Too Little, Too Late?

Posted: 07/1999

Too Little, Too Late?
The Unfulfilled Promise of Wireless Resale
By Kim Sunderland

Wireless resellers have
been stuck between a rock and a hard place for years. And when push comes to shove, the
Federal Communications Commission (FCC) may be largely to blame.

In June 1996, the FCC in Common Carrier Docket No. 94-54 adopted rules governing the
resale obligations of cellular, broadband personal communications service (PCS) and
wide-area specialized mobile radio (SMR) providers. The order was aimed at prohibiting
these wireless service providers from "unreasonably restricting the resale of their
service," the FCC said, so that wireless telecommunications services and competition
could grow. In anticipation of such increased competition, the FCC set November 2002 as
the "sunset," or expiration date, for these rules. The commission claimed that
"the availability of numerous facility-based suppliers of wireless services will make
the condition unnecessary at that time."

Then and now, wireless resellers find that clause to be laughable. "Instead of a
2002 sunset, the rules should stand for infinitum," says David Gusky, executive vice
president of the Telecommunications Resellers Association (TRA) in Washington. "While
these rules have had little impact on the marketplace, without them, wireless resellers
will have a tough time staying in business."

That’s largely due to the fact that, to date, there’s been no FCC enforcement of the
wireless resale rules, sources say, which has been compounded by several other issues. The
largest of those is a lack of action on two major reconsideration issues before the
commission’s Wireless Telecommunications Bureau (WTB).

"The FCC has done nothing to help wireless resellers," said one resale
executive, "and we [resellers] haven’t done a good job of filing complaints, either.
But then, how do you sue your major supplier? We don’t have the time nor the resources for
that."

Warring Factions

The WTB currently is reviewing two wireless resale reconsideration issues, one from
TRA, which doesn’t want the wireless resale rules to sunset, and one from the Personal
Communications Industry Association (PCIA), which represents wireless carriers seeking to
have the FCC drop the wireless resale rules altogether.

"We’re not against resale," explains Mary Madigan Jones, PCIA’s vice
president of external affairs. "There are market opportunities for it, but we don’t
want the FCC micromanaging those relationships."

The marketplace should dictate the growth of competition, she says, adding that the
paging industry, for instance, has no such regulations "and it’s thriving."
Wireless carriers should have more flexibility in establishing resale relationships, Jones
says.

After being denied on its first petition against these rules, the PCIA in September
1998 again asked the FCC to reconsider its mandatory resale requirements. The group argued
that "the time has come for the FCC to show that regulators can really be trusted to
deregulate," which wireless carriers predict will stimulate more competition in the
wireless industry.

Wireless resellers, though, want the mandatory wireless resale rules protected from
possible repeal, and they seek assurance that all wireless carriers comply with the FCC’s
resale rules. "We want the FCC to reverse its decision on a sunset," Gusky says,
"because we need market stability. And we want the FCC to beef up enforcement of
these rules."

Another wireless resale executive says wireless carriers such as Nextel Communications
Inc., Reston, Va., don’t have one reseller. "These guys are just saying, ‘Screw
it,’" he says. "The FCC tells them they must allow resale, but then [the
commission] doesn’t back that up. What good are rules if they don’t get enforced?"

The frustration is coming to a head. Key FCC staffers have confirmed that the WTB in
August plans to circulate a draft order that combines both reconsideration issues. Whether
the full commission will internally or publicly debate the merits of these reconsideration
issues currently is unknown.

However, FCC Chairman William E. Kennard, who’s supported by commissioners Gloria
Tristani and Susan Ness, likely will vote to keep the sunset rule in place. They initially
voted against PCIA’s petition for forbearance and aren’t likely to reverse their
decisions. Commissioners Michael Powell and Harold Furchtgott-Roth both have thrown their
weight behind less FCC regulation and more overall marketplace power.

In his dissenting statement in PCIA’s petition, Furchtgott-Roth last year said,
"Why make the citizens of Miami suffer under the mandatory resale rule while waiting
for Cheyenne to become competitive? Although I have serious doubts about the public
benefits of the mandatory resale rule even in noncompetitive markets, it defies common
sense to continue to impose such a rule in competitive markets."

Wireless resellers counter that the market isn’t competitive. TRA’s Gusky, in fact,
goes so far as to say "resale has never really been embraced by wireless
carriers."

"Resale carriers have always struggled to find a foothold in the market, but the
wireless carriers have resisted," he says.

If the FCC does stand behind the sunset date, wireless resellers say the commission
first should be certain that the market is competitive. If it isn’t and resellers aren’t
getting access to wholesale capacity, then the FCC should abandon the sunset date, at
least temporarily.

"Wireless resale," says one source, "has become a regulatory obligation
rather than a market opportunity."

Hope on the Horizon

However, some wireless carriers are making a commitment to resale. "I am gratified
to see over the past year that several carriers that have been reluctant to embrace resale
as a marketing strategy have begun to develop a different attitude toward resale,"
Gusky said at a meeting of the TRA Wireless Resale Council concurrent with the TRA Spring
Conference & Exhibition in San Diego.

In particular, Gusky points to New York-based Bell Atlantic Corp., Irving, Texas-based
GTE Wireless and Hoffman Estates, Ill.-based Ameritech Corp. as companies that have
improved their contracts to make wireless resale more viable.

