XO Communications and Leading Competitors to FCC: Resale Lines Inflate Qwest's Competitive Market Analysis and Invalidate Forbearance Bids

WASHINGTON, DC--(Marketwire - May 15, 2008) - A group of competitive telecommunications companies today filed a study with the Federal Communications Commission ("FCC") exposing Qwest's use of resale lines and "commercial offers" as the latest example of flawed data the Baby Bell is relying on to support premature bids for regulatory forbearance.

The new study by Gillan Associates, "The Irrelevance of Resale and RBOC Commercial Offers to Competitive Activity in Local Markets," blasts the common Bell practice of padding competitive market assessments with their own resale and "commercial offer" lines owned by the incumbent provider.

The study, commissioned by TDS Metrocom, concludes that resale lines and "Commercial Offers" are meaningless in any retail market analysis because they impose no price constraints on the incumbent and provide no meaningful commercial opportunity for competitors. This finding exposes a central weakness in Qwest's current petitions for regulatory forbearance in Denver, Minneapolis, Phoenix and Seattle -- adding in its own resale and commercial offer facilities in a so-called "competitive line count."

Drew Petersen, Director-Legislative and Public Relations at TDS, said, "Qwest's inclusion of its own resale facilities exaggerates the state of competition in these four markets. The use of such data represents a distortion of the facts, and a desperate attempt by Qwest to meet the test of market competition required for approval of forbearance."

Heather B. Gold, senior vice president of external affairs at XO Communications, said, "Qwest has attempted to puff up its numbers in a variety of ways. First they fobbed off 'wireless substitution' as competition to wireline service, which is completely erroneous. Now Qwest is adding in its own resale service, which is irrelevant. The only test of market share that matters is the proof of successful, facilities-based competition."

According to the Gillan study, the resale market has never constituted a significant market presence, having reached its peak in 2000 serving less than 3% of the market. In addition, "commercial offers" -- wholesale products with rates set by the Bell -- have shown rapidly decaying volumes since their introduction in late 2004.

Competitive Irrelevance of Resale

Gillan cites three reasons why resale is structurally deficient and should not be used in any calculation of facilities-based competitive market share:

--  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."

Contact Information: Contact: Jim Crawford Crawford Public Relations T: 703-753-4480 M: 703-498-7315