Resale Doesn't Count - Qwest Owns the Underlying Facilities; Omaha Experience Augurs Soaring Retail Rates if Qwest Wins Forbearance Bids in Four Western Markets
-- No Ability for Reseller to Innovate or Differentiate. Resale is nothing more than a carbon copy of the retail service as designed by the Baby Bell. The reseller has no ability to differentiate its product from that of the monopoly provider. -- Pricing Formula Ensures Eventual Business Failure for Resellers. Because the pricing differential is a simple discount, the wholesale rate moves in lock-step with the Bell's retail price, and the reseller can never compete on price independently. Further, while the monopoly can offer multiple calling features at negligible cost and huge profits, the reseller's profit on the same features can never exceed the wholesale/retail discount. Finally, the wholesale discount is insufficient to sustain the reseller's business -- high costs and negligible returns virtually ensure business failure. -- Bells' Control of Access Services Crimps Resellers' Profits and Product Flexibility. Only the Baby Bell -- never the reseller -- is permitted to provide access services to customers. The reseller must rely entirely on its retail revenues, while continuing to pay usage-based access charges to the incumbent, even to provide toll services to its own customers. This usage-sensitive cost structure bars the reseller from offering popular flat-rated bundles.Qwest Forbearance in Omaha Shows Failure of Commercial Offers According to Gillan, the earliest version of the Bell "commercial offer" -- the unbundled network element platform or UNE-P -- initially helped drive mass-market competition. At the time, competitors purchased generic loops, switching and transport from the Bell using cost-based rates set by regulators. Competitors set their own rates, terms and conditions independent of the Bell's retail pricing. But when regulators ended UNE-P in 2004 and gave pricing authority to the Bells, the commercial offer segment began a rapid decline. Gillan shows how lack of regulatory oversight reached its worst extreme shortly after Qwest's forbearance win in Omaha. Freed of requirements to offer unbundled loops and transports at cost-based rates, Qwest immediately raised wholesale prices. The net effect:
-- Wholesale volume collapsed as Qwest increased rates between 30% for individual DS0s and 178% for DS3s. -- Price increases fueled a significant decline in competitive activity, with UNE loop volumes declining by 25% for the entire state of Nebraska.Reflecting on the Omaha experience, the Gillan study concludes that "when the RBOC is permitted to set the price of its wholesale offerings without oversight, those wholesale offerings do not support retail competition and cannot constrain the retail pricing of the incumbent." TDS' Drew Petersen said, "The evidence shows that Qwest and all other regional bell operating company (RBOC) incumbents enjoy substantial market power for wholesale services. Because Qwest's resale lines and wholesale offers are their own facilities -- and not competitors' -- they do not exert any downward pressure on pricing, and should not be included in any analysis of competitive market share."
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