An open letter to the FCC: Investigate how operators make money and what they actually spend it on
By Stefan Constantinescu on Monday, September 21st, 2009 at 3:49 AM PST In Government
Dear Federal Communications Commission:
I’m sure each and every one of you have a mobile phone, but have you ever thought about what you are actually paying for every month? It’s easy to say that you’re paying for minutes, text messages and a small portion of the subsidy your operator gave you for your device after signing a two year contract, but have you really sat down and thought about what an operator has to do to make money and how they spend your hard earned dollars?
First you have the network, the most important asset an operator owns. An operator will typically purchase network equipment from a top tier vendor such as Ericsson, Nokia (NYSE: NOK) Siemens Networks, Huawei or ZTE. Then you have your cell towers, the servers the cell towers connect to, the main switching station at the central office, billing software, and finally backhaul equipment which can either be used to connect cell towers that are far apart, or more commonly to provide internet access to mobile devices at the edge of the network versus having a data request go all the way from a cell tower, to the central office, and back. How much is an operator spending on their network per year? Should there be a number, set forth by legislation, for a certain percentage of revenues to be spent on network equipment, maintenance and upgrades?
Recently in Sweden they changed how they’ll be charging for spectrum. If a company has a lot of spectrum, but does not use it, they’ll be charged a higher fee. The reverse is true, that if a company has a lot of spectrum and has also fully utilized it, then their fees are lowered.
There is also a new trend starting to take off called “hollow operator” whereby operators are not only buying network equipment from a top tier vendor, but also paying them to install it, monitor it, and maintain it. This summer Sprint (NYSE: S) Nextel, America’s third largest operator, signed away their network to Ericsson who will be effectively doing all the hard work while Sprint just sits on their hands and collects the markup.
Next you have the devices. The FCC is already looking at handset exclusivity deals, and that’s a fantastic start, but are you looking at what operators do to devices? I encourage you to travel to Europe and Asia and see the mobile phones sold in those parts of the world. Devices typically have no operator branding and come straight from a handset manufacturers’ factory. American operators, all of them, go to a device manufacturer and ask them to make a special variant with custom software, and often a custom exterior, which then has to go through months of testing before it can finally be sold to the American public. As an editor for a mobile telecommunication website, I often wonder why a device we’ve written about months ago, such as the HTC Touch Pro 2, is in the press again just because it is finally reaching American shores. Operators are purposefully delaying handset innovations from being delivered to the American people. But that is just the start.
Verizon (NYSE: VZ) Wireless, the largest American operator, is notorious for removing features that a handset manufacturers include in their devices, just so they can charge consumers to use those features. Bluetooth, which is commonly used to connect wireless headsets, can also be used to send files to other Bluetooth enabled devices. Verizon removes that feature so that consumers have to use picture messaging, otherwise known as MMS, to send photos to their friends and family. GPS, a feature handy for finding your way around town and to search for near by establishments, is removed from Verizon Wireless handsets so that the operator can charge consumers a monthly fee to use something that they would have otherwise received for free had they purchased their device directly from the handset maker. The customizations Verizon Wireless, or any of the other American operators, ask for command an additional price. While a handset maker can ship the same phone to Europe and Asia, merely substituting the packaging to reflect a different language, there are often teams dedicated to servicing American operators. Teams of people who need to be employed, and therefore paid. The American people are paying for this.
Then you have the distribution channels. All across America there are stores owned and operated by the operators. When was the last time you’ve seen an independent shop selling mobile devices? They do exist, but they’re a rare sight. More often than not you’ll see an entire building, or a small kiosk in a mall, setup by an operator offering devices that solely work on that operator’s network. Contrast this to European and Asian stores where mobile phones are sold in electronic stores, or dedicated mobile phone shops, all unlocked, meaning you can use them on any network, and all the devices come straight from the handset maker. The American consumer is paying for those operator owned stores, the (more often than not poorly trained) employees who work in those stores, and the designers who had to create the interior design template that will be copy and pasted from sea to shining sea.
