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GAO: Overbuilds Cut Rates 15%-41%

2/15/2004 7:00 PM Eastern

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Wireline Rivals

The General Accounting Office has completed a seven-month audit of six markets with competitive wireline telecommunications providers, concluding that consumer fees are generally lower in "overbuilt" markets than elsewhere.

The report, released Feb. 10, found rates for bundled services in the competitive markets were 15% to 41% lower than nearby markets with comparable demographics.

The GAO came to this conclusion by tracking the pricing activity in pairs of cities — for example, Augusta, Ga., where Knology Inc. competes with Comcast Corp. and BellSouth Corp.; and nearby Savannah, served by Comcast and BellSouth.

The report underscores an argument overbuilders have always made: Competition does lower rates significantly, according to Jim Baller of Baller Herbst Law Group, which advises telecom competitors.

Overbuilders believe the annual reports on cable competition issued by the Federal Communications Commission have understated the rate differential, Baller added.

The FCC's test for effective competition is so poorly administered, he added, that the agency's computations include markets where no real competition exists.

The National Cable & Telecommunications Association criticized the report before it was even finished, submitting comments included in the text that the study was too small to justify any national conclusions on pricing. According to the GAO report, cable penetration is now at 67% of the nation's households.

Of those, only 2% have a competitive wireline choice.

The NCTA also questioned whether or not pricing differences could have been influenced by factors other than an overbuilder; or whether or not the prices the GAO analyzed are actually sustainable in the long term.

The NCTA restated its criticism upon release of the report, noting that most overbuilders, unless linked to an established utility or a not-for-profit company, are in financial distress.

"Whether or not they ever develop sustainable businesses, it is inappropriate to look to the prices offered by a handful of unprofitable overbuild systems as a benchmark for evaluating competitive cable prices in 33,000 communities," the NCTA said in a statement.

In markets analyzed by the GAO, consumers on average paid $117.28 for a discounted bundle of services, including video, telephone and high-speed Internet.

Unbundled, the average price for those services from the cable and telephony provider is $136.63.

The report noted incumbent cable operators are most likely to respond to bundling and pricing by an overbuilder.

Telephony incumbents told the government they did not consider overbuilders to be a "significant competitive threat," compared to cellular or other terrestrial telephone service providers.

While the GAO noted that rates are on average 15% to 41% lower in competitive markets, the report also said that in one competitive market, rates were 3% higher than the noncompetitive wireline market to which it was compared.

In the high-speed data comparisons, the GAO found rates in three competitive markets averaged 20% lower than à la carte prices elsewhere.

But three other markets reported no price savings on data services.

The overbuilders offer rates 4% to 33% lower than telephony incumbents in five of the markets, but no price savings in the sixth, the report said.

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