Uncommon Wisdom

Nov 5 2010   3:50PM GMT

Broadband policy and business models — not in sync

Tom Nolle Tom Nolle Profile: Tom Nolle

Broadband continues to be in the news, both in terms of policy and in terms of business model. Of course, the two should have some relation to each other, but it’s increasingly clear that’s not going to be the case in many world markets.

The U.S. elections and the Clearwire announcement that it would be cutting staff illustrate the issue perfectly. The loss of the House for the Democrats means that Republicans will now chair the House committee that oversees the FCC, and this has already stimulated predictions that net neutrality is dead in Congress. Not true; it’s been dead in Congress all along. We’ve never believed there was much of a chance that Congress would step up on the issue, and frankly we’d be just as happy if it didn’t.

The reason we have a federal commission in charge of communications is that Congress isn’t likely to be able to address complex technology issues well. We saw how complex issues here are with the Fox/Cablevision standoff. Fox cut access to some of its websites for Cablevision customers, at least for a time, and also cut off its TV programming as the companies battled over how much Cablevision would pay for carriage rights. The FCC admitted it had no authority to act here, even though most would say that non-neutral behavior by content providers has the same effect as by access providers. That means that meaningful net neutrality rules would have to come from Congress, and they’d have to break totally new ground. That alone would be likely to send Congress into a tizzy, and combine it with the combination of heavy industry lobbying revolving around wireless impacts and consumer desires to have everything both neutral and free, and you have a political minefield with no big incentive to address. The election, after all, is over. The Clearwire dilemma shows that some attention is needed here, though.

Broadband services of any sort create a classical S-curve of cash flow, with “first cost” driving a provider far into the red as they build out infrastructure to credible levels and fund marketing campaigns. The hope is that success will turn this around, but the problem in broadband is that even “success” looks a lot like failure when it’s time to add up the numbers. There’s not much margin, and that means it takes a long time to recover early costs. Clearwire needs to go back to the well, and neutrality issues with wireless aren’t going to make it any easier to do that.

The decision by T-Mobile to tout its HSPA+ offering as “4G” is another indicator. Most operators would agree that HSPA+ is a less costly transition than a full migration to LTE, and if one accepted the 3GPP definition of 4G, none of the current LTE offerings could qualify either. But a marketing slogan may help sales, and sales could help turn that S-curve of cost around quicker. Wireline services are already less than marginal in terms of profit, and wireless could easily move into negative territory as well. We may see wireless capex slip in 2011 and beyond if we don’t get clarity on this issue.

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