Finally, and this is personally the one I detest the most, you have advertising. In 2007 American operators spent $6 billion, yes billion, on advertising. Money that could have been spent on increasing network coverage and reliability is instead spent on a 30 second clip that the American people watch during the commercial break of whatever program happens to on that night. If American operators were not the sole provider of handsets in the country, you bet handset makers would invest money in advertising to claim their device is the fastest, brightest, and funnest to own. That savings could be passed on to consumers.
The American people are paying for operators to build, monitor, and maintain networks. I have no problem with this. The American people are also paying software developers to create custom, inferior versions of devices compared to what is offered in Europe and Aasia. The American people are also paying for stores that push these devices, versus allowing a vibrant ecosystem to flourish where handset makers can sell directly to consumers, either in a national chain or in a local store. The American people are also paying to hear their operator advertising they have the best network, while they constantly deal with dropped calls and poor voice quality. What are you going to do to stop this?
I have several suggestions, and I’m sure you’ll read more in the comments below:
- Ban subsidies. Operators should focus on building networks, not manging a 2 year load. American consumers will learn the true value of devices and this will also help a more diverse portfolio of mobile phones enter the American market since there will be no price advantages.
- Hire an independent company to come and survey America’s major cities and publish a yearly report as to which operator has the best coverage and most reliable network. The government should help the American people make informed decisions.
- Eliminate this absurd concept that the person receiving a phone call or text message has to pay for said call or message. America is the only country that I know of that has a “receiver pays” policy and it is embarrassing. Even the OECD says Americans are paying 4x as much as everyone else is for comparable service.
People look down on government intervention, but just like the FCC broke up AT&T and then slowly watched the baby bells join together again over the past few decades, the FCC can put a stop to America having terrible mobile networks.
Yours truly, a Romanian born, New York City raised, Texas University educated, American citizen living in Finland,
Stefan Constantinescu
My question to you is why should the networks be forced to follow certain rules to make you happy? If you don’t like the particular way a vendor is doing business, choose another one. If you don’t like the way any vendor is doing business, then don’t do business with any of them. No one is requiring you to have a cell phone.
Lowers bills = money spent on other things, like food, or a mortgage payment.
“No one is requiring you to have a cell phone.”
So the right choice is to simply opt out of civilization because prices are too high?
Your comment about opting out of civilization is simply silly. Not having a cell phone with all of the latest features is hardly “opting out of civilization”. However if you are having a hard time paying your rent or buying food, maybe you should consider not having luxuries like cell phones, cable tv and the other non-necessities in life.
My point is that the way business works is that companies follow the dollar. If you are fed up with the way any particular company is run, you don’t have to pay them any money. I purposely changed from Verizon because I did not like paying extra for every little thing. I also chose not to buy an iPhone because I felt that AT&T charged too much for their service. There are lesser expensive alternatives to the big 4 cellular companies in the US.
The real problem with the situation is that people are willingly paying these amounts for the service. At a certain point people need to decide for themselves what is too expensive rather than have the government always trying to protect them. It doesn’t usually work well. As for your 3 suggestions, they are good to a point. They would have a better long term impact if consumers started to demand these things rather than the government forcing them.
I think there are plenty of iPhone customers demanding AT&T improve their network.
sorry mike, but stefan is right about this one. the carriers have too much control and power over consumers in the states and its bullshit. it’s like your broadband provider telling you that you have to have a certain computer, and can’t use google search, but comcast search, no mapquest or google maps, but comcast maps. same shit. the operators don’t want to become a dump pipe like broadband providers are so they continue screwing the american public.
its pretty sad that the entire continent of europe has standardized on mobile technology (GSM) and frequencies, yet the US is still juggling 4 main carriers, each with their own frequencies, using to technologies in gsm and cdma, and locked phones. its garbage.
