This article originally appeared in the Sept. 2010 issue of INTERNET TELEPHONY
Consumers and businesses who want to ride on the broadband superhighway hit a major pothole on July 1.
Despite all the efforts of the Obama administration to promote and expand access to broadband services, AT&T is using its market dominance to raise arbitrarily the already exorbitant rates that other carriers – such as other communications providers and wireless companies – must pay for special access services used to ensure that their customers can benefit from broadband services. And as these rates increase, so will the bills of consumers and small businesses, which will have to bear the brunt of AT&T’s actions.
AT&T’s decision to raise the rates for these special access services demonstrates its market power, both in terms of its ability to raise the rates and the timing of its decision. In 2006, when AT&T merged with BellSouth (News - Alert), it promised to lower these rates for three and one half years in order to gain approval of the deal. However, confident that it would still have market power when that time expired, AT&T simultaneously put in place a mechanism that would allow it to increase the rates to the higher level on July 1, 2010.
The reason that AT&T and other incumbents are free to charge such high rates for this service is because the FCC (News - Alert) has granted them price flexibility in certain areas where the commission predicted competition would form and subsequently drive the rates toward a more reasonable cost-based level. Unfortunately those levels of competition have not been achieved. In fact, incumbent telcos generally have used their granted pricing flexibility to increase significantly these rates, demonstrating the rates are not being impacted by competition and are not reflective of costs.
While the extent of the price increases varies by region, COMPTEL (News - Alert) has calculated that some of AT&T’s July 1 price increases are well over 30 percent. It is a definite sign of a market failure when AT&T can predict three years in advance that it can raise its rates in, ironically, what it alleges to be a competitive market.
The lack of competitive alternatives and the absence of regulatory action on incumbent carriers, like AT&T, will continue to have a significant trickle-down effect on the ability of consumers – and more specifically small businesses – to access and afford broadband services. Subsequently, this will have a negative impact on the ability to create new jobs that are needed to spur future economic growth.
The increase in these special access costs will not only hinder competitive carriers’ ability to expand and offer new innovative services. Consumers and businesses will bear the brunt of AT&T’s action as they try to afford broadband services at a time when the stagnant economy is causing everyone to tighten their belts. The higher cost of underlying broadband infrastructure is now being passed on to end users, many of which are small businesses already struggling to pay other increasing bills. In fact, telecom costs are already a significant portion of small businesses’ expenses, which spend on average four times more per employee for communications services than larger enterprises. The increasing cost of telecom services ultimately limits the number of jobs that can be created by these businesses, which many are relying on to spur future economic growth.
The impact on job growth is multi-fold, when considering hiring trends at the incumbent carriers. Even while AT&T was required to lower temporarily its special access rates, its 2009 cash from operations and free cash flow were the company’s best ever annual totals. Yet, despite these windfalls, the company shed tens of thousands of jobs.
A recent study by COMPTEL shows that competitive local telephone companies provide nearly 20 percent more jobs per revenue dollar than incumbents. Additionally, since most competitors focus on serving small and mid-sized business customers, it stands to reason that as competition creates new services and greater cost savings for the end user, they will be able to afford to hire more employees.
Swift (News - Alert) action by the FCC could virtually eliminate the problems faced by consumers and businesses resulting from the incumbents’ continuing abuse of their market power. The FCC has had ample opportunity to take a fresh look at its pricing rules to address this market failure, but has failed to do so. By revamping its rules to ensure that rates are just and reasonable, the FCC could have another means for ensuring widespread broadband access and providing further incentives for job growth, economic development and innovation in the U.S.
Jerry James (News - Alert) is CEO of COMPTEL (www.comptel.org), the leading industry association representing competitive communications service providers and their supplier partners, and has more than 30 years experience in various aspects of the competitive communications industry.
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Edited by Stefania Viscusi