Several rural wireless carriers and the Rural Cellular Association have asked a federal court to review the FCC interim universal service fund (USF) cap ruling affecting eligible telecommunications carriers (ETCs). The cap temporarily prevents ETCs from dipping into the USF. ETCs are a relatively new phenomenon, and before the cap, their “eligibility” allowed them to receive comparable USF subsidies to the wireline carriers serving their same market. Advocates of this policy argue that it expands wireless service to communities that normally wouldn’t have it. Opponents of this policy say it provides a windfall to wireless carriers and artificially props up competition. There are valid arguments on both sides, but one thing is clear. The growth of these subsidies is rising exponentially. RCR Wireless reports that these funds have grown from $1.5 million in 2000 to more than $1 billion in 2007, with the majority of those funds going to wireless ETCs. The issue is a complex one, with no easy answers. Whatever the outcome, the competitive implications within these markets will be far reaching.

AT&T may look to WiMAX to provide broadband in rural markets, according to their CTO John Donovan. “WiMAX could come in handy in some U.S. markets, particularly rural areas where it's becoming prohibitively expensive to maintain copper,” quotes the USA Today in an interview with Donovan. It’s somewhat puzzling to hear AT&T talk about WiMAX, when they’ve committed to LTE for their 4G migration. But, they also already have WiMAX operating in Alaska and in some old Bell South territories. It’s conceivable for them to use LTE as their primary 4G technology, while using WiMAX to fill in gaps, particularly as a wireless DSL product in more rural markets.

Should AT&T find success in offering WiMAX in rural territories, what might become of their copper networks in these territories? We all know that U-Verse isn’t coming to too many rural markets, and if AT&T can provide a wireless local loop, will they need a copper infrastructure at all in these “non-strategic” markets? We could be witnessing early planning of a coordinated rural market divestiture strategy by AT&T. Serve rural consumers wirelessly with both a mobile product and a wireless DSL product, and give up (i.e. sell) that costly wireline infrastructure entirely. What do you think?

Matanuska Telephone Association (MTA), an Alaska based independent telco, has announced they are beginning their transition to an IP based infrastructure. MTA is transitioning their circuit switched network to the MetaSwitch distributed softswitch platform, which according to a MetaSwitch press release, enables the “delivery of both traditional and IP-based voice services.” MTA serves 40K subscribers in south central Alaska.

The move by MTA is representative of a growing trend among independents in the U.S. The transition to IP networks is well documented for tier 1 carriers like Verizon and AT&T. But that same transition is quite active among the smaller independents as well. Those independents are facing some of the same competitive pressures as the larger carriers, with cable MSOs increasingly offering competitive triple play services in all parts of the country. Independent ILECs also face that pesky trend that just doesn’t seem to go away - wireless substitution. Transitioning to IP based next generation networks is driven not only by efficiency gains and modernization, but also by the promise of revenue generating application development. The hope by all involved is that these new IP powered applications will create both additional value for landlines and additional revenue generating applications to relieve the potential of declining subscriber ARPU. It's real early in this game, so there are a lot of fingers crossed, hoping that this promise will indeed come true. Will it?

Like many technologies before it, including digital switching and IPTV, WiMAX technology’s roots are being laid in rural markets. The first WiMAX deployments are happening in towns like Madison, South Dakota and Rexburg, Idaho, and are being deployed by small independent operators not familiar to most, including DigitalBridge Communications and Sioux Valley Wireless. It’s not surprising. Many new technologies are vetted out in this manner, only to eventually gain mass market attention in large urban areas. IPTV is probably the most recent example. I remember listening to rural telcos like CC Communications of Fallon, Nevada and Chibardun Telephone of Cameron, Wisconsin talking about their pioneering video over VDSL deployments way back in 1997, almost a decade before AT&T began to get all of the attention. This scenario is repeating itself with WiMAX. The important early lessons about WiMAX and its capabilities/limitations will be played out in Madison, not in Washington DC or Baltimore.

These rural markets are also great laboratories for the competitive impact of WiMAX. DigitalBridge and Sioux Valley are deploying in some markets where either DSL and cable modem (or both) are present. It will be interesting to watch how consumers react to this new broadband option. Will the broadband portability and mobility that WiMAX provides trump wireline broadband, or simply augment it? Will consumers abandon wireline broadband in favor of broadband wireless WiMAX in much the same way many consumers are abandoning wireline voice in favor of wireless? In a recent interview, Don Marker, CEO of Sioux Valley Wireless told me, "The service is portable…something that no other existing service can offer. In the long run, it is very likely that our portable/mobile service will displace fixed services just as cellular service has done with fixed telephone service." All interesting and important questions, with huge implications for the entire telecom industry. Implications that are being revealed early on in places like Butte, Montana.

Update-6/5/2008 - As of 10:00a ET, the Wall Street Journal is reporting that Verizon and Alltel have come to terms on a sale, with Verizon offering $5.9 billion and the assumption of $22.2 billion in debt. More to follow soon.

There is a rumor floating around that Verizon is in talks to purchase Alltel Wireless for $27 billion. If the rumor holds true, a Verizon acquisition of Alltel would create the largest U.S. wireless carrier, surpassing the current leader AT&T, with a combined 80 million subscribers. AT&T currently has about 72 million subscribers. Such a move would have interesting competitive implications. For example, it may open the door for other interested carriers, wireline or wireless, to gain or expand wireless assets because anti-trust concerns will certainly force Verizon and Alltel to shed some overlapping or dominant territory. Secondly, it would expand the Verizon footprint and brand into more rural territories and perhaps impact wireless substitution there. Much more information to come on this potential blockbuster deal.

