The FCC has received a record three million comments on its net neutrality consultation, and wireless carriers are gathering their forces to resist being subjected to the same regulations as wireline providers. Their key argument, of course, is that spectrum is a scarce resource, so it is essential that they are able to shape traffic and limit bandwidth hogging services in order to ensure a decent quality of service for users.
But the new FCC seems less tolerant of that viewpoint than the one which was in place when the current neutrality laws were passed in 2010, and chairman Tom Wheeler has exchanged some angry letters with Verizon over some of its network ‘optimization’ practices.
If the cellcos do find themselves more restricted than before, it will be one more challenge in the constant battle to balance their outlay on spectrum and network capacity with incremental revenues from reluctant consumers. The drive for spectrum still shapes the balance of power, and the continuing wave of M&A, as it has for several years now. But low cost capacity, not just spectrum itself, is increasingly critical, and will become more so if neutrality laws for wireless are toughened up.
So even with the AWS-3 auction in 1.7GHz looming, all the operators are looking for additional sources of new spectrum, including unlicensed, while Sprint will not participate in the auction at all, perhaps a sign that the era is ending when expensive, long-term licences were the only cornerstones of viable cellular businesses.
But cellcos still want to be free to use their existing assets as flexibly as they can. They were exempt from most of the neutrality restrictions which were brought into US law in 2010. However, there is debate over whether true broadband wireless connections, courtesy of LTE and LTE-Advanced, mean those rules should now be extended to mobile carriers.
In 2010, both fixed and wireless carriers were banned from blocking access to any legal websites, with exceptions for “reasonable network management”. Wireline carriers were additionally barred from imposing “unreasonable discrimination” against legal web traffic, while cellcos were only prevented from blocking applications that competed with their own voice or video calling services. The thinking was that these operators had more limited capacity because of spectrum constraints and had to engage in traffic management to avoid overload and a poor customer experience.
The commission voted in May to approve draft net neutrality rules which would re-examine the issue of differentiation for wireless networks. Under the new proposed rules, the FCC would introduce ‘no-blocking’ rules. These would bar broadband providers from depriving content providers of “a minimal level of access to the broadband provider’s subscribers”. The providers would also have to comply with a standard of “commercially reasonable” practice, though this has yet to be defined and is the subject of some of the fiercest debate. One change from 2010 may be a ban on deals which allow content providers to pay fees in order to get priority service or faster delivery. Wheeler has said that the “speed and quality of the connections the consumer purchases must be unaffected by the content he is or she is using”.
The FCC insists the question of whether the rules would be the same for cellcos remains open. Although there is no firm timescale for a vote on potential new regulation, chairman Wheeler has indicated he wants to have the issue decided by the end of the year, which is a tight deadline, given the number of interested parties which will be lobbying and debating over the coming weeks.
“The basic issue that is raised is whether the old assumptions upon which the 2010 rules were based match new realities,” Wheeler said in his keynote address at the CTIA Super Mobility Week conference last week. The CTIA’s annual event is traditionally a stage for the FCC to set out its stall on the wireless front, and he worried some cellcos by focusing heavily on the increased capabilities of the new LTE networks. He pointed out that, in 2010, there were only 200,000 LTE subscribers in the US, and now that figure is 120m, with 300m citizens covered by the new connections.
However, his comments sparked a robust response from the CTIA itself. Meredith Attwell Baker, president of the carriers’ representative body, and a former FCC commissioner, said: “We are told the remarkable growth of smartphones and LTE since the 2010 rules warrants heavier regulation now. Wrong again.”
Her public comments were backed up by detailed filings with the FCC, lodged on Monday, which make the mobile industry’s position clear. The document argues: “Mobile broadband presents unique technical challenges that demand far more complex and aggressive network management than fixed broadband requires. Mobile networks must subject different uses or users to differentiated treatment on a constant basis to provide consumers with the level of service they have come to expect.”
Indeed, some campaigners go further and argue that the mobile operators’ need for special treatment has increased with the roll-out of 4G. Mobile Future, a technology policy group whose members include AT&T, Verizon and Qualcomm, wrote in its filing that “mobile providers face spectrum constraints as well as considerable challenges posed by consumers that are, by definition, constantly mobile. Since the 2010 rule, these differences have only deepened due to the increasing capacity demands being imposed on networks, the rise in adoption of mobile platforms, services, and devices across all categories, the advent of the so-called ‘internet of Everything’, and the growing mobility of American wireless consumers today.”
The group says that, if the FCC does decide on new regulations for cellcos, it should go no further than to “reinstate the 2010 no-blocking rule, maintaining carrier flexibility to respond to network and market conditions”.
