TCS Daily

Bundles of Joy?

By Duane D. Freese - September 17, 2002 12:00 AM

"It is the wave of the future," according to Sam Simon of the nonprofit Telecommunications Research and Action Center.

And what's that? Why, bundled telecommunications services, of course.

Verizon Communications has launched new packages of bundled long distance, wireless and high-speed Internet access in New York, Massachusetts and, this month, New Jersey. That follows SBC creating an alliance with Echostar to provide a combination of its Cingular wireless phone services, Internet broadband and digital satellite television. And The Wall Street Journal reported Sept. 5 that cable companies, too, are joining the fray by offering phone, cable and their own versions of tiered high-speed Internet services.

Simon says, "Having bundled services is going to be good for consumers."

Will it really? Many consumers seem to want it. A J.D. Power and Associates report last year found that nearly 40 percent of phone, satellite and cable customers would like to get all their telecommunications services through one provider.

And there is some sense to that. One-stop shopping for anything provides a lot of convenience.

But state and federal lawmakers and regulators - being lobbied heavily by the regional Bell operating companies SBC, Verizon and Bell South for relief from rules opening the local loops to competitors - need to remember a little history: Bundling of services is only good for consumers if there is vibrant competition.

Bundling of telecommunications services, after all, isn't new. For decades, in fact, local and long distance telephone service was "bundled" together under the control of one carrier - Ma Bell, or AT&T. As a monopoly provider, it offered you half-dollar-a-minute long distance charges, a monthly fee for leasing your phone and almost no innovation other than moving from rotary dial to touchtone service over its decades of dominance.

That began to change only when long distance competition emerged after federal courts "unbundled" AT&T into a long distance company and seven regional operating companies - the so-called Baby Bells.

The bottom line for consumers from that unbundling has been a precipitous drop in long distance charges from 52 cents a minute in 1984, when the break up began, to around 7 cents a minute today. It also opened the door. But more than that it unleashed innovation. Sprint rolled out its " hear-a-pin-drop" fiber optic long distance network, helping lead the way to the creation of a high-tech backbone for new communications services. The backbone was vital to the growth of the Internet and the advance of data services that underscored the productivity boom of the later half of the 1990s.

Congress attempted to further this competitive unbundling of monopoly in telecommunications when it passed the Telecommunications Act of 1996. That act sought to break the local Bells stranglehold on the last mile into homes and businesses by requiring the Bells to open their local loops if they wanted to expand into competitive telecommunications areas.

Unfortunately, unlike the break up of AT&T into a competitive long-distance carrier and local companies that served all comers, the Bells weren't required to structurally separate their operations into a retail arm selling competitive services and a wholesale arm providing access to their local loops. Instead, regulatory measures were put in place to accomplish that task - measures the Bells have fought in court and Congress ever since.

Their actions effectively forestalled real competition for years. Cable companies, led by AT&T which merged with TCI in 1999 in part because of the Bells' stalling in opening its phone loops, have spent more than $100 billion upgrading their one-way systems to make them compatible for two-way voice and data transmission. Competitive local exchange carriers and other long distance carriers have spent a $100 billion more attempting to bust through.

By the end of last year, gains in the number of phone lines taken over by competitors had been modest - barely 10 percent of the 192 million phone lines in service. But things were starting to pick up.

The reason: State regulatory commissions, acting under Federal Communication Commission guidelines, began to lower the wholesale rates Bells - reduced to four (SBC, Verizon, BellSouth and Qwest) after mergers - could charge competitors for leasing parts of their local loop.

The 1996 Telecom Act provides three ways for competitors to the Bells to enter the local market - separate facilities, such as cable companies are just now bringing on line; simple resale of Bells' services, leased at wholesale rates; and, finally, through leasing of combinations of unbundled network elements from the Bells.

Building entire new local phone infrastructure takes a lot of time and money - and there is too little of both lately for competitors. Simple resale of Bell services doesn't work because the wholesale rates for them set by the Bells, typically 17 to 20 percent below retail, don't leave competitors enough money to cover their administration costs and make a profit and it doesn't permit differentiation of services.

Where competitors other than cable companies have begun to have success in cracking the local stranglehold is through leasing combinations of the so-called Unbundled Network Element Platform, or UNE-P, including the loop, switching and transport functions. It provides both a means to provide distinct local services that aren't available through simple resale and an affordable route to facilities-based competition. And as of mid-year, Bell competitors were offering local phone service for 7.7 million lines by the UNE-P route, up more than 3 million from 12 months earlier.

This has been made possible by two things. First, a 1999 line-sharing order by the FCC made it possible for competitors to offer high-speed DSL service by allowing both voice phone and DSL on a single line, rather than requiring customers to lease a second one. The effect has lowered small business cost for high-speed service by two-thirds, and made DSL affordable for homeowners for the first time.

As important, in the last 18 months, several state regulatory commissions have dramatically reduced the wholesale rates the Bells' were charging competitors, opening the door to increased competition in New York, Michigan, Ohio, Massachusetts, New Jersey and California.

The Bells have fought this not merely in the marketplace, by offering consumers better bundles of service, but in Congress and the courts and before the FCC, where they hope to deprive consumers of choices by fiat.

And they've registered some victories. In particular, in a ruling this summer, the DC Court of Appeals rejected the Supreme Court majority's reasoning about the FCC's rate setting and took a minority opinion to fashion an order that would limit the FCC's line sharing rule.

The FCC has yet to decide to appeal that ruling, and it is being lobbied hard by the Bells and their congressional supporters not to do so. Instead, they want the FCC as part of its triennial review of telecom regulations to move to restrict what elements make up UNE-P and, thus, which elements states can regulate rates.

The Bells argue that the UNE-P rates are being set too low and that they aren't making any money, which means that they have no incentive to build out broadband services.

But as Investors Business Daily reported in early September, Verizon, SBC and BellSouth had $17 billion in operating free cash flow - earnings minus capital expenditures - in the first half of this year. So, they aren't in dire straits.

In addition, two new reports by the Phoenix Center for Advanced Legal and Economic and Policy Studies make clear that eliminating key elements from UNE-P would diminish facilities based competition.

"As common sense dictates, the Bell Company anti-UNE Platform message is not driven by a desire for 'real competition,'" writes George S. Ford, a Phoenix Center fellow and chief economist for Z-Tel Communications, "but an effort to shift competitive entry toward slower, less ubiquitous entry modes."

If all consumers wanted was one-stop shopping, new limits on unbundling by the Bells might make sense. But that isn't what consumers are looking for. They want a host of services, too. And to get those bundles of joy, regulators and lawmakers need to make sure that the unbundling of the Bells' local monopolies continues for the foreseeable future.



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