As political maneuvering at the FCC changes the letter of the law, CLECs take a close look at the lobbying and detail the changes that will change the ISP business forever.

[August 19, 2005]

On the ISP-CLEC list in August, shortly after the FCC voted to allow the Bells to shut their networks to competition, the CLECs began discussing what business would survive in the new environment.

At the end of an unrelated thread, EL asked MT:

"I'd like to here from you what you think the future of the facilities based CLEC will be in view of the most recent FCC rulings, where you see the CLEC's best opportunity to make money and the CLEC's biggest opportunity to lose money."

This elicited an intense and detailed discussion which we have edited here to make it shorter and sweeter.

[MT replied] "The 1996 Telecom Act is an opening of a door of opportunity. Congress seemed to realize that building phone companies is really expensive, so they opened up the ILECs to help CLECs get off the ground. But not everyone realized that the door was intended to eventually be closed again—not all at once, not everywhere at the same time, and not tomorrow, but eventually.

So my recommendation would be that if you are ever going to get into this business, now would be a good time. Our business helps ISPs become CLECs. They are large users of telecommunications services which can benefit terrifically from operating as a CLEC and can then use the rather large savings to fund growth as integrated communications providers: Internet, Telephone, and for the more bold: Video.

The telecom business is not for the faint of heart, but there is opportunity there. It could be worse, you could be an ILEC: you had 100 percent market share and protected margins. There is only one place to go from 100 percent. The stocks of SBC, BellSouth, Qwest, and Verizon are all lower than 5 years ago and you have to go back 8 to 10 years to find a gain. Sometimes it may feel that they are winning all the battles, but I don't think they are."

[FM objected] "I would suggest reading this interview of Earl Comstock by Fatpipe:

Here is one snippet from the interview:

FAT: You were personally involved in helping write the Telecom Act of 1996. What do you say to critics who say the Act has failed to do what it set out to do or that it failed to consider the advanced services that have come down the pipe since?

EC: The problem has not been the 1996 Act—it's been the FCC's interpretation and implementation of the Act. The Act sets out a very clear roadmap as to how to promote competitive entry and thereby promote innovation and lower prices. My most important job at CompTel/ALTS will be educating lawmakers about the ways the FCC has subverted the true intent of Congress when it passed that legislation.

Furthermore, the argument that the Act does not deal with advanced services is entirely specious. The technology-neutral wording in the Act, Section 10 Forbearance, and provisions allowing cable into local service and ILECs (incumbent local exchange carriers) into video all reflected Congress' understanding that convergence was coming. We called it the Information Superhighway then. Section 706 of the Telecom Act dealt with the promotion of advanced telecommunications services and Section 230 covered Internet pornography; obviously Congress was aware of the Internet when it passed the Act. The Act is fine as written."

[FG added] "The Act is fundamentally correct; its main flaw is in its ambiguity. At the time it led to a lot of litigation, but most of us figured that would be done within a few years. Instead, the ILECs and this FCC have twisted it to the most astounding contortions of anticompetitiveness. The basic notion of unbundling was not temporary. Some parts of it no doubt were, and the whole large-scale UNE-P thing was a bit of a stretch (though economically justifiable, in the context of retail ILEC deregulation). But there is simply no way that CLECs can replace the ILEC loops. Why did we start UNE-L CLECs and invest in switching and other infrastructure if the ILECs can just kick us off? (The Ensign bill [.pdf], for instance, puts a 5-year sunset on both copper home-run loop unbundling and even CLEC and IXC network interconnection, ends Equal Access to IXCs, and immediately terminates any and all other unbundling.)

When I started writing The Great Telecom Meltdown, it was an article, not a full-length book, and the working title was "Don't Blame the Telecom Act". It was in response to some other articles that by 2002 were already showing up which blamed the Telecom Act for the collapse of the telecom stocks in 2001-2002. First I ran a short (800-word) article on CNET News.com, and then I went the other way and wrote the full-length book. That took some detailed research, but it didn't contradict my original thesis, that the meltdown was primarily the result of forces set in motion before the Telecom Act (long distance competition, CAPs, the public Internet, e-commerce, wireless telephony). The Telecom Act's pieces (CLECs, DSL) were a smaller share of the total, and the Telecom Act itself was a result of the huge regulatory friction that the old rules had created. The ILECs just like to lie about it, especially when they bray for herds of ponies like the Ensign bill.

I still have enough faith in the public's ability to throw off the shackles of idiotic rulers to think that it is still worth, under some circumstances, starting a CLEC. But it has to be a niche play, not terribly linked to any long-term UNEs. CLECs need to be very flexible. And we need to organize. While Earl is a very good man and doing his best, the ILECs have many more lawyers and lobbyists."

[MT added] "I think the FCC needs to be very careful. A Verizon UNE loop in Minnesota costs as little as $27, but the Special Access replacement costs $231. There needs to be some way to go from $27 to $231 without doing it overnight. There is only one CO in Minnesota for which DS1 UNE loops are eliminated, downtown Minneapolis. But if you are a CLEC that only sold in downtown Minneapolis, this could be an impossible pill to swallow—even with the 1 year, 15 percent transition period.

One of my biggest complaints about the FCC is that they really have trouble working with small companies. What happens on one CO could never impact a BellSouth or SBC, but for some CLECs it could be their entire market. Their developing idea of a "reasonably efficient" competitor should not also have to be a reasonably big competitor."

[FM summarized] "Right now we have a submissive FCC with total disregard for the end users. You have a Chairman whose term is up next June, another working on an expired term and a Commissioner that can't wait to get out. It is a suck up crowd looking out for their own interests and resumé so they can hit the private sector when they're gone from the government."

[FG agreed] "The problem is that the current FCC and the DC Circuit are both extremely ideological, and they are using the flimsiest version of impairment (basically, 'not so impaired that the largest possible CLEC, like the cable company, can't possibly do any business whatsoever') as an excuse to impose a strict feudal propertarian agenda."

— End