However, some wireline and ISP companies argue that LTE networks are increasingly equivalent to fixed broadband systems and can be used to offer competitive fixed or quad play services, but without the restrictions imposed on copper and fiber networks.
And many public interest groups want tougher rules to ensure consumers have a full and fair choice of services when they are using wireless devices, which are increasingly the primary broadband access mechanism for many users. They also want broadband, including mobile, to be reclassified as ‘communication services’ under the Telecommunications Act, a change which would give the FCC greater powers of regulation and consumer protection, but which was rejected in 2010.
Google weighed in on the side of equality of rules, writing in its comments that neutrality rules should apply “regardless of whether you’re accessing the internet using a cable connection, a wireless service or any other technology”. This was one of the most significant of all the three million filings, because in 2010, Google pulled away from its previous insistence that wireless and wireline operators should be treated the same, apparently recognizing that the success of Android was closely tied to that of the cellcos, especially Verizon. Four years on, and Android is an unstoppable machine and Google is noticeably less tied up with Verizon, and more aggressive in pursuing its own wireless ventures. So if it sticks by its tougher line this time around, the FCC may follow.
That would hit one of the routes many carriers want to take to improve customer retention and ARPU – providing personalized tariffs which exempt certain favorite applications from the data allowance, or which guarantee enhanced QoS for a certain service such as Facebook. For instance, T-Mobile offers the option of toll-free plans which exempt Spotify and Pandora music services from a user’s monthly data allowance (but not other, smaller music providers like Rdio). And Virgin Mobile has a new $12-a-month option which offers toll-free access to the customer’s choice of social media sites – one out of Facebook, Twitter, Instagram or Pinterest.
These may be popular choices for consumers, cutting their overall data bills, and also make usage more predictable and profitable for the carrier, but they certainly disadvantage smaller media or social applications and threaten to create a two-tiered internet dominated by the big brands. Wheeler is keeping very quiet on how far he might go to address that issue, but he does make some strong general statements about keeping the internet as a level playing field – and, as Comcast pointed out in its filing, about 20% of web requests are now made from a mobile device, which makes cellular a very important part of that playing field.
Meanwhile, the US operators continue to chase spectrum, and these assets remain a driving force behind M&A deals. The hunt for airwaves was behind AT&T’s failed bid for T-Mobile; the Dish/Sprint/Clearwire/Softbank saga; the Verizon/cableco alliance; and many smaller acquisitions like AT&T’s of Leap and TMo’s of MetroPCS. Winning more customers or innovative services are rarely the key point (indeed, as at Leap, low value customers may be an actual negative).
Even the cost efficiencies of consolidation, however assiduously these are promoted to shareholders, are not sufficient reason to embark on the M&A trail, though as Sprint’s new CEO Marcelo Claure pointed out last week, achieving scale will be essential (and was the main justification for that firm’s now-abandoned plan to merge with TMo).
Claure said he was “wide open” to consolidation talks with cable operators, over-the-top players or other wireless companies, telling a Goldman Sachs conference: “It’s a scale game. We’re believers in consolidation.”
But while Sprint may be the most spectrum-rich of the cellcos, for the others, the main motivator remains acquiring sufficient airwaves to be able to launch a wide range of attractive services and tariffs without the ensuing data volumes breaking the network. So TMo, which has rebuffed a takeover offer from France’s Iliad and could still be stalked by Dish, told analysts last week that it would only merge with another player if they had US spectrum and customers, as well as offering a good price. The firm’s largest shareholder, Deutsche Telekom, may not agree with that, as it is widely held to be keen to cash in its US asset in order to expand elsewhere, but this was the message from the TMo investor relations team at a recent meeting, and presumably a signal to Iliad that, even if it improves its offer, its attentions will still be unwelcome. Iliad has been reported to be assembling private equity support to sweeten its bid, and even to be enlisting help from Google, Microsoft or a cableco, all of which would be keen to have a wireless network to harness for their own business ends. However, none would bring the US spectrum which TMo sees as essential
Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata recounted the meeting in a research note, commenting: “Management believes the company has a lot of potential options as it relates to M&A activity. In this respect, and in our view, a deal with Iliad appears less likely given the lack of domestic spectrum and customers.”
Dish may still be lurking, though the satellite TV provider – which needs more spectrum and a network partner to make its LTE plans for its mobile satellite frequencies viable – has said it wants to wait to make a move until after the AWS-3 auction, when its airwaves position will be clearer, as will the real value of the various carriers’ assets. Jefferies commented: “Dish also does not necessarily fully satisfy the criteria, but offers a more compelling opportunity given its spectrum holdings, and video customer base.”
