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Supremes Rule for Competitive Carriers

The United States Supreme Court gave competitive local exchange carriers (CLECs) and interexchange carriers (IXCs) a shot in the arm earlier this week when it upheld the Federal Communications Commission (FCC)'s right to continue regulating the prices regional Bell operating companies (RBOCs) charge their competitors for access to facilities.

The 6-2 ruling by the high court is seen as a big win for the competitive carrier market. If the ruling had gone the other way, these carriers would have faced huge price hikes from RBOCs that would have pushed many of them out of the market altogether.

Justice David Souter wrote the majority opinion, while Justices Stephen Breyer and Antonin Scalia dissented. Justice Clarence Thomas endorsed only part of the decision. And Justice Sandra Day O’Conner recused herself from the vote because she owns stock in AT&T Corp. (NYSE: T) and WorldCom Inc. (Nasdaq: WCOM).

With larger problems looming at competitive carriers, Wall Street didn’t notably react to the ruling. Several RBOC stocks like Verizon Communications Inc. (NYSE: VZ) and BellSouth Corp. (NYSE: BLS) have gained, while long-distance carriers like AT&T and WorldCom fell. BellSouth was up 1.56 (5.22%) to 31.42 today, while WorldCom, which has had its debt reduced to junk status, was trading down 0.12 (8.33%) to 1.32 (see WorldCom's Junk Status Fuels Fears).

"A few years ago this ruling would have been a big deal,” says Blair Levin, a telecom and media analyst with Legg Mason Inc.. "But today, market forces are much more important than regulatory matters.”

Reactions from the carriers were as expected. The CLECs and IXCs were pleased with the ruling. The five Baby Bells expressed disappointment. The RBOCs have complained that they have been required to lease their networks well below cost since the 1996 Telecom Act was passed, when the FCC got the right to set prices for unbundled services based on a method of pricing called "total element long-run incremental cost" or TELRIC.

In a statement issued Monday, BellSouth said that the court was maintaining “an unfortunate status quo” that would discourage investment by both the RBOCs and their competitors (see BellSouth Rips TELRIC Ruling). Randolph May, a lawyer working for The Progress & Freedom Foundation, a policy think-tank that is partially funded by the incumbent carriers, endorses BellSouth’s assessment of the situation.

May says that the 1996 Telecom Act created false competition that is unsustainable under normal economic conditions. He argues that the widescale failure and bankruptcy of many competitive carriers, like Broadband Access, McLeodUSA Inc. (Nasdaq: MCLD), and WinStar Communications Inc., in the last couple of years is evidence of this.

“We don’t have a viable CLEC industry right now. Just look at all the bankruptcies,” he says. “In the short run you can prop up an industry and manage pricing, but ultimately that is not a sound business model.”

Other pundits argue that that the CLEC demise had nothing to do with the 1996 Telecom Act and that without forced competition the RBOCs will continue to rule the local telephone network as well as the emerging broadband market.

“I don’t think you can link those bankruptcies to the unbundling rules,” says Levin, of Legg Mason. “There are lots of different reasons for companies to go bankrupt -- poor management, bad business plans.”

Levin served as chief of staff to chairman Reed Hundt at the FCC from December 1993 through October 1997, where he helped draft the current pricing model the FCC uses.

While competitive carriers may have won this battle, the war isn’t over. The high court merely cleaned up the legal issues, stating that the FCC had the right to use its current method for pricing the unbundled network services. But the FCC can at any point decide to change the pricing method or do away with it altogether. Some competitive carrier supporters worry that Commissioner Michael K. Powell favors the RBOCs too much.

“Powell is definitely for deregulation,” says Levin. “But I don’t think he is on any sort of ideological jihad to get rid of all the rules. What we have told investors is that the rulings by this commission might end up being more favorable for the Bells without any incremental benefits to the competitors.”

Currently, the FCC is reviewing a whole slew of its rules in an effort to level the playing field when it comes to broadband (see Competitive Carriers Lash Out at FCC and FCC Stirs Up Competitive Carriers). While cable, wireless, and satellite broadband networks are essentially unregulated, wireline services like DSL (digital subscriber line) fall under the same category for regulation as the old telephone network.

The general consensus is that the current commission will likely not do away with the TELRIC pricing method or even change it much. Rather, the commission is more likely to redefine which elements of the network are subject to unbundling and therefore subject to TELRIC pricing.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com
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rjmcmahon 12/4/2012 | 10:23:49 PM
re: Supremes Rule for Competitive Carriers Our Supreme Court will continue to make very relevant decisions effecting the future of our information economy. The Supreme Court decision on copyright in October will also have significant economic effects.

If things go well, the broadcast model, mostly a result of the the free loader problem, will be weakened. Along those lines, keep an eye on hw decryption integrated into playback devices. This should also help with the free loader problem. Producer to consumer business models may stand a chance yet.

