Industry Voices—Kovacs: The FCC is encouraging investment and competition in the business market

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Anna-Maria Kovacs

In keeping with the Federal Communications Commission’s (FCC) helpful new transparency initiative under Chairman Ajit Pai, the agency has provided the text of the broadband data services (BDS) draft order that is expected to be voted at the April 20th Open Meeting. The draft order is designed to increase investment in state-of-the-art broadband infrastructure by both incumbents and competitors.

In 2015, the FCC engaged in a major data collection effort to determine where incumbent and competitive facilities serve businesses. The agency also biannually collects data on facilities that provide broadband to consumers and businesses. Between the two sets of data, the FCC has a good grip on the presence of incumbent (ILEC), traditional competitor (CLEC) and cable facilities. Thus, it can identify the locations where competitors either currently provide BDS or are close enough to provide it if they have the economic incentive to do so.

An initial analysis of the data by the previous FCC under former Chairman Wheeler recognized that services above 45 Mbps, particularly Ethernet services, were competitive. Nevertheless, the previous FCC not only proposed severe price cuts for archaic TDM 1.5 Mbps and 45 Mbps legacy services, it also threatened to regulate—albeit to a lesser extent—those high-capacity modern services that it acknowledged as competitive. 

In response, it was not only the incumbents but the facilities-based competitors that were alarmed by the prospect of price cuts on competitive services where prices were already falling rapidly and which require heavy investment in long-term facilities. The record in this proceeding made it clear that competitors operate under the incumbents’ price umbrella so that price reductions forced on incumbents would effectively also be forced on their competitors. 

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

Not surprisingly, competitors who resold incumbent services welcomed the proposed price cuts, because they would make it profitable for them to avoid building their own infrastructure. However, numerous facilities-based providers opposed them. For facilities-based providers, such cuts would lead to a loss of revenues and cash flow that would make it difficult to raise the capital they need to build their own networks. Even the threat of such regulation would dry up their funding. The previous FCC’s proposal was, ironically, inimical to competition in the BDS market.

In the draft order, the new FCC is proposing a combination of deregulation and limited regulation that will stimulate facilities-based competition. It will price-regulate only legacy 1.5 Mbps and 45 Mbps last mile connections in some geographic markets, and it will only regulate them in the markets where competition is lacking and unlikely to enter. All other BDS services will be free of regulation. In determining the presence of competition, the FCC will consider the existence of both CLECs and cable providers in the market.  

That makes sense. In 95% of census blocks that have BDS demand, at least one facilities-based competitor is present. In most of the U.S., cable infrastructure is nearly as ubiquitous as ILEC infrastructure, and in recent years cable companies have leveraged that plant into a high-growth business that has gained them as much as 35% to 40% of the small business market as well as a rapidly growing share of the medium-business and enterprise markets. 

Given how much market share cable has taken from incumbents in the small-business market, one could argue that this order is too conservative in retaining regulation of the lower-speed legacy services that are being displaced rapidly by those cable services. It is understandable, however, that the FCC would rather err on the side of excessive caution than leave any businesses unprotected. As the draft order is structured, it carefully balances protection of customers of legacy services with incentives for deployment of state-of-the-art services by multiple competitors.

Thus, the draft order proposes to retain the current price ceiling on incumbents’ BDS services if and where their customers have no competitive alternatives today and the underlying economics make competitive deployment in the near-term unlikely. At the same time, this FCC is proposing several other initiatives to encourage investment even in those few areas. In the vast majority of locations in the U.S., BDS deregulation will encourage investors to provide funding both to incumbents and competitors, whether CLECs or cable providers, to extend their infrastructure to reach more customers.  

The importance of broadband infrastructure and the need to invest in it is one issue on which there is bipartisan agreement in Washington. The FCC’s draft BDS order is an important step toward extending fiber infrastructure and the innovative services which ride on it throughout the United States.

Anna-Maria Kovacs, Ph.D., CFA, is a Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.