Hellerstein Regulatory and Industry Review November 21, 1998 HELLERSTEIN REGULATORY & INDUSTRY REVIEW - - Eighth Issue: December 21, 1998

Welcome to the seventh issue of HELLERSTEIN REGULATORY & INDUSTRY REVIEW, a monthly free newsletter covering significant industry and regulatory developments in the telecommunications and technology industries. The newsletter is published by Hellerstein & Associates, a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis.

NOTE: The Hellerstein & Associates Website is located at www.jhellerstein.com. Please keep the suggestions coming and send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.

This seventh issue will focus on some of the local competition issues discussed at the FCC merger en-banc held on Monday, December 14 and at the recently concluded Telecom Policy and Regulatory Summit held jointly by the Federal Communications Bar Association and the Practicing Law Institute on Thursday and Friday December 10 and 11th.

Larry Irving, Assistant Secretary for Communications and Information at NTIA, criticized the stalling techniques and tactics of the incumbent LECs. He compared these stalling techniques to a basketball manager's strategy of "stall ball", which he explained as running out the clock by doing as little as possible when your team has a large lead. Irving challenged the ILECs to quit stalling and start opening up their markets to other competitors. This theme of stalled competition was picked up by many of the later speakers and panelists as they discussed why they thought competition in local markets had not materialized.

Scott Cleland who heads up the Precursor Group of Legg Mason postulated that the lack of any meaningful local competition was a function not of the ILECs will or ability to enter into another ILEC's territory, but it was their need to meet investor expectations for a certain stock price. Investors in ILECs view these investments almost like bonds or Treasury bills, without any risk, thus ILECs actions must be measured on how well they meet this goal.

Hellerstein & Associates agrees that investor anxiety over the stock price of the ILECs is one of the factors contributing to this game of "stall ball". However, it is only natural for the ILECs to adopt a tactic of delaying the advent of full blown competition by attempting to stall as long as possible before competing outside of their territories for residential customers. These actions offer it the best opportunity for holding on to its market share. It would be unusual if the ILECs acted any other way.

Gene Kimmelman of the Consumers Union argued that if the public is expecting its regulators to make tough policy decisions that profoundly change the current social policy, e.g., in Universal Service, than investors should also be encouraged to make the same leap.

Another central theme of the conference was the pending mergers between Bell-Atlantic and GTE and SBC and Ameritech and these companies beliefs that only by getting bigger could they effectively provide residential competition. They claim that the economics of todays market prevent them from competing for residential local service customers outside their regions. SBC, Ameritech, and Bell Atlantic claim that current regulatory burdens make it almost impossible to provide consumers with a choice of providers for local phone service. If the FCC would remove some of these burdens, they promised to aggressively compete for residential customers outside of their regions.

Other panelists saw these two mergers and the pending merger between AT&T and TCI not as a spark that would spur local competition for residential customers, but as a nail on the coffin of local competition. These panelists felt that allowing these companies to merge would lead to an abuse of power and possibly the initiation of predatory acts. This fear of an abuse of power and the potential loss of the consumer gains promised by Congress is why the debate around the mergers has gotten so heated. It is also why many are arguing for the FCC to force TCI to unbundle its cable network before it is allowed to merge with AT&T.

Each side appears to be drawing battlelines in the sand, with no side ready to budge for fear of tipping the balance of power to one side. The FCC, the referee, also appears to be hesitant to act mostly because it has not figured out how its actions may affect the promised benefits of local competition: more choices, increased innovation, lower costs and the future deployment of broadband access to the Internet.

The outcome of the FCC's and the Department of Justice's merger analysis and the decisions that result, have the potential of changing the landscape of broadband access. A decision to unbundle US cable networks and allow AOL and other Internet Service Providers to purchase Internet access, ie, transport, separately from cable access would have worldwide ramifications as many regulatory authorities in other European and Asian countries are all facing similar issues. Moreover, a forced unbundling of the network could slow down the migration to broadband access as the battle will likely move to the courts, thereby jeopardizing the expected consumer benefits. A decision in favor of the cable operators could result in the creation of two parallel but different set of rules, which also will likely have harmful effects on the movement to broadband access.

Thus, it is unclear what action the FCC will take. What is clear both from the FCBA/PLI conference and the en-banc hearing on the proposed mergers is that the FCC will not impose restrictions, such as unbundling of the cable network, on one firm, TCI, to correct a problem that affects the entire industry. What is more likely is that the FCC will take action independent of the merger review process since it would be harmful to competition to force TCI to unbundle its network without requiring the other cable incumbents, such as COX, Comcast, and others, to also unbundle their networks. The FCC could decide as it did in the MCI/WorldCom merger that some issues although extremely important and far reaching require a different venue than that of the merger review process.

Hellerstein & Associates is interested in learning what its readers think of these issues. Please send all comments directly to Judith Hellerstein Judith@jhellerstein.com. If you would like more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com..

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Topics covered in the HELLERSTEIN REGULATORY & INDUSTRY REVIEW were chosen because oftheir interest to the work of Hellerstein & Associates. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com .