If “follow the money” is a maxim in business, then it should come as no surprise Verizon favors the making the bulk of its investments and expansion in its enormously profitable wireless business.

Verizon Wireless earned the company $12.9 billion in operating profits during the first six months of 2013 while landlines and Verizon’s fiber optic network only delivered $87 million. That inconsistency may help explain why Verizon FiOS expansion is stalled while Verizon throws enormous sums into its 4G LTE wireless upgrade project.

The average Verizon Wireless bill is now over $150 a month. FiOS customers pay an average of over $150 a month as well, but Verizon’s costs to reach its smaller customer footprint are higher. Revenues for basic landline service are considerably lower than either wireless or fiber service.

With wireless providing a virtual ATM for Verizon Communications, the New York Times notes it is unsurprising that Verizon wants to buy out its European partner Vodafone, which owns 45% of Verizon Wireless. Once the $130 billion transaction is complete, Verizon will keep wireless profits all to itself as it continues lobbying for permission to decommission rural landlines and encourage those customers to use its vastly more profitable and almost entirely unregulated wireless network instead.

Exactly 100 years after Verizon predecessor AT&T/The Bell System voluntarily agreed to be a regulated monopoly provider of telephone service, Verizon Wireless and AT&T have successfully established unregulated wireless networks that serve most Americans with cell service and wireless data at prices that would be shocking to people 20 years ago.

Just weeks after Time Warner Cable and CBS settled a dispute over retransmission fees, other broadcasters and networks are preparing to make new demands for increased compensation from their cable, satellite, and telco IPTV partners at prices likely to provoke more blackouts.

Despite repeated protestations from Time Warner that over-the-air stations and networks deserve lower fees than cable-only networks, once the two parties went behind closed doors, the cable company quickly agreed to pay considerably more for CBS programming. Sources say CBS made a deal that will run up to five years and includes more than $1.50 in fees per subscriber, up from between 50-85 cents per month, depending on the city served, under the old contract. CBS had asked for about $2 a month. Effectively, the company will earn more than that because Time Warner also agreed to renew both the CBS Sports Network and Smithsonian Channel, which cost extra.

“There is a new template here. Two dollars is the new holy grail,” Wunderlich Securities analyst Matthew Harrigan told Reuters.

Fox was the highest paid network before the CBS deal, collecting close to $1.25 per month per subscriber. ABC receives 50-65 cents and NBC less than that.

Harrigan predicts the other networks will race to raise their own prices, with Time Warner Cable (and others) likely forced to raise rates early next year to cover increased costs.

In the war for compensation, programmers hold most of the leverage.

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The Wall Street Journal reports the dispute between Time Warner Cable and CBS set new industry precedents on the value of broadcast stations and networks and how their programming is distributed on digital platforms. (2 minutes)

There have already been local station blackouts in 80 cities so far this year, with the likelihood last year’s record of 91 markets will be broken before Thanksgiving. In almost every instance where a popular network is involved, the pay television provider eventually capitulates because of subscriber complaints or cancellations.

Moonves

Time Warner Cable admits its dispute with CBS cost the company business, both from prospective new customers going elsewhere and customer disconnects. Time Warner also spent money advertising its side of the dispute and paid to distribute free antennas to affected subscribers.

CBS’ Les Moonves had predicted Time Warner would eventually meet most of the network’s compensation demands before football season arrived. He was right.

“CBS is the winner. Content owners always win these negotiations, it’s just a matter of how much they won,” said Craig Moffett of Moffett Research. “They have all the leverage. Consumers don’t get mad and trade in their channel when these fights drag on. They go looking for a different satellite or telephone company.”

Almost 200,000 Time Warner Cable television customers left during the second quarter, and company officials admit that trend continued during the third quarter as the dispute dragged on. Time Warner Cable is likely to end the year with fewer than 11.5 million video subscribers, a loss of several hundred thousand this year.

Sources say one major sticking point that kept CBS off Time Warner Cable systems for nearly a month wasn’t about money. Instead, it was about digital distribution rights.

