Business Data Price Rules Would Cripple Competition, Commenters Allege

Nearly four dozen comments—overwhelmingly condemning the FCC's plans to regulate rates for Business Data Services (BDS)—poured into the commission this week, as organizations and individuals replied to suggestions on how to remake the business broadband marketplace. In April, the FCC proposed new rules on BDS "in an Internet Protocol environment," also known as"special access,"  that would potentially regulate rates for cable operators' business services.

This week's reply comments and "ex parte" disclosures of recent briefings to FCC staff members included warnings about investment disincentives and threats to "technology neutrality" along with observations about the impact on emerging wireless broadband services.  Many of the organizations trotted out new research reports from economists and financial analysts as well as familiar complaints about the FCC's over-reach.

For example, the National Cable & Telecommunications Association's brief ran to more than 150 pages, including addenda documenting "the significant flaws in the various proposals for rate regulation" and "the particularly harmful effects such regulation would have in rural areas." NCTA insisted that "there is absolutely no basis for regulating the rates charged by cable operators and other competitive providers" of BDS.

"Competitive providers have been investing billions of dollars to extend facilities to business customers all over the country, and the record is clear that these investments and the additional competitive options they offer are… reducing the prices that customers pay for these services," NCTA said. "The Commission should focus on taking steps to promote more of this beneficial competition, not regulating rates in a manner that discourages entry and investment."

NCTA urged the FCC to "take a far narrower approach to regulation than advocated by the CLECs (competitive local exchange carriers) and wireless carriers.

"If the Commission is to go down the highly inadvisable road of expanding rate regulation of BDS, it must at least limit that regulation to providers that exercise market power, which under the traditional and economically cognizable definition, means providers that can control price," NCTA explained. "Moreover, in light of the cost and uncertainties of regulation, it should make every effort to identify appropriately limited product and geographic markets that demonstrably exhibit market failure."

In an analysis embedded within the NCTA filing, economists Michael Katz (a former FCC chief economist) and Bryan G.M. Keating, contended that the FCC's proposed "price regulation schemes would suppress investment and entry incentives and can be expected to distort the prices of services." They concluded that the FCC's plan "can be expected to discourage competition and prolong regulation; violate technological neutrality; create barriers to the adoption of more efficient technologies; and discourage new facilities-based entry."

In a separate analysis, Scott Anderson, chief legal officer at Midcontinent Communications—a provider of voice, video and data services to 199 rural markets in North Dakota and South Dakota—explained that "BDS is one of the fastest growing segments of Midco’s business." He said that "rate regulation may make a number of future BDS projects simply beyond the reach of Midco and potential customers."

Anderson emphasized that Midco's rural communities already have two competitors, which he said "has created a competitive environment for the pricing and provision of BDS services."

"The market is working," he concluded.  "Requiring more than two competitors in a given market to meet the definition of competitive is not necessary for BDS customers to continue to enjoy a competitive pricing environment."

Sizeable segments of NCTA's supplemental reports were heavily redacted because they contained "highly confidential information" from companies, although the NCTA explained that the full reports were delivered to specific FCC officials who required such details. 

The American Cable Association also stressed the need to "promote competitive investment in lieu of regulation." 

"The record shows there is no economic rationale to regulate these providers and the cost of regulating non-incumbents would far outweigh any benefits, undermining the FCC's goal of spurring competition," ACA said in its comments that urged the FCC to keep a "light touch" on BDS rules. It said that new FCC rules "would put at risk about $300 million annually that non-dominant providers invest in BDS facilities."  It claimed that BDS providers have decreased their prices by 50% on average across all geographic areas and all customer segments, with some prices decreasing more than 70%.

MSOs Condemn Rate Regulation Proposals

In its filing, Charter Communications explained that it continues "to face significant obstacles in competing with incumbent LECs and entering new markets."

"Price regulation would only further tip the scale against additional expansion and entry by cable providers, undercutting the very competition the Commission seeks to encourage," Charter claimed. "Cable providers lack any market power that could conceivably justify the imposition of price regulation on their services… [and] if the Commission does decide to price regulate cable providers, it cannot lawfully regulate the large universe of BDS provided on a private-carriage basis."

