We make no secret here that we are strongly supportive of a vibrant telecom industry in which all competitors including ILECs, CLECs, ISPs and cable companies have a fair chance to compete. That is because competition makes all competitors more efficient and creative, ultimately benefiting the economy and society. Nor is it a secret that we support (hopefully) temporary measures that require ILECs to unbundle parts of their network at cost-based wholesale rates to CLECs, in recognition of their historical ubiquitous networks which no CLEC could ever hope to reproduce.

However, we have little patience for pseudo-economic arguments made by companies that are in actuality self-serving ways to boost profits rather than obtain a level playing field. And in 32 years in this industry we have seen a lot of self-serving arguments made by both ILECs and CLECs.

That being said, the CLEC fight for cost-based wholesale service availability during the industry transition to IP-based networks is clearly legitimate. Wholesale services are especially important for reaching end user customers. The economics will never exist for CLECs to build facilities for all but the largest business customers. Thus, CLECs must have access to cost-based special access channel terminations and unbundled DS1 and DS3 loops if they are going to have any chance of competing with ILECs for small and medium business customers.

Of course it is one thing for CLECs to simply parrot this argument. That will only get you so far with the FCC. It is important for CLECs to back their claims with economic facts. Thus it was refreshing to see Windstream, which has clearly been the CLEC leader on this issue, filing two important white papers supporting the need for equivalent wholesale services.

At one time in this industry, such white papers were filed on a regular basis by the largest ILECs and IXCs to support their arguments to the FCC. This practice has dropped off in recent years as industry dollars have tightened. It is good to see fact-based arguments again! While we know that even economic arguments made by so-called neutral economic firms can also be self-serving (i.e., “support the client), it is far better to debate the “facts” presented in such studies rather than opposing parties simply echoing their talking points in their FCC filings.

The white papers were prepared by CostQuest Associates to analyze the economics of last-mile fiber deployment to business customers. The papers focus on the cost conditions underlying CLEC fiber network investments in the last mile and on the cost trends over time for fiber deployments.

The first paper specifically models the monthly cost for a hypothetical CLEC to build last-mile fiber facilities and associated IP electronics, and compares that cost against the revenue required to support a build-out decision and against the cost of leasing equivalent facilities from ILECs. According to Windstream, the paper provides a framework for the Commission to analyze the following critical questions:

1. Under what circumstances is it economically feasible for a CLEC to be able to build its own last-mile fiber loops to a location?
2. To what extent do lower wholesale rates disincentivize a CLEC from constructing its own fiber loops?
3. Given that the ILEC, as the historical monopolist, likely has a first-mover advantage and thus a larger market share than the CLEC, how does that larger market share affect comparative costs between the ILEC and the later entrant? (Windstream June 8, 2015 FCC ex parte in Docket 13-5, p. 2)

Windstream argues that the paper demonstrates the importance of FCC action to ensure a viable wholesale market:

First, this paper demonstrates that the revenue required to support CLEC overbuilding of last-mile fiber facilities - in the face of the lower market share that CLECs can expect - remains prohibitively high for most business locations. Second, surveyed pricing data suggests that current wholesale Ethernet prices may exceed retail Ethernet prices in some locations. Such conditions make it difficult, if not impossible, for a CLEC relying on ILEC last-mile connectivity to compete for business service customers at many of those locations. Third, at pricing levels based on available data, the paper shows that wholesale price reductions are not likely to have a meaningful impact on CLEC’s decision to build its own facilities because no matter what the wholesale price, in most instances there is no economically feasible case for a customer to deploy its own last-mile facilities.  Finally, the paper demonstrates that ILECs continue to enjoy a dramatic advantage over CLECs in the average cost per building of new last-mile fiber deployment - an advantage that is largely attributable to the incumbents’ much larger market shares, which is a direct result of the ILEC first mover advantage rooted in the monopoly era. In other words, CLECs face a much higher threshold than ILECs for fiber loop construction to be economically feasible. Thus, competition for most business service customer locations likely will continue to depend on CLECs’ being able to lease ILEC last-mile inputs so that they can connect their CLEC fiber backbone facilities to individual customer locations (Id. at 2-3).

The second paper analyzes the changes in cost of network deployment over time as the industry transitions from Time Division Multipexing (TDM) to IP. It concludes that the costs for building, operating, and maintaining IP services generally are less than those TDM services.

This suggests that all carriers, including ILECs, will continue to have their own significant business reasons for migrating from TDM- to IP-based networks. Requirements to provide equivalent wholesale special access before and after such transitions and to continue to unbundle DS1 and DS3 capacity UNE loops merely maintain the existing regulatory status quo and do not negate these important business incentives for transitioning to fiber/IP services. Indeed, under a regime merely requiring equivalent wholesale pricing, ILECs attain a windfall as they transition to lower cost networks but still charge wholesale rates based on more expensive legacy cost conditions (id.at 3).

The white papers are certainly worth reading in full. They can be found here.

The ball now is in the FCC’s court. The longer it waits to mandate cost-based wholesale services as the IP transition proceeds, the more CLECs will find themselves at a competitive disadvantage. This Commission continues laudably, if not always smartly to protect consumers (the Open Internet Order, expanding Lifeline), it ought to spend at least an equal amount of time contemplating how the loss of effective competition for ILECs could hurt end users and the industry.

By Andy Regitsky, CCMI