Come together

Posted on Friday, March 22, 2019

More news out of the British rural broadband market about a business model I wanted to write about anyway, with implications for Latin American markets. At least one reader I know will be happy the parade of farm animals continues. Come together. Right now. For network sharing (if you are in favor); national roaming (or the destruction of shareholder value if you are not).

The news this week there was a war of words – and business models – between BT (which we used to call British Telecom), its mobile subsidiary EE (which used to stand for something but I forget what) and the rest of the UK mobile industry.

BT’s competitors O2, Hutchinson 3 (Three?) and Vodafone advocate a shared network solution to solve the rural broadband deployment conundrum I discussed last week. Vodafone CTO Scott Perry is reported to have told a forum that sheep don’t pay phone bills, a point I have also mentioned a few times.

(However, to be fair to our ovine friends, neither do cows pay phone bills nor chickens nor thoroughbred horses nor pigs. Funny. All of these have been mentioned as candidates for Agro-tech / IoT solutions where the animals themselves might not pay the bills – hard get a bank account or a credit card without a national ID card – but their owners might on their behalf. Guess that business has been either slow to develop, not profitable enough to justify network deployment or both, even in advanced economies like the UK.)

The same article linked above quotes BT as saying:

“BT has already invested heavily to create the widest 4G coverage in the UK, and we are keen to collaborate with Government and industry to extend rural coverage into areas where there is none today… To this end, we have recently proposed a new model for consideration over the coming weeks.”

I remember, but cannot find, a cartoon showing a street person speaking to a bank teller saying “I wanna open a joint account with someone who has a lot of dough”. This is what BT – and America Movil in Latin America – accuse regulators of wanting to do: take undue advantage of strong competitors’ financial capability (their ‘bank accounts’ if you will) so that weak competitors can expand on-net services to places where they do not have infrastructure.

The prospect makes AMX almost apoplectic. I am on the organizing committee for the Colombian Telecom and Electronics Engineers’ Association’s conference. We annually have an operator debate and, inevitably, AMX’s Juan Carlos Archila will bring up having to provide national roaming (a variation on the network sharing theme) for Avantel, the fourth-place operator. The measure was supposed to be temporary, so that Avantel could build out its network, but has become essentially permanent (as most temporary measures usually do).

AMX accuses those unwilling or unable to invest in their own networks of freeloading on those who have the financial wherewithal to build.

Avantel accuses AMX of having earned ‘monopoly profits’ that it should share with its competitors. ‘Monopoly’ is incorrect although there would be a lively debate over ‘dominant competitor’ that would take us far from our theme.

BT –having been the government monopoly and then dominant provider since 1912 – will likely be accused by its competitors of having a similar obligation to provide its infrastructure to the ‘greater good’ of the nation. (Hence OpenReach.)

According to the article, BT’s proposal is that the operators would build joint infrastructure – come together – in those zones where there is clearly no business case, but those who have already chosen to build in a particular zone should not be required to share.

We have got at least part way to a solution, one that maybe even AMX could agree to. (Maybe not.) Build a single infrastructure and share it in those zones where no one wants to build but if infrastructure exists, no imposed sharing.

It is possible that the industry could come to an agreement about this model but regulators will likely be looking for more. Let’s think about two adjacent zones, one which has BT/EE service and one which is without any service. Presumably the zone with BT/EE service is denser or richer or otherwise more attractive economically than the zone without service. After implementation of this solution, those in the zone previously without service would have their choice of four operators; the richer/more populous zone would still only have BT/EE service.

Worse, a, let’s say, Vodafone customer from the poorer/less dense zone travelling to the adjacent zone (which presumably would be a natural economic pole of attraction – stores, medical services etc.) would find themselves without coverage.

A regulator would want, at a minimum, full coverage for Voda/3/O2 clients who are ‘roaming’ into exclusively BT/EE territory. Presumably BT/EE would complain that their own infrastructure was being used against them, giving their competitors complete UK coverage at BT’s shareholders’ expense.

Voda/3/O2 would say BT’s proposal forces them to build wherever BT decides to build; whether or not it makes business sense for them.

As always, this comes down to setting appropriate prices. The problem arises when regulators not only mandate national roaming but set prices too low to provide the right incentives.

BT or AMX would, presumably, still be upset about their rival’s ability to claim universal coverage ‘on their backs’ but that pain would be mitigated if the national roaming price was high, say as high as a prepaid minute. Strictly looking at revenues, they would be indifferent if a minute carried on this part of the network was a direct customer of their own or the customer of a roaming rival. (Alliteration. Yes, a deliberate choice.)

The rival would likewise be confronted with either paying a high cost for their customers’ calling but on a pay-as-you-go basis or biting the bullet and building their own infrastructure. The high cost would even encourage investment, generally considered a good thing by governments.

I know it is old-fashioned to talk about ‘calling’ and ‘minutes’ but I am, in fact, old and the same argument would apply to data traffic and MBs.

The remaining issue would be looking at whether there would be an inappropriate incentive to leap-frog the shared infrastructure and build your own, uneconomically, with a business case powered by unusually high prices. I don’t think there is. If the shared infrastructure was already built, the shared tariff would be cheaper than the high tariff for ‘national roaming’ I propose here. If the shared infrastructure had not been built, things get more complicated but the answer is likely to require regulatory approval to build your own when an area has been designated for shared infrastructure.

Alternatively, since I assume that the shared infrastructure would be subsidized by the national government in some, perhaps many, perhaps most cases, another mechanism would be to pay the subsidy to the operator which has already built something before the program began. This operator would have enjoyed a substantial first-mover advantage and, with this mechanism, a rebate on its investment.

As I said previously, I doubt that this proposal would be enthusiastically embraced by either BT or AMX. They believe – with some justification – that their superior financial capability gives them a sustainable advantage that this idea would simply hand to their competitors. The compensation would ease the sting but not completely balance the loss of competitive advantage.

Here, I believe, is there the ‘greater good’ argument is relevant. A country like the UK or Colombia that chooses to go this route has decided that subsidizing broadband for its rural areas is either an economic benefit that all citizens will enjoy, a moral imperative (fairness) or both. Spectrum is a State-owned asset for which operators have received a concession or right-to-use. The State has the right to determine the conditions and, where legally permitted, change those conditions to achieve common goals.

Come together.

Finally, I do not see this as a means to perpetually give new operators a ‘helping hand’. Rather, the process would start with policy makers (let’s say a Ministry of Communications) selecting areas at the fringes of the existing network where most operators would not build on their own. It is a process for ‘dead zones’ that would forever lack effective infrastructure-based competition without a shared, subsidized network.

It is not for secondary or tertiary cities or fringe urban situations that have already demonstrated their economic viability for existing operators, even if a new operator finds it harder to meet its license-mandated coverage or roll-out obligations than it originally thought.

Too bad. Business is difficult sometimes.

And while I am on this point, Latin America already has too many operators in many countries. It does not need more. Nor should existing operators subsidize directly or indirectly some bureaucrat’s mistaken idea about how many carriers would be ‘nice to have’.

That has nothing to do with extending rural coverage and is, frankly, a topic for another day.

Title Reference: Come together was the first track and the first single off the Beatles last-recorded album, Abbey Road, even though this was the penultimate disc released. The single went to number 1 in the US as did Something which was the flipside of the 45. Unusually, the single had two “A-sides”. It is a John Lennon-penned Lennon-McCartney song and Lennon once described the lyrics as “gobbledygook” so not surprising I did not get much mileage out of the words for this article. Not even any farm animal references. Maybe if Paul had written it… or Brian Wilson.

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