Time Warner Cable wanted CBS on its TV Everywhere app TWCTV and was also concerned about CBS selling content to online video streaming competitors that could accelerate cord-cutting.

Time Warner Cable did win permission to offer Showtime on its digital streaming platform and on apps for portable devices. But Time Warner will not get to carry local CBS-owned stations on streaming platforms, a significant blow. The cable company will also have to pay more for streamed and on-demand content.

In the end, CBS got almost everything it wanted and Time Warner Cable was handed back its largely unfulfilled wish list and a bigger, retroactive bill subscribers will eventually have to pay.

“We wanted to hold down costs and retain our ability to deliver a great video experience to our customers,” Time Warner Cable CEO Glenn Britt said in defense of the agreement. “While we certainly didn’t get everything we wanted, ultimately we ended up in a much better place than when we started.”

Moonves gloated to various trade publications and investors that CBS went unscathed after the month-long dispute.

“Our national ad dollars did not go down,” Moonves told attendees at the recent Bank of America/Merrill Lynch Media Communications & Entertainment Conference. “There were no such things as make-goods and there was no harm done financially to CBS Corporation.”

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CBS’ Les Moonves has won his dispute with Time Warner Cable, says Les Moonves in this interview with Bloomberg TV. (10 minutes)

Comcast owns both NBC and the cable companies that carry its local affiliates.

Cable rate increases are not likely to stop with the agreement with CBS. Analysts predict NBC, ABC, and FOX will be seeking similar rates when their contracts come up for renewal. Altogether, every cable, telco IPTV, and satellite subscriber could see rates increase up to $6 a month for the four major American networks.

“Any time one of these larger networks sets the new standard in terms of pricing for their programming, the rest follow,” Justin Nielson, an analyst for SNL Kagan, told Hollywood Reporter. “In most cases it’s been CBS and FOX trailblazing what the rates should be and then ABC and NBC following.”

Comcast-NBC’s Steve Burke is already there. Burke told investors affiliates should be paying 20 to 25 percent more for cable networks such as USA, Bravo, SyFy, CNBC and MSNBC .

“We’re not paid as much as we should be given our rating and positioning by cable and satellite companies,” Burke said. “I see no reason why we won’t sort of draft behind the other broadcast networks and get paid in a similar way.”

Burke predicts NBC will earn between $500 million to $1 billion annually from increased retransmission consent fees comparable to what CBS and FOX receive.

Next week, DISH Networks faces the expiration of their contract with ABC/Disney-owned channels, including the Cadillac-priced ESPN. The outcome of renewal negotiations may serve as an indicator for where rates are headed in the world of retransmission economics.

A growing number of elected officials in Washington are paying attention as they and their constituents live through one programmer blackout after another. At least four pieces of legislation have been introduced to deal with the problem in very different ways, according to Bloomberg News:

The Satellite Television Extension and Localism Act

This law, known as STELA, dates to 2004 and gives satellite companies a license to provide local TV stations, just as cable operators do. The current law is set to expire at the end of 2014, with most observers calling its reauthorization a near certainty. The debate is mainly over how “clean” the STELA reauthorization bill will be as it emerges from the legislative process, with the pay TV companies urging lawmakers to address the issue of retransmission disputes. Broadcasters are working for a “clean” bill, written narrowly to address the satellite companies’ immediate needs. “There’s nothing clean about the current retransmission system,” says Brian Frederick, a spokesman for the American Television Alliance, a coalition of pay-TV companies. Two House committees held hearings on the law this week. A final bill and vote are expected next year.

Video CHOICE (Consumers Have Options in Choosing Entertainment)

Representative Anna Eshoo, a Democrat who represents much of Silicon Valley, introduced this bill Sept. 9 aimed at ending blackouts. “Recurring TV blackouts, including the 91 U.S. markets impacted in 2012, have made it abundantly clear that the FCC needs explicit statutory authority to intervene when retransmission disputes break down,” Eshoo said in a press release. (The FCC gets involved now only if one party accuses the other of negotiating in bad faith.) The bill would unbundle broadcast stations from a cable package and prohibit a broadcaster from requiring a pay TV operator to take affiliated cable channels to obtain more popular channels. That issue is at the heart of why Cablevision sued Viacom in February, following a contentious negotiation.

