Squelching Competition

Bell_logo_1969I doubt that many people outside of the broadband industry understand how good the large incumbent cable companies and telcos are at squelching competition. They have a whole arsenal of strategies to make it hard for somebody small to compete against them.

There is no better example of this than the very successful war that these big companies have waged against municipal broadband. I’m not entirely sure why they have singled out municipalities other than they are somewhat of an easy target. Certainly the actions of the incumbents against cities is far out of proportion to the actual threat. On a nationwide basis the amount of competition from municipalities is miniscule. Following are just a few of the strategies they have used against municipalities:

Creating Laws to Prohibit or Curtail Muni Competition. There are now 23 states that have some kind of prohibition or major restriction against broadband competition. Many of these laws have been written by the incumbents and have been passed due to heavy lobbying and political contributions given by the incumbent providers.

Every year there are attempts to pass new restrictions, often using template language developed by ALEC (American Legislative Exchange Council). This group’s authors suggested statutes that benefit their corporate sponsors and in the broadband area they seem to focus on municipal competition. The FCC recently overturned some restrictive anti-muni state laws in Tennessee and North Carolina. The incumbents urged those states to appeal the FCC order, and even before the appeals have been decided in court those states are trying to pass new laws to replace the ones that were overturned.

Lawsuits or Threats of Lawsuits. I can’t recall a lawsuit where the incumbents have been successful in keeping a city out of the broadband business. But lawsuits are great delaying tactics and can cost a lot of money to defend. Lafayette, Louisiana for example was sued several times before it was able to float bonds to build its broadband network. Lexington, Kentucky was recently sued and they hadn’t even yet found a broadband partner. But lawsuits are a very effective threat and I know cities that have decided not to tackle broadband due to the fear of facing costly suits.

Constant Bad Press. The incumbents sponsor a never-ending barrage of whitepapers and policy research papers that demonstrate that municipal broadband does not work and is a failure. I can think of half a dozen such papers that have attacked Lafayette since they have been in business.

The problem with these papers is that they are full of lies and inaccuracies. While there have been a few municipal failures with broadband networks, most of the operating muni networks are happy with their results and are covering their costs of operations while bringing true competition to their community. The main purpose of these papers is to persuade politicians that muni broadband is a failure – even when it is not.

The anti-competitive tactics aren’t just used against municipalities. Any CLEC that has to interface with a large telco network can recite a long string of stories of how difficult the big companies make it for them to operate. Something as simple as ordering a new circuit or connecting with incumbents can take forever and can cost far more than its worth. The big telcos began almost immediately after the Telecommunications Act of 1996 to make the prescribed processes as non-functional as possible. The intransigence of the large telcos contributed to driving some CLECs out of business.

Even very large competitors are not immune to the delays that the big monopolies can throw at them. The issues that Google is having in California in getting access to poles shows that even big commercial companies are not immune from the tactics of the telcos and the cable companies to keep them out of their markets for as long as possible.

It’s hard and expensive to fight the incumbents. This short blog barely touches the many tactics they use to thwart competition. They have flocks of lobbyists in DC and at the state level. They make big political contributions and have many allies from statehouses down to city councils. And they don’t seem boldly lie if that might convince a politician to vote their way. There is no question that they are a formidable foe and have proven very good at protecting their monopoly and duopoly markets.

The Rural Exemption

FCC_New_LogoI was recently surprised when I saw a small telco in Minnesota invoke the rural exemption. This is a set of rules that was created by the Telecommunications Act of 1996. In those days the rural telephone industry had an effective presence in Congress and this was added to that legislation as a protection for small rural telephone companies.

The Act created CLECs and made it possible for anybody to create a competitive telephone company and compete against the incumbent providers, who were all heavily regulated monopolies at the time.

The purpose of the rural exemption was to provide a pause in the process of allowing a competitor telephone provider into rural markets. The big fear was that there would be markets where a competitor would come in and cherry pick the market and make the remaining company unviable. This was a real concern. For instance, I had one client at the time that made over 60% of their revenues from one very large factory. They didn’t think that if they lost that factory as a customer that they could remain viable and continue to serve everybody else. Their fear was that competition would wipe out the only telephone company in their small community.

This was a legitimate fear. But it turns out the rural exemption was not really the right answer to their problem. It became quickly obvious that they would eventually lose that customer and that the rural exemption wouldn’t really protect them. So I helped that company to branch out into the surrounding towns to offer their own competitive product. They needed to have a customer base that was big enough to survive losing the big factory.

And sure enough, it worked. They lost that factory as a customer a few years later when a competitor offered cheap broadband to the factory that they couldn’t match. But when they lost the factory they didn’t fold. In fact, they are doing better today than they were before they lost the big customer. They beat competition by becoming competitive themselves.

In the 90s there were a number of small companies that invoked the rural exemption. This forced the the state regulatory commission to have a formal hearing before allowing in a competitor. The small companies were in the unenviable position of having to argue that competition was bad for their community. And as you might guess, I don’t think a small company ever won a rural exemption case and the competitors were always granted the ability to serve their markets.

