U.S. regulators plan a major overhaul in telecommunications policy that could strengthen the hand of local phone monopolies in a number of key areas, including high-speed Internet access.
No decision has yet been publicly announced, although FCC officials have said they hope to complete the process by late February. Meanwhile, companies whose plans rely on access to local phone networks are bracing for a sea change that they say could have sweeping effects on competition and customers' Internet choices. Small companies are worried about being driven out of business, companies as large as AT&T are concerned about losing access to local phone networks, and the big local phone companies scent a policy victory they've sought for years.
"Those decisions will in large part determine the structure of the industry with respect to broadband for the next decade," said Russell Frisby, president of CompTel, a trade group representing small and large competitors to the big local phone companies, from AT&T down. "It's very critical."
At stake is control over the future broadband networks and services, and by extension the range of services choices that will be available to consumers and businesses in any given market. In one camp are people who argue that competition between cable and telephone companies' broadband services in any given market is enough. Others believe that additional companies' services continue to be important, despite the continuing failure of the smaller companies such as DirecTV DSL to create sustainable businesses.
Since 1996's landmark telecommunications deregulation, market competition has been fierce among cable companies, local phone giants, and a slew of rivals ranging from Covad to AT&T that use the local phone companies' networks for their own services. The former Baby Bell companies have complained throughout that they were forced to give up access to their high-speed networks to rivals at cut-rate prices, while cable companies do not.
That disparity has made it impractical to make all the investments needed to push broadband forward, the big local phone companies have argued.
Indeed, although the big phone companies have signed up DSL customers at record pace in recent months, cable Internet figures in the United States continue to outstrip them. The top DSL providers had a total of about 5.5 million subscribers at the close of the third quarter of 2002, compared with more than 10.1 million cable modem subscribers, according to the Leichtman Research Group.
Last year, the phone companies' arguments helped spark one of Washington's most expensive lobbying battles in recent memory. A bill freeing the Baby Bells' hands passed the House of Representatives by a substantial margin, but later hit roadblocks in the Senate, and the policy battle switched to the FCC.
Drafts of the organizations' various proposals for broadband and local phone networks have been floating through the telecommunications community for weeks, and insiders now expect the big local phone companies to get much of what they want in the next few months. That would strengthen the local phone companies' hands at the expense of smaller broadband companies and rival phone companies such as AT&T, and would largely eliminate the push for more congressional action.
"Powell and the FCC are likely to do between two-thirds and three-quarters of what (the 2002 bill) would have done," said Legg Mason telecommunications policy analyst Blair Levin. "Congress would react to the Bells' coming back and asking for more the way a parent would react to a child saying, 'Santa only gave me two-thirds of my wish list.'"
How much competition is enough?
The FCC has two pending rulings that will affect the broadband market in subtle but potentially powerful ways. One, dubbed the Triennial Review, is a sweeping look at a long list of telecommunications competition regulations. Among those are decisions on exactly which parts of their networks the big local phone companies have to "unbundle," or let smaller companies use individually at wholesale rates in order to create their own DSL services from scratch.
Previous decisions have successively cut the price that companies such as Covad have had to pay to gain access to phone company lines. "Line sharing," a policy that allowed companies to send their DSL signals on a customer's first phone line, instead of installing a second phone line, dropped Covad's California monthly payments to the local phone companies from close to $26 per customer line to about $6 a line, for example. They and others are worried that policy will be overturned.
Another set of potential decisions, focused more specifically on broadband service, concentrates more on the phone companies' requirements to sell full access to their DSL services, which can then be resold by ISPs and other companies.
Competitors such as Covad and AT&T say it's critical that rivals in both areas continue to be allowed access to the DSL lines, even if cable companies don't have the same obligations. Without rivals offering DSL services, competition will slow, prices will rise and service will drop, they say.
"Bottom line, there's no argument that can be made that consumers would be better off with fewer broadband choices," said Jason Oxman, assistant general counsel for Covad, one of the few remaining independent DSL companies. "Consumers clearly have benefited from an explosion in broadband services."
Policy-makers and some technology companies aren't convinced that the "explosion" in the United States has been much more than a firecracker, however, even with 15 million people now using high-speed Net services. Critics point to other countries such as South Korea, where government officials recently said that 10 million high-speed lines were in service, encompassing more than a fifth of the country's 21 million people.
In that country and others, network companies are investing billions or trillions of dollars for higher-speed connections than are typically seen in the United States, as well. Korean officials said that by 2005, 13 million South Koreans would subscribe to broadband services that averaged 20mbps, or 10 to 20 times faster than the average U.S. connection.
Although drafts of FCC proposals have been floating through telecommunications policy circles in recent weeks, insiders say it's unclear where the commissioners will ultimately come down on the issue. Any decision is likely to split the five-member body, many predict.
At a closely watched speech in Washington in December, Commissioner Kevin Martin gave a rhetorical tip of the hat to a Verizon Communications executive, saying he agreed with much of that company's policy proposals. The big local phone companies should be able to keep exclusive or near-exclusive access to new infrastructure such as superfast fiber to the home connections, while the old regulations should continue to be looked at skeptically, Martin said.
"Companies will not invest in advanced services until we ensure that the governing regulations will not deprive companies of the ability to make a return on their investment," Martin told the crowd of telecommunications policy wonks. His comments, although not necessarily reflective of the remaining four FCC commissioners, sparked almost immediate damage control response from local phone company rivals.
A group of influential technology and consumer-electronics companies, acting as a trade group alliance dubbed the High Tech Broadband Coalition, has also urged the FCC to help speed modernized broadband services by letting the phone companies keep access to new investments.
Whatever the outcome of the set of policy changes, litigation is likely from parties that feel they've lost market advantage. State regulators, who have fought to retain their own prerogatives to regulate aspects of their local markets, have said they are also likely to sue to overturn any new rules that undermine their traditional powers.
Certainly, as the FCC's self-imposed Feb. 20 deadline grows closer, the impact of their potential changes to competition policy is becoming clearer. Consumer groups are urging regulators to focus on competition, and say that giving cable and phone companies complete control over their separate networks will ultimately be bad for the Internet.
"It sounds like they want to set up two monopoly toll roads and say that's enough for competition," said Mark Cooper, research director for the Consumer Federation of America. That's not a good idea, he added. "Proprietary gatekeepers destroy the innovative fabric of the Internet."