The performance of Verizon’s FIOS service demonstrates that the business case for deploying FTTP just isn’t very attractive. Verizon apparently invested $23 billion in FIOS. Unfortunately for Verizon, it appears it’s losing money on that investment. Although Verizon denies losing money on FIOS, it has stopped investing in it. Despite its very high throughput and reliability, consumers aren’t subscribing to FIOS in large numbers, and only a small portion of Verizon’s revenue comes from FIOS. The vast majority of Verizon’s revenue and subscribers come from Verizon’s wireless business. Let’s take a look at the numbers from Verizon’s Q1 2011 earnings results.

(Source available here.)

(Source available here.)

As the above charts show, 63% of Verizon’s revenue comes from wireless while only 14% comes from FIOS Internet subscriptions, and Verizon has about 20x more wireless subscribers (88.4 million) than FIOS Internet connections (4.3 million). Verizon is also adding many more wireless subscribers (1.8 million in Q1) than FIOS subscribers (207,000 in Q1). The most striking statistic is that Verizon added 500,000 LTE subscribers in Q1 2011 – more than twice as many as it added to its FIOS Internet service. With this data its obvious why Verizon isn’t investing more money in FIOS – FTTP is not a strong growth business (presumably because consumers aren’t willing to pay for it).

In OBI Technical Paper 1: The Broadband Availability Gap (available here), the FCC estimated that it would cost $62 billion to deliver FTTP to the 7 million housing units it estimated were unserved by broadband. Can you imagine how the conversation would go if a broadband service provider asked an investor to finance such a build?

Investor: “So you want me to give you $62 billion to serve 7 million households with broadband access that most consumers don’t want when I could build a nationwide 4G LTE network that consumers do want for a lot less money?”

Broadband Service Provider: “Yes.”

Investor: “Are you serious?”

Broadband Service Provider: “Well, Internet advocates want me to build a FTTP network.”

Investor: Laughs and says “Ask them for the money.”

Many Internet advocates would say that’s why government should own and operate an FTTP network. But the government hasn’t built a much less expensive wireless public safety network nearly ten years after September 11. In the current budget environment, good luck relying on government to build FTTP networks any time soon.

The best chance for nationwide broadband is reform of the Universal Service Fund (USF) to support broadband networks. But the FCC’s been working on USF reform for years and hasn’t yet made any real progress. Instead, the FCC’s been hard at work on investment-killing initiatives like net neutrality and roaming. (See my post here.)

If we really want universal broadband access to high throughput wired and wireless networks, it’s time to get serious about adopting policies that promote investment and eliminating policies that kill investment. We need USF reform now and more spectrum for mobile broadband. What we don’t need is more regulation that shifts revenues from infrastructure investment to those who would take advantage of regulatory arbitrage (e.g., net neutrality).

T-Mobile: The FCC would likely approve a transfer to T-Mobile. T-Mobile arguably has the worst spectrum position of the four nationwide providers, which would allay any spectrum aggregation concerns. T-Mobile would also argue that Clearwire’s spectrum is necessary to strengthen T-Mobile’s competitive position vis-à-vis the other nationwide carriers. The FCC would likely accept these arguments and approve a T-Mobile purchase.

Verizon: An application to transfer Clearwire spectrum to Verizon would leave the FCC caught between the Scylla and the Charybdis. First, the Scylla: This FCC has indicated its intent to use spectrum policy to balance competitive forces in the mobile market by denying Verizon (and AT&T) access to additional spectrum. For example, in approving Harbinger’s acquisition of SkyTerra’s L-band spectrum (see my post here), the FCC prohibited Verizon or AT&T from accessing SkyTerra’s spectrum without FCC approval. In the 14^th Mobile Wireless Competition Report (see my post here), the Commission continued to lay the groundwork for denying Verizon and AT&T access to additional spectrum, albeit this discussion was limited to spectrum below 1 GHz. Given the FCC’s inclination to deny Verizon and AT&T access to additional spectrum, it would appear the FCC would not be inclined to approve an acquisition of 2.5 GHz spectrum by Verizon.

The FCC’s Charybdis, however, is that denying Verizon’s acquisition of 2.5 GHz spectrum would also mean denying Clearwire access to the capital it needs to complete the construction of its competitive fourth-generation mobile network. An order denying a sale to Verizon would thus be required to find that the potential public interest benefit of funding the buildout of a fifth nationwide competitor (Clearwire) is outweighed by the potential competitive harm of allowing Verizon to acquire more spectrum. This is an untenable position, especially when the National Broadband Plan found that mobile carriers (including Verizon) need more spectrum anyway. In these circumstances, I expect the FCC would ignore its misgivings and approve the spectrum sale.

