AT&T’s BDS Hissy Fit Is Bad Strategy.

Hell hath no fury like an ILEC scorned. So it is perhaps no surprise that AT&T has decided to heap much scorn on Verizon for playing smart and flipping sides on the debate on how to improve regulation of the Business Data Serve (BDS), nee special access. While perhaps understandable from an emotional perspective, this response is — to use a techncial legal phrase — silly. Worse, taken to its logical extreme, it has the same corrosive effect on rulemaking as the accusation of “flip flopping” has on politics. We keep saying we want people to actually negotiate and look for compromises that reflect the changing reality. But when someone actually says “OK, you know what, lets recognize that reality isn’t so black and white as people make it out and we should look for a workable compromise,” then everyone is like “Flip Flopper! How can we possibly take you seriously now that you will no longer fight to the death!”

 

As I explain below, AT&T (and other ILECs) would gain much more by joining Verizon in negotiating for a transition away from the ILEC monopoly on the high capacity data circuit to a more competitive market structure. Rather than throwing a hissy fit, AT&T should embrace its usual path of shrewd negotiation . . .

 

It’s important to recognize two things. First, companies respond to changed circumstances and adjust their lobbying accordingly. Heck, it was AT&T, back when it was still a CLEC, that got the current proceeding rolling all the way back in 2002 with this Petition for Rulemaking. After getting acquired by Southwest Bell in 2005, AT&T promptly switched sides. Because — in no surprise to anyone — where you stand depends on where you sit.

 

Contrary to modern cynical thinking, that’s not a bug in the rulemaking process. We designed our rulemaking system to include an adversarial component, so that people with different interests can honestly contest the rules based on their self-interest, and the FCC acts as the neutral arbiter to sort things out and evaluate the data and arguments on the merits. We expect companies to change position based on changes in markets, and to recognize reality.

 

Indeed, to go back to AT&T for a moment. In the last open Internet proceeding, AT&T recognized ahead of anyone else on the anti-Title II side that nothing less than a complete ban on paid prioritization could address the concerns from the public in the wake of the Verizon decision and the Netflix/Comcast deal. So AT&T actually proposed a full ban on paid prioritization using Section 706 and other sources of FCC authority as an effort to head off reclassification under Title II. That was a flip from its initial statements supporting the Notices’ framework that would have allowed paid prioritization, but AT&T shrewdly recognized that times had changed and that nothing less than a full ban on paid prioritization would have any chance of persuading the FCC from reclassifying. Indeed, had the other ISPs followed AT&T’s lead at this early stage, it would have been much more difficult for the FCC to reclassify. Instead, the other ISPs held out for too long, and by the time they came around to accepting a full ban on paid prioritization, it was too late.

 

So AT&T itself is not averse to recognizing when a smart company needs to change tack and negotiate. Given that Verizon was the chief culprit in (a) challenging the FCC’s 2010 Open Internet Rules based on Title I; and then (b) insisting on holding out for the right to discriminate until way too late, it should surprise no one that Verizon has learned a Valuable Lesson In Life that AT&T should applaud and join — rather than resist to the bitter end.

 

Why It Makes Sense for Verizon (and AT&T) To Negotiate Rather Than Fight To the Death.

 

This proceeding has dragged on since old AT&T filed a Petition back in 2002. Over the years, the FCC has collected an insane boatload of data indicating that the current prices for data circuits, particularly high capacity data circuits necessary for businesses and to create a viable competitive market in the commercial market, are at monopoly levels. I don’t expect ILECs that charge these monopoly rates to admit that, but anyone looking at the veritable mountains of data and economic analysis ought to admit that (a) the FCC has now studied the crap out of this market, and (b) that means the FCC has the evidence to take action to address monopoly problem.

 

So Verizon, having learned that it makes better sense to cut a deal, decided to reassess its own hand. Start with the fact that it has moved increasingly to being a net purchaser of business data service (BDS) as it has sold off wireline systems and expanded both its wireless and content offerings. This will only be aggravated by the addition of 5G technology, which needs a lot of backhaul to take gigabit wireless data to and from the cloud. The current vision of the proposed 5G architecture — rows of microcells on rooftops plugging directly into fiber — will require extensive access to lots of fiber networks. True, this should spur lots of fiber build out, especially where cities adopt “build one” policies on conduits so that it becomes comparatively cheap to pull fiber. But in many markets, the fiber access market will remain uncompetitive for the foreseeable future.

 

Verizon happens to hold assets in the most competitive markets (like NYC), and needs access in markets that are likely to remain uncompetitive for some time. Additionally, and AT&T should pay attention to this point, Verizon recognizes that the distinction between traditional ILECs and everyone else makes less sense. Yes, ILECs still enjoy their legacy advantage, hence the monopoly level prices for existing data circuits. But if the FCC acts to limit ILEC monopoly power, and does nothing to limit the emerging cable operators, you end up with an asymmetric regulation problem similar to what happened in residential broadband.

