Editorial : Competition at a Crossroads

Looking back over the last 36 years and all the procompetition decisions made by the FCC, Congress and the courts resulting in consumer savings, new services and new jobs, Washington would conclude that competition is good. Yet decisions made this year could undo it all, making competition truly at a crossroads. Here are my top 10 issues, any one of which could sink wireline competition, followed by the various strategies being considered by the RBOCs, IXCs, CLECs, resellers, ISPs and cable companies, and finally how residential and business customers will likely respond.

1) UNE-P
The unbundled network element platform is an FCC mandated service that allows a CLEC or reseller access to the ILEC’s switch and local loop, bundled together as one. The CLEC or reseller buys this service for about $10 a month. CLECs don’t pay the ILEC long distance access charges, and they get value-added services like Caller ID at a fraction of the market price. UNE-P permits bundled local and long distance service at a flat rate. In short, without UNE-P, IXCs, CLECs and resellers can’t survive in the residential switched voice marketplace.

So, who are the bad guys regarding UNE-P? Last summer’s FCC decision on UNE-P is being challenged by the ILECs, and the case is currently in the D.C. Circuit Court. From the looks of things, the court is about to rule in favor of the ILECs regarding UNE-P. The case will then likely go to the U.S. Supreme Court.

2) Access Charges With UNE-P
The ILECs are covering their bases in the fight against UNE-P by trying to get long distance access charges added on to the CLEC/reseller prices. In short, this would make UNE-P pricing at or near local resale levels. There are very few states where local resale is a viable competitive option.

3) HFPL Access
Part of the FCC’s 2003 Triennial Review Order (TRO) would phase out ILEC obligations to provide competitors access to the high frequency portion of the loop (HFPL). So if an ILEC uses ATM or fiber to the remote terminal in the local distribution plant, it doesn’t have to offer data CLECs and ISPs unbundled DSL. Without DSL or cable modem broadband access, ISPs will experience a customer base meltdown.

4) The FCC’s VoIP NPRM and CALEA
The FCC is soon to issue a Notice of Proposed Rulemaking (NPRM). Regardless of what FCC Chairman Michael Powell says about going lite on VoIP regulation, the CALEA requirement will kill off the VoIP over broadband (DSL or cable modem) opportunity for the non-facilities based local carriers. VoIP over DSL will only be economically viable for ILECs, and VoIP over cable modems will only be economically viable for cable companies. The development costs to support CALEA in a centralized operation would be in the multi-billion dollar range. The VoIP upstarts would have to foot the bill, and they don’t have that kind of cash laying around.

5) VoIP and USF
If CALEA doesn’t get the local service upstarts, the Universal Service Fund (USF) and the many other fees and surcharges associated with current switched-based voice service will. When the regulators mandate USF and other fees to be paid by VoIP upstarts, local phone service will not be less expensive than traditional POTS.

6) Intercarrier Compensation
From a regulatory perspective, if you had to single out what needs to be fixed the most, it’s intercarrier compensation. This practice began back when AT&T convinced the government in 1934 that the way to build out the local phone network was to give it a monopoly on long distance. This way it could collect access fees on long distance service and give it back to itself (the local Bell operators) to build out local infrastructure so everyone could afford a phone.

Over the last 70 years with all of the pro-competitive rulings and thousands of new entrants, intercarrier compensation has become a mess and is in need of fixing. Here are some crazy intercarrier compensation agreements:

Say you are a long distance company and have a call to terminate. Send it from an access switch across the VoIP gateway (TDM to IP packet conversion) off to your ISP network (possibly still in the same room) then off to a CLEC over an ISDN/PRI (end user service) then to an ILEC for local call completion. The ILEC gets a fraction of a cent to complete this call branded as local. If the IXC sent a call from their class 4 circuit switch to the ILEC, they would have paid the ILEC 2 to 5 cents a minute.

Now let’s see how an ILEC can take advantage of an IXC. Consider this worst case scenario. For an intra-LATA call in Texas, it costs the IXC 5 cents a minute to terminate the call to the ILEC. It probably costs the ILEC a fraction of a cent. The ILEC in turn charges consumers 7 cents a minute for an intra-LATA long distance call. They make a profit from their own service as well as a fat profit from the access service they provide the IXC. The ILEC makes a huge profit regardless of whether they or the IXC gets the business. However, the IXC loses money on every intra-LATA call. If the FCC and the state PUCs can’t get intercarrier compensation right, competition in the residential or small business market won’t last for long.

7) ILEC Buyback
Say for example that you are a CLEC, and a residential user just signed on to your service. You contact the ILEC to inform them that you are now the proud owner of their customer. The ILEC turns around and calls your newly won customer and offers them $150 to switch back. It’s apparently legal in the eyes of the regulators, but shouldn’t all of the ILEC’s customers get the same $150 bonus?

