Investment or Competition: "Choose One"

Almost every important regulatory decision in the telecommunications industry is directly related to investment and competition, as regulators and policymakers, in principle, want more of both. The big problem always is that those goals often are mutually exclusive. In the short term, it always is possible to boost consumer welfare by policies that promote competition, using policies such as mandatory wholesale and mandatory healthy price discounts for such services.

In the longer term, those same policies tend to depress facilities investment, as profits are not attractive. The problem arguably is worse for legacy services in clear decline, as no amount of investment changes the demand curve for products consumers are abandoning.

So virtually every strategic decision made by every larger access provider these days relates to harvesting of legacy revenues and development of replacement revenues. That is especially true for legacy mobile and fixed service providers, as attackers often can add revenue simply by taking market share from incumbents, even if markets are mature.

For more than a decade, U.S. policymakers have debated whether price controls need to be maintained for special access (T1, DS3) sold to enterprises. Among the issues other than presence or absence of competition in such markets is the fact that demand is shifting away from special access and towards Ethernet replacement services, even as prices for such special access services have dropped substantially over the past few decades.

Among items the Federal Communications Commission will start to address at its April 2017 meeting is a potential change of course on special access (business data) regulations.

The last FCC chairman and commission favored more regulation of special access services, though no action was taken, as the change of presidential administration also clearly meant leadership of the FCC would change.

But the FCC had seemingly been on course to institute lower prices for millions of small businesses, schools, and libraries, with an 11 percent reduction in prices phased in over three years. Critics argued the new price caps would further diminish investment, as demand already is moving away from special access and towards Ethernet access alternatives.

In principle, what is at stake is the proper regulatory stance for an important legacy service that nevertheless is in a declining state, with lots of competition in many--if not virtually all--larger markets.

In fact, executives of independent business data service providers have noted for some years the fact that cable TV operators have taken leadership of the special access market away from independent providers who used to compete with the legacy telcos (primarily AT&T, CenturyLink and Verizon).