 

If you go back to the residential broadband market in 2005, cable modem service had a modest advantage in deployment over DSL. Most houses still had two wires going into the house, a voice wire and a video wire. The 1996 Act made it very easy to cut the voice wire and transfer the phone number to cable (or wireless). But the law still allowed cable operators to make it harder to get rid of your cable service and switch to another provider. This gave cable operators a huge advantage in the residential broadband market. Make it easier to cut one wire (voice) over the other (video), and consumers do what is easier. As a result, cable quickly won the residential broadband fight, and continue to increase their dominance in residential high-speed broadband as time goes on.

 

The Shift From ILEC-Centered BDS To Including All Providers.

 

One of the critical elements of the Incompas/Verizon Framework is something ILECs — including AT&T — have fought for years to get. Under the framework, the regulatory treatment of business data circuits would apply to any provider, not just Incumbent Local Exchange Carriers (ILECs) that have traditionally been regulated in this space. This eliminates the fear of asymmetric regulation once the FCC’s pro-competitive policies are successful. At the same time, from a policy perspective, this re-enforces the idea that the modern communications market has evolved to where we should look less to history and more toward the current state of the market.

 

Granted, this recognition comes with a price that AT&T and other ILECs don’t want to pay. The ILECs have always pushed this reasoning with the goal of eliminating all competition regulation, on the grounds that either direct competition in the market or the possibility of emerging competition makes regulation unnecessary. The Incompas/Verizon framework recognizes that competition is much more complicated than a binary choice between regulated monopoly and unregulated “competition.” The current special access regime is based entirely on this idea that anything more than one existing  provider — or even a potential provider — constitutes “competition” and eliminates the need for any pro-competitive rules. As the mountain of evidence compiled over the last 5 or so years by the FCC in this proceeding demonstrates, not so much.

 

Verizon reads the writing on the wall that something will happen, and wants to make sure it has a say in negotiating those rules. Generally we applaud this kind of realism as a productive exercise of enlightened self-interest. By contrast, throwing hissy fits and whining that Verizon and others have switched sides and decided to negotiate is generally regarded as a sign of immaturity rather than purity. There’s a reason I call this blog “Tales of the Sausage Factory.” At some point, whether you are an ILEC, a public interest group, or any other person involved in trying to get rules, you need to reassess and see what actually serves your goals.

 

So What Is The Public Interest Perspective?

 

From a public interest perspective, it make sense to start transitioning the legacy rules to something more adapted to the current market place. No, we haven’t wiped out legacy market power . But if we actually want to see convergence work positively for the public interest, we need to take a clear-eyed view of the market and focus on eliminating anti-competitive and anti-consumer conduct rather than thinking in terms of stove-pipes and services. It doesn’t make consumers or businesses feel better if they get ripped off by a wireless provider rather than a landline provider, or a cable provider rather than an ILEC.

 

This doesn’t mean trusting Verizon or letting Verizon (or Incompas for that matter) dictate terms. But it does mean recognizing the value of negotiation and seeing when genuine self-interest (which is what drives profit-maximizing firms) runs with the public interest. So far, the Incompas/Verizon framework provides a reasonable framework for building a structure that can last not just for the next 5 years, but the next 15-20 years. If competition really takes hold, then we can stop worrying about the problem and let the regulation whither away. If competition remains elusive, or if we see new consolidation after a period of competition, we have a framework that can deal with the issue.

 

I stress “so far” because we still have a way to go. There are many concerns that need addressing.  Smaller firms naturally are suspicious that an agreement negotiated by a trade association representing many members and interests and a large ILEC may not provide adequate protection. Those dependent on regulated prices to survive need real safeguards and metrics by which to judge when a market is competitive. Verizon may negotiate a framework that works well for large companies capable of litigating access and with big bucks to pay for services, but which leaves smaller providers with smaller war chests still at the mercy of a handful of big firms. After all, Verizon is here out of enlightened self-interest. We applaud that, but recognize the limits of that enlightened self-interest as well.

 

But I will point out to both AT&T and everyone else, that PK pushed for a similar form of negotiation and enlightened self-interest as part of the Tech Transition. At the time, many of the same players that embrace Verizon, as well as Verizon itself, opposed any form of negotiation. But while things did not turn out perfectly for any party, the final Tech Transition Order the Commission has on circulation for the July meeting will allow the ILECS to invest billions of dollars in upgrading their networks and moving us to an all-digital world.

 

It’s time for AT&T to consider whether it wants to come into the tent and negotiate based on enlightened self-interest, or if it wants to stand outside throwing a hissy fit. In the past, AT&T has frequently proved itself a shrewd negotiator and benefited as a result. Likewise, the public has benefitted from real negotiations that yield real — if imperfect — solutions to complicated problems. Verizon and Incompas have chosen the productive path of putting aside old fights and outdated positions and instead trying to find a reasonable approach for the future. AT&T should likewise look to the future, rather than stubbornly cling to an increasingly dysfunctional past.

 

Stay tuned . . . .