Meanwhile, AT&T is still hoping for approval for its own takeover of the other US satellite TV provider, DirecTV, and if this gets the green light, it will be able to use some of its rural spectrum resources more effectively to generate new customers and revenues. In particular, it proposes to bundle a new fixed wireless service, which it nostalgically calls ‘fixed wireless local loop’, with satellite TV packages from early next year. CEO Ralph de la Vega told a Goldman Sachs conference that his firm is looking at
dedicating spectrum in rural areas to the new offering., installing a satellite dish and outdoor antenna in one visit to improve the usually difficult economics of rural wireless broadband with greater efficiency and higher ARPU potential.
Maximizing the revenues from rural as well as urban spectrum will be important as competition heats up, but the key battles will still be for the congested urban heartlands with their dense user bases. To some extent, Sprint has wasted the advantage it has had here. While the other cellcos hustled for more spectrum capacity, it had plentiful 2.5GHz airwaves, ideal for dense networks, all along. It did, of course, make a bold attempt to be the first ‘4G’ player but was forced to use the then-available WiMAX technology, which subsequently became a dead end. The migration to LTE has been ambitious but slow and expensive, and Sprint has handled the transition of its existing users poorly, and provided little incentive, in terms of pricing or network quality, for customers to stay with it during the process. In the meantime, its rivals have leapt ahead with simpler and less technically elegant, but effective, 4G roll-outs, and with aggressive device and pricing strategies.
Claure is here to change all that, and insists the painful network roll-out is lmost complete and Sprint will start to reap the rewards of its plentiful spectrum – even to the extent of not having to participate in the AWS-3 scrum from November (though this is partly to avoid busting the FCC’s proposed spectrum screen, and it will take part in 2015’s incentive auction of 600MHz licences to improve its position in low frequency airwaves, suited to rural and indoor coverage). Other US operators are frightened by Sprint’s capacity and, once it gets its network and pricing in shape, its flexibility to offer unlimited data plans or very high peak data rates.
Mike Murphy, head of technology for Nokia Networks North America, told the CTIA Super Mobility Week event that Nokia, which has demonstrated extremely high data rates in tests with Sprint, has “held a lot of discussions” with its other carrier customers about how to compete with the third US cellco’s 2.5GHz capacity. Its triband Spark network will eventually aggregate the three bands – 2.5GHz, 800MHz and 1.9GHz – to boost speeds from current peak downlinks of 60Mbps to 300Mbps and beyond. By the end of this year, it will aggregate the two FDD bands to reach 100Mbps and in time it will harness the FDD/TDD aggregation which is already being tested in China and by its parent Softbank in Japan. Sprint has revised its TD-LTE roll-out plan to focus initially on congested areas, though national coverage is still on the agenda.
Claure said: “What makes us different is the huge amount of spectrum we have,” he said at the event. “The basics of the network are done. 3G is complete, we’ve finished 4G roll-out at 1.9GHz, and now we’re accelerating 800MHz KTE and pushing hard on 2.5GHz deployment. We’re not there yet, though, which is why we have to focus on value” (one of his first actions was to slash prices on key tariffs to be more competitive with TMo’s high profile Uncarrier deals).
However, Sprint has less room for manoeuvre on pricing than its competitors, since it has the lowest EBITDA margin of any major US cellco, partly because of its hugely ambitious Network Vision deployment. Claure said costs would be lowered, but has not yet revealed how this will be achieved.
Of course, unlicensed spectrum is an increasingly important element of the mobile carriers’ toolbox, most commonly for simple WiFi offload, but progressively as a fully integrated element of a HetNet. And recently, Qualcomm put the cat among the pigeons by pushing LTE as an alternative to WiFi in some of that plentiful 5GHz resource, with the LTE-Unlicensed (now renamed LTE-LAA) technology. For now at least, this does not run LTE on its own in 5GHz, but just harnesses the unlicensed carriers to provide supplemental downlink for a conventional 4G system. It has caught the interest of some carriers, since it ties some of the 5GHz resource into systems they control, though it is hard to imagine it gaining much ground against the mighty WiFi ecosystem, which iteslf is becoming more and more useful to cellcos.
However, some carriers are testing LTE-LAA, including Verizon Wireless, whose VP of network support, Mike Haberman, told a FierceWireless event at CTIA: “We’re looking hard at Unlicensed LTE.”
Push-to-talk revived in Sprint’s former 900MHz spectrum:
One of the aspects of its Nextel takeover that Sprint signally mishandled was the push-to-talk (PTT) service on which Nextel’s success was largely based. It reduced the quality of the iDEN network without providing a credible alternative for the network’s key application and lost a horde of customers as a result. So there are all kinds of ironies in the news that Pacific DataVision, led by two Nextel co-founders, has acquired all Sprint’s remaining 900MHz licences in order to launch a national PTT network.
