(One part of this presentation was discussed in Dan Gilmor's column "Internet content in peril in non-competitive world" in the San Jose Mercury-News, Jan. 21, 2003.)
Currently, local telephone companies in California compensate each
other when one carrier completes a call that originates on the network
of another carrier. This system recognizes the complex,
interconnected nature of the state’s telephone network, with local
carriers of widely differing sizes covering the various regions of the
state. Local calls throughout California are supported by these
inter-carrier payments, although only the calling party is billed by the
originating carrier.
Over time, the nature of the traffic on the network has changed. This has been the result of both changes in technology—direct dialing, fax machines, and Internet—and a general reduction in and restructuring of telephone tariffs. Questions have arisen about the appropriateness of the reciprocal compensation system for calls to Internet Service Providers (ISPs), and this issue is currently being debated at both the state and federal levels. This survey has been designed to present the views of California’s ISPs on reciprocal compensation and the likely effects that ending reciprocal compensation would have on the ISPs and the communities they serve.
A sample of 103 of the approximately 750 Internet Service Providers
in California were surveyed in late October and early November 2000 to
determine their views on reciprocal compensation. The survey
focused on the likely effects that would occur if the current system of
reciprocal compensation for intrastate telephone calls was ended.
| Links: | Complete report (24 pages including the above; in Adobe PDF format) |
| Full executive summary (1.5 pages; in HTML) | |
| Conclusions (1 page; in HTML) |
| Links: | Full paper (3 pages, with charts; in Adobe PDF format) |
| Overview (on this page) | |
| Conclusion (on this page) |
This paper discusses the current state of competition in the DSL market. Two competing bills are under consideration in Congress. One, the Internet Freedom and Broadband Deployment Act of 2001 (HR 1542, sponsored by Representatives Tauzin and Dingell) would eliminate the requirements for incumbent local exchange carriers (the ILECs or “Baby Bells”, companies such as SBC Communications and Verizon) to share their facilities with competitors wishing to provide broadband services via DSL over their local loops. On the other hand, the American Broadband Competition Act of 2001 (sponsored by Representatives Cannon and Conyers), makes it clear that the provisioning of broadband services is subject to the provisions of the antitrust laws.
All parties agree that competition in local broadband telecommunications is severely limited, but the provisions in the Tauzin/Dingell bill do not address the key problems. For example, ILECs control almost 95% of the telephone market in California, as measured by lines, and 90% of the residential DSL market nationwide. The practices of the ILECs restrict the ability of other carriers to enter and compete. These practices have included maintaining unreasonable delays in the provisioning of local lines and collocation facilities and charging ISPs a wholesale price for DSL that is unjustifiably high. The ILECs attempt to counter these charges by arguing that the residential broadband market is not just for DSL but must include cable modems, satellites, and other broadband technologies. Given the presence of these competing technologies, they say, the market is competitive and the ILECs should be freed of obligations to provision lines and share their infrastructures. Laying aside for the moment that this claim is inconsistent with the philosophy underlying the Telecommunications Act of 1996, recent pricing practices and economic logic together demonstrate the fallacy of their claims. For example, in February 2001, SBC/Pacific Bell raised its monthly rates for residential ADSL in California from $39.95 to $49.95. This would not be a rational move in a competitive market.
The ILECs offer DSL services in both retail and wholesale markets. One result of this is that the ILECs determine the cost of the key input for one group of their competitors. Some ISPs combine DSL service offered by an ILEC with their connection to the Internet and sell the package to residential and business subscribers. As the ISPs usually have only a very small share of the DSL market, they feel pressure to meet the ILECs price for the combined service. However, when the wholesale-retail margin is set artificially low, the ISPs are at an unfair disadvantage to the vertically-integrated ILECs.
The ILEC’s near-monopoly control of the local loops was recognized in the line sharing and unbundling requirements of the 1996 Telecommunications Act. Although these provisions are criticized as unfair and burdensome, they are both appropriate and consistent with previous remedies seeking to guarantee access to “bottleneck” facilities.
Nevertheless, some argue that the presence of economies of scale supports the need to treat the provision of telephone-network-based broadband services differently from traditional voice services. Broadband services should be relieved from the line sharing and unbundling requirements, according to this argument. One should not accept this line of reasoning without detailed supporting evidence as it ignores the realities of the DSL market. First, the argument for economies of scale is inconsistent with the recent price increases unless one includes an explicit acknowledgement of presence of monopoly power in the setting of prices. Second, there is the issue of the “shape” of the underlying cost functions. The question should not be whether scale economies exist, but at what market share or size do they occur. It is important to remember that, while economies of scale arguments have been used to justify the monopolies in local telephone service in the past, the modern approach is to encourage new technologies and competitive entry wherever possible. Unfortunately, the Tauzin/Dingell bill embodies a return to the past.
[The opinions or statements expressed herein
should not be taken as
a position of or endorsement by the University of
California, Berkeley.]
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Last updated:13 November 2003