Broadband Deregulation

Posted: 3/2003

Broadband Deregulation:
WILL INDEPENDENT ISPS FALTER?

By Josh Long

Deregulation of broadband services could hamstring the ability of ISPs to negotiate favorable rates with the Bells, potentially leaving a fleet of Internet providers without access to the high-speed pipes the country's largest telephone operators control, some industry-watchers say.

"It's game over for independent ISPs," says Maura Colleton Corbett, executive director of the Washington D.C.-based BroadNet Alliance.

Led by Republican chairman Michael K. Powell, the Federal Communications Commission is considering whether to declare the Bells nondominant providers of broadband services, and in a separate proceeding, whether to classify DSL as an information service, subjecting the Bells to far fewer regulations.

Under the FCC's Computer Rules, the Bells are required to provide ISPs service on a nondiscriminatory basis at the same rates, terms and conditions they offer their own ISP affiliates. But the incumbent phone giants say they should not be subject to broadband regulations when the dominant providers of high-speed Internet access, cable operators, are free to negotiate their own rates, terms and conditions.

Cable modem is the most widespread broadband technology serving about 9.2 million lines through the first six months of 2002, followed by 5.1 million asymmetrical DSL lines, the FCC reported in December.

Those who support the current regulations say the Bells make a ludicrous argument because Verizon Communications Inc. and its incumbent brethren dominate the one technology through which most ISPs serve their broadband customers: DSL.

Critics say the Bells are proposing a duopoly between the phone giants and cable titans.

"Competition among different monopolies is not competition and that is what they are proposing," says Colleton Corbett. "We are so under siege in the DSL market we don't even have the luxury to worry about cable right now. We have to fight one battle at a time."

CABLECOS NOT SUBJECT TO BROADBAND RULES

Cable operators including titan Comcast Corp. have opened their networks to some ISPs -- but such agreements are rare -- and Comcast and its peers are not subject to broadband regulations. The FCC has classified cable modem service as an information service, rather than as a telecommunications service. A telecommunications service is subject to far more regulations.

In a case filed last year before the U.S. Court of Appeals for the Ninth Circuit, ISPs argued the physical broadband transmission over the underlying cable network should be classified as a telecom service.

However, even if the court were to overturn the decision and remand the matter back to the FCC, Legg Mason analyst Blair Levin says it's unlikely the federal agency would require the cable operators to open their networks to ISPs.

"I don't think the government will set the terms and conditions of ISP access to the cable network," says Levin, a former FCC chief of staff. "The court may cause the FCC to have to take another look, but at the end of the day I don't think the FCC wants to undertake another unbundling exercise similar to that required under the '96 Act for the telephone networks."

An attorney, who represents one of the country's largest cable companies, says even if the FCC were to classify cable modem as a telecommunications service, there is no precedent to establish the regulations.

"It is unclear what a ruling like that would mean," the attorney says. "There [are] so many details to be worked out even if there was a ruling it would probably take years for the actual regulations to be drafted and passed and agreed upon and put into place."

WHOLESALE ALTERNATIVE TO BELLS

Even if the FCC deregulates the broadband market, ISPs can negotiate interconnection agreements with DSL wholesale providers that put their broadband equipment in Bell central offices and lease the high-speed portion of the loop from the incumbent phone company.

Jonathan Askin, a spokesman for the Association for Local Telecommunications Services, says broadband deregulation could mean "fewer options" for an ISP, but "it could be a good thing" for a CLEC providing ISPs DSL.

DSL wholesalers, such as Covad Communications Co., also are at the mercy of the FCC because the federal regulator is evaluating (as part of its Triennial Review) which UNEs the Bells should be required to lease to rivals at regulated prices, including the high-speed portion of the loop. Covad leases the high-speed portion of the loop from the incumbent phone companies.

Jason Oxman, assistant general counsel at Covad, says he is convinced the FCC will preserve the line-sharing requirements. "We expect and are very confident that the FCC will preserve our access to the UNEs we need in order to continue providing broadband service to residential users and small businesses," he says.

That may be little consolation to many of the estimated 5,000 to 7,000 ISPs scattered across the country: Some industry-watchers say the FCC will deregulate the broadband market later this year.

In addition, Colleton Corbett says broadband deregulation could force many ISPs out of business, leaving Covad without many of its wholesale partners and left to compete in the retail market directly with the giant phone and cable operators.

One public policy executive of a large ISP says deregulation is inevitable.

"The FCC wants to do something so they can say, 'We deregulated.' They are going to give the Bells at least some of what they want," says Dave Baker, vice president of law and public policy, at Earthlink Inc., the country's third largest ISP.

An FCC spokesman said in January he did not know when the agency would issue rules on the broadband proceedings. First on the agenda was wrapping up the highly anticipated and controversial Triennial Review. That outcome could shape the future of local telephone competition.

