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Kovacs: BDS Reform – What Happens to Competitors After a Mandated Price Cut?

FierceTelecom By Anna-Maria Kovacs

The Federal Communication Commission (FCC) has proposed re-regulation of the business data services (BDS) market, with price-cuts in markets deemed “non-competitive” as the primary tool. The vast majority of BDS is sold to wireline, wireless, and cable networks and to large enterprises. The provision of BDS requires significant capital investment by both incumbents and their competitors.

Until recently, the FCC and commenters in this proceeding have focused on the question of “how many competitors does it take to discipline an incumbent’s prices,” but ignored the question of “what happens to competitors after a mandated price cut?” That has changed in the last few weeks, since numerous competitive fiber providers (CFPs) have pointed out that any attempt to capture the incumbent will also capture them.

Echoing Lightower, Lumos, Unite Private Networks, Uniti Fiber, and roughly a hundred other small fiber providers, Wilshire Connection (“Wilcon”) stated in its August 25th filing at the FCC: “Wilcon faces competition from the incumbent LEC in virtually every location it serves and from other competitive providers in most of its locations. To induce customers to purchase, Wilcon must meet or beat prices of other providers of BDS.” Even if the FCC attempts to target only the incumbent’s prices, it will lower the price umbrella over the CFPs because the sophisticated buyers of BDS will force the competitors to match the incumbent’s mandated price cut.

As Wilcon and others point out, the combination of lower prices for their services, new regulatory burdens, and regulatory uncertainty will raise their cost of capital and the hurdle rates their projects must meet. Uniti Fiber’s September 16th filing explains the result of higher cost of capital or lower revenues: “there are likely to be projects that would be abandoned or never bid on in the first place because the return on investment is insufficient.”

Anna-Maria Kovacs, Ph.D., CFA, is a Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.

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investinbbandKovacs: BDS Reform – What Happens to Competitors After a Mandated Price Cut?