Tales of the Sausage Factory

Why Eliminating Handset Exclusivity Drops the Price of Cell Phones; or “How Is A BlackBerry Like A Pill?”

Back in February, I bought a Samsung Omnia and regretted it almost immediately thereafter. So when my touch screen finally died, I resolved to get a BlackBerry Curve 8330, as my wife has one and recommended it. Yes, she is on Sprint and I am on Verizon, but you can get the same model on both networks.

I was totally unprepared for the sticker shock. $450. Why? Because I was not eligible to buy new equipment. Did I want a replacement Omnia? No, I decided I really did hate my Omnia $450 worth. Out of curiosity, I asked how much it would cost if I were getting a new contract. Answer: $150, plus a $100 rebate.

Verizon claims here in policy land that this represents a subsidy, which they can only do if they have handset exclusivity. Mind you, this model is not actually exclusive, but let that go. Could it really be that Verizon subsidizes my phone $400? That seems an awful lot. So I decided I would look on Best Buy, assuming that it would represent the actual unsubsidized retail price. So I went to bestbuy.com and plugged in Blackberry Curve 8330. Sure enough, the price for the Verizon phone was $499, close enough to $450 to make Verizon’s subsidy claim feasible.

Then I noticed something odd. The same model phone, but for Alltel, cost $680, for Sprint, $750, and for MetroPCS, $400. Why should the same model phone, purchased at the same place, have such a wild swing in price? Remember, these are the prices without the subsidies for buying a new contract, so it can’t be the difference in what the companies chose to provide. The Best Buy price should reflect the unsubsidized retail price. The only difference, in theory, is the plan, (unless we are pretending to make the same model available to every provider and really aren’t). How could the wireless plan make such a difference?

Then it occurred to me where else I’ve seen this dynamic. Go to the drug store and you can see three people getting exactly the same prescription. But one pays $10, another pays $120, and the third pays $500. How is that possible?

Before elaborating below, I will first make it clear that I am rather short on critical data because most of the critical data is proprietary. So what I’ve got is a tentative hypothesis based on observed facts rather than something I can say with certainty. But it is enough for me to say: “Hey! FCC! Go and use your regulatory powers to get the providers to fork over the necessary data to see if I’m right.”

More below . . .

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Econoklastic

Part IIb — Who's Who in 700 MHz: the Experienced Actors

Now we turn our attention to the more experienced potential bidders in Auction 73 for the 700 MHz Band. All have participated in either one or more of the three Lower 700 MHz auctions (44, 49, or 60) or the AWS-1 auction (66).

The Big Guys

Cellco Partnership, Verizon Wireless’ bidding entity, spent a whopping $2,808,599,000 in the AWS-1 auction for 13 licenses and comes to Auction 73 well positioned to bid for the C Block REAGs and possibly the D Block nationwide license.

MetroPCS 700 MHz, LLC, is the bidding entity for cellular telco MetroPCS, which spent $1,391,410,000 in the AWS-1 auction for 8 licenses. MetroPCS appears to be looking to establish national footprint and will be a strong contender in C Block, and likely using A and B Blocks to fill in coverage gaps.

Cricket Licensee 2007, LLC, spent $710,214,000 for 99 licenses in AWS-1; Denali Spectrum License, LLC, spent $274,083,750 for one license in AWS-1. Both are owned by LEAP Wireless; if their AWS-1 pattern holds, expect them to be mainly active in A and B Blocks, pushing to achieve national footprint, although Cricket may be a C Block contender.

The incredulity expressed by some of the trade press over the application of tech company QUALCOMM,Inc., to participate in the 700 MHz auction seems odd given the fact that QUALCOMM achieved nearly-national footprint in a Lower 700 MHz auction by spending $38,036,000 for five EA licenses. QUALCOMM is positioned to flesh out national footprint in the A and B Blocks or to become a C Block contender.

Cincinnati Bell Wireless, LLC, is the wireless subsidiary of a regional CLEC which spent $37,071,000 for 9 licenses in AWS-1. Expect Cincinnati Bell Wireless to concentrate in the B Block CMAs to reinforce regional coverage.

Bluewater Wireless, L.P., is Aloha Partners’ Charles Townsend’s new stalking horse. Townsend and Aloha Partners spent $34,853,070 in the three Lower 700 MHz auctions amassing the largest bundle of spectrum in the auctions, which they have sold to AT&T for $2.5 billion. Bet on Townsend trying to recapitulate that coup, probably in the A and B Blocks, but Aloha Partners got completely frozen out in the AWS-1 auction, partly by blocking bidding by incumbents, partly because Townsend was unwilling to bid high enough where he wasn’t facing concerted blocking. Auction 73 is shaping up to be more costly than AWS-1, and I doubt that Bluewater Wireless is going to be able to pick up nearly as much spectrum on the cheap as it did in the Lower 700 MHz auctions.

