DSL Prime on FCC, ILECs

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Rich Persaud <persaud () b8d net>
Organization: Rich Persaud
Date: Tue, 07 Jan 2003 08:00:12 -0800
To: Dave Farber <dave () farber net>
Cc: Dave Burstein <dave () dslprime com>
Subject: FWD: DSL Prime on FCC, ILECs

Dave,

FCC coverage from Dave Burstein's latest DSL Prime newsletter, usually
online 
at http://dslprime.com or http://isp-planet.com a few days later.

Rich

--- begin excerpt ---

     Meanwhile, the bells gained $21B on the market Monday. Yoshi Dreazen
and 
Shawn Young wrote a Wall Street Journal article on FCC draft UNE plans.
Dreazen 
and Young put appropriate caveats in, but the street inferred that Powell,
Abernathy, and Martin will let the bells cripple the current competition
from 
AT&T and Worldcom. (See below for some actual comments by Kevin Martin,
however) That one day gain (probably illusory) is ten times the $2B cost of
completing the 80-85% DSL buildout.

       Using the regulatorium to exclude some competitors merely puts off
the 
need for telcos to grow another line of business. Consumer as well as
business 
VOIP is ready to take off, which is going to pull massive business away from
the telcos. Like lines lost to competitors, lost revenue can't be matched by
expense cuts proportionately, so the bottom line is hurt badly. Anyone who
doubts, please email me and I'll call you on my Vonage/Cisco phone plugged
into 
my DSL router. Simon Romero in the Times this morning discussed how well
that 
works over cable lines as well. BellSouth is considering offering VOIP as a
second line & LD service to anyone with a cable modem, so as not to lose all
the revenue when cable telephony (also VOIP) starts hitting hard.

...

    39 companies refused to buy or invest in IP.net when approached in the
last 
few months. 

    The coming FCC Triennial review played a major role in one funder's
decision to bail. "Consumer is dead without linesharing, and Powell probably
wants to kill it. It would cost another $10M to wait for the decision, and
we 
decided the odds were too long." I don't know if the Chairman reads DSL
Prime, 
but someone should tell him that ending line-sharing kills DSL competition
for 
consumers. Be ready to laugh out loud if the announcement suggests otherwise
- 
and to cut through the bull if you're a reporter.

...

Billy Tauzin, call Duane Ackerman

BellSouth isn't delivering for Louisiana - and threatening less

The PSC ordered BellSouth to stop shutting off DSL service to customers who
switch telephony to MCI or others. BellSouth's Louisiana President William
Oliver responded to AP BS "will halt investment in its high-speed Internet
network if the ruling is not changed." There's no technical or economic
reason 
not to require line-splitting - BellSouth makes a profit selling DSL on the
higher frequencies, and the only reason to refuse is to handicap the
competition. The order is right, and Todd Wallack on the San Francisco
Chronicle reports California and other states are contemplating similar. The
FCC, in the Texas 271, gave the bells clear permission to split lines. "We
need 
to be vigilant to make sure customers have choices," said PUC President
Loretta 
Lynch to the Chronicle.

...

     The direct cost to a telco providing service in volume is $12-20 per
month, including a return on the DSLAM and other capital cost. The
profitable 
competitive price for DSL and cable is between $25 & $35. $40 may be the
monopolist optimum, which is how Comcast and SBC are calculating it. My best
guess is that $30-35 is better, even for a monopolist, because demand will
grow, but that's a very hard one to prove. Gary Betty of Earthlink tells me
his 
market research says half the U.S. dialup users would switch within the year
if 
the price were $30.

     The majority of Canadian net users are on broadband, twice the U.S.
rate, 
because the price is $27-$31 (U.S.). Japan is adding 900K DSL users per
quarter, compared to 500K in the U.S., because the price is $26-$33 for 5-12
mbps. Germany did 2M in 2001, when the price was $30; after wiping out
competition, they raised the price to $40 and only added about 800K in 2002.
Verizon tells me sales took off where the Veriations $35 price was promoted,
although I don't think that was enough to give them a great Q4.

      Incidentally, these price calculations are only slightly affected by
the 
speed offered to the customer. The difference between 200K and 2 meg is
under 
$2/month in telco quantities, numbers roughly confirmed by two of the
countries 
largest ISPs. Going to 7 meg changes that little, because rarely is anyone
downloading at that speed for very long. So "tiering" is not cost justified,
rather a symbol of duopoly created pricing. Otherwise, someone would double
customer speed for a cost that could be taken out of a marketing budget.

       Nearly every cost in this chain continues to decline rapidly with
Moore's law: modem, DSLAM, routers, internet backhaul. That should mean if
the 
market is working, prices would go down over time.

...

Speaking publicly and inviting an open debate

FCC Commissioner Martin made a remarkable speech December 12, clearly and
openly outlining the key issues in the process of decision, and giving his
opinions. We all know how many policy decisions are made behind closed
doors. 
The 1996 Telecom Act itself, according to Senator Hollings, was written by a
group of lobbyists, and merely reviewed by the Senate Committee. Martin's
recommendations included raising the rate of return accelerating
depreciation 
in TELRIC pricing; deregulating new "fiber to the home" but not DSL or
wireline 
DLCs unless they provided services more sophisticated than today's; removing
switch unbundling requirements where some competitors have switches; that
line 
sharing was not necessary where cable and DSL might compete; and other key
issues. Martin concluded

   "I therefore welcome your reaction, criticism, and suggestions. Your
move."

     This kind of invitation to public discourse is a model of open
government. 
Ironically, he was lambasted both by those who disagreed and insiders who
wanted to keep the details private. "Martin's not the Chairman" was a
comment 
from inside the FCC. The insiders were particularly afraid because Martin is
the crucial swing vote on most of these issues, and on some is much closer
to 
Copps and Adelstein than he is to Powell. Many of these issues are not
simple 
"right wing/left wing"as Martin once said to me.

      Perhaps most interesting is Martin's judgment "if a sufficient number
of 
alternative providers are present, the Commission would assume that a
wholesale 
market for switching is viable." That is dramatically different than what
Dreazen and Young report Powell is putting through the FCC, a proposal that
that would need UNE-P in most locations quickly. Presumably, "a sufficient
number" would be at least 3 or 4 able to wholesale; that would apply to few
locations, and would not be nearly as sweeping as the WSJ reported. Martin
may 
have changed his opinion in three weeks. The pressure is enormous - imagine
$21B riding on your decision. More likely, Powell is trying to push through
something Martin hasn't agreed to. But that's why I applaud Martin's
speaking 
out - and question Powell's "quiet decisionmaking."

     Personally, I profoundly disagree with many of his conclusions. In
particular, following Alfred Kahn, the "Great Deregulator", I believe you
don't 
have an effective market until you have at least 3 or 4 viable players. So
line-sharing must be protected, because a DSL/cable duopoly is inclined to
rig 
prices near monopoly levels. I also don't think "potential competition" is
an 
adequate substitute for a market, and much of his argument is based on the
possibility, not the reality of the competition. Rising consumer prices as
costs drop dramatically is strong evidence the market isn't working. I can't
accept any argument we need less, not more, competition.

... 

Copyright 2002 Dave Burstein. Volume 3, #29 January 6, 2003 DSL Prime is
free - 
pass it on. Reply with subject "unsubscribe" to be dropped from the list.
Brief 
excerpts may be reproduced if credit is given and a copy sent to us. I am a
journalist, not an investment adviser; do further research.

--- end excerpt ---


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