FCC Roaming Rules Save Sprint
$15B in Capital Investment and Job Creation

Posted by: Bob Quinn on February 8, 2012 at 4:23 pm

Sometimes a blog just writes itself.  Other times, the beneficiaries of the FCC’s so-called “competition policies” write your blog for you.  And that is the situation I found myself in when I happened upon the transcript from this morning’s Sprint 4Q2011 Earnings Call.  To bring you back up to speed if you’re not a regular reader of our Public Policy Blog, when last we met, I was suggesting (ok, saying) that the FCC has enacted “Roaming” policies over the last two years that have actually cost the American economy much needed network infrastructure investment and the jobs associated with that investment. At the time, I was commenting on Sprint’s recently announced decision to “roam” at regulated rates in large portions of Kansas and Oklahoma (where it owns spectrum) rather than make the investments necessary to replace its network infrastructure in those areas.

While those comments were met by denials and accusations that AT&T was anti-consumer, Sprint’s CEO today, speaking to analysts confirmed our assessment of those business decisions and actually quantified exactly how many billions of dollars that Sprint avoided investing by “trading off” roaming for capital investment and job creation.

To preempt any criticisms that Mr. Hesse’s comments are being taken out of context, here is the entire section in which these remarks were made:

2011 culminates the efforts of our cash strategy over the last 4 years as we prepared for the investment that lies ahead with Network Vision. We focused first, from 2008 to 2010, on slowing down the subscriber and top line revenue declines that followed the merger. We also focused intensely on reducing both capital and operating expenses these past 4 years. We minimized our CapEx investments in 2G and early 3G radio technology to keep our powder dry for investment in our new world-class Sprint Direct Connect service and in 4G LTE.

Compared to our CapEx run rate in 2007, between 2008 and 2011, we saved an estimated $15 billion in capital. Even when you consider our cash investments in Clearwire and the increase in OIBDA-reducing roaming expenses we incurred over this period, which are effectively a tradeoff with our decision to spend less on 2G and 3G CapEx, we achieved estimated savings in the last 4 years of over $10 billion of cash. Whether the accountants classify $1 as OpEx or CapEx, it’s all cash in our view. From 2008 to 2011, our wireless CapEx investments were approximately 1/3 the spend of Verizon, 1/3 of AT&T spend and 1/2 the spend of T-Mobile U.S.A.

I couldn’t have made the case more clearly myself.  Sprint executed a business strategy that began four years ago to lower capital investment.  In other words, Sprint wanted to stop investing in its own network and ride on the network investments other carriers have made.  Sprint changed its regulatory advocacy from opposing the imposition of roaming obligations to supporting roaming obligations.  From opposing the “home market” exception to roaming obligations (requiring carriers to build out areas where they have spectrum) to arguing to allow them to roam where they own spectrum.  From opposing data roaming mandates to arguing in favor of data roaming mandates. They said the roaming rules would promote investment. Today, however, Mr. Hesse made clear that Sprint was simply executing on a business strategy to “invest less” and “roam more.”  As I said before, nice work if you can get it. And the FCC Policy Honchos made sure Sprint got exactly what it wanted.

The problem of course is that these FCC policies didn’t achieve the asserted goal of more investment and more jobs.  In fact, the FCC’s intervention into the competitive market cost the wireless infrastructure industry at a minimum $15 Billion in infrastructure investment and the jobs that would have been created by that investment.  And this at a time (2008 to 2011) when the US economy really needed those jobs badly.  Don’t take my word for it; take Sprint’s.  And I say the minimum because Sprint is just one company.  Who knows what the total Investment Lost/Jobs Drain the roaming rules really caused.

The experience with roaming should give policymakers real pause when it comes to the upcoming spectrum legislation.  The FCC and some competitors argue that they simply cannot live with legislative language that would prohibit the agency from excluding qualified bidders from the auction.  We, on the other hand, have argued all carriers should be permitted to participate in the auction process in an open and transparent manner – that the auction should allocate spectrum, not the agency.  Intervention into roaming markets to pick winners and losers ultimately cost consumers in terms of both network quality and job creation.

