Consolidation of the wireless industry into two or three mega-carriers is a dream come true… if you are one of those carriers (or Wall Street). But for everyone else, it’s a competition wasteland, where innovation and disruptive marketing wane into comfortable and predictable businesses where participants learn not to rock the boat. If they did, a lot of their accumulated money could fall overboard.

AT&T believes consolidation is already upon us, despite their setback in failing to acquire T-Mobile USA.

John Stephens, AT&T’s chief financial officer, tried to calm Wall Street’s fears that the government has signaled its intent to preserve robust competition.  At yesterday’s Nomura investment conference, Stephens said a reduction in the number of wireless companies in the United States is part of the natural order:

I think it is just logical that the industry is going to consolidate in some form or fashion. I think the marketplace has spoken to that with what it has done to pricing in the valuations on some of the companies. From an economic perspective and a highly CapEx-intensive business, I think it is logical to assume you’re going to have two or three and certainly not six and seven competitors in any marketplace. So I think consolidation is logical.

We’ve heard this argument before. It is commonly trotted out in opposition to community broadband initiatives when existing phone and cable companies fear a third player will ruin the market for everyone. AT&T joins the chorus with the same old excuses: the costs to build and run networks are too high for several players to comfortably compete. Consolidation reduces that pressure as customers are forced to choose among one or two providers, giving each a larger market share and healthier revenue to cover upgrades.

What companies like AT&T always obscure to their customers is the resulting pricing power, where price increases from one often lead to price increases from others. But Stephens has no trouble letting his investors know:

We are going to grow margins year-over-year. Last year’s margins were about 38.5% in wireless and our guidance says we are going to grow. I have said publicly, and some of my peers and coworkers have said publicly we expect we are going to have north of 40% margins this year in our wireless business and still believe that.

Margins = profits. In the absence of aggressive competition which forces companies to invest more in their networks, provide more value in their service offerings, or reduce pricing, increased profits are always the result.

Unfortunately, ZDNet’s editor in chief Larry Dignan seems to buy AT&T’s arguments and talking points, telling readers:

[…] It’s hard to argue against the idea. All industries boil down to two or three players eventually. The big question for wireless consolidation is timing. When will get to two or three carriers? And if so will this consolidation lead to price increases or will the mergers occur after wireless services is commoditized?

Stephens

It is actually very easy to argue against the idea, and the evidence is plainly visible if Dignan would take a look.

First, there is no evidence “all industries boil down to two or three players eventually.” Auto companies, banks, retailers of all kinds — even cell phone manufacturers all compete with more than just one or two other players in the market. A germinating monopoly or duopoly in any market is a signal federal regulators have failed to do the job assigned to them since the days of trust-busting railroads, oil, steel, and the securities business.

The drive to consolidation can be found first on Wall Street, where every industry is under pressure to cut costs, reduce profit-eroding competition, and return higher profits. The drumbeat for consolidation in the wireless industry starts there, is echoed in the executive offices of the cell phone companies themselves, and results in powerhouse deals that have picked off one competitor after another. That is why Cingular, Alltel, Cellular One, and Centennial Communications are no longer familiar names in wireless. They have all been swallowed nearly whole by AT&T or Verizon Wireless.

AT&T would argue that consolidation is a good thing, because through their willingness to sell, those companies indicated they wanted to exit the business. AT&T’s buyout of T-Mobile would have done everyone a favor because the company had lost interest in competing in the United States and wanted out.

The industry has held all of the cards of wireless consolidation until recently, primarily because supine regulators refused to provide a critical “check and balance” on industry pressure, accepting just about any premise to approve whatever wireless carriers wanted. Sure, a few companies had to divest certain assets, as Verizon Wireless did in certain Alltel markets. But AT&T ended up acquiring the majority of those divested territories. When AT&T bought Centennial Wireless, it had to divest a few markets in the southern United States. Verizon Wireless bought most of them. Customers were left in the middle, as always.

