The Most Important Part of the Telecommunications Business You Probably Don't Know About
A hallmark of Tom Wheeler’s tenure as Federal Communications Commission Chairman has been his willingness to take on difficult challenges and push them to completion. Surely one of the most difficult of these undertakings has been to reform “special access,” which the Wheeler FCC has wisely, and more appropriately, renamed “Business Data Services” (“BDS”).
Reform advocates argue that BDS prices are grossly excessive and unjustly enrich the former AT&T local phone companies (i.e., after being renamed, AT&T, Verizon and CenturyLink). They maintain that this has stifled competition and dissuaded new entrants into the market. Since these overcharges are passed through to all consumers, the overcharges have arguably increased the prices that we pay for all manner of services seemingly unrelated to telecommunications. If they are right, the changes under consideration should generate more competition and lower prices.
To understand the role of these wholesale services, think about how you place a call or send an email on your cellphone. The communication travels only a very short distance via wireless spectrum to a nearby antenna. Your provider must then get the data to a node where it can be entered into the international Internet and telephone networks. The process may work in reverse at the receiving end of the message. Unless your provider is AT&T or Verizon Wireless, the cell phone company must purchase access to these connections, and the “legacy” phone companies still maintain a near-monopoly on these services.
BDS are also used by “enterprise customers” such as businesses which transmit large amounts of data (e.g., banks’ ATM networks, Walmart’s internal network, credit card companies, etc.), long distance phone companies, federal and state governments, and Internet service providers. Schools, hospitals and libraries also depend on BDS. Significantly, smaller phone companies seeking to compete with the large incumbent phone companies need BDS to fill in gaps in their own, incomplete networks.
This is a short, simplified version of a very long regulatory story: initially, the large local phone companies were subject to “rate of return” regulation under which they substantiated the cost of providing service and were guaranteed a specified markup as their profit. This traditional regulatory scheme grew increasingly out of touch with modern economics and technology, especially as the FCC sought to introduce competition in the wake of the breakup of the AT&T monopoly. In 1991, the FCC introduced a “price cap” regime. In contrast to “rate of return” regulation, price caps created an incentive to cut costs, since the provider could keep some of any new-found efficiencies while, hopefully, also reducing prices as well.
The biggest problems of today are the result of the FCC’s overly-ambitious, partial deregulation of the price cap regime. Starting in 2000, it began to liberalize the price cap rules based on the assumption that the market would become increasingly competitive -- and that marketplace competition would be able to supplant the price cap mechanism. Along the way, the FCC had stopped collecting price and revenue data from providers, which increased the difficulty of assessing the problem.
Things did not work out as planned, at least in the eyes of BDS customers. The FCC’s optimistic predictions about increased competition proved to be far off the mark. By 2005, the FCC agreed to start a reassessment of BDS. After that, despite incessant complaints about profiteering in BDS, and vague assurances that it was working on the issue, the FCC did nothing.
In 2012, after being taken to court twice, the FCC finally agreed to start moving on its reassessment, which still bears a Docket Number (05-25) that reflects its age. Needless to say, the telecommunications environment has radically evolved since 2005, so the FCC had to start from scratch to take into account the many changes. But after launching a proceeding, much as before, not much happened.
The FCC also moved to collect up-to-date data, first by asking for “voluntary” cooperation and then, in late 2012, beginning to jump the formidable legal hurdles necessary to force, even on a one-time basis, the submission of the necessary information. Then, as before, not much happened.
But in late 2013 a new sheriff came to town. Tom Wheeler perceived BDS as an important component of his effort to promote broadband deployment and competition and directed his staff to make things happen. It took time, but in late 2015, the FCC initiated an investigation of some of the numerous complaints from BDS customers alleging that BDS providers had imposed various contractual provisions and other practices to exploit their dominance.
Because he cannot be certain that he will be able to continue as Chairman beyond Inauguration Day next January, Wheeler does not have a lot of time for what is clearly a massive undertaking. In April of this year, the FCC was finally ready for the last steps. First, it took action on some of the BDS complaints, requiring AT&T, Verizon and CenturyLink to modify some of their contractual practices. Second, the FCC proposed a comprehensive new scheme that, among other things, would reimpose price caps in markets deemed not to be sufficiently competitive. Notably, the FCC proposed to expand the reach of the rules to encompass cable companies, which have started to acquire significant market share in some cases. It also proposed to resume regular data collection so that successive commissions will be able to make accurate assessments of the BDS market.
The most interesting development over the last few months has been a wary collaboration between Verizon and INCOMPAS -- the trade association representing smaller, competitive phone companies. Perhaps because it is repositioning itself as more of a wireless company, Verizon has been willing to join in a compromise proposal that, if included in the FCC’s decision, might defuse some of the objections raised by the big companies.
Verizon notwithstanding, as with other of Chairman Wheeler’s initiatives, the BDS plan has encountered fierce opposition from the phone and cable companies and their friends on Capitol Hill. Keeping in mind that the national elections this year could change FCC leadership, they have pressed for extensions of time to file comments and sought to force the FCC to revise a complicated economic study that the FCC had commissioned from an outside consultant. However, Chairman Wheeler seems determined to get to the finish line, and it is more likely than not that he will present a final decision to his colleagues for a vote at their meeting scheduled for September 29.