Greetings from Dallas and Paris (one of the Louvre courtyards is shown in a panoramic picture taken with my Samsung Galaxy S6 Edge). As this week’s Sunday Brief will be sent from Paris (and more like a Monday edition to most readers), we’ll keep it more brief than normal and make up for it next week when we analyze Verizon’s (announcement Oct 20) and AT&T’s (Oct 22) earnings.
This week, we’ll touch on the FCC’s special access investigation announcement, comment on AT&T’s public relations blunder with a quadruple-play customer (and equally embarassing confession to the Los Angeles Times), and look at the beginning of the 600 MHz auction activities.
The FCC Investigates Large Volume/Term Discounting Practices with Potential Competitors
On Friday, the FCC opened up an investigation into the tariffing processes of AT&T, Verizon, CenturyLink, and Frontier (full FCC Order here and Multichannel News article here). These tariffs are between the incumbent telecommunications providers and competitive LECs (which include XO, Birch, tw telecom, Level3, and even out-of-territory divisions of the incumbents themselves). Here’s a brief summary of the allegations (from the FCC document):
… competitive LECs assert that, in order to compete for customers with any demand for relatively low bandwidth services beyond large downtown areas, they must purchase as wholesale inputs significant amounts of business data services from the local incumbent LEC. They assert further that in practice their only option in making such purchases is to be entangled in a web of terms and conditions that limit significantly their ability to respond to marketplace opportunities to deploy their own infrastructure, which would introduce additional choices for customers. If true, the consequences could well be that, despite competitive entry for a segment of the demand for business data services, incumbent LEC dominance over facility-based provision of such services is preserved in many areas and costs for entry or expansion for competitive LECs is increased with the direct result of that dominance being that end-users are deprived of the benefits of both competition and innovation.
What this paragraph states is that for competitive LECs to have a chance, they need to sign up for large volume discounts which commit them to purchase nearly all last mile connections from the incumbent. This commitment prevents them from purchasing more from cable (most cable companies have wholesale divisions) or from building into multi-tenant facilities for their customers.
To put this into context from an incumbent perspective, total transport revenues for AT&T (both wholesale and retail) were $6.8 billion for the trailing four quarters ending June 30 (total wireline revenues were $57.5 billion). However, as this column has noted several times, transport revenues generate a lot of EBITDA [cash flow] because the build process is very capital intensive (and maintenance costs have risen on a per circuit basis as the incumbents lose market share to cable providers).
It will be very interesting to see where this investigation leads. While there is nothing inherently wrong about having a large volume commitment (which could translate into a large percentage of circuits ordered – that depends on the competitive LECs product offerings, pricing strategy, etc.), if there are no intermediate volume purchasing tiers (e.g., order this package or revert to much higher rates), the FCC might find a way to play a role. Applying 1-2 volume discount “rungs” on a revised laddered schedule is a more balanced way to address this issue than shortening terms or modifying/ eliminating termination liabilities for violating agreements.
Regardless, the Wholesale arms of the cable commercial services units are the big winners here. With relations between the competitive LEC community and their incumbent peers at an all-time low, cable could gain meaningful scale to justify additional line extensions at a time when residential services growth (and corresponding capital requirements) are beginning to slow. This would put a serious dent in the profitability outlook for each of the incumbents.
More to come on this topic. Kudos to COMPTEL for leading the charge.
AT&T’s Monumental Misfire (and Quick Confession)
In September, an AT&T quadruple play customer from El Sereno, California, emailed CEO Randall Stephenson with a few suggestions for how they could improve their service. First, where AT&T only had DSL services (no U-Verse speeds), Alfred Valrie wrote the following, according to The Los Angeles Times:
“Hi. I have two suggestions. Please do not contact me in regards to these. These are suggestions. Allow unlimited data for DSL customers, particularly those in neighborhoods not serviced by U-verse. Bring back text messaging plans like 1,000 Messages for $10 or create a new plan like 500 Messages for $7.
Your lifelong customer, Alfred Valrie.”
Clearly, Valrie has established that these are suggestions only, and that he’s not looking to be contacted. He calls himself a lifelong customer. Asking for improved volumes to compensate for relatively slower DSL services is not a hairbrained idea. And, since Valrie is likely spending $200 or more for quadruple-play services, trimming voice/ data by a few dollars per month is not a big stretch for AT&T.