Eshoo’s bill would also require the FCC to study programming costs for sports networks in the top 20 regional sports markets. The rising fees for sports programming—led by ESPN—is considered one of the major influences behind rising cable bills and the power that content creators such as Disney hold in negotiations. Cable companies have praised Eshoo’s bill, while broadcasters are not fans. Don’t expect to see it get far in a Republican-led House.

Television Consumer Freedom Act of 2013

This bill, introduced in May by Senator John McCain (R-Ariz.), would end the long era of the cable television bundle, that phenomenon by which you pay for hundreds of channels and find yourself watching only about two dozen, or fewer. This summer, Connecticut Senator Richard Blumenthal signed on as a Democratic co-sponsor, but there’s been no similar sponsors on the House side. Blumenthal explained his support of the bill in an August interview with the Hollywood Reporter:

“What I hear from cable consumers overwhelmingly is, ‘give us freedom of choice. Don’t make us pay for something we don’t want and won’t watch. Why am I paying for—you name a channel you don’t like or five or ten or them—just so I can watch the one I do want.’ That’s overwhelmingly the sentiment of people who buy this product. So this bill just gives voice and force to that sentiment.”

Next Generation Television Marketplace Act

This bill from Representative Steve Scalise, a Louisiana Republican, and former South Carolina Senator Jim DeMint, also a Republican, dates to December 2011 and would deregulate the entire television market, top to bottom. It would repeal compulsory copyright licenses, the legal mechanism by which content owners are required to let pay TV companies carry their programs, if they are paid a fee for the content. The bill, which would also dismantle the system of retransmission fees, is essentially an exercise in carrying free-market ideology to its logical conclusion. The problem? It would require a countless number of individual deal negotiations—any radio or television station that wanted to carry programming (i.e., all of them)—would need to strike deals with every programmer, yielding an inefficient system that would likely prove unworkable. Lawyers would love the bill, but don’t expect it ever to pass Congress.

In fact, none of these bills are expected to pass through both the gridlocked House and Senate this year.

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CNBC also talked with CBS’ Les Moonves about CBS’ views towards compensation and distributing content online. (13 minutes)

Time Warner Cable’s approval of its request to offer regulated “digital phone” service in New York has been quickly followed by an appeal for deregulation to loosen rules covering disconnection for non-payment and reduced service quality standards.

The cable operator now qualifies — as a designated Eligible Telecommunications Carrier (ETC) — for significant federal and state subsidies in return for providing discounted Lifeline telephone service for the state’s poorest residents.

The cable industry has traditionally escaped regulation and oversight with claims “digital phone” Voice over IP (VoIP) products are “unregulated information services.”

In March, the New York Public Service Commission approved a petition filed by subsidiary Time Warner Cable Information Services (NY) LLP (TWCIS-NY), to begin offering regulated telephone service to the company’s 1,235,710 phone customers in New York.

As a result, Time Warner agreed to a range of oversight and service standard requirements. But on May 1 — less than two months later — Time Warner filed a new petition with the PSC requesting deregulation and exemption from several provisions the company initially agreed to follow.

“Now that it is concededly a regulated telephone service provider, Time Warner is acting like other regulated phone companies, in that it immediately is seeking to relax the rules designed to protect customers,” writes Gerry Norlander from the Public Utility Law Project of New York (PULP), a consumer protection group.

Not so, says the cable company.

“In order to offer the best telecommunications service to its customers and expand this customer base, TWCIS-NY respectfully requests that the Commission grant the waivers discussed in this Petition,” the company writes.

The changes Time Warner requests would make it easier for the cable company to disconnect service for late or non-payment, allow Time Warner to avoid distributing unwanted paper telephone directories, and escape oversight of its phone service for all but the most critical “core” customers with special needs.

