Sprint Fears Getting Priced Out of Existence by ATandT-T-Mobile Deal

Thursday May 19th 2011 by Wayne Rash

News Analysis: There's a new skirmish in the war that has broken out over the proposed AT&T-T-Mobile merger, this time on the cost of backhaul and claims of an unfair advantage.

A new war of words has erupted as part of the fallout of the May 11 Senate Judiciary Committee hearings on the proposed merger of AT&T and T-Mobile. In that hearing, Sprint CEO Dan Hesse brought up the fact that Sprint, which is not a major wireline carrier, unlike AT&T and Verizon, is forced to buy its wireline backhaul from those two carriers. Backhaul is necessary, of course, because once a cell signal reaches the cell tower, it has to have a means of connecting with the rest of the phone network.

There are basically three ways that wireless carriers can accomplish backhaul. They can use digital landlines provided by the wireline carriers. These lines, known as DS1 and DS3, operate at approximately 1.5 and 45M bps, respectively.

Wireless carriers can also use Metro Gigabit and 10 Gigabit Ethernet where available. Finally, they can use microwave transmission, which has a variety of speeds. Unlike wired backhaul, microwave transmission can be adversely affected by interference and occasionally by weather.

Hesse said that Sprint is at a disadvantage because it would be forced to pay whatever AT&T and Verizon felt like charging for this backhaul, which is called "special access" in the telecom world. Price regulation was eliminated by the FCC a decade or so ago apparently in the belief that competition would keep prices low. However, the only real competition for these lines is between AT&T and Verizon, and the two companies have divided the U.S. into their own fiefdoms, and neither invades the other's territory.

Because price competition is deregulated, the companies can charge whatever they want. The actual prices aren't disclosed, but one telecom executive, who asked that he not be identified because of non-disclosure agreements, told eWEEK that this works out to about $300 per T1 line per month.

This is roughly the same price that other businesses are being offered for T1 access. However, this is approximately 15 times higher than Verizon charges for the same bandwidth if you call it "high speed Internet." Of course, the additional cost does gain you an SLA (service-level agreement) and increased reliability, but it's still really steep, mostly because there's no competition.

While both Verizon and AT&T charge their own wireless divisions for this special access, they're effectively selling it to themselves, which makes it effectively free. They also sell the access to each other, and again, it balances out. So Sprint can easily find itself charged anything the two wireline carriers wish to charge, and could, at least in theory, be priced out of existence.

On May 18, Bob Quinn, AT&T senior vice president for Federal Regulatory posted a blog entry calling Sprint's claims of an unfair advantage and unfair pricing a "myth". Quinn then brought up the relationship between Sprint and Clearwire, and pointed out that Clearwire uses microwave backhaul. This, Quinn claimed, proved that Sprint was obviously using landline backhaul because it wanted to, not because it was forced to.

Without going into the many ways that Quinn's argument was totally specious, the fact is that the vast majority of Sprint's cell sites predate Clearwire, don't have access to the microwave backhaul and may not be in locations where the microwave backhaul is even possible. It was so clearly an effort to spread FUD (fear, uncertainty and doubt) about the merger that it should have carried a warning label. Perhaps, the fact that much of Quinn's assertions are pure fiction gets around that.

Still, Sprint came out with a statement of its own. "The only companies who share AT&T's fairy tale view of the special access market are the landline phone companies that control approximately 85 percent of the special access market and face no meaningful competition to meet the needs of wireless carriers or others who depend upon high-speed broadband connections," wrote Sprint PR Manager John Taylor in a prepared statement. "When you leverage market power to earn rates of return in excess of 100 percent, it's easy to understand why you support the status quo."

The senior telecom executive mentioned above who has access to current rate practices, said that in addition to the pricing provided, special access customers are also put into a position where they suffer huge penalties if they try to move to another carrier.

The way this works is that to get favorable pricing, wireless carriers must commit to a specific number of digital lines in any given metropolitan area. If they reduce their usage, the price goes up dramatically on all of their lines-so high the executive said, that it would more than offset any potential savings from using an alternate carrier.

There are ways a wireless carrier can avoid being held at the mercy of the wireline carriers. The first is to be a wireline carrier yourself. The second is never to use them in the first place, which is what Clearwire did. The third is to never get in bed with them and their special rate plans, which is what T-Mobile did when it decided to build its cell sites with metro Ethernet and only use T1 lines where there was no alternative. Sprint, unfortunately, was built out before those other methods were options, and despite Quinn's assertions, a change clearly isn't an option for Sprint.

Hesse, meanwhile, has reason to worry. AT&T and Verizon can raise their rates when they please and if it means forcing Sprint out of business, they can do that any time. If AT&T gets the market share it wants with T-Mobile, it has just that much more incentive. 


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