Rural wireless operators just might have a big year in 2007. The again, they might not. That’s not vacillation, it’s just that the year is full of potential but depending on several factors, it could go either way.

With new spectrum under their belts from the 2006 Advanced Wireless Services (AWS) auction and hopes of a 700 MHz auction in the offing (as well as freeing up of previously won 700 MHz licenses), smaller carriers could seize a rare opportunity to expand.

New access technologies and falling infrastructure prices will also allow rural operators to upgrade their networks, spelling new business and growth for dozens of regional and even single-market operators this year. But roaming pressure from the Tier I carriers, regulatory battles before the FCC and attempts to reform the Universal Service Fund—could combine for a detrimental if not business-imperiling effect on the small wireless operator.

Perhaps the biggest killjoy smaller operators will face this year is the proposed change to USF distribution. The Federal-State Board on Universal Service has proposed a ‘reverse auction’, which would eliminate the standard formula for distributing funds based on the cost of providing wireline service to underserved areas. Instead, the reverse auction would require carriers to bid competitively for funds and award them according to who can serve an area most efficiently. The goal of the proposal is to stem the rapid growth in the fund, which has more than doubled since 1998 to $3.7 billion annually.

The debate naturally pits large wireline and wireless providers—the main contributors to the fund—against independent and rural wireline providers, who receive most of the funds. Independent and rural wireless carriers are caught right in the middle.

At first glance, small wireless operators stand to benefit if the reverse auction format is adopted. After all, one of the most efficient ways to deliver voice to a sparsely populated area is wirelessly, meaning those providers could bid for funds in a reverse auction. However, those small operators may not be alone. Cingular has petitioned the FCC for Eligible Telecommunications Carrier status in Virginia. That would make the company eligible for USF dollars and presumably eligible to participate in a reverse auction.

Cingular’s position is relatively simple. If it provides wireless service to the same underserved areas as rural and independent operators, it deserves access to the same USF dollars. Independent carriers—and even some of Cingular’s Tier I competitors--don’t see it that way.

In its objection comments to the FCC, Embarq stated that, “The problem with the petition of Cingular Wireless, LLC…like so many other wireless ETC petitions, is that it seeks to divert funds away from their intended use—bringing telecommunications service to places where it would not otherwise be available—and use those funds to modestly increase wireless coverage where customers already have telecommunications service.”

Embarq claims this is directly contrary to the principle off universal service.

Critics of the reverse auction say it sacrifices the end-goal of providing comparable and sustainable service to rural areas for a cheaper, immediate fix that will ultimately be detrimental to the people it intends to serve.

One critic, Brian O’Hara, government affairs representative for the NTCA, said competitive carriers, like wireless providers, will cut costs to the bone, winning the reverse auction in markets where the incumbent carrier—deprived of its USF subsidy—will shut down. And in 10 years time the competitive carriers will be free of their obligations to provide service.

“We may get the cheapest service from a competitive provider, but what happens in 10 years when their technology is obsolete?” O’Hara said.

The NTCA, which has several rural wireless providers in its membership, said that the answer isn’t in pitting rural wireless carriers against rural wireline carriers, but rather separating them from one another so they aren’t competing for the same fund dollars.

“We think wireline and wireless are complimentary—underserved areas need both services,” said O’Hara said. “However, wireless carriers getting their funds based on wireline carriers' costs is just asinine.”

While the USF debate rages, rural operators find themselves faced with a more immediate concern: roaming agreements. Dozens of rural wireless operators and even the Tier II regional providers complain about the rising costs of roaming agreements struck with major national carriers. A consortium of CDMA and iDEN providers has now taken their complaints to the FCC, claiming the commission had agreed to re-open the issue of roaming when it approved Sprint’s acquisition of Nextel.

The consortium, led by Leap Wireless, has asked the FCC to implement an automatic roaming rule, which would require any carrier to roam on any other carrier’s network at a wholesale rate no higher than its lowest retail rate. The major carriers are understandably opposed to such a measure. As they expand into markets where they previously had no network access through merger and acquisition, they lessen their dependence on smaller operator roaming contracts. But as consolidation proceeds, rural operators—which are under increasing pressure to offer their own nationwide rate plans—say the large operators are turning the screws on their roaming agreements, charging exorbitantly high rates to access their networks.

“The small carriers rely very heavily on roaming,” said Clay Dover, executive director of the Rural Cellular Association. “As big carriers tighten that ratchet on roaming and expand into their territories, the smaller carriers are getting very nervous.”

Rural carriers used to get a large percentage of their revenue from roaming agreements, but that amount is shrinking. With roaming revenues falling and their costs to roam on other networks rising, many carriers face huge financial pressures, and some are simply selling themselves to larger players, Dover said.

That may just sound like natural selection in a healthy economy, but Dover said the results would be disastrous for rural communities. Large carriers are mainly interested in their large market customers and their interest in rural areas is largely confined to the Interstates and densely populated areas.

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