June 25, 2012

Should 'Dying' Services be More Highly Regulated?


Regulatory moves can always have unintended consequences. In other cases, regulating what is known misses the transformative impact of what is unknown. One might point to the Telecommunications Act of 1996, the first major revamp of U.S. communications law since 1934.

Many would argue the Telecom Act “failed.” One hears this line of reasoning most commonly from new competitors. The perceived “failure” generally revolves around the continued dominance of the largest providers.

But others would argue that powerful new competitors in fact did arise, only in the form of cable TV operators, not other start-ups. Much of the “competitive local exchange carrier” industry now consists of incumbent telcos who, for example, run out of territory operations.

But even those who might argue the Telecommunications Act failed would have a hard time arguing the businesses and consumers today have less choice, fewer new services or lower prices than they did before the Act was passed.

The paradox is pretty simple: regulator attention was focused on voice services right at the point that voice services were to begin their long descent as a mature product. Innovation in communications now occurs in the mobile or application realms, building largely on new devices and Internet Protocol.

The point is that there is always a danger of regulating what is already dying. The Federal Communications Commission (FCC) is now looking at special access pricing, and some would argue the FCC is looking at re-imposing price regulations. Some will argue it’s counterproductive and doomed to failure.

If the FCC decides to re-regulate the special access market, it will have little or no impact on the cost structure of wireless operators, given that TDM-based DS1 and DS-3 legacy copper services are dying, according to analyst Roger Entner.

Some may suggest the FCC is looking to expand the scope of its regulatory reach to encompass fiber access. To be sure, some market contestants favor such rules, primarily because freezing rates will lower the cost of an input to some businesses. As is typically the case, these rules will only encourage suppliers to shift to newer optical facilities and products, leaving the quality and availability of the older products to wither.

Since prices are already at extremely competitive rates, any price regulation would turn what the FCC would intend as a price ceiling into a price floor, Entner argued.

“This would be about the worst possible outcome as it would eliminate competition in the currently unregulated Ethernet market where competition is vibrant, and where prices have fallen dramatically to help offset the cost for rapidly increasing data consumption,” he added.

At its most innocuous, the FCC’s intention to freeze special access de-regulation sends a confusing signal to the market about whether the FCC is serious about accelerating the much-needed transition to IP-based infrastructure from traditional “switched” service, said Larry Spiwak, president of Phoenix Center for Advanced Legal & Economic Public Policy Studies.

That is to say, when the FCC took the bold step to reform both the Universal Service Fund and intercarrier compensation last year, the FCC made a very deliberate and public choice to phase out subsidies for traditional switched telephone architecture; instead, the agency made the decision that if there were subsidies to be had, they should be directed exclusively to broadband infrastructure.

“In so doing, the agency sent a clear signal to the market that the transition from switched access to IP networks has left the proverbial station, and so everybody better get on board with the program,” Spiwak said.

“Yet, despite this bold step, the agency has yet to provide a legitimate explanation as to why it is acceptable to lock-in antiquated technology at regulated rates for the foreseeable future,” he added. “The FCC can’t have it both ways:  either we are going to have policies that encourage the transition to next generation networks or we don’t.”

One wonders whether we are about to see one more example of regulating what is dying, instead of promoting what is clearly growing.


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Edited by Braden Becker



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