policy, precedent, or law, there needs to be a legitimate, supported and defensible rationale/justification. FreePress no longer has one.
    • Public WiFi spectrum may require no permission or payment to use, however it offers no security or privacy protections for users and there is minimal recourse for quality of service, range, coverage, speed, capacity, security, privacy problems — if and when they do arise.
    • On the other hand, competitive, private WiFi services and commercial wireless broadband services do require permission and payment to use. They also spell out the benefits/limitations in detail in a contract’s terms-of-service — covering among other things commitments of quality of service, range, coverage, speed, capacity, security, privacy, value-added features, etc.
      • The reason wireless broadband services exist and flourish is that they offer a very different value proposition than free public WiFi. Consumers are willing and free to choose which providers’ value-added mix is the one they want.
  • Analytically, there is another big logic problem with FreePress’ petition. It effectively argues that public WiFi use over free unlicensed public spectrum is, and should be, the legal/regulatory equivalent of private commercial wireless use — under a contracted service agreement — over private-licensed spectrum that was purchased at auction for billions of dollars. Simply, they try and argue that whatever one can do on public WiFi, one should be able to do on commercial wireless networks — without any legitimate justification.

    In sum, FreePress’ new petition to apply net neutrality to wireless, spotlights two important questions:

  • What is the new rationale/justification for net neutrality regulation now that the leading advocate for net neutrality has effectively conceded broadband is a competitive market and not a duopoly?
  • Why shouldn’t consumers and businesses be free to buy and sell wireless services under contract in a competitive marketplace like they have been able to for over 15 years?

There are two primary problems with eBay-Skype’s attempt to get the Government to force competitive wireless providers to carry Skype’s free communications app under the guise of wireless net neutrality and Internet openness; first, it is wildly uneconomic, and second, it is anti-competitive.

  • The issue has surfaced in the news (USAToday, WSJ) as Apple enabled a Skype app on the iphone for use on free public WiFi networks, but not on the iphone’s commercial network provided by AT&T; and again when Google’s Android banned a tethering app because it violated T-Mobile’s terms of service as reported by CNET.

I. Skype’s .2% Uneconomics

What is uneconomics? Just what the term implies, not economic, unsustainable… arbitrage.

Skype, has long been seeking a government ruling that its free communications app should be usable on its competitors’ commercial wireless networks with no payment necessary by Skype users or payment by Skype to wireless providers for providing Skype with commercial network services. Its justification has been its interpretation of net neutrality and the FCC’s Broadband Policy Principles, that Internet openness should mean Skype should be able to be used on commercial wireless networks without permission from, or payment to, wireless providers.

Let’s unpack the core microeconomic numbers behind Skype’s uneconomics.

  • At the end of 2008, Skype had 405 million users that generated $550m in revenues — generating $1.36 per user per year, or 11.3 cents per user per month in revenues (RPU).
    • $550m/405m = $1.36… $1.36/12 = $.113
  • At the end of 2008, according to CTIA, the U.S. wireless industry had ~270 million subscribers that generated ~$151 billion, and had average revenue per user of $50.07 per month (RPU). (Since 2000, wireless subscribers monthly bills have remained roughly flat while minutes of use have increased over 700%.)
    • On that revenue base, the industry:
      • Invested $21.1b in infrastructure/spectrum in 2008, for a total cumulative capital investment since inception of $265b;
      • Provided 268,528 direct jobs that pay significantly above the national average comparables (this is an increase of 46% or 84,079 jobs since 2000); and
      • Contructed and operated 242,130 cell sites (this is an increase of 132% or 137,842 since 2000).
  • Now let’s compare the business/economic models of Skype vs. wireless providers.
    • Skype generates $.113 in RPU to competitive wireless carriers $50.07.
      • That means competitive wireless carriers produce 443 times more RPU than Skype.
      • That also means Skype’s RPU is .2% of wireless providers’ RPU.
  • For illustrative purposes only, lets now assume Skype’s .2% uneconomics were somehow forced on the U.S. wireless industry (which already is arguably the most competitive in the world)and Skype’s business/pricing model became the new business model and pricing point at which U.S. wireless providers had to offer services. Looking at it another way, if Skype’s business model became the Government’s new economic benchmark to beat, and we take Skype’s .2% uneconomics to its logical extreme, that would mean a 99.8% reduction in wireless:
    • Revenues from $151b to $300m, a reduction of $150b from the economy, much more with a normal macroeconomic multiplier; and
    • Employees from 268,528 to 537, a reduction of 267,990, much more with a normal macroeconomic multiplier.
  • For those who think this comparison is extreme, it is not, I was actually generous to Skype.
    • The comparison/ratio is actually about four times worse for Skype, because for the comparison above, I attributed all of Skype’s meager revenues to the U.S. when eBay reports that only 20% of Skype’s revenues are actually generated in the U.S. ($110m of 550m). (See page 9 of this eBay release.)

