Broadband Relief Spurs Bell Investment

The FCC has voted to relieve the biggest local phone companies from having to share local loops with competitors if they build a fiber network within 500 feet of a home or small business, marking the latest ruling in a string of decisions to deregulate the broadband market. The commission also said local phone companies are not required to build TDM voice capability into new packet-based networks or into current packet-based networks that never had such capability.

In the wake of the decision, SBC Communications Inc. disclosed plans to provide 18 million homes with high-speed data, video and voice services in two to three years, rather than five years as previously announced. The company plans to reach 18 million homes by the end of 2007, deploying 38,800 miles of fiber at a cost of $4 billion to $6 billion through what SBC called its Project Lightspeed initiative. It has tapped Alcatel to supply gear and integration services for the initiative in a $1.7 billion deal (see related story).

A week following SBC’s announcement,Verizon announced plans to pass an additional two million homes and businesses with an advanced fiber network next year and hire 3,000 to 5,000 employees by the end of 2005 to help build the network.

Verizon, the biggest local phone company, already has begun work to pass one million homes and businesses in California, Florida and Texas in 2004 with so-called fiber-to-the-premises (FTTP) technology capable of delivering phone service, turbo-charged Internet access and video services.

Now, the New York-based telco plans to bring to nine the number of states in which it will build the fiber networks. Those states include Delaware, Maryland, Massachusetts, New York, Pennsylvania and Virginia. Verizon expects to make an $800 million capital investment in the FTTP technology this year.

BellSouth also plans to increase by 40 percent the number of homes it annually reaches with a fiber network. BellSouth plans to pass 130,000 additional homes this year with a fiber network, BellSouth spokesman Kevin Curtin says, and the No. 3 local phone company intends to reach 180,000 homes next year.

Goldman Sachs analyst Frank Governali says in a research note Verizon is likely to be the first Bell to use an all-fiber network in certain areas to offer video services during the first half of 2005. Goldman Sachs expects BellSouth and SBC to offer video over their infrastructures by the end of next year.

“Deep fiber networks offer consumers a ‘triple play’ of voice, video and data services and an alternative to cable,” said FCC Chairman Michael Powell in a statement, who is a strong advocate of broadband deregulation. “By limiting the unbundling obligations of incumbents when they roll out deep fiber networks to residential consumers, we restore the marketplace incentives of carriers to invest in new networks.”

In August, the FCC ruled the biggest local phone companies building fiber networks to predominantly residential multidwelling units don’t have to lease the infrastructure to rivals. That ruling, and the most recent development, build upon the commission’s Triennial Review Order last year. The massive regulatory order freed the regional Bells from having to rent fiber networks extending to homes to competitors such as AT&T Corp. and MCI Inc.

While the most recent ruling signaled a victory for the biggest local phone companies, Legg Mason analysts say there is a potential caveat: the regulatory relief could weaken the phone companies’ argument for a sweeping rewrite of the Telecommunications Act of 1996. “Because a primary argument for such legislation is freeing up investment for broadband, the more the Bells announce large broadband investment in response to FCC decisions, the more the Bells likely diminish the urgency of a legislative overhaul, in our opinion,” Legg Mason says in a research note.

National consumer groups opposed the FCC’s decision to further deregulate the broadband market, complaining it moved the country closer to cementing a duopoly in the high-speed Internet market between the local phone company and the cable operator. “The FCC ... took our country one giant step closer toward solidifying a two-company domination — the local cable and telephone providers — over the consumer Internet market,” Consumers Union Senior Policy Director Gene Kimmelman said in a statement. “As both industries tighten their hold on high-speed Internet access, consumers will see their choices diminish and their bills skyrocket.”

When asked about the potential for a duopoly in the broadband market, FCC Commissioner Kathleen Abernathy told reporters at the United States Telecom Association trade show this fall in Las Vegas she is not particularly concerned given the various platforms used to deliver high-speed Internet access. Responding to the same question, FCC Commissioner Kevin Martin said the FCC will continue to watch Internet competition develop and make sure the industry does not get into that predicament. Both commissioners voted to adopt the new rules granting the Bells relief from having to share their networks within 500 feet of a home or small business.

Jason Oxman, general counsel with the Association for Local Telecommunications Services, says the regional Bells are recapturing their monopoly position over local loops, the last part of the incumbent network that is generally considered the most expensive to replicate. In a recent interview, Oxman said the cost of the fiber is not what makes building a network to homes so expensive; rather, it is the cost of building telephone poles, digging trenches and securing rights of way, “all that stuff the Bell companies own as a result of their monopoly,” he said. “Every step the commission takes is an evisceration of unbundling rules that apply to the monopoly loop plant, and that’s just wrong,” Oxman added.

FCC Commissioner Michael Copps, one of two Democrats on the commission, also rejected the majority’s decision to grant further broadband deregulation. “Monopoly control of the last mile created all kinds of problems for basic telephone service in the last century, and now we seem bent on replicating that sad story for advanced services in the digital age,” said Copps. “Unfortunately, the digital age is going to take a lot longer to get here because of the blows we are inflicting on competition.”