Without a Net

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by Neil Adler and C. Benjamin Ford*Staff Writers

J. ADAM FENSTER/THE GAZETTE Tom A. DeReggi, owner of Rapid DSL Inc. in Germantown, says his company is better cushioned against broadband deregulation than most other DSL providers because it has switched about 70 percent of its business clientele to wireless networks. But lack of competition will drive up prices, he says.

Smaller providers fear
effects of FCC's decision to deregulate broadband

Higher prices, fewer choices.
That is likely to be part of the fallout for businesses and consumers following the Federal Communication Commission's decision to deregulate broadband.

Broadband, the transmission of voice, data and video signals through a single medium, is the future of the telecommunications industry, experts say.

The FCC's Feb. 20 decision, by a narrow 3-2 vote, ends requirements that the former Bell telephone companies lease to competitors at regulated rates new or upgraded networks for high-speed Internet access over broadband.

Deregulation could force some companies out of business -- particularly smaller providers who offer Net access over telephone networks, known as DSL, or digital subscriber line.

With the former Bells -- including Verizon Communications Inc., the region's dominant phone company -- now free to set rates, competitors would have to decide if they still could afford to offer service or build their own networks, industry analysts say.

The slow economic recovery and virtually nonexistent investment climate for telecom companies will make it difficult for small providers to compete, analysts and company executives say.

And as more consumers switch from DSL to cable-based Net access -- about 11 million people are wired through cable, roughly twice as many as twice as many as DSL -- the potential for a monopoly becomes even greater.

The FCC ruling, telecom experts say, could mean only two primary providers offering Net access in a given area: the cable company and the phone company.

"The consumer will be the one most hurt," said Dallas Kincaid, operations manager for Xecunet LLC, an Internet service provider in Frederick. "There's nothing to drive prices down. All this ruling does is take out competition. It was very silly."

It is not clear how much of an impact the FCC decision will have on consumers and businesses because the decision is only a week old and appeals are expected, industry analysts say.

Calls to the Maryland Public Service Commission, the state agency regulating utilities, were not returned.

"It's hard to tell if this ruling will remain in its current form," said Brian Hammond, managing editor of Telecommunications Reports Inc., a Washington, D.C.-based provider of information services to the telecom industry. "Everyone's posturing right now. There's going to be many lawsuits filed."

As part of the decision, the former Bells can be released from leasing requirements by upgrading to high-speed networks using fiber-optic technology.

While they consider this a victory, they are not happy with another part of the decision that preserves regulations governing local phone competition. The FCC has allowed state regulators to continue to decide how much competitors should pay for leasing networks under a new set of federal guidelines. The former Bells announced this week that they intend to fight that part of the ruling in court.

Opponents of deregulation, meanwhile, say it would reduce competition because smaller providers may not be able to afford to replicate the Bells' networks.

The FCC's decision "is another body blow to the American economy," said U.S. Rep. Billy Tauzin (R-La.), chairman of the House Energy and Commerce Committee, in a statement.

Tauzin, who co-authored the Telecommunications Act of 1996, said the ruling "marks a low point for the FCC."

If the courts do not change the ruling, he said, further legislation might be needed from Congress.

"Given the FCC's lack of leadership, I am now prepared to immediately begin that debate," Tauzin said.

DSL woes

Tom A. DeReggi, owner of Rapid DSL Inc. in Germantown, said the FCC's decision will push out small DSL businesses.

"We feel really burnt that the FCC could make a decision so anti-competitive," he said. "It's also anti-consumer."

The lack of competition will drive up prices for small businesses, DeReggi said. He added, however, that the blow will not be as hard for his company because it already has switched 70 percent of its business customers to wireless networks. His company does not do any residential work.

"We've pretty much gone full-force wireless ISP right now," DeReggi said.

Deregulation will take DSL service back to the days before the 1996 Telecommunications Act, when Ma Bell was the only telephone company, DeReggi said.

"What they forget is the prices were so high all those years," he said. "But it's also the service. People have short memories."

Rapid DSL, which has four employees, made about $1 million in revenue last year catering to small and medium-sized businesses, DeReggi said. He declined to say how many customers the company has.

Wireless systems are an emerging technology, but they have been adapted effectively for broadband users, DeReggi said.

"We keep joking if we keep building all wireless, we'll have to fire all our technicians because there will be nothing for them to do," DeReggi said. "With DSL and other wired systems, things break."

The FCC decision, DeReggi said, might make it more difficult to provide DSL to customers who need it.

"Wireless can't go everywhere just like DSL can't go everywhere," he said. "Two or three years ago, no one really believed wireless would work."

