Running head: ASSIGNMENT#1-MODEL MARKET PATTERNS OF CHANGE

Describe the industry and explain the general pattern of change of the particular market model. Industry: telecommunications. For the purposes of this assignment, I will limit my discussion to what had been known as phone service and not broadcast entities (TV, radio, etc) nor shall I dwell on the so-called Cable industry. The analysis shall also be primarily focused on the domestic market. Throughout the world, historically the communication industry has overwhelmingly been a monopoly. This was also true in the United States. As AT&T evolved from the late 19th century, except for a year as a nationalized company, existed as a national monopoly. In the socalled Progressive era of the 1910s, the idea that a natural monopoly would be more efficient and economical than competing systems took hold. The idea of universal service, with rural rates being lower than urban rates (price discrimination). While never a true monopoly, with its substantial market share, and restrictions on connecting non-Western Electric equipment to its network, AT&T operated as one. The barriers to entry were primarily economic, the expensive right-of-way access and materials for wired connectivity being first among them. The restriction of un approved devices not being allowed on the AT&T network, limited interconnecting between competitors as well as additional connection & maintenance fees contributed to its dominance. As a monopoly, there were limited phone styles, and little need for deep price reduction through economy of scale or innovation, though state commissions regulated rates. The upside of the additional revenue, Bell Laboratories had been able to fund and develop technologies that are cornerstones of the modern society that are too numerous to mention here. It is debatable if these would have been developed as quickly without this reliable source of research funding.

After the famous consent decree, in 1984 the Bell System was broken up into several arms. Along with the Regional Bell Operating Carriers (RBOC), there were the Competitive Local Exchange (CLEC) Carriers that were thrust into the regional markets. The accompanying government regulations for access and fees ensured a competitive market existed. This was also true for the nascent cellular networks first being deployed. Combined with the Carterphone decision1, the agreed upon use of Bell Labs developed AMPS2 (later EIA/TIA-3) and roaming agreements, set the stage for widespread use of wireless devices. Since the mobile handsets were able to be used across the service providers platforms, they met the criterion of a homogeneous product. Indeed, now the voice provider networks are almost commodities. The ease of financing from expected growth made entry relatively simple. Today, as the four main carriers move to LTE networks, their older CDMA/EvDO/GSM equipment can be had for pennies on the dollar to a second tier provider. (moving toward very large numbers.) Third, with spectrum being made more available, either through FCC set-asides, held & unused portions being sold (Comcast,

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

etc.), or more being released from re-assignment (digital vs. analog TV), many of the technological impediments are dropping off, permitting a (relatively) easy entry and exit. As innovation occurred, manufacturing became more sophisticated, and competition increased, the prices of comparable devices and services fell. In truth, it would be difficult to find another product/service that has achieved such high levels of wireless penetration3 (est at ~102%) so quickly with such a vast array of accompanying and complimentary product/services. This didnt occur until certain price-point thresholds were crossed. Even the wired world has been so affected. Where a dial-up or DSL connection would offer kbps speeds, or a cable modem would provide low Mbps service for a neighborhood to share a decade ago, affordable fiber-to-the-home provides as much as a dedicated 100 Mbps to the subscriber. Ultimately, while more competitive, this in no way a perfectly competitive market. I also question the notion of it being an oligopoly for reasons I will expand upon. While there are four major players in wireless, there are almost one hundred other carriers. Some are MVNOs, but most are regional providers that garner additional opportunity through roaming agreements with other carriers, both major and minor. Beyond this, the number of device manufacturers is larger and continues growing every year. Through a program dubbed Open Development or the FCC mandated Open Access, a persona can go through a simplified test process to have his device certified for use on a providers network. Usually the costs for a device hover around $1 million per model. Through certain programs & partnerships, the cost can be substantially reduced. Instead of developing a device from the ground up, a developer can opt to use a certified module. This module has already been cleared as safe to use on a carriers network, so the majority of the testing has been completed and passed. If it is not a voice device, the testing is simpler (no GPS/E911 compliance required). Just antenna performance and something called data retry. Both of these tests are fully documented and available for a start-up company to evaluate before seeking/risking investment capital. Hypothesize the basic short-run and long-run behaviors of the model in the industry you have chosen in a market economy. The short run behaviors include the initial capital costs to produce or procure infrastructure/network elements or develop devices for the same. As a device producer, not ceding market share to a (potential) rival raises the opportunity costs on the same rival. This may not lead to a winning strategy, but it is an option to consider. We have seen the costs for voice drop over the last twenty years, both to the end-user and the device developer/service provider. As penetration grew, so did the network in response to increased traffic. This lowered the MC for each additional subscriber. It lowered the costs for each device. Both were passed on to consumers.

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

The long term behaviors are harder to divine. Capital outlays/contracts are still being analyzed for their ROI. The conventional wisdom is multi-faceted, which brings greater variability (cost & opportunity); more spectrum-great initial costs and possible ongoing usage costs from the FCC. Offloading- having devices scan for Wi-Fi (or similar backhaul) to reduce the Access Terminal(AT) from the network, thus freeing capacity. MIMO- to increase data rates, faster file transfer, less time using the network. Encouraging femto cell usage in residences & places of employment as a variation of offloading.

