There is a reason many service providers prefer a facilities-based approach to sourcing their key network platforms: it is a way to control development of features and costs. On the other hand, there are many instances when service providers of many types either must use wholesale leased facilities, or prefer to do so.
Some common examples are market entry into new geographies where market share is expected to be low; where regulatory barriers to facilities ownership or operation might exist; or where network services are ancillary to some other business model.
All that said, there are some clear dangers for any service provider that expects it might have major market share, or wishes to price and package its services in a manner different from the prevailing market norms. Consider Altice Mobile, entering the U.S. mobile market using disruptive pricing, and using both wholesale leased access and owned facilities to enable that strategy.
Altice Mobile offers unlimited data, text, and talk nationwide, unlimited mobile hotspot, unlimited video streaming, unlimited international text and talk from the U.S. to more than 35 countries, including Canada, Mexico, Dominican Republic, Israel, most of Europe, and more, and
unlimited data, text and talk while traveling abroad in those same countries, for $20 per device for Altice fixed network customers.
It will be able to do so because it has a deal with Sprint giving Sprint no-charge access to Altice fixed networks to place small and other cell sites, and in return gets favorable MVNO terms for roaming access to Sprint’s network.
That is one good example of why a facilities approach allows more freedom to create disruptive and differentiated offers.
That has been true in the internet access business as well. Back in the days of dial-up access, ISPs could get into business and use voice bandwidth customers already were paying for to supply the internet access as well over the voice circuit.
All that changed in the broadband era, as ISPs suddenly had to buy wholesale access from the underlying service providers, and had to invest heavily in central office gear and space. For a time, when the Federal Communications Commission was mandating big wholesale discounts, and before broadband changed capital requirements, the wholesale access model worked.
When the FCC switched its emphasis to facilities-based competition, wholesale rates were allowed to reach market rates, and capex to support broadband soared, the wholesale business model collapsed.
As recently as 2005, major independent U.S. dial-up ISPs had at least 49 percent market share. Many smaller independent providers had most of the remaining 51 percent.
In the early days of the broadband market, firms such as Covad, Northpoint and Rhythms Netconnections Rhythms Netconnections were getting significant market share.
More recently, Google Fi had been marketing internet access in a distinctive way, basically a “pay only for what you use model” at about $10 a gigabyte, with unused capacity rolling over to the next billing period. It works at low usage levels, but appears to become unworkable when most users start consuming 15 Gbytes per month, close to the 22 Gbyte point at which Google Fi wholesale suppliers throttle speeds.
Also, Google Fi capped fees at a maximum of $80 per month, no matter how much data was consumed. The model becomes unworkable when Google Fi faces the danger of charging its retail customers less than the wholesale fees it has to pay the wholesale capacity providers.
The larger point is that wholesale-based business models work, up to a point. In volume, facilities become important to contain costs. Also, network ownership also provides more flexibility in creating unusual or disruptive retail packages.
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