The Jeff Pulver Blog: How to Use Inevitable Vertical Consolidation as the Vehicle to Create a Positive Regulatory Structure (A Few Preliminary, Triggering Thoughts):

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March 30, 2005

How to Use Inevitable Vertical Consolidation as the Vehicle to Create a Positive Regulatory Structure (A Few Preliminary, Triggering Thoughts):

// Another chapter in the pulver.com book on the evolution of the IP Communications Industry

[Caveat: I'm usually not one to discourage mergers in the communications industry. I am sure there are quite a number of entrepreneurs who would like nothing more than to be acquired by a well-heeled company, with the deep-pockets, connections and resources to realize the visions and dreams of the founders. For this reason, I generally don't think the merger process should be overly expensive, time-consuming or burdensome on the acquirer, the target or government. Sometimes, I think we should all be so lucky to be an acquisition target. Why discourage would-be acquirers? I also don't like the idea of wasting government resources on mergers. Having said that, I do believe that there may be unique opportunities to achieve positive results in the context of a merger proceeding that legislators, regulators, jurists, and policymakers otherwise might not have the stomach to accomplish without the hook of a pending merger.]

Dave Dorman said something rather revealing a few weeks ago at a House Commerce Committee Hearing on telecom mergers. During the Bell-IXC love fest, Dorman suggested two contradictory reasons why the SBC-AT&T merger is in the public interest. To paraphrase: First, he said that SBC and AT&T should be allowed to merge because there are so many other unaffiliated IP-based communications providers out there that AT&T would not be missed. Dorman also said that AT&T could not survive as an unaffiliated player without its own last-mile access facilities. These two statements beg the question: If AT&T, the largest of all the unaffiliated providers, cannot survive without access to its own last-mile facilities, how does Dave Dorman expect the countless others to survive?

Perhaps the answer comes in using the merger process as the vehicle to install a few minimally-intrusive obligations that might ensure the ongoing viability of application layer competition and the survivability of the unaffiliated IP-based communications providers. The truth is that the existence of these potentially countless number of unaffiliated IP-based communications providers have been and will continue to be pointed to as the reason why there is no longer a need for common carrier and other regulatory oversight over the traditional telecommunications providers. But it the unaffiliated VoIP ASPs die, doesn't that beg for re-implementation of common carrier rules? So let's see if we can develop a simple structure that doesn't kill the unaffiliated and let's the Bells, cablecos and others proceed with little regulatory oversight.

What has become clear over the years is that, ironically, mergers are among the only vehicles that regulators have successfully used to advance the ball for competition. All relevant rulemaking proceedings have become so politically charged that it is, first of all, a painstakingly long process, with untold draining of regulator time and resources. Second, most rulemakings only allow for incremental baby steps for fear of devastating any politically-connected special interest or industry segment. Third, rulemakings are often subject to protracted legal, reconsiderations, vacations, remands.

The FCC has limited resources. I think there are only about 14 attorneys left in the Policy Division of the Wireline Competition Bureau. Can 14 attorneys handle both the IP-Enabled Service proceeding and the inevitable flood of merger reviews? I'm not sure how many staffers are handling the inter-carrier comp and universal service reform issues, not to mention the scores of other relevant proceedings that the FCC should review this year. It is quite possible that the mergers will suck many resources away from all of these worthy proceedings. I'm not suggesting that the mergers should suck up all of the FCC resources. I'd love to see a positive, technology and innovation-promoting, IP-Enabled Services Order soon. I would also like to see the implementation of a more reasonable intercarrier compensation regime. But, if the mergers are destined to suck all of the FCC's resources, is there some way to use the process to do some good.

So, is there a way to snatch victory from the jaws of regulatory stalemate? Mergers have proven to be good means to extract concessions where regulators otherwise might not have had the stomach or the clearest legal hook to adopt rules. Look at the AOL - Time Warner merger. The FCC has not been able to compel the cablecos to allow independent ISP access to end-users. But, because of the AOL-TW merger, those on the Time Warner network do have a choice of ISPs. Whichever way the Supreme Court rules in Brand X, these users will not be affected. A reversal and remand of a rulemaking would have jeopardized these consumers' access to unaffiliated ISPs.

