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The Smoke and
Mirrors of Deregulation Wave0114 3/9/01 The goal of the Telecommunications Act of 1996 was to introduce competition by deregulating the industry and allowing competition and market forces to balance the players/services offered. The Federal Communications Commission (FCC) was assigned the responsibility to implement and regulate all interstate and international communications by radio, television, satellite and cable which the Act regulated. Under the provisions of the Act, long distance companies would be allowed to provide local telephone service, Competitive Local Exchange Carriers (CLECs) would enter the telephone/data market, and telephone companies would be able to provide cable and video services. February of this year, marked the fifth anniversary of the Act, which has been criticized in the past for easing ownership limits on telephone, cable and media companies and by deregulating cable TV rates. The effectiveness of the Act can best be seen from three different views, that of the government, new competitors and the consumer. The Government View The government view is congratulatory and filled with optimism. Congress and the FCC (http://www.fcc.gov) have commended the 1996 act for increasing competition and fostering the growth in Internet usage in the last several years. As far back as 1999, the FCC was praising its advances. In April of that year, Reed Hundt, a previous FCC Chairman, discussed how between 1994-1999, "the idea of competition and innovation and invention and revolution and entrepreneurship has been embraced instead of regulated." According to Hundt, during this time, $4 billion dollars in new money was spent to put Internet in every classroom in the country - increasing the number of classrooms online to 54%. Eight million jobs were created in the information sector, two out of three of all the new jobs created in the United States. Today the organization continues their cry for deregulation, predicting that it will continue to foster competition and thus bring consumers lower rates. The new FCC Chairman, Michael Powell recently was quoted as saying, "Deregulation is.a critical ingredient to facilitating competition, not something to be handed out after there is a substantial number of players and competitors in the market." Powell has begun to shift the role of the FCC though, from previous Clinton appointed Chairmen Reed Hundt and William Kennard, by reducing the government's role in the process and letting the deregulated industries settle matters themselves. In his first few weeks in office Powell has favored easing the Telecom act's rules to allow the Bells to move into long distance more easily, has advocated lifting the 35% cap on the percentage of the national television households a single company could reach through the stations it owned and has called the digital divide the "Mercedes-divide - I'd like to have one, but I can't afford it." Powell's willingness to take a hands-off position even extends to the RBOC (Regional Bell Operating Companies)/CLEC struggle, which Powell sees as a sign that competition is working. CLECs have a different view, arguing that the RBOCs are using unfair tactics to keep them out of the market (more information below), but Powell has stated, according to the WSJ Interactive that, "Regulation should focus on fostering innovation and preventing consumer harm, not protecting young telecommunications companies from their more powerful and established competitors." The Competitor's View According to the FCC, CLECs hold 6-8% of the US local telephone lines, compared with 4.4% at the end of 1999. This sounds encouraging, but many CLECs are failing financially and blaming the RBOCs uncooperative attitudes as the reason. NorthPoint has recently been delisted from the Nasdaq stock exchange, and many other casualties are being reported. Companies that have recently declared Chapter 11, as listed in DSL Report's Company deathwatch (http://www.dslreports.com) on February 13th include Flashcom (Rhythms residential lines go to Earthlink. NorthPoint residential lines go to Telocity), Darwin Networks (filed in January after a large downsizing in December), Zyan and Digital Broadband Communications. Other failures include HarvardNet, which gave up its DSL business last fall, ICG Communcations which declared Chapter 11, GST Telecommunications which also declared Chapter 11 and was then acquired by Time Warner Telecom and Jato Communications which laid off 650 workers at the end of 2000, and then completely shut down. Virtually all the CLECs including AT&T's Local Services have accused the RBOCs of discriminatory practices designed to affect their ability to compete - and succeeding. Michael Armstrong, Chairman and CEO of AT&T was quoted as saying that the RBOCs' control of the local loops will forever halt competition. "As long as [the Bells] are allowed to control this vital choke point, any vision of a competitive local market will remain just that - a vision."An unnamed source that we spoke with had these comments, ".There are four major ILECs that exist, and maybe its just the conspiratorial nature in me, but I can't believe that they have not gotten together and agreed to be difficult with the rest of the market.at least informally." (ILECS are incumbent local exchange carriers) In WAVE #0107 in our article about COMNET Education, we commented on NorthPoint's struggle for collocation. Boardwatch Magazine recently ran an article entitled, "The Bell Monopolies are Killing DSL, Broadband and Competition." The New Networks Institute released a report in December 1999 detailing the cost to an ISP to buy Bell Atlantic ADSL, including the actual lines, hardware rental and bandwidth - which are sometimes set above retail rates. The article also alleges that Bell Atlantic.net, Bell Atlantics' Internet company has begun selling services below cost to discourage CLEC and ISP resellers. Recently, an article in BroadbandWeek heralded the success of IgLou (http://www.iglou.com), an ISP serving the Louisville, Lexington, Cincinnati, and Nashville metropolitan areas, that brought charges against BellSouth for providing preferential access and rates to its own ISP, BellSouth.net. After more than a year of legal battles, the Kentucky Public Service Commission found that BellSouth was guilty of the charges and ordered the RBOC to address the disparities. According to Brock Henderson, Director of Marketing for IgLou, other ISPs and the public in general have cheered the company's success, but BellSouth has been less enthusiastic and has not complied with the PSC's (Public Service Commission) orders. In fact, BellSouth is challenging the PSC's jurisdiction over the matter and is appealing their final decision. The PSC has agreed to review the appeal, although the traditional course of action would be for the matter to move into the jurisdiction of the courts.Henderson adds that they do not have any CLEC competition in the area to purchase DSL from, and so are stuck with BellSouth's rates. There are many other ISPs in the same position and many are being forced (or encouraged) to become CLECs in an effort to increase their bargaining position with ILECs. FISPA (The Federation of Internet Service Providers of the Americas, previously the Florida Internet Service Providers Association - http://www.fispa.org) quotes these reasons why an ISP should become a CLEC, on their Web site:
