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Net neutrality regulations could endanger wireless carriers' business

Proposed net neutrality regulations could have a profoundly damaging effect on wireless carriers, forcing them to either raise network access prices or sharply curtail planned investments on 4G and Long Term Evolution network upgrades.

Most people in the wireless community now understand that the Federal Communications Commission (FCC) intends to impose net neutrality regulations on wireless carriers in one form or another. Although this may seem innocuous, it could not come at a worse time for the industry. Failure to understand the implications could have a damaging impact on the wireless business, especially in terms of deploying high bandwidth 3.5G and 4G networks.

On the surface, net neutrality seems like a good idea because it would prohibit carriers from content discrimination. When you examine what that really means, things start getting murky.

For example, define content. Is it simply a stream of data, or does it include a service that utilizes that data? If it is the latter, does non-discrimination mean that wireless carriers can't differentiate their content from third-party content on the basis of their control over the network infrastructure?

If the FCC adopts that interpretation in its net neutrality regulations, the business of wireless will quickly become very marginal.

Net neutrality regulations could end service differentiation advantages

According to numerical models we have constructed at Stratecast, it appears that once service differentiation is no longer possible or becomes significantly more difficult, wireless carriers become simple access providers. In the access game, competition is already driving prices down to cost and margins are becoming nominal.

The implication is that wireless operators will either have to raise their access prices or curtail investment. Neither is a good deal for consumers. In fact, the likely impact over the long term (three to five years) is that network investment will slow by as much as 50% beneath current levels. That means the coverage maps for Long Term Evolution (LTE) are likely to look more ragged than those receiving so much attention in wireless carriers' ads.

When expressed as best-effort principles of operation, net neutrality makes sense, but at the end of the day, carriers deploy networks to make money. The expectation of revenue provides the incentive to make investments and improve technology. If net neutrality regulations begin to erode that expectation, then carriers will likely find other ways to employ their capital and benefit their shareholders.

Wireless carriers must maximize 3.5G, 4G wireless network revenue

Carriers must understand that net neutrality will probably have a profound impact on their profitability. If net neutrality regulations are adopted and extended to the wireless space -- which, at this point, looks almost certain -- wireless carriers will have to make plans that enable them to maintain profitability.

The bottom line is that wireless is entering the unfamiliar territory of common carriage regulation.

Mike Jude
Program Manager
Stratecast/Frost & Sullivan

One way to do this is to price to value -- that is, price access to the new 3.5G and 4G networks in a way that places a premium on data rates. If a third party comes along with a free voice service that requires a stable high-bandwidth connection, then the pricing of that connection needs to go beyond simple access to reflect the value of the services that it supports.

When consumers begin to buy smartphones for data plans only, that should be considered a value-added service, the price of which is commensurate to the benefit it provides. Pricing data access at wholesale levels is likely to be a prescription for financial suicide.

The bottom line is that wireless is entering the unfamiliar territory of common carriage regulation. Recognizing the move's implications before new networks are deployed is essential to the long-term viability of the market and the financial health of wireless carriers themselves.

About the author:
Mike Jude is a program manager at Stratecast/Frost & Sullivan in charge of the consumer communication services practice. He brings 30 years of experience in technology management in manufacturing, wide-area network design, intellectual property management and public policy. Jude holds degrees in electrical engineering and engineering management and a Ph.D. in decision analysis. He is co-author of
The Case for Virtual Business Processes: Reduce Costs, Improve Efficiencies and Focus on Your Core Business, Cisco Press, 2003.

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