Hawkish on Telecom

It's time to do something about the dysfunctional fiefdoms and renegade dictators in the war-torn republic. No, we're not talking about Afghanistan or Iraq, we're talking about the telecom industry in the U.S.A.

Back at the ranch (yee-haw!), the politicians and administration look to be doing a whole lot of nothing. Sure, they're rounding up the suspects – many of whom work for their largest campaign donors – and trotting them before the Telecom Tribunal. But that amounts to little more than showboating. Other than making for some nice news copy and scads of rich lawyers, what has been done? Not a lot.

But there's another shoe about to drop, and it may be time to take a look at a preemptive strike. What happens, let's say, if the RBOCs start going down? They're seen as the last bastion of strength – a sad, not to say ludicrous, belief. Take a peek at SBC Communications Inc. (NYSE: SBC), for instance...

Does that look strong to you?

Let's look at some fuzzy RBOC economics for a moment, to see how healthy they are. They all have huge debt loads, enough to make the World Bank look responsible – how does $60 billion sound? That's Verizon Communications Inc.'s (NYSE: VZ) debt alone. The bean counters like to point to neat things like "free cash flow" (if cash is free, is it worth anything?), but anybody thinking this business will get any easier is ignoring long-term trends.

Local voice minutes are being siphoned off into mobile phones, which might have something to do with why the RBOCs have acquired heavy interests in many of the wireless companies (paranoid, much?). New data services are clearly not coming online fast enough to replace the loss of voice minutes. The long-distance market (which, ironically, the RBOCs whine about not having access to) is wracked by intense competition, from incumbents and upstarts alike.

And what do we have coming down the pike? Let's see: data, video, and voice services over cable; satellite-based data services; DSL services that allow users to merge data and voice into a single line; local voice-over-IP services (VOIP in the core has contributed to the decimation of long-distance pricing); IP-based videoconferencing... All of this makes the RBOC business about as fun as running the Bernie Ebbers fan club.

But wait, there's more: RBOC capital spending is plummeting, which means they now risk falling behind the technology curve. And their core urban T1 business is being slowly eaten into by a new breed of Ethernet services and fiber-rich BLECs, which will eventually be able to run all data and phone services into new office buildings. Sure, many of these competitors are going bankrupt – but the competitive services are still growing.

When you plug these trends into the patent-pending Light Reading Telecom Project-O-Rama Machine, the results aren't pretty. If the RBOCs don't figure out how to move beyond the wood-burning 19th century voice network, they’ll make bankruptcies like Global Crossing Holdings Ltd.'s look respectable. Selling extra phone lines to Beaver Cleaver's family just doesn't cut it anymore.

Simply, something should be done. And nothing is being done.

Federal Communications Commission (FCC) Chairman Michael Powell has shrugged his shoulders: "Telecom 1996? Not my fault." Right now, the thinking from Powell's camp seems to be that the way to prevent RBOCs from tanking is to restore many of their monopolistic super powers.

VCs and investors: "Well, speculative investments aren't any fun if there's a chance you'll lose money."

The local congressman: "I've been a good friend of RBOC Chairman G. Bud Wiseacre all my life. We've got to help old Bud and keep 'dem jobs in our state (unless Bud engaged in fiber swaps)." Meanwhile, the RBOCs gloat: "See, we told you monopolies were better! Bring back the monopoly!"

But herein lies the problem. The RBOC argument pretty much amounts to this: "We are hurting because of flawed policy." But most of their competitors, the CLECs, are already dead. So how could the policy possibly have favored the competition?

If, on the other hand, the RBOCs' problems stem from bloated bureaucracies, archaic plants, and decaying business models and technology, regulatory relief amounts to little more than a few extra years of life support.

The incomplete 1996 Telecom Act started the path to demolition. Why not just finish the job and start over?

It's time to deconstruct the local loop, the last kink in the telecom time bomb. Government entities should sponsor the purchase of large swaths of the local loop, the regional access points where customers hook into the core of the network. This is the bottleneck preventing customers from hooking up to the storied Gargantuan "fiber glut" that nobody seems able to access.

If federal or local governments could snap up pieces of the local loop, or provide incentives for RBOCs to sell or open up the local loop, the industry could truly be reconfigured. If local, state, or national bought pieces of it, it could lease the access back to whoever wants to use it to deploy new services.

It's not nearly as Stalinoid as it sounds. After all, the federal government already determines the unbundling prices in most states, via Unbundled Network Element Pricing (UNE-P). It's already regulated. If the local entities or even the federal government owned pieces of these entities, they could then lease the access at cheap prices or even resell them to more efficient local phone companies. It would spur development of the local loop, rather than discourage it.

There's already proof that the market wants the local loop freed of the RBOCs' icy grip. Take a look at Verizon’s recent decision to sell local access lines to pay down debt (see Verizon Sells Access Lines). It's selling these lines because it doesn't know how to make money off them. But companies are buying them, perhaps, because they will make money off of them.

