Billing World Publisher's Letter LMDS: The Next New Billion Dollar Opportunity

After six years of debate, the FCC finally issued its order on LMDS spectrum allocation. This letter looks at what the FCC did, who's likely to go after the opportunity and, finally, what this means for carrier executives with billing, customer care and OSS responsibilities if your company or customer wins LMDS spectrum. First, what's LMDS? Local Multipoint Distribution Service (LMDS) is a new spectrum allocation by the FCC that permits two-way, high speed data transmission and/or one-way video distribution in the high frequency microwave or millimeter wave band. Its principle engineering economic strength is that it's cheaper and faster to deploy than fiber optics or coaxial cable. Its weakness is that its range is only 1-10 miles, depending on rainfall, line-of-sight and so on.

Here's a summary of the FCC License and Auction Guidelines for LMDS:
28-30 GHz Allocation: There will be two spectrum bands (A and B) for two-way private line or telephony service and one-way video or Internet access services.

The A Band: This band of 1150 MHz is available to anyone except in-region incumbent local exchange carriers (ILECs) or cable TV operators. The ILECs and/or in-region cable operator can invest 20 percent into the venture and buy after three years of the license award.

The B Band: This band of 150 MHz is available to anyone, including ILECs, cable operators and A Band winners. However, it has a limited capacity compared to the A Band.

Auctions: This spectrum will be divided into 483 BTAs and will be auctioned off spring or summer 1997, if the RBOCs don't get a court stay on the FCC order.

Designed Entities: As with the PCS auctions, the FCC has a designated entity or small business class. Companies with less than $40M/year in revenue are entitled to a 25 percent bidding credit, while companies with $40M-$75M/year get a 15 percent credit. In addition, designated entities have the option of paying for their spectrum over a 10-year period.

LMDS TOP 10 PERSPECTIVE PLAYERS

There are many fine points to the FCC decision, which will be spelled out in the auction package that should be available by May 1997. But based on industry interests, restrictions on who can bid and the suitability of markets, here-ranked from most likely to the least likely-are my top 10 candidates to take the plunge, bid and win spectrum.

1. Entreprenueurs.
If ever there was an opportunity for entrepreneurs in 1997, LMDS is it. The FCC has bent over backwards for the small guys. They have restricted the in-region ILEC and cable companies, require a license winner to cover only 20 percent of the population or provide four point-to-point microwave links within 10 years, will allow an ILEC or in-region cable TV operator to invest up to 20 percent of the capital, require no public interest TV channels, allow 10 years to pay for their spectrum and more. Second, attracting investors who want 35 percent ROI should be fairly easy. Take, for example, this scenario: Start with a half dozen LMDS cell sites and link businesses to an ILEC unbundled switch, then compete as a CLEC. After a year, expand the operation by using the established cell sites of a nearby urban multidwelling complex that provides telephones, Internet access and 50-150 channels of video. With these markets covered, expand into the residential area and cover the entire business community in your BTA. Before the success rate necessitates upgrades or a second wave of capital, sell your operation to an in-region RBOC or cable company. Bottom line: Start with $10-20 million venture capital and in three years the business will be worth more than $100M to an RBOC, cable operator or IXC with deep pockets. Finally, an entrepreneur with no customer base to worry about cannibalizing existing revenue streams can focus on joint ventures with existing carriers, particularly when they have options to buy into your company down the road.

2. CLECs.
For Competitive Local Exchange Carriers (CLECs), LMDS could be another option for high-capacity loops for business, low-speed options for small business and/or residential access as well as an option to add entertainment video services and become a one-stop-shopping carrier like the big IXCs. Also, CLECs have voice switches, ATM-based DCSs, interconnect arrangements with the ILECs, billing and customer care systems in place and more. So, why aren't the CLECs the number one leading contender? First, in the big markets where CLECs currently operate, LMDS spectrum will command a high price at auction time, and LMDS will require management's full attention. Second, LMDS OSS technology is most likely incompatible with the CLEC's current fiber-based infrastructure. The CLEC would be operating two incompatible networks during the early years. Finally, it's tough to approach a customer with a non-fiber solution when you have been telling them for years that fiber is superior to microwave.

