FCC Releases First Comprehensive Market Report But With Notable Exclusions

Kelley Drye Client Advisory

At its December 12 Open Meeting, the FCC adopted its first Communications Marketplace Report (“CMR”), which combines several separate reports into one and is meant to provide a comprehensive overview of the mobile wireless, fixed broadband, audio, video, and satellite communications markets. Congress directed the Commission to complete such a report biennially with its passage of the RAY BAUM’S Act in March 2018. The Act also reauthorized the FCC for the first time in nearly three decades and directed the FCC to take on additional efforts to free up spectrum for commercial mobile and fixed wireless use. Significantly, while the Commission was previously required to include in the Mobile Wireless Competition Report an assessment of whether there is effective competition in the mobile wireless market, whether any carriers have a dominant share of the market, and whether additional carriers would enhance competition, these requirements were struck by the RAY BAUM’S Act when the wireless report was folded into the CMR. Therefore, the CMR does not mention or analyze the proposed Sprint and T-Mobile merger.

What the Report Includes:

Instead of creating an entirely new set of reporting requirements, the RAY BAUM’s Act actually modified and consolidated into a single report several separate statutorily-required marketplace reports the Commission had previously been publishing on a regularly occurring basis. It also eliminated several reports that were deemed outdated or obsolete.
The Act further specified that the report must:
  1. assess competition in the communications marketplace;
  2. assess the state of communications deployment;
  3. assess whether federal, state, local, and tribal laws and regulations create barriers to competitive entry or expansion;
  4. describe FCC actions that addressed challenges and opportunities in the communications marketplace that were identified in the last report; and
  5. describe the Commission’s agenda to address challenges and opportunities the Commission identified in the current report over the next two years.

The Commission also had the discretion to incorporate other reporting into the CMR. The Commission identified two annual reports as good candidates:
  • Measuring Broadband America (“MBA”) Report – The Commission opted to incorporate this report into the CMR, but only as part of the appendices. This Commission report details broadband speeds across the country based on data provided to the Commission by broadband providers. The CMR relied on some of its conclusions for its broadband marketplace assessments. Both the Seventh (2017) and Eighth (2018) MBAs were included in the CMR, the former of which had not yet been released.
  • Section 706 Broadband Deployment Report – Conspicuously not included in the CMR is the broadband deployment report required by Section 706 of Telecommunications Act of 1996. This report assesses advanced telecommunications capabilities in the United States. The FCC previously indicated it would include this report in the CMR, but it later granted an extension of the comment deadline for this report while denying a comment deadline extension in the parallel CMR proceeding. The Commission may be grappling with whether to maintain the distinction between fixed and mobile services for the purposes of its analysis in the Section 706 report, an issue about which it received a number of comments. Notably, the Commission maintained this distinction for purposes of its analysis in the CMR.

What the Report Says:

The CMR assessments rely on data from 2017, but in some instances it compares the 2017 data to that from 2016 or earlier years. The Commission assessed each category of technology separately and below are some highlights from its analysis of the mobile wireless, fixed broadband, and voice telephone markets.
Mobile Wireless Market

The Commission did not offer conclusions about competition in the mobile wireless market, and instead offered substantial data about the number of carriers and subscribers, pricing, investment, advertising, speeds, entry conditions and market concentration, spectrum holdings, and coverage, leaving readers to draw conclusions. This is significant because in the Mobile Wireless Competition Report, the Commission was required to assess whether there is effective competition in the mobile wireless market, whether any carriers have a dominant share of the market, and whether additional carriers would enhance competition. These requirements were struck by the RAY BAUM’S Act.

In the past, the Commission has maintained that there is effective competition if there are at least four nationwide wireless carriers. Based on this premise, the Commission successfully blocked mergers of AT&T–T-Mobile and Sprint–T-Mobile. In the CMR, the Commission did not mention the renewed merger of Sprint and T-Mobile, which is currently pending. The Commission is expected to grant the merger, indicating a change in its prior thinking about marketplace competition.

With respect to the existing market, the report found that the four nationwide facilities-based carriers have a combined market share of 97.7%, broken down as Verizon (35.5%), AT&T (32.4%), T-Mobile (17%), and Sprint (12.8%). These carriers each cover 90% or more of the U.S. population and combined account for 400 million connections, which includes wholesale connections. The fifth largest provider provides 5 million connections across 23 states and the sixth largest has nearly one million subscribers in a single region. Several smaller facilities-based carriers provide service in single, often rural, geographic areas.