Your Partial Payment Will Not Necessarily Prevent Us From Cutting Off Your Phone Line

The Telephone Fair Practices Act (TFPA), prohibits regulated phone companies from shutting off phone service for late/non-payment outside of normal business hours, Fridays after 1pm, weekends, and holidays:

(d) Suspension or termination of service–time. A telephone corporation complying with the conditions set forth in this section may suspend or terminate service to a residential customer for nonpayment of bills only between the hours of 8 a.m. and 7:30 p.m., Monday through Thursday, and between 8:00 a.m. and 3:00 p.m. on Friday, provided such day or the following day is not:
(1) a public holiday, as defined in the General Construction Law;
(2) a day on which the main business office of the telephone corporation is closed for business; or
(3) during the periods of December 23rd through December 26th and December 30th through January 2nd.

Time Warner Cable claims those limitations are too much, and “for its customers’ convenience, TWCIS-NY respectfully requests […] to extend these hours.”

If approved, Time Warner claims it will make your life easier if they can cut you off at their convenience — between the hours of 8:00am and 9:00pm, Monday through Friday, and between 8:00am and 5:00pm on Saturday.

Those times coincidentally match the hours technicians are now dispatched to collect equipment and shut off service for deadbeat customers.

Time Warner says people are often busy or not at home during the day and it would make more sense to coordinate the surrender of service when people are available to hand over equipment. Unfortunately, Time Warner’s preferred hours often fall outside of the calling hours at the Public Service Commission, which maintains a ‘last resort hotline’ for customers about to have their service disconnected.

‘Time Warner Cable Punishes Late Payers With Telephone Service Suspensions and Terminations on a “Massive” Scale’

Unlike cable television and broadband, New York designates telephone service as an essential utility, and regulators take every step to maintain service wherever possible.

Under rules originally adopted when consumers chose both a local and long distance phone company that put all of your charges on a single monthly invoice, regulators sought to protect landline service when customers did not pay the full amount due. Under those rules, partial payments are allocated first to past due charges from the local phone company, then past due charges for regional long distance or local calling, then charges billed by your long distance carrier, and then everything else.

Since your local phone company has the power to cut off your dial tone for late payment, making sure they were first in line to get paid usually kept your phone line working.

“It Appears that Time Warner Has Increased its Reliance Upon Telephone Service Suspensions and Terminations as a Tool to Enforce Customer Payment Obligations.”

According to data provided by Time Warner Cable in response to PULP information requests, during the month of March, 2012 Time Warner Cable sent 68,134 shutoff notices to Time Warner phone customers in New York. The threats worked for the majority of those customers. Only 17,218 were eventually disconnected after the shutoff deadline passed.

Since then, shutoffs and suspensions have soared. By July 2013, Time Warner mailed 146,026 shutoff notices and followed through with 42,777 disconnects, increases of 114% and 148%, respectively.

“As a consequence, interruption of phone service for bill collection purposes has reached massive proportion,” says PULP. “It appears that Time Warner has increased its reliance upon telephone service suspensions and terminations as a tool to enforce customer payment obligations. In the 12 months ending July 2013, Time Warner terminated or suspended telephone service on 592,250 occasions for bill collection purposes. Of that number, telephone service was reinstated after an interruption for collection purposes on 461,268 occasions. Thus, 130,982 or 22% of the customers terminated were not promptly reinstated.”

Those figures concern PULP because it suggests many disconnected customers are now without phone service, swelling the “unacceptably large number of New York households lacking telephone service.”

New York now ranks fourth from the bottom of all states in the most recent FCC Universal Services Monitoring Report of telephone subscribers.

Verizon’s Request to “Streamline” the Payment Process Gives Time Warner Cable the Same Idea

In 2010, Verizon New York successfully petitioned the PSC to streamline that payment allocation system. Few people bother with choosing a long distance carrier these days because most phone companies now offer unlimited long distance as part of a bundled service package. Verizon asked to simplify things so that Verizon New York got paid first and everything else came second.

Time Warner is seeking a variation on that same theme, requesting the PSC allow it to allocate partial payments first to telephone service, with the rest distributed to cover charges for broadband and cable television service.

