NetCompetition

In requesting the FCC and DOJ condition the Comcast-NBCU merger with Title II telephone regulation of Comcast’s Internet backbone, Level 3 seeks to achieve through the back door of the FCC what they could not achieve through the front door.

• In a speech December 1st, FCC Chairman Genachowski said he would not pursue Title II regulation of the Internet, the exact approach Level 3 is urging the FCC force on the Comcast-NBCU merger.

Level 3 has escalated this beyond a peering dispute to a de facto Title II price regulation precedent that Level 3 could then use to insist that all the industry should follow out of “fairness.”

Level 3′s extortionate tactics are destructive on many levels.

First, this bald attempt to set de facto industry-wide policy, via merger conditions, abuses due process, the Administrative Procedures Act, and sound policy making.

Second, this proposed condition has nothing to do with “preserving a free and open Internet,” and everything to do with changing the Internetfrom a “competitive free-market… unfettered by Federal and State regulation” to a Title II price-regulated Internet backbone where the FCC arbitrates Internet disputes like the FCC “fixed” CLEC disputes in the 1990′s.

Third, the Title II policy undergirding Level 3′s proposed conditions would be a predictable unmitigated disaster, because it would take a long-well-functioning Internet backbone peering system, which has scaled with the Internet because it is based on voluntary market-based negotiations, and break the system by making it just like the FCC’s 1990′s system of favoritism and subsidies of CLECs, which created such an uneconomic, regulatory-dependent industry that most all CLECs and fiber backbone companies went bankrupt.

• Those who don’t remember the lessons of history are doomed to repeat them.

Fourth, Level 3 is a financial-basket-case and failing business that effectively is claiming to be entitled to subsidies from competitors.

• This proposed condition is a shameless attempt to finagle an effective off-budget FCC bailout for a mismanaged company that can’t compete.

In sum, Level 3 is seeking corporate welfare while it masquerades as a antitrust victim.

• At core, Level 3 is asking the DOJ and FCC to change the Internet, and abandon the well-functioning unregulated Internet peering system for a proven-disastrous regulated Internet interconnection system.
  • That CLEC approach would obviously devolve into the FCC micromanaging most every market interaction like they actually did when the regulated access to bathrooms in the 1990′s.

The extent to which Level 3′s business is underwater is the untold story behind Level 3′s regulatory “hail Mary” claim that its Internet peering dispute with Comcast is somehow a net neutrality violation.

• Apparently Level 3 has concluded that since it hasn’t found a straight-up way to compete successfully in the Internet marketplace on its own, it wants an Internet regulation bailout from the FCC, in which the FCC would: deem Level 3 a market winner; price regulate the Internet for the first time; and force its competitors to implicitly subsidize Level 3 with mandated Internet peering price subsidies.
  • (To appreciate how bogus Level 3′s claims are, click here for a complete rebuttal.)

Why is Level 3 seeking a de facto Internet regulation bailout from the FCC?

First, Level 3 is a financially-sinking business with no legitimate growth prospects.

• With $6.5b in debt and $3.7b in revenues, Level 3 has long not been able to earn enough to fully pay the interest on its excessive debt.
• With its core Internet business largely flat over the last five years, Level 3 is addicted to serial debt re-financing to minimize the drain on its cash and stay afloat financially.
• Level 3 has a 98 cent stock that’s down ~30% over the past year and Level 3 has among the least desirable bonds in the entire sector.
• Prices in Level 3′s core Internet backbone business have been falling ~15% annually for many years.
• If Level 3 was a swimmer, they would be underwater slowly sinking, and breathing through a snorkel.

Second, Level 3 apparently has looked around the economy and seen how other heavily-indebted entities have negotiated effective bailouts from the government (in monetary investments and/or in regulatory favors): i.e. GM, the biggest banks, Fannie Mae, Freddie Mac, Sallie Mae, etc.

• Apparently, Level 3 imagined a political opportunity to finagle regulatory subsidies for itself by taking advantage of others’ regulatory vulnerability: i.e that Comcast has a merger pending approval at the FCC, and that the broadband industry faces new FCC Internet regulation.
• By using politically-loaded rhetoric that Comcast is demanding an Internet “toll” and “discriminating” against Netflix, a “cable competitor,” Level 3 has done everything to politically inflame and little to responsibly inform.

Third, Level 3 has a failed growth strategy via CLEC acquisitions.

• Since fierce competition in the Internet backbone space has prices falling roughly 15% a year, Level 3 has sought to grow its revenues by diversifying its business by using even more debt to buy CLEC local communications businesses.
• Apparently those acquired CLEC holdings, which often operate under telecom interconnection agreements, are agitating for Level 3 to try and transform the unregulated Internet business into a price regulated telecom business using Title II Internet regulation thinking.
• It seems that some of those old CLEC hands also want to try a redo of past FCC regulation of the local telecom business using Title II thinking where the FCC would intervene and effectively subsidize their business using larger competitors’ margins.
• Fortunately there are still many on the FCC staff who remember the carnage caused the last time the FCC imagined it could be master of the communications investment universe.
• Last time, fiber optic backbone companies like Level 3, WorldCom, Global Crossing, etc. lost a trillion dollars in market value and virtually all of the dozens of CLECs went bankrupt because they were based on regulatory-dependent, uneconomic business models.

In sum, we have seen this movie before –when the FCC tried to pick winners and manage the marketplace — and it was an epic disaster.

• The FCC should see the Level 3 claim that Comcast is somehow violating FCC Open Internet rules that no one in industry has ever seen, as a desperate attempt, by a financially desperate company, to change the longstanding rules and economics of the Internet marketplace, in order to bailout a failing business that negotiated a bad contract with Netflix, executed a bad growth strategy poorly, and is now trying to manipulate the regulatory process for its benefit alone.