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Optical/IP

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 | 10:23:32 PM
re: Supremes Rule for Competitive Carriers What do you think?
________________

Decryption technologies do not place undue burden on system resources or on consumer electronics. DRM solutions can coexist for those that disagree on the solution. A single holy-grail solution isn't required.

Producers of high value content need protection against mass piracy if their industry is going to survive. Revenue gaurantees are not part of a free market, but it is obvious that Americans will consume entertainment delivered conveniently to their homes. Payments to the producers for these consumptions will provide for a healthy industry.

The risks taken by consumers and producers are not the same. Producers take multimillion dollar risks and a lot of time. Consumers take a risk of $8-10 and a few hours.

Technology must provide the solutions because consumers don't tend to obey honor systems if they can get something for free. Most don't understand that the definition of property gives the *owner* the rights to define the limits of exclusion, including no exclusion, assuming there is no infringement on fair use. Technology vendors can and should provide solutions which enable the enforcement of these rules.
facetious 12/4/2012 | 10:23:32 PM
re: Supremes Rule for Competitive Carriers 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.
__________________

...and look at DVD sales outside the US to see a market stifled by the arbitrary regional hardware locks imposed by the movie industry.
Confucius 12/4/2012 | 10:23:30 PM
re: Supremes Rule for Competitive Carriers Technology must provide the solutions because consumers don't tend to obey honor systems if they can get something for free.

If you make "obeying the honor system" sufficiently difficult and painful, yes, people will circumvent it. If you make it easy and non-punitive, people will tend to do the right thing. The problem is that the major labels are just too greedy, and in the course of lining their pockets they've overstepped their bounds and motivated people to find an alternative means to get their music fix. What we are witnessing here is the death of the golden goose. The record companies (anachronistic name, I know) refused to lower the cost of CDs to the consumer despite the fact that the costs of producing the CDs went down. Is it really a surprise that people got fed up? Profiteering is irksome to those on whose backs the profits are made. That the major labels couldn't adjust their expectations is to their detriment. Now they are trying to redefine "fair use" to be essentially meaningless. If they could have it their way, you'd be charged every time you listened to a song. Your attitude seems to be that technology "can and should" provide the means to enforce such a restrictive vision of IP distribution. This is equivalent to being charged every time you read a book that you've already bought.

The fundamental issue as regards fair use is that people should be able to make copies for their own use. They should not be allowed to go into publishing. That's the key difference, and the RCIA isn't satisfied with that, they want an absurd level of control. It's that obsession, motivated by an unrelenting greed, that has motivated people to "find another way." It will be their undoing, and they'll have no one to blame but themselves.

In the same way that telecom engineers have had to "readjust expectations" about their future wealth, the record labels and indeed the artists themselves are going to have to readjust expectations. Being a rock star just isn't going to be as profitable as it once was. So what? Who said popularity guaranteed untold riches?
rjmcmahon 12/4/2012 | 10:23:24 PM
re: Supremes Rule for Competitive Carriers Greed does not justify stealing. Payments must be made for a market economy to function.

We did not place all the NASDAQ stock certificates (human equity) into the public domain after that greed phase. Why should this be done to music and movies?

Most consumers need the friendly reminder to pay for their consumptions, so the proprietor install cash registers by the exit door. This provides payment prior to home consumption. The same needs and can be done for home intellectual property consumption. Distribute and allow for encrypted copies. Authorize consumption by the owner, without infringing on fair use.

PS. Artists and telecom workers have rights to be paid for their labor, regardless of who is popular and who is not.
Twistall 12/4/2012 | 10:23:20 PM
re: Supremes Rule for Competitive Carriers RJ, are you suggesting that there should be no more free public libraries? Or that public libraries ought to fork over royalties every time a book or record is borrowed?

Let's consider Sony for a minute: On the one hand, they are the enablers of "piracy" with their VCR's and mini-disks. On the other hand, they are one of the biggest content producers out there. It would appear that they win either way.

Free access creates demand for the products they sell. Yeah, you've got the bootleg mini-disk or video tape, but you've got to buy the hardware to play them. Then you'll tell your friends about the great band or the great movie, and they'll want in on it, too.

Or maybe you're a big fan of XM radio?
sauron5 12/4/2012 | 10:23:18 PM
re: Supremes Rule for Competitive Carriers Unfortunately, unless you are an established
big name star, artists these days don't make
nearly as much as people think. They are often
tied into contracts that are overly "generous"
to the record company. This simply adds to the
argument that the record companies have become
too greedy.

Sauron
rjmcmahon 12/4/2012 | 10:23:15 PM
re: Supremes Rule for Competitive Carriers Unfortunately, unless you are an established big name star, artists these days don't make nearly as much as people think. They are often tied into contracts that are overly "generous" to the record company.
____________

This occurs because artist don't have access to demand creation (broadcast radio) nor access to distribution.

A modern, bidirectional, democratic fiber network will give the artists a much stronger negotiating postion in any future contracts, including direct producer to consumer sales, as well as provide for word-of-mouth demand creation.

Artists must be paid paid for store-and-forward products as real time performances account for less than 5% of the market. Software vendors receive royalities for reproduction of their works. So should an artist.

Our society is at a crossroads. We can choose a market economy or a dependency economy w/respect to intellectual property. We have chosen a market economy with our physical property and showed the world how to build an economic system second to none. It's time to take lead with our intellectual property.
rjmcmahon 12/4/2012 | 10:23:15 PM
re: Supremes Rule for Competitive Carriers RJ, are you suggesting that there should be no more free public libraries? Or that public libraries ought to fork over royalties every time a book or record is borrowed?
_________________

I am suggesting that we don't turn Barnes and Noble into a public library, or more accurately, we stop the looting of other's private property.

PS. VCRs don't produce content. They allow consumers to time shift and space shift playback. This is part of fair use in my opinion. I believe fair use can and should be supported using authorization and decyryption technologies, though I think we'll need a more precise definition of "fair use" from the court system soon.

Smartcards with authorization keys seem particularly interesting to preserve things like secondary "used" markets.
Twistall 12/4/2012 | 10:23:09 PM
re: Supremes Rule for Competitive Carriers RJM, I'm intrigued by your statement, "Smartcards with authorization keys seem particularly interesting to preserve things like secondary "used" markets."

So if I grow tired of my Slim Whitman CD's, I won't be able to unload them at a yard sale or a second-hand record store, because the artist won't be compensated? "Er, yeah, that'll be 25 cents plus yer smart card authorization key... Sony will bill you for the content later..."

It's just a little too complicated, and a lot too "DIVX."
rjmcmahon 12/4/2012 | 10:23:08 PM
re: Supremes Rule for Competitive Carriers So if I grow tired of my Slim Whitman CD's, I won't be able to unload them at a yard sale or a second-hand record store, because the artist won't be compensated?
____________

With a smart card, done properly, it would be the opposite. The consumer could resell the key to the purchased "rights" without artist involvement.

Think of it like a CD, but the songs themselves are located on a central server and the CD only contains the authorization key. Such a CD would remain tradeable in a used market.

I believe supporting consumer based trading, including through vehicles like Ebay and Amazon, are market requirements that must and will be provided for by DRM vendors.
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