The Rural Cellular Association (RCA) has asked the FCC to investigate the common practice of exclusive handset distribution deals for major wireless carriers. RCA claims such practices are anti-competitive and deny rural consumers access to newer and popular wireless devices. Perhaps the poster child of this issue is the iPhone, and the exclusivity AT&T has with it in the U.S. But there are numerous other examples. The RCA assembled an outline of some of the leading handset exclusivity deals in an appendix of their filing. RCA says the situation is “… creating another ‘digital divide’ between urban and rural America.”

This is a tough issue. Exclusivity is a key weapon in the intense competitive battles between wireless carriers. You could easily argue that exclusivity is fair game in this competitive landscape. But RCA brings up valid points – wide swaths of consumers, almost at the statewide level, are unable to enjoy the benefits of these advanced devices, in large part due to exclusivity deals. Perhaps the more concerning argument is do these exclusivity deals create higher prices for consumers, which would not be the case if the devices were offered by competing carriers. The issue will only intensify as new 3G and 4G devices begin to penetrate the marketplace. These newer devices and the “cool” applications they provide will be fertile ground for exclusivity deals by wireless carriers, as they try to differentiate their service from their competitors. Unfortunately, there are no easy answers for this issue. It’s one of many debates created by a marketplace where multiple competitors are chasing billions of dollars of potential revenue. The stakes are quite high.

The FCC recently instituted an interim cap on universal service funding (USF) for competitive eligible telecommunication carriers (CETCs). CETCs are primarily wireless carriers who have qualified for USF subsidies. These subsidies have been somewhat of a catalyst for building out wireless infrastructure in rural areas. The CETC issue has created controversy because CETCs have been getting USF support based on the costs of the incumbent wireline provider in the territory they want to overbuild with wireless. Wireline infrastructure is much more costly to build than wireless, and thus CETCs have been gaining somewhat of a “windfall,” because they receive subsidies based on a higher cost model than what their actual costs are. It has led to accelerated growth in the high cost fund of the USF program. CETC support was about $1.5 million in 2000 and close to $1 billion in 2007. The cap will be in place until more comprehensive USF reform takes place.

Pivot Media estimates annual wireless substitution rates to average about 2.3% for small rural wireline carriers and 5.7% for larger multi-state rural providers. An argument can be made that the past CETC USF structure certainly contributed to these growing wireless substitution rates. According to Bennet and Bennet’s Rural Spectrum Scanner, “…annual support for competitive ETCs will be capped at the level of support that they were eligible to receive in each state during March 2008. States may still designate additional ETCs, but the new entrants will have to share diluted support with established competitive ETCs.” This interim cap may slow additional rural wireless deployments, and thus temporarily slow wireless substitution in rural areas. Many rural carriers have identified wireless substitution as their most immediate competitive threat.

In a very engaging session entitled Competitive Threats and Opportunities at the National Telecommunications Cooperative Association Annual Meeting, NTCA’s vice president of business and technology, Kevin McGuire argued that NTCA members are in a good position to compete in today’s evolving competitive environment. McGuire demonstrated a variety of technologies including VoIP, Internet video, call management portals, and wireless convergence, while urging the audience to embrace and leverage these technologies. One of McGuire’s key messages was that even though some of the demonstrated technologies seem complicated, NTCA members are in a position to offer them today. He stressed launching these new services don’t always involve having to do expensive technology upgrades. Rather, rural telcos can use some of their existing technologies. As an example, telcos don’t necessarily need a softswitch to offer some of the same features that VoIP service providers offer, including call management web portals. Their existing switching infrastructure allows them to do so today.

Indeed McGuire’s advice is spot on. Most rural carriers have very extensive technology and network assets in place already. Launching competitive services and features without significant investment in new technology is achievable. Carriers would be wise to take McGuire’s advice and really appraise their current technology situation and leverage it to increase their competitiveness.

ViewNow announced today that Western Illinois Video Networks (WIV), a statewide consortium of eight rural telephone service providers, has licensed its video-on-demand (VOD) programming and usage tracking software for their IPTV networks. No longer is an ancillary service, VOD now a requirement to compete in today’s triple play landscape. The reality is that VOD and the VOD experience may come to represent the future of television as we know it.

VOD has been a challenge to more rural operators because of its additional cost and immature business model factors - factors that make it difficult for systems with subscriber counts in the low hundreds or thousands to justify a suspect ROI. But rural operators are increasingly viewing VOD as necessary to compete, or even differentiate. Rural IPTV operators often face cable competitors who have yet to upgrade their rural cable infrastructure to two-way digital, thus preventing them from offering VOD. By being the first to offer VOD in their markets, some rural operators are in a position to use it to their own competitive advantage.

Comcast announced that it will expand its offerings in rural parts of Vermont, including eventually bringing a full triple play bundle. Comcast was required to expand its footprint in this way to meet requirements of it purchase of Adelphia properties in the state. The areas of expansion include Ira, Sunderland, Manchester, Plainfield, Hardwick, Hyde Park, Morristown, Hartland, Mount Holly, Chester, Londonderry, Weston, Woodstock, Coventry, Brattleboro, Vernon, Poultney, Chittenden, Middletown Springs, West Rutland, Ferrisburg and St. Albans.