TCS Daily

Squashing Broadband

By James K. Glassman - June 6, 2002 12:00 AM

Small business depends more and more on super-fast Internet connections, but as the regional Bell operating companies (RBOCs) use their monopoly position as leverage, prices are rising, and small business -- the lifeblood of the U.S. economy -- could soon suffer the consequences.
Late last month, in an appalling ruling for business, the D.C. Circuit Court of Appeals decided for the RBOCs against the Federal Communications Commission's so-called "line sharing" rule.

That rule, implemented in 1999, had required the Bells to allow non-Bell firms to provide digital subscriber line service - a phone version of broadband - over the same lines that the Bells provided voice service, without those firms leasing a separate line. It was a pro-competitive rule that had led to DSL being offered at reduced prices to both business and consumers. But the court, noting that cable modems outnumber DSL service by two to one, questioned the need for such competition.

But what the court failed to take into account was that cable is almost exclusively a residential service, both because of its technical peculiarities and the fact it was built primarily to provide video services in residential areas. Cahners In-Stat estimates that currently only 5% of all business customers can get cable service.

So while theoretically competition between high-speed cable and DSL service would be nice, high penetration of cable modem service in small business markets simply isn't an option at the moment.

Even worse for small business consumers, the FCC has been looking at regulatory relief for the Bells that would declare their high speed services "information services," thus relieving them of the carriage rules for Internet Service Providers on their DSL lines and leasing of high speed elements to so-called competitive local exchange carriers, or C-LECs.

These actions arise as a wave of bankruptcies among C-LECs has led to a decline in competition for broadband generally.

As a result, DSL residential service has gone from $39.40 on average at the end of 2000 to $51.67 by year's end, according to ARS. What would happen to broadband service for small business if the RBOCs get the regulatory relief they want is anybody's guess. History shows, though, that the RBOCs always charge top dollar for such services. And top dollar for T-1 broadband in the past was $36,000 a year; for business-class DSL, it was more than $12,000.

A return to such pricing would set back broadband deployment for years, and cost small businesses billions of dollars more for poorer service. That could do real damage to the economy. Most homes and almost all small businesses have computers. But until recently, most have had to crawl the web at 58,000 bits per second on POTS (plain old telephone service) lines, not the hundreds of thousands and even millions of bits per second that broadband allows. What's damaging about that snail's pace isn't that people can't download music and movies faster. It also interferes with productivity - particularly making full use of the Internet for business purposes. Economists looking at the productivity boost in the later half of the 1990s attribute much of it to big business finally having the high-speed connectivity they needed to make their computer systems fully productive.

The big obstacle in the way of small business and consumers enjoying similar results is one thing -- affordability. Until the last few years, a lack of competition to the RBOCs had left high-speed connectivity out of reach for most enterprises and individuals.

Two things evolving out of passage of the Telecommunications Act of 1996 were beginning to change that. The law offered the Bells the carrot of long distance service if they opened their local loops - the last mile into homes and businesses -- to competitors.

Some companies finding themselves thwarted by the Bells in offering local service, tried to go around them through cable lines. This led to cable companies pouring more than $40 billion into upgrading their systems to make them capable eventually of providing telephone-like services. In the process, the fat coaxial cable pipes into most homes became capable -- through a cable modem to split frequencies -- of offering high speed Internet service to most homes.

As important, the 1996 act spurred the creation of the C-LECs, as competitors to the RBOCs. Facing the same problems as the cable companies, they began pushing DSL lines.

DSL, a technology that uses the upper frequencies of the existing copper phone wires to every home and business while leaving the lower frequencies for voice transmission, had been around for a decade. But the Bells didn't sell it because it didn't want to offer a cheaper alternative to its other pricier high-speed services.

When the FCC in 1999 leveled the playing field for the C-LECs by requiring the Bells to share their copper voice phone line for C-LEC provisioned DSL service, prices for high-speed connections tumbled. Residential consumers could suddenly get a cheap-version of DSL for $50 a month. Businesses could get higher-grade class services, suitable for multiple users, for just under $300 a month.

For the Bells, the result in the break of their monopoly stranglehold was a plummeting in prices. As Jupiter Media Metric noted in February, T-1 lines that went for $3,000 a month two years ago now are offered at $700 a month.

Even so, a July 2001 Yankee Group survey found 70% of small businesses reported receiving better service at a satisfactory price from C-LECs versus only 54% of small businesses served by RBOCs and other incumbent local phone companies.

That's why the Bells went on the offensive, attempting to drive out their competitors through litigation, legislation and lobbying regulators for relief.

And unfortunately for the economy, they're succeeding.

In March, they won passage in the House of the so-called Tauzin-Dingell bill, named after House Commerce Committee Chairman Billy Tauzin and Ranking Minority Member John Dingell. It would let the Bells into long distance without first fully opening their local system to competitors.

Though the effort appears stymied there thanks to opposition from Sen. Ernest Hollings, its existence undermines investment in competitors to the politically powerful Bells. And the court ruling and the FCC's waffling on competition issues only add to the uncertainty.

The bottom line is that increasingly, small businesses have fewer and fewer options for broadband. Low cable penetration rates and fewer DSL competitors are increasingly leaving the RBOCs as the only game in town for small business customers. If the RBOCs are allowed to squash their broadband competitors, and cable modem service remains primarily a consumer offering, who will provide the competition to provide lower prices and better service tomorrow? For millions of small businesses, the answer could well be no one.



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