With the election looming and the current makeup of the FCC likely nearing its end, Fred Campbell has penned a thorough look at what he describes as the FCC’s “legacy of confusion about competition.” An excerpt:
The Wheeler FCC’s repudiation of economic rigor and legal precedents is an anomaly that should end with this fall’s election. Unfortunately, Wheeler is determined to dictate the economic and engineering of several market segments before his time expires. In the few months he has remaining, Wheeler wants to:
• Dilute copyright protections for digital content, dictate retail pricing, and weaken privacy protections for consumers in the video marketplace (despite an FCC finding from just last year that this market is effectively competitive), all of which threaten to bring television’s second golden age to an end;
• Impose ineffective data regulations just on broadband Internet access providers (while leaving other big data companies untouched) that would give internet edge competitors government-sanctioned competitive advantages in the internet advertising and big data markets at the expense of consumers; and
• Impose new price regulations on business data services to reduce the investment costs of favored companies (like Sprint) at the expense of their competitors.
These last-minute proposals are inconsistent with our fundamental economic policy of promoting competition and private investment, and none of them are premised on the sound, data-driven analyses Wheeler promised.
The FCC’s regulation has been challenged by providers and others, asking for a full federal appeals court review of the previous panel decision. As BNA reported, the FCC has already asked for the deadline to respond to be extended to October 3.
Tomorrow is the 40-year anniversary of the Internet Age. On August 27, 1976, scientists from SRI International successfully sent an electronic message from a computer set up at a picnic table at a Portola Valley, California biker bar, to SRI and on through the ARPANET network to Boston.
While the U.S. has seen nearly 40 years of pro-growth internet policy, the Federal Communications Commission in 2015, unfortunately, went from promoting internet investment and innovation through an open, multi-stakeholder platform to making the internet a government utility weighed down by Title II regulation. Check out the infographic below to see the FCC’s abrupt about-face.
We recently submitted Reply Comments to the FCC’s proposed Business Data Services (BDS) policy. You can read the full comments here, but here’s some highlights:
PRICE REGULATION OF LEGACY AND ETHERNET BUSINESS DATA SERVICES WILL DETER THE INVESTMENT NECESSARY FOR UBIQUITOUS HIGH-SPEED BROADBAND DEPLOYMENT
Only the private sector can provide investment necessary for BDS deployment. As the FCC previously recognized, $350 billion of investment is needed to meet the Nation’s high-speed broadband needs. Investment capital at that level can come only from the private sector, not from government. Similarly, private investors will invest only where they can reasonably envision a positive return on their investment. Thus, to meet the growing demand for ubiquitous nationwide high-speed broadband deployment – including the BDS market – government should advance only those policies that actively promote and encourage, rather than deter, private investment.
Investment has promoted and will continue to promote real competition in the BDS market. IIA’s studies affirm how the business broadband market has evolved (and continues to evolve) far past the point at which ongoing regulation of this market can be justified. By the end of 2015, wireline competitors, including cable and CLECs, had roughly the same number of business broadband lines as the Incumbent Local Exchange Carriers (ILECs). CLECs seek to continue to rely on incumbents’ networks where they can, rather than employing a business strategy based on true facilities-based investment and competition.
Further Competitive Local Exchange Carrier (CLEC) investment would be easy but continues to lag. Facilities-based competition is accessible for the vast majority of buildings for which there is BDS demand. The FCC’s record highlights how 25% of buildings connected only to ILEC services with demand for BDS services are 17 feet away from the nearest competitive provider’s fiber network, 50% are 88 feet away, and 75% are within 456 feet. If CLEC providers truly wished to serve these buildings, they would have few difficulties building out nearby fiber to them. CLECs have made a business decision to ignore direct facilities-based competition and rely on other carriers’ capital investments to reach customers, rather than to adopt policies that will promote investment and thus benefit the economy as a whole.
REGULATION OF BDS IS IN NO WAY NECESSARY FOR 5G DEPLOYMENT AND WILL IN FACT HARM AND SLOW 5G DEPLOYMENT
The rapid deployment of fiber to date has occurred without the heavy hand of regulation, and there is no reason to doubt that it will continue. The robust fiber build-out to the nation’s existing macro cell towers to facilitate the transition to 4G wireless networks is an excellent barometer of how the market responds to business opportunities presented in the wireless backhaul market.
THE NASCENT DEVELOPMENT OF 5G TECHNOLOGY ARGUES AGAINST THE COMMISSION’S JUSTIFICATION FOR BDS REGULATION
The new 5G networks will transmit data at Gigabit speeds and will, by definition, not be able to use TDM-based megabit speeds. Thus, the regulation of legacy networks is irrelevant to future 5G deployment. The Commission simply cannot use the market-driven transition to 5G networks as justification for ex ante regulation, which would seem to steer the direction of 5G evolution rather than letting the technology evolve and markets along with it.
INVESTMENT AND DEPLOYMENT OF BROADBAND NETWORKS AND SERVICES IN RURAL AMERICA WILL SUFFER UNDER THE FCC’S PROPOSED BDS PRICE REGULATION
High-speed broadband is deployed most quickly when investors have incentives to invest in these deployments. A system that imposes price regulation and lowers profit margins for investors will not provide the necessary incentives for rapid deployment of 5G technology (or even 4G technology) to rural America.