3. Cellular and/or PCS.
These carriers should also have interest in LMDS because, like the CLECs, they have voice switches, ILEC interconnect agreements and interest in being a one-stop shopping carrier. Also, they have something to build on! The wireless carriers have cell sites and towers to mount LMDS hub antennas and RF equipment. LMDS also addresses the pressing problem of interconnecting new cellular/PCS sites to their existing switches. LMDS can be used in a point-to-point microwave to interconnect cell sites. But as with the CLECs, LMDS may be a diversion from the core business, and even more so. The wireless user or customer is not the person who runs the high-speed networks of corporate America. Nor is it clear if a residential consumer wants wireless service bundled with entertainment video. Bottom line: An LMDS operator looks like a better partner (customer and/or service vendor) to the wireless carrier than an integrated service provider (PCS/Cellular with LMDS).

4. Electric Utilities.
Electrical utilities want to get into the telecommunications market and LMDS presents an attractive option. Also, like the CLECs and wireless operators, they have facilities (tower, light poles, fiber or SONET rings, voice switches, billing systems and customer care systems) and an existing customer base that can benefit from LMDS-based services. So, what's keeping them out? The same reasons many power companies haven't gotten into telecommunications: It's a different and more complicated and competitive business. Also, the state PUCs may and probably will often require a power company to set up a separate subsidiary to get into telecommunications, and the revenue would be relatively small for a power company where the industry is three times as big as telecommunications. Bottom line: LMDS will look like a good venture partner, customer and/or supplier, but not a business power company that would likely flourish as a stand-alone business.

5. AT&T.
LMDS is a natural opportunity for AT&T. They want to be in the CLEC business, and want to be a one-stop shopping vendor and use the 38 GHz carrier services. So what will keep them off LMDS? Money! Suppose at auction time LMDS spectrum goes for the same price per MHz per POP as PCS spectrum, and AT&T wanted licenses to cover the entire USA. At this price the spectrum would cost nearly $200B. (Note: An LMDS A license is 1150 MHz vs. total PCS spectrum at 120 MHz.) If a national LMDS license bidder could get spectrum at the price MCI paid for its DBS slot ($0.006/MHz/POP), then the price for national LMDS coverage would be $1.8 billion. So somewhere between $1.8B and $200B would be the price for a winner-take-all. My guess is it will take around $20B to buy all the A-LMDS licenses for national coverage-and that AT&T will conclude that LMDS may be worth going after in smaller markets (e.g., BTA 30 and smaller) where they won't be building fiber for a few more years.

6. Other IXCs.
Just like AT&T, others will conclude that the cost to get it all is too high. But just as MCI concluded with PCS spectrum, why bid an outrageous price to win spectrum to build a wireless network when you can buy it at wholesale? Let someone else do it and buy capacity at a wholesale rate.

7. Multipoint Distribution System (MMDS).
Operators. What about today's wireless cable operators using 2 GHZ microwave to provide one-way video service? Wouldn't they be a logical party to go after LMDS spectrum to expand their operation? On the surface it looks like a good idea, but they probably won't for several reasons. The LMDS opportunity is first and foremost a two-way high-speed digital service business in the near term. Only after a beach front is established in the market would you expand into the multidwelling unit market and, in the distant future, into the residential market. In the early years, LMDS is a CLEC business. MMDS operators have no CLEC experience or an imbedded, two-way infrastructure to build on. Also, MMDS operators are flourishing in markets such as New York City, Houston, Los Angeles, and San Francisco, where the LMDS auction prices will likely be high. MMDS operators are not cash-rich.

8. Cable TV Companies.
In-region cable companies are not permitted to go after the big or A-LMDS spectrum band. The smaller bands are insufficient to do any of the high-capacity, high-volume digital services to any degree and this capacity isn't needed in residential areas where cable companies now provide service. So what about going out-of-region for the LMDS B or a smaller band, and competing with the neighbor cable operator within the BTA? It's not going to happen because the out-of-region operators would be blackballed from cable executive VIP get-togethers and targeted for programming retaliation. Bottom line: Cable companies will fight LMDS operators just as they did the MMDS folks.

