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«Chairman Pryor, Ranking Member Wicker and members of the subcommittee, I am Ted Carlson, Chairman of United States Cellular Corporation. Thank you ...»

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Testimony of LeRoy T. Carlson, Jr.

Chairman – United States Cellular Corporation

Senate Commerce Committee

Subcommittee on Communications, Technology and the Internet

April 9, 2013

Chairman Pryor, Ranking Member Wicker and members of the subcommittee, I

am Ted Carlson, Chairman of United States Cellular Corporation. Thank you for the

opportunity to speak with you today. I am pleased to provide you with my observations

on the state of rural communications and the challenges we face in serving the people of rural America.

Introduction.

At U.S. Cellular, we deliver a world class customer experience and industryleading innovations across our entire territory, not just in densely populated urban markets. We are expanding our state of the art 4G LTE network and will cover 87 percent of our customers by the end of this year. As the Chairman of a company that serves West Virginia, Missouri, Washington, Nebraska, New Hampshire, Indiana, Wisconsin, Minnesota, Virginia, and many other states, I can affirm that our commitment to a superior network and excellent customer service not only rivals, but beats, what is provided to consumers in urban areas. We are proud of the fact that, despite challenges of serving rural markets, US Cellular has been recognized with awards for offering the “Highest Network Quality Performance Among Wireless Cell Phone Users” as well as being identified by various sources as the “Best Place to Buy a Cell Phone” and the “Number One Large Company to Work For.” We have proven that rural consumers don’t have to settle for second best and that being “rural” doesn’t equate to being left behind.

But providing those services in less densely populated areas does present a different set of business and regulatory challenges that urban providers don’t encounter.

That is why we appreciate the Committee’s willingness to take the time today to examine those differences and, we hope, consider effective solutions to them.

For nearly thirty years, U.S. Cellular has been a leader in providing high-quality mobile wireless telecommunications and information services in rural America. Today, we operate in over 150 FCC-licensed markets throughout the nation, serving over 5 million customers, employing approximately 8000 associates, deploying the latest 4G mobile broadband technology and providing our customers with excellent service.

Providing an outstanding customer experience is an integral part of our success and should reassure you that “rural” can also mean “excellence” when it comes to communications services. We have won the J.D. Power Award for Highest Network Quality in the North Central Region of the United States for fifteen consecutive periods over eight years. We scored first in Forrester’s 2013 Customer Experience Index for wireless providers, surpassing the “big four” wireless carriers by a wide margin.1 For the last three years, Consumer Reports has named U.S. Cellular the top service provider amongst post paid wireless carriers.2 See Forrester Research, http://www.forrester.com/home (registration required); See also, “Ninetendo, Fios, U.S.

Cellular Top Forrester’s Consumer Rankings,” http://news.cnet.com/8301-1023_3-57565208-93/nintendo-fios-uscellular-top-forresters-consumer-rankings/.

www.consumerreports.org/cro/phoneplans0113.htm Despite our consistently high performance, the wireless industry remains very challenging, especially for mid-sized and smaller carriers like us who tend to focus on rural areas. Let me provide some observations on what we’re seeing in the marketplace, the challenges we face as rural wireless providers, and some solutions.

Lower 700 MHz Interoperability First, as wireless providers deploy services in new spectrum bands, FCC rules must provide for interoperability across those bands in order to ensure that consumer needs such as roaming and device portability are met. A huge problem exists today in the 700 MHz Band. Decisions by national carriers to deploy handsets using customized designer band classes, have fractured the handset ecosystem, suppressed inter-carrier roaming opportunities for 4G service and locked customers into large carrier networks.

Interoperability in the wireless industry is a pro-competitive concept that was first adopted by the Reagan-era FCC which recognized the potential for the then-dominant wireline companies to exclude non-affiliated cellular providers from the emerging wireless equipment ecosystem. The FCC must return to these principles, fix the problem in 700 MHz, and once again restore interoperability and, thus, competition and broader consumer choice, by adopting the proposals made by our Company, The Competitive Carriers Association (“CCA”), and the Interoperability Alliance. The FCC must also act to avoid a repeat of this problem as it considers the rules for 600 MHz incentive auctions. Failure to do so would undermine the competitive marketplace and have a significant adverse impact on auction revenues in the incentive auctions.