While that is good news for your Time Warner phone line, it is bad news for your broadband and television service which can still be interrupted for non-payment because your partial payment was applied to phone service above all else.

Customers are unlikely to be aware of this, however. Time Warner Cable bills include a regular notice that if a customer is in arrears for any Time Warner Cable service, telephone service may be shut off.

PULP argues the cable company should let customers decide which services are most important to keep up and running during an emergency.

“For example, a customer might want to jettison cable TV and keep the Internet on to hunt for jobs during a spell of unemployment or other household financial crisis,” writes Norlander. “While the bills include separate items for cable TV, broadband, and telephone services, there is no information given in the bills on how customers can, if they are in arrears, keep the service they pay for with a partial payment.”

Indeed, there is no provision on Time Warner’s website or on its paper bill payment coupon to allocate which services a customer wishes their partial payment to be applied to first.

Time Warner Cable argues it gives late paying customers every opportunity to either make up past due payments or negotiate a payment plan before any service is interrupted.

“Customers have the opportunity to walk into the local [cable] office and make a payment during these extended hours,” Time Warner argues. “They also have the opportunity to pay online and over the phone 24 hours a day, as well as paying cable representatives directly when they arrive at the customer’s premises to disconnect service. TWCIS-NY believes that streamlining of the rules for disconnection of phone and cable services will make the Commission’s rules more consistent across the board and less confusing for customers.”

We Shouldn’t Have to Provide Printed Residential Phone Books We Didn’t Offer Anyway

Time Warner Cable wants to opt out from distributing printed copies of residential telephone directories it doesn’t publish.

When the company provided unregulated telephone service, it never had to offer customers a phone book. But in its new life as a regulated provider, New York requires phone companies to offer, upon request, a printed telephone directory:

Each service provider shall distribute at no charge to its customers within a local exchange area, a copy of the local exchange directory for that area, and one additional copy shall be provided for each working telephone number upon request. A copy shall be filed with the Commission.

Nobody has formally opposed Time Warner Cable’s proposed alternative: distributing residential listings only to customers who specifically request them in print or on CD-ROM.

Most customers don’t realize Time Warner Cable used to outsource most of its telephone service operation to Sprint. In addition to providing VoIP service, Sprint relied on dominant local telephone companies to provide phone books to Time Warner phone customers. In return, Sprint passed along customers’ names, addresses and phone numbers to phone companies like AT&T, Verizon, Frontier, CenturyLink and Windstream to be incorporated into those directories.

In 2010, Time Warner announced a four-year transition project to take its telephone service “in-house.”

Will All of This Competition, Oversight Rules Should Be Relaxed; If Customers Don’t Like Us, They Can Go Somewhere Else

Virtually every telephone company in New York agrees with the assessment Verizon has made for years — if a phone company does not provide excellent service, subscribers will simply switch to a competitor, negating the need for oversight of service quality standards.

Verizon paved the road Time Warner Cable is driving down to offer NY’ers less-regulated phone service.

The PSC agreed, reducing requirements for service outage reporting and other documented service issues. Today, Verizon only reports incidents involving “core” customers — low-income Lifeline subscribers, “special needs” customers including the elderly, those with serious medical conditions, the disabled and the visually impaired. Core customers also include those with no competitive service providers available to them.

Time Warner Cable wants a modified version of the Verizon “core customer” standard applied to its cable phone service — one that defines core customers as those with Lifeline service or special needs.

Time Warner does not want to include those without competitive alternatives and seeks an exemption from any reporting requirements until it signs up at least 5,000 accounts designated as “core customers.” That could take a while. PULP obtained records from Time Warner Cable showing as of Aug. 7 the company has only signed up 149 telephone customers it defines as “core customers.”

The cable company may be thinking of the future. Verizon Communications has made its intentions clear it wants to abandon rural landline service in favor of questionably regulated wireless Voice Link service. The idea that a cable company provides landline service in an area the local phone company no longer does is unprecedented in New York, but perhaps for not much longer.

