August 25, 1998


by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—When the FCC issued its notice of inquiry on data communications (read “Internet”) on August 6, the immediate reaction in most of the press was to ring it up as a victory for the local Bell telephone companies. On closer analysis, many observers leaned toward calling it a win for the Bell’s opponents. But the future depends on how each side plays the cards that the FCC has dealt them.

The notice was a response to petitions from the Bells to enter the long distance market. That market has been denied to them so far, first by the court-ordered break-up of AT&T that spawned them, and then by the 1996 Telecommunications Act as interpreted by the FCC.

While the petitions promised to develop just a data network, there’s no way to keep regular voice calls off once it’s in place. According to the Telecom Act, local phone markets are supposed to have more competition before the Bells get to compete in long-distance.

The FCC told the Bells yes, you may build a long-distance network, but it has to be done by a subsidiary company. Furthermore, you have to lease equipment to competitors under the same terms as the subsidiary.

The notice clearly relaxed the original restrictions on the Bells, so it looked like they got what they wanted. Maybe the FCC commissioners planned to make such an impression, because pressure from several powerful Congressmen was driving them in that direction. The Congressmen have been taking the Bell line that options in the data market are too limited and that it’s high time the Bells get a chance to serve that market.

But the supposed victors were none too happy. The Bells’ press releases indicated that the FCC’s olive branch failed to offer them enough sustenance to build their networks. And the reasons for their disappointment can be seen through a look at the conditions laid down by the FCC.

The petitions were not the only submissions considered in the FCC’s notice. Several competitors, both competing telephone carriers (CLECs) and Internet Service Providers, sent in comments. Most expressed frustration at the treatment they received from Bells while trying to offer their own data services.

The business model for the Internet, as well as the references to data service in the Telecom Act, depend on the assumption that people will soon be able to get high-speed data services in their homes. Regular voice-quality lines have pretty much hit their upper limit with the current 56K (56 thousand bits per second) modems, which in practice deliver service only in the 30s.

Cable modems are impressively fast, but are expected to degrade in speed once a lot of people in each neighborhood start using them heavily. For many years, therefore, it seemed that the only way forward was to lay new optical fiber lines to each person’s home, a formidable expense.

But ADSL, a recent advance in telephone communications, has been realigning the field in a matter of months. Using high frequencies over traditional telephone wires, ADSL can transmit hundreds of thousands of bits per second, maybe over a million.

Many phone lines are ready for ADSL now, and the majority can handle it after fairly cheap modifications. While some people will always have lines that are too long or too old for ADSL, it may well become a baseline expected by urban customers and a tremendous business opportunity for Bells, CLECs, and ISPs.

Bells can prepare most lines for ADSL easily. They can also route traffic from the customer to the Internet. But what happens when competing telephone and Internet companies try to cash in on ADSL’s promise? In state after state across the country, competitors report problems getting service from Bells.

Sometimes the complaint is from a CLEC that wants to hook into the ADSL market by locating equipment at an Bell’s central office. Installation may be delayed for months. Bells turn down some requests flatly with the claim that there’s not enough space or that the CLEC’s equipment could interfere with regular signals.

Sometimes the problem is reported by an ISP, complaining again of delays, or detecting that the Bell is using its relationship with the customer to unfairly favor its own Internet service.

In response to this chorus, the FCC is insisting that the Bells allow competition. It is considering a ruling that would open competition on new parts of the telephone network: the line going from the central office or a concentrator to a customer.

The whole point of forcing the Bells to create their long-distance networks as subsidiaries is to make it easy for competitors and the FCC to check whether the Bells play fair. A Bell can’t easily hide costs if it’s trying to subsidize the subsidiary. Anything it could do favor the subsidiary—such as share customer lists or installing its equipment before competitors’ equipment—would be evident immediately.

The Bells push back with concerns that they’ll be forced to sell equipment below cost. They were backed a couple years ago by a court on a similar complaint. The court ruled that the pricing model required by the FCC for selling parts of the network to competitors was flawed and did not reflect the Bells actual investment.

So who will win after all? Perhaps we will all lose. The competitors won at the FCC level, but Bells still control the phone lines. If Bells feel it’s not worth their while to offer ADSL, it just won’t happen. We’ll all return to drumming our fingers while graphics roll languidly down our screens.

The Bells may hold most of the cards, but the FCC proposal has slipped CLECs a couple of trumps. If CLECs and ISPs press the Bells to follow through, resistance may break down and competition emerge.

Essentially, the competitors need to launch a campaign at the federal level, the state utility commissions, the courts, and the Bells themselves for implementing the FCC compromise. The competitors need to say, “We think we can make a profit under the compromise agreement. We’re ready to offer ADSL. Why can’t a Bell’s subsidiary do the same?”

For that is really what the FCC is proposing. Nobody knows yet whether ADSL offers a model by which companies can sell a service at rates acceptable to customers and still make money. But hundreds of CLECs and ISPs across the country are willing to give it a try. It’s up to the Bells to join the game.

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