Cellular South Licenses, Inc., the bidding entity for cellular telco Cellular South, spent $33,025,000 for 12 licenses in AWS-1. Look for Cellular South to continue to cover gaps in footprint in the A and B Bocks, although it may compete for some C Block REAGs.

Cavalier Wireless, LLC, spent $23,572,350 amassing 51 licenses in the Lower 700 MHz auctions and 30 licenses in AWS-1. Cavalier may try to establish national footprint or concentrate on firming up its regional dominance.

Vulcan Spectrum, LLC, spent $15,075,000 gaining 24 Lower 700 MHz licenses; Bend Cable Communications, LLC, spent $528,000 on 2 AWS-1 licenses. Both are investments of Microsoft co-founder Paul Allen. They concentrated on obtaining spectrum in the Washington-Oregon region of the Northwest in Lower 700 MHz and AWS-1, but Allen’s deep pockets make Vulcan in particular a potential C Block contender as well as aspiring for regional coverage consolidation in the A and B Blocks.

Cox Wireless, Inc., was part of the SpectrumCo coalition which gained 137 licenses for $2,377,609,000 in AWS-1, as was part of the Advance/Newhouse Partnership. However, the real powerhouses in SpectrumCo — Comcast, Time Warner, and Sprint/Nextel — decided to sit the 700 MHz auction out. However, Cox’s cable TV operations and Advance/Newhouse’s resources as a newspaper, magazine, and cable TV conglomerate position both of them to be significant bidders for the A, B, and C Blocks.

More below…

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Tales of the Sausage Factory

700 MHz PreGame Show: Cable Cos Largely Pass — No Surprise And A Win for Public

Yesterday was the day for companies interested in bidding in the 700 MHz auction to file their “Short Form” applications with the FCC. While it will still take a few days for the FCC to process the forms and for companies that made errors to correct the forms and give companies a chance to correct possible errors, we are seeing a few interesting developments already — notably in cable land. It is also interesting to see that MetroPCS and Leap never did get together before the auction.

On the cable side, no real surprise that most cable cos are sitting this one out. (Back in August, I already doubtful they’d want to play.) Actually, the mild surprise is that Cox is going it alone. I have not expected Spectrum Co. (the Comcast/Time Warner/other cable co joint venture) to bid, despite winning big in the 2006 and AWS auction and participating in the rulemaking for the 700 MHz auction. For one thing, thanks to the introduction of anonymous bidding, the cable cos cannot effectively target their industry rivals (like the telcos or the DBS guys) to drive up prices or block them altogether, as they did in the 2006 AWS auction. So a big motivator for the cable companies to participate, i.e. strategic blocking outside the value of the spectrum itself, is gone.

In addition, Sprint divorced itself from the partnership and shacked up with Google, leaving the cable cos with an ugly alimony settlement for the AWS auction and no wireless partner to help them build the network. And, finally, the cable guys haven’t figured out what the heck to do with the AWS spectrum they acquired last summer. While that went relatively cheap (45 cents/mhz pop), it still cost $2.5 Billion with nothing to show and a danger that if the cable cos don’t start building out a network they will lose the licenses at the end of the license term for failure to meet the mandatory performance metrics. (Licensees are required to meet build out and service requirements. The aren’t terribly onerous for the AWS band, but they do require you to build something and push a signal through it.) Given that the 700 MHz licenses have the most rigorous build out requirements ever (in no small part to ensure that folks like Spectrum Co. don’t win the spectrum and then “warehouse” it), the cable cos are very unlikely to buy spectrum on the off chance they’ll figure out something to do with it.

Finally, there is the big reason every is pointing to — the cable stock valuations. Cable stocks have declined significantly this year, both as a function of the general decline in the market and because it looks like Verizon bet right on fiber to the home. Competing against FIOS means that cable operators (particularly Comcast, Cablevision, and Time Warner) are in for another round of expensive capital investment to maintain their competitive footing or risk losing customers to FIOS. In this sort of situation, the last thing investors want to see is cable companies spending billions for licenses they can’t use unless they spend billions more to build networks from scratch.

This last is probably why Cablevision is sitting it out, despite vigorously playing in the AWS auction in ’06, and why Cox, which recently went private, has decided to toss its hat in the ring and play. Cox also has the advantage that licenses that overlap its territories (assuming it does not go for C Block or D Block) also have significant overlap with the area covered by AT&T with its purchase of Aloha. This potentially removes a major competitor for the A and B Block licenses, giving Cox a chance to get coverage of it’s network and offer a package of wireless and wireline services down the road. So Cox can ante up for a chance to catch a bargain without taking a stock hit. By contrast, Cablevision directly overlaps with Verizon for the licenses that cover its region and the adjacent markets into which Cablevision would want to expand. Verizon will fight like a tiger because it wants the spectrum, so the inability to block due to anonymous bidding does not help Cablevision. And, because Cablevision is publicly traded, even anteing for a chance to play will cost it big time.