Mediacom Communications, which also met with members of the FCC's Wireline Competition Bureau, explained "the unique challenges facing cable providers operating in rural and less densely populated areas." Mediacom said its representatives argued that the "imposition of any form of price cap regulation on such providers is likely to create disincentives for further investment in such areas which will, in turn, undermine competition in the BDS market."

Incumbent Telcos Denounce the FCC Plan

USTelecom offered findings from a new study of customer preferences that showed "more and more business customers using and expressing a willingness to use cable broadband services" for Business Internet Access (BI) and Data Networking (DN) services.

"Most business customers surveyed expressed a willingness to switch to cable-provided BI and DN services, contrary to suggestions in the record that cable services in general, and cable 'best efforts' services specifically, are not regarded as adequate substitutes for BDS," USTelecom said. "These findings contradict claims in the record suggesting that business customers feel 'locked in' by a lack of competitive choices." 

AT&T contended that compared to 2013 data "competition is now even more pervasive, particularly given that cable companies are now prioritizing the BDS marketplace to grow their revenues in the face of more intense competition for their core video offerings."

"CLECs predictably attempt to downplay this competition, mostly by twisting the data to focus on areas where there is no BDS demand and by dismissing years of Commission and Department of Justice precedent under which it was recognized that the presence of sunk facilities constrain BDS prices," AT&T said. "Over-regulating the BDS market will have a predictable and very concerning result – disincentivizing investment in broadband infrastructure."

AT&T also fretted that rate regulation would "curb incentives to build the infrastructure necessary for future broadband-intensive 5G wireless services in these areas," which it said "flies directly in the face of this Administration’s efforts to expand broadband access to everyone and its bold steps to speed us toward a 5G future."

Verizon and the telecom trade group INCOMPAS offered more details on the BDS "framework" that Verizon had proposed in June, which supports both Time Division Multiplexing and packet-based services. They said that additional information in their filing "continue to reflect a middle ground and would result in an administratively simple framework that can help guide the Commission towards pro-competitive reform."    

Among other things, the Verizon/INCOMPAS plan suggests that after lowest-speed benchmarks are established, the benchmarks for higher ethernet speeds would be derived by applying the price-cap carrier’s respective relationship of rates.

The companies concluded that their "framework should result in actual price reductions from current levels (i.e., not merely 'paper gains') for TDM and Ethernet services," and they suggested that "the Commission should make clear that Ethernet services provided to wireless providers are subject to this framework, including the benchmarks."

In a research paper submitted on behalf of the Invest in Broadband for America coalition (which consists of CenturyLink, Cincinnati Bell, Consolidated Communications, FairPoint and Frontier Communications), James E. Prieger, an economics/public policy professor at Pepperdine University and former FCC senior economist, calculated that the impact of the FCC’s proposed price regulation for business broadband in rural markets will reach $1.4 billion or more.

Prieger's analysis, “Investment in Business Broadband in Rural Areas: The Impact of Price Regulation and the FCC’s Blind Spot,” concluded that, "The lost opportunities for revenue will lead to less broadband investment for the communities that need it most – slowing deployment and hurting economies that need help competing," Prieger said. "Each dollar of investment discouraged by regulation costs the economy up to three dollars in lost output. Each job lost from the lack of investment costs the economy 1.4 to 3.6 jobs, half of which would have come from small business."

"The FCC is rushing to push through new regulation without giving adequate time to study the likely effects," he said. "The FCC should pause long enough to consider the consequences of the proposed regulation, allow industry and other interested parties sufficient time to investigate newly updated data and associated repercussions."

NTCA: The Rural Broadband Association argued that "a permanent regulatory framework can and should distinguish between levels of competition in markets in right-sizing regulation." It recommended that "regulatory frameworks should specifically be designed… to achieve other important public policy objectives."

"Moreover, any regulatory framework adopted in this proceeding should address and mitigate regulatory burdens on small businesses," NTCA said. "Smaller competing firms should not be burdened with significant new… regulations."