The point of this illustration is to spotlight the extreme uneconomics of forcing Skype’s Internet arbitrage business model on the competitive commercial wireless industry.

II. Skype’s Anti-competitive Problem

In proposing that wireless economics should be mandated to adapt to Open Internet uneconomics where the expectation and right is not to have to get permission from anyone or pay anyone to do something on the Internet, Skype is basically taking a public policy position that is anti-competition policy, and hence logically anti-competitive.

  • To the extent that the FCC’s most recent data and assessment of the wireless industry is even remotely accurate, the U.S. enjoys one of the most competitive wireless markets in the world.
  • It is still attracting over $20b in annual captial investment and is still growing and adding products and services all the time.

In proposing .2% uneconomics, Skype is really proposing a system that is not competitively economic or sustainable.

  • The only way Skype’s proposal could work is if the Government reversed longstanding bipartisan policy in support of competition and replaced it with a government utility model, which would require very heavy governmental subsidization.

In sum, the point of this analysis was to expose the economic irrationality and unworkability of imposing Skype’s vision and economic/business model of an Open Internet on the U.S. wireless industry.

  • At core, Skype’s vision is uneconomic and anti-competitive.

A post by a Google policy analyst yesterday attempted to make the economic case for open access in the U.S. and suggested reasons why American infrastructure providers should embrace a mandated open network model. This proposed theory warrants a strong practical rebuttal. This proposed case for the economics of open access does not hold up to close scrutiny, because it has fatal flaws in both logic and economics.

I. The fatal flaw in logic in the case for the economics of open access:

Since the post assumes broadband markets everywhere are basically the same, it concludes that the open access experience in some European countries is relevant and applicable to the U.S. situation. The fatal flaw in logic here is the core assumption that European and U.S. markets are factually analogous. They are not. They are substantially different factually and structurally as I will explain in detail.

First, the U.S. broadband market is the only market in the developed world where the “incumbent telecom companies” do not have a majority/dominant share of the broadband access market already. According to the latest FCC data “incumbent telecom companies” have a minority share of 38% of the U.S. broadband market. Unique in the developed world, U.S. cable is the broadband share leader with 48% of the broadband market per the FCC. This matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.

Second, the U.S. broadband market is the only market in the developing world where the incumbent telecom companies in total do not have the greatest national scale among broadband providers, and in total are not the only entities with national wire line scale and scope in their country. In the U.S., cable passes 92% of U.S. households per NCTA, and the telecom companies pass <85% per US Telecom. In another unique market structure circumstance, American telecom companies are not national-reach providers like in other developed countries. This means that American broadband companies have many times less the relative national scale and scope than their developed nation brethren do. Once again, this matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.

Third, the U.S. broadband market has more facilities-based, technology platform and business model competition than any other developed market in the world. The U.S. is the only developed country with a nationally-complete cable-broadband infrastructure in competition with the incumbent telecom companies. Moreover, no other developed country has four major wireless broadband competitors with national facilities-based footprints (Verizon, AT&T, Sprint, T-Mobile). No other developed nation has a strongly-funded fifth national wireless broadband/WiMax provider coming online like ClearWire. Yet again, this matters fundamentally because the open access economic case assumes the existence of, and pre-disposition to, monopoly market shares and monopoly economies of scale and scope to economically support a reseller model.