If Time Warner Cable successfully argues “core customers” need not include those without competing alternatives, the PSC may unintentionally hand the cable operator a rural telephone monopoly without quality of service oversight in some communities.

In the race to acquire spectrum and market share, AT&T and Verizon Wireless have already won most of the awards worth taking and have little to fear from smaller competitors. The U.S. government has seen to that.

The two wireless giants have benefited enormously from government spectrum auctions that award the most favorable wireless spectrum to the highest bidder, a policy that retards competition and guarantees deep-pocketed companies will continue to dominate in the coverage wars.

Winner-take-all spectrum auctions have already proven that AT&T and Verizon are best equipped to bid and win coveted 700MHz spectrum which provides the best indoor and fringe-area reception. This is why AT&T and Verizon customers often find “more bars in more places” than customers relying on Sprint or T-Mobile. Smaller carriers typically have to offer service over much-higher frequencies that don’t penetrate buildings very well. With a reduced level of service, these competitors are at an immediate competitive disadvantage. They also must spend more for a larger number of cell towers to provide uniform service.

Verizon’s own presentation materials tout the benefits of controlling 700MHz spectrum, which is less costly to deploy and offers more robust coverage.

Sprint and T-Mobile have two strikes against them at the outset — less favorable spectrum and much smaller coverage areas. Customers who want the best reception under all circumstances usually get it from the biggest two players. Those focused primarily on price are willing to sacrifice that reception for a lower bill.

The same story is developing in the wireless data marketplace. AT&T and Verizon Wireless have the strongest networks as Sprint and T-Mobile fight to catch up.

Where America Went Wrong: The Repeal of Spectrum Caps

Tom Wheeler: America’s #1 advocate for repeal of Spectrum Caps is now the chairman of the FCC.

Originally, the United States prevented excessive market domination with a “Spectrum Cap,” — a maximum amount of wireless spectrum providers could hold in any local market. The rule was part of the sweeping changes in telecommunications law introduced in the mid-1990s. Wireless spectrum auctions replaced lotteries or strict frequency assignments based on merit. The U.S. government promoted the auction system as a win for the U.S. Treasury, which has been promised $60 billion in proceeds from the wireless industry (not the amount actually collected) since auctions began in 1994.

The cost to U.S. consumers from increasing cell phone bills in barely competitive markets is still adding up.

After the auction system was introduced, the largest carriers acquired some of the most favorable, lower-frequency spectrum, easily outbidding smaller rivals. Most of the smaller regional carriers that ultimately won coveted 700MHz spectrum emerged victorious only when AT&T and Verizon felt the smaller markets were not worth the investment. In larger markets, spectrum caps were a gatekeeper against acquiring excess spectrum and, more importantly, rampant industry consolidation.

Under the pre-2001 rules, wireless companies couldn’t own more than 45MHz of spectrum in a single urban area or more than 55MHz in a rural area. That was when Verizon and AT&T competed with carriers that no longer exist — old familiar names like Nextel, Cingular, VoiceStream, Alltel, Centennial Communications, Qwest, and many others considered safe from poaching because the most likely buyers would find themselves over their spectrum limits.

As the largest carriers realized the caps were an effective merger/buyout firewall, the wireless industry began a fierce lobbying campaign against them. Leading the charge was Tom Wheeler, then-president of the CTIA Wireless Association, the nation’s top cellular industry lobbying group. Today he is chairman of the Federal Communications Commission.

“Today, America faces a severe spectrum shortage for wireless services,” Wheeler said in 2001. “The spectrum cap is a legacy of spectrum abundance, not shortages; the inefficiencies it perpetuates cannot be allowed to continue. While the U.S. government is looking for ways to catch up to the rest of the world on spectrum allocations, removal of the cap can at least increase the efficiency of existing spectrum.”

Former FCC Commissioner Michael Copps opposed retiring Spectrum Caps: “Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else.”

Wheeler was backed by an intensive lobbying effort funded by the largest wireless companies itching to merge and acquire.

