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FCC walks away from resale 'competition'

Tue, 11/30/2004 - 7:00pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

Jeffrey Krauss
Jeffrey Krauss
President of
Telecommunications
and Technology
Policy
Recent FCC decisions show that the FCC has given up on resale as a way to promote competition in local telecommunications. The 1996 Telecommunications Act embraces resale, but it also gives the FCC a way out. The FCC has taken that option, deciding that broadband deployment outweighs competition. How things have changed!

To understand this, think back 30 years. AT&T had a monopoly on long distance telephone service, but would-be competitors like MCI were entering the leased line market. Large customers configured these leased lines into private long distance networks. AT&T gave bulk discounts to the large customers, locking them in with discounts that depended on the quantity of circuits leased but were independent of AT&T's cost to provide the service. Competitors were building out their own microwave networks, but did not have the ability to provide service to all of the hundreds of locations that a large customer might need. They needed to lease circuits from AT&T and resell them, in locations where they did not have their own facilities. And they wanted to pay AT&T the bulk discount price. But the AT&T tariffs forbade the resale of leased lines.

In 1978, the FCC adopted its landmark Shared Use and Resale decision in Docket No. 20097, striking down the AT&T tariff restrictions. The FCC determined that resale would force AT&T to price its services closer to cost, a policy that the FCC had adopted but had been unable to get AT&T to implement. And it would lead to more efficient use of facilities, because leased lines had to be leased on a full-time basis, but a reseller could arrange to sell unused minutes of use to other customers.

This eventually led to competition in the switched long distance telephone market. As this market developed, there were some carriers that owned transmission facilities and switches, some that owned switches but leased transmission facilities, and some that simply bought minutes of use at wholesale rates from facilities-based carriers and resold them at retail prices.

Since then, resale has been a consistent principle in FCC decisions on telephone competition. In the 1980s and 1990s, the FCC created the idea of Unbundled Network Elements that the incumbent local exchange carriers (ILECs) were forced to provide to competitive local exchange carriers (CLECs). This allowed them to resell these elements to their customers as part of a competitive local phone service. The FCC policy was enacted into law in the 1996 Telecommunications Act.

But one big difference between local and long distance is that there are no bulk discounts for local phone service, and in fact no tariffed retail prices at all for the unbundled elements, since they are all bundled together into local phone service. So the FCC created a pricing scheme that forced ILECs to sell these network elements at a price low enough that the CLECs could resell local phone service at competitive but profitable prices.

But it seems that resale of an ILEC's local phone service is not an economically sustainable business. At least, that's what AT&T seems to think, based on their recent termination of this business. In fact, by now, the resale of long distance service may also be a bad business. Hardly any of the non-facilities-based long distance resellers are still around, and many of those that are still around are actually owned by the facilities-based carriers.

Resale may be a good business temporarily, particularly when there are large differences between retail prices and the underlying cost of providing service. But eventually the market drives those prices down, and the reseller's profit margin evaporates.

But in addition, resale has some distinctly negative impacts. It creates a disincentive for new entrants to build their own facilities. Why should I incur the risk of building an expensive network when I can lease capacity as needed and resell it without risk? And it creates a disincentive for existing carriers to deploy new technology. Why should I invest big bucks to deploy fiber-to-the home when I'm forced to lease it at low rates to a reseller?

The 1996 Telecom Act, written before the explosion of demand for broadband services, foresaw this last possibility, and gave the FCC the option to reject mandatory resale under limited circumstances. And now the FCC has decided to take that option, first with respect to ILEC fiber-to-the-home, and now with respect to fiber-to-the-curb. Because these are new technologies, not yet generally deployed in telephone networks, the FCC decided that CLECs should install their own—they do not face any more barriers to installing fiber in residential areas than do ILECs. And, the FCC relied on ILEC claims that the mandatory resale policy was a barrier to ILEC deployment of fiber.

So, with the aim of stimulating broadband deployment by ILECs, the FCC has retreated from its longstanding policy of requiring resale of telecom services. That's probably good public policy, because a telecom business based solely on resale is not sustainable in the long run. It casts a pall over ILEC business plans, but there probably aren't many of them left anyway. It lodges control over telecom markets squarely in the hands of facilities-based operators. And you guys know who you are.

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