By 2012, "Closed" Mobile Business Will be Over

Today, the wireless sector is on the edge of a seismic shift, says Deloitte. A survey of wireless industry executives found that 53 percent of surveyed network service provider executives believe their current closed business models will no longer exist by 2012.

That is a shocking finding, for several reasons. Many in the policy community seem convinced the only way to "change" the mobile industry is to legislate more "openness." Mobile industry executives, on the other hand, already believe openness will be the normal way they compete, within a shockingly short period of time.

One way of putting matters is that before the major legal challenges to any new set of wireless "neutrality" rules can be clarified, the industry already might have moved to an open business model, and arguably would have done so without any government action.

If some readers believe this is highly unlikely, one need look no further than the last major revision of U.S. telecommunications policy, the Telecommunications Act of 1996. Despite the fact that many observers argue the Act "failed," you would be hard pressed to find any user of communications who argues their services, prices and features are "worse" or even "the same" as prior to 1996.

Despite the current mistrust of markets, the recent record suggests that "regulatory failure" did not impede market success, defined as better and richer services for end users.

It appears the same thing is happening in the mobile business, and that mobile industry executives widely believe a shift to open models, precisely the state of affairs many policy advocates desire, already is happening at rapid speed.

In just three short years, economic power in the mobile business will be held by third party application providers, not service providers, mobile executives themselves believe.

More than half of the executives surveyed believe by 2010 the future of mobile will be driven by open mobile content, with 67 percent of the respondents believing it will be a “game changing” force within wireless in the short-term, Deloitte reports.

"When asked which mobile operating system has the greatest potential to be the U.S. de facto standard in five years, Google’s open source Android operating system was the runaway favorite with 43 percent of all votes, more than double the score of the next highest finisher," Deloitte says.

"In fact, 27 percent of those surveyed say that Internet companies, rather than network
carriers and handset makers, will dominate the U.S. wireless sector in five years," says Deloitte.

Nearly 60 percent of industry executives surveyed agreed that the future of mobile will be driven by open content and mobile software application providers.

"While almost two thirds of the survey respondents believe that open access regulations will accelerate the commoditization of U.S. wireless network carriers, companies that focus too narrowly on regulatory issues as the key catalyst for change may in fact miss the real market opportunities being driven by open platforms and technologies," Deloitte says.

The regulatory debate over "openness" obscures what will happen, irrespective of any new regulatory intervention. "In fact, when respondents were asked on the best course of action for network carriers to sustain their competitive advantage, keeping network access, devices and services tightly controlled and retaining as much as possible current proprietary business models was the least popular response."

In fact, 74 percent of the executives said that the key to their businesses in the future was to embrace open application and content models. One can argue that regulatory protections to open up networks are important because they will help this "natural" state of affairs to develop on its own.

It might not be politically popular at the moment to argue that a regulatory "light touch" still is the best course of action. But industry executives themselves seem committed to a view that open mobile networks are in fact the fast-coming and basic industry realty.

Whether one agrees that the Telecom Act was a success or failure does not seem to matter. The market seems to have lead to success, in spite of regulatory failure. Maybe we should not be in such a hurry to tinker with the process too much. It looks like openness is the future, no matter what interventions happen, or do not happen.

If You Wanted to Build a National 100-Mbps Access Network, Could You?

The Federal Communications Commission says it will cost $350 billion to build a single, nationally available broadband access network operating at 100 Mbps and reaching virtually every American. The FCC also says it is studying whether telcos and cable companies should be forced to offer open access to third parties that want access to their networks.

Assuming one believes that both ubiquitous access and 100 Mbps speeds are a desirable thing, and virtually everyone might agree, in principle, that that is a worthy goal, the issue becomes "how to get there."

At some fundamental level, policymakers will have to decide whether they want maximum deployment and innovation in terms of new physical facilities, or mazimum third party access. 

Some will argue this is a false choice. That is possible. There is no way to predict with certainty what will happen if robust open access policies are instituted. 

That would be especially true if cable operators, for the first time in industry history, also were forced to open up their facilities for open access. 

Many will point to mandatory open access policies existing elsewhere in the world, and argue the same sorts of benefits can accrue in the U.S. setting. Some consumer advocates say open access is one reason why Internet service is cheaper and faster in those countries. it's a complicated question to answer, however. 

In most, if not all countries where robust open access rules apply to telcos, the competitive landscape is quite different from that of the United States. Few other countries have ubiquitous cable broadband and telco broadband. 

That might not seem, at first blush, to be much of an issue. It is, and the reason is as simple as pointing out that competitive markets are distinctly different from monopoly markets. Keep in mind that a single provider of very-high-speed access, operating on an open access model, still is a monopoly. There is one network and all comers can pay to use it. 

The issue is that such a provider, or providers, as would be the case in the United States, would not be able to operate as a monopoly, because there no longer is any such thing in the U.S. broadband communications business. 

In most communities, there already exist two fixed broadband access providers in the cable and telephone company. In addition, there are places where a third fixed operator exists, or one or more fixed wireless providers.

