Forecasting Market Structure in U.S. Telecoms

1. Forecasting Market Structure in U.S. Telecoms George S. Ford, PhD Chief Economist Phoenix Center

2. Unbundling Framework • “…we clarify that we evaluate impairment with regard to the capabilities of a reasonably efficient competitor.” • This “efficient competitor” idea is meaningless. If a carrier is inefficient in all but the element it needs, then it should get the element. Competition will kill it. The term “efficient competitor” is just another word on the list of things to say often, along with “competition,” “innovation,” and “investment.”

3. Unbundling Framework • “…prohibit the use of UNEs for the provision of telecommunications services in the mobile wireless and long-distance markets, which we previously have found to be competitive.” • 1. Blatantly anticompetitive. Competition drives prices to costs, and if a monopolized input can be acquired at a lower cost, then competitive prices will fall. • 2. Affects UNE-L entry strategy (discussed later).

4. Unbundling Framework • “…we draw reasonable inferences regarding the prospects for competition in one geographic market based on the state of competition in other, similar markets.” • Whether or not the inferences are “reasonable” can only be determined later. The FCC’s inferences have been horribly unreasonable in the past • Triggers • Special Access • Do the inferences cross supply techologies?

5. Unbundling Framework • we … determine that … a general rule prohibiting access to UNEs whenever a requesting carrier is able to compete using an incumbent LEC’s tariffed offering would be inappropriate. • Conflicts with Point 1 – no UNEs in competitive markets • “able to compete”

6. Dedicated Transport • Competing carriers are impaired without access to DS1 transport except on routes connecting a pair of wire centers, where both wire centers contain at least four fiber-based collocators or at least 38,000 business access lines. • Where do these numbers come from? • Are the fiber based colocators the same in each office, so that is reasonable to assume that there is a non-ILEC transport between the offices?

7. Dedicated Transport • “Competing carriers are impaired without access to DS3 or dark fiber transport except on routes connecting a pair of wire centers, each of which contains at least three fiber-based collocators or at least 24,000 business lines.” • Where do these numbers come from? • Are the fiber based colocators the same in each office, so that is reasonable to assume that there is a non-ILEC transport between the offices? • Why fewer collocators (probably scale argument) but fewer lines (antiscale argument)?

8. Dedicated Transport • During the transition periods, competitive carriers will retain access to unbundled dedicated transport at a rate equal to the higher of (1) 115% of the rate the requesting carrier paid for the transport element on June 15, 2004, or (2) 115% of the rate the state commission has established or establishes, if any, between June 16, 2004 and the effective date of this Order. • Why 15%? • Why does the FCC now have the authority to set UNE rates (“the lower of”) (is this a stance on 271 pricing?)

9. High Capacity Loops • Competitive LECs are impaired without access to DS3-capacity loops except in any building within the service area of a wire center containing 38,000 or more business lines and 4 or more fiber-based collocators. • Why back to 38k lines? • It is silly to argue that the trunk-side economics have anything to do with the line-side economics • Any evidence that colos correlate to port-side deployment?

10. High Capacity Loops • Competitive LECs are impaired without access to DS1-capacity loops except in any building within the service area of a wire center containing 60,000 or more business lines and 4 or more fiber-based collocators. • Again, it is silly to argue that the trunk-side economics have anything to do with the line-side economics • Apparent scale conflict again (60k lines v. 38k lines)

11. High Capacity Loops • The High Capacity Loop decision is nearly identical to Special Access deregulation • Special Access deregulation has resulted in sizeable price increases, and no price decreases. • Price increases are market power based, not cost-based (PC Policy Paper No. 18)

12. High Capacity Loops “…the Dog returns to his Vomit and the Sow returns to her Mire, and the burnt Fools bandaged finger goes wabbling back to the Fire (Kipling, The Gods of Copybook Headings).”

13. Switching • “Incumbent LECs have no obligation to provide competitive LECs with unbundled access to mass market local circuit switching.” • Can’t wait to hear how this is justified • “We adopt a 12-month plan for competing carriers to transition away from use of unbundled mass market local circuit switching.” • It often takes longer than that to deploy a switch • What if ILEC slow rolls hot cuts? (higher prices for UNE-P, no transition)

14. Switching • This transition plan applies only to the embedded customer base, and does not permit competitive LECs to add new switching UNEs. • No growth during the deployment phase of network (a death sentence?) • If a CLEC has 100 customers at the beginning of the transition and it takes 12 months to get switch up and running, it will have 54 customers at the end (with churn of 5%)

15. Switching • a rate equal to the higher of (1) the rate at which the requesting carrier leased that combination of elements on June 15, 2004, plus one dollar, or (2) the rate the state public utility commission establishes, if any, between June 16, 2004, and the effective date of this Order, for this combination of elements, plus one dollar. • FCC setting UNE rates again • 271 play?

16. Switching (and all elements) • How will unbundling obligations under Section 271 play out?

17. Consequences • Reduction in UNE availability brings sizeable scale economies back into play • Higher Concentration (fewer sellers; consolidation)* • Wholesale Business Plans* • Limited/Targeted Market Participation (markets with high ratio of market size to entry costs/scale economics) * Phoenix Center Policy Paper No. 12; T. R. Beard, G. S. Ford, and T. Koutsky, Mandated Access and the Make-or-Buy Decision: The Case of Local Telecommunications Competition (Forthcoming Quarterly Review of Economics and Finance 2005; www.aestudies.com).

18. UNEs/Facilities-Based Entry • Even without switching, UNE/FBE Plans rely on unbundled elements • Loops/Transport/Colocation • Will FCC kill these too? • DS1, DS3, Dark Fiber • Will FCC raise price as result of TELRIC proceeding? • Will hotcut volumes be sufficient? • Can the industry tolerate such an inefficient method of providing service?

19. UNEs/Facilities-Based Entry • UNE-L Strategy Somewhat Dependent on Broadband (increased revenues) • “[we] prohibit the use of UNEs for the provision of telecommunications services in the mobile wireless and long-distance markets, which we previously have found to be competitive (FCC Press Release).”

20. UNEs/Facilities-Based Entry • Does FCC decision sabotage access to broadband capable local loops? • Does fiber in network eliminate access to broadband capable local loops • Protective Coupling Device? • Device that eliminates broadband capabilities of copper loops

21. BYOB-VOIP • As soon as the ILECs and Cable Co’s decide BYOB-VOIP is dead, it is dead. • FCC unlikely to help • Antitrust action inevitable

22. Mobile Telephony • Wireless Substitution • At present, not an economic substitute for wireline (Phoenix Center PB10) • Bell Ownership of Wireless • Worse than eliminating a competitor; it leads to higher than monopoly prices for both wireline and wireless (if substitutes; Phoenix Center PB11)

23. Mobile Telephony: Divide and Conquer?

24. Mobile Telephony • Through consolidation of the wireless industry, the Bells will effectively internalize any substitution between the wireless and wireline • Wireless will not reduce market power, but may enhance it

25. WiFi - WiMax • Technological potential is a bit sketchy, but promising • Fragmented structure will be problematic for business plans • How to charge for this service? • Can free service be supported? • What services viably provided over this platform? • For what service will it offer an alternative?

26. Cable Telephony • VOIP Platforms make Cable Telephony a more viable entry platform • Being deployed in numerous markets • Issues • Quality? • Availability (ubiquity)? • Most promising competitor in wireline telecom