If the RBOCs were given more opportunities or incentives to sell their local lines, they might think twice about their business. They could use the cash to pay down debt. If they wanted to stay in the local business, they could then lease the lines back from the government or buy them back from another competitor at the wholesale price they have been complaining is "too cheap." This could be part of the deal. A government sponsorship to buy and reconfigure these assets could provide the spark that would completely open up the local loop to competition – this could finally unlock the bottleneck.

Later on, the government would gradually reprivatize the local loop, à la the Internet, after new business models are developed

And let's look at some other regulatory bottlenecks: FCC designation of broadband data services vs. voice services? Well, Internet access is a data service. Duh. Long distance? Let anybody do it. If suicide were legal, would it be that much more popular?

These steps – and possibly more – might speed up the process by which RBOCs are forced to reinvent themselves, which is what they must do. Their business models are dying. Saving dinosaurs is the job of archaeologists.

— R. Scott Raynovich, US Editor, Light Reading
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ivehadit 12/4/2012 | 9:38:26 PM
re: Hawkish on Telecom scott,
my sentiments exactly (ie take the loop plant away from the rbocs), but it would take a political tsunami to make it happen the way you say it.

a better alternative may be to mandate divestiture, not in the hands of a government agency, but to a publicly traded company, which could provide equal access to all.
porn starr 12/4/2012 | 9:38:20 PM
re: Hawkish on Telecom Last year, Century and Alltel paid about $3k a piece for Verizon's lines in Kentucky, Missouri, and Alabama. At this rate, it would cost about $550 billion to buy all U.S. access lines from the RBOCs. Not sure that there is a govt agency or private company that has this kind of cash. Forcing the RBOCs to hand them over would violate just about every private property law on the books.

The Really Boring Old Carriers will own the twisted pair access to our homes for a long time. We might not like it, but we need to get over it.
dietaryfiber 12/4/2012 | 9:38:19 PM
re: Hawkish on Telecom
Take the lines away and do what Scott? Put in new fancy local loop technology? What new fancy local loop technology - FTTH? To do what? Run video? Imagine being a cable company in that scenario, better plan on buy them as well.

The reason the RBOCs complain about the CLECs is that the rules are still in place for them. SBC (under Project Pronto) must place unbundling equipment in place even if there is nobody to unbundle to. If you have never been to a PUC discussion of Pronto, you should see Sprint, Worldcomm and AT&T lawyers make the mouth of the local CLEC lawyer move.

The whole thing is a giant game being played over who can do what. Giant Companies (IXCs, Wireless, Cable, and the RBOCs) are all looking to get regulatory advantage.

I highly recommend Scott that you actually learn something about the local loop and how it works before you insist on a model of how it should change.

dietary fiber
Consultant 12/4/2012 | 9:38:13 PM
re: Hawkish on Telecom Porn Starr,

Your position is dead wrong. It is quite within Constitutional bounds to mandate separation of access and switching. Indeed, something similar was done in the power utilities in several states. Legal issues are not the key problems.

But Raynovich, did get one thing wrong - most CLECs are not dead. If Raynovich had reviewed the most recent issue of the FCC's local competition report, he would have been shocked to see CLEC share still rising even in era of scarce capital.

Consultant 12/4/2012 | 9:38:12 PM
re: Hawkish on Telecom Dietary Fiber,

The RBOCs have raped their customers for decades with pricing on local loops that is mostly profit and distinguished by patheticly slow provisioning and arrogant customer service.

CLECs using fiber or unbundled network elements have injected pricing discipline into the market and brought rates down dramatically.

I can sell you an OC3 clear channel circuit between NY and London for $5500 a month and the local loop to go two miles is another $2500.

Makes a lot of sense.

dietaryfiber 12/4/2012 | 9:38:10 PM
re: Hawkish on Telecom

He isn't talking about undoing the end fiber market, which has been competitive for years.

Also, big difference between a shared medium irrespective of the distance (remember that OC3 is shared on a Terrabit+ fiber cable) versus a dedicated set of equipment.

Finally recall all the long distance guys are losing money at this.

dietary fiber
Scott Raynovich 12/4/2012 | 9:38:09 PM
re: Hawkish on Telecom I'm aware that some CLECs are thriving, but indeed I need to learn more. It would make for some good news/analysis. Off the top of your head, could you name somne of the CLECs you think are in the strongest position?
willywilson 12/4/2012 | 9:38:08 PM
re: Hawkish on Telecom Thankfully, I don't know everything about the local loop


Anything, my friend, anything.
willywilson 12/4/2012 | 9:38:08 PM
re: Hawkish on Telecom Loved the suggestion that the government should buy the local loops. A vyer, very smart telecom engineer made this prediction to me about five years ago. He said the RBOCs would fall apart and wind up turning their plant over to the government.

Doesn't it always happen with the failures? Once "private enterprise" has used them up and spit them out, the assets get socialized. What's Uncle Sucker there for, anyway? And why do we have politicians and propaganda if not to call it progress?
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