TELECOM Digest OnLine - Sorted: Re: AT&T 'Family' Reunion: Merger Approved

Re: AT&T 'Family' Reunion: Merger Approved

Fred Goldstein (
Wed, 03 Jan 2007 12:24:29 -0500

In V26I2, wrote,

> [I had described the natural monopoly of the ILEC plant]

> Well, let me comment on this "natural monopoly". Basically, it's net
> worth has declined quite a bit and this must be recognized by
> regulators. Here's why:

> 1) Wireless and cable competition. Very simply, it is not a "monopoly"
> anymore so it should not be treated as such. (The past status doesn't
> matter, "today" is what counts). Many people use cable and/or wireless
> for their plain telephone service needs as well as advanced
> communications. It appears this is growing.

There is a duopoly (cable/ILEC) in most areas, simply because past
FCCs have been prescient enough to recognize that keeping the two
industries separate was probably a good idea. It is inefficient to
have two outside plants, but until recently, they were technologically
distinct and thus non-overlapping.

However, the current FCC pretends that competition *FOR INTERNET
CONTENT* should require separate ownership OF THE WIRE ITSELF. This
is absurd. The world can support thousands of ISPs with different
views of how to manage information, but they cannot all string wires
on poles.

> 2) The cost of entry to provide landline service was once enormous.
> With fibre and modern techniques, it is relatively easy to do so.

That is a baldfaced lie.

The cost of pulling fiber plant is higher than the cost of pulling
copper plant. Splicing is enormously expensive. The electronics
needed to light fiber is expensive -- typically it costs >$1k/home to
drop off fiber and put in the hardware needed to deliver POTS, once a
home is "passed" by fiber. Check Verizon's FiOS numbers.

HFC copper is still cheaper; a $100 cable modem can now deliver
full-quality PacketCable out of its FXS jack. But overbuilding cable
is rarely economical. If there's cable in place, the cost per home
SERVED is going to be higher than the incumbent's, unless the
incumbent is so bad that they lose most customers (happens in a few
places, to be sure, but far from the norm).

But in either case, the cost of a "third" provider is usually
enormous, if an overbuild of any type is attempted, because THE POLES
ARE FULL. This requires "make ready", where each pole may need to be
modified or even replaced. That can cost more, just by itself, than
the entire cost of building a plant on fresh poles. Just to give some
numbers, HFC plant can be built today (this is lower than it used to
be) for about $15-20k/mile if the poles all have room (happens in some
rural areas, not many cities) but make-ready can be $300-2000/pole
depending on whether it just needs some adjustment or replacement, and
there are typically 40 poles/mile. Do the math. Now figure a typical
suburban American street has maybe 40 homes/mile. What does it cost
per home to overbuild with a 20% penetration? With a 5% penetration?

> Our cable company ran coax than later fibre quickly throughout our
> area. (Indeed, cable TV needs some competition on their rates.) If
> the traditional landline company raises its rates too much a cable
> company will be able to come in and undercut it. They're doing that
> now.

Of course. At least we do have duopoly in some places, rather than
pure monopoly. But while duopoly reduces the temptation to commit the
most egregious abuses of monopoly pricing, it can get a little cozy.
In this case, though, the ILEC was, by law, the sole COMMON CARRIER
who HAD TO lease bandwidth to ISPs. Cable was never a common carrier.
(The press gets this wrong; the Brand X ruling changed nothing. Of
course Martin lied about Brand X too. I documented this pretty well
in this article: .) So ISPs
went from being able to buy from one source (ILEC) to being able to
buy from zero sources. This reduces the number of ISPs from "many" to
exactly "two".

> 3) Cost of landline maintenance: The regulated side comes with many
> burdens. They must provide service to deadbeats and to all areas,
> even those where there isn't much money to be made. So, the asset of
> an established customer base, like deadbeats or grandparents with
> little phone usage, isn't worth very much in the high tech world of
> big profits.

The prices ILECs charge are normalized to 1992 cost studies, which in
turn are known to be padded with something like 20% nonexistent
capital assets. (Powell shut down the FCC's Audit Division in 2001
after early audits showed huge errors in ILEC books. See Bruce
Kushnick's ebook "The $200 Billion Broadband Scandal" for details, .) Since then their costs have plummeted
(Bells got rid of roughly half the work force and the inside plant
electronics have gotten a lot cheaper) but their rates haven't been
adjusted to match -- this is "price cap" "deregulation", raising their
profit margins dramatically.

BTW a "deadbeat" is usually someone who doesn't pay their bills, not a
low user. Bells do NOT service deadbeats; they demand good credit or
deposits. A whole industry of CLECs has sprung up to service them,
mostly using prepayment to prevent loss. This has gotten harder under
recent regulatory changes, though.

> Also, the old conduits and copper lines need
> maintenance, if the copper is old the insulation may be rotting and
> worthless. So this "asset" is of very limited value as well.

Again, false -- copper lines remain useful, though the pre-1950
paper-insulated wire should have been replaced by now. And if it is
replaced, today's very high price of copper metal should encourage
salvaging of the old material. Indeed I was asked yesterday whether I
thought that Verizon would replace POTS with FiOS just to mine the
copper wires for salvage value. I suggested that the economics were
not suitable for that, especially since FiOS can't handle all
applications. But salvage value is way up.

> Let's remember that in the full regulated days the Bell System was
> accepted as a steady safe stock. But that world no longer exists.
> Investors expect big returns and landline companies, saddled with
> low end regulated customers and burdens, have trouble meeting those
> demands.

Regulated utilities were always a safe bet. Today's Bell manglers
want to run risky businesses, but moderate the risk by abusing their
monopolies. That's not an honest way to run a business, either for
the shareholders or the other bag-holders, such as ratepayers.

> 4) In essence, the Bell System world ended in 1983. Now it's
> competitors want it both ways: They want to be free to enter into
> Bell's old markets -- even at a discount -- but Bell still has to
> carry the regulatory burden.

Discount? Wholesale rates are based on cost, not "discounts", except
for Total Service Resale, whose "discount" is the "avoided cost" of
marketing and collection. The old Bell companies have very little
"burden" left.

> To put it another way, I suspect VOIP providers can't wait to offer
> service in wealthy areas, but probably don't even enter poor areas.

Again, flat-out lie. VoIP providers don't give a tinkers' dam about
where their subscribers are -- they don't own the plant,
remember? And for those wondering, telco per-subscriber revenues in
poor areas aren't much lower than in rich areas. Immingrats,
especially, run lots of international calls.

> I like the commentators (like Newsweek) that suggested customers
> keep a landline as an emergency spare if they get VOIP. That's bad
> for two reasons: 1) it gives the Bell companies the scraps of little
> business while the juicy profits go to the new guys.

The Bells can price at/above cost, rather than run a mix of
loss-leaders and gouges. That's how competitive markets are supposed
to work. Stop pining for 1963's rate structure, when a call from
Chester to Philadelphia was priced as a luxury and it was cheaper to

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