I thought the analysis below might perhaps be of interest to some list subscribers in regard to regulatory issues related to the price of wireline Internet backhaul in fiber to the neighborhood + wireless community networking... I asked Chris if I could pass it on and he said it'd be fine for it to be redistributed. - Steve Ronan
---------- Forwarded message ---------- Date: Fri, 7 Nov 2003 07:59:59 -0500 From: Chris Savage <[EMAIL PROTECTED]> Reply-To: Telecom Regulation & the Internet To: [EMAIL PROTECTED] Subject: [CYBERTEL] Building Entrances, Dark Fiber & Monopoly Power Hello all, Please tell me what's wrong about my analysis below. The basic conclusion is that regulators are making a terrible mistake, demonstrably bad in raw economic policy terms, by not requiring ILECs to construct and sell dark fiber to end users. Back in the Stone Age when I first took economics, there was a simple little proof you could do that showed what monopolists do to maximize profits: facing a downward-sloping demand curve, they maximize profits by restricting output, which pushes up price. They sell less than would be delivered in a competitive market (where price=marginal cost) but they make up for the lower volume with proportionally higher prices. Monopolist gets more profits; consumers pay more, for less stuff. Clearly, unequivocally, a welfare loss. Back in Medieval Times when I first learned about utility ratemaking, I learned all about how the normal set-price-to-marginal-cost rule can't really work in high-fixed cost, large-economies-of-scale industries, like telecom. Since cost declines over the entire output of the market, and since lots of costs are fixed, setting price equal to marginal cost leads to negative returns for the otherwise-efficient firm. So you have to price some or all output above marginal cost, leading to cost allocation nightmares, debates about ECPMs and Ramsey prices, etc., etc. In other words in these weird industries the monopolist *has* to be able to price above marginal cost; as the joke goes, the only question is how much? I submit that our fascination with trying to figure out how to price shared network facilities in declining cost, high-fixed-cost industries has obscured a plain and simple exercise of raw monopoly power that is right in front of our noses. I'm talking about the refusal of the ILECs to sell dark fiber and, instead, to insist on selling bandwidth in pre-measured, expensive increments (DS0, DS1, DS3, OC-3, etc.). The basic product of a communications network is bandwidth. What goes *over* the bandwidth provided is up to the customer. The more bandwidth provided for less price, the more the "surplus" is transferred to the consumer. The more the provider can restrict output of bandwidth and charge more for it, the more monopoly profits it makes. Technology being what it is, a clean run of fiber between any two points within any metropolitan area can be "lit" entirely by customer-supplied gear at either end. There is no need for any intervening telco "facilities" or "services" or "enhancements." With dark fiber the customer can decide whether to deploy on the ends (a) cheap gear that doesn't give much bandwidth or (b) more expensive gear that gives a lot. The customer can decide whether the bandwidth ought to be formatted as OC-n or as gig-E or whatever. The fiber provides the telecommunications service, i.e., the simple transmission from A to B of the customer's data. Now, lots and lots of customers (residence customers) will choose not to buy a point-to-point fiber run (or series of point-to-point runs). (That raises the issue of dry copper private lines, which is, basically, analogous, but that's an exercise for the reader.) But some larger business customers will; and aggregators could buy some runs and fill up the bandwidth on their own. Why don't ILECs offer dark fiber? Because they don't have to. If they did they would sell a lot fewer bandwidth-impaired services (and, note: an OC-48 is a "bandwidth impaired" service as compared to what fiber can carry). This would be true even if they were compensated for the full cost of the fiber. Why don't they have to? Two reasons: (1) the regulators don't make them; and (2) competition doesn't force them to. As to reason (2), there's no competition because once a building is built and has an entrance from a conduit in the street, that conduit and entrance, particularly in large urban areas but really in a lot of places, probably is the last bastion of natural monopoly/essential facilities. You don't want a separate physical road into your neighborhood for each of the postman and the milkman and the dry cleaning service and the kids' soccer carpool. You want one physical road that everybody shares. Same with conduit runs and building entrances, basically. As to reason (1)... Anybody have any good reasons? I sure can't think of any. Other than the fact that the ILECs' profits would fall, would *anything* bad for *anyone* else happen by instituting a requirement that ILECs sell dark fiber connections at retail to anyone willing to pay a fair (yes, it would have to be regulated, since it is a monopolized function) price for it? This seems to me to be a classic case of public v. private interest, and, therefore, a classic case for direct regulatory intervention. Comments? Criticism? Chris S. *************************************************************************** This electronic mail transmission may contain confidential or privileged information. If you believe that you have received the message in error, please notify the sender by reply transmission and delete the message without copying or disclosing it. *************************************************************************** -- general wireless list, a bawug thing <http://www.bawug.org/> [un]subscribe: http://lists.bawug.org/mailman/listinfo/wireless