Morgan O’Brien and Brian McAuley are the chairman and vice chairman, respectively, of Pacific DataVision, which has now secured 6MHz of bandwidth nationwide for PTT, and is seeking FCC permission to add wireless broadband services too (though clearly these will have to be fairly specific to stay within this small amount of spectrum).
The company seems retro in many ways, not least its use of unspecified digital radio technology from Motorola Solutions, which in its starrier days supplied the iDEN network to Nextel (but failed to make it a broader competitor to GSM and CDMA, just as, in a later era, it made the wrong bet on WiMAX versus LTE). Pacific DataVision is a very traditional Motorola customer, since it will offer a two-way radio service (the cornerstone of what is now Motorola Solutions), which does not connect to the PSTN but will be targeted at vertical segments, public safety and small-to-medium businesses, requiring high reliability and security, and extensive use of PTT.
While it will use the Motorola technology for two-way radio, it is likely to use LTE if it gets permission to add broadband – O’Brien has previously advocated the use of LTE in private radio spectrum for critical communications.
“We acquired from Sprint the top 20-25 markets, 60% of all the 900MHz spectrum,” O’Brien said in an interview. “It’s fairly easy to conceptualize that 60% of spectrum becomes broadband, and the rest can stay narrowband. That’s the proposal, and we’ve been spending the last couple of months working with industry on something to file.”
Sprint gained its 900MHz holdings from Nextel and a later acquisition of Velocita Wireless.
Pacific DataVision recently raised more than $218m in equity funding in a private placement with institutional investors. FBR Capital Markets was the sole initial purchaser and placement agent. The value of the Sprint deal was not disclosed, except that the acquirer said that, as part of the agreement, Sprint had received $10m of the spectrum purchase price in the form of Pacific DataVision common stock at the same price per share paid by the institutional investors. In addition, Motorola Solutions agreed to lease a portion of the spectrum from a Pacific DataVision subsidiary.
The companies go back a long way. In 2009, Sprint launched a service called NextMail Locator which was powered by Pacific DataVision.
US carriers divided on WiFi Calling:
The major US operators are gearing up to introduce WiFi Calling services, despite their early moves towards VoLTE. For Verizon and AT&T, the WiFi option is definitely a second string to fully fledged LTE voice, which will enable them to include a wider range of services and added value. But for T-Mobile, always the most WiFi-centric of the big four, the voice platform may be more central to its model.
Verizon’s CFO Fran Shammo said Verizon Wireless plans to introduce WiFi Calling in the middle of next year but that it was “never a top priority” because the carrier has achieved such good coverage with LTE. While wireline and WiFi-only operators are harnessing WiFi Calling – which can provide greater carrier control, mobile hand-off and QoS than purely over-the-top services – as an alternative to cellular voice, for mobile operators it is clearly a double-edged sword, only to be used as a fallback when there is a poor cellular signal. However, since Apple included support for the functionality in its iPhones last year, there has been some consumer pressure on operators to provide the option.
“We built our voice platform so extensively, there was never a need for us to tell our customers, ‘Oh, our network is not good enough so you need to go on WiFi to complete your call’,” Shammo said dismissively at a recent conference, and added that it is difficult for Verizon to guarantee QoS once a call moves onto WiFi, which can have a negative effect on customer experience and the carrier’s brand reputation for network quality.
AT&T’s mobile CEO, Ralph de la Vega, said last week that AT&T would launch WiFi Calling in 2015 too, but only as a complement to VoLTE and 3G voice, saying: “We don’t have this burning desire” to use it to enhance coverage. He added: “We’re very focused on making sure it’s a great experience for customers, but we see it as a complement, not a replacement. We feel good about a great nationwide network with unlimited talk and text.”
However, T-Mobile is already supporting WiFi Calling on the new iPhone (the only US operator to do so), although Sprint has the facility for its Android handsets. TMo is now making all its smartphones compatible with HD voice over WiFi, as part of its long-standing reliance on extensive WiFi offload, via its hotspot activities and its home routers.
The cellco has announced WiFi Unleashed, which allows all TMo customers to make free WiFi calls to the US from outside the country with their existing cellphone number.
“WiFi Unleashed is a game changer. This is like adding millions of towers to our network in a single day,” said CEO John Legere. “The difference between us and the traditional carriers is that they’ll do everything they can to make more money off you. We’ll do everything we can to solve your problems, and today, that’s about uniting WiFi with our data-strong network for unprecedented coverage.”