Blog Post

The challenges for wholesale network operators

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Amid the political fighting over LightSquared and whether or not it will interfere with GPS, there’s a far larger issue: Can the nascent carrier really build a business as a wholesale carrier? History offers some perspective that maybe it can’t.

A blast from the past.

This “next-generation digital wireless technology…will be offered across the country to meet the explosive demand for high-speed access to the Internet” via a “wholesale business plan” that is “an unparalleled opportunity for minority and other small business entities to enter the wireless business.” Of course I’m talking about NextWave’s business plan, circa 1999, which was simply one step on the path to an exit from bankruptcy and a sale of its spectrum assets to Cingular and Verizon.

I wouldn’t be the first person to make the comparison between NextWave and LightSquared, but it is worth noting that LightSquared has recently attracted a great deal of political backing precisely because of its wholesale business plan. For example, various public interest organizations noted in an FCC filing in support of LightSquared that “compelling public interest benefits… would flow from a new mobile broadband entrant, particularly one offering a wholesale network that can extend the reach of the smaller, rural and regional mobile carriers, as well as access to connectivity for a wide range of innovative new devices, applications, services and retail providers at the network’s edge.”

Relying on rural wireless won't save wholesale operators
However, this says nothing about whether deploying a new wholesale mobile broadband network is any more feasible today than it was for NextWave a decade ago, when a wholesale business plan was basically a way to sidestep the real challenge in creating a profitable wireless business, namely acquiring end users. Certainly smaller carriers would benefit from gaining wholesale access to a new LTE network, but those players aren’t going to fill up a network by themselves. Thus, as even LightSquared’s supporters admit, the viability of a new wholesale player is dependent either on two things. First, on one or more major carriers using the network to substitute for its own network build-out, or on new entrants with a substantial customer base deciding that offering wireless service is important for their future business success.

The balance of power isn’t in LightSquared’s favor.

The problem for a wholesale-only player is that it really has no leverage to establish a profitable business relationship with major potential partners. We’ve seen this in the case of Clearwire, where it has been all but impossible for Clearwire to secure an advantageous deal with Sprint. While Sprint can happily keep high margin voice and SMS traffic on its own network, Clearwire must handle vast amounts of data traffic in exchange for a very modest proportion of Sprint’s overall ARPUs.

Clearwire (s clwr) attempted to develop both a retail presence and a diverse wholesale revenue base to create some of that leverage, but it has been forced to curtail its retail operations due to a lack of money. And still, despite having signed a range of wholesale agreements, the overwhelming majority of its wholesale customers are from Sprint. LightSquared has a similar challenge, having signed a deal with Sprint that is even more one-sided, in that LightSquared must pay Sprint (s s) $9 billion to host its network for the next 11 years, while Sprint has no obligation whatsoever to buy LightSquared’s capacity.

When it comes to wireless, retail customers offer leverage.
None of this is to say that there can’t be a successful wholesale wireless offering or that a network sharing arrangement isn’t a cost effective way to create a 4G network. Wholesale relationships and network sharing agreements can work well when the balance of power is roughly equal. Take for example Tracfone’s MVNO relationships with multiple established carriers in the US, or the network sharing agreements between mobile operators in Europe. However, unless a new startup has some compelling leverage, there is no reason for an established operator to sign anything other than a one-sided deal.

History repeats itself.

A fashionable argument is that the supposed spectrum crisis means that wireless operators will have to use wholesale providers because they simply won’t be able to find alternative sources of spectrum. However, that flies in the face of what we’ve seen over the last year, when Clearwire, NextWave, DBSD and TerreStar have hardly seen a rush of buyers for their spectrum assets.

Another argument is that these wholesale providers will find a ready market amongst new entrants looking to offer their own branded wireless services in the near future, because devices and services will be “always connected”. However, there is little evidence that consumer electronics providers are queuing up to offer their own wireless services, and any attempt by a major player like Apple to develop such an offering would create massive disruption to existing distribution relationships.

As a result, it’s increasingly difficult to see a sustainable place in the market for dedicated wholesale players like Clearwire and LightSquared. Even DISH Network’s prospective 4G network is a challenging proposition, but it is not reliant on wholesale bandwidth and will leverage DISH’s existing 14 million customers. However, DISH would be well advised to secure other major partners before rather than after it commits to a large-scale buildout.

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, CA, which specializes in technical and financial analysis across the satellite and telecom sectors.

7 Responses to “The challenges for wholesale network operators”

  1. Not sure I understand the Tracfone link wrt the “balance of power being roughly equal”. What leverage do they have that gives them power? Would be nice if they could use Lightsquared to offer a full service of their own…that way they could maintain their low prices, but not be dependent on the carriers they use, for speeds and handset choice, as is the case currently with Verizon dictating they offer entry-level only phones on Verizon’s network.

    • Tim Farrar

      Tracfone is a subsidiary of America Movil, which has enormous scale and leverage. As BTIG Research ( notes:

      “America Movil is the third largest wireless operator in the world with more customers than AT&T, Verizon and T-Mobile USA combined. That size provides the scale to procure low cost handsets and leverage operating expenses. America Movil had already used that scale to established itself as the largest pre-paid operator in the United States with pay as you go services on TracFone and Net10 brands. As a large reseller, TracFone has also achieved significant negotiating power to buy minutes from network operators in the United States”

  2. NextWave’s business plan was created in 1994. By 1996, NextWave had $5 Billion in take-or-pay agreements with 20 resellers for voice services.
    Just as the tremendous cost of a chip fab makes economic sense by spreading the fixed cost across many partners, so can a wholesale wireless network.

  3. Harvmehalf

    So, just to understand this better; Tracfone wireless has leverage…because they have relationships with many of the major carriers, and not just one?
    That didn’t just happen overnight though. I mean their relationship with Verizon has only expanded in the last two, three years, and before that, it was really only AT&T that supported the MVNO. If Light squared are to succeed, it’s not going to happen within the first five years of it’s existence – they’re going to have to slowly build leverage.

  4. Rafiki Cai

    Mr. Farrar, I’m appreciative of your pragmatic and insightful sharing on LS and wholesale broadband business dynamics.

    What made reading your article anguishing for me, is the best interest of the public being (indirectly) boxed in (again) the same old profit market. Sustaining the profit environment for carriers and stockholders should not be the ‘only’ dimension of this discussion.

    I am not accusing you of carrying water for the barons, mind you. I’m simply making a point that it should be increasingly clear to many, that the business, profit, enterprise paradigm does ‘not’ carry public interest as a core value.

    Municipal Wifi should be a reality for a number of reasons, but it isn’t. Most astute observers know the reason why and its not because cities are not eager to engage.

    How can we break from this stifling box (prison) and open up another dimension?

  5. Using the Sprint/Clearwire relationship to judge the viability of a wholesale wireless broadband business model is not fair, as Sprint already owns a network. Lightsquared would be mostly selling service to retailers without a network. If companies without a network (like say, a cable company, or a mobile device mfr that was shunned by the major carriers) wanted to offer a service of their own, then Lightsquared would have enough leverage as the only national option.

    Lightsquared biggest obstacle to success will be political. They have to resolve the GPS issue, and would-be competitors ATT and Verizon will surely support the efforts to use that problem to stop Lightsquared. The pricing of 4G service in the US and the rules the carriers attach provide a huge opportunity for a new service provider, but whether they will be allowed to compete is another story.

    • LightSquared should have to pay to fix any legacy GPS devices they break.

      If there is some long term benefit in converting their spectrum from low power to high power then the consumers of the GPS tools deserve 10-20 years to prepare.