Over the next decade there was a huge increase in competition in the rural areas as cable companies got the technology that allowed them into the telephone and data business. Competition from the cable companies was so inevitable that almost nobody wasted the legal fees needed to invoke the rural exemption. And I think that after enough of these cases were filed and always lost I think small companies got the message that being against competition sent the wrong message to their customers. There were still a few rural exemptions invoked into the 00s but most of these were nothing more than a feeble attempt to keep competitors at bay for a few extra months.

It’s possible that there have been some cases filed in the last few years that I missed, but I can’t recall having heard of a rural exemption being claimed for many years. The law is still on the FCC rulebooks, but it’s obvious by now that every regulatory body is pro-competition. There is basically zero chance of a rural telco convincing a regulator that they should be exempt from competition. Particularly since the rural exemption only looks at voice competition and we have move to a world where it’s all about broadband.

This current case is a perfect example of why the rural exemption ought to be obsolete. The competitor in this case is a new cooperative that is building gigabit fiber optics to everybody in the community including the farms. The farmers in this area either had very slow DSL, or if they were too far from town they had no broadband at all other than dial-up or satellite. The telco that filed the rural exemption has known about this coming competition for at least five years.

This small telco should have taken the same advice I gave my small client with the factory in 1997 – they should have found a way to participate in the innovation. This telco could have taken a lesson from the hundreds of other rural telcos that have built their own fiber to customers. Nobody is going to build a second fiber network in a rural community and this company could have built fiber and ensured their prosperity for decades to come by being the first with fiber. But instead, they now are going to have to go to the state regulatory Commission and tell the citizens of their community why they would be better off without fiber and faster broadband. I’m glad I’m not their consultant or lawyer because I don’t think anybody can make that argument these days with a straight face.

Unbundling the Broadband Networks

canada_flag-1920x1080The Canadian Radio-television and Telecommunications Commission (CRTC) has ordered that large telecom companies, both telcos and cable companies, must unbundle the last mile of their network and make the facilities available to competitors.

With this ruling the CRTC has said that competition and choice is important. This was a surprising ruling because all telecom companies had filed comments stating that forced unbundling would be a disincentive for them to build expensive fiber facilities to homes and businesses.

This ruling was only the first step; the processes and procedures needed to accomplish unbundling still need to be worked out. It’s estimated that perhaps the first unbundled connections will be available to competitors by the end of 2016

This ruling applies to both fiber and coaxial networks and will apply to the larger providers like BCE (Bell Canada Enterprises) as well as to the two biggest cable companies, Rogers Communications and Shaw Communications. But the biggest impact is expected to be on BCE which has invested heavily in fiber to both businesses and residences.

The CRTC said that this was the only path they saw towards competition since the cost of building duplicate fiber networks was expensive and not likely to happen.

We know something about unbundling in this country. The Telecommunications Act of 1996 ordered large US telcos to unbundle their copper networks and make them available to competition. This promoted the explosion of CLECs in the late 90s, but the use of unbundled copper largely died when many of the CLECs formed during that period imploded during the telecom crash in the early 00s.

But the FCC in this country has never required unbundling of fiber. In fact, the 1996 Act removed the unbundling requirement as soon as a telco replaced copper with fiber. The Act did require the unbundling of dark fiber (fiber sold without electronics), but as is typical in this country, the telcos chipped away at that requirement to the point where it became incredibly difficult for a competitor to get access to telco dark fiber.

Our experience in this country is that the large companies will comply with this requirement only reluctantly, and here they put as many roadblocks as they could in the way of competitors. The telcos here required difficult paperwork for every step of the process and dragged their feet as much as possible any time they worked with a competitor. There is a famous rumor in the industry that in the work space at one of the large US telcos that dealt with unbundling there was a large sign reading “Delay, Delay, Delay”. Too bad this was before cellphone cameras because several reputable industry people swear this is true.

The idea of unbundling active fiber is an interesting one. Certainly if a competitor could get access to fiber affordably they could offer an alternate suite of products and bring both product and price competition into the network.

The idea of unbundling a cable company’s coaxial network is not as easy to contemplate. Coaxial cables are arranged so that there is not a unique cable for each customer. At the pole each customer is added into the same data and cable TV transmission path as everybody else in their neighborhood. It’s hard to think of a neat technical way to unbundle anything in an HFC network. It might be possible to unbundle the data path, but this is also shared through most of the network. It will be interesting to see how the CRTC deals with the technical issues.

Obviously competitors here will keep an eye on the Canadian experiment to see how it progresses. There has been no cry here for unbundling of fiber networks, but if there was such a ruling I think it would enable a raft of new competitive providers and would bring real competition into the duopoly networks we have in most US markets. Certainly the US suffers from the same duopoly competition that drove Canada to make this ruling.