The Broadband Problem: Anatomy of a Market Failure and a Policy Dilemma

Chapter 5. The ILECs' Competitors

138 5 The ILECs’ Competitors The ILECs’principal,and only significant,direct competitors in wireline services are the CATV industry (in residential broadband service) and IXCs such as AT&T and MCI (primarily in business voice and data services). Remaining CLECs also hold small market shares in some areas.As of 2003, ILECs held roughly 75 to 80 percent of the local business market (including both voice and data), about 95 percent of the local residential voice market, and a 30 to 35 percent share of the local residential broadband market. At year-end 2002, according to FCC statistics, the ILECs served nearly 170 million voice lines, while all competitors combined served nearly 25 million, giving the ILECs an 86 percent share of U.S. voice lines. (Revenue market shares are slightly but not greatly different.) In addition, as of 2003, indirect competition from wireless services andVOIP held perhaps 5 percent of the residential voice market and an unknown but quite small percentage of the business voice market. Competitors’ market shares are continuing to increase, in part due to telephone number portability regulations put into effect in late 2003. Nonetheless, these statistics indicate that the ILECs clearly continue to dominate local services and that existing levels of competition may not guarantee satisfactory industry performance. In fact, however, the situation is considerably more disturbing than the market share statistics suggest. First, approximately onethird of these “competitors” are in fact simply resellers of ILEC services. Second, the ability of both the CATV industry and the IXCs to compete with the ILECs is limited, for reasons discussed 1901-05_CH05.qxd 03/03/04 10:58 Page 138 the ilecs’ competitors 139 shortly. And third, the CATV industry and the largest IXCs in fact share some of the ILECs’most disturbing structural characteristics and incentives to suppress technological progress and the emergence of a competitive, open-architecture industry. For the last decade the CATV sector has been consolidating into a small group of regional cable television monopolies, all of which operate closed, vertically integrated systems, and which in turn are owned by an oligopoly of national media conglomerates (including broadcast and cable television content and distribution, newspaper chains, music and film studios, and Internet access service). For several reasons a competitive , technologically dynamic, open-architecture broadband industry represents just as deep a threat to these companies as it does to the ILECs. Their services, strategies, and policy positions already reflect this fact, and the prospect of a broadband industry dominated by an ILEC-CATV duopoly therefore raises major concerns. In certain respects, for example, through the extension of the effects of media industry concentration into the domain of the Internet and the Web, the rise of the CATV industry could make the broadband problem worse rather than better. The CATV Industry Some analysts argue that the CATV industry can compete with, discipline, or substitute for the ILECs in providing digital services ranging from voice telephony to broadband Internet access, and can do so to a sufficient extent to obtain most benefits of competition.1 This argument is based largely on the CATV industry’s control of an alternative infrastructure for delivering local digital services and on the fact that, through cable modem service , the CATV industry leads the ILECs in delivering residential broadband Internet access. Between 1998 and 2003, the CATV industry has held roughly 65–70 percent of the residential broadband market. Unquestionably , cable modem service has provided some real competition to the ILECs in the residential broadband market; even a duopoly is better than a monopoly, and the CATV sector does appear to be more dynamic than the ILECs. Under appropriate policies and structural conditions, the CATV industry could contribute substantially to the long-term performance of the U.S. local broadband system. Moreover, several CATV firms have announced that they intend to support or provide VOIP services. Unfortunately , there is much reason to be skeptical about CATV-based broadband competition under the industry structure and policy regime which has been in effect since the 1990s, and which continues as of late 2003. 1901-05_CH05.qxd 03/03/04 10:58 Page 139 140 the ilecs’ competitors As of year-end 2002, the U.S. CATV industry’s total annual revenues (including content properties but not counting unrelated revenues of larger, diversified corporations such as AOL Time Warner) were approximately $50 billion, or roughly 40 percent as large as those of the ILEC...