The $45 Billion Market Where Businesses May Welcome Regulation

  • FCC seen voting to lower prices for business-data services
  • Corporations overcharged $75 billion in past five years alone
Photographer: Thomas Barwick/Getty Images

A $45 billion market is facing its biggest regulatory threat yet -- a measure that could dramatically cut the phone bills of businesses across the country.

The U.S. Federal Communications Commission could vote before year’s end to lower rates for business-data services, or BDS as they’re known. Offices, retailers, manufacturers, hospitals, schools and universities need these dedicated network connections to transport massive amounts of data from one point to another. Average consumers even use them every time they withdraw cash from an ATM or swipe their credit card at a store.

For years, just a handful of telephone companies -- AT&T Inc., Verizon Communications Inc., and CenturyLink Inc. -- dominated this little-understood but lucrative market, with cable giants like Comcast Corp. and Charter Communications Inc. having only recently joined the fray. Such concentration has resulted in overcharging American businesses -- to the tune of $75 billion over the past five years, according to the Consumer Federation of America.

“This is one of the most important fights going on in D.C. from a business perspective that the phone companies and the cable companies have managed to keep sort of tucked away as this arcane, incomprehensible D.C. policy fight,” said Colleen Boothby, a partner in the law firm of Levine, Blaszak, Block & Boothby LLP, who represents businesses that buy data services. “And it’s not.”

New rate regulations would send shocks through an industry that posted $45 billion in revenue in 2013, the last year the commission studied. Marc Rysman, an FCC-hired economist from Boston University, estimates that total sales for broader enterprise-level services could even top $75 billion annually. And AT&T, the nation’s largest phone operator, has the most to lose, according to Matthew Schettenhelm, a Bloomberg Intelligence analyst. AT&T’s so-called fixed strategic services and legacy voice and data services -- a new reporting category, which includes BDS -- made up almost 20 percent of its 2015 revenue of $146.8 billion, he said in a recent research note.

But so far the FCC hasn’t indicated when it might act. The agency is up against the clock in an election year while battling back industry arguments that enough competition already exists in the market to keep prices fair. The phone companies, for their part, point to the recent arrival of cable operators, the mergers of smaller providers and the rise of new technologies, which taken together have provided businesses cheaper and, in some cases, better alternatives.

Also still unclear is how much the FCC will cut rates. Bloomberg Intelligence says the commission may lower price caps by 11 percent to 16 percent, while smaller competitor Sprint Corp. is urging a 45 percent decrease. 

That would be welcome news to Shams Charania, a Dunkin’ Donuts and Baskin-Robbins franchisee in Georgia and Alabama, who subscribed to phone and internet services from AT&T for $150 to $160 a month per store before switching to a cheaper reseller. He now pays $116 to $131 a month per store. At one point Charania successfully negotiated a lower price with AT&T, but his bill went up again after only a couple of months, and he was forced to call back and haggle again before canceling.

“We own so many businesses,” Charania said. “So to keep doing that for each and every store was nightmare.”

Long Time Coming

The new regulations would be a capstone for Democratic FCC Chairman Tom Wheeler in what may be one of his last major initiatives.

Wheeler said the government’s intervention is needed not only to bring rates down but to advance the next generation of wireless technology, 5G. Mobile-phone providers like Sprint rent space on these high-capacity lines for their customers’ data traffic, and have called for cheaper prices -- a sore point for the nation’s largest telcos. USTelecom, a trade group that represents providers including AT&T and Verizon, said in a white paper in February that Sprint has advocated rate regulation in lieu of building out its own facilities to better compete in the market.

The big providers also claim the FCC is moving too hastily. In a June blog posting, AT&T said the FCC has ignored standard processes to achieve a desired result.

“It’s just very fast when you look at how things are done at the FCC from when the comments, replies, writing the order, getting it done,” said Melissa Newman, vice president of federal regulatory affairs for CenturyLink, in an interview. “It’s just not a lot of time.”

Jennifer Fritzsche, an analyst with Wells Fargo & Co., said the FCC’s rules might have greater impact on a company like CenturyLink, which gets about 64 percent of its revenue from business customers and relies more on its landline phone and broadband business for growth. For AT&T in particular, new price caps “probably won’t move the needle” since about half of company’s revenue comes from pay-TV and wireless, she said.

Cable operators, meanwhile, have invested in network expansion to capture a slice of the market -- and it’s paid off. Over the past 10 years, cable companies including Comcast, Time Warner Cable, Charter, Cox Enterprises Inc. and Cable Systems Corp. have emerged as what the FCC has described as “significant suppliers” of business-data services.

“It’s probably a bigger deal for cable,” Fritzsche said. “Even though AT&T has more exposure, cable is being very loud and speaking out against this because they’re not really regulated.”

The FCC proposed the rules on April 28, and received final comments from the public on Aug. 9. The next formal step is to cast a final vote, which could happen during either the commission’s Sept. 29 or Oct. 27 meetings, according to Schettenhelm, the Bloomberg Intelligence analyst. That could be an aggressive timetable. 

Kim Hart, a spokeswoman for the agency, said Wheeler has “laid out an ambitious agenda on behalf of American consumers that he intends to carry out.”

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