Among Mobile Virtual Network Operators (“MVNOs”), TracFone Wireless was the largest, with about 23 million subscribers. Other communications and technology companies are entering the MVNO market, including Google through Project Fi,” where subscribers switch between Wi-Fi networks and the LTE networks of T-Mobile and Sprint, and Comcast with Xfinity Mobile, which had about 380,000 subscribers by the end of 2017 using a combination of its own Wi-Fi hotspots and Verizon’s mobile wireless network.

In 2017, total mobile wireless revenues were about $179 billion and the total number of wireless connections was 411 million. Among subscribers, 60% were postpaid, 20% were prepaid, and wholesale connections and connected devices accounted for the remainder. Because not all connected devices are associated with a phone number, that number will become less accurate if the Commission does not change its methodology. Additionally, the report concluded that nearly 100% (99.8%) of Americans have mobile LTE coverage at speeds of 5 Mbps down / 1 Mbps up, including 99% of Americans in rural areas and 97% of residents on Tribal lands.

To address challenges in the wireless industry, the report highlighted the Commission’s efforts to make spectrum available to mobile wireless providers. It specifically noted plans, currently underway, to make 4950 megahertz of mmW spectrum available across five bands and its progress toward licensed and unlicensed sharing with federal incumbents in the 3.5 GHz band. The report also discussed efforts that addressed wireless infrastructure deployment challenges, including changes to pole attachment and copper network retirement policies, passage of One-Touch Make ready rules, and preemption of state and local regulatory barriers.

Going forward, to further encourage investment, innovation, deployment, and competition, the Commission committed to making significant amounts of spectrum available in low-, mid-, and high band frequencies. However, the report mostly points to efforts already underway, including forthcoming auctions in mmW bands and its proceeding to explore sharing in the C-band. Because the RAY BAUM’S Act requires the FCC to work with NTIA and other agencies to make more spectrum available, including the reallocation or sharing of government spectrum, other efforts are sure to arise.

A few items were noticeably missing from the FCC’s wireless market assessment. First, the CMR made only a few passing references to the significant changes expected in the wireless market from 5G developments. Second, while the Commission said that it plans to prioritize proceedings that advance the goals of universal service and target the digital divide, it did not mention the Lifeline program as an avenue to achieve those goals. Finally, while broadband deployment continues to be a significant mission of the agency, it did not mention the current challenges with the Mobility Fund Phase II program. This program is meant to provide over $4.53 billion in support over 10 years primarily for rural areas that lack 4G LTE. On December 7, 2018, the Commission put the auction process on hold while it investigates whether mobile providers over reported their coverage areas to the FCC, which is used to establish the map of areas presumptively available for support.

Fixed Broadband
Unlike the mobile wireless assessment, the Commission did offer conclusions on competition in the fixed broadband marketplace. However, it did not provide as much detail about provider market shares or subscribership. The fixed broadband market includes fiber, cable, DSL, fixed wireless, and satellite broadband providers.

For its assessment, the Commission relied on the speed benchmark of 25 Mbps down / 3 Mbps up, which is the same benchmark the Commission used in its last Section 706 report for advanced telecommunications capability. This benchmark was the basis for the Commission declining to even determine whether fixed broadband and mobile broadband are competitive substitutes in the CMR, let alone assess competition between the two. This is important because the RAY BAUM’S Act directed the Commission to consider all forms of competition,” including intermodal, facilities-based, and new and emergent communications services. Instead, the CMR notes that the FCC’s February 2018 Broadband Deployment Report found that there are salient differences between the two technologies” and that mobile services are not currently full substitutes for fixed services.”

The CMR found that there have been substantial improvements in fixed broadband access, concluding that the digital divide is closing.” It said that the number of Americans without access to fixed terrestrial broadband service of 100/10 Mbps dropped 56% in one year from 78.9 million to 34.8 million. At 25/3 Mbps, the decrease was from 24.8 million to 19.4 million. These decreases were coupled with increases in speeds at nearly all tiers for urban, rural, and tribal subscribers. At the end of 2017, 94% of the overall population had coverage of fixed terrestrial broadband at 25/3 Mbps. However, 24% of Americans in rural areas and 32% on Tribal lands did not have such coverage, though the percentage had narrowed.

