FCC Must Reject Proposal Allowing Business Data Services to Increase Already Inflated Pricing

Overcharging Cost American Households $300 per Year

Washington, D.C. – It has been widely reported that the recent Federal Communications Commission  decision to allow network operators like AT&T and Verizon to sell customer proprietary information to online advertisers is a huge gift to the dominant communication corporations.  Today the FCC has announced another bonanza for these behemoth corporations that is an even more blatant and direct example of crony capitalism that will harm consumers.  In a letter to the FCC, the Consumer Federation of America (CFA) joined with Public Knowledge to call on the Commission to reject the proposal of the dominant incumbents to allow increase on already inflated prices for Business Data Services (BDS) because it will drain consumer pocketbooks of tens of billions of dollars per year.

The letter reminded the Commission that its actions must reflect the evidence before it and that evidence shows that current rates are unjust and unreasonable and eliminating competition policies would make matters worse.

Business Data Services have become a pervasive input to the delivery of a wide range of goods and services, not just the communications services that consumers pay for directly.  They are the high speed, always on connections that businesses have come to rely on for their routine communications. This includes the following examples of mobile broad band and phone service:

  • Small, medium, and large businesses that need much more capacity than a single telephone line;
  • branch networks (like ATM’s or gasoline stations) that have many nodes that need to be online all the time; and,
  • businesses like healthcare providers, who need to move large quantities of data between their offices frequently and in real time.

The CFA/Public Knowledge letter included the following:

The costs of BDS services are consumer charges.  They are intermediate costs that businesses incur in producing the goods and services that the public consumes.  Like fuel, rent and wages, they must be recovered as routine costs of doing business.  The tooth fairy doesn’t pay them, consumers do.

The importance of BDS services has been increasing sharply as digital communications become an increasingly important input to economic activity.  This is the choke point of connectivity in the digital age. This chokepoint totally dominated by the major incumbent local exchange carriers, AT&T, Verizon, CenturyLink, and Frontier.  The FCC’s extensive data gathering shows that the vast majority of consumers (over three quarters) are served by a single supplier.  An additional twenty percent were served by a duopoly.  And the competitive market has been consolidating since the data was collected, with the incumbent telcos buying XO Communications, Level 3, and EarthLink.

In our comments last year, we estimated that overcharges are on the order of $20 billion.  Historical experience and the contemporary evidence gathered by the FCC indicate that further deregulation of BDS service could increase rates by 25%, adding between $10 and $20 billion to total overcharges.  These overcharges total $300 per household—$150 that should have been returned to consumers in lower rates and $150 per year in rate increases that will be visited on consumers by adoption of the ILEC proposals.

The proposals by the dominant incumbent BDS providers are based on the faulty assumptions about the market structure that are inconsistent with the record in this proceeding.

  • The geographic market definition that the dominant incumbents propose is far too broad.
  • The identification of potential competitive entry into the BDS market alleged by the dominant incumbents is wrong.
  • The product market definition that the dominant incumbents propose is inaccurate.
  • The definition of a workably competitive market offered by the dominant incumbents is incorrect. Two competitors is simply not enough to render a market workably competitive, With respect to the number of competitors necessary to identify a competitive market we concluded that “four is few, six may be enough, and ten is workably competition.”

This conclusion was supported by the evidence in this proceeding.  Defining product and geographic market and the potential entrants reasonably, econometric analysis of the pricing data shows that the presence of four actual competitors lowers price by 28% and the addition of four potential competitors increases the price reduction to 43%.  The threshold for a market to be assumed to be workably competitive should be four actual and four potential competitors.”

Simply put, a monopolist protectionist approach will not pass stand up to judicial review.

  • Based on the record in this proceeding, it is clear that current rates are not just and reasonable under sections 201 and 202 of the act.
  • The rates charged embody massive cross-subsidies supporting the more competitive offerings of service providers. This violates the explicit ban on such services under Section 254 of the Act.
  • Finally, the severe abuse of market power slows and distorts the deployment of broadband. This makes the abusive rates terms and conditions imposed on the market an ideal target for action under Section 706 of the Act.

Contact: Mark Cooper, 301-384-2204

The Consumer Federation of America is an association of more than 250 non-profit consumer groups that, since 1968, has sought to advance the consumer interest through research, education, and advocacy.