as the world turns
January 4, 2008
By Tom Wheeler
In the New World wireless companies simply don’t need to own the network. The camel’s nose snuck under the tent with MVNOs; wireless brands whose lack of network ownership was irrelevant to consumers. A couple of years ago there was a warning signal that the old model was shifting when UK consumers voted MVNO pioneer Virgin Mobile “Best Network” even though it didn’t have a network (and the network that Virgin used was way down the list).
Recently, however, the camel has crawled all the way under the canvas. UK carriers T-Mobile and Hutchinson’s “3” have announced that they will combine their networks and share the capacity. The two companies project they will save $4 billion over the next 10 years by competing with each other while using the identical infrastructure. What makes this even more interesting is that 3’s cutting-edge new services have been hindered in the market by comparatively poor network coverage. Overnight that differential will vanish thanks to a competitor. Scratch your head, the world as we know it really is coming to an end when one competitor helps another out of a multi-billion dollar capital hole.
Let’s think anew for the new year. Where is it written that carriers need to own their networks? If American Airlines can run flight services without owning any airplanes, why can’t wireless service companies do the same? It looks like 3 and T-Mo have just figured out what the airlines already knew: that profitable operations in a capital-intensive business come from providing a service, not necessarily owning the physical methodology of delivery.
The history of the U.S. wireless industry is a network-centric history that wasted untold billions of dollars building duplicative networks and advertising “mine is better than yours.” For the first two wireless carriers this might have made sense, but when the PCS licenses came on the scene in the mid ‘90s the capital wastage went into overdrive. Why was it necessary to have up to nine different wireless networks in a market? Why should the capital markets and corporate balance sheets be strained to build purposeless redundancy? Couldn’t that money have been better spent providing a deeper, more robust network and developing new and innovative services? Alas, however, that’s all money over the dam.
Someone approached me years ago with the idea of buying cellular towers and leasing them back to the carriers. “The carriers will never part with that important and differentiating infrastructure,” I foolishly opined. As we now know, carriers engaged in just that kind of infrastructure sharing and their business did not fall apart. So, if it was financially and operationally advantageous to share towers, why not take the next step and share the network that runs over those towers?
Last month I wrote about the tectonic plates that are shifting the relationship between carriers, handset manufacturers and consumers. The albatross around the carriers’ necks, I suggested, was their networks. The Internet folks define themselves by building high-margin services while the wireless carriers continue to define themselves by building networks. It now appears that two UK carriers — T-Mobile and 3 — have decided the Internet approach of selling services is the way to the future. Their networks are just a necessary evil.
Happy Brave New World!
Tom Wheeler is a managing director at Core Capital Partners, a venture capital firm specializing in early stage technology-based companies. He has been CEO of both the Cellular Telecommunications & Internet Association (CTIA) and National Cable Television Association.