Thursday, December 09, 2004

The Phone Company Sharks are Circling

Recent stories have noticed that, whoops, the widely touted move of the Baby Bells, including our own BellSouth, into the land of the triple play runs into Federal law requiring that video providers pay local landowners (aka local governments) for the use of their right of way and poles. This translates into franchise agreements with local governments. Which, generally, translate into cash fees and universal provisioning requirements.

The Bells have petitioned the FCC to let them out of this "unfair" "regulation." As I've grown weary of pointing out, entering into a contract for the use of someone else's property is not what we usually call either unfair or regulation. (Apparently any advantage you take of governmental agency is fair in the eyes of some ideologues.) The Bells have complained that it would be too complicated to get franchise agreements with all those little municipalities everywhere and that they should get some sort of special consideration because they are providing competition for the cablecos and that what they are doing is not really "video" but is, instead, some special IP (Internet Protocol) thing.

A reasonable reader might be perturbed. Too many little guys to deal with? Get over it. The cable companies manage. Providing competition with cable? Hunh? The phone company is going to endorse subsidizing those who compete with monopoly operations! Surely those Bell monopolists haven't thought that through. Or maybe they think we won't notice a little hypocrisy. About the IP thing, a casual reader might think: that is just silly. Well, probably that reader would be right, it is just silly. But that doesn't mean that the Bells aren't actively trying to get the FCC to pull the trick of removing their video offering from any requirement that enter into franchise agreements with local governments to use their land and equipment. Yes, it is nutty. But the Feds just pulled this trick at the state level by deciding that Voice Over Internet Protocol (VOIP) phone service wasn't really phone service but was, instead, an "information service" and used that rationale to keep state regulatory commissions from regulating the phone service provided by, for instance, cable companies.

However perturbed the reasonable reader might be, most mainstream coverage of the issue has been exceedingly thin, doing little more than repeating the incumbent's justification and their 'concerns' that dealing with local governments might slow their broadband rollout and make it more expensive.

Follow the Money
Ah, but a little bit of reportorial prying into that last motivation, expense, reveals a lot that is not in the press releases of the Bells. "Follow the money", the ominous advice of Deep Throat during the Watergate scandal applies here. The other stuff is mostly distraction and excuses. The real motivations of large corporations are simple, and they are not public benefit or concern for the United States' standing in the broadband race. The motivation is that first of the seven deadly sins: greed. (Before you dismiss that characterization as overblown let me ask you what you'd call it if a company enlisted the powers of one branch the Federal government to override federal, state, and local law requiring that property owners be compensated for the use of their property and equipment. I'd have to call it greed. What would you call it?)

Two stories published recently gently ease into the real story while also repeating the claims of the incumbents. They are both useful though the USAToday version is a bit more readable and the BusinessWeek article a bit more complete (for instance, correctly including BellSouth as a major player in this arena along with Verizon and SBC).

Part of the expense story is, of course, fees--money. Getting out that cost, which the cable competitors already pay, would place their cable competitors at the same disadvantage vis a vis video as the phone companies are in relation to telephony. What the telephone companies really want is bit more advantage over their competitors, they want out of any local version of universal service.

Universal Service
What people mean when they refer to "universal service" is that all in a service area that desire service can get the same service at the same price. Most municipalities' contracts with cable companies to lease use of their rights of way and poles require that all the owners of the property used (aka citizens) be allowed to buy the service at the same price. That seems both fair and reasonable.

That works ok for cable companies since their hybrid coax systems were designed with equitable service in mind their upgrades are relatively easy to do. Besides the cablecos' make the most money off high cost, high margin, high bandwidth premium services and they are mindful that HDTV will mean massive upgrades to their system anyway. Cable companies are generally ready to upgrade their whole systems when they have to.

But the phone companies are different. Their core business is still the phone line into the home. It is a low bandwidth use and their systems are awkward and expensive to transform into a more capable, high-bandwidth IP-based network. They want a bigger competitive advantage over cable than just a reduction in local municipal fees. The phone companies want to force high-cost customers on the cable companies and to be allowed to skim off the highest profit customers for themselves.

Time out
A break for some elementary economics is in order: When the cable company provides TV service for an entire community some neighborhoods are more profitable than others because the provide greater income for each mile of cable laid and for each connection to a home built. That logic puts a premium on dense (more customers per mile) and wealthy (more expensive services per household) neighborhoods. To make that concrete: In Lafayette think River Ranch, a densely packed neighborhood of wealthy households.

The Sharks
If the FCC steps in and preempts local law the phone companies will be able to set up what will be, for them, a very delightful cycle that drives their costs down and their competitor's costs up. They will, as they have already done in their current DSL (Digital subscriber Line) upgrade, provide service first to those areas that will be most profitable while their cable competitors upgrade costs have to be spread across many less-profitable neighborhoods. Cable costs are greater than they would be if they could cherry-pick too. Relative to what they would have to charge if they too had to provide universal service the phone companies will be able to reduce their charges. Lower prices lead to ever higher penetration rates and ever lower costs per customer. The predator can leisurely eat its way down into less profitable neighborhoods forcing ever higher costs on its competitor.

The image is sharklike: There is a certain deadly fascination about looking at all those teeth.

Of course, this would be a more realistic scenario if the phone companies weren't so far behind in terms of basic network bandwidth. But BellSouth, of all the phone companies is best positioned to make this little game work for it. It currently has its fiber closer to the home than any other. That has cost it a lot of money to relatively little benefit. But it is already in most wealthy neighborhoods with its DSL buildout. The returns on DSL alone haven't been enough to compensate for massive wireless investments and outright wireless debacles in Latin America and allow BellSouth to pursue the Fiber To The Home build that will take Verizon to a spot well ahead of the cable companies. But this little regulatory trick might just give BellSouth, more than any other, the breathing space it needs to catch up in wealthy areas only. From that high ground it could conceivably eat its way down the food chain.

Caveats
Now this strategy just won't work in Lafayette. The new LUS fiber-based utility will be both cheaper for all consumers and have enourmously more bandwidth to push out advanced services with. There will be no space for an entering edge of the wedge at the top. And arguably the cable companies and particularly the newly privatized Cox are too far ahead for merely pulling even in video provided to wealthy neighborhoods to give BellSouth enough margin to allow it to build up more rapidly than the cable companies can respond.

But this scenario is, IMHO, the phone companies' last best hope to catch up. You can bet that the sharks will be circling at the FCC.

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