Open access is a policy that improves choice, increases competition, and might increase America’s standing in the international broadband rankings. It is one of the key policy recommendations filed with the FCC by the Ad Hoc Public Interest Spectrum Coalition (PISC) regarding the upcoming 700 mhz spectrum auction. We think that the public interest is best served when the same company that owns the “pipe” (in this case, the wireless network) does not also control the retail side of things. Increased competition is more likely than a monopoly (or duopoly) model to give customers choice in broadband service as to speeds and pricing— and it is more likely to bring broadband to areas that are currently underserved.
Open access is a wholesale/retail business model. The wholesaler owns the pipe, and sells network access and connection to retail outfits, who deal with the customers. It’s pretty simple stuff. But some, such as the Progress and Freedom Foundation, have said that open access has been tried before, and failed. According to the PFF report, the market in competition for local telephone service provided by Competitive Local Exchange Carriers (CLECs) never took off. In most markets, the Incumbent Local Exchange Carriers (ILECs)— such as the Bell companies, who own the communications pipe into the home— are still the only viable option for local telephone service. So the question is: Why should we port this allegedly failed model over to a new area?
There are a number of reasons why open access didn’t work to open up local telephone competition. The 1996 Telecommunications Act required ILECs to share their lines, and sell access to their networks at wholesale prices. But it didn’t make them want to. The ILECs saw open access as a threat, and CLECs as dangerous competitors to be thwarted by any means possible. Unfortunately, the courts and the FCC did little to promote the intent Congress expressed in the Act, giving its provisions a decidedly pro-monopolist slant. The open access model proposed by PISC not only requires the network operators to open itself up to competing retailers. It makes them want to, by structuring the business environment such that the independent retailers will help them make money.
There are, however, successful communications wholesale/retail business models that we can point to, to demonstrate that an open access model can be viable for wireless communications. It is simply not the case that only vertically integrated monopolies can succeed in the marketplace. The most striking domestic example is the rise of “Mobile Virtual Network Operators” (MVNOs). These are companies like Virgin Mobile, Helio, ESPN Mobile, and Qwest Wireless that, from a customer’s perspective, work just like traditional mobile operators like AT&T or Sprint. But the MVNOs do not actually own any towers or control any spectrum; they lease it from the “real,” non-virtual carriers.
The business of selling communications services wholesale has also been successful for carriers— most notably, Sprint. Big players like Virgin Mobile and Helio lease their infrastructure from them. Sprint has been increasing the number of MVNOs it does business with, and other carriers are not far behind. Want to start your own MVNO? Fill out Sprint’s handy application.
The number of MVNOs keeps increasing. While a lot of MVNOs go after markets the primary carriers are less interested in— the youth and prepaid market or sports fanatics— not all MVNOs are so specialized. Qwest Wireless, for instance, is a full-service provider that offers integration with their local phone service business.
The compartmentalization of wireless services continues: the last few years have seen the rise of the MVNE, the Mobile Virtual Network Enabler. If you want to start a wireless company, not only can you outsource your infrastructure to a carrier and be an MVNO. Now you can outsource your billing and other support to an MVNE such as Visage, in order to focus on marketing, product development, and the other fun stuff.
MVNOs show that a wholesale/retail business model for communications can work, but only when the wholesaler cooperates. The ILECs were reluctant to cooperate because they were overly concerned with harming their existing business models. The wireless companies were more willing to try different business models, and they were rewarded for their creativity. But how do you ensure cooperation from the wholesaler who might end up winning the 700 mhz spectrum, particularly if that winner ends up being an entity such as SpectrumCo— a group comprised mainly of cable companies, i.e., existing broadband providers who are likely to be little interested in creating a competitor to their existing service— to whom open access is anathema? You make it so that the wholesaler depends on the retailers in order to make money. To that end, PISC has asked that the wholesaler be limited in its ability to also be a retailer. This would have the effect of making the wholesaler more cooperative with independent retailers. Both the law and market forces would ensure their cooperation.
