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NOVEMBER 19, 2002 NEWS ANALYSIS A Nationwide Brawl over Local Phones The bitter dispute between the Baby Bells and new rivals for local calling services is landing in the FCC's lap for a resolution
In the middle is the Federal Communications Commission (FCC), which as part of a triennial review will decide later this year what rules will define the battlefield as the combatants compete for local-phone supremacy. The point of contention is a provision of the 1996 Telecommunications Act obliging the Bells to sell capacity on their local networks at wholesale rates to all comers -- rates the Bells claim are below their costs. This, the Bells say, enables the CLECs and AT&T to siphon their local customers -- an estimated 8.8 million so far, and a potential 10 million by yearend. GAINS IN JEOPARDY? It galls the Bells to think that they're subsidizing competitors, and their fondest dreams depict the FCC killing the 1996 provision. The debt-laden Bells -- Verizon (VZ ), SBC (SBC ), BellSouth (BLS ), and Qwest (Q ) -- contend that, unless the FCC rules their way, their business model could unravel and leave them all in financial jeopardy. At the very least, the Bells say, the FCC should reassess what pieces of their networks have to be leased to the CLECs. At greater risk than the health of the Bells, the CLECs and AT&T contend, are the benefits of deregulation: more consumer choice, innovation, and lower cost. In danger is not just the competition that has sprung up since the 1996, they say, but the bigger and more vibrant telecom industry that has developed in the 20 years since the AT&T divestiture. No financially feasible way to replicate the Bells' network exists, the CLECs argue. Without the entree the 1996 law provides, these companies contend that it would be impossible for them to gain even a foothold in local service -- and thus achieve the government's goal of bringing meaningful competition to a $400 billion market. TOWARD A SOLUTION. Over at the FCC, sources close to the discussion say a primary concern is to reach a decision that will be legally bulletproof. Hard experience has made this a priority: Both previous attempts to outline a list of services Bells must provide their competitors were rejected by the courts, first in 1999, and again last May. Thus, the FCC wants to minimize the inevitable legal challenges that will follow any changes it makes -- or doesn't make -- to its rules. Accomplishing that, FCC insiders say, would help get the telecom business back on its feet by eliminating at least some of the uncertainty that has fed the implosion of large chunks of the industry. As daunting as the FCC's task sounds, finding a solution is far from impossible. Rhetorically, the battle is epic. But in practical terms, it's a fight over how to solve arcane technical issues -- and, of course, to decide who will bear the resulting costs. In a nutshell, this furor over the telecom's future boils down to how, when, and by whom a simple little phone wire will be transferred from a Bell holding a local monopoly to an upstart competitor. Under the current FCC mandate, the Bells must provide CLECs a variety of network services, including access to the copper wires that run to consumers' homes and to circuit switches. The latter are the computers that electronically connect callers, just as old-time operators once did manually with pin-and-socket switchboards. FIGHTING AND SWITCHING. The package of services the Bells provide is called the Unbundled Network Element Platform, or UNE-P. State regulators set the price the Bells' competitors must pay for UNE-P according to a formula that the Bells claim is unfair and doesn't let them recoup their costs (see BW Online, 11/19/02, "Why the Baby Bells Aren't Cheering"). Unfortunately for the Bells, the U.S. Supreme Court approved the pricing formula, known as TELRIC, last spring. That decision means the only way they can now escape the low-price UNE-P formula is to redefine the bundle of services itself. For this reason, the Bells have petitioned the FCC to remove the switching function from UNE-P. The Bells' argument goes like this: It's absurd that they're forced to offer switching to the likes of AT&T, which already has its own switches to serve long-distance customers. As for smaller competitors, the Bells say they could buy the equipment for next to nothing from struggling equipment providers such as Lucent. MAKING THE CONNECTION. That's all well and good, the CLECs retort, but a switch's cost isn't what they're afraid of. Every time a customer wants to change carriers, a Bell employee must physically unplug the user's phone wire from a Bell network switch and manually transfer it to the competitor's switch -- a one-time repeat of the old operator's job. The process, known as a "hot cut," is both expensive and inefficient -- especially if local-phone customers get into the habit of changing carriers as often as long-distance customers now do. Neither side wants to pay for this procedure, and the CLECs worry that the Bells will make it hard for customers to switch by taking their sweet time to perform hot cuts. How to break this logjam? One way, analysts say, is for the FCC to borrow from the reasonably successful -- and legally defensible -- framework it created in 1996 to allow the Bells to enter the long-distance market. Each Bell was required to prove it had opened its network to competitors before it was permitted to compete for long-distance customers. This carrot-and-stick approach gave the local monopolies a strong incentive to do something they didn't want (let competitors into the local market) in exchange for something they did (compete in long-distance). The same approach could settle the hot-cuts issue, analysts say. The FCC could create a requirement that the Bells perform a specific number of hot cuts over a defined period -- and do so at a reasonable price -- to show that it can be done. Once state regulators affirm that the Bells had met that test, they would be freed from providing switching services for their competitors. Poof! UNE-P would disappear. "TESTED AND PROVEN." Such a phase-out would calm the CLECs' fears that, if UNE-P instantly disappeared, the cost of servicing new customers would exceed the revenues the CLECs could expect to generate. It would also give the Bells an incentive to make the hot-cut process meet the standard the FCC would set -- so they could stop providing switching for their competitors as soon as possible. Says Blair Levin, a telecommunications analyst at investment firm Legg Mason and a former FCC chief of staff: This carrot-and-stick formula "is tested and proven. It ties a lot of the pieces together." Such a plan would be a variation on a proposal submitted by AT&T, which has asked the FCC to require the Bells to develop an electronic method for making hot cuts. And BellSouth, along with CLEC Time Warner Telecom, proposed a similar framework to the FCC in August. The Bells, which want to stem customer defections to the same competitors they say their infrastructure is subsidizing, appear to be amenable to such a compromise: "We're not [an] intransigent monopolist that won't consider any solution but one where we get it all. We are eager to consider all approaches," says Eric Rabe, Verizon's vice-president for media relations. The FCC hopes to make its decision by yearend. In the meantime, the telecom industry will continue its multimillion-dollar lobbying campaign -- and wait to see the effect. Waiting as well, analysts say, is Justice's Antitrust Div., which appears worried that any decision that adversely affects the CLECs, especially AT&T and WorldCom, could roll back telecom competition. In the battle of the local-phone carriers, a compromise may be needed to make everyone a winner.  By Jane Black in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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