David Burnstein's List: Telecom

Recent activity in the rural telecom sector leads us to speculate about a rural ‘super’ carrier trend. We define this trend as the formation of large scale, larger than we’ve ever witnessed before, telecom service providers focused mostly on rural markets. Despite the 1,000+ carriers serving rural territory in the U.S., the three largest ‘RBOCs’ combined, still serve the majority of rural customers. That’s beginning to change, and leading to the rise of the rural ‘super’ carrier. Companies like CenturyTel, Embarq, Windstream, FairPoint, Frontier, TDS, and maybe Qwest are on a path to become rural ‘super’ carriers.

Last October, the seventh largest ILEC (Centurytel) acquired the fourth largest (Embarq) in a deal estimated to be worth $11.6 billion. According to a Centurytel press release, regulators in Georgia, Minnesota, Mississippi, Nebraska and Ohio have approved the deal, bringing it one step closer to completion. According to Embarq, the combined company will operate in 33 states, 18 of which don't require regulatory approval for the merger. The combined company will have 7.7 million access lines, 2 million broadband customers and more than 400,000 video subscribers.

As more consumers drop landlines, they’re becoming more expensive to service and as such a bigger drain on some carriers’ bottom lines. This is leading to consolidation among rural carriers as they seek scale in order to compete, such as Windstream’s announcement earlier this week that it will buy D&E for $159 million, and last year’s purchase of Embarq by CenturyTel.

In 2008, phone companies lost about 7.94 million lines, while cable companies signed up about 3.95 million voice subscribers.

Rural phone companies are allowed to charge about 2 cents to 8 cents a minute to connect long-distance and wireless calls to their networks. The fees, up to 100 times higher than rates charged by large local phone companies, offset the rural companies' high costs and low call volumes.

Before Iowa Telecom, Windstream acquired D&E Communications Inc. for $169 million in stock and cash in a deal that closed earlier this month. In September, Windstream agreed to buy Lexcom Inc. for $141 million in cash, and in early November, the company agreed to buy NuVox Inc. for $463 million.

A 2010 study by the U.S. Federal Communications Commission found that one in six Americans had experienced bill shock, and in 23 percent of those cases, the bills were more than $100.

In the United States, mobile operators agreed in October to begin a series of automatic warnings next year, which will probably be text messages, when customers approach the limits of voice, text, Internet and roaming packages. The F.C.C. extracted the agreement, which is voluntary, only after threatening operators with binding rules.

These wholesale and unbundled rates seem very low.

In 2010 OPTA proposed to apply cost-oriented fixed and mobile termination rates, in line with the EC’s 2009 Recommendation under the European Union (EU) telecoms legislation, but in August 2011 these rates were overturned by the Dutch Trade and Industry Appeals Tribunal following an appeal brought by certain operators. The tribunal prescribed a different methodology that includes costs not directly related to call termination. Under OPTA’s new proposal based on this methodology, fixed and mobile termination rights would be significantly higher than under the EU approach.

As noted in TeleGeography’s GlobalComms Database, under Ofcom’s original ruling from 1 April 2011 the MTR for Everything Everywhere, O2 UK and Vodafone UK fell to GBP0.0266 (USD0.0418) per minute, down from GBP0.0418, with this set to fall further, to GBP0.0170 at 1 April 2012, before dropping to GBP0.0108 and GBP0.0069 at 1 April 2013 and 1 April 2014 respectively.
...
The Guardian cited a statement from the cellco as saying: ‘The fixed line operators have merely pocketed previous reductions in mobile termination rates, instead of reducing prices for customers. BT, meanwhile, has actually increased its line rental prices three times over the past year and a half.’ Ofcom, meanwhile, reportedly welcomed the tribunal’s ruling, claiming that the decision would ‘reduce significantly termination rates which will bring competition and consumer benefits’.

The OECD has published a study on the decline in mobile termination rates across its member states. It found rates fell 53 percent from 2006 to 2011, from USD 0.1406 per minute to USD 0.0650 per minute. However, there is still a wide range in rates, going from zero in Canada and just USD 0.0007 per minute in the US to USD 0.142 in Estonia and USD 0.165 in Chile. The study also looked at the impact that termination rates have on retail prices and calling volumes. While lower rates appear to lead to higher calling volumes, they do not always result in reduced retail prices for end-users, as operators may increase the cost of other services to compensate. The complexity and difference in the way that operators charge fees makes it difficult to draw a link between rates charged and prices paid by users for voice calls in different countries, the report said. The study also looks briefly at different billing methods for interconnection. It suggests a move to a 'bill and keep' system, with rates at zero, could improve competition and support the introduction of more VoIP services and different end-user tariffs.

The European Commission has suspended plans of the Spanish telecoms regulator (CMT) to postpone by a year the introduction of cheaper mobile termination rates (MTRs). CMT planned to delay cheaper rates until January 2014, one year later than the Commission's recommended deadline. CMT has proposed to extend the transitional period for implementation by an additional year in order to protect the interests of the mobile industry in Spain. The Commission disagrees with CMT's argument that a significant reduction of prices by December 2012 would have too negative an impact on the mobile industry in Spain. The Commission believes the Spanish regulator has not shown that an extension to this deadline would be justified, in particular as the industry had since 2009 to adapt to the new MTR approach. In the letter sent to CMT, the Commission has explained that this proposal does not comply with the principles and objectives of EU telecoms rules which require member states to promote competition and the interests of consumers in the EU, as well as the development of the single market. The Spanish regulator has three months to work with the Commission and the body of European telecoms regulators Berec on a solution to this case.

On the back of the ratification of the new charges, Ofcom has said that it expects the new prices to ‘lead to real term price reductions for consumers, as communications providers pass on savings to their landline and broadband customers’. In confirming its regulatory decision, Ofcom also highlighted that the number of local loop unbundled (LLU) lines in service had increased from just 123,000 in September 2005 to more than eight million today, while there are now some 6.2 million WLR connections in the UK in addition.

AT&T and Verizon maintain their dominance in wired connections by demanding that customers, including other wireless companies, commit to buy as much as 90 percent or more of their wired connections from them. Customers that refuse are denied access to enormous discounts for each wired connection, and instead must pay highly-inflated “list prices.” Customers that agree must severely restrict their purchases from competitive suppliers, or risk paying “shortfall penalties” to AT&T and Verizon. If you need to buy some wired connections from AT&T or Verizon, and every wireless provider does, pricing will skyrocket unless you commit to buy all, or nearly all, wired connections from them. Given this “choice,” it is not surprising that most customers commit to AT&T and Verizon.

The result is that AT&T and Verizon reap large profits from the sale of wired connections, while companies like mine, that have the capital and the desire to invest in wired connections, are “locked out” of the market.

Commenting on the matter, EC vice president Neelie Kroes noted: ‘We need a fair EU single telecoms market. We cannot allow a situation where certain operators are able to achieve an unfair advantage or overcharge consumers through excessive mobile termination rates. Consumers all over the Union should equally benefit from the lower rates agreed back in 2009.’

‘In Europe, too often excessively intrusive regulation blocks innovation,’ noted Luigi Gambardella, ETNO executive board chair, adding: ‘Such a situation creates a paradox: hampering innovation is hampering competition. In Europe, the way rules are applied does not enable operators to innovate. European citizens and consumers are not getting the full benefits that we could deliver to them. Profound changes in the industry should result in changes to regulation. Industry is committed to invest, but is expecting both the European Commission and national regulatory authorities to engage in a review of their policy that takes into account current and foreseen market conditions.’