Wireless interoperability was established by the Reagan era FCC at the start of the industry in order to foster a level playing field and to drive the development of roaming and a robust device ecosystem.

Fast forwarding to today, we face a world where a lack of device interoperability across the Lower 700 MHz band has largely prevented Lower 700 MHz A Block licensees from gaining access to consumer devices capable of operating on their spectrum. In turn, this lack of available devices has significantly hindered network deployments by these licensees. Notably, because “a significant number of Lower A Block licenses are held by smaller, rural, and regional licensees,”3these deployment difficulties have had a disproportionate negative effect on consumers in rural and unserved areas.





This lack of interoperability arose because the 3rd Generation Partnership Project (“3GPP”) developed two separate, duplicative, and incompatible band classes for Long-Term Evolution (“LTE”) wireless broadband operations in the Lower 700 MHz band. Specifically, Band 12 covers operations in the Lower A, B, and C Blocks, whereas Band 17 only covers operations in the Lower B and C Blocks. AT&T, the only national carrier providing service in the Lower 700 MHz band, operates in the Lower 700 MHz using only Band 17 equipment, which cannot be used by Lower A Block licensees. Because AT&T is the only licensee operating in Lower 700 MHz band which is large enough to be capable of driving the device ecosystem, the Lower A Block licensees have found themselves with essentially no LTE mobile devices to sell to their Promoting Interoperability in the 700 MHz Commercial Spectrum, Notice of Proposed Rulemaking, 27 FCC Rcd 3521, 3532 (2012) (“Interoperability NPRM”).

existing and prospective subscribers. The lone exception is U.S. Cellular, which, through great effort, managed to secure a small portfolio of LTE devices capable of operating on band 12 and thus utilizing the Lower A Block spectrum. The 2012 launch of LTE service by U.S. Cellular in conjunction with its partner, King Street Wireless, remains the only Band 12 network launch since Lower 700 MHz licenses were auctioned in 2008. However, U.S. Cellular is the exception, and even it remains constrained in its ability to gain access to a wide variety of LTE-capable devices.

Notably, because of the ongoing lack of interoperability between Band 12 and Band 17 in the Lower 700 MHz band, a number of Lower A Block licensees were compelled to request an extension of their interim construction benchmark deadlines, which the FCC recently granted.4 The industry has been actively seeking intervention by the FCC since 2009.

Back in September of that year, after discovering that AT&T had begun to issue Requests for Proposals that specified Band 17-only equipment, an alliance of Lower 700 MHz A Block licensees (the “Good Faith Alliance”) filed a petition for rulemaking asking the FCC to adopt an interoperability requirement for the Lower 700 MHz band.5 In doing so, the Good Faith Alliance warned the FCC that various public interest harms would arise if it failed to prohibit AT&T from deploying Band 17-only devices. The FCC sought comment on this petition in 2010.6 Commenters in support of the petition included small and regional 700 MHz licensees, a coalition including Sprint Nextel and See Wireless Telecommunications Bureau Extends 700 MHz A Block Licensee Interim Construction Benchmark Deadline Until December 13, 2013, Public Notice, DA 13-210 (rel. Feb. 13, 2013).

SeePetition for Rulemaking Regarding the Need for 700 MHz Mobile Equipment to be Capable of Operation on All Paired Commercial 700 MHz Frequency Blocks, 700 MHz Block A Good Faith Purchasers Alliance, RM-11592 (filed Sept. 29, 2009).

SeeWireless Telecommunications Bureau Seeks Comment on Petition for Rulemaking Regarding 700 MHz Band Mobile Equipment Design and Procurement Practices, Public Notice, 25 FCC Rcd 1464 (2010).