Fourth, the U.S. broadband market has more consumer-demand driven than any developed nation marketplace. Consequently, the U.S. is investing more than any developed nation in wireless broadband mobility. U.S. consumers strongly demand mobility and the facts prove it. According to the FCC, Americans have more wireless phones than wire line phones, use more wireless minutes than wire line minutes and are demanding wireless broadband more going forward in both relative and absolute terms over stationary broadband. Moreover, America’s uniquely responsive competitive system to consumer demand results in dramatically more value for American consumers than European consumers. According to FCC data, American consumers enjoy dramatically cheaper wireless rates and consequently use about four times more wireless minutes than European consumers. Thus, American consumers demand and get four times more value from wireless than European consumers do. Finally this matters, because the open access economic case assumes that a vibrant facilities-based competitive market does not or cannot exist, which the facts of the U.S. market clearly disprove.

Simply, if the U.S. and European markets are not substantially analogous in terms of market structure, economies of scale, and competitiveness of the markets, it is illogical to conclude that open access economics in the U.S. would be the same as they are in some European countries.

II. The fatal economic flaws in the case for the economics of open access:

The post by Google’s policy analyst focuses most on the Dutch KPN example and quotes KPN’s CEO who candidly embraces monopoly economics. “If you allow all your competitors onto your network, all services will run on your network, and that results in the lowest cost possible per service.” [bold added] The fatal economic flaw here is that the open access economic case assumes one national provider with monopoly share and economies of scale and scope, when no major American broadband provider has anywhere near broadband monopoly share or monopoly economies of scale or scope.

First, in proposing to impose open access economics, it begs the question which American industry/technology the Government would designate as the ‘national champion’ that would be expected to, or authorized to, accumulate monopoly broadband share… in order to achieve the necessary open access monopoly economies of scale and scope… in order to provide the lowest possible service cost to resellers like KPN does?

Would it be the current U.S. broadband leader, cable, which has never had any open access regulations or obligations historically?
Or would it be the #2 provider, the “incumbent telecom companies” which have less than half of the necessary open access economics monopoly share, and economies of scale?
Or would it be one of the four current major wireless broadband providers with much smaller broadband market share than cable or telecom, so consumers demand for mobility could be met?
This matters fundamentally because one provider needs to enjoy monopoly market share and economies of scale for open access economics to have a chance to resemble some European markets.

Second, this proposed case raises several important unanswered questions.

If the analogy of European markets is not logical and hence does not hold, where is the evidence that the assumed monopoly economies of scale required by open access will generate superior overall benefits to the consumer than competition currently delivers?
How will a mandated open access policy that assumes and requires monopoly share and economics, provide consumers with diversity of choice in technologies, business models, and mobility options that they enjoy currently?
What would happen to the stranded infrastructure and the majority of consumers that found themselves not with the government’s designated monopoly open access broadband provider?
How would the tens of billions of dollars in now unnecessary sunk alternative infrastructure costs be factored into the overall cost-benefit assessment of the wisdom of imposing a monopoly open access policy on a competitive marketplace?

Third, if the government decided to impose open access economics, but did not designate a broadband technology/competitor to be the ‘national champion’ that would be the beneficiary of monopoly economics, the perverse effect would be to practically impose unworkable infrastructure economics on all the competitors in the marketplace, because none have the requisite monopoly economies of scale and scope necessary to make open access economics work.

In the best case economics, cable or telecom providers would have less than half of the share and economies of scale or scope necessary to support workable open access economics.
In the case of the four major, facilities-based, wireless broadband providers, they would have only a small fraction of the monopoly scale and scope economies necessary to support open access resellers.

The economic reality of imposing monopoly open access economics on broadband competitors without monopoly scale would ensure that none of the existing broadband competitors could maintain their current viable economics or business model. Moreover, it would also prevent any return on investment on their expensive capital-intensive infrastructure, which in turn would end the current virtuous cycle and economic model which funds the upgrade of multiple broadband infrastructures to meet exploding demand for capacity. In addition to the real risk of discouraging the private infrastructure investment that funds 95% of the U.S. broadband/Internet infrastructure, the flawed economics of open access in a competitive market would logically put the U.S. taxpayer on the hook to make up for a going-forward private broadband investment shortfall of many tens of billions of dollars.

In sum, the proposed theory of open access economic viability depends on the fatal flaw in logic that European countries with open access are analogous to the U.S., when the evidence proves they are not at all analogous. Moreover, the open access economic case has a fatal economic flaw as well. It assumes incorrectly, that competitors with competitive shares and economics, have, or could have, monopoly shares and economies of scale, which the evidence and logic also disproves.

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