8) No DSL Without Voice
Say you are a consumer, and you want broadband Internet access. Your only option is DSL, and you can only get it from the ILEC. But say you want CLEC voice service under UNE-P? Sorry your ILEC won’t give you DSL without taking their voice service as well. It’s legal, but it doesn’t sound pro-competitive.

9) Cingular Acquisition of AT&T Wireless
Cingular wins the bidding for AT&T Wireless subject to the Justice Department’s antitrust division. Now SBC and BellSouth control 42 percent of wireless subscribers, Verizon controls 24 percent and Sprint PCS another 11 percent. Less than 20 percent of wireline customers are served by non- ILEC carriers. If Verizon Wireless today offers free calling among its subscribers, then what’s stopping all ILEC wireless companies to do the same amongst each other? The ultimate bill and keep! Where would that leave IXCs regarding competition? Alternatively, what bundle options (local, long distance, and wireless) do ILEC competitors have?

10) Trinko
On January 13, 2004, the U.S. Supreme court released its unanimous decision in the case of Verizon vs. Law Offices of Curtis V. Trinko. The court now says you can’t sue an RBOC based on the Sherman Antitrust Act if you claim it failed to perform its Telecom Act of 1996 obligations. In short, the court says the RBOCs have no duty to help their competitors—only to avoid attempts to be sued over antitrust violations!

So where does this leave the telecommunications service providers? Here is my take.

RBOCs

The RBOCs have three courses of action:

Scenario A: A National IXC Offering
The RBOCs must realize that the only way to make major inroads with Fortune 500 and federal government network customers is to have a national IXC offering. But the above 10 regulatory issues don’t offer promise regarding an IXC business model. So, an RBOC can take the plunge and be the first RBOC to go out-of-region and become a true IXC player in the business market like AT&T, MCI and Sprint.

Scenario B: Go FTTP
Realize that the only way to fight your only true in-region competitor, the cable companies, is to go fiber to the premises. The CapEx and OpEx for FTTP is terrible, but there is no choice if your growth depends on new in-region services and revenues.

Scenario C: Take Your Losses and Kill off the Competition
RBOCs will lose customers in the short run to CLEC/IXC competition. But the days are numbered for these competitors. Once these competitors die off, raise your prices and you’re back in pre-1984 hog heaven, and only face cable competition.

If I were an RBOC CEO, I would go with Scenario C, that is if the regulators let me get away with eliminating my competition.

Cable Companies
The cable companies have two strategy options. Option 1 is to go up against the RBOCs and go after not only residential but the business user as well. That would require a lot of capital and would cause them to neglect their core business of new content in the all digital residential cable network build out.

Option 2 would be to concede the business marketplace to the RBOCs but fight for the residential user for broadband Internet access and POTS while building on content and entertainment services. Comcast chose the second option with its announcement to go after Disney. In the cable industry, whatever Comcast does, the rest of the industry will follow.

IXCs and CLECs
The reality is that the FCC is at a loss as to how to fix the competitive landscape with regulatory action. If they have the will to be bold, competition will survive. However, they aren’t likely to come up with a solution that will satisfy all. And, if Chairman Powell has his way, he will likely err on the side of the ILECs.

ISPs
ISPs are in the midst of a customer meltdown without access to broadband. United Online may be the last survivor with its $9.95 a month dial-up service and its scale of operation. But what is going to stop the RBOCs from mirroring this low price?

Customers
Finally, here is a look at what customers can and are doing.

A. Fortune 500: Given the low cost, available dark fiber from the CLECs and IXC wholesalers and the massive cutbacks of technical staff by the established IXCs, the choice is obvious. Become your own telco.

B. Small Business and Consumers: There are roughly 16 million UNE-P users in the U.S., according to analysis released by Comptel/Ascent. With UNE-P availability, small businesses saved $4 billion last year. Other analysis shows that residential users saved $16 billion a year because of competition and UNE-P. For people taking the local/long distance bundle, these users saved $450 a year in telecommunications expenses.

So what is the take-away here? Nearly 30 million residential users saved over a dollar a day because of competition. Shortly, it will dawn on Republicans and Democrats that this is a great campaign issue. Just imagine this for a sound bite, “We support pro-competitive telecom policies because you the voter can save over a dollar a day.”

We are indeed at the crossroads of competition. If you need to understand the new competitive technologies and industry dynamics, plan to attend one of our many new technology and business opportunities seminars given by Dr. Jerry Lucas. For more information or to register, go to www.telestrategies.com.