The competition-distorting game in the business data market

In their never-ending quest for continued and even expanded “special access” price regulation, competitive local exchange carriers (CLECs) for years have suggested that no real competition exists in the business data market. 

Not true. I’ve been writing for some time how the cable industry provides effective competition in the business data market by offering Ethernet connections that are significantly faster than today’s CLEC services that continue to rely on antiquated copper-based networks as a result of special access regulation. Now, it turns out there is a group that agrees with me: the cable industry itself. 

{mosads}In their most recent comments filed at the Federal Communications Commission (FCC), the National Cable & Telecommunications Association (NCTA) highlights how the cable industry has played “a significant and growing” role in the special access marketplace. NCTA noted how their presence has increased from  “…virtually non-existent when the Commission first started this proceeding back in 2005, ” to now offering “…business customers a wide variety of high-capacity services including state-of-the-art Ethernet services over Hybrid Fiber Coax or I00 percent fiber optic networks.” 

Not surprisingly, innovation and competition have vastly changed the market since 2005, two years prior to the iPhone’s introduction. Rather than simply reselling services and facilities provided by others, the cable industry has entered this market the harder way: through investment. So as NCTA notes, “the most important task for the Commission in this proceeding is to ensure that it preserves incentives for continuing and expanding facilities-based competitive entry and investment.” 

One would think that preserving competition and expanding investment would always be the principal task and goal of a regulatory agency, but this hasn’t been the case with special access. Instead, we’ve seen the CLECs, for two decades, hold on to their special privileges, including price regulation, forcing ILECs to maintain two networks, one of which the CLECs use to offer a slower, technologically inferior product to that which cable now offers. 

So, for the Commission, the issue ought to be simple: Is there competition? And if there is competition, why regulate prices? The first question is answered easily by cable’s extensive entry into the market; the second naturally follows from it – in a competitive market, no need or justification exists for price regulation.   

The question the FCC must now resolve is whether rates are “reasonable,” and market competition is the proof of that. As NCTA notes, “Firms lacking market power simply cannot rationally price for services in ways which…would contravene Sections 201(b) and 202(a) of the Act.” Based on this longstanding precedent, where a competitor has entered the market with its own facilities, the Commission has no basis for concluding that the competitor’s price is unreasonable.  Consequently, in areas with two or more facilities-based providers, the Commission has no basis in logic or law to compel an incumbent LEC to offer service at a regulated rate that is lower than the competitive price.” 

Viewed this way, the Commission’s task is pretty simple. The FCC has enough data to act. It should end this proceeding quickly and allow the market and competition to work, encouraging rather than discouraging the facilities-based investment that is already bringing faster and better products to the market for business services. Unsurprisingly, the most competition in this market is already at higher speeds than 1.54 Mbps, for the same reason that Willie Sutton robbed banks – it’s where the money is. 

Rate regulation would distort incentives for competition and new entry, particularly among competitors that have built out facilities to compete. Rate regulation is unnecessary. The best sign of a well-working, competitive market is when new entrants come in with a better product to compete for customers. That’s exactly what’s happening in the business services market today.  

Too often in Washington, we see industries (like the CLECs) seek special protection to shield themselves from competition, rather than advertise that they want to participate in the competitive fray. Good for the cable industry for taking the path of competition, and good for them for calling out the CLECs’ regulatory, competition-distorting game.

Mehlman served as assistant secretary of Commerce for Technology Policy under President George W. Bush. He is a founding co-chairman of the Internet Innovation Alliance (IIA).