9. RBOCs.
There are three things the RBOCs are highly likely to do with LMDS. First, go to court to delay LMDS auctions or at least delay them as long as possible. Second, hold back from going out-of-region with LMDS as they have delayed starting out-of-region CLEC operations. Third, once they have exhausted the legal battles to delay LMDS auctions, invest up to 20 percent in upstart LMDS operations by entrepreneurs.

10. Foreign Companies.
The only reason foreign companies are last on this list is because the World Trade Organization Treaty, which permits 100 percent foreign ownership of U.S. common carrier operations, doesn't go into effect until Jan. 1,1998, and the LMDS auctions likely won't take place before then. However, the FCC could change the rules and allow foreign companies entry into the LMDS auctions. If not, they will have to wait on the sidelines until the first of the year or participate as a junior partner under the 20 percent open ownership option. Which foreign companies would have a high interest in LMDS? First, the carriers. All major foreign carriers want to have a global presence, particularly in the United States, because of the multinational corporate customers and the global traffic generated in and out of the United States. In short, global ventures such as Concert (MCI and BT) and Global One (Sprint, Deutsche Telekom and France Telecom) are the "in thing." Massive LMDS deployment in the high-speed digital service market will happen first in the United States, where foreign carriers could take the lead and apply this experience globally. The second interested group is foreign radio, switching and infrastructure vendors. Owning LMDS licenses would guarantee a U.S. market for their products and a leg up on other global LMDS markets. Finally, LMDS offers a backdoor to foreign broadcasters who can't get a U.S. broadcasting license because of foreign ownership restrictions. Note: The World Trade Organization Treaty doesn't cover broadcast licenses, so what's the backdoor entry strategy of foreign broadcasters? Get an LMDS license (or have another party get it) and offer video channels as a common carrier to the foreign broadcasters as a customer. Currently, this seems legal under FCC rules.

WHAT ABOUT OSS, BILLING AND CUSTOMER CARE?

There are three things to think about if you have interest in LMDS. First, the order of these top 10 will be reversed by the year 2000. Today's entrepreneurs will likely sell their operations in three years, as FCC LMDS rules allow. This means the bottom of the list players-#10-Foreign Companies, #9-RBOCs, #8-Cable Companies and #7-IXCs-can and likely will buy into LMDS. So, as a carrier or carrier supplier, eventually you will be dealing with and/or buying LMDS.

Second, the technical people on top of LMDS haven't a clue about billing, customer care or OSS. Their attention has been on RF technology, getting the performance (e.g., capacity) up and the cost down, and virtually no attention has been given to OSS. The LMDS world needs the equivalent of SONET. The reality is that LMDS equipment for the corporate customer must be linked to systems providing pre-ordering, ordering, service provisioning, billing, trouble shooting, maintenance and so on.

Finally, if you are a carrier, think wholesale. LMDS carriers will need OSS, billing and customer care support and interconnection to ILEC and IXC networks. Chances are good that entrepreneurs with LMDS spectrum will sell out to the big carrier players in three years. Today's carriers should look at wholesaling support services and facilities now.

LMDS entrepreneurs will look for technical expertise and/or any kind of partnership to reduce their cost to enter the CLEC business. They need a convincing business plan with 35 percent ROI to attract venture capital, and the way to get this is by outsourcing billing, customer care and OSS. On the other hand, the big carriers will want to keep their eyes on these LMDS carriers and a foot in the door of this new technology, should they succeed and become an acquisition candidate. Wholesaling gives a big carrier these opportunities and more-that is, revenue.

Billing World will be watching LMDS for billing, customer care and OSS opportunities. If you have interest in LMDS auctions, TeleStrategies Inc. will be sponsoring a two-day seminar on the subject May 6-7, 1997, in New York City.