Hearing: Intermodal competition is on the horizon

Intermodal competition from wireless and broadband voice-over-IP providers must be considered when Congress decides to rewrite laws regulating telecom carriers and companies offering phone services, a panel of four telecom analysts said during a House Commerce Committee hearing last week.

The hearing was the first of a series of information-gathering events that will be conducted this year in preparation for lawmakers’ expected attempt to rewrite the 1996 Telecommunications Act. That landmark created "government-managed" competition that is now "outdated," according to outgoing Commerce Committee Chairman Rep. Billy Tauzin, R-La., who organized the hearing.

"I suspect we knew no better in 1996, but we know better now, and now is the time for Congress to begin the process of retooling the ’96 Act to bring it up to speed to today’s—as well as tomorrow’s—marketplace and technology," Tauzin said.

In particular, VoIP is "transforming the whole voice marketplace," Tauzin said. Echoing this opinion was Legg Mason analyst Michael Balhoff, who said cable operators are so well positioned to provide broadband VoIP over recently upgraded networks that some believe they could dominate the wireline voice market.

"The current risk is that we eventually could be returning to a monopoly system owned by the cable operators if the local exchange carriers (LECs) are unable or unwilling to invest in the longer-term network because: (1) the expense of the investment in high-speed network is too high to generate a satisfactory return, (2) there is too much uncertainty or fear about rules requiring them to share their investment with competitors, or (3) the time required in the investment will be too extended," Balhoff testified.

As for CLECs, Balhoff said they provide healthy competition for business customers but not on the residential side, where most depend on TELRIC-based discounts for unbundled network elements leased from incumbent carriers to compete. This "regulatory arbitrage" business model has discouraged many investors, he said.

But keeping CLECs part of the local-phone landscape appeared to be a priority for Rep. Edolphus Towns, D-N.Y. While VoIP may be exciting, the fact that broadband access is a prerequisite to subscribing creates a barrier of entry to many, he said.

"In my district—where many constituents still don’t have a dial-up Internet connection, let alone broadband access—voice over Internet Protocol is not an option for the foreseeable future," Towns said. "I’m concerned about what happens to regular local phone service for these consumers, if the high-paying, profitable customers migrate to Internet Protocol."

Merrill Lynch analyst Adam Quinton said the problem in the U.S. is not the availability of broadband but its acceptance by consumers. Although about 85% of all households have a broadband option available, only 22% actually subscribe.

Of course, despite having tremendous potential, broadband VoIP providers are a relatively minor player at this point. Meanwhile, wireless usage continues to grow, and eventually 10-15% percent of U.S. households will use only a wireless phone, said Frank Louthan of Raymond James Financial. Even if consumers keep traditional, circuit-switched wireline phones, the increased usage wireless technology is causing ILECs’ access-fee revenues to erode steadily, Louthan said.

Given the impact of wireless and the potential for VoIP to blossom, Rep. Joe Barton, R-Tex, said he believes Congress needs to reconsider the contribution and distribution needs related to the universal service fund.