October 5, 2015 11:46 AM

Special Access Regulation: Always Best for Retail Customers?

The notion that extending regulation of ILEC special access could be bad for anyone (who's not an ILEC), much less retail business customers, may seem incongruous.  After all, if the competitors--who are serving real business customers--are in favor of imposing regulations on ILEC special access, then how could it possibly hurt their customers? 

Competition, Contracts, and Consumer Inertia

Last September, Chairman Wheeler described the mass market for broadband Internet access as so non-competitive that it made little difference if a customer faced a monopoly, or had a choice of service provider.  The Chairman stated,  

[c]ounting the number of choices the consumer has on the day before their Internet service is installed does not measure their competitive alternatives the day after.

Speech at 4.  The reason, he explained, is that "[o]nce consumers choose a broadband provider, they face high switching costs [like] . . . early-termination fees. . . .  Id.  Interesting observation, but is it accurate?   

Well, in April of 2010, the FCC surveyed a representative sample of broadband subscribers about their broadband purchasing/switching behavior over the prior 3 years.  The Commission found that 36% of customers had switched broadband providers in the past 3 years (compared with 19% of mobile customers switching providers over the same period). Survey at 6, 10.  Of the consumers that had switched ISPs, the overwhelming majority (86%) said the process of switching providers was either "very easy" (56%) or "somewhat easy" (30%).  Survey at 10.

Instead of describing any unique market failure in the consumer broadband Internet market, what Chairman Wheeler intuitively sensed was the phenomenon of "consumer inertia."   Consumer inertia is a behavioral tendency in markets where products are purchased through contracts--like cable TV, or insurance.  In these markets, consumers may aggressively shop for their initial service, but then neglect to continue to monitor market prices and, thereby, over time receive less competitive terms.

Consumer Inertia Is Good for Competitors, But Not Customers

The effect of customer inertia--on their service providers--is best illustrated by the fact that there are a lot of locations where competitors are serving retail customers with ILEC special access, even though competitive fiber is available.  See, e.g., T-Mobile example in last blog.  One reason that a CLEC will not automatically use competitive fiber when it becomes available is that each time a retail customer location switches to a different physical transmission line, the CLEC must physically "groom" the retail customer's premise equipment (modems/servers/PBXs) onto the new network.
groom5.jpgCarriers Hate Physical Grooms.  A physical groom is a hassle for both the CLEC and the customer.  To better understand why, let's consider a hypothetical example. 

Let's say you're a CLEC, and you're serving a customer with 5 locations in a metro area.  Your own fiber is serving 3 of the customer's locations, and the other 2 are served via ILEC special access.  To get those 2 special access locations on anyone's fiber, you (and your customer) have to physically be present to: 1) allow physical access/wiring by the new access vendor, and 2) configure/test the customer's new service.  Also, to mitigate the consequences of any service disruption, this usually happens at 3:00 in the morning, preferably on a weekend.

falling down2.jpgIf the worst happens, the business customer could temporarily lose service, lose business, or even end up causing their IT guy to turn into the Michael Douglas character from Falling Down.  The risk varies, but it's always there, and that's without the nastier risk of . . . competition. 

Customers Love New Fiber Facilities.  Physical grooms are hard on carriers, but customers love how a groom just "wakes them up!"  You see, the retail business market works kind of like Chairman Wheeler imagined the mass market for broadband Internet service to work--at least in the sense that business telecom contracts really do have high termination penalties.  See, e.g., these small business customer complaints to the BBB about tw Telecom.  Early termination penalties--after the original contract term--may even promote consumer inertia.  But, things change when the service provider wants to change the customer's physical service configuration.

In fact, nothing disrupts consumer inertia like the customer spending a lot of time on the phone with their current supplier (as a customer might do to prepare for a coordinated service cutover).  In fact, since the CLEC is only coordinating with the customer because it has alternatives, it's only a matter of time before the customer starts thinking the same thing.

So, referring back to our previous example, let's say you're the CLEC and have been serving this customer for 7 years.  And, let's say that the customer has had no disruptions/complaints in that 7 years.  You've been sending out bills and they've been sending out checks; it's every carrier's "fairy tale" customer relationship! 

Then, you try to do something nice by putting the customer's special access locations onto competitive fiber, and what happens?  The customer's eye starts wandering, suddenly nothing in your contract is good enough for them anymore, you become clingy, and, before you know it . . . the "fairy tale" unravels in tears and bitter rancor?!
    
groom4.jpgWell, it's not always that bad.  But, at best, if you want to keep the customer, you're probably going to have to lower their price, and stop coming home drunk (or the telecom equivalent).  So it's kind of easy to see--from the CLEC's point of view--why, if a customer's service was initiated using ILEC special access, they would need a really good reason to take the customer off that service.
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Some carriers are lobbying for the blanket extension/expansion of special access regulation, because this service fits comfortably with the network architecture they decided on 15-20 years ago.  But, Chairman Wheeler recognizes the limiting effects of inertia on retail consumers, and he knows better than to simply assume that the outcome favored by service providers is also the best outcome for their customers.  If the effect of extending special access regulation is to keep retail customers believing that their choices are no different than "the day before they had their service installed" many years ago, do these carriers really believe the FCC will think this is the best choice outcome for consumers? 


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