By the end of 2001, the new Bush Administration’s FCC was ready to deal, gradually repealing the spectrum caps and fueling major wireless industry consolidation in the process. Providers everywhere could now own or control 55MHz of spectrum in any market, with the promise the caps would be repealed altogether by March 2003.

The result was already foreseen by former FCC Commissioner Michael Copps in November 2001, when he strongly dissented to the Republican majority gung ho for dissolving spectrum caps.

“Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else,” Copps wrote in his strong dissent. “Just look at what the analysts are talking about as the specter of spectrum cap renewal approaches – their almost exclusive focus is on evaluating the candidates for corporate takeovers and handicapping the winners and losers in the spectrum bazaar we are about to open.”

Just in case Copps might be making headway in his campaign to protect competition, Wheeler began complaining even louder about spectrum caps during the spring of 2003, just before their dissolution.

“The wireless industry fought long and hard to secure this spectrum for America’s wireless consumers,” said Wheeler. “Now we must tread carefully — in this era of rapid technological change, writing rules that are too restrictive would be irresponsible. In order to use this spectrum both efficiently and effectively, those who purchase this spectrum at auction must be allowed the freedom to grow and evolve with the demands of the market.”

Europe: Protecting Consumers from Giant Multinational Competition Consolidators (Some of the same ones AT&T reportedly wants to buy)

There is a reason Europeans are shocked by the costs of wireless service in the United States and Canada. North Americans pay higher prices for less service than our European counterparts. Most of the New World also has fewer choices in near-equivalent service providers.

Much of this difference can be attributed to European regulators maintaining focus on driving competition forward and disallowing rampant industry consolidation. But as Wall Street turns its attentions increasingly towards Europe to push for the next big wave of wireless mergers, the European system of “competition first” could be undermined if providers follow the North American model of high profits and reduced competition through consolidation.

Across much of Europe, at least four national carriers serve each EU member state, almost all controlling a share of the most valued, low-frequency wireless spectrum. European regulators do not allow a small handful of providers to maintain a stranglehold on the most valuable radio spectrum. Competitors have traditionally been offered a spectrum foundation to build networks that can stand up to their larger counterparts — the large multinationals or ex-state monopoly providers who had a head start providing service.

A report released by Finland market research firm Rewheel in May found clear evidence that the European model was benefiting consumers at the expense of rampant provider profits. Europeans in “progressive” markets that welcomed new competitive entrants pay lower prices for far more service. In some cases, the price differences between the five giant multinational providers that dominate Europe — Vodafone, KPN, France Telecom, Telefonica and Deutsche Telekom — were staggering. Competitors like Tele2, TeliaSonera, and “3” charge up to ten times less than the larger companies for equal levels of service.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg ATT Takeover List of European Wireless Carriers 7-15-13.flv[/flv]

“Europe is ripe for competition,” reports Bloomberg News. Providers like AT&T may be preparing to embark on a European wireless acquisition frenzy, but Wall Street warns profits are much lower because of robust price competition in Europe that benefits consumers. (4 minutes)

The study also found a number of the largest European providers were following in the footsteps of Verizon Wireless, AT&T, Rogers, Bell, and Telus here in North America:

• Prices were enormously higher in markets that lack effective competition from an upstart competitor able to deliver a comparable level of service. Smaller cell companies with very limited infrastructure or with non-favored spectrum could not provoke dominant players to cut prices because reception quality was starkly lower and consumers would have to cope with a reduced level of service. In Europe, when new competitors were able to fully build-out their networks using favorable spectrum, incumbents in these progressive markets slashed prices and boosted services to compete. In North America, upstart competitors cannot access favorable spectrum for financial reasons and the investor community has dismissed many of these players as afterthoughts, starving them of much-needed investment.
• Large dominant European providers are now heavily lobbying for deregulation of merger and acquisition rules and want the right to acquire the competition entering their markets.
• In almost half of the EU27 member state markets spectrum is utilized very inefficiently by the largest incumbent telco groups who are keen to protect their legacy fixed assets and cement their European dominance with more consolidation at the price of competition. In the United States and Canada, many of the largest providers crying the loudest for more wireless spectrum have still not used the spectrum already acquired.

