As policymakers and service providers ponder the implications of a future “shut down” of the public switched telephone network, they will face a new series of questions.
Since the robustness of investment in new networks will hinge on expectations about profits, many of the questions will flow directly from the more challenging business model. As the regulatory framework had to change in the shift from a monopoly model to a competitive model, so the framework arguably will have to change again with a shift to all-IP networks.
When service providers worry about the implications fo “dumb pipe” or “over the top” business models, they simply acknowledge a key change in the foundation of the networks business, namely that network access and applications now are logically distinct.
Whatever else might be said, it is obvious that “certainty” is not a key feature of the fixed network business anymore. That’s a problem since uncertainty is the enemy of investment.
How much capital should a service provider invest in mobile, versus fixed networks? What is the expected return? What assumptions drive those estimates?
If policy is intended to promote investment, what can and should regulators do, or not do, to encourage investment?
To the extent that all U.S. broadband networks rely on private capital to invest in new broadband facilities, the question of financial return for such investments is fundamental.
If the financial return, and the risk, of broadband facilities investment do not roughly match or exceed what is available from alternative investments, those investments will not be made, and it won’t matter much how much people scream about what they can’t get.
In that regard, it is fair to note that many investors no longer consider telecom an especially desirable investment. It is rare these days to find a venture capitalist willing to consider backing a new telecom equipment supplier, for example. To the extent that interest remains, it is centered on mobile and mobile applications.
And there are reasons for that investor caution. Any perusal of industry statistics or quarterly or annual financial reports, at least in developed markets, will show stress around the traditional revenue sources most communications or video suppliers rely on.
In fact, Bernstein analyst Craig Moffett argues that, over the last decade, the returns on invested capital in communications networks in U.S. markets have been anemic, at best. He argues that economic value creation has been, in aggregate, barely positive.
Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade. Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Satellite networks had the best return on invested capital at 5.5 percent. Others, including AT&T, Comcast, Dish, Sprint and Verizon have negative returns, Moffett argues.
In fact, the very existence of the universal service fund and high cost subsidies shows clearly that in rural areas, it never has been a “profitable” endeavor to run a telephone company without subsidies and access fee payments.
Even with such subsidies, one might still reasonably argue that only firms with lower overhead can afford to serve such areas and potential customers, using a fixed network.
The point is that asking private investors to risk capital in businesses facing serious demand issues and rival product substitutes will be challenging. That, in fact, is precisely the problem the European Community is having trying to entice service providers to invest in high-speed broadband across the continent.
The issue is not whether universal service and access to broadband facilities is desirable, but how best to accomplish that goal. It might not always be the optimal solution to require the use of one specific approach or network, rather than looking at the full range of potential suppliers.
But that will require a bit more flexibility than traditionally has been the case in the common carrier telecom regulatory approach.
The point is that new rules for the U.S. IP networks will have to take into account the need for investment incentives, not only the older social goals. The reason is simply that the attractiveness and certainty of investment in fixed networks is not a given.
By Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.