To all,
a good article on the auction from internettelephony.
Opportunities abound
in the wireless loop loop
The LMDS spectrum auction this week will give competitive, non-telephony service providers a way to build a solid business model for entry into the local loop
DAN TAYLOR
After several years of planning, on February 18 the Federal Communications Commission will begin auctioning off two block of wireless spectrum for local multipoint distribution services (LMDS). The LMDS auctions will allot wireless capacity in the 28 GHz and 31 GHz frequencies to the highest-bidding service providers in a majority of metropolitan areas across the United States.
So far, 175 companies have registered to participate in these auctions. Unlike the Personal Communications Services (PCS) auctions of 1994 and 1995, the LMDS auctions represent an entry into telecommunications for non-traditional service providers. Because LMDS can be used for point-to-multipoint voice and data services, it is the first opportunity for converged service providers, whether they are Internet service providers, competitive local exchange carriers (CLECs), cable operators or electric utilities. The LMDS auctions will remove barriers to entry into the local loop and will take the first steps to creating a truly deregulated telecommunications market in the United States.
Wireless local loop (WLL) and LMDS are not synonymous. LMDS is, in fact, a form of WLL. The other wireless local loop types in North America include: multimegabit multipoint distribution service (MMDS), which has been the domain of video providers; the unlicensed industrial, scientific and medical (ISM) band; traditional cellular frequencies; and the competitive 38 GHz market. The LMDS auction is different from these other WLL markets in that this is the first time that competitive, non-telephony service providers can build a business model for entry into the local loop.
The LMDS opportunity is the culmination of marketplace, technology and (de)regulation. It comes:
At a time when both traditional and emerging telecommunications service providers see advantages and opportunity in offering combined services around traditional telephony, Internet access and video entertainment, LMDS is an excellent way to quickly and cost-effectively build new infrastructure.
At a time when legal interpretation of the 1996 Telecommunications Act favors facilities-based carriers-those who own their own networks-are in the best position to compete. Because WLL is a quick way to deploy local access, it is expected that wireless access will grow in lock-step with a deregulated marketplace.
Finally, when consumers no longer see the benefit of paying a multitude of bills for telecommunications services, the concept of a single service provider and a single bill becomes very appealing.
Beyond the technology, we have been asking questions about the business models for LMDS and other WLL technologies. How will wireless providers be different than traditional telcos and cable companies? Why is this so?
Many of the answers lie in how the existing local loop works. Current tariffs and subsidies are designed to support the overhead and cost models of large telecom monopolies. Because many of the new, competitive providers are unregulated, they have substantially lower overhead structures, making them more competitive in a deregulated, price-determined marketplace.
A new model
Traditional telephony and cable TV services have followed a basic model of natural monopolies and vertically integrated suppliers. While there has been significant growth in the competitive network access business, players such as CLECs and competitive access providers (CAPs) have had to follow a model similar to that of the incumbent telcos. However, WLL departs from this model, because it enables a competitive service provider to operate a local network, build a brand and buy services from other network operators.
This allows a delineation between network operations and service provision. In the Internet, it is common for a local/regional ISP to buy nationwide dial-up services from a national network operator.
In many cases, the national service provider does not have any retail (branded) distribution of its network services; rather, another ISP "resells" the dial-up network. The ISP becomes a distribution channel for the national Internet backbone providers. It is a symbiotic relationship. Long-distance voice services also follow a similar model of wholesalers and retailers.
Unfortunately, local phone companies have structured their businesses as vertically integrated monopolies. Some aspects of their operations subsidize others, and they are not in a position to "resell" some parts of their operations. For example, directory assistance is rarely a money-maker, so the local phone companies pay for it with subsidies from the local service which is, in turn, subsidized from long-distance revenues.
Because it is very difficult for an incumbent phone company to profitably resell parts of its operations, local phone companies have created obstacles to the 1996 Telecommunications Act that make it unprofitable for a competitive provider to resell local telephone services. Herein lies the opportunity for wireless local loop.
Currently, the true cost of providing local telephone service to all Americans is not reflected in our local phone bills. Instead, customers subsidize local service via long-distance voice tariffs. Interexchange carriers (IXCs) such as AT&T, MCI, Sprint and WorldCom all end up paying nearly half of their revenue back to the local phone companies. That's right-50% of a customer's long-distance bill goes to the local phone companies for connections to long-distance providers.
Without this subsidy, consumers would pay around $50 for local phone service. Customers currently pay approximately $23 a month for local service, after taxes.
Any competitive service provider who can provide local phone service for less than the incumbent does now is in a position to compete. So the next question becomes: How can a competitive service provider offer better services for less? The answer lies in the business model.
Telephone companies have had to achieve a 40-50% return on investment for new services. Why? Because of their organizational structures and their overhead costs.
WLL is an opportunity for competitive providers to enter the business with a completely different business model. This often implies a lower cost of goods sold, lower overhead costs and perhaps even lower margins. A deregulated market will have strong price competition. Low overhead is critical to profitability in a low-margin, high-volume business.
Competitive providers have a clean slate right now. They can build and operate their networks for less money than the telcos. They will have lower overhead costs and can be profitable at lower prices. WLL enables low-cost network buildouts and requires low overhead to maintain and operate.
New challenges
As the telecommunications market continues to evolve through deregulation, long-term profitability will be directly related to market share. New providers face the challenge of building a strong, defensible market position. To do this, they should enter the market as early as possible.
LMDS operators are the next-generation service providers. Wireless technologies will eventually dominate the "last mile" of the telecommunications network, so early providers will be in the best position to gain market share and develop customer loyalty. WLL will define the business model for new service providers-a business model no longer dominated by fixed equipment and overhead costs.
While existing WLL providers have sold their services to business customers (38 GHz), the challenge for LMDS today is to also develop a business model for residential services. Residential customers at this point in time have yet to reap the benefits of telecom deregulation. Hopefully, LMDS will change this reality in the near future.
Dan Taylor is Director, Global Telecom Research, at The Aberdeen Group, Boston.
Visit The Aberdeen Group website.
Hiram |
