‘Train Wreck’ May Be in Store for Regulatory Programs, Telecom ‘05 Panelists Say

The clash would come as customers, including big businesses, face ever higher fees and turn to new technologies for relief, said Legg Mason analyst Blair Levin. He said the fear is a “vicious cycle” in which customers drop off traditional phone networks because of high regulatory fees, reducing the base for those fees and forcing regulators to increase the fees -- causing more people to leave.

As govts. continue to add fees, including local govt. levies on services such as wireless, costs will be passed on to consumers who will begin to wonder why they're paying so much when they can get services like Vonage’s for less, said Michael Sullivan, aide to Sen. Ensign (R-Nev.).

“It’s one of those train wrecks that people have been looking for for a long time and hasn’t happened -- but I think it will,” said Doug Sicker, U. of Colo. asst. prof. Regulators “have to get over the idea” that voice over the public switched telephone network is the main communications medium, he said. The real train wreck would be “competitors pricing irrationally enough” to challenge the sustainability of regulatory systems, said Anna-Maria Kovacs, analyst and pres. of Regulatory Source Assoc.

For now, regulatory issues aren’t significantly affecting financial evaluations of companies, “with the possible exception of universal service,” said Levin. At least there’s nothing like the impact of the UNE pricing issues of 1-2 years ago, he said. But in 3-5 years, new players from the high-tech side, such as Microsoft, could exert price pressure on traditional communications companies and cause an exodus of customers seeking alternatives, Levin said.

Sullivan said Ensign’s recent introduction of a telecom reform bill caused a surprisingly big splash among analysts and financial talk shows, with stock of equipment manufacturers rising. That’s an indication that “if we could get the rules right, people will invest money,” he said. Kovacs said it also might be a sign that investors think legislation could eliminate some of the uncertainty in the industry.

Panelists said network neutrality is an issue that could be widely affected by the entry of new players into communications. Levin said Google’s plan to offer Wi-Fi in San Francisco raised an interesting question of whether a content-based provider would favor its own content in offering a common carrier service. On the other hand, network neutrality regulation shouldn’t impede traditional carriers’ ability to have bandwidth available to serve their customers, panelists said. The consensus seems to be that deliberate actions such as port blocking should be barred, Levin said. The difficult choices come when the Bells offer new services such as video, he said.

Members of another panel debated whether to expand the universal service program, their views generally reflecting their industry roles. Glenn Brown, a consultant for rural telephone companies, said universal service was created to assure telephone networks in areas too costly to wire without financial help. If there are concerns about the growing cost to other carriers, the program should be broadened to gain contributions from new communications services, he said: “The key is to spread out the costs to the widest base possible. Go to players who benefit from that ubiquity.” Critics argue the market should decide rural expansion, Brown said, but universal service is used “to fill in the gaps where markets won’t go.”

Kathleen Grillo, a Verizon executive, warned the growth of the universal service fund (USF) may reach a point that it “threatens the statute’s [Communications Act] requirement that rates be affordable.” Before expanding the program to pay for deploying broadband in rural areas, regulators need to decide if funding would go to Wi-Fi or BPL providers and rural phone companies. “A lot of things aren’t worked out,” she said.

Tom Sugrue of T-Mobile said the program should have a “consumer focus,” rather than being aimed at funding carriers. Sugrue also complained that the wireless industry has only one member on the board of the Universal Service Administrative Co. (USAC) although wireless is now close to being the biggest universal service contributor. He said he also wonders if USF support should fund broadband deployment. “Given the problems of the present system, throwing this multibillion dollar new obligation on it may not be the way to go,” he said.