Facilities: The shibboleth of competition

Dec 14, 2001 12:00 PM

In what might be deemed the "Powell Jr. Doctrine," FCC Chairman Michael Powell, recently took the time to detail his expectations for competition in the coming years. The top regulator stressed that only through facilities-based competition could we hope to achieve the original goals of the Telecommunications Act of 1996, which were "to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies," while at the same time provide for greater redundancy in the U.S. communications network.

Powell and other market advocates recognize the need for an interim solution to allow competitors the means to grab market share from the incumbents, but they are wary of continuing the subsidization of companies just for the appearance that there are myriad alternatives to the phone company. As any armchair analyst will tell you, each market can support between three and five large competitors in addition to a few niche players. Today you have more than thirty competitive carriers operating in some markets. Consolidation is not only imminent, in many ways it's desired. 

As more efficient players consolidate their less successful peers, a number of factors come into play that will ensure the remaining carriers will only grow stronger. Two important factors include the return to rational pricing among service providers and the decreased need for capital as acquisition of networks replaces buildout. Furthermore, as best-of-breed practices are spread across merged companies and lessons are learned from the missteps of others, survivors will steadily provide greater value to their customers.

Federal regulators have clearly recognized that viable competition is not determined by the number of players on the scorecard, but rather the value provided by those players. Unfortunately, state regulators have not been so inclined. In my home state of New Jersey, the Board of Public Utilities just voted to drastically reduce the price that competitors pay to use the incumbent's network. The agency halved the rates for the unbundled network elements platform (UNE-P) in an effort to get non-facilities based carriers to go after residential customers. 

The commission's actions, though promoting the entry of a few resellers that differ little from Verizon, will do little to promote real competition for New Jersey. Instead, facilities-based competition, which has proved to be the most viable method to bring value to investors, the industry and the security of the public network, will most likely slow to a crawl in the Garden State as a result of the price reduction. This is cold comfort to equipment vendors like Nortel and Lucent, as well a host of other companies that depend on carrier spending.

For facilities-based competitors like Time Warner Telecom and XO Communications, the trend toward more UNE-P competition and "zeroing out" of UNE rates is a Pyrrhic victory at best and a clear and present danger at worst. As investment in the CLEC sector slowed in 2001, a "walled garden" was created. Barriers to entry were raised, and over time, rational pricing returned to the market. Through consolidation and burnouts, the total number of competitors in many markets has somewhat decreased while competition has significantly increased with massive market share loss being experienced by the Bell companies. By lowering the bar for entry, resellers could once again flood the market, strangling erstwhile healthy carriers like Time Warner and XO.

In shadow of the Sept. 11 attacks, the concept of redundant, independent and viable networks that exist alongside the incumbent facilities of independent operating companies and the Baby Bells is extremely important. Only through the deployment of new networks (fiber, cable, satellite, wireless, etc.) can we as industry guarantee the security and reliability of this country's communications infrastructure. Additionally, greater facilities-based competition is the best hope for a quick revival in the languishing telecom sector. 

Chairman Powell has made a commitment to spur the development of "intermodal" and "intramodal" competition through facilities. Yet the actions of state regulators, well intentioned as they may be, will certainly harm the efforts to create new networks independent of the incumbent's infrastructure. Competition is 100% necessary, but competition at any price is something we as an industry cannot afford. 

Robert A. Saunders is a senior analyst with The Eastern Management Group, a management consulting firm focused exclusively on the communications industry. He can be reached at rsaunders@easternmanagement.com.

Visit The Eastern Management Group online.

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FYI...

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