Editor’s Note: This article is an excerpt from RCR Wireless News’ May Special Edition, “Enabling the Mobile Revolution: Mobile Chips, Devices and Accessories.” The 80-page special edition is available here.
There is not a more vexing problem for the wireless industry than the plight of rural operators.
On one hand rural operators are essential in that they provide services to a large portion of the nation that larger operators have overlooked, and they also offer network roaming capabilities for just about all of the industry’s largest operators. On the other, rural carriers have very different operational structures from their larger brethren and thus are often at odds with the nationwide carriers when it comes to regulatory and competitive concerns.
To the surprise of few, rural wireless operators continue to face a number of challenges in their collective daily quest to remain viable options for consumers increasingly bombarded with advertising and promotions from nationwide operators–operators that spend billions of dollars on marketing each year and, in the case of the nation’s two largest operators, are dominating the market.
This has often resulted in a “big vs. small” dynamic among wireless carriers that has prevented a cohesive front to regulators.
Battling big brothers
At this year’s Rural Cellular Association event, a number of speakers representing smaller carriers noted during a panel discussion that the wireless industry was dominated by two operators that were increasingly driving the industry to a duopoly.
“It’s not inevitable, but it’s heading that way,” said recently named RCA President and CEO Steven Berry during a panel session entitled, “Wireless at a crossroads.”
Berry noted that 90% of all new postpaid customer growth in 2009, or roughly 9 million customers, were signed up by either Verizon Wireless or AT&T Mobility. And that even the smallest of the nationwide operators, T-Mobile USA Inc., was more than five times larger than the largest member – U.S. Cellular Corp. – of RCA.
Beyond the pressure being applied by rival operators, Berry noted rural wireless carriers were also at a policy crossroads.
“Decisions are being made now that will determine whether we are allowed to compete fairly or that will put us at a disadvantage,” Berry warned.
Those decisions include voice and data roaming, of which RCA gained a victory on earlier this year when the Federal Communications Commission cut home-roaming exclusions; spectrum interoperability surrounding the 700 MHz band, details of the National Broadband Plan and Universal Service Fund reform.
“If any of these decisions go into AT&T’s or Verizon’s favor it could put us all in danger,” warned Slayton Stewart, outgoing chairman of RCA and CEO of Carolina West Wireless.
USF making way for NBP
One topic that has garnered strong opinions from both sides of the battle is USF reform. Smaller carriers claim these funds are necessary for them to be able to continue to provide services in areas that cannot justify investments, while opponents think the fund is a way for larger carriers to subsidize their smaller competitors. The FCC has long sought ways to reform the current system and with its latest proposal in the National Broadband Plan is asking that traditional USF funds be diverted to operators, regardless of size, that will build out wireless broadband networks.
Berry noted that the recently announced National Broadband Plan basically will eliminate USF support to rural wireless carriers, but that the Connect America plan in its place is still lacking details.
“The NBP falls short for regional carriers,” Berry said. “I am very disappointed in it. It creates new non-facilities-based competitors for regional carriers.”
Smith noted that while USF may need some reform, the premise of the program is still needed for rural wireless carriers looking to offer service.
“USF has been about providing telecom capabilities no matter where you are in the U.S.,” said Smith. “I am still trying to build out wireless voice in some areas. There are still places without basic wireless service.”
This lack of actual customers to serve is highlighted by Hays, Kansas-based Nex-Tech Wireless, which operates a CDMA-based network covering portions of western Kansas and eastern Colorado. The carrier said its network covers around 190,000 potential customers spread accross 30 counties.
“Much of our coverage area has more coyotes and potatoes than people,” noted Johnie Johnson, CEO of Nex-Tech Wireless.
Johnson said that Nex-Tech was still reeling from 2008 cuts in USF funding and that it has seen around $20 million in lost funding that had been set aside to increase coverage in Kansas.
“It would be very difficult to operate as a business without the USF funds,” Johnson said. “Without those funds our network would likely be just like our competitors, covering just the interstates and highly traveled state roads.”
Roaming potential
Another issue concerning rural carriers is roaming, whether it’s the increasing loss of voice traffic as larger carriers expand their coverage or their own access to data roaming agreements that they say larger carriers are reluctant to provide.
“Data roaming is every bit as important as voice roaming,” said Carolina West Wireless’ Stewart. “We have seen a huge increase in data traffic. If we are not able to offer the latest and greatest handsets and the same size of a network, which is nationwide, it’s difficult to compete. It’s hard for consumers to stick with us.”