Observers do not expect broadband deregulation to directly impact the country's largest ISPs because it will be in the interest of the phone companies to reach agreements with AOL, Microsoft Corp's MSN and Earthlink due to their marketing muscle and massive size. AOL and MSN, the country's largest ISPs, declined to comment on the broadband proceedings.

Earthlink's Baker says his company is "somewhat insulated from these FCC decisions," because in part it has open access agreements with Time Warner Cable in 39 markets and Comcast (through AT&T Broadband) in two markets, Boston and Seattle.

ISPS SAY RULES KILL PROFIT

Smaller Internet providers, who are struggling to make a buck, may be less fortunate. "If you talk to my little ISPs ... a lot of them are saying they can't make any money under the current situation," says Sue Ashdown, executive director of the American ISP Association.

David Robertson, president of the Texas ISP Association, says his members lose money on a customer for several months before they can break even. He claims the Bells, including the No. 2 local phone company, SBC Communications Inc., charge their affiliates an inflated price.

"SBC ASI (Advanced Solutions Inc.) has the same problem [as outside ISPs] except they get recapitalized by Mama Bell," he says. SBC Spokesman George Thompson disagrees.

"ASI can't get recapitalization from a Bell company -- from SBC. The extent to which there is a separation is across the board throughout the entire organization," says Thompson. "That is an illegal practice, so the suggestion is simply not the case. There isn't a shred of evidence to support that."

Citing an example, Thompson says SBC was not even allowed to draw from a box of recycled office equipment belonging to ASI.

"That is the extent to which there is a [separation] between ASI and SBC and that is part of a federal mandate," Thompson says.

Colleton Corbett, of the BroadNet Alliance, says the Bells are selling ISPs a wholesale service for $29.99 a month, yet charging their retail customers $19.99 -- evidence enough that they are losing money and being cross-subsidized through the parent company.

"You know they are cross-subsidizing if they are offering it for retail less than they are offering it for wholesale," she says. "So they are taking the loss somewhere yet their monopoly is growing and we are all going out of business. So you do the math."

Analysts say the Bells may have an incentive to open their networks to ISPs so they can garner some wholesale revenue in situations where a dial-up customer wants to migrate to broadband through their current ISP or the cable company.

"Having Earthlink selling a Verizon DSL line is better than that customer going to the local cable company from Verizon's perspective," says ARS Inc. senior broadband analyst Mark Kersey.

However, one analyst who conducted a study on the next potential wave of broadband customers says dial-up subscribers thinking about migrating to high-speed Internet access don't pick their current ISP as their first, second or even third choice.

"The loyalty to current ISPs is not very strong, not very strong at all," says Bruce Leichman, president and principal analyst of Leichtman Research Group.

FIGHTING THE RIGHT BATTLE?

Gartner Inc. analyst Ron Cowles is in favor of curtailing the FCC's role. He calls on ISPs, phone companies, state regulators and all other interested parties to collaborate to negotiate interconnection agreements and rates, as set forth in the Telecommunications Act of 1996.

Adam Thierer, director of telecommunications studies at the Cato Institute, says a free market should dictate the number of competitors. He says it would be a mistake to apply old rules to broadband regulations.

Thierer says it's preferable to see multiple broadband technologies survive rather than hundreds or thousands of companies competing over an antiquated infrastructure.

"If all we are fighting over is access to the same old crummy copper wire that has been in the ground for the last 20 or 30 years then that is not a fight worth having in my opinion," he says. "What is more important is the question of the new competing facilities and infrastructures that will hopefully be built and deployed to compete against the old copper wire or coaxial cable."

Those competing technologies could one day include satellite, wireless via Wi-Fi and broadband over the power lines, Thierer says.

BroadNet Alliance's Colleton Corbett responds, "You can't ignore the law. It is there for a reason."

The FCC, particularly Powell, has viewed the resale model as an impediment to investment in new infrastructure and a healthy competitive environment, Thierer and other regulatory observers say.

So far, the son of Secretary of State Colin Powell has produced more words than action. And, if a Democrat were to prevail over President Bush in the next election, a new FCC chairman could take telecom policy in an entirely new direction.

Furthermore, experts say public utility commissions are certain to challenge federal rules if state regulators are not granted sufficient authority to shape the policies in their respective jurisdictions.

Add in the likelihood that the 108th Congress will introduce broadband bills, and the future of regulations is hazy at best.

Analysts say broadband deregulation won't have a practical effect on ISPs this year because the Internet companies have multiyear contracts with their providers. Furthermore, it is likely an FCC decision would be challenged in court. "It will get stopped in court. Either way nothing will happen in 2003," says analyst Cowles.