Comcast fears that FCC's special access proposals could harm new business service entrants

The FCC may have passed an order to explore how it can realign special access, or what it now calls Business Data Services (BDS) rules, but emerging business service providers like Comcast (NASDAQ: CMCSA) are fearful that new regulation could impede new competitors from growing.

Neil Smit, CEO of Comcast, told investors during its first quarter earnings call that that the FCC will impose rules that would make it more challenging for newer business service providers like Comcast to build out their network to expand their service presence.  

"The chairman claimed that there was limited competition in the business data services area and it needed more regulation, but I would say that we compete every day for that business and it seems counterintuitive that the FCC would want to impose regulations on a new entrant such as us that would bring more competition to the business," Smit said. 

Smit's concerns were echoed by FCC Commissioner Michael O'Rielly who said new regulations could put limits on new competitors like cable.  

"Facilities-based competitors have been largely unregulated in part to encourage entry and promote competition," O'Rielly said. "As the further notice rightly points out, the great entry success story has been that of cable and now the commission would roll back the relief of price cap carriers despite plenty of evidence that pricing flexibility was not only warranted, but is insufficient."

O'Rielly said that the proposed rule would place regulations on any service provider that offers business services.

"The commission would expand the universe of regulated providers to include cable companies – new competitors which have risked capital to deploy service without any warning that they might be rewarded with restrictions on how they price and market their products," O'Rielly said.

Comcast has been making notable strides in rolling out business services, particularly Ethernet to small and increasingly medium and large business customers.  

An example of Comcast's commitment to expand its Ethernet footprint came recently when it announced plans to invest $1.2 million to expand business services to 425 local businesses in Bellevue, Wash., for example.  

According to a recent FCC filing, Comcast said it can offer Ethernet in 1 million buildings over its existing HFC and growing fiber networks.

Along political party lines, the FCC voted 3-2 to approve the Tariff Investigation Order and a Further Notice of Proposed Rulemaking proposing a new regulatory framework for the provision of special access services.

The FCC's special access proposal is seeking public comment on reforming and modernizing its rules based on four principles:

·         Competition is best, but where competition does not exist, market conditions must not be allowed to stifle the ability of business customers to innovate and compete;

·         Technological neutrality should be at the core of any new regulatory framework;

·         Policies should remove barriers to the transition to new technologies; and

·         Rules should be crafted to meet the needs of both today's and tomorrow's marketplace.

Alternatively, the rulemaking drew support from Sprint and Level 3.

Sprint, which uses special access circuits for wireless backhaul and delivering business services, applauded the FCC's action as a way to foster new choice for consumers and businesses.

"Driven by the largest market data collection in the FCC's history, today's action establishes a basis for real reform," said Charles McKee, VP, government affairs federal and state regulatory for ‎Sprint in a statement. "Importantly, the FCC formally recognized what competitive carriers have long experienced, that large incumbents exercise overwhelming market power and impose unreasonable rates, terms and conditions over a critical part of our nation's networks. In laying out a framework for reform, the FCC sets the stage for greater broadband competition that will ultimately benefit all consumers."  

Jeff Storey, CEO of Level 3, an ongoing critic of such plans, said during the company's first quarter earnings call this morning that it supports any reforms that can revise the so-called lock-up demand contracts for special access. These contracts require wholesale buyers like Level 3 and other competitive local exchange carriers (CLECs) to commit to long-term purchases of incumbents' special access services.

"We'll know more in the coming days as the rules come out, but we support a competitive marketplace and believe the elimination of the lock up demand agreements will create a more competitive industry and fuel investment and innovation and opportunity for Level 3," Storey said. "We think it's good for us, we think it's good for our customers and we think it's good for the U.S. economy."

Earlier this month, Wheeler laid out his draft Further Notice of Proposed Rulemaking (FNPRM) proposal in a blog post.

With the FNPRM, Wheeler proposed four key tenets for new special access regulation: identifying competitive markets, a technology-neutral approach, encouraging transitions from TDM to IP, and addressing current, future transitions.

Additionally, the FRNPM also seeks comment from all interested parties about how best to determine where competition does and does not exist. That includes competition among products, the supply and ability to supply BDS in specific geographies, and the needs of different classes of customers.

Wheeler has set a goal to have the FCC adopt a final order this year. However, getting to that point will likely be fraught with debate between other commissioners and face legal challenges from not only AT&T, but also other ILECs like CenturyLink (NYSE: CTL) and Frontier.

CenturyLink (NYSE: CTL), FairPoint and Frontier, said in a joint statement that the FCC's proposal will inhibit service providers that serve rural areas from making new enhancements to their networks.

"Regulatory rate reductions for broadband data services in the highest cost areas will prevent or slow competitive growth and make it difficult for current providers to continue with planned upgrades and future investments," the companies said in a statement. "Ironically, the main beneficiaries of such rate cuts would be large wireless providers that sold off their rural properties and can well afford to pay the actual cost of network investments that they choose not to make themselves."

Interestingly, Wheeler's proposal came out just as AT&T's fellow ILEC Verizon and industry advocacy group Incompas developed a similar proposal to regulate special access services.

Verizon (NYSE: VZ) and Incompas called for a technology-neutral regulatory regime for special access while advocating compliance with Title II of the Communications Act.

For more:
- hear the FCC meeting
- here's AT&T's blog post
- Law 360 has this post (sub. req.)
- see this FCC filing (PDF)

Related articles:
Sprint says ILEC control over special access cost U.S. economy $150B over five years
Verizon, Incompas call truce in special access regulation war
Sprint disses ILECs' inflated special access costs as FCC completes comment period
USTelecom touts study saying special access regulations will stifle broadband growth