T-Mobile, trade associations representing rural and smaller providers, a coalition of public interest groups, and public safety associations. Nevertheless, the FCC took no further action regarding the lack of interoperability in the Lower 700 MHz band until March 2012, when it released a Notice of Proposed Rulemaking seeking additional comment on the issue.7 Once again, the vast majority of commenters, representing various carriers and organizations, urged the FCC to adopt an interoperability requirement. Unfortunately, although it has been more than three and a half years since the Good Faith Alliance filed its petition, the FCC still has not adopted an order in that proceeding. And this is despite the fact that the FCC has acknowledged that “a unified band class across the Lower 700 MHz band has the potential to yield significant benefits for all licensees.”8 Interoperability across the Lower 700 MHz band would greatly benefit the public.

For instance, as noted, the current and ongoing lack of interoperability has severely impeded the competitive roll-out of LTE broadband coverage by Lower A Block licensees because the lack of interoperability undermines the business case for smaller carriers to deploy networks. In turn, the lack of interoperability has impeded access to broadband services in the many parts of the U.S. not served by AT&T. In other words, consumers across the country are being deprived of the substantial benefits of broadband access due to the lack of interoperability in the Lower 700 MHz bands.

More broadly, the difficulties faced by Lower A Block licensees decrease competition in the wireless marketplace to the detriment of consumers. This is because significant opportunities for small and regional carriers – who otherwise would be in a SeeInteroperability NPRM, 27 FCC Rcd 3521 (2012).

See id.at3522.

position to provide robust competition to the dominant national carriers – have been lost due to the artificial barriers created by their inability to obtain devices capable of operating on their spectrum holdings. The importance of continuing to advance robust competition is especially crucial at this time given that the wireless industry is in its most precarious competitive state in over a decade. For instance, in its most recent Competition Report issued in March, the FCC, for the third straight year, was unable to find the existence of “effective competition” in the wireless industry.9 In fact, the weighted average of the FCC’s Herfindahl-Hirschman Index (“HHI”) calculations increased to 2873 since the FCC’s previous report.10 Notably, an HHI exceeding 2500 indicates that a market is “highly concentrated.”11 The FCC also noted that, from 2003 to year-end 2011, the average HHI has increased from 2151 to 2873, which represents a 33.6% increase in market concentration over this time.12If Lower A Block licensees are provided a level playing field, they could help to correct this competitive imbalance.

Unfortunately, at this time, the potential for Lower 700 MHz A Block deployments to spur increased competition has not come to fruition because additional competitive carrier LTE deployments have been delayed and/or limited by the continued fragmentation of the Lower 700 MHz spectrum band.

Moreover, absent interoperability, Lower A Block licensees likely will never be capable of providing effective competition because they will not be able to provide the quantity and quality of devices necessary to attract a substantial customer base. As the See Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993; Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services, Sixteenth Report, WT Docket No. 11-186, FCC 13-34, 2 (rel. Mar. 21, 2013) (“Sixteenth Competition Report”).

See id. 59.

See id.at 54.

See id.at 59.

Commission recognized in the Sixteenth Competition Report, mobile handsets and devices “directly affect the quality of a consumer’s mobile wireless experience and can factor into a consumer’s choice of a wireless provider.”13 As such, a carrier’s “portfolio of handsets and devices may be a significant non-price factor affecting its ability to compete for customers.”14 To date, Lower A Block licensees have found themselves with essentially no LTE mobile devices to sell to their existing and prospective customers, which is not surprising considering that vendors seek first to serve the demands of their largest possible customers, where volume (and profitability) is greatest. Smaller carriers simply cannot drive handset development. Moreover, even if smaller carriers manage to gain access to some devices, those devices will cost more because these carriers lack the economies of scale necessary to reduce costs. These higher device costs for Lower A Block licensees must either be passed on to the consumer (in the form of higher retail prices, which most consumers will not pay if given the choice of service providers), or absorbed by the Lower A Block licensee if it chooses to instead price LTE devices comparably to similar devices offered by the national operators. The consequences of this latter approach, however, would be unsustainable. Because device subsidies result in slim – or in some cases nonexistent or negative – profit margins, Lower A Block licensees may become unprofitable and could eventually be forced out of business, which results in even less marketplace competition.



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