Flouting Assumptions By The FCC and Others, First Comprehensive Market Study Since 1996 Telecom Act Shows LECs Rapidly Losing Market Share

Recent rules and requirements mandated by the FCC to open local telephone markets are based on erroneous assumptions according to the U.S. Competitive Telecom Markets report to be released in February by Northern Business Information (NBI), a NY-based telecommunications research firm. The FCC has justified its aggressive stance by arguing that the 99.5% of aggregate national revenues retained by the local exchange companies (LECs) is due to competitive barriers that require corrective action. In fact, the Northern Business Information study shows that the LECs have already lost substantial market share in regions targeted by competitors such as AT&T, MCI, Sprint, and a host of lesser players. Moreover, current FCC policies may have the unintended effect of suppressing the competition it is meant to encourage,while creating false markets. The report also estimates current and future local exchange and long distance phone revenues, reviews the competitive strategies pursued by the local and national phone companies, and analyzes the potential impact of state and Federal regulations -- and other trends affecting the telecommunications marketplace.

"It's natural the FCC would miss this seismic shift in the competitive landscape since they view the marketplace from a national perspective, rather than the micro-market perspective we took in this report," said Ron Cowles, NBI Manager of Research and Development and author of the U.S. Competitive Telecom Markets report along with Judith Hellerstein, Meera Singh, and Stece Koppman. Judith Hellerstein remarked that in the four markets analyzed, New York, Chicago, Los Angeles, and San Francisco, we found the LECs already facing serious competition for business customers, not only from the Competitive Access Providers, as the FCC suggests, but also from the inter-exchange carriers (IXCs) and other LECs."

Ironically, the actions taken by the FCC and state regulators could have the unintended effect of suppressing -- rather than stimulating -- migration to a truly competitive marketplace. "This single-minded focus on opening up local markets could be damaging not only to the LECs, but to AT&T and the other IXCs," said Steve Korba, NBI's Research Manager, U.S. Telecom Service Markets. "On one hand, the LECs are being asked to open their markets without replacing lost revenues through new higher margin services such as digital and long distance. On the other, competitors such as AT&T could pay dearly for delays in entering local markets caused by their protracted legal and regulatory challenges. Consumers will also suffer by continuing to pay inflated costs for long distance services. It's a zero sum game for everyone."

Report Highlights

Among other highlights, the Northern Business Information report states:

* Incumbent LECs stand to lose over 30% percent of their markets to competition by the year 2000 (with a much higher rate in urban areas). In New York City, for example, NYNEX has already lost 20% of its local exchange business market to competitors.
*In the same period, the IXCs will lose 20% of their share of interLATA toll revenue to the regional Bell operating companies (RBOCs).
*Both the interstate toll and local markets are at their peak growth rates for the foreseeable future. Tight margins -- and high embedded costs -- could block certain competitors from entering the local exchange markets.