The enduring need for competition policies in the IP era

By Chip Pickering, CEO, COMPTEL

Chip Pickering

From the desks of engineers to the halls of Congress, there is excitement and interest around the ongoing IP transition in communications.

There are especially lively discussions about what government can and should do to smooth the transition. Suggestions range from modest adaptation of existing FCC rules to a wholesale overhaul of the Communications Act itself.

I have been involved for about two decades in creating and implementing the Telecom Act of 1996, first as a staffer, then as a member of the House of Representatives. In my view, the IP transition holds the potential to be more than a migration to a new software protocol.

Consumers may remain oblivious to what's happening within the networks that serve them, but as many experts have explained, ubiquitous adoption of IP software protocols will enable lower costs, increased reliability and more innovation. These benefits are why competitive carriers have been aggressively seeking out opportunities to invest and deploy IP technologies in their networks for many years now.

But if AT&T and other incumbents are allowed to dictate the terms of the larger IP transition, this migration from TDM to IP technologies could have the perverse effect of creating a very different sort of transition--a transition to fewer providers, higher prices and reduced innovation and service options for consumers.

Whether Congress takes the lead or the FCC, policymakers must preserve one of the great innovations of the '96 Act--replacing regulation with competition.

To this day, an important market failure dating back to the monopoly era overhangs the communications market, particularly in the enterprise market. Market research by Atlantic-ACM shows that, nationwide, 71 percent of all spending in the wholesale last-mile access market goes to three former Bell companies--AT&T, Verizon and CenturyLink. In any given metro area, the classic structure is dominant market share by one of these companies, with dramatically smaller shares held by everyone else, ranging from competitive carriers to cable providers to wireless.

This dominance over network facilities is not accidental, nor is it the result of superior business acumen by the incumbent providers. It is the persistent impact of the monopoly era, during which ratepayers were called upon to fund ubiquitous buildout of communication networks. And its physical manifestation today is utility poles, buried conduit, rights of way, fiber optic lines, copper lines, building entry facilities and so on.

These strategic assets remain immensely valuable, and they also create a defensive business perimeter around most office buildings in the nation. Inside this "last mile" perimeter, the incumbents control nearly all physical assets used to reach a particular customer. Challengers face very daunting economics trying to overbuild this last mile to pick off a customer or two at a time.

Competitors may only invest in assets where traffic volumes are heavy enough to generate a reasonable return. Investment in the network's capillaries--the smaller pipes, nearest to an individual customer location--is, with few exceptions, uneconomic.

To open up this bottleneck, the '96 Act required incumbents to lease last-mile network facilities to competitors at regulated rates. This requirement has opened up an entire sector of the telecom industry that had not previously existed. It laid the foundation for billions of dollars in investment by competitive providers. 

Millions of consumers and businesses now enjoy the advantages of competition in the communications market. And they feel free to assert their rights to choose among providers to seek out better service offerings, lower rates, more responsive customer service, or another of the myriad of benefits that have resulted.

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    Figure 1

It's clear competition is working, particularly in the business market, as companies of all sizes are increasingly choosing providers other than the incumbent carriers for their communications needs (see Figure 1). The same holds true for government agencies, healthcare organizations, and schools and libraries (see Figure 2). 

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    Figure 2

This vibrant marketplace competition, however, now is at risk.

Large incumbents are seeking to use the IP transition as a prop to disguise their plans to stifle competition and increase prices. While we can and should encourage the deployment of IP technologies, it is critical that the FCC ensure that the IP transition not lead to less competition and higher prices for business, government and non-profit customers.

Nothing about the IP transition meaningfully changes costs to deploy hardwired connections to individual customer locations. Whether traffic is conveyed in an IP or a TDM format, overbuilding small network capillaries still is cost prohibitive.

But incumbents now are trying to charge competitors far more for access to these bottleneck facilities when using an IP protocol, especially when connecting to lower bandwidth consuming customers like smaller and multilocation entities. This can occur because IP services are not regulated like their TDM predecessors.

Here's just one example of this unchecked behavior: AT&T is charging 10 times more for connecting in an IP format ($1,260 for 2 Mbps) compared to an equivalent capacity in TDM ($126 for 1.5 Mbps) at its proposed IP trial site in Kings Point, Fla. With wholesale price hikes like this one, the large incumbents are attempting to turn the IP era into a transformational moment for their profits.

The effects of these higher prices will become more pronounced as incumbents phase out their TDM offerings. Then competitors will have no choice but to pay much higher rates for equivalent last-mile capacity--even though the incumbents argue the move to IP unlocks new network efficiencies.

Both competitors' and incumbents' customers will suffer as a result. Competitors' customers will have to pay more due to higher IP prices. Incumbents' customers will pay more too, as the incumbents no longer will be disciplined by their primary competitors' pricing. Some competitive carriers may even be driven out of business. This sharp decline in competition will erode '96 Act gains--lower prices, higher investment and service innovations.

The FCC already has recognized this considerable harm and has stated that equivalent access and terms and conditions are required for any IP trial proposed by an incumbent. At minimum, the same standard must be applied permanently and nationwide, or competition in the business market as we know it today will not survive and business, government and non-profit customers will lose.

The large incumbents should not be able to use the IP transition as a means only to their own ends, without consideration to what customers want and need in the IP Era.

As these issues are being debated, it's important that Congress and the FCC hear directly from customers that are benefiting from competition. If you want options to your incumbent phone company, we encourage you to share your stories with us, either at or during the COMPTEL PLUS Fall 2014 Convention & EXPO (Oct. 5-8 in Dallas). Policymakers should be reminded of the positive impact competition made possible by the '96 Act has had and should continue to have on the lives of all Americans.

Chip Pickering became CEO of COMPTEL in January 2014. Pickering was a six-term Republican Congressman, representing Mississippi's Third District. During this time, he served on the House Energy & Commerce Committee, where he was vice chairman from 2002 to 2006 and a member of the Telecommunications Subcommittee. He also was co-chairman and founder of the Congressional Wireless Caucus and an assistant minority whip of the House.