AT&T: The AT&T analysis is similar to the Verizon analysis, with one exception: When the FCC approved the AT&T-BellSouth transaction, AT&T-BellSouth “voluntarily” agreed to divest to an unaffiliated third-party all of the 2.5 GHz spectrum then held by BellSouth. Some believe that, because the FCC once accepted AT&T’s “voluntary” divestiture of 2.5 GHz spectrum, the FCC would not allow AT&T to buy it back. I disagree. First, the divestiture did not set any precedent because the divestiture was “voluntary” rather than part of an FCC order based on a finding of competitive harm. Second, the two situations are very different factually. When the AT&T-BellSouth merger was being considered, Clearwire and Sprint-Nextel lacked a nationwide footprint in the 2.5 GHz band, and they argued that the BellSouth divestiture was necessary for them to acquire such a footprint and become a more viable competitor. The Democratic Commissioners at the FCC agreed and considered the BellSouth divestiture necessary to promote competition. For the reasons noted above in the Verizon discussion, however, a Clearwire sale to AT&T to fund Clearwire’s network build would also likely be considered pro-competitive, which would be consistent with the reasoning underlying the “voluntary” AT&T-BellSouth divestiture. Like the Verizon scenario discussed above, I think the FCC ultimately would approve a sale of Clearwire spectrum to AT&T.

Sprint-Nextel: The FCC would almost certainly approve a sale of Clearwire spectrum to Sprint-Nextel. The FCC arguably already approved Sprint-Nextel’s control of Clearwire’s entire spectrum holdings in 2008, and I think it very unlikely the FCC would reach a different conclusion today.

Cable: A purchase by cable operators seems unlikely given cable’s reluctance to invest too heavily in mobile (i.e., other than Cox, cable hasn’t done anything with the AWS-1 spectrum it won at auction in 2006). But, if cable did purchase spectrum from Clearwire, the FCC would likely approve the sale, because cable would likely be considered a new entrant into the mobile market.

At the end of the day, I think it’s likely that Clearwire would be able to obtain regulatory approval of a sale of a portion of its spectrum regardless of who wins the private auction. The real question is: who is actually interested in the spectrum and how much are they willing to pay for it?

First, the agreement states clearly that the FCC “would not have any authority over Internet software applications, content or services.” As I’ve noted before, Internet software applications, content, and services “have as much potential to prevent consumers from enjoying the protections of the existing Internet principals as ‘broadband Internet access service’ providers.” Indeed, Google, with over 80% of the search engine market, has much greater potential to block consumer access to the Internet sites of their choice than does Verizon, who has a paltry 3.6 million FiOS Internet subscribers and “continues to bleed landline and DSL customers.” Google was nevertheless able to get Verizon to agree that Google remain completely free from any of the net neutrality regulations to which Verizon itself would be subject. That’s a significant win in any book.

Second, the agreement’s “non-discrimination” provision presumptively prohibits the prioritization of traffic. This is a significant competitive victory for Google, because Google already prioritizes its own traffic via its own content delivery network. “If Google were an Internet service provider, it would be the fastest growing and third largest global carrier, says Craig Lebovitz, Arbor Networks chief scientist.” Google uses its extensive content delivery network to speed the delivery of its packets – like YouTube – to end users. To compete with Google, competitors would need access to similar prioritization capabilities. Fortunately for Google, Verizon just agreed not to use its resources and expertise to help even track conditions for Google’s competitors. Win number two for Google.

Third, Google agreed that only the transparency principle would apply to wireless networks. On its face, this looks like a win for Verizon Wireless. But it’s a Pyrrhic victory. Google has nothing to lose in forswearing regulation of wireless because the wireless industry is incredibly competitive – and that competition ensures that wireless service providers can’t engage in discrimination that is harmful to consumers (without risking serious subscriber losses). And, with the recent success of Android and Google’s takeover of AdMob, Google is in a better position to leverage power in the wireless market than Verizon Wireless. When your operating system is increasingly powering the smartphones consumers are using to access the Internet, you have a virtual monopoly on mobile advertising, and the market power of network operators is constrained by competition, why would you want increased federal oversight? On balance, leaving wireless out of the net neutrality race is another trip to the winner’s circle for Google.