Re-monopolizing the phone service 

US telecoms regulator the FCC has signaled the end of the independent ISP, a move which will leave DSL provision concentrated in the hands of just a few large providers. The move, which turns local DSL provision from a regulated monopoly into an unregulated monopoly, also has repercussions for rural telephony providers, who will lose a chunk of subsidy, and has potentially chilling consequences for free speech.

Unless state regulators step into the void just vacated by the Federal regulator, however, every independent DSL provider will find itself at the mercy of the Baby Bells when its contract expires – and the Baby Bells have no compulsion to renew those competitors’ contracts.

At the moment in the US, DSL is sold wholesale by companies owned by the Baby Bells, aka the “ILECs” (incumbent local exchange carriers), such as SBC (formerly Southwestern Bell and Pacific Bell), and Verizon (formerly Bell Atlantic). The ILECs are also DSL retailers, of course, in direct competition with independent ISPs who depend on the ILECs for service and in most cases, infrastructure.

In a statement today the FCC said it was scrapping the mandatory sharing requirement on incumbents that “caused vendors to delay development and deployment of innovations to consumers.” In June the Supreme Court ruled that cable broadband is an “information service”, rather than a “telecommunication service”. The latter is subject to the watchdog’s oversight and public service obligations, while the former is not. Now the FCC is stepping away from regulating DSL with the justification that it needs to “level the playing field”, reasoning that two mistakes cancel each other out.

In a statement, the president of the California ISP Association CISPA Dane Jasper described it as “a re-monopolization of a network that has been publicly regulated and paid for by rate payers for more than 100 years.”

“This is not leveling the DSL playing field. The FCC is putting a fence around the playing field and giving the keys to a few phone companies with armies of paid lobbyists, letting the phone companies decide who can play in the broadband game.”

So what happens next?

Much depends on what the ILECs – the wholesalers today – decide to do when the ISP contracts expire. No ISP large or small is safe, but it’s hard to see the ILECs pulling the rug away from the larger DSL ISPs such as AOL or Earthlink without a fight. The largest ISPs have the legal and financial clout to make termination of their contracts at the very least awkward experience for the Baby Bells.

The alternative for ISPs is to negotiate a deal with a CLEC, a competitive local exchange carrier, but in practice that means Covad. (Of the three national CLECs once offering national wholesale DSL, Covad survived Chapter 11, but Northpoint and Rhythms didn’t – they went bankrupt and dissolved.) But Covad service isn’t cheap and is beyond the reach of the smaller indies.

So ILECs are likely to target the local ISPs for termination, taking out a competitor and cutting their own costs as a bonus.

In theory the FCC’s ruling shouldn’t matter on a regional basis, because the states regulate their own phone services. But in practice intensive lobbying has neutered the state regulators.

For example, the California Public Utilities Commission decreed that SBC should not retail DSL below the price of its wholesale offerings. However, SBC won itself an exemption for special promotional offers, and permanently offers retail below wholesale prices by running non-stop, back-to-back “promotions”.

Without economies of scale, and the financial muscle that buys lobbyists and lawyers, the outlook for small DSL ISPs looks grim.