Telco Tonic

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Washington— The Baby Bells scored a broadband victory last Thursday when the FCC ruled that fiber deployments feeding into copper loops do not have to be leased to competitors at regulated rates.

The Federal Communications Commission had previously deregulated fiber-to-the home facilities, but BellSouth Corp. sought relief for the deployment of fiber within 500 feet of last-mile copper loops that feed into homes.

SBC Communications Inc. reacted by announcing that the agency’s ruling would allow it to speed its fiber-deployment schedule. SBC had planned to pass 18 million homes with fiber by 2009, but now expects to reach that goal by 2007.

At least one analyst last week predicted Verizon Communications Inc. would step up its much-watched fiber-deployment schedule, too.

Fiber rollouts will allow the phone giants to provide voice, video and data in direct competition with cable companies, which were among the first to promote the concept of the facilities-based “triple play.”

The Bells’ all-copper plant, built to support narrowband voice services and slow-speed Internet access, was considered inadequate to challenge cable’s hybrid-fiber facilities.

Critics said the FCC’s decision would shut out companies that need regulated access to Bell broadband facilities.

But chairman Michael Powell said the FCC was committed to policies designed to promote investment first, with regulatory obligations put off to another day.

“If our goal is to vault to the lead of the world, if our goal is to bring the next-generation architecture, we must have a regulatory plan intended to incent the construction of architecture where it does not exist,” Powell said.

FCC member Michael Copps reiterated his belief that consumers won’t have broadband access at affordable rates unless the Bells are required to share fiber-fed copper plant.

“The loop represents the prized last mile of communications. Putting it beyond the reach of competitors can only entrench incumbents who already hold sway,” Copps said.

The cable industry has poured $85 billion into network upgrades, with the largest companies providing a suite of digital service to consumers.

Cable’s rollout of voice-over-Internet protocol (VoIP) service has made the Bells more anxious about the decades-old moat around their core residential business.

Meanwhile, cable’s video business is already under assault from direct-broadcast satellite companies DirecTV Inc. and EchoStar Communications Corp. And the Bells have tried to make inroads in the pay TV market before their plant is video-ready by entering into marketing agreements with those satellite carriers.


Beginning in the Clinton Administration, the FCC has moved aggressively to keep cable’s broadband service deregulated while moving less aggressively to provide equal treatment to the Bells, partly because of mandates in the Telecommunications Act of 1996 that required the Bells to open their networks to rival carriers.

Last week’s vote went a long way toward creating rough broadband regulatory parity between cable and the telcos.

But the FCC has not taken the final step of allowing the Bells to close their high-speed-data facilities to competing Internet-service providers — something cable operators are permitted to do.

Analysts disagreed on whether the FCC’s ruling packed a big enough punch to send cable to the canvas.

Merrill Lynch telecom analyst Jim Moynihan released a report Thursday predicting Verizon would accelerate the rollout of already deregulated fiber-to-the-premises facilities.

Verizon was expected to pass 2 million by the end of 2005. Moynihan now expects the company to reach 3 million by that date.


Fulcrum Global Partners analyst Richard Greenfield said the FCC’s action cleared the way for the Bells to compete for cable subscribers, despite “failed attempts” by the Bells to gain a toehold in the video business.

“It now appears the [Bell] threat is credible,” Greenfield said.

A Bell entry into cable would benefit programmers, because they would “have yet another outlet to distribute product,” he added.

Merrill Lynch cable analyst Jessica Reif Cohen offered a more bullish assessment of the FCC ruling on cable.

She noted that Verizon and SBC have huge footprints, comprising 60% of U.S. TV households and leaving Comcast Corp., Adelphia Communications Corp. and Time Warner Cable especially vulnerable.

But she said two factors weighed in cable’s favor: DBS penetration remained moderate in areas served by cable; and Verizon and SBC are unlikely to capture more than 20% of households served by their fiber plant over the next five to 10 years.

“In total, then, we would project a fairly modest share shift of 5 [million] to 7 million homes to [Bell] video from the cable/DBS universe, at best,” Reif Cohen said.

Reif Cohen pointed to another negative for the Bells: programming costs. She said the Bells would pay more for programming than large MSOs because they would lack the scale needed to obtain volume discounts.

“We would expect that [Bell] video economics would be punished severely by the lack of scale economics, adversely affecting nearly every item in the cost structure,” she said.


The biggest losers under the FCC’s ruling were competitive local-exchange carriers (CLECs), which have invested in telecommunications facilities, but still need regulated access to the Bell lines that feed into homes.

The Association for Local Telecommunications Services (ALTS), a facilities-based CLEC trade group, denounced the FCC’s action. The group claimed that the Bells have been deploying fiber for years and the notion that FCC action was necessary to spur such deployment was not credible.

“Thanks to the FCC’s action today, the Bells can now deny competitive carriers access to local loop facilities that contain any fiber — including part fiber/part copper loops that were deployed decades ago,” ALTS general counsel Jason Oxman said.

Consumer groups also attacked the FCC’s decision, saying it would lock out competitors from the Bells’ fiber facilities and limit consumer choice.

“The FCC today took our country one giant step closer toward solidifying a two-company domination — the local cable and telephone providers — over the consumer Internet market,” said Gene Kimmelman, senior policy director for Consumers Union. “As both industries tighten their hold on high-speed Internet access, consumers will see their choices diminish and their bills skyrocket.”

The FCC did make at least one concession to Bell competitors. The agency required them to unbundle a 64-Kilobit channel to competitive voice providers currently serving consumers.

“The commission did not want to disrupt service in that context,” FCC official Michelle Carey said.