The FCC started the process last week of changing the way that the large telcos sell transport products on their networks. Transport products are products like T1s and larger circuits that are used to send data from one point to another and the telco market for these products is called special access.

I’ve often heard people ask how the big telcos can still make so much money since they have lost most of the voice lines that were their bread and butter products for a hundred years. And a big part of the answer is in special access. There is still a gigantic market today for transport for things like connecting schools to each other, for connecting bank ATM networks, for connecting cellular towers or for connecting all of the locations in a market together for a government or large business.

While there is a lot of special access sold to businesses the majority of special access is sold to other carriers. Special access is what gives most CLECs and other competitive carriers the ability to compete – it’s how they actually make a connection to buildings in a market. Very few companies own wireline networks that connect to all of the businesses in a community. In most larger cities there is some fiber owned by non-telcos, but except for the rare city that has built fiber everywhere, such fiber is generally limited to fiber strung along major roads or to business parks.

There is still a surprisingly large amount of the country where the telco is the only one that has ever constructed wires to reach all of the nooks and crannies of a city. It’s not hard to understand why this is so since it’s expensive to build fiber. You read in this blog all of the time about companies that are building fiber to serve residential customers. But it’s even harder to justify building fiber to serve only businesses – unless the businesses are really large or unless there are a lot of them in a single place – like in a business high-rise or in a central business district.

The telcos have been adept at taking advantage of their monopoly position in the special access market. They have priced transport products high and also imposed scads of rules on these products over the years that are all in their favor. The recent order took the first swipe at abolishing some of the more unfair rules.

For one the FCC got rid of termination charges. The telcos have been selling special access only under term contracts. If a competitive carrier was buying a special access for a two or three years period and their end user customers stopped paying them – because they moved or shut down – the carrier was still on the hook to pay for the circuit for the rest of the contract period. The FCC also abolished a number of rules that twisted the arms of carriers to buy special access – rules called tie-ins. If a carrier wanted to buy a large quantity of circuits in one market they were pressured into buying special access in other markets where they might have instead found a competitive alternative.

The FCC has also started the process of trying to regulate special access by market. They are contemplating doing this by determining first if various markets are competitive, and then imposing stricter rules for markets that are considered as non-competitive. And my guess is that will be most markets since there are not a huge number of markets where somebody else owns a lot of alternative wires. Interestingly, this is happening at the time when Verizon is trying to buy XO Communications – one of the largest alternative fiber providers. The fear among other carriers is that merger will take a big pile of competitive fiber transport off the market and turn it into special access.

The FCC also said that that they are considering making the cable companies subject to the new transport rules. The cable companies are late comers to the transport world since they largely shunned building to businesses when they first built cable networks – not enough businesses bought TV to justify the construction. But cable companies have extended fiber markets in many places to cover business parks and business districts and have become a major player in the transport business. But like with other duopoly competition, they often ‘compete’ with prices and terms that are not that different from special access so that they and the telcos can split the lucrative revenue stream. So there will probably be non-competitive markets where the FCC’s new pricing rules apply to them as well.