Comments to the Federal Communications Commission on the Telecommunications Industry Structure (October 20, 2009)

Summary – Given the dominance of AT&T and Verizon in the telecommunications industry, unbundling, open-access and non-discrimination are necessary but not sufficient conditions to ensure a competitive broadband infrastructure market.

The Commission should supplement these regulatory requirements with a long-term comprehensive plan to develop a competitive broadband infrastructure market that would include acquisition guidelines, a dedicated antitrust watch-guard organization, and benchmarks for a competitive broadband market.

I. Introduction

The draft Berkman Study on Next Generation Connectivity provides a helpful yet incomplete picture of the steps needed to foster a competitive broadband market in the United States. In particular, the unbundling and open access requirements recommended by the study are necessary but not sufficient conditions for the achievement of a competitive broadband infrastructure market.

Unbundling and open access requirements are helpful because they open the fringes of the market to new entrants. As certain fringe players succeed, some will expand their service offerings into the core infrastructure market.

Nevertheless, to foster sustainable competition in the broadband infrastructure market, the Commission must address the dynamics of the industry’s market structure, including the power, incentive, behavior and planning horizon of the industry participants.

In this regard, the Commission must put together a comprehensive long-term plan in concert with the Department of Justice and the U.S. Congress to ensure that a competitive environment can not only take root but survive.

II. The Industry Dynamics

  1. Communications Networks Are Moving to the Internet Protocol

Communications networks are increasingly utilizing the Internet Protocol for the interexchange of information because of its superior cost-saving and revenue-producing opportunities. For example, IP communications can simultaneously handle voice communications, data transmission, video distribution and mobility.

Additionally, IP communication networks are designed to enable connectivity between and among an unlimited number of people and applications. Hence, IP communications produces the positive externalities that regulators find so appealing.

      2. Consumers Want Low-Cost Ubiquitous Connectivity

As the Berkman Study explains, consumers want connectivity that is just there, connecting anyone, anywhere with everyone and everything, without having to think about it. However, the Berkman Study does not highlight the fact that the capability to meet this consumer requirement is here today in the form of 4G mobile technology. Additionally, 4G technologies utilize the Internet Protocol and have lower costs than existing networks. Hence, the current gap between available technology and customer demand is closing. That is, a viable solution is at hand.

Relying on this fact set, many economic theorists will assert that unfettered market forces will provide the optimal outcome for consumers. However, history – as well as the Berkman Study – shows that is not the case.

      3. Dominant Carrier Behavior

Historically, the telecommunications industry in the United States was dominated by AT&T, and today it is dominated by AT&T and Verizon (formerly known as the Bell System).

On multiple occasions over the past 130 years, the Bell System has utilized the following approach to maintain its dominant position:

a) Consolidate the market through acquisitions
b) Discriminate against competitors to eliminate competition and forestall market entry
c) Negotiate a Consent Decree when sued by the government, agreeing to market restrictions or a divestiture of non-essential business units
d) Get Congress to vacate the Consent Decree
e) Wait for an economic downturn to re-consolidate the industry

Not surprisingly, AT&T and Verizon have, once again, consolidated the telecommunications industry (local, long distance and mobile) and thwarted competitive entry after Congress replaced the 1984 Modified Final Judgment with the Telecom Act of 1996.

Notwithstanding this onslaught, the Martin Commission blithely hoped that the Cable TV industry would overcome its members’ spotty footprints and dubious service reputations and produce a competitive market in the IP communications.

Similarly, the current Commission can wish that new WiMax entrants will overcome their spectrum and other market disadvantages and grow into a viable broadband alternative.

From a theoretical perspective, it is true that three suppliers – each with a cut-throat competitive mentality – could provide a satisfactory outcome for consumers. However, the Bell participants and the Cable TV companies are life-long monopolists, with no lust for competitive warfare.

Similarly, the current 4G WiMax entrants are likely to be acquired by a telephone or a cable company after the build-out, and this type of acquirer will not rock the competitive boat. Hence, in the United States broadband market, three alternative suppliers are not likely to lead to competitive market. For example, the following chart submitted by Verizon’s expert witness in WT Docket No. 09-66 dated September 30, 2009 indicates the lack of competitive pricing by the four national competitors in the mobile communications market.

Table 3

Voice Pricing Plans

Source: Carrier Websites, September 2009

            Minutes   Price

AT&T       450     $39.99
               900     $59.99
              1350     $79.99
          Unlimited $99.99

Sprint       200     $29.90
                 450    $39.99
                  900   $59.99
          Unlimited $99.99

T-Mobile   300    $29.99
                  600    $39.99
                 1000    $49.99
                  1500    $59.99
              Unlimited $99.99

Verizon      450   $39.99
                  900   $59.99
                 1350   $79.99
           Unlimited $99.99

These prices are almost identical, but they do not reflect a low-cost equilibrium. Rather, the prices are extremely high and produce supernormal profits. For example, AT&T Mobility and Verizon Wireless have cash flow margins higher than any company in the Fortune 1000. In fact, the prices are so high as to enable the carriers to recover the entire cost of their networks in less than 24 months. Hence, the Commission cannot assume that two or three competitors are sufficient for a competitive broadband market structure when the dominant market leaders are former cozy monopolists. Rather, the Commission must develop a plan that fosters both competition and competitive rivalry.

Additionally, the plan must anticipate and address the expected anticompetitive behavior of the dominant carriers. Otherwise, consumers will be left with two or three dominant, non-competing choices for broadband connectivity.

III. A Comprehensive Approach Is Needed to Ensure the Development of a

Competitive IP Communications Market

Competition in telecommunications networks began to take root in the early 1980’s. Fifteen years later, the Telecom Act came too quickly for the likes of a once-successful MCI to survive.

The first lesson from history is that the government should adopt a long-term plan for the development of a competitive IP infrastructure that covers a 20 year period. Such a plan should include a comprehensive definition of the relevant market and benchmarks for sustainable competition. For example, a competitive structure could be defined as a Herfindahl index of 1600 or less along with no category of providers (e.g., Bell Companies, Cable Companies, or independent mobile providers) having a market share greater than 40%.

Second, the Plan should include absolute prohibitions on infrastructure acquisitions by the dominant telephone companies and cable companies.

Third, a beefed-up antitrust watch-guard organization should be included to play the role that Judge Harold Greene exercised under the 1984 Modified Final Judgment.

Fourth, the FCC should adopt open access, unbundling and non-discrimination rules and be prepared to enforce these rules with stiff penalties, including spectrum divestitures if the rules are willfully violated.

Finally, the Commission should engage the U.S. Congress to codify the overall plan in the form of comprehensive legislation that expires after twenty years – but only if the competitive benchmarks are met.

IV. Conclusions

The Berkman study provides valuable information and analysis for the Commission’s deliberations in broadband communications. The report’s recommendations for unbundling and open access are well supported and should be adopted along with non-discrimination provisions.

However, unbundling, open access and non-discrimination are necessary but not sufficient conditions to ensure a competitive broadband infrastructure market.

The Commission should supplement these regulatory requirements with a long-term comprehensive plan to develop a competitive broadband infrastructure market.

The Commission could commission the Berkman Center or other similar organization to help develop such a comprehensive plan that would include acquisition guidelines, a dedicated antitrust watch-guard organization, and benchmarks for a competitive broadband market