AT&T and T-Mobile: Rethinking the Dynamics of Competition

In the past two decades, we have all witnessed the astronomical growth of everything mobile. As a veteran of the industry, I can easily reminisce about going “digital”, and the decommissioning of all things analog . As a former employee of AT&T Wireless, I can vividly remember the day that company hit the 1 million customer mark. At the time, it was a crowning achievement in bringing together network engineering, service offerings and operations for a substantial footprint in the industry. An argument could be made that any of the original players in the nascent domestic mobile marketplace were innovating and creating competition – in a space ripe with opportunity, and in a marketplace functioning as any healthy marketplace should. The past is always remembered fondly, but in this case, the past is a clear and timely reminder that today’s marketplace is dramatically different, and the dynamics of growth have changed.

Yesterday, the Department of Justice launched an antitrust lawsuit against AT&T over its proposed merger with T-Mobile. In a NY Times article, Sharis A. Pozen, acting assistant attorney general in charge of the Justice Department’s antitrust division was quoted saying “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.” In an issued statement, Julius Genachowski, Chairman of the FCC added “Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices.” Ten years ago, this would have been a complete argument.

If the Department of Justice and the FCC are truly concerned about impacts on future investment, job creation, continued innovation and competition, it might be time to evaluate the merits of a transaction in light of what drives the marketplace. Today, the real innovation that creates sustained growth and competition isn’t coming from the network service provider. It’s coming from the likes of Apple, Google, Motorola, Facebook, Amazon, Samsung, HTC, and many others. It’s driven by thousands of developers who are fueling new use cases and applications. It’s supported by enterprise software makers, media and entertainment, energy and healthcare companies extending their products to the mobile edge. And most important, all this innovation is ultimately being implemented by a consumer base that has shown their hunger and unstoppable desire for mobile capabilities.

In addition, for wireless service providers, the availability of spectrum assets remains a paramount concern. All of this mobile innovation in products and services does require, in the end, a network to support the experience. This wireless connectivity also represents a potential efficiency in rural markets, extending the promise of broadband to millions of people beyond major corridors and NFL cities. Cited extensively in the AT&T merger documents as a key efficiency gain, bandwidth and spectrum in most markets remains one area of competitive differentiation for providers. Unfortunately, that differentiation is partially grounded in a well-publicized and challenged bidding process. The FCC specifically should continue to evaluate the relationship between spectrum requirements and competitive impacts, and the mechanism for getting spectrum to the marketplace for commercial use. This merger is a great opportunity for that evaluation, since the FCC cites our global leadership position in mobile technology as a specific concern in this transaction. Uplifting spectrum policy benefits the industry as a whole, and removes barriers that could restrict future innovation in products and services.

The Department of Justice, the FCC and all constituencies involved in the disposition of this merger should be applauded for their time and effort ensuring the public, and our country, is not adversely affected by this transaction. We can only hope the lens used for inspection of this deal moving forward is not clouded by the tenets of a market that has long since matured and moved on.

Update: Verizon iPhone launch

As an update to our previous post, Verizon introduced the iPhone Tuesday and provided select details about the launch including:

- Pricing: 16GB for $199, 32GB for $299
- Data plan: no formal announcement, but expected to be unlimited data for roughly $30-$40
- Availability: Feb 3 for existing subscribers, Feb 10 for new subscribers

Most commentary surrounding the launch in centered on the network differentiation (no simultaneous voice and data on Verizon), and the lack of LTE support. Telwares maintains its earlier key observations:

- AT&T’s quarterly churn numbers could jump significantly if there’s a mass exodus, but that’s not likely. A vast majority of AT&T’s installed base of iPhone users are tied to family or corporate plans, making it more difficult to switch without prohibitive financial penalties.
- The most significant difference (and differentiator) in the network offerings of AT&T and Verizon is the ability to talk and use data simultaneously – an advantage AT&T has leveraged in the marketplace since launching 3G services.
- The network capacity and quality issues caused by an overwhelming amount of data traffic on AT&T’s network could replicate themselves on Verizon’s network as well. While Verizon maintains their network is ready to handle the demand, there’s no guarantee and no way to predict what actual demand will be.
- Verizon will have 7 to 9 million iPhones in its subscriber base by the end of 2011.
- The most interesting metric to observe, if the announcement happens as planned, will not be the bleeding of customers from AT&T to Verizon – it will be the battle for market share between Android, Apple and RIM in the Verizon customer base.

