FCC: Forced Access Uneconomics and Selective Math?

February 12, 2010

The FCC just signalled it is considering requiring forced access and more special access as part of its soon to be released National Broadband Plan.

  • Colin Crowell, a top aide to FCC Chairman Genachowski told Bloomberg that mandating competitors lease their facilities to other competitors “has a lot of appeal as part of a national strategy” in order to help small businesses grow and aid job creation.
  • Not coincidentally, Public Knowledge and five CLECs released a new study supporting this forced access approach with uneconomic analysis and selective investment and job math.

There are fatal and destructive flaws underlying this forced wholesale access and market share redistribution scheme.

1. Uneconomics: The core underlying premise here –that monopoly profits actually exist to reallocate to resellers — is patently false. The FCC has found repeatedly that the broadband market is not a monopoly, and just last month the DOJ Antitrust Division just rejected this broadband monopoly/market failure thesis. There is no real dispute that the broadband market is competitive, only if it is competitive “enough” for some.

  • Forced wholesale access in a competitive market is a obvious recipe for mass value destruction. In the competitive facilities-based broadband market, providers price, provision, and innovate in order to retain and gain customers.
  • Forcing competitive broadband facilities-based providers who took the risk to invest in and deploy new and faster broadband networks — to wholesale their broadband networks — is simply taking their property and investment and giving it to entities that refuse to invest in providing better broadband facilities for all Americans.
  • It does not take a degree in economics to understand that this forced access scheme is uneconomic at its core. If the Government seizes both the value and reward of broadband investment from competitors without just compensation, one destroys the incentive for facilities-based providers to invest in more broadband facilities for all Americans in the future.
  • Some at the FCC seem to be stuck in a 1996 time warp, clinging to a factual predicate of monopoly networks that simply has not existed for many years.

2. Faux Competition: Many also appear to think that if they call their regulatory scheme “competition” and attempt to justify their new regulations with economic growth and new jobs arguments and language — that by acclamation it can really be considered competition and market-driven. However, that word-smithing does not pass the snicker test.

  • Forcing market competitors to provide access to their property at FCC-set prices, terms and conditions is not market competition, but a Rube Goldberg, market-share redistibution scheme that reallocates value and profits from those willing to take a risk to earn a reward to those unwilling to take a risk (because they can manipulate Government to let them take some of someone else’s earned reward for free.)
  • The reason this is “faux” and not real competition is that without the FCC artificially and continually re-creating all the elements a CLEC broadband reseller would need to survive economically, financially and operationally — none of these newly government-dependent faux competitors would be able to survive on their own long-term.
  • Real sustainable competition revolves around real market economics, not corporate welfare subsidies, special treatment, and government dependency.

3. Deja Vu: We have witnessed before the mass market destruction this kind of uneconomic thinking and faux competition policy approach can wreak in the aftermath of the tech bubble.

So no one can say they did not know… lets review the carnage that FCC forced access policies, which were based on uneconomics and selective math, caused in the past.

In implementing the 1996 Telecom Act, the FCC heavily emphasized faux copper resale “competition” over real economically-based, facilities-based competition.

  • The FCC’s policies helped artificially inflate CLEC and fiber backbone investment bubbles, which ultimately crashed when:
    • Most all CLECs went bankrupt in 2000-2002, because their entire industry business model was based on uneconomic and unsustainable assumptions and selective math; and
    • Many fiber backbone companies, like WorldCom, Global Crossing, PSINet also went bankrupt because they were based on uneconomic assumptions and selective math.
  • One trillion dollars of market capitalization, or one quarter of all the shareholder value lost in the 2001-2002 bursting of the tech bubble was based on FCC policy uneconomics and the consequent corporate fraud to hide those underlying uneconomics.
    • (See my 2002 House Financial Services Committee testimony on Global Crossing’s Bankruptcy here for my analysis of the FCC’s “irrational economics.”)

4. Selective Math: The Public Knowledge/CLEC study which purports to show: “How regulation of wholesale markets can stimulate private sector broadband investment and create jobs” is largely nonsense because it shamelessly bases its conclusions on smoke and mirrors analysis to hide its core selective math.

  • The study devotes 50 pages of selective math in order to distract everyone from the obvious rub here.
    • If the government forces a facilities-based broadband competitor to sell their service to a reseller at a government set discount, the Government unquestionably is lowering that facility-based provider’s return on investment and discouraging future network investment on the margin, because the provider no longer knows if the Government will allow a sufficient return on investment to warrant the risk of the incremental investment.
    • If the government reduces the overall value and profitability of the Nation’s broadband infrastructure by broadly devaluing it with forced wholesale access regulation, the wholistic net-net effect of all the job transfers obviously will be cumulatively negative not positive.
      • Simply, less overall money to pay people means less paid people.
    • At core, this study’s core assumption — that somehow carving up someone else’s hard-earned pie will get everyone to produce more pie — is not based on sound economics, but the wishful thinking of the uneconomics of abundance.

In sum, forced wholesale access of competitive broadband facilities would powerfully disincent future broadband investment by denying it a competitive market return on investment.

The FCC would be wise to build its National Broadband Plan on the:

  • Rock foundation of sound economics and market-driven competition, which has long proven to drive economic growth, investment, productivity and job creation; and
  • Not the shifting sand foundation of uneconomics and selective math, which has a destructive history of market bubbles, industry-wide bankruptcies, disinvestment, negative growth and massive job losses.

 

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2 Responses to “FCC: Forced Access Uneconomics and Selective Math?”

  1. Do you have to be a certain age to use this?

  2. The big D said

    I have to agree to the thrust of this argument with a few caveats. Went to work in 2000 for ILEC, mix of rural and urban. They invested in broadband buildout but very slowly and let the cable company catch them. Because the cable company did not have wireless service ILEC abandoned broadband investment for high profit margin wireless buildout. Cable company was able to price their broadband at cost because they required subscriber to purchase video delivery and they had little competition in that space so they were guaranteed a net bundle profit. By now I am sure they are making a nice profit in broadband because their main competitor gave up competing. However we did sell wholesale DSL in the urban areas and no CLEC was seriously interested. Also NTCA continued to drop the DSL tariff every year I was there which lowered the profit in the rural service areas but raised the short term profits with the High cost loop compensation. The wireless profit margins are now shrinking and their only hope is to get people to pay outrageous fees for data on their little cell phone

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