Regulated pricing of last mile dedicated transport service, or “Special Access” (“SPA”), has been a market factor in the development of data networking and the expansion of data services since 1984.  Whether intended or not, Special Access has been the foundation of pricing for many competitive carriers, either as part of a cost-plus price in a resale arrangement or as a baseline price to discount from on a bypass arrangement.  The presence of SPA pricing afforded certainty in price quotes for all players in the market. The availability of SPA services allowed the competitive markets to grow beyond the footprint of competitive fiber networks.  SPA was a reliable option for locations where no alternatives existed.

There is a lot of debate on the efficacy of the FCC’s competitive test.  A common argument surrounding the debate is that the competitive test is not based on real world decision-making scenarios:

• In the real world where build decisions are driven by cost and revenue, with distance being merely one factor in calculating the cost, the FCC’s assumption that a carrier will build fiber up to half a mile for a transport service from an existing fiber route is twice what I have seen.
• The Commission elected to base the competitive market test at the county level because it “strikes the best balance between being sufficiently granular and administratively feasible.” However, despite being convenient for regulators, the real impact on end-users will be delays in quotes and delays in service delivery, or increased prices.

By allowing ILECs freedom to maximize prices for customers in buildings where they are the only provider, the FCC may be removing tariff-based price-suppression.  An increase in prices can often provide sufficient price headroom to attract competitors who can charge enough to cost-justify construction of separate business broadband facilities to serve these businesses.  In other areas, price increases could cause data-intensive business in truly non-competitive locations that were nevertheless deemed competitive by the FCC’s test, to relocate businesses and jobs away from rural areas to areas with actual competition.

Several carriers have already appealed the FCC’s Order, asking the US Court of Appeals for the District of Columbia to find that the Order is “arbitrary, capricious, and an abuse of discretion; violates the notice-and-comment requirements of the Administrative Procedure Act; violates other federal laws including, but not limited to, the Communications Act of 1934 (as amended), the Commission’s regulations, and the Constitution; and is otherwise contrary to law.”  This may result in a delay and some tweaking of the rules, but we believe the handwriting is on the wall and it’s best to plan for a new world of business data transport service without Special Access.  In other words, this is the opportunity to plan strategically with a clean slate.

So, how should CLECs, Cable companies, Managed Services Providers (“MSPs”) and other competitive carriers move forward in the new world of business data services (“BDS”)?  Carriers that primarily lease facilities from other carriers will have a different strategy than carriers that are primarily deploying fiber-based facilities themselves, though most competitive carriers have a mix of both.  The next year will see significant change that will result in some major shifts in relationships.

CLECs and MSPs reliant on third-party facilities

Many companies use Special Access and Unbundled Network Element (“UNE”) services as their primary source of facilities and build their price tools around these services.  End-user customers seldom specify the technology required, more often they specify bandwidth capacity based on the applications that require the bandwidth.  Many carriers have set their Ethernet pricing on a non-mileage-sensitive basis and many TDM circuits are used simply to carry Ethernet and/or IP traffic. End-users often trust their carrier for the best solution to support their requirements. 

Carriers in these positions should take this opportunity to build a portfolio of alternate providers.  Increasingly, these providers are likely to be Ethernet providers rather than TDM providers. In building your portfolio, the most relevant geographic coverage factors are by building, wire center, or zip code.  Several vendors provide managed building list services and fiber route maps for carriers without this data.  CLECs and MSPs can also work with carriers that aggregate buying power of multiple carriers to take advantage of volume discounts where your own volumes don’t justify decent pricing. 

Fiber-based CLECs, legacy-cable companies, other fiber providers have a huge opportunity

Many of these companies have established wholesale sales operations. The detariffing forbearance of Special Access in tariffs creates an advantage for fiber-based carriers to win new customers as carriers are disrupted and seek alternatives.

A large portion of the $45 Billion annual spend in BDS will be looking for a new home during this disruption as contract renewals are quoted at higher prices, and fiber-based CLECs and CATV carriers are well-placed to capture a large percentage of the $22 Billion/year that is not already on the competitive carriers.  To obtain this business, carriers need to make the transition from the ILEC seamless.  They have to be able to accept bulk orders electronically, the same way CLECs and MSPs place SPA orders today: Industry-standard ASRs and APIs worked out between a buyer and seller.  Manual order entry into an online portal is a non-starter for high volume carrier customers.  Clearing houses that manage the electronic interface between CLECs and ILECs (and other CLECs) can link a carrier to a group of potential customers with a single connection.

Construction time intervals are a big issue.  ILECs have standard intervals for SPA services and can meet them most of the time.  ILECs already have building access agreements in virtually all buildings. So, even if new facilities are required to meet a new customer’s needs, they have nearly a one month advantage by not having to negotiate a building access agreement.  Outside plant construction required may add weeks or months depending on the backlog in the local permitting process.  In many cases the ILEC may not have to perform any outside construction, but a new entrant will.  It’s reasonable to assume a delay between 30 - 90 days longer for a new fiber-based entrant to deliver a broadband data service compared to an existing carrier.

 End-User Customer Impact

End-users located in buildings without true competition may see substantial price increases or delays in service delivery while new fiber facilities are permitted and constructed.  End-users who cannot absorb the price increases may choose to relocate. 

Remember!

A major disruption is brewing in BDS markets with a good chunk of the $22 Billion ILEC BDS pie at stake.

Perhaps next steps should be: