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.