2014/01/24 The FCC Relegated to Janitorial Duties?
By Keith Nissen
We all knew this day would come. The adoption of Internet-protocol technology has changed the way we communicate and how we are entertained. Yet, telecom laws and regulatory policies seem frozen in time, circa 1996. This week a US Appeals court ruled that the FCC could not require Internet service providers, such as AT&T and Comcast, to comply with net-neutrality regulations because broadband services have been categorized (by the FCC) as (largely unregulated) information services. If the ruling is sustained, the FCC may have very little say over the future of IP-based services in the US.
At the same time, telecom operators are pushing the FCC to initiate the gradual shut down of the highly-regulated and antiquated public switched telephone network (PSTN). Unlike European countries that began planning the shutdown a decade ago, the FCC has largely ignored this eventuality, for good reason. Shutting down the PSTN involves addressing complex issues ranging from achieving universal broadband access, to maintaining competition and dealing with the economics of keeping thousands of small independent telephone companies alive. 2014 is beginning to look like the year when all these thorny problems reach a tipping point and solutions must be found.
To give an example of the challenges that lay ahead for the FCC, total switched voice access lines (PSTN and VoIP) have declined by 10% annually for most of the past decade. As of year-end 2012, there were approximately 79 million PSTN/VoIP switched access lines in operation. Yet, among Internet households, only 40% or 38 million currently have a home voice line and many of these households already use a VoIP service. In order to shut down the PSTN, the FCC must figure out a way to convince 41 million households, most of whom have no perceived need for the Internet, to give up their heavily-subsidized PSTN voice telephone lines and subscribe to unregulated broadband and VoIP services. The alternative is no wireline voice communication service at all.
The Universal Service Fund (USF) has been the primary method for redirecting telephone service revenue to rural areas. Rather than subsidizing individual rural users (which is achieved through state-level subsidized rates), the fund has actually been the lifeblood for many small, independent telephone companies. All home telephone subscribers pay into the USF on a monthly basis which has suffered with declining subscribership.
Beginning in 2010, the FCC allowed USF funds to be used for investment in broadband infrastructure. If the PSTN is shut down and broadband is to remain an unregulated service,
new mechanisms for funding universal broadband service initiatives will need to be found. Yet, these small, independent telephone companies are a remnant of the early 1900’s prior to Theodore Vail buying up telcos to form the mighty Bell System. These were assets that Vail deemed of little value even in 1920. Is it good policy to keep these telcos alive in an IP world?
Another issue the FCC will need to tackle is central office closures. The Telecommunications Act of 1996 fundamentally altered the telecom landscape by forcing incumbent telco’s to lease network facilities (local loops priced at cost) to competitors. This was intended to spur competition by the creation of nearly-virtual telephone companies. After an initial surge of investment, the law proved to be a dismal failure with only a few business market competitive local exchange carriers (CLECs) still surviving. These business CLECs typically operate their own IP-based core network which interconnects with leased telco facilities (T1 lines) through equipment collocated in the telco central office.
Incumbent telephone companies own a lot of real estate and central office buildings, often in the most expensive downtown locations. Closing down and selling many of these sites would be a financial windfall for these companies. Yet, it would also be a financial hardship for competitors who would incur the costs of relocating their equipment. An unbiased arbitrator, such as the FCC, will be needed to ensure fair and timely negotiations.
The incumbent telephone companies (e.g. Verizon and AT&T) have long benefited from operating dual networks. They have modernized their core transport networks to IP technology and built out broadband infrastructure outside the reach of 1996 Telecom Act regulations. They have also operated the PSTN largely as a cash-cow, incurring maintenance-mode level expenses along with a guaranteed annual profit. However, most PSTN network equipment has now been fully depreciated. Declining subscribership will either drive monthly rate increases (which most state commissions would oppose), or lower revenue. The incentive for incumbent telephone companies to keep the PSTN operating is no longer present.
In late 2012, AT&T submitted a petition to the FCC to launch a proceeding concerning the Time Division Multiplexing (TDM) to IP transition. Citing the FCC National Broadband Plan, the petition points out that current regulation “requires an incumbent to maintain two networks …. reducing the incentive for incumbents to deploy” next-generation facilities and “siphons investments away from new networks and services.” While the historical validity of these statements may be questionable, AT&T is clearly trying to suggest that operating the PSTN is a liability they should no longer be saddled with.
In November 2013, the FCC responded by taking the first steps to formally address the IP network transition. FCC Chairman Tom Wheeler wrote in his blog that “our communications networks are changing and fast”. The FCC plans on issuing a January 2014 order Wheeler said “that will include recommendations on how to begin experiments that will allow the Commission and public to observe the impact on consumers and businesses of such transitions.” AT&T has proposed conducting trials (part of the experiments) designed to show how the network transition process can take place and that no ongoing regulation of IP communication services will be required. Combined with the recent net-neutrality ruling, the FCC will have virtually no jurisdiction over any IP-based communication or entertainment services.
MRG Analysis:
One must acknowledge that PSTN voice telephone service is dead and the challenge is how to gracefully shut it down. Over the next few years, the FCC will search for ways to minimize the pain. But pain there will be. It will be next to impossible to find solutions that do not harm Mom and Pop rural telephone companies. Can you imagine explaining to Grandma how to reset her broadband modem to get dial-tone again? Home telephones will no longer operate in an extended power outage and service providers will always blame network problems on your wireless router.
Such is the price of technology advancement. IP technology was never even designed for voice communications. In fact, an IP network must be configured to emulate the PSTN to ensure packets reach their destination in the right order and in the right timeframe. All this to generate the same voice-quality connection the PSTN delivered for over 100 years.
But it didn’t need to be this way. For example, why are mobile and home voice calls billed differently, when they are both analog services and use the same IP-based core transmission network? Why must the contact list on a mobile phone be separate from the contact list on a home phone? Why can’t apps be downloaded to a home phone just like a mobile phone? These are all capabilities that consumers would love to have and would actually pay extra to receive. But the regulatory environment forced PSTN and mobile voice services to be separate. The end result has been to replace the family PSTN voice line tariffed at $11 per month with a $200 per month mobile expense.
Considering how poorly the FCC has guided the telecom industry over the past decades, it is appropriate that they be relegated to janitor duties, tasked with cleaning up the mess they made. Yet, it is worrisome what broadband service providers will do with their oligopoly power. They make no secret that measured-rate broadband service is on its way. Pay-TV competition from over-the-top (OTT) video services has never materialized. Netflix is even in discussions to join the pay-TV operator service bundle. The viability of future virtual pay-TV service providers, possibly Apple, Google or Microsoft, depends on delivering entertainment over the Internet in a net-neutral way. Without any government oversight, this may not be possible.
Hopefully 2014 may be the year when a discussion begins around these important issues. Absent new telecom legislation, what the FCC can do and cannot do may be decided in court. One can say that FCC regulation is not needed because there are other legal remedies to control anti-competitive behavior, and consumer abuse. Yet, the recent Wall Street crisis, the BP oil spill and mining disasters are all evidence of what can happen without effective government oversight. We don’t need for the FCC to have a crystal ball that predicts technological advances and tries to manufacture competition. But when it comes to consumer protection, we need someone on our side. Like it or not, the FCC may be our only hope.
Source: MRG Analysis