Over at Forbes, our Honorary Chairman Rick Boucher has an op-ed on how regulating prices for business data services will only increase the digital divide. An excerpt:
It’s well understood that high-speed networks are deployed most quickly when investors can foresee a profitable rate of return on investment. Because of the unique challenges to network deployment in rural America, the need for a predictable rate of return on investment is essential for rural providers. The Commission’s proposal would impose on rural America a system that, by design, is assured to diminish new network investment. With price regulation, rural deployments would bring lower returns. With the incentive to invest removed, few companies would be willing to dedicate the capital needed to modernize rural networks. The deployment gap will widen, and the arrival of competition in the business data market will be delayed. Even if one high-speed network company proved willing to invest in the currently unserved rural market, it would immediately be saddled with de facto monopoly status and subjected to price regulation.
Under these conditions, it’s certain that few companies would make rural investments. The FCC cannot simply overlook the reality of these markets and remain true to its and the Administration’s commitment that all Americans, and all American businesses, including rural hospitals and educational institutions that are the lifeblood of many local communities, deserve and should receive the same broadband services available in metropolitan areas.
The light-touch regulatory framework of the 1996 Telecom Act set the stage for extensive internet network investment and innovation. To examine how this investment and innovation have empowered Americans to shape presidential races, we hosted “From Netscape to Snapchat: Politics in the Age of Broadband” at the Rock and Roll Hall of Fame in Cleveland during the Republican National Convention (RNC). You can watch a video of the event below.
Over at The Street, our own Bruce Mehlman has an op-ed on Verizon’s recent about face when it comes to investment and facilities-based competition, particularly in the business data services market. An excerpt:
Since 2003 — a virtual eternity in the fast-paced world of telecom — Verizon has staunchly advocated for investment, deployment of fiber, and facilities-based competition. Verizon’s once-visionary leadership coined the phrase ‘new wires, new rules/old wires, old rules’ used by the FCC to create pro-fiber investment policies that helped spur the deployment of its modern high-speed broadband network. The “Fi” in FiOS, a central part of Verizon’s corporate strategy and broadband buildouts — stands for fiber, after all.
Yet Verizon now trumpets a deal with the competitive local exchange carrier (CLEC) trade association INCOMPAS that favors price regulation in the BDS market. Why the sudden change? Some might suggest that Verizon’s proposed mergers currently pending before the FCC and other government agencies might be the reason why the company is now simply driving 55 past the speed trap giving a friendly wave to the regulatory cops.
But there’s another likely reason: In a highly regulated environment, it can be tempting to let regulators determine outcomes in markets rather than doing the hard work of competition.
The need for rate regulation requires first a determination that there is market power, meaning that the observed prices or rates are above some “proper” level, usually defined with reference to economic cost or competitive outcomes. Yet, no party has provided the Commission with convincing evidence that prices are not “just and reasonable.” Instead, the unsupported claim that BDS prices “are too damn high” pretty much sums up the economic arguments, leaving the Agency little to work with and explaining its historical reluctance to intervene.
But past is past and the current Commission under Chairman Tom Wheeler has signaled its determination to address and likely lower BDS rates. The regulatory paradigm is outlines in the BDS NPRM is to skirt the issue of evaluating market power altogether, and instead use the simple head-count of the number of competitors as proxy. This analytical substitution is without validity in economic theory and especially inapt for telecommunications markets where fixed costs are largely relative to market size.
As the FCC continues its special access agenda, its use of flawed data is not escaping notice. The latest to voice their concerns about the Commission’s current course are nine senators — eight democrats, one independent — representing rural communities. From a letter these lawmakers sent to FCC Chairman Tom Wheeler on August 1:
We appreciate the Commission’s goal with the FNPRM to incentivize telecommunications providers to build and invest in networks while enhancing competition among the various providers of business data services. As you work toward a final rule, it is especially important for rural states like ours that the Commission use all the available data, including the data submitted earlier this year by the major cable operators, to both measure competitive markets accurately and ensure that the regulations for noncompetitive markets are based on the real cost to provide service.
The bipartisan letter was put together by Senator Jon Tester (D-Mont.), who was joined by Maria Cantwell (D-Wash.), Patty Murray (D-Wash.), Heidi Heitkamp (D-N.D.), Michael Bennet (D-Colo.), Amy Klobuchar (D-Minn.), Bob Casey (D-Pa.), Angus King Jr. (I-Maine), and Tammy Baldwin (D-Wisc).
The smart folks at Light Reading have kicked off a four-part series analyzing the Cable industry’s performance and opportunities in serving the business market. If you’re the type who enjoys wonking out on telecommunications complexities, you’ll want to check the series out.
The first part of the series, “How Cable Means Business About Business,” examines cable company entry into the business data services market. The data it presents makes clear how companies such as Comcast and Time Warner (now part of Charter Communications) have made significant inroads in the commercial communications service market. As this chart from the article shows, Comcast’s business market strategy appears focused on medium-sized business customers.
And Time Warner Cable (now owned by Charter Communications) has seen year over year revenue growth in the commercial service market:
So what’s the big deal about these charts? Why is cable’s growth in commercial services relevant? It’s important because the Federal Communications Commission (FCC) is poised to impose new price regulations on existing antiquated copper-based networks as well as new fiber facilities and services that serve business customers. The FCC justifies this regulatory overreach on the perceived lack of competition in the marketplace.
In doing so, however, the Commission appears to be turning a blind eye to the true competitive nature of the commercial services market. As we’ve noted before, in crafting new price regulation, the FCC is relying on dated, incomplete and deeply flawed data. The FCC’s market data is not only nearly three years old, it also fails to capture the robust entry and success of cable in this market.
Imposing heavy handed price regulation on this rapidly changing market could create long-term incentives that ultimately lower capital investment, lessen facilities-based competition, and harm consumer for businesses in urban and rural markets across the nation.
Broadband network investment vital to 21st century economic growth and job development should not be put at risk, it’s not too late for the FCC to pause and consider these new data points before rushing to judgment.
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