Net Neutrality Threatens the Business Models of Cell Phone Operators, Wall Street Analysts Say
Most of the arguments against net neutrality rules for wireless providers have centered around capacity. Opponents say there just isn't enough bandwidth to absorb the onslaught of video and other data-intensive applications coming to mobile devices. Carriers need to be able to manage such traffic congestion to prevent their systems from clogging, according to some network engineers and mobile service operators.
But if you ask Wall Street analysts, the biggest risk to carriers is how neutrality rules would upend their business models. It's not about video, they say, but about their cash cow: voice service. Last week, Federal Communications Commission Chairman Julius Genachowski announced a proposal that would codify and expand guidelines for Internet service operators to ensure that consumers get access to any legal content or service of their choosing.
That would mean if you want Skype or Google Voice on your iPhone, a carrier could not stand in your way.
And that has worried mobile service operators such as AT&T, Verizon Wireless, Sprint Nextel and T-Mobile, analysts say, because those services would cut into their greatest source of revenue: voice. And because voice applications don't use up much bandwidth, wireless carriers can't make up the lost revenue by charging more for the data those services use, analysts say.
Craig Moffett, an analyst at Sanford C. Bernstein breaks it down this way:
Cable and telecom Internet service operators can continue to make money even as their networks are open to competing applictions like video services by charging consumers by the amount of data they use.
"That doesn't solve the problem for wireless," Moffett said in a telephone interview. "For wireless, the arbitrage risk comes from low bandwidth applications like Skype and Google Voice, but unfortunately for the voice business, almost all the revenue today comes from low bandwidth voice and data applications. So it's a risk that simply can't be managed by the adoption of usage-based pricing schemes."
"So up to now, operators have managed that risk by simply prohibiting certain applications. In net neutral world, they wouldn't have that luxury," Moffett said.
To be sure, bandwidth constraints are an issue and will be a bigger problem in the future as more people buy smart phones, analysts say.
The carriers say they are already seeing huge a surge in mobile broadband use. CTIA-The Wireless Association filed a petition Tuesday with the FCC asking for 800 mhz of additional spectrum over the next six years so carriers can beef up their networks. High-tech titans Microsoft and Google have pushed for the use of unlicensed radio waves -- known as white spaces -- as an alternative to carriers' networks for accessing the Web.
U.S. wireless networks are "facing incredible bandwidth strains, and which require continued private investment at very high levels, and pro-active network management, to ensure service quality for 270 million customers," said Jim Cicconi, AT&T's senior executive vice president of external and legislative affairs in a statement after the FCC announcement last week.
Genachowski said last week when he proposed the new rules that the agency would take those concerns into account as it draws up final rules over the next few months.
September 29, 2009; 2:51 PM ET
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