A remarkable thing happened when the federal government said no to AT&T over T-Mobile. Predictions of the smaller carrier’s imminent demise and its slow bleed to irrelevance has not happened. In fact, Deutsche Telekom picked its American asset up, shook the dust off, and is now investing in upgrades to keep the competition coming. At least $4 billion in improvements and some major network upgrades are on the way, and the company has even refreshed its marketing in a new, get-tough campaign against AT&T, Verizon Wireless, and Sprint. Now all three of those companies are watching to see what T-Mobile pulls next.

That is exactly the point.

The wireless world and Wall Street wants you to believe that consolidation is the only way the mobile phone marketplace of 2012 can work. Dignan has thrown in the towel, conceding they are likely right. But T-Mobile is proving they are exactly wrong. Instead of abandoning its asset, which DT still sees as valuable, it is investing in it to compete. Had the merger been approved, AT&T would never answer T-Mobile’s disruptive competition again. Rural America would still be waiting for better service. AT&T would have less pressure to keep prices down and upgrades up, and Wall Street would have turned its attention to the next targeted carrier ripe for the picking by AT&T or Verizon Wireless’ emerging duopoly.

Stephenson: Payback time.

Six weeks after AT&T’s colossal $39 billion dollar merger with T-Mobile USA fell apart, AT&T CEO Randall Stephenson opened his checkbook and donated $30,800 (the maximum allowed under federal law) to the Republican National Committee.

That contribution dwarfs Stephenson’s largest previous donation over the past twenty years: $5,000, according to the Center for Responsive Politics.

Bloomberg reports that Stephenson took a credibility and pay hit from the merger debacle, forcing AT&T to turn over $4 billion in deal penalties to its rival, T-Mobile, including precious wireless spectrum. The deal’s collapse personally cost Stephenson more than $2 million in bonus pay.

Although AT&T is not commenting, Wall Street analysts are, and they suspect Stephenson is sending the Obama Administration a clear message that he is upset with the decision to challenge the merger. The rest of AT&T appears to be following suit, with nearly two-thirds of political contributions, mostly from company executives, going to the Republican party which has traditionally maintained a much more friendly relationship with the communications giant.

Several Republicans criticized the Justice Department and Federal Communications Commission for interfering with the merger deal which consumer advocates argued would reduce competition and raise prices for wireless services. Republicans have also expressed near-universal support for AT&T’s policy positions on Net Neutrality, community broadband, usage-based pricing, spectrum and price deregulation, removal of state oversight of telecommunications services, and marketplace consolidation.

AT&T is a major sponsor of this summer’s Republican National Convention in Tampa, Fla. Several former lobbyists for AT&T are now working with the Romney campaign and its money bundling operations on behalf of the Republican presidential candidate.

The center reports no personal political contributions from the heads of either Verizon Wireless or Sprint.

Roger Entner, an analyst with Recon Analytics in Dedham, Massachusetts, notes AT&T was still trying to make nice with Obama Administration officials as late as last December, sending ornate cupcakes to various administration officials, including those at the FCC.

Entner noted it didn’t work.

Six college towns will benefit from the nation’s first multi-community broadband gigabit deployment, thanks to $200 million in capital funding to get the broadband networks off the ground.

The Gigabit Neighborhood Gateway Program leverages local government, universities, private capital, and the public to jointly support and foster the development of new fiber optic networks.

The new program claims it will offer competitively-priced super-fast broadband through projects that will cover neighborhoods of 5,000-10,000 people and communities up to 100,000 in size.  Selection of the six winning communities will be announced between this fall and next spring.

“Gigabit Squared created the Gigabit Neighborhood Gateway Program to help select Gig.U communities build and test gigabit speed broadband networks with speeds from 100 to 1000 times faster than what Americans have today,” the company said in a statement.

“The United States is behind in the world for Internet speed,” said Mark Ansboury, Gigabit’s president and co-founder. “The goal is to help get us out front for a platform of innovation.”

That platform is certainly not forthcoming from the country’s largest broadband providers, who according to Ansboury have been pulling back on wired infrastructure upgrades in recent years, shifting focus to more profitable wireless networks.

