New FCC Data Roaming Mandate Seen Changing Dynamics of AT&T Merger Review

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With efforts under way to free up 500 megahertz of spectrum for wireless broadband over the next 10 years, the Federal Communications Commission will be under increasing pressure to ensure competition in an industry marked by consolidation and radically transformed by technology. And that challenge has been made even more difficult by AT&T Inc.'s planned $39 billion acquisition of T-Mobile USA, one of the largest deals since the 2008 financial crisis.

The FCC's review of the deal will now come on the heels of a controversial decision to require one of the companies involved, AT&T, and Verizon Wireless to enter into data-roaming agreements with competitors on “commercially reasonable terms and conditions,” a move that agency officials say will stimulate greater competition in an industry dominated by two powerful players, AT&T and Verizon. But critics of the move argue that the agency's new data-roaming mandate could actually have the opposite effect: forestalling competition among multiple providers in rural areas, where President Obama sees the greatest need for expanding mobile broadband access.

Eye on Small, Rural Carriers.

If AT&T obtains full regulatory approval from the FCC and the Department of Justice, the company would become the biggest wireless carrier in the nation, with a combined 130 million users, compared with Verizon Wireless's 96 million and Sprint Nextel Corp.'s 50 million.

After the merger, AT&T and Verizon together would control nearly 80 percent of the market, with Sprint a very distant third-place competitor.

The FCC's data-roaming order acknowledges this fact, at least implicitly, guaranteeing that customers of smaller, rural, and regional carriers will be able to download an e-mail or read a newspaper on their smartphone when they travel outside their geographic region.

For the last five years, Sprint Nextel Corp., T-Mobile, and other smaller rivals to AT&T and Verizon have lobbied aggressively for a data-roaming mandate to prevent the nation's two largest wireless carriers from walling off their networks to roaming traffic. And while such deals have since become common, even without the FCC's intervention, smaller carriers have been left with little recourse against unreasonable rates, terms, and conditions.

“We're no longer on an island,” explained Holly Henderson, manager of legal and external affairs for SouthernLINC Wireless, which provides voice coverage in southeast Mississippi, Alabama, Georgia, and the Florida panhandle, in a recent interview with BNA. “The FCC's [order] gives smaller carriers an incentive to invest. It now makes sense for you, as the consumer, to buy this new whizbang smartphone; you can use it here in Georgia and you can use it wherever you go. For them, the consumer, it's no longer an 'island technology.' ”

Indeed, agency officials have held out their order as a boon for competition, part of a pro-consumer policy aimed at tempering the effects of concentration in the industry.

Critic Says Order Boxes In FCC.

The order could dramatically change the dynamics of how the FCC reviews future mergers in the wireless industry, starting with the mega-merger of AT&T and T-Mobile.

“The FCC boxed itself into a corner,” said one long-time communications lawyer, who spoke to BNA on the condition of anonymity. “[The agency] bears a much heavier burden now to justify forced divestitures of important assets, like spectrum, after dictating to AT&T the rates it can charge [competitors] for data roaming traffic. How could they, on the one hand, require AT&T's networks to accommodate this roaming traffic and on the other hand require it to give up spectrum?”

While both Verizon and AT&T--and all facilities-based mobile broadband service providers--are subject to the FCC order, AT&T may be the company that is the most disproportionately affected.

In announcing its acquisition of T-Mobile, AT&T made a commitment to extend LTE (long term evolution) coverage to 95 percent of the country, a plan that it argues will move the United States closer to the goal of achieving universal access to affordable, high-speed internet service. Some experts, like Jeff Silva, an analyst for Medley Global Advisors LLC, predict that the small and rural wireless carriers, having gained leverage from the FCC order, may rush to enter into data-roaming with AT&T and not Verizon, since AT&T will be assuming the full infrastructure cost obligations of 95 percent LTE coverage.

Political Goals Said at Work.

“FCC Chairman Julius Genachowski appears to be trying to finesse a balancing of agency objectives that may lead to imperfect--but politically satisfying--policy outcomes,” Silva said of the agency's multi-faceted policy agenda in 2011, which includes mandating data roaming, making available for auction some 500 megahertz of spectrum for wireless broadband connectivity, and reviewing the AT&T-T-Mobile merger.

“The chairman's strategy appears to imply that Verizon and AT&T will have to pay a price now and then for being the nation's two largest wireless operators,” he added in a research note. “That tack may also implicitly concede the necessity for awkward political trade-offs along the way, possibly including conditional merger approval of the AT&T-T-Mobile transaction.”

