Uh Oh. Verizon Sues Cox Communications

Verizon Communications has sued Cox Communications Inc., claiming infringement of eight patents for providing telephone services on a data network. So far, only Vonage has had to face lawsuits over VoIP intellectual property. What isn't clear is what happens if Verizon wins the lawsuit, either outright or through a negotiated settlement.

After Vonage was found to infringe patents Verizon, Sprint, Nortel and at&t, many of us have wondered whether lots of other service providers might be found to infringe the same patents. Many independent VoIP providers and even some technology suppliers apparently have wondered the same thing, even if they won't say so in public.

Apparently we might find out relatively soon. The wider implications are pretty clear: it is not clear what Cox might be doing that any other cable company affiliated with Cable Television Laboratories is not doing. So the damage conceivably would not be limited to independent providers of VoIP services but possibly every leading cable company operating in the U.S. market.

And since Cox does not create its own technology but buys it from the same suppliers thouse other cable operators are using, one has to wonder whether there might not be exposure even on the supplier side of the business, though it is extremely unlikely Verizon or other telcos would bother their own suppliers.

Granted, any damage would be annoying, not a grave danger to any leading U.S. cable company. It isn't so clear what the damage might be at a smaller cable company, though arguably the potential size of the infringing revenues wouldn't be that great, so the penalties would be commensurate.

Atlanta-based Cox, the third-largest U.S. cable TV company, should be ordered to pay cash compensation for using the inventions, Verizon says in a complaint filed in federal court in Norfolk, Va.

Vonage's troubles, it appears, might not be confined there alone.

Google 700 MHz Auction: "Bid to Lose"?

Perhaps nobody outside Google really knows how serious the search giant will be in the auction for C block spectrum in the 700 MHz range. There remains some thinking that Google's primary objectives--getting more openness in wireless networks--are well on the way to being satisfied.

Using that line of thinking, Google will submit the minimum required bid, but nothing more, essentially "bidding to lose."

But one never knows. Given the current economic climate, and the failure of any takers for a smaller segment of spectrum that carried a requirement for public service services, the final auction price might not be as high as some had forecast just a year ago. If it appears prices might be low enough, even Google might decide it is worthwhile to play a while longer.

The 700 MHz spectrum is attractive for any number of reasons. It is the last chunk of spectrum likely to be made available for mobile use. And it's nice spectrum, with greater range than the 2.5 GHz spectrum used for much of today's mobile service. The signals also have greater ability to penetrate walls and buildings, a big advantage, as anybody who uses a mobile phone inside a building can attest.

Those signal propagation characteristics also might mean lower costs to construct the network. True, it can be argued that Google doesn't need to own that, or any other spectrum, to accomplish its mobile Web and mobile advertising objectives. But you never know. The auction might not require as much capital as many had thought just a short while ago. An opportunistic buy always is possible.

Fuzzy Thinking on Network Neutrality

With the caveat that "network neutrality" means different things to different people, it is striking that some observers think bandwidth caps for excessive use have anything whatsoever to do with network neutrality.

That's a little like arguing bigger or smaller buckets of mobile voice or text usage constitute some sort of "neutrality" issue. It's a business issue, nothing more.

The discussion is sparked by news that Time Warner is testing usage-based pricing for broadband access in a few markets, for new customers. The idea undoubtedly is that the new plans will be price neutral for 95 percent of customers, and affect only "extreme" downloaders or really-heavy peer to peer customers.

Once the test starts, new customers will be offered a choice of four plans that allow them to download set amounts each month--5, 10, 20 or 40 gigabytes. The typical user now consumes something on the order of three gigabytes a month.

Grande in Play

Grande Communications appears to be in play. Its board of directors has authorized management to "explore strategic alternatives to enhance shareholder value." That's a "for sale" sign posted by one of the largest "overbuilders" in the U.S. market.

Grande has retained Waller Capital to assist the board and management in exploring strategic alternatives.