Rather than sending a quick “Thanks for your suggestion. We’ll look into it” note and pop it into a virtual file never to be read again (I’ll admit to having done that a few times while I was at Sprint), they sent the Valkyries (a.k.a., the Intellectual Property division of AT&T’s Legal Department, led by Thomas Restaino) after him (nearby picture is of John Charles Dollman’s 1909 work, The Ride of the Valkyrs). According to the Times (see hyperlink above), the response to Valrie read in part:
“AT&T has a policy of not entertaining unsolicited offers to adopt, analyze, develop, license or purchase third-party intellectual property … from members of the general public,” Restaino said. “Therefore, we respectfully decline to consider your suggestion.”
Gulp. What’s most amazing about this communication is that at least three people at AT&T probably approved the response, and it appears that none of them actually read Valrie’s note (which clearly contains nothing innovative or groundbreaking, but strongly hints at the frustration that there’re data speed inequities occurring in AT&T’s network in Southern California, and that customers who balance wireless and wireline services might deserve more of a discount than wireless-only customers).
Before AT&T CEO Randall Stephenson delivered the mea culpa of the week to the Times, however, an AT&T spokesperson (Georgia Taylor) actually explained to the reporter that AT&T’s action was deliberate:
“In the past, we’ve had customers send us unsolicited ideas and then later threaten to take legal action, claiming we stole their ideas,” she explained. “That’s why our responses have been a bit formal and legalistic. It’s so we can protect ourselves.”
Again, Randall Stephenson has apologized for their response and indicated that they have taken appropriate measures to prevent this from happening again, but it makes me wonder how many other customers have received a bullying note from AT&T in 2015? I received one in the summer of 2010 for using the words “Rethink Possible” in a Sunday Brief column (we modified it slightly) but that letter was not threatening by any means and I had an excellent dialogue with the external counsel who was probably paid by the hour to read my column.
In all seriousness, executives need to read these notes as fellow customers and apply rational thinking and appropriate action. Listen less to the legal department, and more to quadruple-play customers.
The 600 MHz Auction Pre-Party Begins – Who Cares?
The FCC was also busy this week releasing the initial markets pricing for the Broadcast (600 MHz) Auction. There are two parts to the bidding process, as outlined in the nearby diagram provided in a recent FCC/ Greenhill presentation:
- Maximum “ask” pricing for each broadcaster in each market. As in any forward (or reverse) auction, an initial asking price has to be established. In the case of the 600 MHz auction, the FCC established three prices: 1) one whereby the broadcaster receives funds and shuts down; 2) one where the broadcaster receives lesser funds, but agrees to share a new channel with another broadcaster; and 3) one where the broadcaster receives an even lesser amount, but has more flexibility to locate their new broadcast channel. The full listing of opening bid pricing is here courtesy of FierceMarkets. In nearly all publicly available information, it’s most likely that options 2 and 3 will be the most common choices for broadcasters.
This is a reverse auction, which means pricing will not go up. The FCC has a spectrum “supply” that it is looking to fill in each market, and their intent is to fill this at a rate that yields the largest possible take for the US government (and taxpayers).
- Minimum “bid” pricing from would-be bidders (most likely current wireless carriers, with the exception of Sprint). The FCC table is here. Of particular note are the FCC’s new 415 Partial Economic Areas (PEA) which is appropriate given their smallish nature. For example, in addition to Kansas City, St. Louis, and Springfield, the towns of Cape Girardeau, West Plains, Moberly, Farmington, Kirksville, Rolla, Hannibal, Maryville, Macon, Columbia, and St. Joseph Missouri all have their own PEAs. This structure should enable competitive bidding from rural wireless providers in markets where prices may have previously been prohibitively high.
The broadcasters will look at the first schedule and notify the FCC of their intention to participate in the reverse auction by mid-December. Based on the pricing already established, it’s likely that many if not most will choose to play and remain in operation. Look for more on this topic over the next six months.
Next week, well cover Verizon and AT&T’s earnings commentary and look for other insights from Alphabet [Google]. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to email@example.com. We’ll subscribe them as soon as we can (and they can go to www.sundaybrief.com for the full archive). Thanks again for your readership, and Go Royals!