Seventeen years ago, the Federal Communications Commission (FCC) moved to deregulate private business lines, referred to as Business Data Services (BDS) – effectively going from rate-of-return regulation to price cap regulation and permitting full price flexibility in competitive business markets. Now the FCC appears to have changed its mind – despite evidence showing that the market has become even more competitive than ever before.
It seems that evidence no longer matters when it comes to command and control regulations. The FCC’s action to re-regulate will have real consequences on consumers – these regulations will impede network investment, which will, in turn, stifle competition. Those market outcomes are exactly what sound regulatory policies are supposed to prevent.
As background, BDS services are leased private telecommunications lines (or circuits) that transmit data traffic between business locations. These services are direct connections that bypasses switched telephone networks. BDS customers may include government agencies, as well as large enterprises and tech firms like Citibank, Facebook, Netflix or Google. Customers may also include telecommunications providers such as Level3, T-Mobile and Verizon, who use these private circuits to extend their network’s reach by leasing from their competitors. Essentially, these services often represent high-speed data circuits that connect to other private networks.
Except in some rural markets, BDS is a very competitive market, consisting of a host of large and small rivals, including incumbent telecommunications carriers, cable companies, fiber providers, Ethernet contractors and other competitive providers. A recent FCC survey found that 50% of buildings across the U.S. have multiple BDS circuits within 88 feet of each other. Given that fact, it is safe to assume that competitors in urban markets add new customers with relative ease. It is a contestable market.
While BDS competition has intensified, the FCC felt that the slow TDM portion of the DBS circuits marketplace was non-competitive and needed price regulation. Sadly, the FCC’s conclusion was not based on empirical evidence showing that the TDM market is non-competitive. Indeed, “the order appears to apply indiscriminate price regulation to legacy TDM services without regard to the state of competition in the local market, or economic factors such as company size, demographics, and geography of the service area.” Since the incumbent carriers provide the bulk of TDM circuits this adverse ruling falls heaviest on them.
The DBS lessees are often large businesses such as Facebook, Amazon, Netflix or Google, who offer Internet services to their customers who are located throughout the US. They may own some very high capacity circuits and lease other circuits from several providers. As in most markets, lower prices are available to those willing to make longer term and higher volume commitments. Inexplicably, the FCC regards the availability of term and volume discounts as evidence of non-competition. Clearly the FCC is misinformed.
Now the FCC appears headed toward price controls. The tentative plan calls for an 11% immediate cut to be followed by automatic reductions of 3% each year. This cut is not based on any real analysis. If the FCC’s intentions become actual regulations, studies show that these price controls will reduce incumbent revenue (through price reductions on existing circuits that are being leased), reduce margins, and thus provide less cash flow available for investment.
Ironically, the incumbents that FCC plans to beat down with price controls are the same incumbents the FCC expects to invest in advanced services for rural and underserved areas. While public policies should encourage investment, by regulating prices in rural America, the proposed BDS regulations will assure that competition and investment will never reach these markets. This very conclusion was reached by a group of Democratic Senators in their letter to the FCC Chairman. The FCC should read the letter. Logical inconsistency abounds at the FCC.
The benefits of slower speed price-controlled data services for businesses will come at a cost to all broadband consumers, because setting artificially low business prices will impede investment by all high-speed data providers – including incumbents and competitors. In the absence of market failure, what we see is government failure and the outcome does not bode well for broadband consumers.
This commentary was co-authored by Alan Daley and Steve Pociask and is available at FORBES.