The only power that the cell providers have over the consumers is that which the consumers give them. Again, I maintain that if you don’t like the fact that Verizon makes you pay extra to use the GPS, for example, you can either not use the GPS or you can not use Verizon. No one is forcing you to do either.
As long as customers continue to sign 2 year contracts and pay the extra money for all of the extra features, there is no incentive for the companies to change.
Why is it the Government’s job to do what consumers won’t (not can’t) do for themselves?
Stephan brought up AT&T twice. The first time was with the break up of Ma Bell. The problem with that break up is that we are almost right back to where we started. If you do the same for the cell companies I guarantee that it will not last. Also remember that when the airlines were highly regulated that airfare was extremely expensive. In the long run price ceilings tend to create a supply shortage which ends up leading back to either (or both) higher prices or inferior products.
The second time that Stephan mentioned AT&T was in regards to the customer outcry against AT&T to improve their network and AT&T is already doing so without any government intervention. They know that they need to otherwise they will end up loosing customers regardless of what phones they carry.
Generally more government control over things leads to higher costs for the consumer. The more demands that you put on an industry the higher the costs and those costs are shouldered by the consumer. Look at the digital tv switch over. It cost consumers money in having to buy new tvs or converters. The mandatory switch to CFC bulbs, while it sounds good to have more efficient bulbs, is going to cost more to buy lights and is going to fill our houses and landfills with a lot of deadly mercury.
Great post Stefan. Milan hit the nail on the head. It’s common for people unfamiliar with the issue to say “it’s a free market, go somewhere else”, but this is not the case at all. Carriers are collectively controlling the market leaving consumers no other choice. They all offer the same deal, more or less. All the advertising gives the appearance of competition while market conditions from a consumer’s prospective show no sign of it.
What I find encouraging is MVNOs are able to buy network capacity at wholesale rates and resell at a fair price. They do so, apparently, by cutting costs and competing on price, whereas the big 4 compete on coverage and exclusive handset deals. Still, the best handsets are hard to obtain outside the ‘big four channel’.
It was a great disappointment when Google lost out to Verizon in the latest spectrum auction. I was so hoping they would turn the industry upside down and put our wireless future on track. Call me crazy, but it’s going to take a company like Google to build out a network that is robust and cutting-edge while offering fair pricing for the consumer. They are well adept at generating adequate revenue from the business community and are best suited for spearheading a much-needed disruption in the wireless industry.
Bstring, wow that was a thinly veiled backhand swipe at me.
I do understand how market economies and government regulations work.
“Carriers are collectively controlling the market leaving consumers no other choice. They all offer the same deal, more or less. All the advertising gives the appearance of competition while market conditions from a consumer’s prospective show no sign of it.”
What control do the carriers have over the consumer? Are they forcing you to buy their cell phones?
The only control that the carriers have over consumers is that which the consumers give to the carriers. The big 4 have 250 million subscribers. That means that there are 250 mil people are willing to pay for the service that they get.
“It’s common for people unfamiliar with the issue to say “it’s a free market, go somewhere else”, but this is not the case at all.”
Again, who is forcing you to even buy a cell phone in the first place?
What is interesting is that as you are clamoring for government regulation, Sprint just added free cell to cell calling regardless of network. Sounds like at least one company is at least starting to try and provide more service to their customers.
Some old tired myths here. For one, Verizon doesn’t remove Bluetooth features from their smartphones, nor do they lock the GPS any more.
Apple is the one who has crippled Bluetooth on the iPhone, and ATT is the one that prevents use of apps like Slingplayer, which are permited on Verizon.
Why not make this an open letter to the CRTC as well? Yes there will be three new carriers launching with two of those going completely nationwide in early 2010. But as far as I can tell the rates won’t be that big of a savings (WIND may have the best savings so far though). To get the phone one wants though, staying in a three year contract just for a phone is ludicrous (even two years is stretching it).