Gigabit Squared defines the next generation of broadband Internet in terms of speed, declaring 2,000Mbps (2Gbps) as the target to achieve.

The winning projects will be sponsored by Gig.U members, which include:

• Arizona State University
• California Institute of Technology
• Case Western Reserve University
• Colorado State University
• Duke University
• Florida State University
• George Mason University
• The Georgia Institute of Technology
• Howard University
• Indiana University
• Michigan State University
• North Carolina State University
• Penn State University
• University of Alaska – Fairbanks
• University of Arizona
• University of Chicago
• University of Colorado – Boulder
• University of Florida
• University of Hawaii
• University of Illinois
• University of Kentucky
• University of Louisville
• University of Maine
• University of Maryland
• University of Michigan
• University of Missouri
• University of Montana
• University of Nebraska – Lincoln
• University of New Mexico
• University of North Carolina at Chapel Hill
• University of Oklahoma
• University of South Florida
• University of Virginia
• University of Washington
• Virginia Tech
• Wake Forest University
• West Virginia University

Blair Levin, executive director at Gig.U, believes private American telecom companies will always be constrained from delivering world class broadband comparable to South Korea or Japan because of Wall Street opposition to the investment required to construct them. In the eyes of investors, today’s slower networks, in their estimation, do just fine.

Gig.U believes that they have a solution, at least for towns with a sizable university system that can serve as host of the next generation broadband network:

First, any community that wants its residents to have access to a network that delivers world-leading bandwidth can do so. The barrier is not technology or economics. The barrier is organization; specifically, organizing demand and improved use of underutilized assets, such as rights of way, dark fiber, or in more rural areas, spectrum. The responses identified a multitude of ways local communities can improve the private investment case by lowering investment and risk, and increasing revenues for private players willing to upgrade or build new networks without budget outlays from the local government.

Second, the responses confirmed that university communities have the easiest organizing task and greatest upside. Their density, demographics and demand make the current economics more favorable for an upgrade than other communities. For example, the high percentage of the population in university communities living in multiple dwelling units makes the economics of an upgrade far more favorable than for communities composed largely of single-family homes. With the growing importance of Big Data for the economy and the society, university communities are the natural havens for such enterprises to be born and prosper. Through the Gig.U process, our communities are already exploring more than a half-dozen paths to achieve an upgrade; paths that will be replicable for others and will deliver a major step forward in providing America a strategic broadband advantage.

Outside of a handful of upstart private competitors like California-based Sonic.net, most fiber broadband expansion come from private companies like Google — building an experimental fiber-to-the-home network in Kansas City, community-owned broadband services coordinated by local town or city government, co-op telecommunications companies owned by their subscribers, or municipal utilities.

While those efforts are typically committed to the concept of “universal service” — wiring their entire communities — the Gig.U project targets funding only for networks in and around university campuses.

The New America Foundation builds on Gig.U’s premise in its own recent report, “Universities as Hubs for Next Generation Networks,” which argues affordable expansion of broadband can win community support when the public has the right to also benefit from those networks. While Gig.U’s approach suggests the project will target fiber broadband directly to the homes qualified to receive it, the New America Foundation supports the construction of mesh wireless Wi-Fi networks to keep construction costs low for neighborhoods targeted for service.

An earlier project in Orono and Old Town, Maine may afford a preview of Gig.U’s vision, as that collaboration between the University of Maine and private fiber provider GWI is already in its construction phase. For those lucky enough to live within range of the fiber project, broadband speeds will far exceed what incumbents Time Warner Cable and FairPoint Communications deliver. FairPoint has fought similar projects (and GWI specifically) for years.

Will private providers object to the Gig.U effort to win local governments’ favor in the six cities eventually chosen for service? History suggests the answer will be yes, at least to the extent local cable and phone companies demand the same concessions for easy pole access, reduced pole attachment fees, and easing of zoning restrictions and procedures Gig.U project coordinators expect.

Levin has stressed Gig.U projects are based on university and private funding sources, not taxpayer dollars. That may also limit how much objection commercial providers may be able to raise against the projects.