It claimed that the FCC's experience "reaffirms the broader need to adopt a different way of approaching regulation in a world where networks and services are no longer inextricably intertwined, and to cease in particular in giving 'free (or reduced) passes' without careful forethought and disciplined analysis of the public policy consequences… solely because the transmission involved may be a 'channel termination' or 'last mile' or 'middle mile' or 'backbone,' or the technology involved may be 'IP-enabled' or 'legacy.'”

Crown Castle, the country’s largest independent tower owner and operator (more than 40,000 towers for shared wireless infrastructure), argued that commenters who supported rate regulation "completely ignore or merely pay lip service to this critical investment dynamic."

"As the record makes clear, rate regulation would be antithetical to the Commission’s goal of promoting network investment by competing providers and thereby increasing competitive alternatives for BDS," the Crown Castle filing contended. It gave a shout-out to Comcast's earlier comments, that "that rate regulation would deter investment… [a] well established… matter of economic theory and market reality."

The Free State Foundation contended that rate controls "will curb financial returns on investment for business data facilities."

"This necessarily will discourage infrastructure deployment by both incumbents and by new facilities-based entrants like the cable operators," FSF continued. "Rate regulation also discourages facilities-deployment and market entry by competitors who, given a choice, prefer regulatory arbitrage to facilities-based competition."

Sprint, which generally backed the Verizon/INCOMPAS filing, characterized their agreement as one that can "fix the long broken business data services market."

"As the need for more backhaul increases with the advancement of next generation 5G networks, access to high-capacity BDS at reasonable prices will be critical to mobile networks," Sprint said. It lamented that the current "broken market for BDS… has left 97% of this market controlled by one – and sometimes two – providers."

Taking a Contrarian Stance: "FCC as Wizard of Oz"

Among those supporting the FCC plan were the Consumer Federation of America and the New Networks Institute, whose filing included an elaborate denunciation of the Verizon/INCOMPAS proposal as a being "like the story of the Wizard of Oz." In this version, "Verizon would like to set the FCC up as the Wizard – lots of smoke and mirrors, but ultimately a weak little man manipulating dials that are powerless to do anything meaningful," their filing explained.

CFA and NNI urged the FCC to take aggressive steps "to establish the legal basis for concluding that rates, terms and conditions in the BDS market are just and reasonable." It sought to link the BDS proceeding to the FCC's recent final order on the IP Transition.

"It is simply impossible not to take note of the connection between the two," their comments insist. "Since the IP transition is about the transition to a fully digital network, the Commission should not be surprised to find that the link between Business Data Services and the IP transition, the recently released IP transition order actually raises the importance of the BDS docket to an even higher level."

CFA and NNI also urged that the Commission "must open a cost docket to determine the appropriate level of rates and the productivity factor. The cost analysis must be updated on a triennial basis."

Competify, a coalitionof competitive telecommunications, information processing and public advocacy groups and companies, acknowledged the need to "heal this long-broken marketplace." It claimed that "incumbent providers continue to obscure the facts" and encouraged the FCC to "complete a comprehensive review of the robust data in the record and reach a pro-competitive, pro-consumer result."

"Those hardest hit are rural communities and those that rely on mobile broadband, where incumbent market power could threaten U.S. leadership in 5G and further the digital divide,"  said Competify, which was established last year. 

Gary Arlen

Contributor Gary Arlen is known for his insights into the convergence of media, telecom, content and technology. Gary was founder/editor/publisher of Interactivity Report, TeleServices Report and other influential newsletters; he was the longtime “curmudgeon” columnist for Multichannel News as well as a regular contributor to AdMap, Washington Technology and Telecommunications Reports. He writes regularly about trends and media/marketing for the Consumer Technology Association's i3 magazine plus several blogs. Gary has taught media-focused courses on the adjunct faculties at George Mason University and American University and has guest-lectured at MIT, Harvard, UCLA, University of Southern California and Northwestern University and at countless media, marketing and technology industry events. As President of Arlen Communications LLC, he has provided analyses about the development of applications and services for entertainment, marketing and e-commerce.