IP Convergence: Beyond VoIP, Beyond Cost Savings

A funny thing happened on the way to the FCC’s road to broadband nirvana. No sooner had the FCC unleashed the “competitive forces” swirling around the broadband access market when Verizon and BellSouth announced that they would impose a “regulatory surcharge” on its customer’s DSL bills. You see, back in August 2005, the FCC declared that broadband Internet access is an information service and not a telecommunications service. This allowed the FCC to apply a “light touch” regulatory scheme to the Bell Companies’s DSL product. The FCC further declared that after 270 days the Bell Companies would not have to count their DSL revenues when calculating their contribution to the universal service fund. Guess when the 270 days expired.

The rationale behind absolving the Bell Companies of their universal service funding obligation was to establish regulatory parity with the cable companies and their cable modem service. Without this parity, the Bell Companies would be at a competitive disadvantage. So, being rational actors in a competitive broadband access market, what do you think Verizon and BellSouth did when presented with the opportunity to reduce the price of their service in parity with the cable companies? That’s right, they immediately imposed a “regulatory surcharge” roughly equivalent to the universal service fee they imposed previously.

Now I realize many of you are probably shocked, shocked at the audacity of Verizon and BellSouth. How could they cry so loudly for regulatory parity, claiming their competitors had an advantage because they did not have to include a universal service surcharge, and then turn around and impose an equivalent surcharge? What does that say about their earlier pleadings? Here is an excerpt (see p. 42 of the filing) from Verizon’s May 3, 2002 comments to the FCC

If telephone companies face universal service obligations for broadband that are not
imposed on cable, satellite, and terrestrial wireless providers, then telephone companies will bear an additional expense that will be passed on to their customers. That will make their services relatively less attractive than cable, satellite, and terrestrial wireless broadband and will result in market distortions. The Commission should avoid subjecting wireline broadband providers to obligations that cable and wireless broadband providers do not have for at least three reasons. First, the Commission’s own definition of the public interest underlying universal service obligations includes the criterion that to the extent possible, carriers with universal service contributions should not be put at a competitive disadvantage. Second, the universal service provisions of the Act itself directs that every carrier be required to contribute “on an equitable and nondiscriminatory basis” and that the Commission must establish “competitively neutral” rules to enhance schools and libraries’ access to advanced services. Third, at the extreme, a difference in treatment would violate the APA, the Equal Protection component of the Due
Process Clause, and the First Amendment.

Perhaps it was the hypocrisy and outright chutzpah that motivated the FCC to send a letter of inquiry (the first step in an investigation) to Verizon. And no doubt BellSouth reversed course so as not to prejudice the FCC’s review of their acquisition by AT&T. But what does this all say about the competitiveness of the broadband Internet access market and the FCC’s commitment to competition?

In support of its decision to “deregulate” the Bell Companies’ DSL service the FCC said – (at paragraph 50)

“We find that the parties’ competing analyses, though useful, fail to recognize all of the forces that influence broadband Internet access service deployment and competition, so we adopt neither. The parties’ arguments are premised on data that are both limited and static. Most importantly, the competing analyses fail to recognize the dynamic nature of the marketplace forces. We fully recognize that not all American households can choose between cable modem and DSL-based Internet access service today. But a wide variety of competitive and potentially competitive providers and offerings are emerging in this marketplace. Cable modem and DSL providers are currently the market leaders for broadband Internet access service and have established rapidly expanding platforms. There are, however, other existing and developing platforms, such as satellite and wireless, and even broadband over power line in certain locations, indicating that broadband Internet access services in the future will not be limited to cable modem and DSL service. Changes in technology are spurring innovation in the use of networks. As discussed below, there is increasing competition at the retail level for broadband Internet access service as well as growing competition at the wholesale level for network access provided by the wireline providers’ intramodal and intermodal competitors. We find that an emerging market, like the one for broadband Internet access, is more appropriately analyzed in view of larger trends in the marketplace, rather than exclusively through the snapshot data that may quickly and predictably be rendered obsolete as this market continues to evolve.”

Obviously when the FCC referred to the “dynamic nature” of the broadband Internet access market it didn’t envision Verizon’s “regulatory surcharge”. By reacting so quickly to Verizon and BellSouth’s attempted surcharge, what is the FCC saying about their past analysis and future regulation of the broadband Internet access market?

For those of you hoping for a re-examination of its broadband policies, don’t hold your breath. Instead, the FCC will use its bully pulpit to prevent the Bell Companies from sticking it to their DSL customers. But here is where carriers need to keep one hand on their wallet and net neutrality proponents might as well give up now. Because if Verizon can’t recover its “costs” from its DSL customers, guess who is going to pick up the tab? So watch out content providers and others who use the Bell Company Internet backbone network, your costs are about to go up and it won’t do any good to complain to the FCC because they would rather see your costs go up than consumers’ costs go up.

All of this of course begs the question of what business the FCC has interfering in a “competitive” market. And I am not the only one asking this question. Rich Tehrani is wondering too what the heck they are doing and asking the right questions. Back in August 2005, the FCC knew better than the industry participants who warned of abusive pricing practices. The FCC saw the bigger picture and wasn’t locked into a “static” view of the market. It was an admirable (if disagreeable) position so it is all the more disheartening to see them abandon it as soon as someone exercises their “freedom” in a way that the FCC does not like. Have the courage of your convictions. If you truly believe the broadband Internet access market is dynamic, then let Verizon and BellSouth experiment with regulatory surcharges. If you believe the broadband Internet market is competitive then let Verizon and BellSouth shoot them self in the foot with a price increase. I know Verizon normally doesn’t back down from a good fight. It will be interesting to see what they do here. I suspect there is an important enough principle at stake that they may well dig their heels in on this one. If so, it will be interesting to see how the FCC justifies its involvement in this matter.