The likelihood of lower interconnection charges is good news for cellular operators, but a telecommunications economist warns the industry not to “pop the cork” on that bottle of champagne yet.
“There’s a bit of a road ahead before the carriers find out what the cost savings are because all these states have to establish regulatory dockets,” said David Roddy, chief telecom economist for Deloitte & Touche Consulting Group in Atlanta.
The Federal Communications Commission recently adopted new local competition rules that include two distinct things for wireless communications:
Local exchange carriers must base the interconnection fees they charge wireless carriers on the actual cost of interconnecting. LECs now negotiate the charge, which may average 3 cents a minute.
New rules allow radio common carriers to charge LECs for terminating wireless calls that originate on a landline phone.
State commissions will make initial interconnection fee decisions, based on arguments by the LEC and wireless carriers.
“This is a savings that goes to our bottom line, to bring down the cost of doing business and be competitive,” said Wendy Carver-Herbert, spokeswoman for U S West Cellular. “This was a hard dollar expense for us.”
While the cellular industry stands to gain from the changes, the interconnect charge may not slip much lower than 1 cent per minute, despite predictions that it could drop to 0.2 cents, Roddy said.
“The cellular guys are looking good no matter what they get. PCS has a little disappointment because they had been hoping for bill and keep, ” he said.
The bill and keep proposal supported by personal communications services operators was not embraced by the FCC, meaning PCS carriers will have to pay the interconnect charge they had hoped to avoid.
For telecom companies, the main game is access to the customer and setting up a lifetime account, said Richard Siber, a wireless analyst at Andersen Consulting. Less expensive access is good but ownership of the network is tops, he said. Lower interconnection rates give telecommunications carriers an incentive to build their own networks if the math works out right, Siber explained.
“If a build-to-own or rent scenario is developed and they can rent at a price so that the return on investment and equity are met, they can continue to pay other companies to get to the customers. But if they determine, due to this ruling, that they can build and own and lower their costs, they’ll do that. That way they can control the drop and the intelligence on the customer,” Siber said.
Equity analyst John Bensche of First Boston said the interconnect ruling has its merits, but “one must see through the superficial analysis of `Wow, lower costs’ and understand that those effects will be fleeting at best.”
Wireless companies can expect intense competition from start-up companies next year.
“If the economics of cellular work at the current level of operating cash flow per sub, then by passing along the entire cut, the economics are neutral to the carrier. It will only take one player in a market to pass along the savings before the rest must follow suit or lose share as they are undercut on price,” Bensche said.
