On Spectrum and Wireless Backhaul Bottlenecks

March 27th, 2012 by · Leave a Comment

In a guest article in Forbes over the weekend, Level 3 CEO James Crowe opened a new front against the incumbent last mile providers. Or, more accurately, he reopened a front that the FCC has been trying to sit on for a very long time. He took them to task for exacerbating the very spectrum shortage they are complaining about in order to maintain their marketshare.

Everyone who thinks about it knows the solution to the spectrum crunch - smaller cells in more places connected to more fiber.  While there is no way to manufacture spectrum no matter how much money you throw at it, we can add all the fiber we can pay for.  One big reason it doesn't yet scale is because there is little competition in wireless backhaul and thus a slow pace of innovation.  Incumbents always start with a scale advantage, but that's not what Mr. Crowe is talking about.  As folks who do this sort of thing know, you must commit to buy some threshold percentage (e.g. 90%) of your backhaul needs from the incumbent to benefit from discounted prices, else you pay list prices and won't be competitive.

Say I'm the only grocery store in a small town, very profitable but with a high cost of entry.  One day an upstart local businessman opens a discount cheese shop across the street.  I then tell all my customers that if they don't buy 90% of their cheese from me, I'll charge them double for everything they buy in my store. If he wants to compete, he'll have to be as big as me and he'll have to do it all at once - it doesn't matter if his cheese is better or cheaper.  Predatory? Err, you think?  I really can't figure out why this isn't an obvious abuse already prevented by current laws.  At least with predatory pricing a monopoly takes a margin hit.  This way, they can keep prices artificially high by raising them even higher for those who stray - and call it a discount plan.

Not that some providers aren't making headway anyway. The independent metro fiber industry has been making some headway, with Zayo being the most publicly aggressive.  But for now the way is clear in part because these operators are still small in the grand scheme of things and there is still room beneath the incumbent's discount caps.  All they have to do is build it better and cheaper than the incumbents, and when it comes to building metro fiber they have figured that part out.  Turn these guys loose on a larger scale, and the long term economics of the wireless business and its data traffic growth won't look so grim.  It's just that the incumbents may lose control over the infrastructure in the process.

For its part, Level 3 hasn't been that active in FTT yet but is surely looking ahead to what it could spend the forecasted positive free cash flow it hopes to be making next year on.  Somehow I doubt the FCC is going to take this on right now, during an election year, but I suspect that James Crowe expects no immediate response on that front.  His Forbes piece is aimed more at mobilizing allies for now.

What do you think.  Should the FCC take action?  Will they?  And how?

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Categories: Metro fiber · Wireless

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