Verizon to announce iPhone offering today

According to multiple sources, including the Wall Street Journal, Verizon will formally announce later today the carrier will begin offering the Apple iPhone at the end of January. This will mark the end of AT&T’s exclusivity deal with Apple regarding the devices, but also represents a pivotal moment for both AT&T and Verizon in terms of Wall Street and network performance.

The impact to AT&T could be substantial given the network capacity and quality issues that subscribers have reported, leading to frustrations that could result in a switch of service providers. Quarterly churn numbers could jump significantly if there’s a mass exodus from AT&T, but that’s not likely. A vast majority of AT&T’s installed base of iPhone users are tied to family or corporate plans, making it more difficult to switch without prohibitive financial penalties.

The network capacity and quality issues caused by an overwhelming amount of data traffic on AT&T’s network could replicate themselves on Verizon’s network as well. While Verizon maintains their network is ready to handle the demand, there’s no guarantee and no way to predict what actual demand will be. For example, several studies have cited that Android users (the bulk of Verizon’s non-Blackberry smart phone portfolio) use more data than current iPhone users on AT&T’s network.

Perhaps the most significant difference (and differentiator) in the network offerings of AT&T and Verizon is the ability to talk and use data simultaneously – an advantage AT&T has leveraged in the marketplace since launching 3G services. This functionality is important to many subscribers, and may prove problematic for Verizon if the majority of potential new subscribers are not aware of the technology difference.

The most interesting metric to observe, if the announcement happens as planned, will not be the bleeding of customers from AT&T to Verizon – it will be the battle for market share between Android, Apple and RIM in the Verizon customer base.

Given the announcement is still pending, Telwares believes:

- Verizon will announce the iPhone with an unlimited data plan, attempting to lure dissatisfied AT&T users across carrier lines and attracting smart phone upgrades within their installed base of subscribers.

- Verizon will have 7 to 9 million iPhones in its subscriber base by the end of 2011.

- Verizon will not experience the network issues that AT&T has endured; all service providers are now beyond the shock factor of data usage from smart phones, and Verizon has the advantage of the lessons learned from AT&T’s deployment.

- AT&T’s quarterly churn numbers will be moderately impacted, but will not drastically impact stock price during 2011.

Telwares CEO Charlotte Yates on spectrum and network optimization

From Bill Snyder’s column:

Wireless broadband woes are harder to fix than you might realize

AT&T has taken a huge amount of heat for its subpar 3G performance. Much of the criticism is well deserved, but there’s a larger, more disturbing truth: We’re running out of wireless spectrum. What’s more, networks designed to handle big downloads can’t cope with the peer-to-peer traffic generated by games and smartphones.

“No one was prepared for the effects of [Apple's] iPhone,” says Charlotte Yates, CEO of Telwares, a telecom and IT infrastructure consultancy. Sure. You’ve heard that before, but Yates explains that it’s not just the amount of traffic, as many of us suppose, but the type of traffic, that poses difficulties.

Consider your iPhone, Droid, Pre, or similar device. Much of the time when it’s in your pocket or purse, it’s actually pinging the network to see if you have e-mails, stock updates, or news alerts. Most of those chunks of information are rather small, but when added to the constant polling of the network, they consume lots of resources. Similarly, multiplayer games, Twitter, and social networking sites used on wireless networks are constantly refreshing and pulling down data on what individuals are doing and broadcasting it.

There’s also a less-than-obvious problem caused by big downloads of things like HD video. Networks, says Yates, are designed for two-way communication. In effect, the network is waiting for traffic to come up the pipe and consuming a certain amount of resources as those channels are idle. Thus, massive downloads actually cause both downstream and upstream problems — stress the networks weren’t designed to handle.

