CFA Study Finds Special Access Market Concentration Cost Consumers & U.S. Economy $150 Billion Since 2010

Statement of Mark Cooper, Research Director, Consumer Federation of America

Washington, DC, April 5, 2016 – Taking on one of the most pressing issues facing the current Federal Communications Commission (FCC), the Consumer Federation of America (CFA) today released a study that estimates that large incumbent telephone companies have engaged in abusive pricing practices for high-speed broadband “special access” services, with overcharges totaling about $75 billion over just the past five years. As a result, CFA estimates that the indirect macroeconomic loss to American consumers doubles that damage to a total in excess of $150 billion since 2010.

The analysis, “The Special Problem of Special Access: Consumer Overcharges and Telephone Company Excess Profits” explores the critical – and often unappreciated – role special access plays in the U.S. telecommunications and broadband marketplace and the impact concentrated market power has on American consumers and the American economy as a whole. Special access services are critical inputs to a wide range of businesses, including mobile broadband services, anchor institutions like hospitals, schools and libraries, public safety offices, ATM networks, and essentially any enterprise that needs access to secure, dedicated high-speed, high-capacity connections to the wireline communications network.

“This review is both timely and important, particularly in light of the FCC’s historic investigation into anticompetitive conduct in this critical market,” said Mark Cooper, Director of Research at the Consumer Federation of America and author of the study. “The anticompetitive, anti-consumer conduct of the large incumbent telephone providers is a shocking reminder of the immense market power held by these organizations and the consequences this kind of concentration can have on both the individual consumer and the American economy.

“The unreasonable costs that special access impose on businesses are rolled into the costs of the goods and services they sell. They don’t disappear, and the tooth fairy does not pay them,” Cooper said. “Consumers pay them in the price of the products and services they buy.”

Special access was among the first communications services deregulated by FCC action after the passage of the Telecommunications Act of 1996 in the hopes that competition would develop, but it never came to fruition. In fact, utilizing guidelines established by the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC), the CFA analysis shows that the concentration of the special access market by large incumbent carriers is at least three times the threshold of highly concentrated as measured by the Hirschmann-Herfindahl Index, or HHI.

As a result, incumbents are able to exercise their market power not simply to earn excess profits but also to weaken potential competition for these core communications services. By raising the costs that their potential competitors have to pay for this essential input, they can also stifle their growth.

“Deregulation of the special access market is a striking example of the folly of premature deregulation, a clear case of regulators removing their oversight before competition is strong enough to prevent the abuse of market power,” said Cooper. “The FCC predicted that competition would quickly come to the special access market, but it vastly underestimated the difficulty of overcoming the advantages that the large local telephone companies have. Fundamental economic conditions like economies of scale, scope and network effects combined with a ubiquitous network that had been deployed behind the protective wall of a franchise monopoly and paid for by captive consumers, to give these incumbent companies an insurmountable advantage in the special access market.”

Relying on the results of a widespread approach to modeling of the economy, the study points to results that indicate the concentration and overcharges in the special access market depress economic activity throughout the economy. Reducing prices in the special access market to competitive levels will increase consumption, consumer surplus, and output in the economy. This virtuous cycle of adoption, investment, and innovation will ultimately result in tens of billions of annual economic benefit for the entire U.S. economy, and the Commission should move swiftly to address this failed market.

Contact: Mark Cooper; (301) 384-2204

The Consumer Federation of America is an association of nearly 300 nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education