PublishedJuly 11, 2012

Verizon-Cable Spectrum Swap with a Side of Non Compete

The problem with the dream of a free market in telecommunications networks is that barriers to entry are too high.  So high in fact that that the largest cable TV operators who not so long ago were given exclusive franchises to build local networks that might compete in a digital world with legacy monopoly telephone companies, have decided not to bother with the wireless part.  And Verizon with its lock on lucrative access lines for business customers and its dominance of mobile wireless has decided not to bother with any more fiber optic lines to challenge cable’s dominance of residential Internet access and video entertainment.

Meanwhile, a reliable affordable Internet connection is increasingly important to our children’s education, our economic prosperity, our civic participation and even our health care.

How can the FCC conclude that the public interest would be served by approving agreements between the only two players in a local wireline duopoly in which they become business partners for the joint marketing of a single “quad play” service?

While they have the technical ability and financial incentive to make critical interconnections rocky and more expensive for any surviving wireless competitor?

This non-merger tectonic shift sure feels to us like a slippery slope toward cable monopoly (for residential landline), telco monopoly (for business landlines) and wireless duopoly of AT&T and VZ — the largest AND the only vertically integrated mobile wireless companies.

If so, consumer rates will rise, and landline service will become an unaffordable luxury for most.  At that point either Americans will demand rate regulation of Internet access as a public utility OR the majority of Americans will be limited to small device wireless content consumption, text and voice and maybe basic cable at home.   Kids can’t use digital textbooks and nobody can access online higher education or start a business if they don’t have a home broadband connection.

A senior Washington DC Verizon executive, then a member of Congress, in 1985 sponsored legislation to remove the antitrust line of business restrictions just imposed by the Court effective the year before, that kept the local telephone monopolies out of competitive information services and put the FCC in charge instead.   The telcos wanted to leverage their control of last mile network facilities into adjacent markets.

That same telecom exec and others continued to press this case unsuccessfully in and out of Congress for 10 yrs until the 1996 Telecom Act was passed, and included a new interconnection plan to break the Bell telco local bottleneck monopoly over last mile networks.  So-called CLECs arrived coincident with the .com bubble, but were choked off by anticompetitive tactics and deregulation in the following decade.  Verizon now argues that carrying IP traffic over its networks as opposed to straight  voice and data is not telecommunications at all, so it can no longer be regulated.  Nevermind that many people want to buy plain old Internet access like they wanted to buy basic voice dialtone. Verizon just doesn’t want to sell it to you, because bundling in “information services” is both more lucrative and preserves the fiction that they no longer provide telecommunications subject to the 96 Act and FCC regulation.

With this Verizon/Cable cartel, only cable survives as a real competitor to telcos for residential wireline Internet access.  VZ in all of its many non-FIOS markets is now ceding that business to cable in favor of retaining for itself dominance in both business wireline (special access and backhaul) and mobile wireless services.  If head-on competition is that difficult for those with huge legacy network advantages, imagine the barriers to entry for anyone else.

Section 271 of the Telecom Act allowed the Bell telcos to enter info services and other competitive markets ONLY upon proving the presence of a facilities based local competitor (and a showing of fair interconnection with them)  Until then they were prohibited from joint marketing local landline access telephone service with more competitive long distance or info services.

Section 272  of the Act required that competitive services were to be provided through a separate corporate affiliate so that the FCC could monitor for anticompetitive discrimination against rivals in interconnection or pricing.

In the pending Verizon deal, cable instead becomes the dominant local access provider for residential customers and VZ wireless becomes its affiliate in a joint marketing scheme. But cable operators need not prove the presence of a single competitor for bottleneck local access services, because the Act does not apply to them.  And where that competitor could be the telephone company, VZ will be much more financially invested in the success of its new quad play bundles of VZ Wireless and Cable TV/Internet access with superior wifi offloading options, than in taking customers back to unprofitable dialtone or plain old DSL Internet access.

Cable for its part will have new incentives to support proprietary home wifi offloading and public wifi exclusively for its quad play customers because it can use these features as positive competitive differentiators that other vendors can never match.

This negative competitive fallout is not lost on Rep. Henry Waxman, Ranking Member of the House Energy & Commerce Committee, who raised the issue at an FCC Oversight hearing yesterday.   The Commissioners also got an earful from several different Members of Congress about the continuing problem of the AT&T and Verizon special access wireline monopoly over wholesale inputs their competitors must buy at inflated rates.  That’s not to mention the parallel overcharging for telecom lines to all American businesses in their vast and dense geographic footprint from Fortune 500 companies to small businesses.

As FCC Commissioner Jessica Rosenworcel noted at the hearing, “competition  is essential.”   But policies and theories and dreams of unregulated free market competition won’t cut it.   If actual competition has failed to materialize or disappears through mergers and joint ventures leaving customers facing monopoly and duopoly, regulation will be the only solution left, regardless of whether you come from the right or the left.

With residential telephone last mile infrastructure headed for extinction, fiber optic lines serving only the high end of the residential market, but mobile devices of some description for everyone, we’ll start to look more and more like a third world nation.   The FCC has an opportunity here to support competition and stave off rate regulation by either blocking this cozy corporate deal or strictly conditioning it on nondiscriminatory interconnection.

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