“Carriers handle network management differently — even if one carrier is optimized, another may not be. And because networks are connected, the weakest link sets the pace,” Yates says.

Spectrum, like water, is a resource you don’t think much about — until it runs out. And that’s a major challenge facing carriers, consumers, and the government.

“I believe that that the biggest threat to the future of mobile in America is the looming spectrum crisis,” said FCC chairman Julius Genachowski at the CTIA conference in October. He predicted that total wireless consumption could grow from 6 petabytes a month last year to 400 petabytes by 2013. (A petabyte is 1,024 terabytes.)

“So we must ask: What happens when every mobile user has an iPhone, a Palm Pre, a BlackBerry Tour, or whatever the next device is? What happens when we quadruple the number of subscribers with mobile broadband on their laptops or netbooks?” Genachowski said.

Right now, there’s approximately 834MHz of total spectrum available (including 50MHz about to be added), but the FCC believes that most of it — 760MHz to 840MHz — will be needed by 2010, leaving little for future demand. The commission may well expand that, but there will be competition beyond the wireless industry to use it, particularly from the military and emerging entrants to the marketplace, says Yates.

A December 2009 report from Morgan Stanley shows that peak wireless data usage in the United States routinely exceeds 75 percent of capacity, which is a danger sign for carriers, as the figure below shows. Much of that is due to iPhone users, who use the Internet much, much more than other smartphone users (though Android users are beginning to take significant advantage of the Web as well). The financial firm expects AT&T and other carriers to have boosted capacity significantly by 2012 at its cell sites, where much of the bottlenecks occur that frustrate users, thus reducing peak demand to 60 to 70 percent of capacity.

The wireless industry has wrestled with capacity challenges in the past. In the 1990s, AT&T added Digital One Rate plans to its offering. This “one rate” deal was an overwhelming commercial success, adding hundreds of thousands of subscribers — but also overwhelmed a network that wasn’t ready or optimized to receive them in such short order, recalls Michael Voellinger, executive vice president of Telwares.

AT&T, Verizon, and the other major carriers have plenty of responsibility for the limpid 3G service, but if they are to avoid another, much broader meltdown, a lot of players — including the FCC — had better start moving to solve network management issues and the shortage of spectrum. Consumers may even have to moderate their desire for the most bandwidth-intensive applications.

Line2 for iPhone

There’s been a tremendous amount of media coverage in the past few weeks concerning Line2 for the iPhone, a VOIP application that creates a second number on your iPhone and leverages both WiFi and 3G to make calls. This is pretty remarkable on a few fronts – first and foremost, it’s in the app store. If you’ve followed the drama around VOIP calls and iPhone, this is a big deal. Second, it actually works well. Voice quality, ease of setup and intuitive use are all present so far (a whopping 12 hours into the user experience).

We will post observations here on Monday after a weekend of testing. If you’re curious about the application, here’s a few links to get you started:

Line 2 website

New York Times Technology Section article

AT&T Call Center Solutions Announcement

Commentary from Sam Bloomfield, Contact Center practice leader at Telwares -

AT&T’s announcement that it will be offering a hosted solution for call center operations is consistent with the trend of moving more telephony and CRM application to the cloud. Like all solutions there are advantages and disadvantages to this approach. It is useful to have this solution if you are willing to surrender some control over some of the basics you were use to having. At the same time it demands reliable and fast connectivity and confidence in the available of ATT resources to make changes that you need, unless you have the access and staff to make those adjustments yourself. Most larger operations will probably be less interested in this service/product because of the control issues involved. Smaller shops could see real benefit to this approach and reduce overhead costs associated with some of the on-premise solutions. Be sure to create a solid business case to prove how this should work. Also understand how changes will be made and how quickly and above all understand the level of service and priority you will be getting form the carrier.

