Does the FCC’s public utility-style regulation of wireline incumbent telephone companies (abbreviated here as ILECs) and their legacy copper-based voice services work to protect consumers or impede broadband competition? That is the question explored by a new American Consumer Institute study.
Telephone service regulations came about in the 1930s to control the telephone industry’s monopoly power. Today, the monopolies are gone, but the regulations persist. Because the ILECs’ competitors are not subject to the same voice telephone service regulations, these asymmetric regulations put ILECs at a competitive disadvantage and it affects market outcomes – investment, innovation, market shares and, yes, consumer choice.
Empirical evidence shows that the majority of telephone calls are no longer made on the incumbent’s wireline network and choice is prevalent. As the FCC notes, “overall, almost 75 percent of U.S. residential customers (approximately 88 million households) no longer receive telephone service over traditional copper facilities.” By last count, 62% of household members either exclusively use wireless services or mostly use wireless services for their telephone services, while only 7.6% exclusively use wired telephone services provided by either cable, incumbent telephone or competitive telephone carriers. In addition, there are various popular computer-based communications and messaging services used by consumers, including text (and voice) messaging, real time video and social media applications. There is no wired telephone monopoly and no need for onerous regulations.
In the same way that telephone companies no longer corner the market for wireline voice services, they also are not the dominant provider of video or broadband services. As for video services, cable companies still account for the majority of pay TV subscribers, around 53%, compared to 34% for satellite and 13% for all telecommunications providers. Meanwhile, over-the-top providers, like Netflix, Roku and Hulu, are prompting some consumers to disconnect traditional cable and video services entirely.
Similarly, cable companies provide the majority of wireline-based broadband services, with cable modems accounting for 68%, Digital Subscriber Line (DSL) accounting for 19%, and fiber (provided by both ILECs and cable TV providers) accounting for 11%. In effect, the ILECs face asymmetric regulation – different rules than their rivals face. That asymmetric regulation affects market outcomes – competition, innovation, investment, concentration and, ultimately, consumer choice. Title II regulations on the old wireline companies, or broadband companies for that matter, are not necessary. They don’t protect consumers; they prevent competition.
Historically, these regulations have been used to set retail and wholesale prices, establish quality of service standards and penalties, set financial rates of return, disallow some investments from the rate base, approve new products, prohibit the discontinuance of outdated services, and create cross-subsidies between services, markets and customers, as well as regulate compliance, operations and billing. As previously noted, the ILECs’ competitors are not subject to the same regulations on voice-based services.
Now these regulations are affecting the broadband market. Since ILECs that build “all fiber” networks for voice, data and video must keep their older copper networks running, at least for some time, there is a duplication of network costs that discourages the transition to fiber and these costs represent a regulatory burden that other competitors do not face. What company can provide low-cost broadband services when they are required to maintain two networks (a copper network and “all fiber” network) instead of one? This copper “inertia” coincides with a marked decline in ILEC wireline market share in recent years and the market is concentrating.
While the ILECs are no longer the leading provider of voice, video or broadband services, rather than recognizing this non-dominance, the FCC moved in 2015 to reregulate broadband services by applying public utility-style regulations. This expanded power has the FCC looking at new asymmetric regulations affecting the ILEC’s transition to fiber, as well as the potential for reregulating data services that ILECs are required to provide to businesses and their competitors, called special access services. Following the imposition of these new regulations – for the first time ever – ILECs have sustained back-to-back declines in the total number of broadband subscribers, despite continued growth in the overall broadband market.
The Telecommunications Act of 1996 was to provide a “deregulatory framework” for increasing competition and to “accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans.” Yet, in the two decades following passage of the Act, the promise of deregulation has been replaced by re-regulation and the imposition of 1930s public utility-style regulations. Instead of competition, FCC regulations work to re-concentrate the industry. There are no consumer benefits from increasing market concentration and reducing competition.
The American Consumer Institute study finds that asymmetric regulations on ILECs affect the competitive landscape, reduces broadband investment, increases wireline concentration and reduces consumer choice. Policymakers need to encourage competition, end asymmetric regulation, and lift these unneeded regulations on all telecommunications and broadband providers. Consumers would see more benefits from a faster Internet services and from a more competitive market. Concentration by regulation is not the answer.
This article is available on Forbes online.