TRA Director Jim Wolfinger, president of wireless reseller MCI WorldCom Wireless, told
the Wireless Resale Council that this change of heart is happening as a result of supply
and demand–pure and simple. "There are several robust competitors out there and
there are different folks coming to the party wanting market share. That works well for
us," he says.

While for years there were only two cellular providers in each service area, personal
communications services (PCS) entrants have tripled the number of wireless competitors in
each market. Such competition has driven pricing down generally and encouraged carriers to
move to a national footprint and a national pricing structure.

Although failed, it was the impetus behind the Bell Atlantic bid for AirTouch earlier
this year. And it will be a byproduct of the San Antonio-based SBC Communications
Inc.-Ameritech and Bell Atlantic-GTE pairings, if approved. Among smaller carriers,
clustering for economies of scale has been the mode of operation.

"Wireless carriers’ fundamental problem is that although revenues per minute have
fallen by nearly 50 percent since 1994, their fixed costs have stayed relatively
high," explain analysts at The Yankee Group, Boston, in an opinion letter on the
subject. "And, with as many as seven competitors in a market, their share of a
still-growing pie is getting smaller. Thus, we believe wireless carriers are in a race to
improve business processes and reduce their cost structure. Expanding [the] footprint via
acquisitions or alliances means that a greater percentage of calls are ‘on-net,’ so
carriers don’t have to pay high wholesale rates for roaming onto other carriers’ analog or
digital networks."

Competition and consolidation are good for resellers, says Philip Forbes, who is
responsible for the wholesale distribution of wireless services, carrier alliances,
intercarrier roaming and industry relations for GTE Wireless. "There are six to seven
wireless facilities-based carriers in most markets. That bodes well for resellers as some
carriers see resellers as an important and viable distribution channel."

GTE has a resale program that it now offers on a nationwide basis through WIN4, its
strategic answer to the national network created through alliances with other service
providers. "We set out several years ago to facilitate multimarket resale,"
Forbes said at the TRA conference. "The more markets we bring into the fold, the
easier it is for [resellers] to deal with us."

Although reseller Wolfinger is cautious about the ultimate impact of consolidation
(that is, fewer competitors) on the viability of resale, he agrees with Forbes that it
makes life easier for resellers. "The less of a patchwork they have to put together
to have a national play, the easier it is for them to do business," he says.

Wolfinger heads what may be the largest wireless reseller in the country–stitched
together from dozens of agreements. Prior to their merger, both MCI Communications Corp.
and WorldCom Inc. embraced a resale strategy for wireless services. MCI acquired
Nationwide Cellular in 1995–then the largest cellular reseller in the United States–with
designs on creating a national footprint. Similarly, WorldCom purchased Wolfinger’s
company, Choice Cellular Inc., in summer 1996.

MCI WorldCom’s pure resale strategy has come under fire from customers and shareholders
urging it to acquire a facilities-based provider. (Under pressure, the company in June
picked up paging company SkyTel Communications Inc., for which MCI WorldCom is the largest
reseller. A deal to acquire Nextel went South in May.)

MCI is one of few wireless resellers. Based on a 1997 annual membership survey, TRA
estimates there are between 100 to 120 wireless resellers in the United States, the
primary business of which is reselling wireless services. This compares to five or six
times that many that are reselling long distance services.

Slimming margins in the long distance industry, however, have spurred long distance
resellers to consider bringing in additional services, such as wireless, that have greater
margins.

Research released in January by Peter D. Hart Research Associates shows that the
average revenue per wireless user is $38 per month, notes John Vito, senior partner with
Phoenix Wireless Consulting Group LLC, Lisle, Ill.; speaking at the San Diego TRA
conference on tomorrow’s wireless market.

"From a wireless perspective, that’s terrible because it was three times that just
a few years ago," he says. "But from another business perspective–looking at
wireless as a second source or a third source or a fourth source, it’s a great recurring
revenue stream."

While it is attractive on its own, Vito says that the $38 per month per user is not the
target; it is the hundreds of dollars per month per user that can be achieved by packaging
multiple services.

In fact, a Yankee Group report notes that the only means for non-first-tier carriers to
match the bundled offerings of the first-tier carriers (such as AT&T Corp. and Sprint
Corp.) is to use resale as a means to acquire wireless as an element of their full-service
portfolios. The report also indicates that competitive local exchange carriers (CLECs) as
well as second-tier long distance carriers are likely to pursue resale strategies.

And while retail per-minute pricing continues to decrease, an increase in minutes of
use (MOUs) is expected to allow resellers to maintain sufficient margins, according to The
Yankee Group. However, it also expects that this margin pressure will weed out inefficient
resale operations.

Those resellers that remain, according to The Yankee Group, will take an increasingly
greater share–7.7 percent in 2002 compared with 4.4 percent in 1996–of the total
wireless services market. Revenues from resale are expected to more than double from $2.04
billion in 1999 to more than $4.5 billion in 2002 (see chart, "Wireless Annual
Services Revenues: Resale vs. Industry," below).

Kim Sunderland is Washington bureau chief for PHONE+ magazine. Editor-in-Chief Khali
Henderson contributed to this article.