[flv]http://www.phillipdampier.com/video/WABI Bangor Orono Maine Getting Faster Service 5-16-12.flv[/flv]

WABI in Bangor previews the new gigabit broadband network being constructed in Orono and Old Town, Maine.  (2 minutes)

Frontier Communications will not roll out a national IPTV service to compete with cable operators in all of its service areas, but is still exploring its options for providing pay-TV service in larger cities.

That decision, announced by executive vice president and chief financial officer Donald R. Shassian, came at last week’s Global Technology, Media, and Telecom Conference sponsored by Wall Street investment bank J.P. Morgan.

Shassian used the occasion to clarify remarks made during the company’s first-quarter results conference call, which caused some shareholders and analysts concern about the company’s lackluster performance, capital spending plans, and company debt that will come due early next year.

Shassian said Frontier will not deploy U-verse-like IPTV service across its entire national service area, but is considering the future option of delivering the service (and better broadband speeds) theoretically in selected markets.

Shassian also raised the prospect of modifying part of its acquired fiber-to-the-home FiOS network to fiber to the neighborhood technology that companies like AT&T are currently using. But for the foreseeable future, most Frontier customers will have to subscribe to satellite television if they want a video package with their home phone and broadband service.

Stop the Cap! was the first to report Frontier was considering licensing AT&T U-verse to use in selected larger markets where the company has lost considerable ground against cable competitors that deliver consistently faster broadband service.

Wall Street reaction to the proposal has been negative, with concerns Frontier will need to spend hundreds of millions, if not billions, to deploy such a network.

Shassian sought to distance the company from any suggestion they will further increase spending on network improvements. In fact, Shassian says Frontier will end its broadband expansion program, and the extra spending to pay for it, by 2013.

“Our capital expenditure spending will decrease in 2013 as the geographic broadband expansion of our network concludes,” Shassian said. “We expect capital expenditures to drop by approximately $100 million in 2013.”

In lieu of national IPTV service, Frontier remains committed to its resale partnership with satellite TV provider Dish Network. But Shassian did admit U-verse technology is among the options the company is exploring to remain competitive.

Surprisingly, Shassian also said the company was considering partially modifying its acquired FiOS network in Indiana and the Pacific Northwest, because of the cost savings it could deliver.

“We have been evaluating alternative platforms which could generate savings from capital expenditures, video transport and even content costs that can be significant to the FiOS video market business,” Shassian said. “I want to be clear that we have no plans to deploy IPTV across our nationwide network and therefore do not see upward CapEx pressure from any potential changes in our facilities-based video strategy.”

Asked about the potential cost savings afforded by swapping out FiOS technology for IPTV fiber to the neighborhood service, Shassian said it could open the door to expanding service in areas where existing copper-based last mile network facilities can sustain a minimum of 20Mbps broadband service. Frontier claims 1.9 million homes in its service area can receive 20Mbps today, of which 600,000 are currently within a Frontier FiOS service area.

“If we changed, we may have to change out set top boxes on [existing FiOS customers],” Shassian said.

In this clip, Frontier Communications’ executive VP and chief financial officer Don Shassian speaks to a J.P. Morgan investor conference in Boston about the company’s broadband and IPTV plans. (May 15-17, 2012) (4 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

The implication of substantially altering the company’s existing fiber-to-the-home network baffled some analysts.

One, who talked with Stop the Cap! asking not to be attributed, suspects Shassian’s role as a financial officer at Frontier may explain part of the mystery.

“He’s not the chief technology officer, and I suspect he is partly confused about the different technologies,” the analyst explains. “I can’t see Frontier tearing down their current network, but it may make sense for them to switch technology strategies when considering if and where they can expand their network.”

“Frontier’s first quarter results were more than disappointing, and the company is being exceptionally cautious about anything that requires spending right now,” the analyst said. “The next shoe to drop is another dividend cut, which would kill the stock in the market, and if we think Frontier will spend a billion to improve its network, that dividend is going down.”