UPDATE Apparently, Cablevision did file a short form. A Cablevision spokescritter said that Cablevision was reserving the right to bid, but declined to say if Cablevision would bid. Earlier stories I had seen said they wouldn’t bid. Well, I give them credit for trying. Good luck trying to break out of NYC.

All in all, I consider the elimination of Comcast and Time Warner as potential bidders to be a real win for the public interest. As I have written before, allowing cable companies to bid for this spectrum raises extremely serious competition problems and would make it virtually impossible to see a new, independent broadband provider emerge. Given that the 700 MHz auction creates a potential “transformative moment” for wireless broadband, and therefore potentially for broadband generally (especially the much hoped for “third pipe”), I breathe a huge sigh of relief to see the cable boys out of it.

Stay tuned . . . .

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Tales of the Sausage Factory

The 700 MHz Auction as the Next Front In the Cable/Telco War.

There are many ways to parse the fights in the 700 MHz auction: incumbents v. new entrants, rural v. large incumbents, public safety v. commercial use, and the occassional suggestion by us in the public interest community. But, as I recently indicated elsewhere, an analysis of the band plan fight about large licenses v. small licenses reveals another interesting battle: Telcos v. Cable, with new entrants lining up with Telcos for large licenses and non-vertically integrated wireless carriers like T-Mobile aligning themselves with the cable-dominated consortium SpectrumCo.

What makes me believe license size in 700 MHz auction has become a new front in the fight between telcos and cable cable cos? Why has this new battleground emerged? And what are its implications?

See below . . . .

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Tales of the Sausage Factory

I, For One, Welcome Our New Google Overlords

In a news report worthy of KBBL-TV’s Kent Brockman, MSNBC’s Olga Kharif writes of Google wielding it’s awesome and terrible powers in preparation for bidding in the 700 MHz Auction (as if I think about anything else these days). According to Kharif, “Google is wielding a surprising amount of power in the nation’s capital,” as demonstrated by “the influence Google is having on a closely watched government auction of $10 billion in licenses to provide wireless service.”

As evidence of Google’s supposed “influence,” Kharif points to Google’s involvement in the 4G Coalition “widely considered Google-led” (by whom, Kharif’s cat Mittens?) and how Martin’s express support for 4G on the large licenses v. small licenses issue shows that the FCC is likely to “play ball” with Google.

I might just let this go as another example of the Google-mania that has takne root in the press, but the normally perceptive and attentive Paul Kapustka on GigaOm made the same mistake. Because Martin said nice things about 4G and the DBS Guys (which I still thinks sounds like a Rock Band that performs at the CES Show), everyone is all “oooohhh the 4G guys are doing real well.” And the Google worshippers are all “Ah, Google Overlords, is there nothing you can’t control?”

Two critical facts tend to drop out of this analysis.

1) Martin lost his first-round bid to get the larger license-size reag plan through. That was the original plan, as noted by the Commission when it initiated this proceeding last August. This large license proposal got enormous push-back from SpectrumCo LLC (Comcast/TW/Cox/Sprint-Nextel) and the independent wireless incumbents (T-Mobile, MetroPCS) and the little rural guys. The fact that Martin was unable to get his fellow Republicans to vote with him and get the large-license band plan ratified in this round (as opposed to considered as one option among several in the Further Notice) is a set back for the supporters of large licenses.

2) The other supporters of large licenses, the ones Martin couldn’t mention for political reasons, are Verizon and AT&T. You might remember these telcos from such Kevin Martin movies as “Local Governments Hate Competition” and “Cyren Call: Song of Satan.” Verizon went so far as to hire ace auction expert Peter Cramton to write this paper on “Why Large Licenses In The 700 MHz Band Make Jesus Happy.”

[WHY the telcos and the cable cos are battling over the sze of licenses is extremely interesting and important, and is the subject of this post here.]

So yeah, Martin gave the big shout out to the DBS and 4G guys, since he’s not exactly going to say to the Dems “I’m puzzled why Ds who claim to hate cable market power back SpectrumCo against Veizon and AT&T.” And I think Martin genuinely does believe large licenses are the best way to get another national broadband competitor on the scene. (I also believe it, which is why I prefer large licenses a la the telcos and our Great Google Overlords.) But the idea that Martin did this just because Google redid the words “Federal Communications Commission” in rainbow and promised that they wouldn’t do evil with the licenses doesn’t exactly cut it. (No offense to Rick Whitt, whom I like and I think is a great lobbyist, but lets stay focused on the actual docket and relevant history, shall we?)

I suppose I should just accept that Google exerts a fascination on the trade press these days and let it go (and figure that anyone who wants my view on reality rather than Googleview will come here). But after spending last summer of watching Google and the rest of the tech industry unable to find their lobbying ass on net neutrality with both hands and a compass and a big sign saying “telcos, please spank us here”, while constantly hearing from the press and the cable cos how all of it was really the amazing Google Overlords at work has made me just a shade irritated.

Besides, it’s Friday afternoon and I’m due for my shabbos rest.

Stay tuned . . . .

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