If I Had $1.7 Billion...

Posted: 2/2004

If I Had $1.7 Billion...
By H. Russell Frisby Jr.

Imagine for a moment you have more than $1.7 billion. What would you spend it on?

If you were the Bell companies  BellSouth Corp., SBC Communications Inc. and Verizon Communications Inc.  you would collectively use the bulk of those funds to pay fines for not complying with rules designed to foster local competition. Next, youd toss in several hundred million for wining and dining lawmakers around the country in an effort to rewrite laws governing the telecommunications industry. Then, for good measure, youd spend the last $40 million or so on a public relations campaign designed to thwart competition and make an end run at restoring your monopoly (see chart below). And this doesnt include the millions of dollars spent in the 50 states to influence legislators and regulators.

Image: Adding it Up

But imagine what could have been done with this $1.7 billion if it werent squandered on efforts to deny competitors access to the public switched telephone network; to slow roll the development of innovative, lower-cost bundles of voice and data services; and to keep customers captive to the Bell legacy network.

Consider the deployment of fiber-to-the-premises (FTTP). Last year, BellSouth, SBC and Verizon announced they planned to deploy fiber deeper into the local network so they could better deliver highspeed Internet access, voice and other advanced services in a bundle they believed would be attractive to consumers. Skeptics might say the Bells fiber deployment plans were just another empty promise in a string of false promises the Bells frequently make to gain regulatory concessions and forestall competition.

According to the editor of DSL Prime, the Bells have indicated they intend to spend between $500 and $800 per FTTP customer this year through 2006.

With that in mind, lets do a little math. The Bells spent $1.7 billion on efforts to stall competition and lobby against opening the telecommunications markets. If the Bells are going to spend between $500 and $800 per home on FTTP deployment, then for $1.7 billion they could have deployed fiber to somewhere in the neighborhood of 2.1 million to 3.4 million homes, rather than trying to stall the inevitable competition.

Looked at another way, if you factor the $1.7 billion into equations used by the Department of Commerce to determine the impact of telecom equipment investment, the Bells could have created 30,000 jobs had they invested their money upgrading their networks, rather than spending it on fines or lobbying efforts. Moreover, had they so chosen, the Bells could have expanded the nations gross domestic product by almost $5 billion over the last several years.

The Bells have been given multiple opportunities to enter into new lines of business and invest in network improvements that would ultimately improve their balance sheets and the quality of service they provide to their customers.

One of the first large-scale opportunities was the 1996 Telecommunications Act, which gave the Bells the chance to offer long-distance service, as part of a lucrative service bundle, in exchange for opening the local markets to competition. The Bells have taken full advantage of the long-distance market. They are now able to offer long distance in every state and have accumulated more than 30.8 million long-distance customers in the last few years. In some of the states in which theyve had long-distance authority for a few years, the Bells have garnered as much as 40 percent of the long-distance market.

Though they have had the chance to profit in long distance, the Bells have not lived up to their end of the bargain prescribed by the 96 Act requiring them to fully open the local market to competitors. Because of the Bells constant attempts to seek full deregulation, challenge every rule that promotes competition and deny competitors access to the critical pieces of the local network, competitors only have been able to garner a 14.7 percent local market share in the seven years since passage of the Telecom Act.

Another opportunity the Bells neglected for decades was the deployment of technology that would increase the capacity of the legacy copper network and bring groundbreaking new services to consumers. That technology was DSL, a broadband access methodology that began to gain traction only when the heat was turned up by competitive DSL upstarts like CompTel/ASCENT Alliance member company Covad Communications Co. and cable companies that went full-speed ahead with their own high-speed Internet access offerings.

Competitive pressure forced the Bells into a new line of business that has proven quite profitable. As of third quarter 2003, BellSouth, SBC and Verizon were serving a combined 6.6 million DSL customers and have had phenomenal success offering bundles of services that include local, long distance and high-speed Internet access.

The most recent opportunity for the Bells was the chance to roll out broadband facilities without being hampered by regulations they claimed created disincentives to invest in new infrastructure. For years, the Bells said they would only invest in broadband networks if the proper incentives (read: deregulation) were in place. The Triennial Review Order issued by the FCC in August 2003 gave the Bells got exactly what they said they wanted. The FCC loosened regulations governing the Bells deployment of new network infrastructure to encourage investment in advanced architecture. The Bells no longer are required to share these so-called new networks with competitors and could deploy without fear of diminishing their investment.

But, no sooner than the FCC handed down the decision, the Bells began reneging on their promises. They claimed the Triennial Review Order still did not give them the proper incentives and they began pushing for what they really wanted  even more deregulation. This included loosening the rules governing their historical monopoly over voice telephone service.

In a Dec. 5 speech, FCC Commissioner Kevin J. Martin discussed the Bells response to the Triennial Review Order. He noted, the critical policy decisions made during the course of this past year create a window of opportunity for incumbent telephone companies  an opportunity for incumbents to invest their way out of legacy regulation.

Commissioner Martin went on to say it is the incumbents that are now at a crossroads. Do they remain providers of traditional voice services subject to regulation, or do they seize the opportunity to enter new competitive markets and invest in, and deploy, advanced infrastructure in a minimally regulated environment?

Martin also compared the incumbent telcos to the cable companies, which had their own monopoly on video services in the 1980s, but were heavily regulated, forced to lease capacity and saddled with significant debt. He noted, the cablecos, much like the incumbent telcos, were given a light at the end of the tunnel, in the form of laws enabling them to begin offering new services if faced with effective competition by new entrants.

When given the opportunity, the cable companies seized the day. They realized they needed to invest significant sums of money to deploy the state-of-the-art networks required to compete against direct broadcast satellite and create a foundation for advanced services, such as high-speed Internet access and telephony. By some estimates, according to Commissioner Martin, the cable companies have invested more than $80 billion in network upgrades.

In his view, incumbent phone companies have the same opportunity now. Commissioner Martin stated if incumbents want to seize the opportunity, they cannot sit idly by or wait for the commission to save them.

The Bell companies  with a huge war chest of cash and a historical cache of captive ratepayers to which theyre now able to market a wider variety of services  seem to be satisfied trying to stall competition for as long as they can.

What they now fail to see  through their myopic monopoly mindset  is competition is real. The more than 400 CompTel/ASCENT Alliance member companies are the ones that embarked on risky entrepreneurial plans to bring bundles of local, long-distance and broadband services to consumers across the nation. By deploying a variety of business models, these competitive service providers have spurred a revolution  one that has driven consumer costs down, led to the development of new services and created alternative offerings that caused the Bells to update their stale service portfolio.

This month marks eight years since the passage of the 96 Act. The Bells need to live up to the promises they made to the nation so long ago. Consumers, regulators and lawmakers are growing weary of the Bells constant excuses, extensive lobbying and excessive whining. These wasted efforts should be replaced by real investment and innovation that will drive the economy. But those positive results are achievable only if true competition in the marketplace is allowed to thrive.