[February 3, 2005]

2. Pricing and Cost Issues:
predatory prices crush competition

The FCC says they cannot and will not police predatory pricing. If a LEC chooses to sell retail at a price point that is less than the wholesale price, they can do it. They are also allowed to "bundle" services. At the same time, cross subsidization and accounting rules apply, which means they aren't supposed to subsidize unregulated services from regulated revenues, if I understand the point.

The latest filing for Verizon (2003) shows a loss from unregulated activities in excess of EIGHT HUNDRED MILLION dollars. This is from the ARMIS database at the FCC. I asked the FCC if that number included DSL revenues and expenses and received an ambiguous answer; "Sometimes." I suspect that 2004 will show an increase in the amount listed if it indeed contains DSL revenue and cost figures.

So where does the money come from to subsidize the losses? The money obviously comes from regulated services revenue. So that makes it cross subsidization by definition. The profits from regulated services allow the Bell companies to crush competition in my opinion.

Please note that this figure (800 million) is what they admit. The real number could very well be much higher. I base that comment on a reputed remark from the then Chairman of the Oklahoma Public Utilities Commission, who once said [paraphrasing] that if all of the Certified Public Accountants in the State of Oklahoma were to be employed for a year analyzing the cash flow of the phone company, at the end of that year it would still be impossible to figure it out.

Further, please note that this figure is for all of their unregulated activities, not just the ISP business. That said, caller ID, voice mail and similar services are HUGE profit centers for any LEC. So with profit from that source, how much any given LEC is really losing in the provision of retail ISP services—specifically DSL service through its unregulated subsidiary—is almost impossible to know.

I have been unable to find a record of the most recent FCC audit—something that is required—for any LEC or RBOC. I did search the online database, which is where I found the 800 million dollar number in the ARMIS database. Someone please tell me whether the FCC has ever performed any audits. I have been unable to find any public record that any audits have been performed as required.

One FCC staffer has suggested that while the FCC has no power with regard to pricing for enhanced services, the Department of Justice does in the form of a potential anti-trust complaint. Yet throughout FCC proceedings for Computer II and III and the Telecommunications Act, there is a plethora of comment about insuring competition, which now turns out to be so much blather about nothing much—if in fact the FCC has no power over pricing and will NOT enforce cross-subsidization rules or perform audits.

Without the ability to regulate price or the will to enforce common sense cross-subsidization rules, it is obvious that any and all efforts by the FCC to insure competition are moot—witness that any given LEC typically controls upwards of 90 percent of the DSL market within its market area. If that isn't a monopoly, then what is it? Some studies say that owning 40 percent of the market (as AOL once did in dialup) gives a company monopoly pricing power. So what does 90 percent of the market mean?

Yet at the same time, cable companies have been able—at HIGHER prices— to garner more of the broadband market. This leads to an interesting point: An RBOC buries its own partners with predatory pricing, yet is unable to achieve parity with the cable industry.

So long as the phone company is willing to sell at retail below their cost of doing business, competitors have no hope of competing. The SBC VP of Finance once said that they are not selling DSL below cost and he named a figure that if memory serves is $26.95 a month. If you go to the FCC database for 2003, you will note that SBC claimed a loss of 500 million for enhanced services. Given that SBC makes a huge profit from most enhanced services, then one has to wonder if said VP was being disingenuous with his remarks. Or perhaps he was using some sort of convoluted math that showed a profit for DSL at some future date under conditions he did not explain, such as a price increase once competition was destroyed.

 

1. Background

what the RBOCs really think about competition

missing the Internet revolution

Robert Cannon

2. Pricing and Cost Issues: predatory prices crush competition

>RBOC costs, for the record

3. Business Practices

4. Slamming and other dubious business practices

5. Networks

6. Customer Service

7. VNXX

8. Verizon's Petition for Forbearance

9. Unintended Consequences

10. Conclusion

RBOCs, why you need me