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Reality Check: Questions and priorities facing the next administration

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.

Regulations are commonplace in the telecommunications industry, and the Federal Communications Commission has shaped providers’ roles, both for the Internet and the last-mile infrastructure which carries the Internet into homes and businesses, for decades. While there is usually bipartisan agreement on goals, opinions vary regarding how they should be implemented: We need to make more spectrum available (timing and pricing of that spectrum TBD); we need to eliminate lack of broadband infrastructure as a barrier to K-12 learning goals (who should provide and at what price TBD); we need to ensure equal access to the Internet (although there is debate over the existence of prioritized Internet content to generate additional profits).

The debate in Washington over the next four years will be focused on several fundamental questions:

1. At what point do societal goals (e.g., universally accessible multi-megabit per second broadband) become so expensive they are not worth the effort? How can the government encourage innovative solutions and avoid embarrassing debacles (e.g., $267 million in Rural Utility Service funding squandered through their Open Range investment)?
2. When should net neutrality be replaced with a packet postal system?
3. What should the government’s role be in fostering competition?

The answers to these big questions have massive ramifications. We explore the high level alternatives and tradeoffs posed by each of these issues below.

With the passage of the American Recovery and Reinvestment Act (a.k.a., the Stimulus Package), the National Telecommunications and Information Administration and the RUS received over $7.2 billion in funds. (NTIA is under the jurisdiction of the Department of Commerce and RUS under the Department of Agriculture). Of this amount, $4.7 billion was provided to the NTIA to support the deployment of broadband infrastructure, enhance and expand public computer centers, encourage sensible adoption of broadband service, and to develop and maintain a nationwide public map of broadband service capability and availability.

The Obama administration put a very short timeline for potential applicants to submit for funds (six weeks) and decisions on the applications received were also granted in record time (less than four months). This compressed time schedule (application as well as consideration) led to wild market penetration assumptions. Since only one project was approved for each rural area, there was no hedging of bets. Decisions were made quickly, and funds were dispersed in 2010.

Many of these projects are scheduled to be completed in early 2013, just after the inauguration. Judging from the publicly filed status reports, there is a mix of successes and failures. One of these larger projects deserves focus. Merit Network was established in 1966 to “design and implement a computer network between public universities in Michigan.”

As shown by the chart, they had a fairly large network connecting south Michigan as well as some of the Upper Peninsula colleges and universities. Building on their decades of experience, Merit applied for and received a $103 million grant to build out the red and blue network above (more details available at www.merit.edu). This is a wide-ranging project covering 52 total counties. Unfortunately, network construction is significantly behind schedule with only 885 of 2,287 fiber miles (40%) constructed as of Oct. 19, and 0 of 2,287 fiber miles lit. As they acknowledged in their recent quarterly report, they are delayed and over budget due to excessive Environmental Assessment Costs. And winter is coming to Michigan which means more delays.

Who will Merit turn to for the overrun? Will the state of Michigan provide an additional $5, $10 or $50 million dollars to pay for the completion? This is going to be an expensive network to operate and maintain – will Merit have its own dedicated maintenance technicians, and at what cost? And if Merit, who has a solid reputation in the Michigan community, cannot raise the necessary funds, who should take over the network?

Merit is not the only company which received BTOP funds and struggled with implementation. Many other BTOP-funded projects are having difficulty raising the 20% in matching funds required to continue to receive grants from the government (that should be a sign). Others are having difficulty finding anchor tenant customers. The government only funded the initial costs, and many of the projects are having great difficulty finding a way to make money. Even if $1 billion (of $7.2 billion) of the projects fail, it’s too much and emblematic of a slapped together vision with short application timelines which always leads to chaos and strife. For a full list of the approved broadband infrastructure projects, click here. Read a few of the reports for yourself and, while some projects are in “green” status, most of them are in trouble. Look for reports in 2013 about the BTOP bailout.

Then the next administration will need to deal with the growing drumbeat to modify the current rules surrounding net neutrality. It’s been a while since we visited the core issues surrounding net neutrality and the FCC. Over the past four years, cable and next-generation mobile broadband networks have become the bandwidth choice for more Americans, replacing DSL and 3G. We have found a use for increased speeds, whether Netflix/Hulu, YouTube, Skype, Pandora or all of these at once.

Neutrality works for embryonic networks. When these fledgling companies wanted equal access to cable networks, they received them. But as networks mature, and as consumers face tradeoffs between $80 to $100 per month home Internet (cable + LTE) bills and diminished service, the rules should change.

Rather than clinging to rules where regulatory bodies tell privately-held companies how to engineer their networks, the FCC should open up a docket asking companies how they would apply existing Internet principles (e.g., bit prioritization, specifically the “type of service fields that have existed but are currently unused in IPv4) to serve the needs of all of their users. Give those companies the opportunity to manage their networks more efficiently, and services will be more affordable for the mass market.

The steadfastness of net neutrality proponents in 2010 led to the advent of per-gigabyte pricing in wireless networks in 2011. “We’ll be neutral, but you will have to pay for each byte you consume” is the unsaid message from Verizon Wireless and AT&T. Even the thought of having third-party paid data (also called “toll free” data) sends the net neutrality proponents into orbit. The existing (or new) FCC needs to recognize that as networks mature, the founding principles need to change. Access should remain open, but applying postal (next second, next day, next week) delivery to the Internet will enable affordability for all users.

Finally, the next administration faces the issue of industry consolidation. If this FCC is remembered for one thing, it will be the rejection of the AT&T/T-Mobile USA merger. Generally, when the Democrats are in the White House and the Congress, regulations favor more competition (e.g., 1996 Telecom Act). And, when the Republicans are in the White House, merger approvals are easier (the exception to the rule here is the second-term Clinton administration who never met a merger that they didn’t like).

Given T-Mobile USA’s connection with Metro PCS, it’s very possible that an incoming administration will not face another AT&T/T-Mobile USA-sized deal. But they could face a Charter-Cox-Comcast deal, or a Sprint Nextel/U.S. Cellular, Comcast/Time Warner Cable (in part or in whole), CenturyLink/Time Warner Cable, or an AT&T/satellite merger. Each of these M&A transactions creates scale for the merging parties, and can create a high barrier for new entrants.

The Obama administration has been consistent in its opposition to consolidation within a geographic area, but has not set guidelines around horizontal integration. For example, let’s say Facebook and Apple and Netflix decided to merge, creating a $600 billion company. Would the current administration approve that merger? Is there an upper limit to the size of the company created? How about Facebook and LinkedIn (creating a $50 billion company) – one that creates a single social network with one tracking mechanism for personal and business communication? Is there a Herfindahl Index that needs to be constructed for online concentration?

With recent equity market value increases being focused on a small cluster of companies, anti-trust policy now begins to influence 401(k) returns. The consequences of disallowing mergers could harm the portfolio returns of millions of households. Whether Republican or Democrat, the anti-trust division will inevitably be busy over the next four years. An incoming administration needs to eliminate confusion and set clear lines to allow competition to flourish and equity portfolios to grow.

Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at [email protected] and you can follow him on Twitter @pattersonadvice.

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