Intermodal Competition and Telecommunications Deregulation in Florida T William E. Taylor Senior Vice President 34th Annual PURC Conference February 16, 2007 Intermodal Competition and Telecommunications Deregulation Network convergence affects regulation. § Assumption of a single vertically­integrated ILEC network with dependent competitors drove regulatory structure – Long­distance carriers [1978 – 1996] – CLECs [1996 ­] – Led to economic regulation of both retail and wholesale services. § In theory, such dual regulation (wholesale and retail) is perilous. § In practice, with intermodal competition, deregulation of wholesale services must be considered. 1 Intermodal Competition and Telecommunications Deregulation Overview July 2006 § State of competition in Florida (2005): Intermodal Competition in Florida Telecommunications Prepared for: BellSouth Telecommunications, Inc., Embarq Florida, Inc., Verizon – Wireline carriers Florida Inc., and Windstream Communications Florida, Inc. – Intermodal carriers By — Cable William E. Taylor Senior Vice President — Wireless Harold Ware — VoIP Vice President — Joel M. David Fixed wireless Senior Analyst http://www.psc.state.fl.us/library/filings/06/06521­06/nera%20fl%20white%20paper.doc § Effects of wholesale regulation in these markets – Essential facilities – Wholesale regulation when the retail market is competitive? – Regulatory reform 2 Intermodal Telecommunications Competition in Florida 2005 Telecommunications Competition in Florida Florida PSC: “Status of Competition in the Telecommunications Industry as of May 31, 2005”: § [A] report on local competition would be incomplete without [an] analysis of the alternatives, such as wireless, cable (VoIP­based), broadband, and … (VoIP). These… intermodal competitors…have developed and evolved to challenge the traditional telephone wireline companies for market share. (p. 2) § Simple CLEC market share … understates the true market share held by competitors including wireless, cable, and other IP­enabled (Internet Protocol) providers. The gap between the CLEC market share and the true size of the competitive market share is unknown today, but we believe it will continue to grow as alternatives become more generally accepted. (p. 3) § In previous years, the analysis of this statutory requirement has focused primarily on the wireline sector of the telecommunications market. As noted throughout this report and the 2004 report, wireless and, to a lesser extent, VoIP competition have become a significant portion of the voice communications market…increasing numbers of customers are replacing traditional wireline service with these options and, therefore staff must conclude that they are providing functionally equivalent local exchange service to residential and business customers…. (p. 69) § 4 Wireline Subscription § Year­end 2000: about 3.4 million more 16,000,000 CLECs 14,000,000 ILECs Wireless Subscribers mass market (residence and small Wireless and Residential and Small Business Broadband s 12,000,000 er b business) wireline access lines than total i cr s 10,000,000 ub wireless subscribers and mass market r S o 8,000,000 s ne i L high­speed broadband lines. f 6,000,000 o ber 4,000,000 um § N Year­end 2002: about 1.3 million fewer 2,000,000 mass market wireline lines than total 0 wireless subscribers and mass market 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 Note: Due to differences in reporting, June 30, 2005 data are not available. broadband lines. Source: FCC December 2000­December 2004 Local Competition and High­Speed Internet Reports. § Year­end 2004: about 7 million fewer 12,000,000 ILEC and CLEC mass market lines Actual Lines 10,000,000 es Predicted Lines n combined than total wireless and mass i L 2.5 million lines 8,000,000 cess market broadband lines. c A d che 6,000,000 t i § w l S Trending residential access lines using a i t 4,000,000 en the historical relationship with population d esi suggests a more rapid reduction in R 2,000,000 ­ wirelines. