(Second of two stories; read the first story here)

Telecom service providers and cable operators are going head to head in assembling quadruple-play service bundles with which they hope to lock up the consumer market. The cable industry has already spent billions to upgrade its networks, while both AT&T and Verizon are now pouring billions into their access networks to be able to deliver video.

Those plans could be derailed by a third network operator using WiMAX technology to offer a service bundle of its own, according to a new study by two telecom veterans. The study, “The WiMAX Explosion,” is a 267-page report from the Boschulte Schnee Group LLC, comprising Alfred Boschulte, former CEO of Nynex Mobile, and Victor Schnee, founder of Probe Research and well-known telecom forecaster.

If deployed and marketed properly, WiMAX could provide a way of reaching consumers that is much less expensive than today’s wireline networks and can offer true mobile/fixed, voice/data service convergence, the report states. And the technology is maturing at a fortuitous time, when Internet-IT companies are looking for a way to break the incumbents’ stranglehold on access networks and new wireless spectrum is about to be made available by the FCC in its 700 MHz auction, set to begin in early 2008.

The Clearwire-Sprint partnership, announced after the report was distributed, is confirmation of one of its claims – that WiMAX makes more sense if deployed as part of a national network. And Clearwire’s earlier co-marketing agreements with EchoStar and DirecTV, announced the day the report went to press, also echo recommendations made by Schnee and Boschulte that video partners make sense for WiMAX players.

Even without a clear video component, WiMAX is a threat to the cable industry because it can undercut their prices on voice and high-speed data, where the companies are reaping big profits today, Schnee said.

“Cable is getting its incremental profits out of the fact that VoIP and broadband have very low incremental costs on the network they build,” he said. “The dollars they are accruing, which are excellent, are coming from their ability to gain significant revenue and at low cost from VoIP and broadband services. WiMAX will attack that.”

Schnee and Boschulte estimate that Comcast is deriving 60% or more of its revenues from non-video business. So while their video business may not initially be at risk from WiMAX, their non-video business will be.

“A successful WiMAX competitive represents a margin threat in the early years to cable for it begins life by attacking the very high margin low marginal cost services of VoIP and Broadband that cable has been thriving on,” the report states.

Clearwire’s partnerships with DirecTV and EchoStar enable the company to offer video as part of a service bundle and its intention to partner with Sprint will make the company a national player, two components that can weaken cable and telco interests, Schnee said.

Longer term, the move to more Web-based TV and mobile actually plays to WiMAX’s strengths, Boschulte said, because a truly converged high-speed network will be able to deliver video to mobile devices as well as to the home.

The upcoming 700 MHz spectrum auction also plays to WiMAX’s strength, opening up the possibility that new players could bid on spectrum and use WiMAX technology to deliver service. While FCC rules for the auction, announced in April, have made it likely that AT&T and Verizon can bid up the cost for pieces of that spectrum, and make it harder for a single national network to be created, the report states, there is still an opportunity for Google, Microsoft or others in the Internet/IT community to acquire at least 10 MHz of spectrum for national coverage, separately or allied with others including DBS companies, the report states.

The 700 MHz spectrum is particularly attractive to potential WiMAX companies because it has physical advantages over other spectrum being used for wireless access, including being “more robust and far less subject to atmospheric or foliage attenuation,” has the ability to penetrate building walls and windows, reducing the need for outdoor antennas, does not require line of sight between transmitter and receiver and has superior signal propagation, reducing the number of base stations required.

AT&T and Verizon are at risk because they are both focused on building very expensive fiber access networks right now, Schnee said. About the time those networks are built, the video business will be much more fragmented that it is today.

“We get asked about [Verizon’s fiber-to-the-home buildout] FiOS more than anything else,” he said. “In our view FiOS’s primary goal is to get the video customer. If they don’t, they are going to lose their shirts. Even if they get the video customers, they are never going to make any money on it. If they had done it 10 to 15 years ago, when we told them to do it, it would have made sense. But now it doesn’t. We see the video business about to fragment – it will take about five years for cable to really start losing customers in a big way. In five years, there will be many more ways to deliver video, including Web video.”

BellSouth had done extensive WiMAX testing before being acquired by AT&T, which still owns that spectrum, while Verizon did early testing of pre-WiMAX gear but sold off the spectrum it had acquired.

While the incumbents may be considering WiMAX, Internet companies have shown a greater willingness to move more quickly, Schnee said. If Clearwire and Sprint pull their partnership together into a national WiMAX offering, as they say they plan to do, they make natural partners.

“We have Google looking at the 700 auction,” he said. “How will Sprint and Clearwire try to interact with Google both in terms of 700 auction and broader terms? There was a statement in their press release that said that they were going to provide consumers across the country with access to the ‘open Internet.’ If they are saying they mean open in the sense that Google means open, this means they are trying to do something with Google. The next thing I would expect to see is some announcement from them about Google, or some investment by Google into this network if it is going to be open.”