Could Incumbents Wireless Cos Dominate Unlicensed Spectrum?

Significant amounts of government spectrum are headed towards being made available for shared unlicensed use. However, industry commentators have barely analyzed the potential impact on the industry structure from the availability of this new spectrum. The common initial reaction, and one suggested in the PCAST Report is that new entrepreneurial unlicensed providers will emerge to create a vibrant new group companies offering new services and better prices. This view presumably implies new unlicensed service providers may put significant competitive pressure existing licensed service providers as they lose their monopoly/oligopoly status their spectrum licenses afford them. While, this may happen, its also possible that the impact of the new spectrum may not be so radical. The existing licensed providers may simple leverage their competitive advantages to dominate unlicensed spectrum as well.

A major obstacle for new unlicensed service providers seeking to create significant industry positions is obtaining the financing needed for the infrastructure buildouts their services require. This is particularly true if they can’t find credible barriers to entry in order to prevent rapid commoditization of their services. But even in an optimal scenario, it unlikely individual small service providers will be able to finance major regional or national buildouts on multiple spectrum bands.

As mentioned in a prior post on unlicensed spectrum, hardware providers with leading technology, whose equipment all services providers will need, are probably in the strongest position within the current unlicensed spectrum ecosystem to get financing and maintain strong margins. Emerging service providers will undoubtedly push hardware providers for vendor financing and many are likely to provide valuable assistance. But it’s unlikely hardware providers will be willing or able to provide enough financing to jump-start massive buildouts by small unlicensed service providers and also fund the service providers’ negative operating cash-flows until breakeven.

Even potential new service providers, such as DISH, with its significant financing ability and strategic advantages including a 14 million-subscriber base, are hesitant to undertake the cost and challenges enter the already competitive US wireless market. It’s unlikely that lowering (or eliminating ) the price DISH paid for its AWS-4 spectrum would motivate them to change their mind and aggressively enter the market. This calculation for small startup service provider without DISH’s advantages is likely to be even less favorable.

Existing wireless major wireless service companies and/or tower operators, however, are well positioned to undertake these buildout projects. Both of these groups have significant financing ability and relatively low costs of capital that emerging unlicensed providers lack. But they also have other advantages and motivation that may make undertaking a significant wireless buildout a more compelling and viable option than for any new entrant.

Existing wireless companies have long complained of a spectrum shortage and they already have built out most of the country on multiple bands. Expanding their current coverage to encompass additional unlicensed spectrum bands is likely to be significantly less expensive for them than for any new entrant. It may even be cheaper than their current cell splitting plans on licensed spectrum.  Moreover, unlicensed buildouts could allow them to offer (and charge) their existing subscribers significant additional data capacity. Existing service providers would also be able to leverage existing relationships and purchasing power with critical equipment manufacturers and other service providers.

Tower operators have one of the most expensive pieces of the wireless ecosystem – tower space. Many of their towers have additional capacity that they could potentially use to accommodate additional antennas and other equipment for unlicensed use. If a network needs additional towers, they are in the best position to build them and to find other the tenants to offset the cost. If the tower companies provide the service on a wholesale basis to multiple service providers, perhaps for peak demand use to supplement their licensed spectrum, it could allow them to side-step conflicts of interest that might undermine its existing tower leasing business and allow them stay closer to their core competencies.

Wireless service providers and tower operators may work together in building out infrastructure on unlicensed spectrum. In fact, they face challenges that may require them to partner on some projects. The tower operators are not experts in service provision, nor will they be eager to offend their current licensed tenants. The wireless companies will likely need lease concessions from tower operators to justify the project. In many case the tower operators may have RF engineering data on various sites that a wireless service provider does not have outside their current bands.

The potential opening of significant amounts of unlicensed spectrum is a watershed moment in telecom industry. The history of its unfolding has yet to be written. However the current providers superior financing, economies of scale and customer relationships may yet leave them with sufficient barriers to largely neutralize unlicensed competition in this area, even without their spectrum oligopolies. This may leave new unlicensed spectrum service providers at the fringes of the industry or in narrow verticals in which the major operators don’t participate.