by Gary Kim
Changing end user preferences, greater competition and occasional intervention by government are among the reasons the entire global telecom business is in a continuing process of change. Generally speaking, competition and changing end user demand cause more revenue change, but recently government actions have been pronounced.
The most recent example is action by the Federal Communications Commission to change the Universal Service Fund. Up to this point, the fund has spent about $8 billion a year to subsidize voice services in rural and low-income areas. But the fund now will shift to funding broadband access, with a reduction and cap on overall spending.
Less voice revenue for rural service providers is among the obvious implications. That also means higher prices for rural voice customers, lower profits for rural operators, or both. It might also mean a shift of some share to mobile voice or VoIP, as some customers react to higher prices by substituting alternative services.
Consolidated Communications, for example, got $11.76 a subscriber, per month in the first quarter of 2011, a figure that will drop to zero at some point. USF payments.
On average, $9 per connection was paid to the High Cost Fund in 1999 but that this amount increased to $27 per connection by 2010. USF payments skyrocket.
The FCC rules also make mobile broadband a universal service objective for the first time in history, and will create a separate “mobility fund” to support mobile broadband. That presumably will mean more revenue for wireless providers.
The new rules also are expected to include an ability for satellite providers to participate in the rural broadband program as well. In a relatively restricted number of cases, some incremental revenue for satellite broadband providers is expected.
The other big change is to the intercarrier compensation rules, which also will affect service provider costs and revenues. The new rules require VoIP providers to pay intercarrier compensation, which will raise the cost of using VoIP services.
While it is true that VoIP providers will pass those new charges on to their customers, the rules will reduce the price advantage many VoIP providers have had, compared with calling on public networks. VoIP prices will increase.
The rules also are expected to initially cap interstate and intrastate access charges with the ultimate goal of moving toward a “bill and keep” approach. Generally speaking, that will mean service providers will exchange traffic without charge, recovering network-related costs from their customers, rather than the other network delivering traffic.
Those limits might have some impact on “free conference call” services that traditionally have relied on high access rates to provide the “free” calling services. That might mean less revenue for some rural service providers working with the conference calling companies, as well as less revenue for the free conference calling services.
The rules apparently also will include cable operators more centrally in the intercarrier compensation scheme as well, meaning cable operators stand to make more money.
But European operators also have felt the effect of changing government rules, especially providers of mobile services whose revenue now is lower because of EU-mandated cuts in roaming costs. France Telecom, for example, says lower roaming rates accounted for 1.7 percent of its lower revenue in the most recent quarter.
At yet another level, industry participants and regulators have agreed in Singapore, Australia and New Zealand to structurally separate former incumbent telco operations, creating new national wholesale companies to provide infrastructure, while legally distinct retail units purchase capacity from the wholesale companies to create their own branded services.
While most changes in policy framework only affect some revenue sources and recipients, structural separation actually means carriers are out of the facilities business, and operate “over the top” just like all other service providers. That’s a potentially huge change with important implications for competition, and for profit margins, in the fixed line business.
The point is that, as even software companies such as Microsoft and Google have found, the communications business always is enabled and shaped by government regulators.
Governments create the rules about “who” can be in the business, set all sorts of rules about how such businesses shall operate, allocate spectrum, and in the case of LightSquared, can block an entire business model by simply refusing to allow a change of use for spectrum that already is licensed. LightSquared faces licensing challenge.
Also, consider some of the elements of the USF plan that could be challenged. The FCC has defined “broadband” as a download speed of 4 megabits per second and upload speed of 1 Mbps. This definition artificially inflates the size of the rural broadband “problem” because it does not count 3G wireless, some small rural wireless Internet providers and basic satellite service as broadband.
Refusing to count these providers as broadband will inflate the cost of the subsidies by classifying more areas as “unserved” and necessitating higher subsidies to achieve the faster speeds. One suspects there will be further “clarification” of such matters. Unresolved issues.
By specifying one definition of “broadband,” the FCC also shapes potential revenue outcomes by some contestants.
The plan also subsidizes at least two broadband competitors in rural areas through the Connect America Fund and a separate Mobility Fund.
If the goal is basic broadband connectivity in places that allegedly have no broadband at all, why not make all technologies compete for a single subsidy in these places before subsidizing two?
Some also will oppose the parts of the plan that “pick winners,” favoring some approaches over others. Wireless subsidies will be awarded based on competitive bidding from the outset.
Subsidies for fixed service to homes and businesses will transition from current payments to competitive bidding only over time. Satellite also is regarded as a special-purpose technology to serve the most remote areas, rather than a competitor that is almost universally available already.
All of those issues inevitably create winners and losers to some extent.
One suspects that outsourced voice platforms will become more important over time in rural markets, since the cost of voice infrastructure will no longer be subsidized. In other words, it will in the future make more sense to buy voice services from a third party than create those services using an owned switch.
Telecom might be a business, but it also is a business whose shape, revenues and potential profits are shaped in significant ways by government action. The new USF rules are but one example.
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight -- follow him on Twitter @garykim.
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