Our source says he does not have much confidence in Frontier’s current management.

“They talk a nice story, but the numbers never finally add up,” he says. “Rescuing wireline is expensive and companies always promise it will cost incrementally little to expand revenue-enhancing broadband to their rural customers, but if that were true, the companies would have already done it, and without significant spending they have not.”

Verizon Wireless will force customers off of their grandfathered unlimited data plans when they reach the end of their current two-year service contracts, according to the company’s chief financial officer.

It is all part of the cell phone company’s strategy to boost the average bills of customers with new, more expensive tiered family-shared data plans. With a significant number of current customers grandfathered on unlimited data plans that users likely will not forfeit voluntarily, Verizon will force the issue as customers come up for contract renewal.

The plan received considerable approval at today’s JPMorgan Chase TMT conference, a gathering for Wall Street investors and tech companies like Verizon.  Executive vice-president and chief financial officer Fran Shammo laid out the plan to switch customers to forthcoming family “data share” plans that are priced based on anticipated usage:

As you come through an upgrade cycle and you upgrade in the future, you will have to go onto the data share plan. And moving away from, if you will, the unlimited world and moving everybody into a tiered structure data share-type plan.

So when you think about our 3G base, a lot of our 3G base is unlimited. As they start to migrate into 4G, they will have to come off of unlimited and go into the data share plan. And that is beneficial for us for many reasons, obviously. So as you pick what tier you want to be and we think that there will be some price up in those tiers.

“Price up” is code language for bill hiking. Customers adopting family share plans may be able to share data across a larger number of devices, but at consumption pricing, many customers will find their Verizon bills substantially higher than before.

Shammo

“And the important part of that is we want the connections to come in and the way we have designed our plan, this plan is built on tiers and as we look at the future growth of LTE consumption because of the speeds and video consumption and consumption of other M2M-type devices, it is going to be more important that people will start to upgrade in their tiers as they start to really realize the benefits of the LTE network,” Shammo said. “As [customers] add more devices, they are going to have to buy up into tiers. So again, you will see the revenue increase there.”

Those revenue predictions were not sufficient to satiate Phil Cusick, an analyst at JPMorgan Chase. He questioned Shammo about the prospects for Verizon further increasing revenue with across-the-board rate increases on service plans.

Shammo would not commit to that, but was pleased with the lack of customer protests over their recent introduction of a $30 equipment upgrade fee. He called the new fee “the right thing to do.” More fees and surcharges are likely, according to Shammo.

“I think implementing these additional fees is probably where we are at,” he said. “With the construct that we have dealt with around data share and where we see consumption of LTE going, when you put the combination of them together, we are fairly confident that we will see people start to uptake in the tiers, which is really where we will get the revenue accretion in the future.”

Shammo also said Verizon’s fiber to the home network FiOS has gotten such rave reviews, it almost sells itself. That means the company will pull back on promotional offers and plans a general rate increase for all customers in the coming months, if only to bolster company profits.

“We have to do a better job in discipline of price increases and I think that you’ll see us do some price increases here over the next two quarters to offset the content increase and that will also contribute more profitability to the bottom line,” Shammo said. “You are going to have to concentrate more on reducing the amount of promotions, reducing the amount of retention that you put on the table to retain a customer and then also you are seeing that the industry is pricing up.”

Verizon FiOS customers will find rate increases applying both to equipment rental and service pricing nationwide, according to Shammo.

“We were actually below-market compared to our competitors on the amount of fee that we charge on the rental of a set-top box or a digital converter box,” Shammo explained. “We are switching around our bundles and the customers that are coming out of the current bundles will be priced up to the newer bundles. So you are going to see really a shift over the next two to three quarters in price-ups coming out of FiOS.”

As far as FiOS expansion goes, the company does not expect any major expansion in the service for the next several years.

“If we can penetrate the market and really turn the wireline profitability, could we potentially build out to other areas? Yes, but that is a decision that will be made in years out, not right now,” Shammo said. “So from a capital perspective, we are being very disciplined with where we are going to put that capital.”