ROI

Telstra’s separate susidiary buzz: Government plan could zap ROI

Telstra, Australia’s national carrier, remains locked in a dispute between its shareholders and the Australian government, which proposes to break Telstra up to support its broadband network initiative. Telstra believes it can play a role in NBN, as the network is called, without structural separation. Discussions on how that would be accomplished were proceeding nicely, according to Telstra, until the legislation for separation was introduced.

We are of the view that separation like this is not likely to succeed at its objectives and in fact is more likely to compromise them. In addition, it would clearly undermine the value of Telstra’s shares, which have been sold off to the public for some time through yet another government program. To take steps to devalue them now is not likely to create confidence in any new government process, including NBN.

Then there’s a very important truth, which is that competition always lowers price and always creates overbuild and thus always lowers net industry ROI. There are situations where that is reasonable; some geographies have ample demand density. Australia doesn’t appear to be one of them, according to our model.

If the government’s goal is to create competition in the interior or service portion of the network by making the access network into a shared utility, it should have clear indicators that the ROI in that service portion is sufficient to create real opportunity. Without that, there could be a lot of future failures in the center, which would undermine the profitability and sustainability of the new edge—whatever it turns out to be.

Femtocell deployment to test 4G pricing and ROI

Vodafone is planning to release the first European femtocell offering in about a week, using Alcatel-Lucent products. AT&T is also planning to expand its currently limited set of trials immediately, and to have a national offering in late 2009. The moves will be an important step in the evolution of femtocells, and may prove a trial balloon for the 4G deployment of femtocell technology that we’re hearing is an absolutely critical part of nearly everyone’s 4G plans.

With 4G deployment there is a need to manage total first-cost and at the same time give users a reasonable experience. Femtocells in each 4G home would give users an in-home experience with 4G as a baseline even if their own home area wasn’t yet covered by 4G cells, or was covered sparsely. If we see more with femtocells in 2009, we’ll also have a chance to see how carriers propose to price femtocell airtime: Will they discount it or make it free given that their network isn’t really being used? That will tell us a lot about whether femtocells will be a means of encouraging high-bit-rate applications at home where traffic won’t hurt the provider network, or whether providers will try to use femtocells only to get a better ROI by reducing the demand for true 4G cells.

Senate FCC hearings tied to open handset & broadband policy

Obama’s pick to chair the FCC starts his confirmation hearing today, and there’ll certainly be a lot of inane questions and evasive answers. The primary focus is likely to be the national broadband policy that’s on the FCC’s plate and is even to be featured as a topic in the next open meeting. There’s been a lot of comment on the issue already, most of which ignores the practical realities of U.S. market demography. In any case, it’s unlikely that Genachowski would tip his hand on an issue the FCC needs to vote on. In short, it’s theater.

Another issue is more complex and potentially even more important. Open handset policy has become a major target of many since the AT&T iPhone 3GS upgrade plan was announced. There is little question that consumers would like an open handset ruling, but given the role that smartphones have played in mobile service evolution, it would be a major setback for operators to lose the ability to link a hot phone to their data service.

Could a 4G initiative be promoted without any captive handsets to ensure some quick ROI? Again, we’re not going to know at the hearings, though we may catch a hint of Congress’s own position; they can always pass legislation to overrule the FCC. The Senate is looking at exclusive deals between handsets and providers now.

25 years after the Bell breakup….price stability needed

We’re 25 years out from the Modification of Final Judgment that broke up the Bell System, and there’s been a lot of recapitulation of that time. Not surprisingly, most of it’s not particularly insightful. The truth is just too complicated and not very exciting, apparently.

The process began with realization that competitive long-distance providers were never going to be fully competitive as long as AT&T had local exchange control, and so the MFJ broke that monopoly, which was OK in a policy sense. It did reduce long-distance pricing steadily. It also created an undesirable stratification of the industry that separated access cost from interexchange revenue and so stalled broadband deployment.

The Telecom Act of 1996 was designed to again reorient the industry to create vertical competitors and to keep from restarting the old Bell monopoly. Lawmakers imposed a wholesale requirement on the RBOCs that shared their access with the IXCs. But long-distance pricing was doomed and so only increased subsidies could have kept the IXCs alive, and that was not the goal of the Act. Neither was the CLEC craze that venture capitalists started.

The IXCs got bought, the CLECs died, and the federal courts finally clarified things—by which time it was all moot. In this decade, the Powell policy of cross-modal competition between cable and RBOC was the only sensible play all along, and it’s actually working pretty well. Those who lament the death of the small CLEC or the lack of hundreds of healthy competitors should just take a look at the ROI on access investment; it’s poisonous for any new entrant.

Consolidation is already going on in telecom worldwide, and that’s a sure indicator that the problem isn’t a lack of competition, it’s a lack of price stability. The past should be a lesson for us: Regulatory policy can’t easily cope with fast, fundamental changes.