Then there are two national satellite broadband providers, Wildblue and HughesNet.

Beyond that, there are four mobile providers with existing or partially-built mobile broadband networks, as well as Clearwire, also in the process of building its own national broadband network.

So here's the problem. Where open access broadband networks are most successful, there is not a ubiquitous cable competitor fighting head to head for customers. Assume for the sake of argument that cable providers, nationally, have about 48 percent share of the fixed market, all telcos collectively have 38 percent, and other providers have the rest. 

Assume away all the issues of changing the business models of the whole industry so that one provider in each locality is charged with building a 100-Mbps access network, and is then free to provide service to all comers, at government-mandated rates.

Assume away the problem of the actual wholesale rate, which was part of the Telecommunications Act of 1996. That Act imposed just such an open access policy on major U.S. telcos.

To simplify what happened in the aftermath, telcos violently disagreed with the wholesale rates, while competitors argued just as vociferously that the mandated rates were too high. At the same time, investment in faster broadband facilities slowed dramatically, for one simple reason. Telcos saw no advantage to investing in expensive new facilities that provided a financial return unappealing to the entities who would have to lend the money.

All of that changed when new rules were written that exempted new fiber-based facilities from the open access requirements. Keep in mind that cable companies still do not have any open access requirements of any sort, and that any new broadband policies might well require them to provide wholesale access as well, and that they might also object to the mandatory wholesale rates. 

But ignore that for the moment. Here's the investment problem. Companies have to raise $350 billion in private capital to build the network. And when they develop their financial projections, they will have to note that the new revenue from building the $350 billion network is based on the incremental difference between what typical customers now pay for broadband access, and what they will pay for 100 Mbps access.

But there are other services on the network, you might point out. That's true. But here's the problem. The new network only replicates voice and video revenue already earned on the existing networks. No smart lender is going to okay huge sums based on replicating existing revenues. They will want to know what new and additional sources of revenue will exist. 

The providers can argue that where consumers now pay $40 a month for single-digit megabits per second of access, they will pay $100 to $200 a month for 100 Mbps access. Then the providers will have to model what percentage of customers will do so. When the number turns out to be quite small, the money will not be raised.

There just aren't all that many customers willing to pay $100 to $200 a month to get 100 Mbps when they can do nicely with 20 Mbps to 40 Mbps for lots less money. Ask people. They will tell you what they'll do.

You might argue that take rates will be very high if people can buy 100 Mbps for $40 a month. And that's correct. The problem is again that $350 billion cannot be raised if the new network has no ability to pay a return, in a reasonable amount of time, on the investment. And at anything like $40 a month, no lenders are going to cooperate. 

But matters actually are more complicated than that, as if that was not a show stopper. Recall that most people who want broadband access already buy it. Recall that cable providers, with their own networks, serve about 48 percent of the customers. 

Ask any cable executive you can find whether they would be willing to stop using their own network and just buy access from the telco. Go ahead. Ask anybody you can find. Let me know when you find anybody that says they will do so. 

But ignore that. Say the local telco is charged with building the 100-Mbps access network, and that somehow lenders are convinced that large numbers of people will buy the more-expensive 100 Mbps service. How many of its own customers, and customers of other providers, will switch to buying the 100-Mbps service? 

Be generous and say 20 percent of all broadband access customers can be convinced to buy the 100-Mbps service. That means about eight percent of the telco's own retail customers will do so. 

Say 20 percent of cable customers desert. That adds another 10 percent of U.S. broadband customers. Then assume 20 percent of all the other customers likewise make the move. That adds another three percent of current broadband customers.

What that all works out to is that about one in five homes or locations the new 100-Mbps network passes will buy the higher-priced access service. So the issue is whether an adequate financial payback can be built on serving one of five locations passed with a single new service.

You might argue there also is voice and video, but the problem is that the existing networks already provide those services. Additional revenue is not created just because the network changes.  

But assume an investment of $2700 per passing to build the network. Assume the 20 percent take rate and $60 a month incremental revenue per customer ($100 a month). 

Based on those assumptions, the network costs $13,500 per customer, since only one in five homes is a buyer. At an incremental $60 a month in revenue, breakeven (even at zero interest cost) is 225 months, or 18.75 years per customer.

Nobody will lend money for a breakeven of 18.75 years, and that is assuming zero interest on borrowed money.

An open-access 100-Mbps network might be a worthy public policy goal. But it is hard to see how money can be raised to build it. 

Singapore will Structurally Separate NGN

Singapore is issuing a request for proposal to build a next-generation optical access network and has decided it will be built using a "structural separation" regime, where one company will build and own the access facilities and provide wholesale access to any retail provider that wants to use the network.

The RFP to construct the network will therefore provide for structural separation of the passive network operator from the retail service providers. If necessary, the government also is prepared to mandate open access provisions.

Put your finger in the air. The wind is blowing. As Bob Dylan once said: "you don't need a weatherman to know which way the wind blows."