Even though MVNOs have been largely successful, we do not have to look to whether they are as successful as the primary carriers. As long as it makes sense for the primary carriers to act as MVNO wholesalers, any success by an MVNO is value created that would not have been created under a pure vertically integrated model. But the most important point with MVNOs is not just that the companies involved are able to succeed. It’s that MVNOs are able to innovate in terms of hardware (Helio) and business models (the prepaid market) in ways that the primary carriers haven’t. MVNOs are able to succeed and in so doing offer consumers choices they otherwise wouldn’t have. Open access to the 700 mhz spectrum that’s up for grabs should have a similar effect on wireless broadband.
There are a number of policies that could help facilitate the creation of a third pipe of broadband. Rules preventing incumbent broadband providers from snatching up the spectrum are also a good idea, as well as rules that try to make sure that the bidding process is fair. Open access is a policy that attempts to ensure that the wireless broadband market will remain competitive, regardless of who wins the auction, and it’s a business model that has already been successful among wireless providers.
MVNO's are strictly
MVNO’s are strictly branding relationships, like getting your DSL or Cable Modem service through Earthlink (or AT&T Yahoo). Some MVNO’s have their own HLR and OSS/BSS systems, but everything else is the MNO’s. Everything you get with Virgin Mobile is 99 and 44/100 percent pure Sprint (think Boost, but Sprint only owns part of Virgin). You can look at Virgin’s S-1 on their website. It’s not pretty. The most concerning statistic is that every year they are having to increase their marketing spend to acquire fewer net new customers.
Take a look at figure 3 on page 53 of the PISC comments.
http://www.publicknowledge.org/pdf/pisc-fcc-comments-20070523.pdf
It seems to propose a facilities sharing network where one party owns and maintains the equipment. There are a lot of problems with this document. The pictures are 1990’s technology: the gateway MSC no longer exists and never switched packet data and video. Also it reflects a basic misunderstanding of open access models predominately used around the world. Most of the DSL is unbundled at the line, and Cable is usually just a rebranding. How PON will work is in flux, but the most promising model is an overbuild to the node (other models split the fiber capacity and defeat the purpose of running fiber). In the current network models (wireless and wireline), you enter the network through a combination of gateways (data and media) and session control interfaces.
Facilities sharing (towers and backhaul) is a growing trend, especially in Europe and India because margins have dropped so much more rapidly than variable costs, and most MNO’s have substantial debt service. In these cases, the sharing MNO’s already have fixed costs, and are looking to sharing as a way to reduce expenses, not grow revenue and serve new customers. The sharing MNO’s break out their raw traffic at the edge of the backhaul, and the rest of their networks are separate. The PISC shows a sharing of the entire operator network, like an MVNO, only the network cost isn’t already being paid for by an incumbent MNO. MVNO’s are incremental, so the MNO only needs to recover variable cost and some profit. In PISC everyone will need to participate in the fixed cost recovery, so margins will need to be much higher.
In a high fixed cost business with rapidly declining margins, you want to eliminate middlemen not add more. If you feel you need a 3rd broadband option that is not the Cable and Telco Company, just exclude them (KISS). Don’t create another bloated financial model that can’t survive 5 years. Think of all the time we wasted after 1996.
Thanks for your comments. I
Thanks for your comments. I appreciate the expertise and insight you’re bringing to the blog!
This makes a difference for a customer, though. You can pick and choose among different pricing models even if the underlying network is the same among the different competitors. Additionally, the MVNO is responsible to you the customer— not the MNO. They can’t get away with passing the buck (and last very long in the market). The different MVNOs compete with each other for customers, and each of them has much more leverage when dealing with the underlying MNO. At the same time, you the customer have more leverage in dealing with the MVNO, because there are more places for you to jump ship. The more balanced negotiating positions of the parties involved are more likely to produce an good outcome. This is similar to why Costco can get low prices: it can negotiate with the manufacturer in a way that individual consumers cannot. From a consumer standpoint, MVNOs have been a success.