Many suspect that the FCC will attempt to impose a cap on the amount of spectrum that a combined AT&T-T-Mobile can acquire in a single market, while at the same time mandating some divestiture of AT&T's assets, including spectrum. When viewed in the context of the AT&T-T-Mobile merger, the FCC's new data-roaming mandate raises the question of just how much spectrum the nation's two largest wireless carriers--AT&T and Verizon--can control in a given market.

Roaming Mandate May Undercut Divestiture.

“If data roaming is a reality, and true, facilities-based competition from mandatory data roaming is realized, I don't see why they [AT&T] would have to divest anything,” said Jeffrey Eisenach, managing director and principal of Navigant Economics, a critic of the FCC's decision. “Divestiture ought to be a moot point.”

Eisenach said he believes that the FCC will still try to force AT&T to divest spectrum assets, despite the new roaming mandate.

“What the commission is really engaging in here with its data-roaming order is the mobile wireless version of the 'ladder of competition,” said Eisenach. “That competitors, in order to effectively enter the market and make investments in network assets, have to have advantaged access to other people's infrastructure.”

Given this new mandate, the FCC now faces the challenge of calculating precisely how much spectrum AT&T would ultimately have to give up.

The FCC first implemented a 45 MHz spectrum cap in 1994 during the Clinton administration. The agency later raised that cap to 55 megahertz before eliminating it entirely in 2003 under Republican Chairman Michael Powell. That decision ultimately led to a 70 MHz “spectrum screen.” The screen was designed to be an internal benchmark to trigger closer scrutiny of markets involved in wireless mergers. Under Republican Chairman Kevin Martin, however, the spectrum screen ranged from between 95 MHz and 145 MHz per market in merger reviews.

Absent a forced divestiture, AT&T and T-Mobile would occupy roughly 135 MHz of spectrum in the top 100 U.S. markets, while Verizon would control 88 MHz and Sprint would maintain 69 MHz.

Rural Cellular Group Pushes Divestiture.

Steve Berry, president and chief executive officer of the Rural Cellular Association, which represents carriers that will ultimately benefit from the FCC order, said it would be “absurd” for AT&T not to divest spectrum now that the company is subject to a data-roaming mandate.

“What we ought to be looking at is how much 700 MHz spectrum they should be divesting,” Berry said.

Of all the spectrum bands allocated for mobile broadband uses, the 700 MHz band is the most valuable to the wireless industry because of the electromagnetic properties of its frequencies. Frequencies in the band are said to travel farther and penetrate walls and windows far more effectively than existing cellular networks do, allowing wireless carriers to provide their services--particularly mobile broadband service--with far fewer cell sites.

AT&T controls 26 MHz of spectrum in the 700 MHz band, and has entered into an agreement to buy spectrum from Qualcomm in the band for $1.93 billion. The acquisition would include 12 MHz of lower D- and E-block spectrum covering 70 million people in five of the top 15 U.S. markets, and 6 MHz of lower D-block spectrum covering 230 million people in the remaining areas of the country.

Public interest groups and rural carriers, including members of the Rural Cellular Association, have lined up in opposition to the deal, warning of the consequences of just two wireless carriers--AT&T and Verizon--controlling all of the cellular and 700 MHz band licenses in most of the largest markets in the country as well as in many rural markets.

The RCA was among the most aggressive supporters of an FCC data-roaming mandate, saying it would improve the chances that smaller, rural, start-up wireless carriers could remain viable enough to stimulate competition.

“[AT&T] clearly wants 700 MHz [band spectrum] and it wants it in such a way that it would not have to do data roaming,” Berry told BNA. “They don't want to share any of their capacity or capability.”

Taken in totality, the FCC order will provide a “pathway to 4G,” the next-generation of wireless technology, for smaller market players, Berry said.

Negative Impact on Investment Feared.

Some analysts caution that the data-roaming order may discourage AT&T and Verizon from investing in the 4G LTE infrastructure necessary to bring broadband to “unserved” and “underserved” areas of rural America. As for AT&T's and Verizon's rivals, their fears of dampened investment will only be compounded if the order results in mandated rates that are so low that a regional carrier will choose to enter into a roaming agreement rather than invest in facilities-based services.

As Republican Commissioner Meredith Attwell Baker noted in her statement dissenting from the FCC's decision, “regulator-sanctioned roaming rates could well create disincentives for host carriers to build the next tower and…similar disincentives for roaming carriers to invest and expand their own networks.”

To many industry observers, there is a direct correlation between the FCC's new data-roaming regime and the Telecommunications Act of 1996, which required the Bell operating companies to share their facilities with competitors.

Congress had hoped the act would unleash competition in every sector of the communications industry, and it did, but over the next decade, upstart competitive local exchange carriers either consolidated with other telephone companies or left the market entirely. Those that survived were the ones that invested in their own networks, rather than continuing to lease access from the incumbent phone company at wholesale rates.

