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By Gerry Carson, Managing Consultant, Advocate Networks, LLC
The state of the telecommunications industry demands that service providers take action today to prepare for potentially higher future access costs. Consolidation has dramatically increased the pricing power of the RBOCs. Industry revenue continues to trend downward, generating unprecedented cost pressure for all in the marketplace. In a market downturn, successful players will be executing strategic plans to reduce cost and mitigate the risk of rising costs. Restructuring networks does not happen overnight and thus providers must act today in order to be prepared.
In order to consummate the acquisition of BellSouth, AT&T agreed to a set of post-merger rules known as the merger requirements. The FCC’s public filing in WC Docket No. 06-74 spells out these merger requirements, including the following statement: “No AT&T/BellSouth ILEC may increase the rates in its interstate tariffs, including contract tariffs, for special access services that it provides in the AT&T BellSouth in-region territory.1” These merger requirements expire in January 2010. In less than one year from today, AT&T will have the option of raising special access rates. One potential outcome in 2010 is clearly that special access rates are increased.
The financial statements released by the RBOCs show wholesale as a healthy contributor to the bottom line, but there are two different strategies for managing this business segment. The first strategy honors existing pricing agreements and offers discount concessions to retain wholesale customers over the medium and long term. The second strategy would allow existing agreements to expire and apply price increases to produce short-term improvements in revenue. Clearly, the latter strategy presents risk for CLECs and others in the marketplace.
On the regulatory front, the win by democrats is likely to establish an FCC that is not pro-big business and responds more strongly to complaints in the wholesale market. Although the FCC may take a harder stance, regulatory relief, or forbearance, has already been granted. Forbearance means RBOCs can negotiate what is essentially a commercial agreement for specific areas of their business, like broadband. Prior to forbearance, all agreements had to be publicly filed as a tariff with the FCC. Another potential concern for service providers is the future availability of the Unbundled Network Element (UNE). A significant decline in the availability of UNEs has taken place over the last several years. Service providers that must now purchase special access will see a dramatic rise in cost of goods sold.
Service providers must take steps to fully understand cost of goods sold risk in 2010 and beyond. Independent of the scenario that unfolds, service providers with a solid understanding of future pricing risk and a strategic plan for mitigation will prevail and be better positioned in the marketplace.
Please contact Gerry Carson (Gerry.carson@advocatenetworks.com) if you would like to explore this topic further.