Diminishing returns and slowing growth in a maturing industry don’t surprise me. Nor does the fact that a particular MVNO lost money last year concern me, because the MVNO model seems to be a success overall. In the alternative, we’re in a bubble and they’re all going to crash and burn— but I don’t see any evidence of that.
We’re more interested in demonstrating that the MVNO model has been a success for the MNOs that lease to them. If it makes sense for the carrier to wholesale, and it makes sense for the retailer to retail, then we have a good business situation. I don’t think the proper comparison is the success of an MVNO vs. the success of the carrier’s retail operations (or other traditional MNOs); rather, I think it is between the success of a carrier that also does wholesale vs. the success of a carrier that does not. Also, the notion that “middlemen” are inefficient is I think false. (Sorry, I know you never stated that, but it’s an assumption that I think is implicit in a lot of this discussion.) Middlemen can be efficent or not efficient; it just depends on the market. Grocery stores are middlemen. Priceline.com is a middleman. Does it make sense for widget maker X to wholesale or retail its products, or both? It just depends. I think MVNOs have shown that the market for communications services can support a wholesale/retail business model. (It might be the case that a partcular MVNO would prefer to own its own infrastructure. Assuming they could afford to do that, it is still unlikely that they could get the spectrum. This is why open access makes sense in a world of spectrum scarcity— it gives the Helios of the world some chance to come to market.)
I think your assumption is that MVNOs and retailers don’t bring anything new into the mix, that the MNO couldn’t just replicate itself. I think that they can, and do. This is because I don’t see connectivity as a commodity product. I think there is plenty of room for value-adding by the retailer.
John, I see you are a quick
John, I see you are a quick study, and I absolutely adore Phil. (I suspect some of him has rubbed off - unfortunately he also thinks Virgin is a success, or at least he did two years ago!) MVNO’s are “resellers at will.” They take the opportunities the MNO’s don’t want to pursue, e.g., pre-paid. Sprint/Nextel couldn’t find a MVNO to do the Nextel pre-paid and so they created Boost as a completely separate brand, distribution strategy, and most importantly accounting structure. The goal here is to move low margin ARPU and high churn subscribers off the books, so Sprint compares more favorably with AT&T and Verizon.
Look back at the early AT&T Wirlesss (the first time around right after they bought McCaw). They had a lot of pre-paid business that was yanking down there numbers, so they systematically set about to get rid of them to prop up their numbers. DirectTV did the same thing over the last two years with high credit risk subscribers. They cut way back on their resellers and retailers. Down most of their business is direct (and they lease most of their STB’s, but that’s a separate thread!).
Wholesale open access is going back to reinact a year 2000 battle. There are more important battles in wireless today. For example, mobile video, which is a multi-radio open standard problem. MNO’s expect to use their dominance in mobile voice to contol broadcast mobile video. MediaFLO (Qualcomm) has locked up Verizon and AT&T (and probably Sprint) with a typical Qualcomm pseudo-standard where every gets to pay large royalties. Modeo and HiWire are all but done for, which is good, because they are DVB-H (think OCAP-lite). Talk about media concentration: phones, iPods, PDA’s, tablets, remote controls, planes, trains, and automobiles controlled by the MNO’s. On the horizon is Sinclair (I know Gigi hates these guys, but they are incredible lobbyists) with a fantastic new technology from Samsung called A-VSB. All of the wailing and gnashing of teeth in the late 90’s about why didn’t the US change to the better (for mobile) European television technology OFDM may have been wasted. It turns out that with A-VSB, the US and Korea may be able to leave the rest of the world in our wake. The problem is that Sinclair is convinced that they can turn it to their advantage (enough said). My point is no policy organization is even paying attention to this, because of the big name wireless issues (700Mhz, white spaces, …).