Xecunet is looking to offer DSL in Maryland, but the FCC decision could mix things up a bit, said Kincaid, the company's operations manager.

"This ruling will change our model" for DSL service in the state, he said, declining to provide specifics.

"It's going to happen, but it has to make economic sense to offer it," Kincaid said. "This ruling makes it more of a challenge."

From a business standpoint, he said, the lack of competition will result in providers eating the costs or passing them onto customers.

"This ruling will basically stall any opportunity for prices to go down," Kincaid said.

Residential end-users and people who work from home will be affected more than companies because they tend to rely on DSL service, said Edward Fineran, president and CEO of Atlantech Online Inc., a Silver Spring ISP.

"Is your DSL bill going to go up? Most likely," said Patrick C. Ross, associate managing editor of Washington Internet Daily, a division of Warren Communications News Inc. "What you hear from consumer groups and independent ISPs is it's going to be virtually impossible for anyone other than a Bell to compete in residential DSL service.

"There has been tremendous competition in the small-business community for DSL service," Ross said.

Tim Hugo, executive director of technology trade organization CapNet, part of the Greater Washington Board of Trade, said the decision by the FCC avoided pulling the plug on emerging voice telephone competition at the expense of broadband competition.

"The FCC's decision today will not only deny consumers greater choice in broadband providers, but will also choke off future broadband competition and financially ruin many Internet broadband providers," he said in a statement.

"While the FCC may believe they are providing 'new rules' for 'new wires,' they may actually be providing 'new excuses' for 'old monopolies,'" Hugo said. "The Bells claim that this deregulation will foster new investment. But I have seen no evidence suggesting that giving the Bells more monopoly power over broadband services will significantly increase their broadband investment."

"This decision will be especially harmful for small businesses -- the engines for economic growth -- that have no alternatives to Bell-operated broadband facilities," he said.

Not all opposed

Some telecom industry officials, however, applaud the FCC ruling.

Matthew J. Flanigan, president of the Telecommunications Industry Association, an industry trade group in Arlington, Va., said it should unshackle telecom companies that have held off expanding DSL service.

Incumbent local exchange carriers (ILECs), often known as the former Bell companies, decided against expanding DSL in their communities because they would have to share the lines with competitors under the 1996 Telecommunications Act.

The competitors could then offer the service at a lower cost because they did not have to bear the cost of deployment.

"Up 'til now, without this regulatory relief, they had to give it away to their competitors at low cost," Flanigan said. "It's like the old saying, 'When a condemned man is told to build his own gallows he'll hammer very slowly.'"

The FCC ruling could spur a recovery among telecom businesses that serve the carriers, such as Ciena Corp. of Linthicum and Corvis Corp. of Columbia, he said.

"It's not going to happen overnight," Flanigan said. "But in the second half of '03, we should see an increase in the spending. With this ruling, we expect an average growth of 9 percent over the next four years, more so in the latter half."

Flanigan, however, said it is possible that the cost for DSL service will go up.

"You've got to pay for the service you're getting," he said. "But today they can get a competitive price from cable so that will keep the ILECs honest. If the business doesn't have cable [Internet service] in their area, or if it is a rural area, then the ILECs may have a tendency to raise the price."

Competition can improve through telecom companies using other technology to offer Internet access, such as wireless and satellite alternatives, Flanigan said.

"We are complementary to DSL and cable. If some of these players decide not to build out, our market share could get bigger," said Sheila S. Blackwell, a spokeswoman for StarBand Communications Inc., a McLean, Va.-based provider of high-speed Internet service nationwide via satellite.

The company has about 40,000 subscribers and a work force of 140, she said.

The FCC decision "won't impact us," Blackwell said.

It is unclear how the decision would affect cable operators. Comcast Corp. of Philadelphia, one of the main cable providers in Maryland, would not comment on the FCC's decision, company spokesman Tim Fitzpatrick said.

The National Cable and Telecommunications Association, a Washington trade group representing the U.S. cable television industry, believes the FCC decision would not have a significant impact on cable TV offerings, a NCTA spokesman said.

Providers with their own networks may have a better chance of surviving, telecom industry analysts say.

Starpower Communications LLC of Lanham, for one, has its own network and likely will not see prices go up, said Scott Burnside, senior vice president of regulatory and government affairs for RCN Corp. in Princeton, N.J., one of Starpower's co-owners.

The company, a provider of cable, Internet and telephone service in Montgomery and Prince George's counties, Washington and Northern Virginia, has about 80,000 customers, mostly residential, and 250 workers, Burnside said. The company's other owner is Pepco Communications LLC of Washington.

Starpower might gain some customers as a result of other providers going out of business or deciding not to build their own networks, he said.

"We're completely self-contained," he said. * *