“When the FCC forces [companies] to share existing facilities, it reduces incentives for investment in new facilities, depriving consumers of the benefits of real competition,” said Hance Haney, director and senior fellow of the Technology and Democracy Project at the Discovery Institute, a public policy think tank.

Haney, who advised then-Sen. Bob Packwood (R-Ore.) during the drafting of the act, views the data-roaming order in a historical “wireline” context, noting that the act, much like the FCC's roaming order, developed out of a need to stimulate competition.

“There was this idea that building last-mile connections was going to be prohibitively expensive for competitive carriers, so you can lease facilities from incumbents [to] provide ubiquitous coverage. However, the prices were set so low that it was cheaper for the competitive carrier to lease [access] to the incumbent's facilities, and investment was diverted away from the network,” Haney said.

Since the late 1990s, former FCC chairmen Reed Hundt and Bill Kennard have been criticized for extending the Telecommunications Act's unbundling mandate too broadly, authorizing the unbundling of almost any network element or combination of network elements. As a consequence, new entrants were tempted to effectively “resell” an incumbent phone company's services, rather than build their own networks.

Population Density Impacts Economics.

“The FCC's data-roaming order is inconsistent with its mission to enable as many facilities-based broadband providers as possible,” said analyst Roger Entner of Recon Analytics. “If you want to encourage facilities-based competition in the United States, especially in rural America, mandated data roaming is not the way to fix it. If you prefer that consumers can use any network anywhere so they have the best possible coverage, then yes, that may be the way to go about it. But the two really bite each other.”

In rural America, competition among facilities-based providers will be significantly lessened, Entner says, because smaller wireless carriers will to choose to roam on Verizon's and AT&T's networks in rural areas rather than invest in infrastructure on their own. The more densely populated the geographic region, the more profitable a cell site becomes. The more rural and sparsely populated, the more financial risk. In the most rural parts, a cell site built with private-sector investment could actually be a loss maker for a wireless carrier.

“The FCC has made rural [infrastructure] build-out a more difficult proposition,” Entner said. “For the smaller carriers, they now have the choice between putting in a new base station and operating that system or roaming. It's almost inevitable that the smaller carrier will rely on Verizon and AT&T, because it makes financial sense. Everyone will rely on them to do the build-out and then get whatever rate it is.”

National Broadband Plan Envisions Roaming.

The National Broadband Plan said that in order to achieve “wide, seamless, and competitive coverage,” the FCC should encourage mobile broadband providers to construct and build networks. The plan notes, however, that “few, if any,” of these networks will provide ubiquitous nationwide service “entirely through their own facilities,” particularly in the initial stages of construction and in rural areas.

While underscoring the importance of data-roaming agreements to “entry and competition for mobile broadband services” and to enable customers to stay connected when traveling beyond the reach of their provider's network, the plan stopped short of recommending a new roaming directive other than to say that the industry “should adopt voluntary data-roaming arrangements” and the FCC “should move forward promptly in its open proceeding on roaming obligations for data services provided without interconnection with the public-switched network.”

The agency, in its 14th “Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services,” issued last May, suggested that roaming on competitors' networks like AT&T's or Verizon's will afford smaller market players access to greater network coverage while they are deploying their own networks.

“To create a customer base, a new facilities-based entrant must provide network coverage that is sufficient to attract new customers, including enticing customers to switch from existing service providers,” the FCC wrote in the report. “Providers, including new entrants to a mobile wireless market that typically deploy their planned networks gradually, may seek access to networks besides their own in order to achieve a competitive level of coverage while their network is being built out.”

Concentration Index Rising.

The report also noted that there are more than 100 small, facilities-based wireless carriers providing service in a single geographical area, many of them in rural areas. This number remained unchanged between April 2008 and October 2009, the period during which the FCC collected data. These non-nationwide carriers, the FCC pointed out, typically rely on roaming agreements with AT&T, Verizon, and Sprint to extend their facilities-based network coverage.

The report revealed that while 95.8 percent of the U.S. population is served by at least three mobile voice providers, and 76 percent of Americans can choose from at least three mobile broadband providers, the industry may not be “effectively competitive.”

According to the latest Herfindahl-Hirschman Index of the market--a measure of the size of firms in relation to the size of the industry--the concentration of mobile wireless service providers is now at a weighted average of 2848, an increase of nearly 700 since the FCC first began calculating the metric seven years ago.

The next annual report is expected to be released by the agency in the coming months, which will likely reveal how the agency views competition in an industry that could have a new No. 1 provider: AT&T Mobile.

By Paul Barbagallo