For telecom, it's all about IP
The Federal Communications Commission's (FCC's) Technology Transitions Policy Taskforce is having its first meeting on March 18. The workshop will consider various topics around the final transition to IP, including network capabilities, adoption and evolution. One suggestion that has received considerable support in the comments so far is that the process should protect consumers by including a few pilot trials to ensure that any issues that might surface do so within a limited and safe environment. The Taskforce workshop could not be more timely or welcome.
Communications companies have reported year-end 2012 results, and it is becoming ever-more obvious that communications is all about IP. Wired or wireless, descended from traditional telephony or from cable, consumer- or business-targeted, the focus is on IP.
For businesses, IP is the bright spot. Despite the economy, companies as diverse as Akamai, AT&T (NYSE: T), Cbeyond (Nasdaq: CBEY), Cogent (Nasdaq: CCOI), Comcast (Nasdaq: CMCSA), Level 3 (NYSE: LVLT), tw telecom (Nasdaq: TWTC) and Verizon (NYSE: VZ) grew their IP-based services. What is even more encouraging, all of these companies justly boast about their investments in their IP-networks--adding fiber, connecting more buildings to their backbones with fiber, adding data centers, enhancing security.
For example, Cbeyond's March 2013 investor presentation describes "our all-IP network," over which the company provides cloud services to small and mid-sized businesses. It plans to spend $35 to $40 million to light 1,000 buildings, using fiber leased from Zayo and FiberLight. Cogent's 10K describes the company as "a leading facilities-based provider of low-cost, high speed Internet access and Internet Protocol, or IP, communications services." It explains that its network's costs are low and its reliability high because the "network is optimized for IP traffic" rather than "built as overlays to traditional circuit-switched telephone networks." tw telecom's year-end investor presentation describes the company as a leader in Ethernet services, with fiber networks spanning 29,000 route miles with roughly 18,000 fiber-buildings, more than 4,000 of them added in 2012.
Not surprisingly, this is a highly competitive market, served by telcos, cable companies and competitive carriers (CLECs). Vertical Systems Group, which tracks the U.S. business-Ethernet market, has published its 2012 year-end Leaderboard. It showed that the market grew 24 percent in 2012. While AT&T and Verizon split about 40 percent of the market, six additional companies are listed as leaders with shares between 10 percent and 4 percent. Roughly 30 other companies share the rest of the market.
Consumers are also benefiting from the IP-migration. Wireless carriers are deploying LTE, the IP-based 4G technology that offers broadband speeds described by RootMetrics as "lightning fast." Their recent survey shows AT&T's maximum LTE speed at 58 Megabits per second (Mbps), Verizon's at 49 Mbps and Sprint's at 33 Mbps. But even their average speeds of 19, 14 and 10 Mbps, respectively, are between four and 15 times faster than non-LTE speeds, and they are competitive with the speeds to which most consumers of fixed broadband subscribe, per the FCC's recent "Internet Access" report.
Particularly for those consumers who rely primarily on wireless to access the Internet, the rapid deployment of LTE is likely to become a huge advantage. That deployment is advancing rapidly. Verizon now offers LTE to 273 million Americans, i.e. 87 percent of the U.S. population. AT&T offers it to 170 million now and plans to bring it to 300 million, i.e. 95 percent, by the end of next year. Sprint has it in 58 cities now and promises to have it in nearly 230. T-Mobile's merger with MetroPCS was motivated in large part by the desire to match the rest.
IP is also critical to consumers on the wired side. Cable broadband, which is based on IP carried over hybrid-fiber-coax, is available to 93 percent of homes. According to J.P. Morgan, the major cable companies had 38 million subscribers at the end of 2012. Cable has also taken a quarter of the consumer voice market with its voice-over-IP service.
Also according to J.P. Morgan, there were 34 million telco broadband subscribers at the end of 2012. Many of them still use the low-speed DSL with which the telcos entered this market. But the telcos are catching up. Verizon's FIOS is available to 15 million homes, with the buildout largely complete, and 5.5 million consumers use its service. Given that broadband penetration is under 70 percent of homes passed, Verizon's roughly 37 percent penetration of homes passed represents an approximately 50 percent share of its market.
Roughly half of AT&T's 16.4 million broadband customers have migrated from DSL to U-verse, which carries IP over hybrid-fiber-copper. It has been a rapid migration--two years ago, only 3.3 million customers used U-verse broadband and at year-end 2012, 7.7 million did. Even more encouraging, AT&T has committed about $3 billion to increase its U-verse coverage to 8.5 million additional customer locations. Like FIOS, U-verse is an effective competitor to cable. AT&T has about 50 percent share in the markets in which it offers U-verse. On the other hand, in markets in which it only offers DSL, its share is only 38 percent. CenturyLink (NYSE: CTL) has also begun to invest in fiber-to-the-node.
Thus, the recent alarm in the press that the telcos might disappear from the consumer broadband market is fallacious. The concern about a cable monopoly is based on statistics that conflate all telco broadband, ignoring the gains of FiOS, U-verse and other fiber-based networks. Yes, DSL is losing subscribers, but the networks in which the telcos are investing are gaining.
But the mistake is more fundamental than just a matter of looking at the wrong statistics. It encourages regulatory policies that are highly destructive to investment, and thus damaging to consumers.
It is not by accident that the cable industry--which enjoys minimal regulation, has never been obliged to share its network with competitors at regulated prices and has never been forced by regulators to operate an obsolete network alongside its IP-network--got ahead of the telcos. Neither is it an accident that technology transitions occur with remarkable speed in the wireless industry, which is also lightly regulated and free to adopt new technologies at will.
Nor is it surprising that the telcos--which are heavily regulated, forced into various forms of price-regulated network-sharing and forced to operate their Plain Old Telephone Service (POTS) networks alongside their IP networks--are now in catch-up mode. They did not begin their investment in FiOS and U-verse till they were confident that fiber, hybrid-fiber and the related electronics would be free of unbundling. But even to this day, their deployment continues to be hobbled by the demand that they waste capital on the POTS network fewer and fewer customers want.
To their credit, all the FCC commissioners are trying to encourage both broadband deployment and adoption. Indeed, Chairman Genachowski has challenged all states to develop gigabit communities. If the United States is to become a gigabit nation, it must resist those who urge it to remain a kilobit nation. It is time to complete the IP transition.
Anna-Maria Kovacs is a Visiting Senior Policy Scholar at Georgetown University's Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.