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Where Verizon and AT&T Really Dominate and why CenturyLink/Qwest Makes Sense

From The big FCC story about Verizon today is not mystery fees – John Taylor’s Posterous:

A much bigger story is that the FCC issued a public notice in the special access docket which requests data from incumbent local exchange carriers and commercial mobile radio service providers.

How’s that for telecom gobbledygook?

In English, what it means is the FCC is asking landline and wireless phone companies to provide confidential data about the prices charged and paid for special access connections. This request for data is a necessary step to take before the FCC can do anything to rein in Verizon, AT&T and other landline phone companies who dominate the special access market which our broadband economy depends upon.

Special access connections are what make a lot of what we take for granted on the Internet and with your mobile devices. They are what connects the mobile phone towers or your landline ISP to the larger Internet. They also provide the kinds of connections needed by large call centers that could be outsourced to a company like Global Response.

The problem is that in any given location, there is usually only one dominant provider of these kinds of circuits: namely the local telephone company, who in a lot of cases, is a direct descendant of the Bell System where “universal service” was the mandate. The largest of these two companies is AT&T and Verizon, who are also the largest two mobile phone service providers.

Verizon and AT&T are big enough in different areas of the country where even if, say, Verizon where to increase the costs of a special access circuit to AT&T, AT&T could retaliate by increasing the cost of a different special access circuit to Verizon and it would even out.

For the other national mobile phone service providers like Sprint (who had less of a landline business historically) or T-Mobile (who was historically only a wireless provider), they are almost entirely at the mercy of companies like AT&T and Verizon for the kind of connectivity necessary to make their towers work. Because they don’t really have a choice as to which provider to use for these special access circuits, and they lack the kind of pricing leverage that AT&T and Verizon have, they basically have to pay whatever that provider wants to charge.

Meanwhile, pure play landline telcos like CenturyLink make money on special access circuits where they are the provider. When the acquisition of Qwest completes, they’ll make an even larger share of that $18 billion market.

Even if the landline market more or less goes away, you’re still going to need those special access circuits. CenturyLink (with Qwest) will be in a great position to capture a significant chunk of that very profitable market. In this light, their merger makes tons of sense.

Will the FCC be able to reform this market so that providers can’t overcharge each other for special access circuits? It remains to be seen. One can hope, but the government does not have a great track record in successfully regulating the business practices of dominant telcos.


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