From the Finnish report:

The obvious question that needs to be asked is how is it technologically possible and economically viable for Tele2, 3 and TeliaSonera to offer four times more gigabytes of data usage at a fraction of the price charged by larger companies.

• Do independent challengers have privileged access to more efficient technologies (i.e. LTE) than the E4 group members?
• Do they hold relatively more spectrum capacity than the E4 group members?
• Do independent challengers have access to more radio sites and their spectrum reuse factor is higher than the E4 group members?
• Or are independent challengers (i.e. Tele2, DNA) unprofitable?

None of the above are true.

The answer is actually very simple. Independent challengers and incumbents such as TeliaSonera present mainly in progressive markets are utilizing the spectrum resources assigned to them. In contrast, incumbent telco groups […] rather than utilizing their spectrum resources instead appear to be more concerned about keeping the unit price of mobile data very high […] by restricting supply, the same way the lawful “cartel” of OPEC controls the price of oil by turning the tap off.

In progressive markets (where at least one independent challenger is present, triggering spectrum utilization competition) such as Finland, Sweden, Austria and the UK, mobile data consumption per capita is up to ten times higher than in protected markets.

In some European countries dominated by the biggest players, consumers are being gouged for service. Where robust competition exists, prices are dramatically lower.

The European nation where market conditions are most similar to the United States is Germany. Two large carriers dominate the market: Deutsche Telekom, the former state-owned telephone company and Vodafone, part owner of Verizon Wireless.

In Germany, consumers spending €20 ($26) end up with a data plan offering as little as 200MB of usage per month. In progressive markets in adjacent countries, spending the same amount will buy an unlimited use data plan or at least one offering tens of gigabytes of usage. In short, German smartphone service is up to 100 times more restrictive than that found in nearby Scandinavia or in the United Kingdom. These same two companies charge Germans double what English customers pay and a Berliner will end up with 22 times less data service after the bill is settled.

So what is going on in Germany that allows the marketplace to stay so price-distorted? The fact all four significant competitors have close ties to or are owned by the large multinational telecom operators mentioned above. Deutsche Telekom, Vodafone, Telefonica and E-Plus, the latter one belonging to the Dutch KPN Group are all members of a lobbying organization attempting to persuade the EU to invest public funds into improving Europe’s wired broadband networks. Playing against that proposition is a growing number of Europeans moving to wireless. By charging dramatically higher wireless prices in Germany, all four companies have successfully argued that wireless adoption is not a significant reason to stall public financing of private broadband projects. In fact, Germany’s wireless growth is well below other EU nations.

The Finnish researchers point out the evidence of informal provider collusion is pretty stark in Germany:

“One would expect these ‘European Champions,’ especially the ones with lower market shares (Telefonica and E-Plus), to look at the smartphone centric market transformation as an opportunity to secure or improve their market share, especially in light of the fact they should have plenty of unused radio spectrum capacities to make their offers more consumer-appealing,” the report finds. But in fact these new entrants have priced their services very closely in alignment with the larger two.

“Undoubtedly, multinational incumbent telco groups and their investors have good reasons to lobby EU decision makers to enact friendly policies that will protect their inherited oligopolistic high profit margins,” the report states. “But will the German model serve the best interest of consumers and business in other EU member states? In Rewheel’s opinion, clearly not. Enforcing an overly ‘convergent player friendly’ German model would severely limit competition in the mobile markets, leading to high prices for consumers and the Internet of mobile things and sever under-utilization of the member states’ scarce national radio spectrum resources.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg ATT Entry in Europe Not Seen as Competitive Threat 7-15-13.flv[/flv]

Competition is brutal in Europe’s wireless marketplace — a factor Bloomberg News says could temper AT&T’s planned “European Wireless Takeover.” What makes the difference between enormous profits in North America and heavy price discounting in Europe? Spectrum policy, which gives European competitors a more level playing field. Bloomberg analysts speculate AT&T will bankroll its rumored European buyouts and mergers with the enormous profits it earns from U.S. subscribers.  (4 minutes)