FCC says BDS order will incite investment, but critics charge it will inflate service pricing for SMBs

FCC Chairman Ajit Pai
Chairman Ajit Pai said the FCC drank a potion that drove them to overregulate the market.

The FCC voted along party lines to pass a report and order that it says recognizes competition in the business data services (BDS) market is robust, but critics maintain the action will drive up prices for small to medium businesses (SMBs).

BDS generated a number of back-and-forth debates during Tom Wheeler’s tenure as FCC chairman. Wheeler was not able to pass new reforms on BDS as he stepped down from his chairman position after Donald Trump became president in January.

In delivering the order, the FCC claimed that legacy regulation inhibits the investment required for the transition of BDS from legacy TDM networks to high-speed Ethernet connectivity. As part of the new order, the FCC has adopted what it calls a market test which determines that pricing regulation is no longer required when various conditions are met.

RELATED: FCC’s BDS reform draft draws praise and derision from incumbent, competitive carriers

Under this plan, the order will address two main issues: 50% of the buildings in a county are within a half-mile of a location served by a competitive provider and that 75% of the census blocks in a county have a cable provider present.

Following a transition period, ILECs in counties meeting the competitive market test will no longer be required to file tariffs with the FCC. However, the FCC added that rates “must continue to be just and reasonable.”

For counties that do not meet the competitive market test, the order retains price regulation for lower speed TDM connections to end users. Additionally, the order allows ILECs to offer volume and term discounts, as well as contract tariffs, which are known as “Phase I pricing flexibility” under the FCC’s old rules.

Creating incentives

Comparing the regulation of the BDS market issue to Alice in Wonderland, FCC Chairman Ajit Pai said the FCC drank a potion that drove them to overregulate the market.  

“We truly did not anticipate it, but Lewis Carroll gave us a parable on the dangers of overregulation in the communications sector,” Pai said. “For several years, the FCC has longed for something akin Alice’s garden by seeking a business data services with an array of competitive options.”

By regulating prices and rates for BDS services, Pai said that it can actually do more harm to consumers and businesses.

“Price regulation, which is the government setting the rates, terms and conditions for special access, is seductive,” Pai said. “In reality, price regulation threatens competition and investment because regulators will struggle to set the right price."

Pai added that strict price regulations don’t encourage incumbents or competitors to invest in new networks.

“If the price is too low, network owners won’t have an incentive to invest in more modern networks, and why would they if by law they can’t get a return on the investment,” Pai said. “If it’s too low, competitive providers won’t have an incentive to build their own facilities if they can cheaply use someone else’s network.”

Unsurprisingly, CenturyLink, which has been a vocal proponent to realign the BDS rules, applauded the FCC’s action.

“Right-sizing these regulations based on a fact-based, data-driven analysis will promote investment in next-generation broadband facilities and help spur economic growth across America,” said John Jones, senior VP of public policy and government relations for CenturyLink, in a statement.  

Criticism mounts

However, criticism of the new order is already mounting even within the FCC itself. Commissioner Mignon Clyburn, who dissented on the order, said that the order favors large service providers at the expense of small businesses.

“Business data services, or special access, are important to the functioning of business and anchor institution in each and every city and town in America,” Clyburn said. “Yet it is these very businesses—the Mom and Pop hardware store, the small wireless store, or small rural hospital—that drew the short straw this morning.”

Clyburn added that the FCC’s order will have its largest impact in rural areas.

“Instead of looking out for the little guy, the commission chose to side with the interests of multibillion-dollar providers, and today’s order opens the door to immediate price hikes for small business data services,” Clyburn said. “Especially hard hit will be those in rural areas, meaning cash-strapped hospitals, schools, libraries will pay more for vital connectivity.”

Chip Pickering, CEO of Incompas, said that the FCC’s action reflects that it is “out of touch with consumers, out of sync with businesses and out of step with our nation’s internet infrastructure goals.”

“Today’s FCC action protects monopoly over free markets,” Pickering said. “By saying one provider is sufficient, the FCC is favoring old incumbents over new innovators. It is punishing small business customers, and holds back entrepreneurs. Our networks drive our economy, and blocking competition from one of our economy’s most important sectors is dangerous.”