Democracy & Technology Blog Special access, con’t.

Over at Broadband Politics, Brett Glass takes exception to what I have written about special access. Glass and I disagree on a couple factual matters, as well as on the big picture.
One factual disagreement concerns the following observation by Glass:

Despite the fact that it’s absolutely essential to the provision of many services, prices for it are held in check neither by competition nor by even a minimal amount of oversight. It’s thus an area that’s ripe for price gouging and anticompetitive tactics, both of which are occurring.

In fact, special access pricing is only deregulated in areas where competition exists. In noncompetitive areas, special access prices are still regulated.
Also, Glass and I draw opposite inferences from his contention that

The cable TV providers most often rent “special access” lines or dark fiber from point to point as needed. They rarely build their own, and thus are subject to the same price gouging as anyone else who needs “middle mile” connectivity.

Glass views this as evidence of “market failure.” I view it as cable operators have concluded they can earn a higher return if they invest their capital somewhere else. If there are huge profits in special access, investors would back competitive entry.
What does Glass mean by the term “market failure”? Glass says,

  • In fact, to get Qwest to carry data 45 miles in my region costs about twice as much as an Internet backbone provider charges to take it to the rest of the world!
  • Even in the rare situations in which they could provide such services (either via their own facilities or via rented ones), they often refuse to deal.
  • The fact is that this is a real market failure. Combined with the problem of closed backbones (Level3 owns three backbones which run through our area, but will not open any of them up to us at reasonable cost), it creates a huge “middle mile” connectivity problem.

So Glass seems to be saying there is a market failure because there are refusals to deal at all and/or because there are refusals to sell at a reasonable price. I do sympathize with the predicament, if it exists, in which entrepreneurs who are seeking special access circuits but who cannot find or afford them are out of luck.
But it seems to me the alternative would be for government to require competitors to share their facilities at prices low enough to allow others to offer their services at a profit.
Well, what if the government-mandated “reasonable” wholesale price doesn’t allow the provider to recover his or her actual cost plus a competitive return for the investors to which they owe a fiduciary responsibility? The competitor would have to mark up other products and services to generate a cross-subsidy for special access.
This hints at the big picture.
Broadband providers aren’t earning obscene profits. If they were, it would be reflected in escalating prices for their shares. Stock brokers would be pounding on your door to dump any shares you may have in Google and buy AT&T and Verizon instead. When has that ever happened?
Broadband providers can temporarily overcharge some customers in order to subsidize other customers. But that is an unsustainable strategy. Competitors will target the the exploited customers which will jeopardize the services provided to subsidized customers.
The Supreme Court recently addressed the issue of refusals to deal, and the general rule is that just because someone could provide an input you are looking for doesn’t mean they have to. The ruling makes eminent sense, because forced sharing diminishes incentives for investment.
You won’t invest in facilities of your own if it is cheaper buy access to someone else’s facilities, and they may decide not invest when they consider they will have to share the profits from a successful investment with you but will have to eat the cost of an unsuccessful investment without your help.
Those of us who have been around for a while can remember when the telephone company was a legally-protected monopoly which could undercharge or overcharge with seeming impunity depending on the whims of public policymakers.
Those days are long gone. The nail in the coffin was the Telecommunications Act of 1996.
Today, consumers are ditching their landline service in favor of wireless and/or cable VoIP offerings. The wireline business is imploding, partly because of the persistence of cross-subsidies.
Former Senator Russell Long (D-LA) famously said, “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.” Isn’t that really what the advocates of government-mandated reductions in special access pricing are asking?
Aren’t they saying: Charge me a low wholesale price so I can earn a retail profit, and recover any loss you incur somewhere else. I deserve it (for whatever reason). Adios.
Glass also claims he has seen no evidence for my claim that the data reported by GAO was incorrect, and

I do see reason for Mr. Haney himself to be biased. He seems to work for (and have worked for) organizations which are supported by the very firms which are price gouging for “special access.”

I used to work for the U.S. Telecom Association and Qwest. I now work for an educational nonprofit. I admit my views are consistent. But setting that aside, I never criticized the GAO report but I do say there is ample evidence the FCC’s numbers are a mess.
The best example is a report commissioned by the National Association of Regulatory Utility Commissioners (NARUC),

Buyers have criticized the FCC’s current regulatory regime because it has apparently allowed excessive earnings. For their part, the RBOCs contend that the ARMIS figures are virtually meaningless. We agree with the RBOCs ….

This report estimated that the carriers are probably earning substantially less than ARMIS indicates. Instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.
The bottom line here is there is no market failure, just a concerted effort by purchasers to use lobbyists to persuade policymakers to intervene in the market to reallocate profits. In this case, we have a regulator (the FCC) and a history of regulation (of the telecommunications industry) which unfortunately makes that a potentially viable strategy.
Remember this: The gradual deregulation of special access was adopted by the FCC during the Clinton administration. Sorry, but you can’t call it right-wing ideology or demonize it as a George W. Bush or Republican legacy.
Related items:
Thoughts on broadband policy
‘Special access’ shouldn’t be fixed
Don’t believe ‘special access’ hype
Deregulate special access rates
Don’t re-regulate special access

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.