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
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phulshof 12/4/2012 | 10:22:57 PM
re: Supremes Rule for Competitive Carriers I see no reason why producers of consumer electronics and software should carry the burden of a monopoly industry that refuses to adapt itself to the market situation.

All arguments I've seen in favour of CRM are focused on infringement of copyright. The content industry already has a law that takes care of that: copyright law. If they wish to stop people from illegally copying or distributing content, they can.

Since it is impossible to use DRM to stop illegal use of a copyrighted work while allowing all types of legal use of a work (fair use), and since copyright law provides all the legal protection the content industry needs, I see no reason to pick up the bill for additional rights for the content industry.

That's not what the content industry is after of course. In the eyes of the content industry, every use of a work should be compensated for. In their eyes, fair use is something that needs to be removed from this planet as quickly as possible. Since they cannot do this directly, they're using the excuse of copyright infringement to pass new laws on technology. I say it's time to tell them NO!
Confucius 12/4/2012 | 10:22:57 PM
re: Supremes Rule for Competitive Carriers or more accurately, we stop the looting of other's private property.

Here's where your argument loses its intellectual force. I am all for the creators of intellectual property being compensated for their efforts (after all, what do I do but create intellectual property?), but the fact of the matter is that you don't retain complete control of your IP when you sell it or the rights to use it. It's your "private property" until you sell it to someone else. When you take money from someone else for your intellectual property, you are releasing it from your control to a greater or lesser extent, depending on the deal you made. It's disingenuous to call a song the artists's "private property" when I bought the CD.

Having bought the CD, and thus having duly compensated the artist, I am then free to make use of the CD more or less as I wish. If I want to copy some of the songs into a mix, that's my right. If I want to use the CD as a coaster, that's my right. If I want to give it to my kid brother, if I want to let someone borrow it to decide if they like it, etc- those are all examples of fair use. In your world, each of those actions would be cause for additional compensation to the artist (and record label and God only knows who else you feel should get the windfall.) That's nonsense. Not only is it not now reality, it's not going to be reality because people will never stand for that sort of tyranny.

It's one thing for me to take a CD and start making copies of it and selling them on the street corner or on EBay. That is (appropriately) a violation of the fair use doctrine. What you advocate is no different from making it illegal to give your newspaper to someone else when you're done with it. That's a pretty radical view of fair use, and one which properly finds very little support in this society. Any attempt to extract compensation for uses that have been historically included in the purchase price is doomed to failure.

You must really hate Richard Stallman.
rjmcmahon 12/4/2012 | 10:22:54 PM
re: Supremes Rule for Competitive Carriers Please read the following site for copyright information. I'll ask twice because it's important to understand the rights a consumer.


PS. I don't hate Stallman nor the GPL. But it is hard to see how unilaterally imposing his GPL position to *all* intellectual property helps pay anybody. Ironically, he believes the *distributors* of the software should get paid and they in turn can *choose* to pay *some* creators a *small* amount for their contributions. This is basically what we have today with the content refineries, sw/hw bundles, and broadcast industry. The creators are not the primary beneficaries of their work.

His model does not provide for a market based economy. But he doesn't care about that. He only cares about his personal learning from others source code. With all due respect to Stallman, his personal desires won't create wage paying jobs which provide for people and in turn allows them to take care of their families.
fk 12/4/2012 | 10:21:41 PM
re: Supremes Rule for Competitive Carriers There is a relatively simple solution to the issue of compensating artists and labels that has already been used the last time a disruptive technology threatened to harm an industry: compulsory licensing. Back when the radio was invented, the record companies went through the same exact doomsday scenario; they felt the future of their industry was on a precipice as a result of this new technology that allowed people to get actual music for free. (Is it sounding familiar, yet?) The solution was to charge a fee to anyone broadcasting which was used to compensate copyright holders for the harm they experienced. Once the fee was paid, the broadcasters could play whatever songs they wanted. The effect of this solution was twofold: the radio industry exploded, and the record industry prospered as well. And people were allowed to listen to all the music they wanted to.

There is no reason why this solution couldn't be applied to the current situation. Charge a buck or two a month to everyone with an internet connection, and apportion it to the record companies. This would have the dual purposes of compensating the content creators and fostering a more robust and expansive internet, with its attendant benefits to consumers. Win-win.