RCA incoming chairman Ron Smith, who is also president at Bluegrass Cellular Inc., added that the recent FCC decision on home-market exclusion adds the presumption that there should be roaming, but that until it spells out that data roaming being included, plans for national broadband coverage will suffer.
“The FCC has to realize it’s still an issue out there,” Smith said.
Industry observers agreed that roaming is still a significant issue for smaller operators, but added that they do have some power in the segment. “Roaming is still critical for the big 4,” said Amit Patel, CTO for Alcatel-Lucent’s U.S. strategic wireless accounts. “But, the big carriers are not looking to create roaming agreements. … T-Mobile might be more motivated, but AT&T is not.”
Patel noted that AT&T Mobility’s recently reported first-quarter financial results showed continued strong customer growth for the carrier despite a strong marketing push by rival Verizon Wireless touting the lack of reach of AT&T Mobility’s network.
“Those December ads against AT&T did not drive AT&T to want to fill out its map,” Patel said.
However, AT&T Mobility’s LTE plans could spell a different story. Patel noted that the carrier’s 700 MHz spectrum assets are not as wide-ranging as those held by Verizon Wireless, which could lead to opportunities for rural carriers with 700 MHz spectrum in areas where AT&T Mobility is lacking.
Another potential for rural carriers is investment firm Harbinger Capital Partners, which recently closed on its acquisition of SkyTerra Communications Inc. The $1.8 billion deal includes stipulations that Harbinger use the 30 megahertz of spectrum it acquired in the deal to build out a nationwide cellular network to supplement the satellite-based services being offered by SkyTerra.
Patel noted that Harbinger will be required to cover 100 million potential customers within three years and 190 million pops within five years, and that rural wireless carriers could be good partners for the buildout. Harbinger has reportedly decided to use LTE technol
ogy for its network, and, according to media reports, has recently begun talks with T-Mobile USA Inc. as a potential customer on the network.
“Harbinger is looking at a lot of different business models,” Patel added.
700 MHz details still up for debate
There is also increasing concern amongst RCA members that the FCC will not take a solid stand on 700 MHz spectrum interoperability, which would require carriers and device makers to make their networks and equipment compatible with the different spectrum positions in the band. This concern arose from device and equipment requirements from Verizon Wireless that included support for only its band 13 and from AT&T Mobility for its band 17 in the 700 MHz band.
This issue was originally handled by the FCC in the PCS auctions with requirements that equipment and standards for the spectrum being auctioned be interoperable with all the spectrum auctioned in the 1.9 GHz band. For the 700 MHz auction, the FCC did not mandate such interoperability.
“If you auction spectrum in good faith and allow after the plan for band plans to be developed, how do you plan for that?” Bluegrass Cellular’s Smith asked rhetorically.
Berry also noted this could be an issue for public-safety, which is set to receive spectrum in band 14 in the 700 MHz band. Without interoperability requirements, public-safety equipment might not be able to operate on other networks in the 700 MHz band.
Device access
Handset exclusivity issues is also a topic rural wireless carriers have been battling. Smaller operators have been pushing the FCC on the issue, saying that if they are not allowed to offer compelling devices to their subscribers, they will not be able to stay competitive.
“We try to differentiate ourselves with coverage and better customer service and have been pretty successful,” noted Stewart. “But, when you don’t have access to the latest stuff, customers won’t stay with you in the marketplace. Customers are choosing carriers that provide good local service, but if we don’t have the latest offering, it’s hard to compete. People are willing to stay with us if we are competitive.”
Smith noted that rural wireless carriers were having some success in negotiating access to some devices, but that more needed to be done.
“We’ve historically had exclusivity in the wireless industry, but in the past it has typically been short-lived,” Smith said. “In some cases that has now gone to lifetime or takes it out through the lifetime of the device. On the CDMA side, we have the Associate Carrier Group that has been very successful in getting devices, but it’s not the ultimate solution. There is still an issue with 46 of the top selling handsets having some sort of exclusivity tied to them.”
Local still matters
Despite the increased competitive pressure from nationwide operators, panel members in general indicated that smaller wireless operators still had an advantage in being able to “localize” themselves with their customer base, an advantage they were urged to continue to take advantage of.
“The strength of rural carriers is that they are involved in their community,” said Huawei’s Jagernauth.
Alcatel-Lucent’s Patel added that the involvement should include customization options that take advantage both of technology changes as well as local knowledge.
“Make your customization geared toward your customer base,” Patel explained. “Tie in local events with local community groups.”