The same is true of spectrum policy.  When spectrum is scarce, policymakers should ensure that spectrum is utilized most efficiently.  That means letting the market drive the spectrum into the hands of competitors who have the incentives to deploy the spectrum quickly and most efficiently.  As this morning’s Sprint call aptly demonstrates, when you intervene and put your regulatory thumb on the scale, you may – unintentionally or not – drive a result that is the opposite of that which you intended.

Sprint Cash Expenditures (PDF)

Comments (2)

Thanks for putting up the entire transcript, yet, how is this stating that Sprint is spending less money in the long run when Hesse clearly stated this was a move to free up investment in Network Vision, which is a program to update Sprint’s networks to 4G LTE? They may be spending less money now, but it would be short-sighted in my humble opinion to discount the future investment in Network Vision. Finally the investment Sprint cut was mostly the investment in redundant sites from the Nextel disaster. Basically what you are advocating is that Sprint should have continued the failed investments of the Gary Forsee tenure, which included one of the worst mergers in corporate history, the Nextel debacle. If that were continued, Sprint would already be bankrupt, adding to lost jobs and wages in a difficult economic time.

Also note that Verizon is entering into a very similar arrangement with Pioneer that Sprint had, why not knock them?

Fraydog February 10, 2012 at 6:04 am

Thank you for your comment. You raised two points so I will give you my observations in order. On the investment point, Sprint’s CEO clearly said that he made a tradeoff between roaming and capital investment and that by utilizing roaming instead of capex, he saved $15B in capex that he would have otherwise had to spend during that four-year cycle. I think your reference to the “long run” is interesting in that it implies, that in the long run Sprint will spend at least $15B more over the next cycle of investment than it otherwise would; i.e., that in the long run it will more than make up for the capex dollars it didn’t spend from 2008-2011. I don’t however think you can fairly infer that fact from the transcript. But, if Sprint wants to clarify and show the math for that, I invite them to do so. The bottom line from my perspective is that during the recession years when the country really needed capital investment to create jobs, Sprint took its investment money out of the market. AT&T did not. We invested $58B over those years. Sprint’s disinvestment was facilitated by the FCC’s roaming policies, which guarantee providers the ability to ride on someone else’s network instead of building their own. We may disagree on that, but I think that is a pretty fair reading of what is going on here.

On your point about Pioneer, I assume that was a reference to my prior blog on Sprint eliminating a significant chunk of network in Kansas and Oklahoma. Sprint has made some vague allusions to that network belonging to another party – I assume that is your reference to Pioneer Cellular. I don’t have a problem with how a company chooses to build out its footprint, but I think sound public policy should dictate that the government should make sure that companies’ in this space build that spectrum out before imposing roaming obligations on other carriers. The Sprint sites I referenced in my prior blog were absolutely not “redundant sites.” This was actual footprint where Sprint clearly owns a boatload of spectrum. My beef isn’t with Sprint’s arrangement with Pioneer (or any other deal Pioneer may now have with Verizon). My point is that instead of spending capital dollars to replace that infrastructure, Sprint relied once again on government regulated roaming instead of capital investment. They are enabled to do that by FCC Roaming policies which permit Sprint to seek a government-regulated roaming rate even in areas – like the ones I highlighted in Kansas and Oklahoma –
where Sprint possesses its own spectrum and has made a business decision to not build that spectrum out! Spectrum is a scarce resource in this country. There has not been a spectrum auction in the US since 2008 and there likely won’t be another auction for several years even on the most optimistic timetable. My view is that we should require companies to build out their own spectrum footprints before we give them any rights to “roam” on other companies’ investments. That is the point I was trying to make. We might disagree on that point, but I still appreciate you taking the time to reply.

Bob

AT&T Blog Team February 10, 2012 at 12:41 pm

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