Saving the world is serious business, and the FCC takes its job seriously. “Competition does not always flourish by itself,” said chairman Tom Wheeler in a blog post
last week. “It must be supported and protected if its benefits are to be enjoyed.” Every year, the agency releases its Mobile Wireless Competition Report – a 300-page treatise on the existence (or non-existence) of "effective competition" in the wireless industry. For the last three years, the Commission has refused to pass judgment
one way or the other, preferring to loom ominously and breathe heavily.
There are also other, more sinister dangers facing the market.
Former FCC head Julius Genachowski spent three years
warning of an impending "spectrum crunch"; the idea being that with so much data moving through the air, smartphones and tablets will eventually run out of oxygen. Earlier this year, Congress authorized the agency to buy back portions of the radio spectrum and auction them off to wireless providers, thereby alleviating the crisis. Now, however, the FCC is considering auction rules
that would discriminate against the nation’s largest, most congested networks – the ones it intended to save.
It seems our superhero faces a moral dilemma: chase after the monopolists, or head off the Malthusian threat?
While the FCC scratches its chin, T-Mobile
(NYSE:TMUS) is busy turning the industry on its head. The wireless provider made headlines earlier this year by eliminating contracts and cutting service prices, and it has made them again with its most recent quarterly results. In the last three months, T-Mobile added more than a million customers to its rolls (and a million in the quarter before that) – many of them highly valued postpaid subscribers. It’s now the fastest-growing carrier in the country, and to smartphone users saddled with expensive, two-year data contracts from competing providers, the “un-carrier” has turned into something like Big Rock Candy Mountain
– a fantastical place of ease and comfort.
However, by regulators’ logic, T-Mobile should be dead. Of the nation’s four largest carriers, it’s the only one without property below 1,000 mhz, a range that the FCC believes to be special. Lower frequencies carry further, penetrate buildings better, and are considered essential to building out a network. T-Mobile’s real estate is mostly in the 1,700 mhz and 1,900 mhz bands – the boonies.
The reality is that these higher frequencies are perfect for cities, where data speed is limited by customer load rather than distance from cell towers. In a dense environment, short range actually becomes an advantage; all things equal, it means less interference. Since its acquisition of MetroPCS earlier this year, T-Mobile has plenty of bandwidth, and connection speed in urban areas now depends on infrastructure and technology, not additional frequencies.
The kicker is that, for T-Mobile, urban customers are the only ones that matter. Between the terms of a failed 2011 merger with AT&T
(NYSE:T) and the FCC’s mandate that nationwide carriers like AT&T and Verizon
(NYSE:VZ) offer voice and data roaming at "reasonable" rates, T-Mobile is guaranteed the right to piggyback on competitors’ networks. Consequently, it has little incentive to expand coverage beyond cities. Neither does Sprint
(NYSE:S), which angered AT&T last year
by moving to roaming agreements in Oklahoma and Kansas, rather than building out infrastructure on its prime 800 mhz property. Paradoxically, and yet predictably, the FCC’s mandate has actually killed competition in the geographical majority of the country – a problem that will hardly be solved by auctioning off more of the radio spectrum to smaller carriers that have no interest in using it.
T-Mobile’s network isn’t the fastest – AT&T takes that prize
– and it doesn’t have anything close to Verizon’s coverage, but consumers are willing to endure a lot for a lower price. LTE speeds approaching 50mb/s aren’t much use to someone with a 200mb data plan, or even a 2gb plan for that matter. Fears of a "spectrum crunch" were always a little overwrought: Bureaucrats worrying about a commodity – theoretical maximum speed – that no one is getting, and few could afford.
In the real world, data quantity matters at least as much as data speed, and T-Mobile seems to be the first carrier to have figured this out. All of its plans come with unlimited data, although the cheaper plans will throttle your speed after a certain point. T-Mobile is also the wireless provider best positioned for commoditization. Many of today’s smartphones will outlive their two-year purchase contracts, and if AT&T doesn’t have cheaper plans to offer customers when their jail time is up, it may lose them (and it will certainly lose this one). Meanwhile, falling handset prices spell trouble for the subsidy model that the major carriers have relied on. Sooner or later, they won’t have much choice but to follow in T-Mobile’s footsteps.
In the long run, T-Mobile’s competitive advantage won’t be its new pricing scheme – which will get copied – but its ability to leverage the cost-effectiveness of an urban wireless network into lower prices. That means building towers rather than buying spectrum. It means focusing on what customers actually experience, and not theoretical maximums or the sort of hypothetical abstractions that can only exist inside a 300-page dissertation. And it means continuing to provide "effective competition" in a market that is, after all, pretty competitive.
No positions in stocks mentioned.