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 5 Wireline Usage 50,000,000 45,000,000 Actual Local Calls § ) 40,000,000 Predicted Local Calls A dramatic decline in expected wireline ds n a us 35,000,000 o usage in Florida based on historical h 27 billion calls T 30,000,000 s ( ll relationships with population. a 25,000,000 l C ca o 20,000,000 l L ua 15,000,000 nn A 10,000,000 5,000,000 ­ 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 § A similar dramatic reduction in Florida 100.0% 84.0% e 80.0% s wireline long distance usage, as U f o s e 60.0% measured by the cumulative changes in t 45.9% 41.7% 37.5% Minu 40.0% 33.5% n i switched access minutes of use 1995­ e 20.7% ng 20.0% ha 2000 compared with 2000­2005. C e g a 0.0% nt e c r ­20.0% ­14.4% ­11.6% Pe ­23.8% ­40.0% ­31.4% BellSouth Verizon Embarq Windstream Total of 4 Carriers 1995­2000 2000­2005 Source: FCC, National Exchange Carrier Association, Network Usage Data. 6 Cable Telephony § Table 3 Cable telephony is widely Advanced Cable Services Are Widely Available in Florida Homes Passed Percent of Homes Passed available across Florida. Broadband Telephony Broadband Telephony Company Total Ready Ready Ready Ready Comcast 3,392,721 3,304,487 1,203,565 97.4% 35.5% – Cable passes 95% of Bright House 2,024,048 2,024,048 2,005,903 100.0% 99.1% Knology 334,379 334,379 334,379 100.0% 100.0% households Cox 332,308 332,308 332,308 100.0% 100.0% Atlantic Broadband 54,748 54,748 ­ 100.0% 0.0% Advanced Cable 44,255 44,255 44,255 100.0% 100.0% Mediacom 28,158 28,158 25,472 100.0% 90.5% – Cable penetration is 78% of Other 40,909 27,335 ­ 66.8% 0.0% Total 5,917,147 5,815,339 3,611,503 98.3% 61.0% homes passed Note: Because Knology is an overbuild operation, Knology homes are subtracted from the totals shown. As a result, totals include the primary provider only and may thus understate the services available. – Broadband deployed to 98% of Comcast includes the former Adelphia and Time Warner systems in Florida. Source: Warren Communications News, Cable Fact Book, GIS Format. homes passed Table 5 – Telephony enabled to 63% of Cable Telephony Share of Households homes passed. Cable Telephony Share of Households § Population Density First Half of Oct. 2005 ­ A substitute for basic telephone Area (persons/sq. mile) 2005 Mar. 2006 MSA Group 1 over 1,000 1.4% 4.7% service? MSA Group 2 500­1,000 0.8% 3.9% MSA Group 3 Less than 500 2.5% 4.4% Non­MSA Area 0.4% 3.7% Statewide 1.6% 4.4% Source: Cable share: TNS Telecoms ReQuest® Consumer Survey. 7 Cable Telephony § National penetration rates for Cox 21.6% Knology 20.8% cable telephony. Cablevision 19.4% Bright House 11.1% – Data presented in chronological Time Warner 8.0% Comcast 5.0% order of deployment (from top Charter 4.9% to bottom) Insight 11.6% Mediacom 9.1% – Penetration increases 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Source: VoIP Deployment & Strategies Update: Cable Operators , Broadband Advisory Services, Pike & Fischer, July 2006, p. 3; Bright House Networks Press Release, More than 225,000 Florida Families Switch significantly with time. to Bright House Networks Digital Phone: Now Announcing a Florida Unlimited Calling Plan , May 2, 2006 and Table 1; Knology Inc, SEC, Form 10­Q, March 31, 2006, p. 12. 140 100% C Circuit Switched Homes Passed a b l 90% e T § ) VoIP Homes Passed 120 e s l n e p Cable telephony availability is o 80% li Cable Telephony Homes Passed h o n 100 as % of All U.S. Homes y (Mil 70% H d e o s m forecasted to increase s a 60% e P s 80 s P e a s m 50% s o e d H dramatically. as y 60 n 40% o % h p o e f A l e 40 30% T ll le U b 20% .S a . C 20 H o 10% m e s ­ 0% 2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E Source: J. Halpern, et al., Bernstein Research, Quarterly VoIP Monitor: VoIP Growth Still Accelerating , April 18, 2006, Exhibit 12. 8 Cable Telephony 25 20.0% 18.0% § Cable Telephony Subscribers 20 16.0% Sha Cable telephony penetration is Share of U.S. Households ) r 14.0% e o f illions forecast to grow rapidly 15 12.0% U . M S. ( H rs 10.0% o us ibe r 10 8.0% e c ho § s 6.0% lds But from a small base as a Sub 5 4.0% proportion of addressable 2.0% ­ 0.0% households. Room for 2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E Source: J. Halpern, et al. ,Bernstein Research, Quarterly VoIP Monitor: VoIP expansion. Growth Still Accelerating , April 18, 2006, Exhibit 13. 9 Mobile Wireless § National penetration grown to 62% of the population and over 90% of the 20­49 population. $0.45 600 ) s r $0.40 § a l l 500 Dramatically lower prices and M o $0.35 i D n ( u e t higher usage volumes. t e u $0.30 400 s n o i f M U $0.25 r § s e e 300 p Substitute or complement? p e e $0.20 r u M n e o v $0.15 200 e § n t R h Substitute for basic exchange e $0.10 g a 100 r service? e v $0.05 A $0.00 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Minutes of Use Per Month Average Revenue Per Minute Source: FCC, Tenth Annual CMRS Competition Report, Table 8.