The current justices seem to have a nonpartisan goal of taking power away from the federal legislatures and strengthening the state governments. This philosophical approach could help the muni-lan operator, though the operators will need deep resources to fight off the Bell Souths and Comcasts of the world.
mc_jaded 12/4/2012 | 10:23:37 PM
re: Supremes Rule for Competitive Carriers I should say "proposed" legislation.
mc_jaded 12/4/2012 | 10:23:37 PM
re: Supremes Rule for Competitive Carriers "Along those lines, keep an eye on hw decryption integrated into playback devices. This should also help with the free loader problem. Producer to consumer business models may stand a chance yet. "

The current legislation to integrate hw encryption into all computing devices will do nothing less than to kill off the general purpose computer, and to stifle and suffocate innovation and development into personal computing devices. Palm, Intel, AMD, Dell, et al should not have to bow to the likes of the RIAA and MPAA.
fusionboy 12/4/2012 | 10:23:36 PM
re: Supremes Rule for Competitive Carriers Why haven't the PC vendors done anything to stop the piracy? It starts to look suspicous after awhile.

The same could be said about VCR's and MiniDisc player manufacturers also!

Fusionboy
rjmcmahon 12/4/2012 | 10:23:36 PM
re: Supremes Rule for Competitive Carriers The same could be said about VCR's and MiniDisc player manufacturers also!
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You are confusing things. The PC vendors can support fair use while preventing infringing uses. The VCR could not distinguish between infringing and noninfringing recording.

The SSL analogy applies here. Without SSL there would be little ecommerce. Without hw decryption the independent artist will never get paid and the internet biz-models for content will revert to broadcast free loader models (or bundled w/PC models).

Free markets economies require payments as incentives to labor. PC vendors need to provide a viable solution which pays the artists before real broadband is deployed, else the central planners will kill all incentives for productivity.

PS. Look to ebooks for a decent technical solution. Look to DVDs and DVD players to see how markets can grow when consumers pay for their consumptions.
rjmcmahon 12/4/2012 | 10:23:36 PM
re: Supremes Rule for Competitive Carriers The current legislation to integrate hw encryption into all computing devices will do nothing less than to kill off the general purpose computer, and to stifle and suffocate innovation and development into personal computing devices. Palm, Intel, AMD, Dell, et al should not have to bow to the likes of the RIAA and MPAA.
__________________

Federal legislation for DRM can and should be avoided. Agreed that it gives too much (all) control to the content refineries.

But how does a system which pays rights holders kill innovation? Building SSL into the browser hasn't killed ecommerce. A similar type of solution can and should be deployed by PC vendors to protect high value content.

Why haven't the PC vendors done anything to stop the piracy? It starts to look suspicous after awhile.
hemmingway1 12/4/2012 | 10:23:35 PM
re: Supremes Rule for Competitive Carriers sntwk asked for Telecom '96 references:

Here are a few:
http://www.benton.org/Policy/9...
http://people.deas.harvard.edu...
http://www.fcc.gov/telecom.htm...
http://www.cmcnyls.edu/PUBLIC/... (you have to fish thru the list on this one--some other fairly interest stuff here too, even though 5 years old)

Also, BCR magazine had some excellent articles discussing many angles, post-Feb 1996 thru 1997, but you'll have to get them from a library or long-term subscriber. They are not on their website.
mc_jaded 12/4/2012 | 10:23:35 PM
re: Supremes Rule for Competitive Carriers "But how does a system which pays rights holders kill innovation? Building SSL into the browser hasn't killed ecommerce. A similar type of solution can and should be deployed by PC vendors to protect high value content."

SSL isn't mandatory for all Internet applications. SSL doesn't preclude the existence of open-source software. SSL doesn't preclude the usage of non-SSL Internet applications. SSL doesn't require fundamental changes to hardware system architecture and require consumers to buy brand new computers just because the MPAA and RIAA can't change their business models.

"Why haven't the PC vendors done anything to stop the piracy? It starts to look suspicous after awhile."

Why haven't automakers done anything to stop drinking and driving?

sntwk 12/4/2012 | 10:23:35 PM
re: Supremes Rule for Competitive Carriers Can any body suggest good references, online and print, about telcom regulation -96 especially the references which are critical of this act.
hemmingway1 12/4/2012 | 10:23:35 PM
re: Supremes Rule for Competitive Carriers RJM comments: "Why haven't the PC vendors done anything to stop the piracy? It starts to look suspicous after awhile."
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I know several folks that would take issue with that. PC component/hardware/software vendors have devoted thousands of man hours over at least the last 4 years (probably longer but that is when people I know began involvement), in several industry groups and venues, to try to appease the content owners with various methods.

The content owners have ridiculous expectations that place an unacceptable burden on system resources, or have requirements that simply can't be met for consumer products, and they are uncompromising in their positions. They also don't agree among themselves, across different content owners, on acceptable methods.

From the perspective I have, the suspicion points the other way. They don't seem to want a solution because it can't be guaranteed they will never lose even a single penny of revenue (in typical monopoly, controlled-access fashion). Yet the other extreme of pulling all content from the public domain which eliminates the theft concern entirely isn't acceptable to them either.

Every day they delay they lose more potential revenue from the bulk of the law-abiding consumers than they will ever recover by waiting for some impossible holy-grail content protection solution. It is a simple trade off to a realistic person, it seems to me.

They need to get over it, and take the same level of risk their customers take in paying for a movie that may suck or an album that sucks except for 1 or 2 songs-- but can't get their money back for it. We the consumers that keep them afloat accept an imperfect world. They should too. They need to hire some new accountants to show them how much they are losing, net-net, by waiting.

What do you think?
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