Analyze at least three (3) possible areas for the industry that could lead to transaction costs, and explain each in detail. 1. Government regulation/interference- Since the early 20th century where telecommunication was treated as another regulated monopoly, government at several levels has been involved mandating, forbidding, requiring and litigating aspects of the industry. This is true for many industries that existed in the era of the so-called Progressive movement following the trust busting period, it seems as though the nation feels something is owed to it by the utilities. Whether its an implied level of service beyond the contractual agreement, remuneration for real or perceived wrongs, or the need to extract fealty just to conduct its business, telecommunications is almost singled out (along with the other traditional utilities.) The transaction costs from such intervention include, but are not limited to; a. Direct costs for securing spectrum (wireless providers only)- $19 billion6 dollars from the wireless providers. This may have come from the winning bidders, but ultimately the costs will be passed on to the customers. b. Service mandates for providers and equipment manufacturers-The FCC mandated assisted Global Positioning System accuracy/e911 compliance on a strict timetable before the technology was considered mature. c. Numerous federal, state and local fees, charges and mandates4-These can be explored through the supplied link. d. The buying back of free unused TV broadcast spectrum to the FCC in exchange for a portion of the proceeds from another round of auctions5.

2. Search costs-the costs associated with the OEM and/or the carrier to determine the best path to follow. This would encompass both OEMs and carriers when it comes to features the networks and devices should support (now and in the future, as well as a timeline of support)

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

or even which of the inevitable competing technologies or implementations to support. Examples; Push-to-talk ? (PTT) Voice over LTE ? (VoLTE) Simultaneous Voice over LTE ? (SVLTE) Voice over DO? (VODO) 4G only ? or a 3G fall back ? Combinations of the above ? Which ones? These all have an associated cost to develop, a cost to forgo develop with the risk that a competitor will develop it (an example of Game Theory.) There are also costs associated with the process effort reaching a decision on this.

3. Rent seeking-the costs associated with gaining users, access, contract and favorable outcomes for oneself and/or negative outcomes for rivals.

Speculate about the behavior that could result from these transactions and propose at least two (2) strategies for dealing with them. 1-Part of the FCC mandates requires certain carriers to provide Open Access to wireless device manufacturers. By choosing this option, the cost of testing is shifted to the module manufacturer. While the device developer may bear some of those costs, they are amortized in the module price & spread across many more modules then would be sold from one device developer. 2. Lobbying. By gaining access to the FCC, and other government agencies, bureaucrats and politicians, both providers and manufacturers can persuade the authorities how this impact the bigger picture, the economy, the industry affected and voters7. If done well enough, the industry in question may be able to impose costs on a competing industry via the same method. (see Rent seeking above)

Collect costs, revenue data, or other data from the industry that you deem relevant. Explain how you would modify the data in order to make it relevant to decisions a manager must make.

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

The most commonly cited metric is ARPU8 (Average Revenue Per User) and the trends9 in the same. Churn, the % loss of customers month-to-month and year-to-year, is often the basis for goal setting and EOY reviews. Data capacity, data usage projections, access point build out rate, market penetration, net adds, area physical coverage and POPs are all tracked by differing organizations, both internal & external to the industry. The data a manager needs & how to modify it depends on the managers functional area. For the purposes of this discussion, we shall limit the managers role is from a market-entering device manufacturer. I would need to cross reference the costs of 3G only, 3G+4G, 4G only modules and what the bulk discounting is(price discrimination). Wishing to enter quickly, I would limit myself to Data-only products. Access to the carriers data plan information is critical. If 3G is at a sufficiently lower price point than 4G, I might expect more buyers of my product. #G would inevitably be less costly and simpler to manufacturer. However, the 3G data-device market already has active experienced competitors in the market, so one would need a proper market analysis to see if there is a place for what may be considered a low tier device. Depending on the numbers, a 4G device may be more complex to produce, with higher costs for testing & materials, but the 4G space is still wide open and have a better chance for short-term success to provide long-term corporate viability.. It would be easier to establish the product name. As a case in point, iPhone/iPad. They used the relatively simple GSM technology for entry, finally moved to CDMA/EvDO and UMTS, but have yet to produce a device for the 4G-LTE environment. Other data-centric device using 4G have grabbed substantial market share from Apple, and gain experience in optimizing follow on devices. Not ceding market share to a (potential) rival raises the opportunity costs on the same rival.

Explain the major factors that affect the degree of competitiveness in your industry. Use data to develop at least three (3) measures (e.g. productivity measures) to show how the industry is evolving.

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

Glossary of terms wireless; http://www.ctia.org/media/index.cfm/AID/10407

References; 1-Carterphone decision; http://www.infomatek.com/Carterphone_Decision.htm

2-Advanced Mobile Phone System http://www.reference.com/browse/phone+system

3-Wireless penetration from CTIA http://www.ctia.org/advocacy/research/index.cfm/AID/10323

4-Taxes, fees and mandates on your phone bill http://www.fcc.gov/guides/understanding-your-telephone-bill http://abtolls.com/information/readingbills.html

5-Incentive auction & spectrum fees http://www.bna.com/cbo-estimates-158b-n12884903858/ 6-Revenue from auction http://www.broadcastingcable.com/article/95459700_MHz_Spectrum_Auction_Comes_to_a_Close.php

7-CTIA and NAB opposes auction fees http://www.broadcastingcable.com/article/475137CTIA_NAB_Join_to_Pan_Spectrum_Fees.php

ASSIGNMENT#1- MODEL MARKET PATTERNS OF CHANGE

8-Major wireless carrier ARPU http://www.fiercewireless.com/story/carrier-metrics-arpu/2009-02-24 9-ARPU trends

www.chetansharma.com/Worldwide%20Wireless%20Data%20Trends.doc

Summary: Revenues in the 700 MHz Spectrum Auction http://www.publicknowledge.org/pdf/economists-e-block-plan-increases-revenues.pdf

LTE for UMTS, Harri Holma and Antti Toskala Wiley, 2009 http://www.alibris.com/search/books/qwork/16165987/used/LTE%20for%20UMTS%3A%20Ev olution%20to%20LTE-Advanced