This debate was central to the fascinating discussion at the State of Telecom event at Columbia’s Instititue of Tele-Information, held in mid-October. I attended the afternoon sessions.

Wall Street’s vision

Simon Flannery, managing director at Morgan Stanley, described the challenges that are eroding the margins of the cellcos. Of course, the top two cellcos are doing better than the rest. Flannery said that margins at Verizon at about 45 percent, while margins at Sprint are about 16 percent. Apps that are eroding core revenues include free text messaging and free calling.

Meanwhile, cellcos are selling advanced services that require more bandwidth. “Backhauling fiber to towers requires a massive build,” said Flannery. “Smaller carriers lack the cash flow to reinvest, and there is no financing for newtowkrs that are without returns.”

The market is trending towards a duopoly.

Craig Moffett, senior analyst at Bernstein Research, said that the services that people pay for are the easiest to provide: internet access, phone calls, and so on. “People are less willing to pay for information and entertainment, which are services that cost more to provide.”

Voice may require 9.6 Kbps and people will pay $50 per month for it. People will only pay about $30 per month more for the next generation services that multiply data usage by 10 or 100 times. “The sale price per bit is falling faster than the cost per bit.”

At the bottom end of the market, Moffett said, there is the “poverty problem” where households whose net income is negative after paying for food, clothing, and shelter account for perhaps 40 percent of all homes. “Retailers can depend on the upper two quintiles, but telcos have to sell to the full 100 percent of the population,” Moffett claimed.

The consumer advocate concurs

Mark Cooper of the Conumer Federation claimed that he disagreed with everyone on all sides of this debate. He said that in some poor countries, there are 75 cell phones per 100 people. “People who have no electric power at home may have cell phones.”

If a cellco is just adding voice customers, it’s easy to grow. “It is easy to add subscribers but it is expensive to add capacity. Users, uses, and usage all add costs to wireless mobile networks.”

He agreed with the Wall Street analysts that the marginal sale price of bandwidth drops rapidly.

He added, however, that unlicensed wireless spectrum is the great success story of the past two decades. Even AT&T is now selling Wi-Fi. “Unlicensed has no champion in the scrum for spectrum.” Cooper said that at most 10 percent to 20 percent of spectrum should be sold to the cellco monopolies, so that the Washington can avoid the next monopoly and the next “100 year mistake.”

The Economist Magazine has the data

In an article entitled The Limits of Frugality, The Economist magazine warns that those rural cellphone users who have no electricity in their homes will soon be paying higher prices. “Sunil Mittal, the boss of Bharti Airtel, the mobile-phone operator … said the extra cost of servicing rural customers, and their low usage levels, had made things unprofitable. Prices are now expected to go up across the industry, after two decades of decline. India’s low-cost telecoms revolution has, it seems, reached its limit.”

Buildouts will now focus on the urban rich. “Today perhaps 17 percent of India’s population has half of its spending power, according to the Asian Development Bank …. One proxy for the difference in profitability between the urban rich and the rural poor is the price paid for mobile-telecoms spectrum. In the 2010 auctions for 3G telecoms licences, operators bid ten times more for a slice of the airwaves in affluent Delhi, with 18m people, than in east Uttar Pradesh, with 120m people.”

Washington, D.C.’s policymakers should expect fixed wireless and wireline internet to connect the rural poor at an affordable price. The true price of cellular broadband is going up fast, worldwide, and like all price rises, it will harm the poorest the most.

Parkinson, who says he plans to step down in 2010, appears to have recommended most of the applications in the state of Kansas, including several multistate applications. Kansas is one of the few states to recommend EchoStar’s nationwide satellite deployment. The governor also recommended a large and costly cellular deployment. Several of the projects appear to overlap each other.

The state even recommended a project from Connected Nation, the telcos’ non-profit.

“We’re excited to recommend these 22 applications to the NTIA, and we’re optimistic that many of them will be awarded funding,” said Carole Jordan, Rural Development Division Director for the Kansas Department of Commerce. “All of them show great potential for increasing broadband access to rural Kansas, which will benefit our state economy, create new Kansas jobs and help us fulfill the mission of the federal Recovery Act.”

I could not find the letter on a government site but obtained it through the StimuluatingBroadband blog people — Pratt Networks — here.

The only Exceptional middle mile project in the letter in the Navajo Tribal Utility Authority, a roughly $34 million project, half grant and half loan, mixing fiber, microwave, and wireless. No objections to it! Looks like a good project.

There are two Outstanding middle projects. There’s little data in the federal database on the Triplet Mountain project.

But there is a reasonable amount on PacTex. It’s a fiber run across the state that would cost about $140 million and is run by ex-AT&T executives. I’d like to know more about where the fiber runs from and to and whether this fiber run is simply an investment that AT&T should have made anyway in the past — there are numerous investments that AT&T should have made but chose not to in order to better reward its CEO at the time.

There are three Exceptional last mile projects.

Smith Bagley is a roughly $10.5 millon project to serve “Navajo, Hopi, and White Mountain Apache Tribal lands as well as rural non-tribal lands.” While the coverage area is deserving, the technology is cellular (3GPP). There is, as I read it, no open network commitment.

TowerStream I filed applications across the U.S. and it’s surprising that the governor recommended their application in Phoenix. Phoenix is the site of numerous failed wireless trials but it was chosen because it is an ideal location for the provision of wireless service. Much of the city is in a sort of bowl, so there are natural heights that enable the cheap placement of wireless infrastructure.

The third is WeCom for WiMAX in Kingman, AZ. There’s little data on the project and it seems fine as long as the principals are qualified.

Castillo Technologies filed 15 applications and gets two Deserving ratings in the letter. NPG Cable of St. Louis, MO, which filed 3 applications in AZ gets two Deserving ratings in the letter. I wonder whether “Deserving” ratings will be treated as recommendations or not.

Wi-VOD, which filed two applications totalling about $20 million grant / $30 million loan gets an Outstanding recommendation.

The letter’s Public Computer Center recommendations seem reasonable. The application of the state library system, for about $1.25 million to upgrade public computers in 84 libraries, seems particularly good and deserves its Exceptional rating.

In what I call the education category and what the government calls Sustainable Broadband, there are some odd decisions.

The Tohono O’odham Utility Authority gets an Exceptional rating, but the application is a small addition to a middle mile project and a last mile project neither of which are mentioned in the letter.

Three quirky projects get Deserving ratings:

Broadband for the Deaf and Hard of Hearing, a $140 million project to bring broadband to 66,000 households for two years that is supported by Vint Cerf.

WildBlue’s $15 million project for the state of Arizona — I don’t like satellite for the stimulus except in small and exceptional cases.

The third is a national project that’s based in Arizona, so I understand why that state’s governor would recommend it. CHC-TV LLC proposes a $35 million project to deliver education nationally. I believe it would make sense for the federal government to negotiate with CHC-TV for a pilot project at 1/50 the cost for the state of Arizona alone.