Fallout from the FCC's Line Sharing Decision

A week ago today, telcos cheered as the U.S. Federal Communications Commission (FCC) eliminated network sharing requirements on facilities-based wireline broadband Internet access providers. The decision, which applies to both DSL and fiber networks, is intended to create cable-telco broadband regulatory parity in the wake of the Brand X decision (see Supreme Court Backs Cable in Key Broadband Case for details). Telcos were quick to claim that the change will speed broadband deployment. Susanne Guyer, Verizon's senior vice president for federal regulatory affairs, said 'This decision will help accelerate deployment of broadband networks.' That's nonsense, of course. The only reason telcos are not offering DSL everywhere is that it is too expensive to upgrade their copper plant, particularly in rural areas, to meet the copper loop length requirements for DSL. In other words, the barriers are technical and economic, not regulatory. What is clear from the FCC decision is that third-party ISPs dependent on telcos for DSL network access are skating on thin ice. Some telcos may decide that continuing to leverage these players as marketing channels is a useful strategy. Others may pull the plug or raise wholesale prices to a level that make DSL resale economically unviable for ISPs. EarlthLink is hosed, and seeing the writing on the wall, it's telling to see AOL de-emphasizing access by moving its proprietary content to an open Web portal. There is some time for the players to figure out the fallout. The FCC order requires that telcos continue to provide network access to unaffiliated ISPs, on a grandfathered basis, for one year. In the wake of the FCC decision there has been wailing about the threat of broadband service providers blocking competitive IP services and applications, like Vonage and MovieLink. It's not likely though, as the customer push-back would be severe. The real question is whether the telcos and MSOs will ever wake up to the opportunity of selling quality-of-service (QoS) enhancements for these applications. It is a basic market segmentation issue. Some consumers simply are not interested in buying VoIP from their MSO or telco, and instead, prefer to use an independent provider like Vonage. MSOs could easily sell an 'enhanced experience' for a service like Vonage, improving call quality by guaranteeing QoS, for say, $10 extra per month. And such an offering would likely deliver margins as high as 70%. Investors ought to be asking why MSOs and telcos are leaving $7 per month in free cash flow on the table. It's a poor business decision.