Does Ownership Matter?

Pac-West’s John Sumpter

Paula Bernier, editor in chief of xchange, recently wrote a piece posing the question of whether, and to what extent, network ownership matters today for service providers. The piece talked specifically about how EMBARQ Corp. does not own a wireless network, yet is able to leverage the wireless assets of partner Sprint Nextel Corp. to offer a pioneering fixed/mobile convergence service. But it made me think more about the question as to what extent ownership — and ownership of what — matters.

It really does, as it tells us a lot about how an industry is going, and where a company thinks it has advantages. It helps first to think about a business where there is little need for ownership. For example, consider an import/export business in San Francisco. It doesn’t need to own much infrastructure. Office space, communications, temp help, shipping and warehouse space all are needed for the business, but do not need to be owned by the business.

Why? It’s because all of the necessary resources are available through intensely competitive wholesale markets. There is no advantage to owning those resources. If any of these resources were not available through a competitive wholesale market, it would be necessary for a business to reproduce and own them, otherwise that business would always be at the mercy of the owner of the noncompetitive resource.

What must proprietors in the import business (or any business) always own? They must own their customer contacts and their proprietary knowledge of the business, their ideas for customer service and marketing. They need to own whatever gives them a competitive advantage.

This tells us what’s important or necessary for any business to own and control. If a necessary resource is your path to differentiation and a competitive advantage, you must own it. If a necessary resource is not available through a competitive market, you must own it.

What about the telephone industry?

It wasn’t too long ago that the AT&T monopoly (predivestiture) owned everything from raw material (copper smelting) to manufacturing (Western Electric) to networks made up of switching and transmission, sales, billing and everything else that is necessary to run a telephone company. It owned everything.

AT&T was forced by the courts to own less than everything (against its will), and discovered it doesn’t need to own everything. AT&T was forced by the courts to allow non-AT&T equipment (telephone sets, fax machines, modems) to plug in to its network. Competitors won that market and the new AT&T leaves it to other players. The new AT&T doesn’t own manufacturing, it is happy to play one manufacturer against another and reap the benefit. It even leases transmission capacity from other carriers — unthinkable before the divestiture.

So what does a telephone company need to own? What gives a competitive advantage or is not available from a competitive wholesale market? Well, to have a chance of significant success, it needs to own the last mile (or continue to convince the government that UNE-loops should be made available). The last mile is not generally available from a competitive wholesale market. The two major loop owners (the incumbent local telephone company and the cable company) do not, to my knowledge, both offer wholesale loops. The incumbents offer some loop services to small competitors, but there is no other significant competition for wholesale loops. The “wholesale market” for loops is not competitive. So AT&T must (and does) own loops. Cable-based competitors own loops. Everyone else is scrambling.

Must AT&T own a cellular network? I don’t think so, but it’s a guess right now. Here’s what’s at play: The FCC has made enough microwave spectrum available to competing networks that it is possible to play in the retail cellular market without owning your own network (check out mobile virtual network operators, aka MVNOs). If the FCC continues to ensure enough spectrum is available to competing wireless networks, then a competitive wholesale market will develop. For AT&T, all it might need for its competitive advantage would be the brand name and the ability to integrate wired and wireless service. That integration might be accomplished without owning the wireless network (just as it does not own everything in the wired network it uses, it just owns all the loops it needs in its service territory).

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