Alec Saunders SquawkBox

This morning’s Squawk Box was ably hosted by Dan York. Sitting in for me (I was on an airplane), he took on the twin topics of the carriers rumored attempts to create a Skype competitor, and the launch of Clearwire as the US Cable companies, Google and Intel step to the plate to try to save WiMAX.

On the call: Dan York, Jim Courtney, Ken Camp, James Body, Mark Hewitt, Dave Brown, Todd Spraggins, Jeanette Fisher, Ragui Kamel, Ian Hood, Bill Volk, and Mike Pruyn.

Thank you, Dan, for hosting it. From the listen I’ve had while editing it sounds as if it was a great session.

 

 Squawk Box May 8 [31:49m]: Play Now | Play in Popup | Download

There's an interesting regulatory battle going on south of the border. "Forbearance" is a provision in the 1996 Telecom Act that allows the FCC to set aside the competition rules when enforcement of the rule is not required to protect the public interest.  Incumbent's have learned how to use the forbearance provisions of the the act to systematically dismantle the competition provisions within the legal framework of the act itself.  Now they're applying that knowledge.

In the case currently before the FCC, the commission will make a final decision on December 5th in a forbearance petition by Verizon that would exempt it from UNE-P — the requirement to sell high capacity DS-1 and DS-3 connections on a cost-plus basis to competitors — in six eastern US markets including major metropolitan areas like New York, Boston, and Philadelphia.  The impact of this decision would be that CLECs who currently buy and resell those would, at minimum, see their costs rise and perhaps dramatically.  Consumers and small businesses would also see prices rise.  One study suggests that prices would rise by $2.4 billion, or $114 annually per household, in the affected areas.  In all likelihood local loop competition will disappear altogether, leaving just Verizon and the cable company to compete with each other.

Advocates for the incumbents will argue that there is enough competition in the market with two well financed competitors.  In this duopoly, however, there are high switching costs because of a requirement to replace equipment.  A duopoly of this type bears a strong resemblance to a monopoly since neither competitor can appreciably better its position without substantial expense and risk.  The competitor who drops prices will harm itself without an appreciable gain in market share because of the barriers to switching.  Game theory predicts this outcome. 

The interests of consumers are best served by a critical mass of competitors selling like products and services.  The likely outcome of a successful petition by Verizon will be higher prices for 35 million people.  If you want proof, just look north to Canada and the situation within the mobile market.  In Canada, to switch between Rogers, Bell or Telus requires the consumer to purchase new telephones, and to pay substantial contract breaking penalties.  The result is a cozy arrangement amongst the carriers in which all can predict that pricing levels will stay approximately the same because it wouldn't be rational to compete by dropping price.  It's no accident that Canadians pay some of the highest cellular rates in the world.

The US incumbents understand this too.  Moreover, the rules of Telecom Act stipulate that the FCC must act on any forbearance petition within 12 or 15 months of receiving it. If the FCC doesn't respond then the petition is "deemed granted".

In the past the FCC dealt with few forbearance petitions.  Today, however, they are being bombarded with petitions as the incumbents have now discovered the power of the "deemed granted" rule.  Via the simple strategy of overwork, the incumbents are taking away the ability of the FCC to set its own policy agenda.  Wednesday's decision on Verizon forbearance is just the beginning.

Closer to home, StatsCan published a mess of statistics about the Canadian communications industry last week as well.  Highlights:

• In the quarter ending June 30, 2006, Canadian wireless carriers had profits of $996 million, a 36% increase from 2005. This is the first time that wireless profits have exceeded the incumbent telcos’ wireline profits, which were $822 million, down from $1.2 billion a year earlier.
• Wireless subscribers at the end of June were 17.2 million, up 10.9% from a year earlier. Wireless revenues were $3.1  billion, about 35% of the industry’s total revenues of $8.9 billion.
• The incumbent wireline telcos lost 706,000 residential lines in the preceding 12 months, and a total of 1.2 million residential lines in the past five years.  That represents a 5.8% year over year decline. Their business line counts grew by 36,000 in the past year, partially reversing a three-year decline (2002-2005).
• Cablecos had 750,000 telephone subscribers at the end of June 2006, six times more than a year earlier.

 

Cisco announced today that they have acquired set-top box maker Scientific Atlanta for $6.9 billion. Scientific Atlanta’s customer list reads like a who’s who of the cable industry — Time Warner, Comcast, Cox, Adelphia, Rogers, Videotron.   According to Om Malik, the acquisition brings them End-to-End Subscriber Systems, DVR & Non-DVR Set tops, HD & standard definition Set tops, System & Client Software, Cable HSD/Voice Modems, Home Networks, HFC Networks, Satellite Systems, Head-ends, and Network Management.

According to News.com, Cisco CEO John Chambers ranks this acquisition in the top four that the company has ever done, and says the company plans to take the Scientific-Atlanta products and integrate them with Cisco’s routers and switches and home networking equipment to create an end-to-end business.

James Enck asks how long until we see a set-top box with SIP and WiFi built in?  Om Malik says "Cisco had data, Cisco had voice, and what it needed was video to complete the triple play." 

This has just a created a headache for Motorola, but it’s going to cause Microsoft, and TiVo a world of hurt.  The end-to-end play is powerful, and neither of these companies have any head-end assets. 

Front page of the business section in the Globe and Mail this morning: Bell, Telus face erosion in market share.  Convergence Consulting Group is forecasting residential line share loss at 7% for Bell this year, and 5% for Telus.  Primarily due to the low cost of entry for VoIP technology, cable companies will capture 6.5% of the residential market this year, 16% by end of 2007, and 27% by the end of 2009.

More details on Convergence’s report can be found on their website.   Interestingly enough, Convergence predicts that US cable companies will have less impact  in the US residential telephone market than we are likely to experience here in Canada.