Telco TV

Spitzer Calling for Naked DSL

5/10/2005 10:02 AM Eastern

Taking a time-out as Wall Street’s ethics cop, New York State Attorney General Eliot Spitzer is showing interest in competition in the telecommunications industry, particularly with how major phone companies market high-speed-data service.

Verizon Communications won’t sell digital-subscriber-line service unless the customer also buys local phone service, and the customer can’t drop local phone service without disconnecting DSL. SBC Communications Inc. has the same policy.

Siding with Verizon’s rivals, Spitzer told the Federal Communications Commission Monday that Verizon’s bundling policy is anticompetitive because it deters Verizon DSL customers from seeking alternative voice providers that are attempting to nibble at Verizon’s huge voice market share.

Cable companies and Internet-based voice-over-Internet-protocol providers, such as Vonage Holdings Corp., are in the best position to attack Verizon’s residential market by offering flat-rate pricing plans that include any-distance domestic U.S. calling and loads of features that can be managed from Web pages.

Evidently, Spitzer sees an opportunity to break up the bundle through the FCC’s review of Verizon’s proposed $8.5 billion merger with MCI Inc. The FCC may impose conditions on the deal to ensure that it meets the public-interest standard in federal communications law.

“The [FCC] should condition the merger on the combined Verizon/MCI offering stand-alone DSL service to all customers, existing or otherwise, not later than 30 days following [FCC] approval,” Spitzer’s office said in an FCC filing on the merger’s competitive impact.

Last month, Verizon chairman and CEO Ivan Seidenberg said the company was moving ahead with plans to offer “naked DSL,” adding that the bundling strategy was the result of internal operations.

“On this issue, the reason why we didn’t offer it was nothing very strategic,” Seidenberg told reporters in Las Vegas. “For 100 years, we provided a line with a phone number. All of our systems, everything, was built that way.”

Testifying before a Senate committee in March, Seidenberg said he would oppose a naked-DSL merger condition.

The FCC is studying whether to force Verizon and SBC to sell DSL a la carte after Bright House Networks complained that Verizon’s bundling policy deterred consumers from signing up for the MSO’s competing VoIP service. Bright House said imposition of a naked-DSL requirement might rectify the problem.

In the FCC filing, Spitzer signaled agreement with Bright House.

“By selling its DSL service with its monopoly voice service, Verizon discourages its DSL customers from using VoIP competitors,” Spitzer said, adding that Verizon’s introduction of its own VoIP service, called “VoiceWing,” would give the company “further incentive to hinder competitive VoIP products through means other than competition on the merits.”

Echoing Spitzer’s concern, Vonage also called for a naked-DSL merger condition. With 600,000 subscribers, the company markets its VoIP service to consumers who already have DSL or cable-modem service. Signing up a Verizon DSL subscriber currently requires Vonage to convince the customer to purchase voice service a second time.

“The practice of DSL tying is clearly anticompetitive because it … essentially forces [consumers] to purchase local services they do not want -- either because they have a wireless option or because they prefer to use VoIP alternatives,” Vonage said in an FCC filing on the Verizon-MCI deal.

Oddly, neither Spitzer nor Vonage addressed a likely method for circumventing a naked-DSL merger requirement: pricing strategies. Unless the government imposed price controls, Verizon could offer naked DSL at such a high markup to the bundle that very few consumers would purchase the stand-alone offering.

“If you do it without any price regulation, it’s meaningless,” said Thomas Hazlett, an economist with the Manhattan Institute for Policy Research. "[Verizon will] say, ‘Yeah, we're offering it. We’re offering at 60 bucks a month.’”

Hazlett said he was not advocating price controls.

Cable companies use pricing strategies. Comcast Corp. charges $57.95 per month for stand-alone cable-modem service but $42.95 if combined with a cable-TV subscription. That vast majority of its 7.4 million broadband subscribers -- 89% -- opt for the bundle, according to Comcast.

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