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The Other Duopoly The Other Duopoly

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Magazine

Need to Know: Technology

The Other Duopoly

Consumer advocates are worried about a merger of wireless carriers. For a preview of how it will work, look at landlines.

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Towering over the competition: The top telecom companies have a huge advantage.(Darren McCollester/Getty Images)

Most of the anxiety about AT&T’s proposed merger with T-Mobile centers on the wireless market. Critics say that the deal will create a duopoly in which AT&T and Verizon control nearly 80 percent of the wireless business. But, in fact, that nightmare may already exist—in an entirely different arena: the complex system of payments for landline services. As Rep. Darrell Issa, R-Calif., complained at a hearing last month, “We’re reassembling a duopoly in the back end.”

That “back end” refers to landline communications companies that lease access to their networks—a market variously referred to as backhaul, special access, or high capacity. The good news is that there is a fair amount of competition when it comes to carrying voice and data traffic between large cities. The bad news is that there are a lot fewer options—and sometimes just one—when it comes to the “last mile” connection between these competitive networks and, say, a medium-sized office building or a cell-phone tower next to a highway. Together, AT&T and Verizon own 70 percent of backhaul nationwide, according to the NoChokePoints coalition, an interest group. What the Federal Communications Commission does about it may come to define the telecommunications market for years to come.

 

Ownership of those landline networks gives players a major competitive advantage. When the FCC deregulated the special-access market in the mid-1990s, interstate special-access fees made up only 5 percent of Verizon’s and AT&T’s total revenues. But consolidation, and the lack of competition, allowed them to raise the price for back-end use. By 2007, the service had jumped to almost 25 percent of Verizon’s revenue and about one-fifth of AT&T’s income, according to a 2009 report by the National Regulatory Research Institute that provides the latest available data.

“The backhaul issue is the Rodney Dangerfield of telecom issues—it never gets the respect it deserves,” said Maura Corbett, executive director of NoChokePoints, whose coalition includes public-advocacy groups and wireless companies such as Sprint. “It is the plumbing of the Internet and wireless communications,” she said. The coalition is urging the FCC “to determine what changes are necessary to ensure reasonable prices.”

 

 
Ownership of landline networks gives players a competitive advantage.

According to documents that Sprint filed with the FCC, traditional phone companies, primarily AT&T and Verizon, provide more than 90 percent of special access sold to mobile carriers. That concentration puts Sprint and other carriers in the position of paying millions of dollars—or whatever the owners decide to charge—to their biggest competitors. “Looking forward, special access will be critical to the provision of wireless services,” said Charles McKee, Sprint’s vice president for government affairs. “AT&T and Verizon’s control of the special-access market is a threat to competition.”

AT&T and Verizon are used to being painted as the big, bad wolves. No one is forced to buy their services, they argue. “This is a dynamic, rapidly growing marketplace; dramatic changes occurring even in the last year demonstrate the wide array of competitive alternatives … [for] customers,” Verizon asserted in documents filed with the FCC. AT&T Senior Vice President Robert Quinn said that his company is not an incumbent monopoly and that many options exist for backhaul services. Other wireless companies should focus on innovating and developing, he argued, rather than debating about “yesterday’s technology.”

But smaller wireless carriers—not to mention banks and other businesses that depend on the services—simply cannot build nationwide backhaul networks, Corbett countered. “If there were any way Sprint and other phone companies could avoid pumping money to their competitors, don’t you think they’d choose that?” she asked. “It’s all about economies of scale.”

 

To increase competition, Congress requires Verizon, AT&T, and other network owners to sell special-access services. But the companies that lease those services worry that new and deregulated technologies—like ethernet—are threatening to leapfrog the rules. In 2005, the FCC opened proceedings on the issue, but the docket lay dormant until November 2009 when the agency formally requested more data on special access. Now, with the wireless merger in the works, the FCC is poised to ask for another round of data this summer. AT&T insists that its merger has no impact on special access because T-Mobile doesn’t offer such services. But competition elsewhere, something the FCC prides itself on protecting, is still in short supply.

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This article appears in the June 11, 2011 edition of National Journal Magazine.

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