The trend to move more and more applications to a central host is rapidly picking up momentum. Carriers and providers like this approach because it allows them to control the relationship, and provide the outsourced solutions, often attractive to many organizations. If you have a hosted relationship the barriers to changing providers in some ways is higher. You may be less likely to make the switch because you are not as in control of the parameters as you were when it was all premise based. At the same time it could result in more movement because you have less control. You may be willing to find a new full service provider because you are used to having another party manage so much of the technology process, and you are used to fewer IT resources on staff. Carriers also like this approach operationally because they can control upgrades, sell in new services and provide the kind of direction they can control, and create trends that increases customer “stickiness.” Just like netbooks are begin to gain market share of significant size, SaaS is gaining in popularity. No new operation, or one that keeps up with emerging trends can afford to ignore this option. At the same time the decision to go with this approach must be decided, like all good business decision, with full visibility into the pros and cons, expense versus investment, and account management and support services and level of overall service level comfort from the provider.

AT&T / CWA Contract Expiration and Potential Strike – Update 2

Update Sunday #2 – From the CWA-Comtech website on “Legacy T” bargaining, which seems to summarize the entire picture right now (link below):

April 5, 2009

12:01 a.m. – We are currently working without a contract and maintain the right to strike whenever we feel it is necessary.  We are still very far apart on many issues.  The contracts in the Midwest and West Coast have not yet expired.  We will continue to bargain through the night and through the day tomorrow to try to develop a framework within which we can come to an agreement.

In the meantime, wages, hours, benefits, and working conditions remain in place.

Go to work if you are scheduled, but this is NOT business as usual.  Step up your mobilization activities.  Solidarity is more important now than ever.

http://www.cwa-comtech.org/barg_mobe/at-t-legacy-t-bargaining-report-23.html

Telwares maintains:

While a strike would clearly put a strain on AT&T’s resources, we do not believe this will materially affect continuing operations within AT&T in the short term. The Telwares concern for existing clients and prospects grows larger if a strike were to happen and extend for more than a few weeks. At that point, we believe there could be real jeopardy for clients relating to account support, service provisioning/troubleshooting, and network implementations/migrations.
KEY ENTERPRISE CONSIDERATIONS:
•Contractual risk mitigation ‐ how are labor disputes handled in your contract(s) and is there remedy available to you if needed? The majority of AT&T agreements to address labor disputes as part of Force Majeure language – due diligence is required.
•Account maintenance and support ‐ if resources are stretched within AT&T, what is the contingency plan specific to your relationship with them, in practical terms?
•SLA delivery ‐ what provisions are wrapped around the SLA’s in your contracts, and again, are there sufficient remedies in place if service were to degrade?
•Implementation and/or migration of new services ‐ if new services are planned or in‐flight, what is the contingency plan to accomplish the transaction? What remedy is available to your organization?
oIn addition, there may be implied delays in contract negotiations or legal review/approval process due to any labor dispute. This should be challenged aggressively.

AT&T / CWA Contract Expiration and Potential Strike – Update

Update Sunday: Negotiations are continuing past the strike deadline. According to various statements by the CWA and AT&T, the two sides remain focused on wages, health care costs, and job security. More detail will be posted as appropriate. Telwares maintains:

SUMMARY OF ISSUE:
•On April 4th 2009, a series of five regional union contracts will expire between AT&T and the Communications Workers of America affecting 112,000 employees. A sixth contract due to expire later this year is also in scope.
•Members of the CWA have ratified a strike if negotiations are unsuccessful.
•AT&T is seeking concessions related to active and retired employee health benefits, essentially sharing more of the burden with employees.
•The CWA is seeking to finalize a variety of wage issues and mitigate the AT&T position on sharing more of the medical costs.
•AT&T has been preparing for several months to accommodate a strike by training non‐bargained employees for assignment throughout the organization.
TELWARES PERSPECTIVE:
While a strike would clearly put a strain on AT&T’s resources, we do not believe this will materially affect continuing operations within AT&T in the short term. The Telwares concern for existing clients and prospects grows larger if a strike were to happen and extend for more than a few weeks. At that point, we believe there could be real jeopardy for clients relating to account support, service provisioning/troubleshooting, and network implementations/migrations.
KEY ENTERPRISE CONSIDERATIONS:
•Contractual risk mitigation ‐ how are labor disputes handled in your contract(s) and is there remedy available to you if needed? The majority of AT&T agreements to address labor disputes as part of Force Majeure language – due diligence is required.
•Account maintenance and support ‐ if resources are stretched within AT&T, what is the contingency plan specific to your relationship with them, in practical terms?
•SLA delivery ‐ what provisions are wrapped around the SLA’s in your contracts, and again, are there sufficient remedies in place if service were to degrade?
•Implementation and/or migration of new services ‐ if new services are planned or in‐flight, what is the contingency plan to accomplish the transaction? What remedy is available to your organization?
oIn addition, there may be implied delays in contract negotiations or legal review/approval process due to any labor dispute. This should be challenged aggressively.

