In the first hundred pages of the triennial review, the FCC defines competition. This deceptively esoteric subject is the foundation of the effort to end line sharing.

by Alex Goldman ISP-Planet Associate Editor [September 19, 2003]

Every three years, the FCC is required to review the state of telecommunications competition in the U.S. When the FCC issued its preliminary review on February 20, 2003, it did so to widespread disapproval. The California ISP Association (CISPA) said in a press release, "today's FCC order on line sharing is an unconstitutional disaster for independent Internet service providers and their residential and business customers."

On the other side of the telecommunications political spectrum, Walter B. McCormick, Jr., president and CEO of USTA, the ILECs' trade association, said, as the association was suing the FCC, "instead of providing the leadership the country needs and the courts have repeatedly demanded, the FCC opted to punt critical decisions out to the states, triggering 50 different regulatory proceedings and 50 different sets of rules. As a result, we have a 586-page ruling, but no national policy."

The review itself contains an record of how high feelings ran among the commissioners—if you look closely enough. Nestled in footnote 782 is the following eye-opening comment:

Chairman Powell claims that our decision on line sharing contains some compromises, which, he contends, are improper. Chairman Powell Statement at 15-16. There is nothing improper about our decision. The Commission is composed of five people, each of whom sometimes has a different view of the right answer. When that occurs, it is essential to work together to find common ground, or else the agency cannot function. Compromise is inherently part of that process, and "good public policy often must be [ ] a balanced compromise of conflicting values and judgments."

It appears that none of the commissioners was entirely happy with the ruling. Clearly the most dissatisfied was commissioner Michael Copps, who stated unambiguously, "Today's decision chokes off competition in broadband."

The massive document that is the triennial review contains a long and detailed argument with numerous footnotes. The first item argued is the definition of competition. Establishing the definition takes 100 pages.

Destroying competition by defining it
As many of us learned in our high school debating societies, being able to control the definition of terms is often tantamount to winning the debate. The outcome of the FCC's debate is the notion that only facilities-based competition is sustainable—that "competition" is synonymous with "facilities-based competition.". This deceptively plausible argument eventually leads to the review's overarching conclusion: In effect, competition must be destroyed in order to save it.

On page 9, the FCC lists five barriers to entry: scale economies, sunk costs, first-mover advantages, absolute cost advantages, and a final item it called "barriers within the control of the incumbent LEC." Implicit in the last item—beyond merely sabotaging the deployment of shared lines by CLECs—are the LECs' ability to flout the law (see SBC Slapped With $6M Fine) and their strong lobbying at both the national level (see PACs) and state level (see Voices for Choices Wins Two vs. SBC).

The "economic analysis" undertaken by the FCC inherently ignores the influence that the ILECs can buy. To some economic conservatives, this doesn't appear to be a problem. The book "What's Yours Is Mine: Open Access and the Rise of Infrastructure Socialism" (recently published by the Cato Institute), argues a theory called "regulatory capture" which claims that all regulation is futile because in a money-lubricated democracy like ours, regulated companies eventually buy out their regulators (see You Are A Socialist).

The FCC does acknowledge, "capital requirements are exacerbated by the length of time—months or years—that it can take before investments start to turn a profit owing to the pace of construction, the difficulties of luring customers away from incumbent LECs, and the need to invest in a great deal of equipment before serving the first customer."

The commission seems to have given more weight, however, to the BOCs' rebuttal that "new entrants may have advantages of more advanced equipment, lower labor costs, and the ability to serve larger areas or to market selectively to more attractive markets."

The FCC claims, "the [Telecommunications] Act [of 1996] is not directly aimed at eliminating an incumbent LEC's market power in any particular market," which is helpful to its overarching argument, because the FCC sees no way of eliminating ILEC market power.

Given the difficulties of competing directly with the phone company, and given the fact that many facilities-based CLECs are bankrupt (see Book Review: CLEC for a summary of an insider's analysis of why this is so), the FCC chooses to rely on what it calls "intramodal competition," which some might characterize as doublespeak for "we don't need no stinkin' competition in the phone industry."

The FCC defines intermodal alternatives as "facilities or technologies other than those found in traditional telephone networks. These include, for example, traditional or new cable plant, wireless technologies (satellite, mobile, or fixed), power line (electric grid) technologies, or other technologies not rooted in telephone networks."

