October 5, 2015 11:46 AM
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
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. Carriers 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.
If 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.
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?!
Well, 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.
* * *
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?
September 24, 2015 11:10 AM
I was troubled to see the FCC, in its Technology Transitions Order
, tell ILECs that they would not get the full benefit of their new fiber deployments until the Commission concludes its "review" of competition in the "special access market." Order
, paras. 101-143. Then, last Thursday, the FCC announced
that it had taken a "major step" in its review of competition in the special access "market" by making its collected data available to the parties. And, that made me feel a lot better. (just kidding!)
The FCC should
be moving forward with its review, if only because it's been 14 years since AT&T first petitioned the FCC to revisit its 1999 Pricing Flexibility Rules
. However, the fact that the FCC has not, more recently, focused on the threshold question of whether ILEC special access service is even a distinct "relevant market" should give the public doubts about how quickly this matter will conclude.
You see, the FCC can never justify economic regulation for the benefit of "consumers" if the regulation does not apply throughout the entirety of a rationally-defined market. For example, last September, Chairman Wheeler explained in a speech
that he believed cable to be dominant over the most important part of the consumer broadband market (25Mbps and above), yet the FCC's Open Internet rules
applied much more broadly. Likewise, the last time the FCC made rules
affecting ILEC special access, point-to-point data transmission was only widely available from the ILEC.
As a rational matter, unless the Commission's rules cover (at least the majority of) an entire relevant market, its rules cannot possibly provide benefits to consumers in that market. Here's why it's doubtful that "ILEC special access" services constitute a relevant product market in most parts of the country. It's Not a Market If Similarly-Situated Customers Don't Use It
Several years ago, the FCC had a "forum
" on special access, and you know what? Everyone was old! And, so are the companies and carriers that buy a lot of ILEC special access. The next time you see a story about special access, look at the age of the companies complaining. I guarantee you that they all started before 2000.
Why aren't there any "young" companies complaining about special access? Well, probably for the same reason there's no young Bingo players: it's not that fun, and younger gamblers had better alternatives when they picked up the habit.Bandwidth Intensive Customers Don't Need ILEC Special Access
. If this isn't obvious, just look at the blog
where I explained why Google (and other content delivery companies) took Netflix's "interconnection service" candy at the 11th hour of the net neutrality proceeding. Netflix was trying to obtain--through regulatory pan-handling--the same benefits that these companies had invested so much capital to create through their own networks.
The appendix at the end of the blog
shows network investment by companies that were new enough to not need special access, but yet old enough to have purchased high-bandwidth transmission capacity at "rock bottom" prices in the wake of the 2002 telecom meltdown. These companies would never have invested that kind of money to build their own networks if they were destined to be dependent on ILEC special access. Small/Medium Retail Customers Have Non-Special-Access Competitive Alternatives
One might argue that it's unfair to just look at the most bandwidth-intensive customers, because CLECs often rely on special access to serve fairly small (in terms of number of locations) business customers. I couldn't agree more. That's why it was interesting that just last week, Comcast Business Services announced
that they are able to serve multi-location business customers throughout the country through wholesale agreements they have struck with other large regional incumbent cable companies.
While Comcast's announcement focused on the fact that it could now (with out-of-region wholesale agreements) serve large national multi-location customers, the more interesting point was that it's in-region business unit (small/medium customers) has been the fastest growing part of its business for the last several years. Similarly, the success of "bring your own access," web-based business providers, like RingCentral
is further testament to the fact that small and medium business customers generally do have choices for competitive phone service--regardless of whether the customer's existing CLEC provider can use these substitutes as wholesale inputs for their
The bottom line is that it's not a "market" if not everyone needs it--then it's just a brand. But, even old customers of old brands can find it in themselves to switch brands . . . It's Not a Market If There Are Substitutes
You know what's interesting if you compare who filed comments in this proceeding 10 years ago with the companies that are still active now? It's who's missing. Any guesses? Hint: what's different between these two?
No matter what your lyin' eyes are telling you, these are not a "before and after" picture of the same guy. One is T-Mobile Chairman John Legere (before he became a hippie), and the other is John Legere look-alike Christopher Walken.
When the FCC kicked off its special access review, in 2005, T-Mobile filed essentially the same special access comments
as Sprint. But, after the introduction of the iPhone in 2007, it became clear (to everyone not named Sprint) that mobile data was the future of wireless, and bandwidth constrained cell-sites would not satisfy, or attract, customers for long.
Hence, T-Mobile took its first major step in quitting special access in the Fall of 2008, when it named
6 new vendors of advanced fiber backhaul solutions. By February of 2010, it was reported
that T-Mobile had replaced copper backhaul with fiber in 7% of its towers, with plans to raise that number to 25% of its towers by the end of 2010. Finally, in August of 2012, T-Mobile announced
that it had upgraded all of its cell sites to advanced backhaul services, 95% of which were served by fiber.
The T-Mobile example is indeed dramatic. But, just as T-Mobile switched tens of thousands of locations to fiber, there are other successful wireless competitors that entered the market after T-Mobile, like Cricket and Metro PCS (acquired by AT&T and T-Mobile, respectively), that never
used ILEC special access (or at least never complained about it to the FCC).
* * *
Some CLECs have pointed out that there are always going to be some significant number of buildings that will only be accessible via ILEC facilities. But, this fact does not make those locations a "market," because, there is no evidence that the ILECs price services to these locations any differently than they do for the bulk of their customers that do have access to competitive alternatives.
Thus, the FCC cannot rationally conclude that there is a separate "market" for a subset of an ILEC's customers (that the ILEC does not treat differently) for a service that not all of the ILEC's competitors, or retail customers, need to use. And this is why this proceeding will not conclude anytime soon.