AT&T / CWA Contract Expiration and Potential Strike

Update to previous entries…negotiations are continuing.

SUMMARY OF ISSUE:
•On April 4th 2009, a series of five regional union contracts will expire between AT&T and the Communications Workers of America affecting 112,000 employees. A sixth contract due to expire later this year is also in scope.
•Members of the CWA have ratified a strike if negotiations are unsuccessful.
•AT&T is seeking concessions related to active and retired employee health benefits, essentially sharing more of the burden with employees.
•The CWA is seeking to finalize a variety of wage issues and mitigate the AT&T position on sharing more of the medical costs.
•AT&T has been preparing for several months to accommodate a strike by training non‐bargained employees for assignment throughout the organization.
TELWARES PERSPECTIVE:
While a strike would clearly put a strain on AT&T’s resources, we do not believe this will materially affect continuing operations within AT&T in the short term. The Telwares concern for existing clients and prospects grows larger if a strike were to happen and extend for more than a few weeks. At that point, we believe there could be real jeopardy for clients relating to account support, service provisioning/troubleshooting, and network implementations/migrations.
KEY ENTERPRISE CONSIDERATIONS:
•Contractual risk mitigation ‐ how are labor disputes handled in your contract(s) and is there remedy available to you if needed? The majority of AT&T agreements to address labor disputes as part of Force Majeure language – due diligence is required.
•Account maintenance and support ‐ if resources are stretched within AT&T, what is the contingency plan specific to your relationship with them, in practical terms?
•SLA delivery ‐ what provisions are wrapped around the SLA’s in your contracts, and again, are there sufficient remedies in place if service were to degrade?
•Implementation and/or migration of new services ‐ if new services are planned or in‐flight, what is the contingency plan to accomplish the transaction? What remedy is available to your organization?
oIn addition, there may be implied delays in contract negotiations or legal review/approval process due to any labor dispute. This should be challenged aggressively.

Organized labor: A time for workplace change?

Following a presidential election that was almost exclusively (and sometimes brutally) focused on change, the CWA and AT&T Mobility contract negotiations have sparked many debates on the role of unions in the workforce – now and in the future. It would be hard to dispute, looking at history, that unions played a pivotal role in shaping the workplace of today. While many of those influences are strikingly positive, the global economic condition we are currently experiencing puts the labor organizations in a precarious light. Push too hard, and you potentially damage and / or break the company. Push too little, and you stand to lose credibility with members as viable representation. This is exacerbated by the financial positions of the companies in question. While AT&T and AT&T Mobility may not be in imminent danger, there is a perception that most large global organizations are in a weakened state. Any demands that appear, even on the surface, to take advantage of  “timing”  will have negative effect on the public perception of organized labor. Ask the UAW if mutual cooperation is important right now.

What is perhaps overlooked on the grand scale is the opportunity for unions to play an important role – again – in reshaping the workplace. They are ideally situated to enable the broad deployment of training and re-tasking for displaced workers. They can have an important and influential voice in helping companies retool, in a corporate environment where boundaries are disappearing – by virtue of that little thing known as the Internet. They can even be an important arbitrator in the rebuilding of our core infrastructure, and in the broadband deployment of our future.

Specific to the CWA and AT&T, we maintain that the current negotiations are minor in contrast to the larger contracts at stake over the course of this year. This particular contract will be an excellent barometer for the tone, tactics, and potential impact for the customers of AT&T. Perhaps it can even be a barometer for larger change.