December 15, 1998

QUID PRO QUO OR STATUS QUO IN NEW HIGH-SPEED ACCESS PRINCIPLES?

by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—An unusual mix of local telephone companies and national computer manufacturers promised last week to deliver high-speed data services to the public. Nothing new about this promise; they’ve been talking about it for months—but this time they also promised to help their competitors in a quid pro quo to ease regulation.

A list of “Ten Principles” were submitted by these companies to the FCC on December 7. While principles are not the same as iron-clad promises, the accompanying letter says they “represent a firm commitment on the part of the nation’s leading local telephone companies to open their local networks to competition.”

This ought to be welcome news to the hundreds of competing telephone carriers and Internet providers who have tried for at least three-quarters of a year to enter a high-speed data market they fear will be taken over by incumbents. And my impression is that the ten principles do contain concessions to competition. But whether the changes are thoroughgoing enough that they can hold up under day-to-day competition remains to be seen.

Let’s take the complaint by Internet service providers that the incumbents discriminate in favor of their own Internet services. These services are taking on the outlines of a major business strategy now that a kind of high-speed access called ADSL is available.

Discrimination could be as subtle as delaying service to new customers of competing providers, or even offering a message saying “Press 1” for the incumbent’s affiliated Internet service when a customer calls up to order ADSL. The very first of the ten principles, therefore, promises that incumbents “must not discriminate between affiliated and nonaffiliated ISPs.” The phrasing is simple and refreshingly free of ifs, ands, or buts.

The promise becomes cloudier over the next most pressing concern: collocation. That’s a practice whereby a competing telephone carrier puts equipment in the incumbent Bell’s central office and hooks it up to the devices used by the incumbent to terminate local phone calls. Collocation is critical to allowing competing carriers to sign up customers at reasonable rates, and for years these carriers have been complaining that the incumbents put barriers in the way.

The incumbents promise collocation in the second principle, but subject to restrictions. For instance, they may refuse to provide cages to protect competitors’ equipment from tampering, or make the competitors provide “reasonable adjacent structures.”

I am willing to grant, however, that restrictions may be reasonable and necessary. What if a hundred competitors started up in some city and demanded cages in every central office? The sheer floor space required could get out of hand.

To someone who has followed the controversies between incumbent telephone companies and their competitors—controversies that have led to many rulings against the incumbents in state utility commissions, and to refusals by the FCC to let incumbents into the much-desired long-distance market—it is clear that many of the ten principles would reverse historical decisions and remove the restrictions over which incumbents are gnashing their teeth.

Thus, the fourth principle frees incumbents from providing some kinds of “unbundled network elements.” Some ISPs want to purchase these unbundled elements—that is, buy part of the path to the customer while tying into the incumbent’s phone network for the rest of the path—because they believe the combination can help them compete successfully in the ADSL market. To get the elements in bundled form, the ISP would have to become a telephone carrier and shoulder a lot of regulatory burdens.

Unbundled network elements have become a point of hot contention in many states, and incumbents would dearly love the issue to go away. Admittedly, the fourth principle places many conditions on the restriction against “unbundled network elements,” so it may allow still for reasonable negotiations.

Another end-run around regulation is suggested by the ninth principle, which addresses the suspicion of many critics that incumbents charge too much for basic local phone service and artificially lower prices for advanced services where there is competition. The principles asks that incumbents be “subject to existing non-structural safeguards” to prevent this kind of cross-subsidy.

It is almost impossible to understand what the incumbents mean by requesting “existing non-structural safeguards” unless one asks what a “structural safeguard” might be. It just so happens that the FCC offered last August to let Bells into long-distance data services, as I have recounted in another article, but only if they offered the services as separate subsidiaries. This is in fact the “structural safeguard” that made the Bells unhappy.

John Schneidawind of BellSouth, who kindly provided me with a copy of the principles, confirmed that the ninth principle was meant to remove the need for a subsidiary. But he said the effect of the principle would be very limited because it applies only to “integrated” services.

Clearly, the impacts of the principles are extremely subtle, and in this article I have stopped well before getting into Section 3(4)(B) and other matters that I myself can’t fathom. I’m sure, however, that FCC experts will scrutinize the principles with the same magnifying glass they have used on previous Bell proposals.

One possible judgment would be that the Bells promises just maintain the status quo. In other words, they’ve had to accept competition (limited though it is) in plain old telephone service, and they ought not to get a special deal to allow the same competition in ADSL. If the FCC sees things that way, they could frostily respond, “Thank you for admitting that compliance with the Telecommunications Act is possible—now we expect to see you do it without further incentives.”

Currently, regulations for ADSL and other services are set mostly at the state level. Pacific Bell, according to spokesperson John Britton, has already won in California much of the relief desired by other Bells. For instance, it is free to set prices as it wishes on advanced services, can operate without setting up a subsidiary, and does not have to unbundle its network elements.

Britton says that California understands the importance of high-speed data access in peoples’ homes. Utility commissions in other states want high-speed access too, but many are trying to protect small telephone carriers and Internet providers along the way.

Recent FCC actions (notably a ruling that GTE’s ADSL service is subject to regulation by the FCC rather than the states) suggest that more decisions will shift toward the federal level. But at this level, the FCC itself has been a tough negotiator.

The FCC is mandated, by the 1996 Telecommunications Act, to make sure local phone markets are open to competition before allowing incumbents to enter the long-distance market. The Bells have a history of offering minimal changes to existing practices in the hope that the FCC will acknowledge that sufficient competition exists. Let us hope that the ten principles represent something more substantial.

In addition to the soft strategy of petitioning the FCC, of course, the incumbents have a hard strategy too. It includes frontal assaults on FCC rulings in the courts (many of them vindicating the incumbents) and lobbying Congress to put pressure on the FCC to loosen the reins.

It is not coincidental that conservative Congressmen announced on December 11 that they would overrule the FCC in order to let the Bells into the long-distance market, and would open up a general inquiry into whether the FCC was doing its job. In my opinion, it’s doing the job Congress told it to do in the Telecommunications Act, but admittedly everybody including the FCC commissioners are frustrated with the lack of progress in high-speed services and local competition.

The most impressive aspect of last Monday’s ten principles is the range of companies that signed on. In addition to most of the incumbent telephone companies (including GTE, the only incumbent that didn’t originate as a Bell) one can find Microsoft, household-name computer manufacturers (Intel, Gateway, Compaq), and national business councils.

The computer companies obviously see the Internet as their next big source of sales. But they have no need to protect competition in this medium.

Thus, to the outrage of some Internet providers, Dell and Compaq announced around the time of the October Comdex trade show that they were teaming up with the Bell company US West. Soon, if you live in area where US West offers ADSL, you will be able to buy a computer and be signed up automatically for Internet service—with US West, of course. Where do deals like this leave the small Internet provider?

Perhaps the incumbents will take pity on the small telephone and Internet companies. After all, the competitors that the big guys really worry about comes from outside—specifically, from cable TV companies with cable modems that, frankly, outperform ADSL in both price and speed.

Cable modems represent the kind of monopoly that Internet providers fear in telephony. If you buy a cable modem, the only Internet provider you can sign up with is the one chosen by your cable TV company. So the fight for Internet competition must be waged on two fronts at once.


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