Mobile Backhaul Among Issues Regulators are Looking At, as Part of AT&T T-Mobile USA Buy

U.S. backhaul markets now are part of the regulatory review of the proposed AT&T purchase of T-Mobile USA. Specifically, the Federal Communications Commission is looking at potential harm to the market for supplying mobile backhaul connections. The FCC six of AT&T's top competitors to answer questions on network coverage, backhaul, pricing and spectrum for its review of AT&T's $39 billion takeover of T-Mobile USA.

The agency sent 37-page letters with a list of nine questions Monday to Verizon Wireless, Sprint Nextel, U.S. Cellular, MetroPCS, Cellular South and Cricket Communications parent Leap Wireless International asking for detailed information about the companies' operations.

Citing a new business arrangement between AT&T and Verizon, Lynn Refer, president and CEO of Telecom Transport Management, a small wireless backhaul provider, says the future of the independent backhaul business may be at risk.

Under the pact, Refer and others in the industry said, the two largest wireless companies have a reciprocal arrangement to provide infrastructure to connect each other’s wireless data traffic. See Rivals' alarm grows over AT&T / Verizon deal - Eliza Krigman and Elizabeth Wasserman - POLITICO.com.

Those sorts of questions never quite go away in the telecom access and wholesale business. Similar concerns have been raised in the past about interconnection agreements between AT&T and Verizon in other instances. Consider the matter of how carriers interconnect with each other, specifically in terms of the business arrangements.

Historically, networks have used two dominant mechanisms. Networks that estimate they will typically exchange equal amounts of traffic will negotiate "settlement-free" peering agreements, where the carriers agree to exchange traffic without payments to the other provider, on the theory that, when traffic exchanged between the networks is roughly equal, there is no reason to conduct detailed billing operations that would result in a net zero effect in any case.

That typically is not the case for networks of unequal size, though. A smaller network, with fewer users, typically will originate much more traffic for the exchanging networks than it ever will terminate on behalf of any other large carrier. In such cases, the larger carriers will negotiate "transit" agreements to account for the unequal traffic flows.

Basically, the smaller networks pays the bigger network for the excess traffic being delivered to the larger network. In a business with huge network effects, that might be expected.

In such cases, smaller networks and backhaul providers always will fear that the two largest U.S. networks, with the largest networks, will use their leverage to raise rates for smaller carriers who need to buy backhaul services from either AT&T or Verizon. Though a conceptually different issue from competitive impact on the broader mobile market because of the AT&T purchase of T-Mobile USA, potential impact on U.S. backhaul rates now has become an issue in the merger approval process.

The concern always exists, in every segment of the market where smaller networks and service providers compete with AT&T and Verizon, of course. But one might argue the "problem" is self correcting Were AT&T and Verizon to raise rates too much, incentives would be created for third party backhaul providers to get into the business.

Some would argue that the backhaul doesn't have as much to do with any actual potential harm, but simply is a way policy advocates can continue to argue for more regulation of special access pricing in general.

Washington lobbyists generally in the pay of smaller carriers and service providers have for years been trying to get the FCC to dictate terms in this market, without success. There are obvious reasons. A small carrier does not have the money to build a significant amount of special access capacity most places it is needed, and must buy from other carriers. A competitive market for access circuits, where rates reflect demand, will tend to benefit those who own the assets, especially where there are not so many other providers.

"Market power" tests never go away. But the success many firms have had in providing competitive backhaul services precisely because an AT&T or Verizon is the only other alternative has generally created opportunity for competitors to jump in and provide options for buyers. Oddly enough, "higher prices" are the magnet to attract new competitors. Lower prices will keep them away. Some might argue that so long as competitors are free to enter markets, neither AT&T nor Verizon will have the ability to harm other providers by maintaining excessively high prices.

In fact, given the general and legitimate concern within the global industry about bandwidth pricing, deals that might lead to marginally higher prices might be exactly what is needed to encourage all providers to invest more in facilities. In a competitive market, high prices fix themselves. Mobile backhaul won't be any different.