Analysts Envision Different Pace of Telecom Competition
Two financial analysts offered differing views of how telecom competition will play out. During a Brookings Institution panel Fri., Precursor Group CEO Scott Cleland predicted a major revolution soon based on burgeoning intermodal broadband competition, but Medley Advisors Senior Policy Dir. Jessica Zufolo said such developments would be more pertinent to investors if broadband were more widespread in the U.S.
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Cleland said the “UNE-P era” is soon to be gone, but Zufolo said her investor clients are still focused on current policy issues such as UNE pricing, saying the Bells are trying to gain UNE price increases from the states during the 6-month “interim” period before the FCC completes final rules for UNEs.
Daniel Berninger, senior analyst for Tier1 Research who organized the panel, said it was interesting that the Telecom Act’s effort to open local telephone service didn’t go as well as the long distance competition that resulted from AT&T’s 1984 breakup. Maybe the earlier competitive movement went better because one person -- U.S. Dist. Judge Harold Greene -- managed it, he said, or maybe policy-makers in the later case weren’t “able to follow through” on the Telecom Act’s requirements, he said.
Cleland said “the long distance paradigm was completely different” and trying to apply it to local service was the problem. There are “nettlesome economic realities that made the [1984] AT&T model when applied to the Telecom Act a bust,” he said: (1) The price-demand elasticity in long distance service was much stronger, he said: “You cut the price and people demanded more.” When the price of local phone service is cut, “people say ’thank you’ and don’t buy more of it,” he said. (2) It doesn’t take as much capital to get into long distance, and the capital can be used more efficiently.
Cleland said lawmakers had the right concept but only now that “the intermodal future is here” did the competitive model work for local service. He said there were many wireless competitors, customers were porting wireline numbers to wireless, cable this year had become “a legitimate 2nd pipe to the home” and broadband technologies “are off the charts.” It costs $1,500 to lay fiber to a home underground, $1,000 to bring it in by pole and $75 to bring Wi-Max to the same home, he said: “Do the math.” Doing VoIP over a data network is “cheap and easy” and the sound quality can be better than circuit- switched voice, he said. “I think the future is extremely bright because rather than have a copper wire that we fight over,” all these options now are available, Cleland said.
However, Berninger said he’s “not satisfied with intermodal competition” and would “also like to see intramodal competition.” He said “competition happens when you have substitutable services.” Zufolo noted studies show the U.S. is 11th in the world by pervasiveness of broadband buildout. Wi-Max could be a plausible intermodal substitute if there were “a greater broadband take rate,” she said. “The last mile is very important.”
Zufolo said the “feedback” she gets from investment clients such as mutual funds managers is they're very interested in issues teed up at the FCC and state regulatory bodies, including VoIP regulation, access charge reform. Her clients tend to have investments in all telecom sectors, she said. UNE pricing may go by the wayside but it’s still an important issue because “states are very active in rate cases” and during the 6-month interim period set by the FCC “there’s definitely a push by industry to raise UNE rates as much as they can.” She said she also was watching wireline LECs attempt “to position themselves to consolidate their market share between now and 2nd quarter of next year in order to figure out how to go head-to-head with cable.” Meanwhile, investors are “cautiously optimistic about the rise in VoIP take rate.”
Cleland predicted there wouldn’t be a major Telecom Act rewrite soon because some communications segments, such as broadcasters, “don’t want to open a Pandora’s box” and even the Bells, main proponents of a rewrite, are not as unified” as they once were on policy issues. “As a pragmatist, I'd say there is going to be very little done on Capitol Hill,” he said.
Cleland and Zufolo agreed on one thing: The so- called UNE-L competitive option, in which competitors lease primarily loops from the Bells, is a good vehicle for some. Zufolo said her clients were impressed with competitors beginning to buy soft switches as the cost of equipment went down. Cleland said now that “UNE-P is dead,” UNE-L has become an attractive option.