Let’s not count our triennial review chickens before they hatch

The triennial review order, when released, has a bit of something for everyone. Large ILECs would be free to build broadband networks to peoples’ homes without having to share the new fiber facilities with competitors. Competing CLECs would have a few more years to utilize UNE-P. At face value the Solomonesque ruling might appear to deliver a tonic needed by the telecom industry. Several CLECs could possibly renew their leases on life and sidestep or recover from bankruptcy. And the regional Bells might have a chance to offer new services, to oppose a threat from the cable industry. But peeling back the layers of the order yields revelations of new problems for the telecommunications industry, coming at an inopportune time. Two new studies by The Eastern Management Group highlight these difficulties.

On February 20, the FCC offered its outline of the triennial review order. Though fine-tuning remains to be worked out, little of what the order says has not already been made clear for all to see. That being the case, a question that emerges from the impending order, sort of the elephant in the room, is what impact do the new rules have on investment in the telecommunications sector.

During April and May of this year, The Eastern Management Group set out to decipher the impact the order would have on telecommunications investment. Interviews were conducted with executives of new facilities-based carriers, manufacturers and software companies and private equity investors.

According to people interviewed, the triennial review order has created uncertainty in the market. Uncertainty is bad for investment. The industry is rife with speculation that the order may be overturned. However no one can fathom what the outcome will be.

Ambiguity ensnaring the order is sidelining investment decisions at companies. The order says that public service commission in each state will be the arbiter of when the sun sets on UNE-P, which individuals surveyed perceived as being somewhere between a long time and never. The lack of clarity is a signal to private equity investors that new competitors, with UNE-P fueled business models, are certain to arrive and perhaps overwhelm certain markets, thus threatening investment. Prospective bank-rollers see investments squeezed by competition in numerous states. On the endangered list are additional rounds of funding for facilities-based carriers, roll-ups of distressed assets, and early seed rounds.

The pending arrival of new UNE-P based competitors is already seen by some survey respondents as softening demand for services. Some interviewed claimed customers were postponing purchases anticipating the order would push prices downward.

UNE-P near term growth may be strong in the wake of the order. This has some switch makers and certain other manufacturers revising sales forecasts downward. This pressure has consequences for the economy, which may not benefit from jobs, payroll and taxes. A small carrier expressed dismay at having to budget an estimated $50 thousand per market entered, per year, for new legal and regulatory bills, at a time when cash is king.

Each year the telecommunications industry seems to push back the date of recovery from its overwhelming troubles. Many companies surveyed believed that the FCC order would see any rescue recede farther into the background.

The conclusions of both studies point to billions of dollars in positive economic impacts from facilities-based competition, according to industry sources, that have been forgone due to FCC policy, and to the likelihood that these positive impacts will be permanently forgone if the policy continues in its current form.

John Malone is President and CEO of Eastern Management Group, one of the oldest and largest management consulting firms focused exclusively on the communications industry. He provides professional services to leading edge communications companies and governmental institutions worldwide. He and his firm have advised every major telecommunications manufacturer, software company and carrier in North America, Asia, Latin America and Europe. John Malone has been professionally involved with the telecommunications industry for more than 30 years.