Tomorrow, the FCC will release a Further Notice of Proposed Rulemaking with the aim of resetting the conversation on “business data services” (BDS), the Commission’s new name for the decade-old proceeding on special access services. Despite the new moniker, we fear that this proceeding will just be more of the same – a proposal to increase regulation on services provided by those actually investing in fiber (incumbent providers (ILECs) and cable companies) to benefit a handful of companies that want to continue avoiding investing in fiber infrastructure themselves. We agree with Chairman Wheeler that “competition is a facilities-based issue.” And that’s why the Commission should instead be asking what it can do to incent more fiber build-out and facilities-based competition throughout the country.
The FCC initiated this proceeding in 2005 to determine whether the regulatory regime for special access services that it set up in 1999 (called “Price Flex”) was working. The Price Flex regime gave ILECs flexibility to contract and set rates for special access services (oops, I mean business data services) where they could show that facilities-based competitors were present in a market. Competitive providers (CLECs) have faulted this regime over the years, arguing it deregulated ILEC services in areas without adequate competition. In response, the FCC began the process of collecting detailed location and pricing information on BDS to examine the actual state of competition.
Despite the CLECs’ best efforts, economists have reviewed these data, and their findings may surprise those who believed the Price Flex relief deregulated in areas without facilities-based competition. In fact, the opposite is true! The data show that sunk competitive facilities are present in more than 95% of all MSA census blocks where businesses purchase BDS. These census blocks account for about 97% of all the locations that use BDS. And 99% of all businesses are located in these areas. This review shows that the Price Flex relief was actually under-inclusive. The data confirm that there are sunk competitive facilities in areas that were granted regulatory relief and, in fact, that there are lots of other areas that were not deregulated where competitive facilities are also present.
The competitiveness of the BDS market is put into even sharper relief when one examines new data which show the distances between buildings and nearby competitive fiber facilities. We now know that virtually all buildings that currently only have an ILEC connection are within 1/2 mile of competitive fiber. Seventy-five percent of these buildings are within 500 feet of competitive fiber (i.e., it’s running down the cross-street at the end of the block); half are only 88 feet from competitive fiber (i.e., it’s running underneath the street in front of the building); and a quarter are a mere 17 feet away from competitive fiber (i.e., it’s running underneath the sidewalk right in front of the building).
Plus, the vast majority of the BDS that AT&T sells goes to locations where multiple competitors are present, either connected to the building or within 1,000 feet. Eighty-five percent of AT&T’s total BDS bandwidth is delivered to buildings with at least two competitors, as is 59% of AT&T’s sub-50 Mbps bandwidth.
These statistics illustrate the state of the BDS market – it is competitive across geographies and classes of speed. End users who buy BDS can choose between multiple suppliers, and this competition disciplines the market. Based on this more granular evidence, we believe the FCC could simply improve the Price Flex regime to deregulate in areas that have not been deregulated but where the data provides evidence of sunk competitive facilities.
So, if that’s the case, you might ask, how could the FCC possibly be headed back down the regulatory mineshaft? Well, the CLECs assert that close shouldn’t count; according to them, the majority of buildings nationwide do not have a competitive last-mile connection, so anyone wishing to sell BDS to customers in those buildings must purchase the last-mile connection to that customer from the ILEC. Their view is that CLECs should never be expected to build out fiber to business customers even when the building is just 88 feet away from CLEC fiber. Oh and by the way, if cable has built out to those buildings, the CLEC reward to them for providing the facilities-based competition Chairman Wheeler asserts he would like to see is to regulate them too. Well, that would certainly teach the cable companies a lesson for breaking the CLEC First Commandment: Thou shalt not use thine own capital to invest in infrastructure.
The ILECs and cable companies have made major investments to build out their networks to serve businesses across the country. Deciding now to subject ILEC and cable BDS services to increased rate regulation will make it less financially attractive for CLECs to build out competitive connections, and decrease incentives for ILECs and cable companies to continue to do the same. All while sending the message that, if you make investments, you too will come under the FCC’s regulatory microscope.
To be crystal clear here, providing disincentives to build more fiber will retard the development and rollout of 5G architecture and the necessary deployment of fiber-fed small cell technology. As we’ve said before, the demand for more backhaul to support 5G will spur competition on its own, just as it did with the roll-out of the 4G network. Let’s not forget Sprint’s Network Vision RFP as an example of how eager parties will be to construct fiber backhaul facilities. Increasing regulation on these providers will only slow down 5G backhaul construction.
Of course, that seems like really bad public policy. But deregulation of competitive markets is not in the DNA of this Commission. Thus, despite undisputed evidence that there is competition pretty much everywhere there is demand for special access, the FCC appears poised to propose that monopoly-era rate regulation be broadly re-imposed on services that are already subject to intense marketplace competition. Boy, I hope we are wrong.
By proposing regulations that favor a handful of companies that would prefer not to invest in last-mile infrastructure, the FCC would discourage fiber build-out by everybody. If the Commission really wants to drive fiber infrastructure investment and increase facilities-based competition, it should instead approach BDS regulation with one driving question: How will the policies we adopt here incent companies to deploy more last-mile fiber in the United States? That’s the question I’ll be looking for in tomorrow’s FNPRM but, based on this Commission’s track record, I don’t expect to find it.