ILECs are crying wolf over regulation

You hear a lot these days about the impact of unbundled network element-platform (UNE-P) regulation on the telecom industry. Not only is UNE-P blamed for reducing the profits of the incumbent local exchange providers, it’s now being blamed for contributing to the telecom slump by reducing the incumbent local exchange carriers’ ability to purchase hardware and software.

A refresher: UNE-P is the Federal Communications Commission rule requiring ILECs to make their network facilities available to competitors at rates determined by state public utility commissions. The ILECs maintain that the rates that the states set are unrealistically low and don’t reflect the true cost of operating the networks. Thus, the argument goes, UNE-P amounts to forcing the ILECs to subsidize their competition at unfair prices.

Some folks agree. Two months ago, UBS Warburg issued a report indicating that BellSouth, Qwest, SBC Communications andVerizon are losing money because of UNE-P requirements in 18 states. As a result, UBS Warburg lowered its stock ratings on the ILECs from “buy” to “hold,” indicating Warburg’s belief that UNE-P requirements represent a liability to the ILECs.  

Because the ILECs are losing money to UNE-P (goes this line of reasoning), they aren’t making needed investment in infrastructure and operation support systems, which translates into lower revenue for telephone company hardware and software providers. So UNE-P is not only hurting the ILECs, but also it’s damaging the industry as a whole, and any right-thinking mortal should be up in arms about it.

Forgive me if I disagree. I like the ILECs just fine, but I don’t buy the argument that anything that’s bad for Ma Bell is bad for the industry.

Let’s take a closer look at the facts. First, the UBS Warburg study only looked at the residential market – a mature market by any account. Whether today or next year, ILECs are going to have to stop basing their profit projections on basic residential services and begin to focus on offering enhanced services and business offerings. UNE-P might accelerate that trend, but it’s not causing it.

Second, the argument that UNE-P is depressing the earnings of telco hardware and software vendors just makes me laugh. Here’s the problem: If the ILECs are going broke selling their facilities to competitive local exchange providers, one has to assume the CLECs actually are buying. So what are the CLECs doing with the money they’re saving? Why, presumably purchasing hardware and software to make their networks more efficient.

And if they aren’t, don’t blame UNE-P. Blame the telco vendors for creating products the market doesn’t need.

That’s the real issue here. ILECS are subtly trumpeting UNE-P as an example of government regulations meddling with a free market. But when did the ILECs last pay the slightest attention to what the market requests? If it were up to them, we’d all still be using analog rotary phones.