A related success story can be found at McLeodUSA, a facilities- based provider with former ILEC status. The company was incorporated as McLeod Telecommunications in 1991 and won regulatory approval for local and long distance service in Iowa and Illinois in 1993. In 1997 the company changed its name and began, with a series of mergers, to call itself a CLEC and market DSL services. Presently the company provides voice, data/Internet and hardware/equipment and on February 20th reiterated their year-end revenue and EBITDA targets of $2.1 billion and $225 million respectively. The Consumer View This brings us to the third party in the telecommunications market - the consumer. Although the FCC and the Telecom Act advocate consumer protection, the tales of woe from DSL and Bell customers are endless. Determining service availability takes weeks, service rollouts take months, and then truck rolls are problematic, costly and incorrectly accomplished. The problems seem so large in fact, that Verizon was recently awarded a monetary fine, of up to $43 million as part of an annual review process completed by the NY Public Service Commission (NYPSC), for their lack of customer support (throughout all their service offerings). Verizon's wholesale DSL business, which operates as a separate affiliate, is also being fined $723,000 as a result of service complaints from competitive providers needing Verizon to install lines. Problems with Verizon have become so bad in some areas that one consumer even registered the domain names BellAtlanticPathetic.com and VerizonPathetic.com to voice his annoyance online. On February 9th, Verizon actually closed down DSL line sales at 53 central offices (COs) affecting 35% of its 1,850 COs in 30 states. This will aversely affect their wholesale customers (CLECs and ISPs) but many customers are pleased with the shutdown due to a feeling that over crowded networks have exacerbated problems with their DSL service. Many groups are also interested in consumer rights. The New Networks Institute (http://www.newnetworks.com/broadbandbill.htm) recently published a Broadband Bill of Rights on their Web site that, "sets out statements of law and policy that [they] believe are crucial if customers (and competitors) are ever going to receive adequate DSL and Broadband services- without all the current hassles." On the Consumers Voice Web site (http://www.consumersvoice.org) one customer posted the following comment, to sum up their Ameritech service: "If an airline was risking passenger lives by undertaking the same business practices as Ameritech, it is difficult to imagine that lawmakers and regulators would sit idly by and allow the company to continue operations with merely a fine and an admonition to 'clean up its act.'" Consumers Voice is an organization dedicated to working with elected/appointed officials within the government to ensure that communities across the country have a voice in consumer matters. Bob Johnson, Executive Director for Consumers Voice said he thinks that the consumers have become the big victims in the whole situation. The Consumers Union's press release (http://www.consumersunion.org/telecom/lessondc201.htm), "Fifth Anniversary of Telecommunications Act Offers Consumers Little to Celebrate," criticizes the FCC's handling of telecom mergers, which have decreased the number of Bell monopolies from seven to four. In 1996 there were eight RBOCs. That number has since been reduced to four - Verizon, SBC, BellSouth and Qwest - through a series of mergers. Johnson claims that the Telecom Act promised consumers three things; lower prices, more innovative services and reliable services. Between this consolidation push and the fact that cable rates have risen nearly three times as fast as inflation, consumers in most areas are 0 for 3. Johnson also believes that solutions will not be driven by the FCC or Congress (and actually could be harmed by them), but by individual state commissions. An Administrative Law Judge in Pennsylvania has started this process by ordering Verizon to structurally separate its wholesale and retail operations over the next year. New Jersey and Maryland have initiated similar processes within their states, but these actions are not a guaranteed success. For instance, on March 7th, CLEC.com reported that Maryland legislator Joan Stern withdrawn the bills the two Maryland bills, one to force the structural separation of Verizon's wholesale and retail units, and another to set up a task force on competition, after it became apparent that neither would be approved by the House Environmental Matters Committee. Committee leaders have now formed a working group to study the local-telephone market and determine their role in the competitive process. Market Statistics We do know this. As of September 2000 there were over 3.8 million cable modem subscribers and at the end of December 2000 there were approximately 2.4 million DSL subscribers. With 55 million households owning a PC, these broadband numbers are small - but costs have decreased to a monthly average of $40 and subscribers will increase with time. Also, beginning this month, residents of Lake County, Chicago, Illinois will have three local phone companies vying for their local telephone dollars. Ameritech, AT&T (over its cable lines) and a new competitor, TDS Metrocom will compete for the 400,000 lines in the residential area - which is certainly a positive effect of the Telecom Act. Assessment We find ourselves again looking at the three players in this market - government, new competitors and the consumer. The new administration's focus seems to be supporting commercial ventures - not consumers, new competitors are financially weak and destined to lose to the RBOCs, and consumers are very unhappy with their limited choices and technical DSL nightmares. The FCC has said that deregulation is great, but if it doesn't result in competition, then consumer interest is threatened, which it certainly has been in the past few years. Cable modems, DSL and satellite subscribership is growing, but consumers that have a choice between the three are few and far between - and lucky! The average consumer is using a 56k modem and only dreams of the high-speed connections they read about. Even Washington DC-based Greenberg Traurig telecom attorney, Rick Brecher, admits that the Act's biggest accomplishment might be helping lawyers like him earn a living. |
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