How Many Carriers Will Make It Through to 4G, Analysts Ask

"Verizon and AT&T on the wireless side earn reasonable returns, not great returns,” Moffett said. The two largest carriers’ return on capital is a percentage that’s only in the mid-teens, he noted. “To put that in perspective, Apple’s is triple digits and Google is growing at 50 percent annually. [AT&T and Verizon’s] returns are passable, but not great. On a consolidated basis, Verizon doesn’t earn its cost of capital, that is including its wireline business.” None of the other carriers come close to earning their cost of capital, he said. “Over a long period of time … you would assume that the inability to earn the cost of capital would eventually start an industry on a path of incremental investment,” Moffett said. “That hasn’t happened,” but you can’t assume investment will continue “forever."

Making the transition to 4G “is a very real issue” for most U.S. carriers and “it’s not just quantity of spectrum anymore,” Moffett said. “It’s having a clear swath of spectrum you can launch a network on so that you can start to manage the transition.” Sprint Nextel “is really struggling with that,” he said. T-Mobile, Leap Wireless and MetroPCS are all “really struggling,” he said. “As you look out at the landscape, there is a legitimate question as to how many people will make it through the funnel to 4G."

There’s a “disconnect,” in that the wireline side of the industry is underperforming while at the same time it’s critical to wireless growth, said Anna-Maria Kovacs of the Georgetown Center for Business and Public Policy. “One of the things that’s important for the wireless side is to do as much possible to encourage the wireline side to stay healthy.” The wireless industry is hugely competitive, Kovacs said. “In this whole industry there is a tremendous amount of choice at every level, from which provider you go to, how you pay for it, where you buy it, what you wind up using,"

Moffett and Kovacs both noted that equipment makers like Apple, rather than the carriers, are making most of the profits. “An awful lot of the money is going to the device manufacturers, which passes through the vendor, the Verizon, whatever, it’s going to Apple,” she said. “That’s part of what I think is going to have to be worked out. Do we want to encourage as frequent upgrade of the devices, which is eating a huge amount of the industry’s profitability.” If AT&T or Verizon put in place strategies that made them more profitable, and their blended returns doubled, “you would immediately have the hue and cry that these businesses have to be regulated, they're earning 15 percent returns,” Moffett said. “Apple earns 100 percent returns and there’s no outrage."

An FCC Office of Engineering and Technology former chief said smartphones can help the industry address the pending spectrum crisis. “We talk about smartphones and about what it can do for our applications,” Dale Hatfield said. “What I'm talking about … is phones that are very, very smart in their handling of interference.” Smaller cells also are key, he said. Hatfield said there’s been lots of talk about getting rid of fixed networks, but wireless depends on wireline. “We're all going to be doing wireless,” he said. “If you take the extreme in this we're going to be going wireless 20 feet and we're going to go right back on the fixed network for the rest of it."

Receiver standards also have a role to play, Hatfield said. In many markets, UHF broadcasts were only on every sixth channel, he said. “It wasn’t because the transmitter signals interfered with each other, it’s because the darned receiver couldn’t reject adjacent channel” interference,” he said. “In the old days, if you bought a little bit better receivers, today we would have been able to use all that spectrum without going through all these machinations.” With weather report receivers today, “there’s incentive to put in cheap,” he said. “We've got to do something for that.” The U.S. can no longer afford to build guard bands into spectrum allocations, he said.

NTIA’s recent report on the 1755-1850 MHz band “made clear that sharing is going to have to be part of the overall solution,” Wireless Bureau Chief Rick Kaplan said: “The thing we're going to have to struggle with though is do we have the regulatory structure and does the way we look at spectrum in general support” sharing.

Spectrum is a “tough challenge,” but “there’s not one solution,” Kaplan said. “Efficiency is certainly one part of it, and companies need to be as efficient as possible.” Unlimited spectrum for commercial use isn’t the answer, he said. The FCC also needs to focus on getting underutilized spectrum like the wireless communications service band and the 700 MHz A-block in play, Kaplan said. “We need to be very active on the policy levels to do everything we can to ensure that the ecosystem is evolved there,” he said. “We've checked the box already” on those bands “but maybe we should erase the check mark and go back and look at it,” he said. “There’s spectrum out there today that we think is being used in ways that we need to take a look at."

Given the changing nature of the wireless industry, the FCC in some cases has to “sit back and watch how [the industry] evolves and not jump in too quickly,” Kaplan said. “For us, creating an environment with competition, that can enhance competition and investment is crucial to what we have oversight over. … For us ,it’s just really important to allow all these things to grow. I think our generally deregulatory approach has helped this along.”