In support of its conclusion that there is substantial competition in the fixed broadband market, the CMR noted that the percentage of Americans with access to two or more fixed terrestrial broadband options of at least 100/10 Mbps more than doubled in 2017, from 26% to 54.5%. Additionally, 83% of Americans have at least two options at 10/1 Mbps, 70% at 25/3 Mbps, 65% at 50/5 Mbps, 55% at 100/10 Mbps, and 25% at 250/25 Mbps. Satellite service is another broadband option across the country at 10/1 and 25/3 Mbps, depending on satellite capacity.

With respect to market concentration, cable companies remain at the top, holding 79% of all residential subscribers with speeds of at least 25/3 Mbps. Companies offering DSL or fiber to the premises (“FTTP”) have 20% of residential subscribers at that speed. The report indicates that 89% of Americans live in areas where DSL is deployed, 80% where cable broadband is deployed, and 40% where fiber broadband is deployed. Satellite providers serve approximately 2 million subscribers at or exceeding 25/3 Mbps. Not accounting for speed, there are currently over 2000 fixed wireless providers delivering services to approximately 4 million customers. Among them, nearly 77% serve fewer than 2000 residential customers and 56% serve 1000 or fewer.

When discussing the Commission’s efforts to address challenges in the fixed broadband market, the report focused on two programs. First, the Commission highlighted the Connect America Fund Phase II (“CAF-II”) auction, which awarded $1.49 billion in funding over 10 years to service providers that will offer voice and broadband in unserved high-cost areas. Second, the report touts the Commission’s increase in the Rural Health Care (“RHC”) program funding cap from $400 million to $571 million.

Going forward, the Commission reasserted its commitment to reduce regulatory burdens that pose barriers to broadband deployment. Specifically, the Commission noted plans to reexamine rate floor rules for rate-of-return carriers, to remove tariffing rules, and to work on eliminating arbitrage in the FCC’s intercarrier compensation system through enforcement proceedings, tariff investigations, and rulemakings.

Voice Telephone

The report finds that there continues to be substantial changes in the voice telephone marketplace. In total, there were 55 million traditional switched access voice lines in 2017, which includes 22.5 million residential lines. There were also 64 million interconnected VoIP subscriptions, which includes 40 million residential subscriptions. Of the combined 119 million fixed retail voice subscriptions, 53% were residential while 47% were business. Switched access lines decreased by a three-year compound rate of 11% while VoIP increased by a compound rate of 8%. Of the VoIP subscriptions, 7.8 million were from over the top (“OTT”) services. The report also noted that there are 336 million people with mobile voice subscriptions, representing a compound annual growth rate of 2% over three years. Approximately 54% of households were mobile only in 2017. Finally, the report found that there are a number of app-based or otherwise purely data voice services on mobile phones that the Commission is not able to track.

What the Next Report Will Look Like:

Because the RAY BAUM’S ACT was only passed in March, the FCC had a short timeline to combine several independent reports into one comprehensive report. Future reports may be more robust, more forward looking, organized differently, or include more cross-cutting competition analysis. In statements preceding adoption of the report, two commissioners expressed desires for such changes. While Commissioner O’Reilly supported adoption of the report, he said he wants future reports to be less siloed by technology and regulatory regime, which includes greater analysis of competition between mobile and fixed broadband providers, and between communications providers and other entities in the Internet ecosystem, such as the major tech companies. Commissioner Rosenworcel, who concurred in adopting the proposal, critiqued it for being backward-looking. She also said the report lacked details that prior individual reports had included.

Future reports may also incorporate more accurate or different data. Most of the data in the report was self-reported by communications providers or obtained by third parties. Both sources have been critiqued and the report acknowledges in several instances that information provided by carriers might not be entirely accurate. The CMR noted that the Commission has a proceeding open to explore how to improve the accuracy of the data that is reported. Additionally, Commissioner Rosenworcel said that the Commission should take on the job of gathering, or at least validating and qualifying, the data it receives from third parties, rather than relying on the accuracy of that data.

It will be interesting to watch how these reports are used by Commission leadership and Congressional leaders with FCC oversight. Since the reports cover a two-year timeframe, there can be Commission leadership changes in that time, which can bring significant changes in policy direction from the goals established in the CMR. 

The RAY BAUM’S Act directs the FCC to submit the CMR to Congress in the last quarter of every even-numbered year, with the next report due in 2020.