@jbtaylor on tech

Last week, the public interest group Free Press held a policy summit which attracted every telecom policy nerd in Washington, DC, except me. (I has a prior commitment on my schedule.) Of all the speeches given, this one by Free Press's research director Derek Turner, caught my eye because it captures the history of telecommunications and competition over the last several years.

At Sprint, we don't agree with everything Derek said here, but we do agree with his conclusions about why the FCC should act to fix the wireless backhaul market.

What's wireless backhaul you ask? Here's a quick explantion. Most people don't realize that the only wireless part of a mobile phone call is that part where you handset transmits your call to the nearest cell phone tower. The rest of the conversation travels over a wireline network. Moving your wireless call across a wireline (or landline) network is what we call wireless backhaul. (Wireless backhaul is also called "special access" or "the middle mile.")

Because they have territorial monopolies, Verizon and AT&T don't compete with each other to provide wireless backhaul to cell phone companies. In fact they really don't compete with anyone. In the top 50 metro areas where Verizon has a territorial monopoly, it controls more than 90% of the wireless backhaul market in that area. (The same can be said for AT&T.)

Verizon and AT&T can do this because the FCC prematurely deregulated the market for the circuits used to provide backhaul before there was any evidence of signinificant competition. Guess what happened after the FCC deregulated? The landline companies like AT&T and Verizon jacked up their prices considerably. Verizon has markups that are 700% over cost in some areas according to Free Press.

Go to minute 12:47 in this video to hear what Derek has to say about backhaul. He explains it better than I can.

Today at the Free Press Policy Summit in Washington, DC. Free Press research director Derek Turner gave an addres which examined what is holding back further growth of America's broadband economy.

While Sprint doesn't agree with every position taken in the address, we certainly agree with what Mr. Turner said about the need to fix the broken special access markets dominated by the nation's landline phone companies.

Below are the remarks pertaining to special access. I urge you to read them and read the entire address. (Click the image above to get that link.)

Optimism alone is not going to protect consumers and promote innovation.

Instead of nurturing platform competition, the FCC actually made decisions that undermined the potential of emerging technologies to challenge the broadband duopoly.

New entrants can put up wireless antennas, but they have to be able to move their customer’s traffic between their local networks and the Internet backbone.

In many cases, the only available option for “middle-mile” transport is the high-capacity connection offered by the phone company.

So even if new broadband providers build their own local networks, they are still at the mercy of the large monopoly incumbents.

Many of these high-capacity lines are governed by the FCC’s special access pricing rules.

These regulations are supposed to prevent the incumbents from squeezing out competitors who use these high-capacity lines.

But unfortunately, the Commission’s record here at protecting consumers and promoting competition is just terrible.

The rates of return -- or profit margins -- for these critical connections were somewhat reasonable for much of the nineties.

But over the past few years, the FCC’s blind eye has allowed these profits to become obscene.

The nationwide rate of return earned on these lines by AT&T, Qwest and Verizon is above 100 percent.

In some areas, the rates of return are well above 500 percent, a level that would make even the most stalwart monopolist blush.

Why are these returns so high?

Well, in many of these markets the FCC decided that the conditions for potential competition were so ripe that rules constraining incumbents’ prices were not needed.

Not surprisingly, the GAO found that the prices in deregulated markets are higher than prices in markets still under regulatory pricing constraints.

And as a side note, in one last deregulatory kiss to the incumbents before the new Administration took over, the FCC got rid of the reporting requirement that produced the data showing these obscene profits.

So we’ll have no idea if this trend gets any worse than it already is.

The sad fact is that the FCC got it wrong."