As Senator Daniel Patrick Moynihan famously said, “Everyone is entitled to his own opinion, but not his own facts.” The FCC has spent the last year analyzing the data submitted in the Business Data Services proceeding to understand what is driving the BDS marketplace. It has committed to a “data-driven” rulemaking process in its analysis of whether additional BDS regulation is needed. The jury is still out as to whether that will take place.
As we explain in today’s reply comments, the facts show that competition in the BDS market is thriving. Even as of 2013, competitors had deployed competing facilities in more than 95% of MSA census blocks with BDS demand, and those blocks contain 97% of all BDS connections and 99% of business establishments. And, according to the NPRM, ILECs’ in-region market share was already under 50%. Undoubtedly, competition is now even more pervasive, particularly given that cable companies are now prioritizing the BDS marketplace to grow their revenues in the face of more intense competition for their core video offerings.
CLECs predictably attempt to downplay this competition, mostly by twisting the data to focus on areas where there is no BDS demand and by dismissing years of Commission and Department of Justice precedent under which it was recognized that the presence of sunk facilities constrain BDS prices. But the economist retained by the Commission found, based on his analysis of the facts, that “fiber-based competitive supply within at least half a mile generally has a material effect on prices of BDS.” And the data show that nearly all buildings with ILEC BDS connections are well within a half mile of competitive fiber. In fact, three quarters of them are within just 456 feet of competitive fiber and about half of all ILEC BDS buildings are merely 88 feet from competitive fiber.
The regressions conducted by the FCC’s hired economist and the Commission itself tell a similar story. Those regressions suffer from some serious flaws, which were pointed out not only by our economists but in the peer reviews. And those flaws bias the results in ways that tend to overstate any finding of market power. Even so, the regressions still found no evidence of market power for services above 50 Mbps. And when regressions are conducted for Ethernet services under 50 Mbps, the result is exactly the same – no evidence of market power. In fact, when the Commission’s regressions are corrected to address just some of the criticisms in the peer reviews, they do not show statistically significant evidence of market power for DS3 services either, and only very small pricing effects for DS1 services, around 3%. This is well below the level where the DoJ’s “SSNIP” test (which measures market power in horizontal mergers and is generally set at 5%) would justify government intervention.
Query then how the facts can possibly be squared with the proposals the CLECs are tossing around – double digit immediate price corrections, regulation of Ethernet services, and the rest of it. They cannot. And the fact that CLECs team up with Verizon and call their proposals a “compromise” doesn’t make them any more credible. Verizon is now a net purchaser by far of BDS now that it has sold off large chunks of its wireline business. When the Commission follows the data where it leads, there can be only one conclusion – no new BDS regulation is needed or warranted.
This is especially critical because we know that overregulating the BDS market will have a predictable and very concerning result – disincentivizing investment in broadband infrastructure. Unwise regulation will undermine incentives for all market participants to invest: incumbent providers will be less willing to invest in new facilities where they will be forced to resell at artificially low prices, and new competitors will not build because they will be able to buy from the incumbent at these below-market prices. This impact will be felt most severely in more rural areas that are costlier to serve. And, equally concerning, this same dynamic could potentially curb incentives to build the infrastructure necessary for future broadband-intensive 5G wireless services in these areas. This vicious circle flies directly in the face of this Administration’s efforts to expand broadband access to everyone and its bold steps to speed us toward a 5G future.
In sum, the facts are these: (1) BDS competition is nearly ubiquitous everywhere customers use these services; (2) there is competitive fiber close enough to nearly all ILEC BDS buildings to discipline prices; (3) there is zero evidence of market power for any Ethernet services and services above 50 Mbps – and at most, increased competition in the DS1 market has a very small impact on prices; and (4) overregulation will significantly disincentivize broadband investment, which is particularly worrisome in rural areas.
The FCC cannot ignore the weight of the evidence and impose an unjustified and burdensome BDS regulatory regime, even a so-called “compromise” solution proposed by other BDS stakeholders, where the facts (and data) do not lead to the conclusion it expected to find. Instead, it must make a clear-eyed evaluation of the BDS marketplace with all the facts in hand. Doing so leads to only one possible conclusion – the BDS market overall, and particularly for Ethernet services, is working and working well.