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Broadband Decision: An Unbundle of Joy?

Photonics Spectra
May 2003
Brent D. Johnson

After the woeful performance of the telecommunications sector during the past year, the industry has been looking for any glimmer of hope that might restore investor confidence and return revenues to pre-2001 levels. With the Federal Communications Commission's (FCC) ruling Feb. 21 that appears to deregulate advanced fiber networks, the industry may have gotten its wish.

Under the Telecommunications Act of 1996, incumbent local exchange carriers were required to share access to their unbundled networks with local service providers. This was intended to spur competition, thereby lowering prices for telephone and Internet services.

busJoy.jpgIn the recent proceedings, FCC Chairman Michael K. Powell argued that competition has been established at the local level, particularly regarding the cable and wireless companies that offer rival services. Although the commission largely rejected further deregulation, its decision frees the carriers from their line-sharing responsibility when it involves new fiber-to-home and broadband services.

Equipment suppliers have expressed a reserved optimism about the rules. "From our perspective, anything that would promote the development of broadband and ease impediments to fiber deployment is favorable," said Paul Rogoski of Corning Inc. However, the pricing issue, which would be left to the state legislatures to decide, is a point of contention. "We are concerned about that," he said. "There is a potential for 51 different regulating schemes."

Alan K. McAdams, a professor of economics at Cornell University's Johnson School of Management in Ithaca, N.Y., is less enthusiastic about the compromise. In particular, he is critical of making the rules for unbundled network elements inapplicable if there is fiber in the component, which means that the incumbent local exchange carriers no longer have to share this infrastructure.

"The FCC is perceiving that we have competition in broadband today," McAdams said. In Canada, however, digital subscriber line access costs the equivalent of $20, while in the US it is approximately $40. "If competition exists, why are American prices so much more expensive?"

Brian Murphy, director of public relations for Alcatel in Dallas, a major supplier to the incumbent local exchange carriers, believes that the decision to deregulate the broadband network is a good one. "What hurt was when [the carriers] put in new broadband and were forced to share that technology," he said. "They took all the investment risk and had to share that with their competitors."

The question, he said, is why they should do that with new installations. Their competitors could just as easily install new technology. Moreover, he noted, the cable companies -- their biggest competition -- deal in both voice and data and do not have to open their networks.

However, McAdams argues that the competitive local exchange carriers did make a substantial investment in the local loops, and they all went out of business by the end of 2001. As a result, some states are so angry that they have cut the wholesale rate to unbundle the local loop.

"The state commissions are recognizing that there is no competition," he said. In his analysis, the FCC is allowing the incumbent local exchange carriers to have a fiber monopoly because they declared that competition was present, and the carriers say that they will not invest in fiber unless they can get their copper monopoly back. In addition, they want the states to refuse to regulate them.

"I see no rationality on any side of this activity," McAdams said. "I thought there would be an immediate explosion of fiber build-out. It hasn't happened."

Lynda B. Starr, a vice president at Probe Research Inc.'s US Carrier Research, explained that the incumbent local exchange carriers do not have the money to build out the networks because of overspending and lack of revenue. "For years, they have been saying they would invest more if it was unbundled, but have recently backed off." Meanwhile, the competitive local exchange carriers face higher-than-expected acquisition and network costs and now also may face regulatory obstacles, depending on how the rules governing unbundled network elements play out in the states.

McAdams offers an alternative: Build your own network. "There is a new paradigm," he said. He suggests that if you want to get to the gigabit range, you will have to do it yourself. Once it is in place, you can get the cost down to zero.


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