By Bruce Kushnick, New Networks Institute, reprinted by permission from Seeking Alpha
BDS is the new telecom battleground as the companies that control network access services control America’s wireline and wireless communications.
The proposed BDS deal by Verizon and INCOMPAS (the association of telecom competitors) leaves billions of extra expenses charged to competitors and stifles potential growth. Verizon and AT&T have been able to cross-subsidize their other lines of business, including wireless, due to control of the wireline network infrastructure.
Are wireless competitors such as Sprint being overcharged $0.5 billion to $1 billion annually for access? Consumer Federation of America finds that the market concentration of the BDS market cost consumers and the U.S. economy $150 billion since 2010.
Over the last few years the FCC has been conducting a series of proceedings to fix “special access” services, now called “broadband data services” (BDS) and the agency is supposed to be making some announcements and changes over the next few months.
BDS is one of the best guarded and most misunderstood topics in telecom today – and the most essential for the future as everything from 5G to IoT to fill-in-the-blank depend on these formerly hidden networks, this critical infrastructure.
Simply put, and regardless of what you’ve been told, for the most part these wires are part of the state utility networks. They are the wires that deliver end user services, from ATM machines to alarm services, but are also the wholesale lines that are used by the companies and competitors for the wires to the cell towers. Sometimes referred to as “middle mile” or “backhaul,” they are not special – they are the copper and fiber optic basic phone wires used for phone, broadband and data services.
Just three companies – Verizon (NYSE:VZ), AT&T (NYSE:T) and CenturyLink (NYSE:CTL) – control most of the state-based telecommunications utilities in the U.S., such as Verizon New York or AT&T California, (with the exception of the state utilities or territories that were sold off to Frontier or FairPoint).
And while the common wisdom is that no one is using the wires and everyone is wireless, truth be told, the FCC’s 2016 analysis found $45 billion in broadband data services revenues in 2013. But most surprising, $25 billion of these revenues, the majority, are still mostly copper wires that could have been installed over the past 20-70 years. And since no other large phone company came in to put in more copper, these wires are still mostly monopoly controlled.
Training Manual: For your inner nerd, here is a link to a summary based on AT&T’s BellSouth training manual, detailing the network infrastructure-the physical lines and network equipment.
During the last few decades, the companies were somehow able to manipulate the accounting and regulations to separate special access services so that they would have very high profit margins while the majority of expenses end up in the accounting for “local service.” Yet, it is all the same wires and all the same wired utility networks.
And talk about irony. This proceeding started 14 years ago by AT&T, then the long distance carrier, against what is now – AT&T. AT&T claimed that the rates it paid to use special access services were grossly excessive. (The “Bells” are now AT&T, Verizon and CenturyLink.) This is from the original petition’s table of contents.
And this excess for access was never resolved. Consumer Federation of America writes that it doesn’t just harm the competitors but impacts consumers as well-big time.
“Consumer Federation of America (CFA) estimates that large incumbent telephone companies have engaged in abusive pricing practices for high-speed broadband ‘special access’ services, with overcharges totaling about $75 billion over just the past five years. As a result, CFA estimates that the indirect macroeconomic loss to American consumers doubles that damage to a total in excess of $150 billion since 2010.”
The FCC finally wants to close this proceeding as they believe that the future is wireless and that the next generation requires a massive growth in new special access fiber optic services. 5G, the new, super-hyped wireless tech, is a fixed wireless service that requires lots of small antennas attached to a fiber optic wire. Unknown to most, 5G has a miniscule range, and worse, it also requires a clear line of sight to work.
The FCC initiated a large data collection effort over the last few years to document the special access market, but there are serious problems with the methodology and results. The collection efforts were only for companies who spend over $5 million annually for special access services. The FCC did not examine actual end user companies who buy the service, especially the small businesses that get an alarm circuit or even a large chain where each franchise pays its own telecom expenses. And it never examined the massive cross-subsidies or even the financial books of the state utilities.
From an Investor Perspective:
If broadband data services are really the underlying newly-renamed wired infrastructure, then all companies and services that interconnect or rely on these local networks will be impacted by the FCC’s decision. This includes the end user services such as the alarm and security systems or the banking networks or healthcare networks. If wireless is really a wired service with an invisible cord, then all wireless and broadband services offered by AT&T, Verizon or the competitors like Sprint (NYE:SS) or T-Mobile (NASDAQ:TMUS) will be impacted if the FCC doesn’t get this right.
But it is more than that. Since BDS is really the state utility wired infrastructure, it is also a matter of which areas will get upgraded, which areas will get shut off, or which areas will get faster broadband or have competition. And it is even about the costs of using the wireless phone for watching videos or the price competitors, like Sprint, have to pay to offer services. Also, companies that are selling video like Netflix (NASDAQ:NFLX) or social media services must also be concerned as their offerings are constrained by what their customers can get and the price they pay for it, especially if there are data caps imposed by the provider.
And unfortunately, we don’t believe that the FCC can or will get this right.
The INCOMPAS-Verizon Deal Doesn’t Examine Actual Expenses or Fix the Cross-Subsidies.
In order to resolve this long term conflict, two unlikely bed fellows, INCOMPAS, (formerly Comptel), the association of competitors that represents Sprint and T-Mobile as well as Level 3 (NYSE:LVLT) and Windstream (NASDAQ:WIN), entered into an agreement with Verizon about special access services.
INCOMPAS writes:
“We propose that the Commission apply this one-time rate adjustment in two steps. In the first year, we propose the Commission reduce the Price Cap Index (‘PCI’) by 10 percent with an additional rate reduction based on an X-factor of 4.4 percent minus inflation. In the second year, we propose an additional five percent reduction in the PCI, plus an additional rate adjustment based on an X-factor of 4.4 percent minus inflation. This two-step one-time adjustment is reasonable and supported by the Further Notice.”
Translated, INCOMPAS-Verizon is asking the FCC to reduce current rates by 15% over two years and add an X-factor of 4.4%. These are “forward-looking” mathematical models where the actual expenses and profits are approximated.
And there are details upon details about how all of this should be applied as detailed in Sprint’s presentation to the FCC on August 29th, 2016.
Verizon wants this deal because it would shut down any questions about the actual costs of offering service. In fact, AT&T, Verizon and CenturyLink were requested to supply expense information about their current special access offerings but they never did.
But not every telco wants this deal. AT&T and CenturyLink have a litany of issues – they do not want any reductions or oversight. And they have submitted their own X-factors and explanations as to why everyone else is wrong.
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