Grande is in the process of building a deep-fiber broadband network to homes and businesses in portions of Austin, Corpus Christi, suburban northwest Dallas, Midland, Odessa, San Antonio, San Marcos and Waco. The San Marcos-based company offers high-speed Internet, local and long-distance telephone and digital cable.

Sprint Shares Whacked on Downgrade

Sprint shares lost about 25 percent of their value Jan. 18 as Fitch Ratings lowered its credit rating. The Fitch downgrades reflect the ongoing concerns over Sprint Nextel's financial and operating results and the lack of visibility as to the company's performance going forward.

Fitch now believes credit metrics will experience greater near-term deterioration with leverage worsening. Sprint's difficulties with stabilizing its core operations and improving the company's competitive position were cited as evidence for the downgrade.

Fitch believes Sprint will experience difficulties in increasing its mix of prime subscribers given the high industry penetration rates, the low postpaid churn rates of its national competitors, the slowing economy and its competitive position. Of course, Sprint has had a churn problem for a couple of years now.

On the other hand, Sprint's continues to hold a good liquidity position and balance sheet. Cash was $2.2 billion at the end of the third quarter of 2007. Free cash flow (FCF) for the last twelve months was $2.2 billion.

The problem is that Fitch expects material free cash flow erosion during 2008.

Still, Fitch sees no issue with ability to service debt obligations. With manageable maturities over the next two years of $1.3 billion coming due in November 2008 and $600 million in May 2009, Sprint Nextel has more than sufficient liquidity through its cash position and bank lines to finance its current maturities and current commercial paper levels.

Considering Sprint Nextel's other strategic initiatives such as and including the share repurchase program and WiMAX deployment, Fitch expects Sprint Nextel to conserve liquidity and conservatively finance those initiatives.

Fitch's negative outlook is an indicator of weaker operating trends and the potential that further erosion could occur to Sprint's operations if the company remains unsuccessful in stabilizing its business.

Mobile Web: Falling Walls

The Internet has proven problematic for communications providers in any number of ways. Aside from mobility, the Internet and private IP services provide the foundation for most growth initiatives. Without it, there would be no demand for broadband access services, music downloads, video downloads and streaming, videoconferencing or Web services.

On the other hand, IP-based services also allow creation of services outside the traditional service provider walled gardens, creating competition for captive provider services. As a rule, IP also lowers the cost, and therefore the retail price, of just about any communications, content or information service.

So it is no surprise that wireless providers have mixed feelings about wider use of mobile instant messaging services that compete, at least in part, with lucrative text messaging services.

By the end of 2013, as many as 24 percent of mobile consumers will be using mobile IM services, say researchers at Forrester Research. That likely will cannibalize some amount of text messaging and shift brand awareness towards the IM providers (Microsoft, Google, Yahoo, AOL) rather than mobile carriers.

Sweden to Separate Networks

It looks like Sweden will join the ranks of countries believing that creating a separate wholesale broadband access entity will spur innovation in domestic telecom markets. A law giving Sweden’s telecoms regulator, the PTA, powers to impose a separation of network operations and retail services on TeliaSonera or any other infrastructure-based telco deemed to have significant market power now is under review.

But TeliaSonera has seen the writing on the wall and preempatively launched a wholesale unit on its own. TeliaSonera Skanova Access now offers equal wholesale terms to rivals and its own retail operations.

If approved, the new law will emulate BT’s "functional" separation. Swedish regulators say they will wait to adopt the new rules when the EU has formalized its own rules on functional separation.

There's a key challenge for North American regulators here. The grave potential danger of such structural or functional separation moves is that it will scare off investors who must provide the investment capital to build robust new optical access networks. As the trend continues to grow, not simply in Europe but in the Asia-Pacific region as well, we will accumulate a track record demonstrating whether, in fact, a capital strike is a realistic fear.

If functional separation can be made to work, if it continues to provide an attractive basis for investing capital in networks, pressure might mount on North American regulators to make similar moves. That will be especially true if market abuse were perceived to be occurring under the current "inter-modal" competitive regime that now prevails, under which competition between cable companies and telcos is expected to provide competitive benefits.