Court Decision Could Mean Higher Broadband Prices

Releasing Bells from line-sharing rules could damage competition, experts say.

Anne Ju, Medill News Service

WASHINGTON, D.C.-- Broadband consumers could find themselves dealing with lackluster service and rising prices as the Baby Bells gain ground in the telecom deregulation debate, industry experts say.

The warning comes in the wake of a District of Columbia appeals court decision last week to reject existing unbundling and line-sharing rules imposed on the Bells, put in place by a 1996 law. The ruling is a partial victory for the four regional telephone companies--Verizon, SBC Communications, Bell South, and Qwest Communications--who say the regulations have prevented them from effectively competing against cable companies in the broadband market.

The court, which ordered the Federal Communications Commission to rewrite the provisions, apparently decided that cable's 54 percent hold of the broadband market made it too formidable a competitor to the Bells' DSL offerings.

Hurting Competition?

Independent Internet service providers and phone companies that depend on line-sharing and unbundling provisions say the ruling--designed to improve competition--could do the opposite.

What distinguishes the Bells, known as incumbent local exchange carriers (ILECs), from their rivals, called competitive local exchange carriers (CLECs), is that the Bells own the line infrastructure. Covad Communications is one of a handful of nationally recognized CLECs.

Lifting the federal requirements that the Bells share those lines with competing ISPs and CLECs would effectively push those companies out of the market, and consumers would pay, says Sue Ashdown of the American Internet Service Providers Association.

"If the FCC rewrites the rules, it is game over for competitive DSL providers," she says.

Letting the Bells and cable companies take exclusive control of the broadband market would create a duopoly, Ashdown says. Without DSL competitors the Bells would have no incentive to keep their DSL services up to par, forcing customers to deal with higher prices but lower service quality.

Some argue, however, that the Bells may have a point. There are industry experts sympathetic to the Bells' argument that current FCC regulations have limited those companies' ability to compete with cable broadband providers.

United States Telecom Association spokesperson Allison Remsen, one such expert, calls the ruling "a win for consumers." The ruling will let the Bells establish rates based on market forces, instead of "synthetic competition," she says.

Inconsistent Ruling

Remsen may agree with the court's ruling, but another telecom expert says it doesn't mesh with former rulings.

The court's decision is disappointing and inconsistent with the Supreme Court ruling earlier this month that favored a "pro-competitive" market, says John Windhausen Jr., president of the Association for Local Telecommunications Services. The appeals court's decision fails to acknowledge that the CLECs already provide DSL competition for the Bells, he says.

And if the courts were to free the Bells from line sharing, "the worst outcome would be that residential consumers wouldn't have a choice for competitive broadband access," Windhausen says.

Because the Bells currently hold most of the small-business market, and cable companies dominate the residential market, their control would only increase once competition from CLECs went away, he says.

The result? "Prices would go through the roof," he says.

While that is the worst-case scenario, Windhausen says his organization--which represents 37 CLECs--is hoping it won't come to that. Line-lease contracts with the Bell companies are still in place, and the court decision will have an immediate impact on the competing companies only if the Bells decide to break those contracts, which is unlikely, he says.

Jason Oxman, general counsel of Covad Communications, says the court decision is "clearly wrong," especially since it "ignores" the recent Supreme Court ruling that said the Bells have sufficient incentive to invest in DSL under current unbundling provisions.

However, Friday's court ruling could have a silver lining, Oxman says. Since contracts bind the Bells to honor the line-sharing provisions of the 1996 law, he says, the court order "doesn't proscribe any particular outcome." That means DSL competitors are safe, he says.

CLECs Down, Not Out

FCC Chair Michael Powell also said in a statement that this ruling does not spell the CLECs' demise. "While we continue to evaluate the court's opinion and consider all the commission's options, in the meantime the current state of affairs for access to network elements remains intact," Powell said.

Joe Laszlow, an analyst at Internet research firm Jupiter Media Metrix, agrees with Oxman that the sky isn't falling for DSL competitors--at least not yet. But the court ruling does create some uncertainty for their future, he says.

Laszlow says the Bells are arguing that "the CLECs' work is done." The reason the CLECs were brought into the market under the 1996 law was to encourage telecom competition, he says. Now that cable companies--not the CLECs--are the Bells' main broadband competition, perhaps the CLECs have become irrelevant, he says.

Despite that argument, however, Laszlow believes consumers would still lose out if CLECs went away.

"You don't want a duopoly at this point," Laszlow says. "Having [only] two providers at this early stage in the market will slow deployment and will probably result in higher prices."

Meanwhile, ISPs and phone companies say they will lobby Congress to codify the FCC's adopted rules from the 1996 act, "so the FCC and the courts can't touch them," Windhausen says.

"We'll be doing everything in our power to get this decision overturned," Windhausen says. "It's likely to be appealed to the Supreme Court."