I note that Verizon has chimed in in favor of such a proposal. I think this is the solution we will eventually end up with, and it seems like the best solution I've heard so far. Making every appliance the equivalent of a parking meter is a non-starter, Hollings delusions to the contrary. People will just figure out a way to beat the system. Make the price reasonable and build it into plain vanilla access, and the problem is solved.
skeptic 12/4/2012 | 10:21:36 PM
re: Supremes Rule for Competitive Carriers There is no reason why this solution couldn't be applied to the current situation. Charge a buck or two a month to everyone with an internet connection, and apportion it to the record companies.
There is a reason. It amounts to extortion and
making people with no interest pay for a service
that they don't want. And such a fee is going
to be so difficult to apportion that the bulk
of it will likely end up in the hands of IP
"holders" rather than "creators".

The better choice would be to throw out the whole
notion that digital or internet distribution
should be treated differently than any other
form of distribution. There is nothing disruptive
about internet radio.

Anyone who wants pirated music can just go out
and get it. They are not prowling around internet
broadcasts waiting for songs.

rjmcmahon 12/4/2012 | 10:21:29 PM
re: Supremes Rule for Competitive Carriers There is nothing disruptive about internet radio.

Sure there is. First, a review of the money flow for broadcast radio may be helpful.

Advertisers pay radio owner. Radio owner pays DJs (salary) and copyright holders (via ASCAP). Copyright holders make side payments to DJs (for CD demand creation). Copyright holders take in music revenue by producing, distributing and selling CDs. Artists receive any leftovers after everybody else takes their cut.

Using a unicast store-and-forward network neither advertising nor DJ based CD demand creation works very well. (Hence the arguements made by broadcasters that consumers ffwd'ing through streams or changing the playlist orders is illegal.) No demand creation, no payments to DJs nor CD revenue for copyright holders. Radio owners will then revert to talk and physical commerce only (things seem to be moving that direction already). Artists will make even less and less real music will be produced, only commercials.

The best way to fix this is for consumers to pay direct for their consumptions and let word of mouth become the primary vehicle for demand creation. This requires hw decryption at the playback device(s), which works, and will stop the piracy. The nice part is that artists will be able to sell direct without all that legacy broadcast overhead.

PS. Ever ask the question, "Who is paying tomorrow's Mozart?" Hint, it's a pay-for-content industry and not the symphony.
mc_jaded 12/4/2012 | 10:20:21 PM
re: Supremes Rule for Competitive Carriers "Along those lines, keep an eye on hw decryption integrated into playback devices"

The following page from the EFF (Electronic Frontier Foundation) describes the MPAA's call for legislation to regulate Analog-to-Digital converters.


Yes, you read that right. In the eyes of the MPAA, everybody from automobile component manufacturers to hearing aid manufacturers should have their pockets picked to subsidize and ostensibly protect works of are like "Dude, Where's My Car".

Ok, so I am being a bit facetious, but either the MPAA is ridiculously out of touch with reality, or this is just an over-the-top ruse to allow the heinous CBDTPA legislation to pass.
rjmcmahon 12/4/2012 | 10:20:19 PM
re: Supremes Rule for Competitive Carriers The following page from the EFF (Electronic Frontier Foundation) describes the MPAA's call for legislation to regulate Analog-to-Digital converters.


The EFF is failing in their arguements. They seem to be confusing "principles" with "principals". They would do better by arguing the protection of consumer fair use. The constant anti-MPAA rhetoric doesn't help in my opinion.

Does the EFF believe intellectual property should be protected? If so, what does the EFF propose as a solution? Remember, things like medical records are going digital. Would EFF argue that a hacker has the rights to place those on P2P networks allowing *anybody* the ability to pull up our medical records via an SSN? Why should Hollywood's movies be protected any less than our medical records? Argueing that "hwood movies suck therefore they don't deserve protection" doesn't hold water.

Getting back to the more difficult problem of plugging the A/D hole. The EFF excerpt:

"If ADCs are constrained from performing analog-to-digital conversion of all watermarked copyrighted works, you might end up with a cellphone that switches itself off when you get within range of the copyrighted music on your stereo; a camcorder that refuses to store your child's first steps because he is taking them within eyeshot of a television playing a copyrighted cartoon; a camera that won't snap your holiday moments if they take place against the copyrighted backdrop of a chain store such as Starbucks, which forbids on-premises photography because its fixtures are proprietary works"

This arguement is junk. It will not sway any political position.

Let us find solutions which stop the piracy. The trends of turning all intellectual property into a broadcast industry, a broadcast industry which is moving completely towards embedded adverstising, dilutes all creativity.

Unicast pay-for-content industries will only grow when groups provide real solutions to real problems. What is the EFFs position on how to help with that?
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