Blog October 4, 2016

Rate Regulation of Business Data Services Puts in Jeopardy Lower Prices and Better Services For Small and Midsize Businesses

“In May of this year, the Federal Communications Commission (FCC) unveiled a proposed framework for regulating the rates of “business data services” (BDS), a [$25] billion-dollar-per-year market of high-capacity data and voice connections used by businesses and consumers across the country.

Regulating this market in general is nothing new. Early on, telephone companies had a monopoly on BDS, but the FCC was able to create a streamlined regulatory process that allowed new types of companies, most recently cable operators, to enter the market. These increased investments by new players led to higher competition, which in turn effectively kept prices competitive while still encouraging innovation.

In recent years, companies like Charter have made significant investments in this sector that have increased competition, lowered prices and improved services, particularly for small and medium sized businesses. The FCC’s own rulemaking called cable the “great entry success story” in the BDS market.

The facts speak for themselves. The percentage of buildings connected to fiber has increased from 11 percent in 2004 to 42 percent in 2014.  See, Declaration of John Mayo on Behalf of Comcast Corporation at paragraph 39 (dated June 28, 2016).

In more rural markets, smaller providers have lowered prices for Ethernet by 50 percent on average over the last 5 years.  See, Comments of the American Cable Association, WC Docket No. 16-143, WC Docket No. 05-25, RM 10593 at 36 (dated June 28, 2016).

In short, the current climate is working.

Giving credit where credit is due, the FCC is largely to thank for these positive developments. For decades, the FCC’s common sense approach recognized that competition comes when companies invest in their own infrastructure.

But a proposal by Verizon and INCOMPAS under consideration by the FCC is a departure from these productive strategies, favoring instead aggressive artificial price regulation.

When a new competitor is considering entering the BDS marketplace, it must weigh whether the market can support a revenue stream that will offset the large upfront investment associated with deploying fiber, especially in rural areas. Accordingly, prices for BDS play a critical role in how a company assesses whether to deploy fiber and where to deploy it.

By placing artificial caps on what companies can charge for BDS, the FCC would only be discouraging companies from entering a market in the first place.

Charter’s recent analysis finds that if the Verizon/INCOMPAS proposal to regulate Ethernet services had been in place over the past year, much of the deployment of fiber we made would not have made economic sense, and we would not have made those investments. The results would have been less competition and less private sector investment in infrastructure – the opposite of what small and medium sized companies need, and what is needed to grow our economy.

The FCC should be encouraging more expansions into small and midsized cities as well as rural areas where the costs of entering the market are steep, rather than creating new policies that dis-incentivize investment and harm competition. Unless the FCC continues its current pro-growth, limited regulatory approach and rejects the Verizon/INCOMPAS proposal, new entrants like Charter will be discouraged from making future investments in BDS, leaving the dominant phone companies as the only game in town for small, midsized and rural business customers.”