Admittedly, some merger conditions have not had their intended effect, either because they were largely overly broad or easily loopholed into meaninglessness. SBC and Verizon were both obligated to provide significant out-of-reach competition as conditions of their prior, respective mergers. I think the lack of inter-region competition by the Bells speaks for itself -- no cross-Bell competition when, as the Bells put it, UNE prices are so low, each Bell is practically giving its network away to would-be competitors? That is pretty telling.

In any event, if orchestrated properly, I think it is possible to get the Bells to do the right thing in the context of their respective mergers, much of which they seem very willing to do anyway.

First, I would get each entity to commit to Net Freedom and consumer empowerment obligations with immediate, self-effectuating and meaningful penalties for violations of a consumer's net freedoms. In particular, no merged company may interfere with the consumer's right to access the content or applications of the consumer's choice; no merged company may interfere with the consumer's right to attach the personal devices of the consumer's choice. We'll undoubtedly fight over the details surround QoS guarantees to unaffiliated providers (i.e., Should the Bell be allowed to offer a higher quality product to its own customers? Should the quality of provisioning to unaffiliated ASPs evolve over time as consumer expectations change?) These are tough questions, but probably a lot easier than the evolving impairment standard that has plagued the wholesale unbundling regime of Title II of the Telecom Act for 8 years. Perhaps, the bottom-line should be that the merged entity cannot discriminate against the unaffiliated ASPs vis-a-vis the merged entities treatment of its other retail customers AND its own affiliated ASPs (e.g., AT&T's Call Vantage).

Which brings me to my second concession proposal. Each entity should commit to establishing a separate IP-based communications separate affiliate. In SBC's case this could simply mean preserving AT&T CallVantage. The separate affiliate could be used as the benchmark to verify that all unaffiliated IP-based communications providers are dealt with on just, reasonable, and nondiscriminatory rates, terms, and conditions. This is not a perfect solution, but it's got to be better than what we've got now. There will still be some room for cross-subsidies and insider dealing. Frankly, would SBC really care if it gouged AT&T CallVantage if it meant simply taking money out of one pocket and putting it in the other, while using its other hand to take money out of a lot of other unaffiliated pockets? Second, the type of provisioning that SBC might provide to CallVantage is not necessarily the type of provisioning that every other IP-based communications provider might prefer. There would have to be room for some reasonable flexibility in provisioning and building to suit the needs of other customers, so that we all don't become mere cookie-cutters from the CallVantage mold.

I suspect that the intercarrier compensation issues will become less relevant after the mergers, but not necessarily. As SBC and Verizon become net payers of interstate access, or, at least, the revenue becomes less significant, we'll see some movement towards bill and keep or cost-based intercarrier compensation. I do have some concerns about the sanctity of backbone peering relations. With the largest Bells owning the largest backbones, will they begin to "de-peer" with others? That would certainly set the power and ubiquity of the Internet back a long way.

I think I would also suggest that the merged entities commit to offering a reasonably priced naked broadband product to retail customers. Verizon and Qwest have already committed to offering naked DSL. The cablecos currently offer unadulterated broadband transmission without compelling the end-user to purchase the cablecos own voice product. If this product is inevitable and the sleeves-off-their vests, why not ask the merged entities to commit to it?

A final note on consolidation and its affect on VoIP companies as retail customers rather than as potential competitors of the Bells. To some extent, IP-based communications provider are really just large users of telecommunications services, like all other large users. As such, they are subject to the potential problems that beset all large users after losing competitive suppliers. In the special access market, loss of AT&T and MCI, will mean loss of the two largest competitive sources of special access. The FCC has deemed the special access market competitive based on the competitive offerings of AT&T and MCI. With these competitors gone as stand-alone providers, there will likely be significantly less competition in the special access market. I suspect this might result in dramatic price increases in the less competitive special access market, unless the regulators or anti-trust authorities take some action to ensure that the market behaves as if it were competitive.

The question emerges, when will the positive concessions apply evenly across all carriers? It would be most unfortunate if SBC and Verizon were the only entities obligated to adhere to these positive obligations.

These are just my initial, evolving impressions. I welcome your thoughts and feedback.

Posted by jeff on March 30, 2005 07:22 AM | Permalink

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March 30, 2005

How to Use Inevitable Vertical Consolidation as the Vehicle to Create a Positive Regulatory Structure (A Few Preliminary, Triggering Thoughts):

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