The review adds, "as we evaluate evidence of intermodal deployment, we will consider to what extent services provided over those intermodal alternatives are comparable in cost, quality, and maturity to incumbent LEC services," which seems reasonable until you realize that in most cases this means that any market served by a broadband cable company (whose Internet services are often cheaper and faster than the LEC's) and a broadband phone company will be deemed sufficiently open that the phone company will be able to close its network to independent ISPs.

The FCC is clearly not concerned with protecting the business interests of any telecom provider that relies on the ILECs' networks. The review states: "We disagree that we should continue to require unbundling of a network element until a vibrant wholesale market for that element exists . . . while this approach might ensure that competitors have access—either through wholesale alternatives or access UNEs—we are concerned that this approach might discourage investment in facilities by competitors."

In effect, it appears that the FCC review envisions a market offering consumers a choice of three providers to every home: the local cable monopoly, the local phone monopoly, and the local energy monopoly. But these monopolies will have no incentive to serve consumers, no incentive to compete on price, and, as the phone company did in the past, will have no incentive to deploy new technology.

IP in amber
As Martin F. McDermott III noted in the book CLEC, the telco business is about fossilizing a business plan in amber and not deploying new technology. It's all due to a system of regulation in which "they calculate all their costs, include their debt/equity ratios and other factors, and receive a percentage of those costs as their net profit."

Telcos are not about technology. "They are not technology or market driven entities, so it should be no surprise that the services that are deployed are determined by financial criteria rather than customer demand."

If the logic of the FCC's review is followed to its end, and three monopolies are the only choices given to consumers, the old anti-innovation system will return. As McDermott describes it:

Touch Tone service was first developed by Bell Labs in 1948. It was first deployed in the early 1960s. The reason for the twenty year hiatus was that AT&T had gone through a massive infrastructure upgrade during World War II and the Korean War and the switches that were installed could not accept Touch Tone calling and were not due to be changed out until the early 1960s at the earliest. The depreciation schedule for switching equipment in those days was 25 years. Thus, they would lose money if the replaced those older switches before they were fully depreciated. Q.E.D., Touch Tone service had to wait. Looking at it from their point of view, it made perfect sense. They were acting as responsible managers, protecting their profits for their investors. That the country needed new technology or customers wanted new services that they were willing to pay for . . . was not part of the equation.

Similarly, DSL was invented in the 1980s but not deployed until about 1998. If phone and cable companies are once again guaranteed a rate of return on their investments, their stock will be blue chip (i.e., very reliable) once again. Maybe the FCC's goal is to serve bankers and investors and corporations, not consumers.

Even today, the phone comapnies are turning away customers who want to pay more for services. Complained one poster to BroadbandReports:

It's not about the money. It is all about the competition, or the lack of that the telcos are interested in. I have DSL through a Verizon line reseller. My package is faster than anything Verizon would let me pay for. I tried, I really really tried, went all the way up to the business end, and even they wouldn't offer me a package this fast. The reseller did, and thus got my business. Same Verizon line, the reseller just didn't choose to tell me what I could and couldn't pay for (and it works flawlessly I might add). This is an even more obvious problem now that Verizon has changed to their "everyone gets one rate, but with varied connection speed" policy. The telcos just need to learn how to compete, something they are not very good at. They prefer to have the monopoly in any given area, as it allows them to dictate prices and policies that they couldn't with a competitor nipping at their heels.

The FCC claims, in its definition of competition, that a market served by several monopolies will be competitive. If this "deregulation" comes to pass, the telecommunications industry will once again be frozen in time, with one significant difference.

In a few nations, there is true competition. Perhaps the example of Japan or South Korea or Singapore will force U.S. monopolies to innovate. That slim hope, however, is much less than U.S. consumers deserve.

Do you add value?
We asked the CEO of one ISP that is not facilities-based, Victor Shepherd of Grand Rapids, Mich.-based iServ, what he thought of the FCC's opinion that his company is not true competition. He told us, "there are roads funded by property taxes that everyone is free to drive on and there are toll roads. I assure you the public roads are better."

He pointed out that he, too, provides services that the monopolies do not. He said, "one reason we have customers coming to us from the cable companies is that we provide services, like anti-spam and better customer support, that they have chosen not to offer."

He concluded, "I think the FCC is going in the wrong direction. If they're trying to stimulate competition, their thought process is wrong. I'm not asking for a free ride, just a level playing field, or at least one that I can play on."

—End