Broadbandits’ Revenge

The politics of telecommunications policy have changed, and not just because Democrats now control Congress.

Over the last few years, the Republican-led Federal Communications Commission has deregulated the consumer broadband offerings of traditional telecom companies AT&T, Verizon, Qwest and others. These companies have responded by investing billions of dollars in next-generation fiber networks and new video services, such as IPTV. This investment pattern mirrors the $110 billion in spending by cable operators on network upgrades since the 1996 Telecommunications Act deregulated their services. This Darwinian cycle has resulted in increasing bandwidth, lower prices, and more providers innovating to compete for you, the consumer. Today, no one has a monopoly in broadband and no one is standing still.

The success of U.S. broadband policy can be seen in the fact more than 65 million Americans subscribed to broadband as of June 2006, according to the FCC’s most recent data. The percentage of U.S. households accessing broadband is about 42 percent; our European counterparts average around 23 percent.

Deregulation of broadband is the signature accomplishment of the Bush administration in communications policy. Until recently it appeared the commission was following a similar deregulatory path with respect to the broadband services offered to large corporations. But pushback from competitive providers’ lobbyists, a coalition of large enterprise customers, who refuse to identify themselves, and diehard congressional supporters of managed competition — including Rep. Ed Markey, Massachusetts Democrat, now the chairman of a key subcommittee in Congress, seem to have slowed these efforts. The broadbandits scored a major success last month when the FCC failed to muster three Republican votes to eliminate these obsolete rules in a petition sought by Qwest Communications.

Our local provider Verizon was granted an identical petition 18 months ago. And, contrary to the sky-is-falling rhetoric from those who favor regulating broadband, not one complaint has been filed against Verizon at the FCC.

Aside from failing to approve the Qwest broadband petition, the FCC is also re-evaluating whether to re-institute government mandated price controls for certain business broadband services, something the Clinton-era FCC deregulated. Mr. Markey is trying to force the FCC to vote, hoping the Republican commissioners who comprise a majority won’t stick together.

One of the principal proponents of re-regulating these business broadband services is Sprint Nextel, which also is partnering with Clearwire to build a nationwide WiMax network. With a WiMax network of its own, Sprint Nextel could reduce the backhaul costs it pays to route calls from cell towers to switching centers. Sprint Nextel has also inked a deal with FiberTower to provide backhaul for its 4G/WiMax service in several markets. If the FCC steps in the re-regulate this dynamic market, the economics of investing in new WiMax network capacity might change.

The funny thing is Sprint once had assets that would have offset some of its wireless backhaul costs, but they spun off those assets last year. Now it appears they are beseeching the government to cover up the gap they created.

Re-regulation could also affect the aggressive efforts that Cablevision, Time Warner and Comcast are each making to offer packages of phone, TV and high-speed Internet service to small and midsized businesses. Comcast, the second-largest broadband company in the United States, expects to become the fourth-largest phone company by the end of the year. Its CEO has said the company will invest $3 billion in its network to expand into the business market.

But if the broadbandits succeed in persuading the FCC to regulate in this space, this could mean residential and small business customers must shoulder the extra costs so large corporations get a break on their broadband service. There is no free lunch.

Policymakers either can ensure investments can profitably be made in new facilities by letting the market set prices; or they can attempt through regulation to keep prices low, which will encourage competitors to simply share existing facilities instead of building their own.In that case, competitive offerings will simply mimic the incumbents’ while the incumbents will search for investment opportunities which don’t require profit-sharing. This is not a recipe for innovation.

For the FCC, the choice is clear. The commission should set a timetable for complete elimination of price controls on special access services, immediately grant petitions for the deregulation of business broadband services and establish a bright-line test for eliminating remaining regulation of traditional telecom carriers subject to effective competition.