Wednesday, November 10, 2004

FCC Ruling Will Force Increase in Competition

This week's FCC ruling regarding VoIP will light a fire under all carriers to implement broadband transport and VoIP for all customers. While some customers in hard to reach areas will remain in what the WSJ article terms "stone age telephony", most urban and suburban areas will need to convert to VoIP over broadband ASAP. Alternative carriers, CLEC, SLEC and Vonagish pure IP plays will begin to under cut the traditional carriers during 2005. Most of the archaic ILECs will refuse to meet the challenge, mostly due to fear and uncertainty. Ther will be a resurgence in capital investment within the CLEC and alternative carrier market segment to meet the renewed challenge to "cherry pick" at the best and most lucrative of the local exchnage carrier's customers.
These local exchange carriers will resist the change until it begins to significantly effect new revenues. By the time this occurs, it will be too late for those "stone age" carriers to recoup their best customers. There is a ray of hope that the USF will fund the operations of the old style carriers. However, it is not likely that investors will flock to place their capital in the hands of those that did not plan for this outcome.
The Bush Administration got off to a poky start on telecom policy, but Federal Communications Commission Chairman Michael Powell seems to be revving things up. The latest example is an Internet vote he won yesterday that has the potential to reshape the industry from the ground up.
At issue is a new technology known as Voice Over Internet Protocol, or VOIP. Put simply, VOIP allows consumers to place telephone calls over the Internet -- and it's growing like gangbusters. One of the leading providers, Vonage, requested that the FCC declare its product an "interstate service," and Mr. Powell won the votes to do exactly that. Yesterday's ruling is the first time the FCC has exempted an Internet voice service from state regulation.
We're all for federalism, but if there ever was a candidate for national regulation under the Constitution's Commerce clause, this is it. Our telecom network spans the country and is operated by national companies, yet it is still regulated by 50 mini-dictators known as state utility commissions. Charged with protecting the "public interest," these busybodies have a license to micromanage every firm that's ever conjured up a dial tone. The resulting web of regulation has retarded innovation and growth.
State regulators still have the right to set local phone rates, and many exercise the prerogative by keeping prices artificially low. Phone companies are forced to make their business customers subsidize their residential customers, at the same time making enough money to reinvest in their services. Businesses simply pass their own higher costs along to consumers via higher-priced goods and services, while everyone gets stuck with stone-age phone service.
Phone companies can also be required to make annual or quarterly reports to 50 separate bodies on their revenues and assets in each state; can be subject to 50 different quality of service requirements, 50 different rules on how to send bills, and 50 different tariffing regulations. California, which has never seen a rule it didn't like, requires phone workers to wear a special badge.
Today's FCC vote exempts Vonage, and by extension other VOIP providers, from this mess. That's a blow to state regulators, who've been so eager to envelop VOIP that some states, such as Minnesota, refused to wait for the FCC and went ahead with their own VOIP regulations. The FCC ruling should invalidate those efforts, as well as any going forward.
More broadly, yesterday's vote also advances Mr. Powell's deregulatory agenda. The FCC chief has long argued that true competition was never going to come from giving consumers a choice between a Bell and a Bell look-alike, but from giving them a choice among different technologies -- cell phones, traditional land lines, cable telephony, VOIP.
The phony "competition" that came out of the 1996 Telecom Act -- which forced local phone companies to unbundle their networks and lease them to competitors at artificially low rates -- was plagued by fights over rates and infrastructure, and led to an investment coma. Contrast this with VOIP, where cable providers have been only too happy to work with companies like Vonage that want to offer Internet phone services over their lines, and where real competition and investment are already thriving.
The vote will also assist the spread of broadband. Americans have been looking for a reason to make the switch to high-speed cable or DSL, and the promise of $25-a-month unlimited phone service (as VOIP provides) is proving to be a killer incentive. Meanwhile, the emergence of such rivals has spurred the Bells to more quickly upgrade their own equipment for broadband so that they too can offer VOIP.
The real beauty of the FCC's decision is that it sidesteps the usual hand-to-hand combat over deregulation. Many a brave FCC chief has attempted to cut back the jungle underbrush of local regulation, only to get ambushed by powerful state interests. By declaring VOIP free of meddlesome state control from the start, and assuming victories in the inevitable state legal challenges, the FCC can now sit back and wait for the technology to grow on its own. That's already happening, with an estimated 800,000 consumers using VOIP by the end of the year, and 17 million by 2008. Companies have already proven to be early adopters; Ford, Boeing and Bank of America have all announced they'll be using VOIP networks.

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