Just about everyone across the nation knows about the big historical fight between AT&T (NYSE: T) and Verizon (NYSE: VZ) for dominance in the telecom industry, as the two massive telecom providers have extensive wireless networks and a host of related services they've deployed in an effort to grab as much market share as possible in the lucrative U.S. market.
On that score, smaller players like Frontier Communications (NASDAQ: FTR) and CenturyLink (NYSE: CTL) don't really pose a big competitive threat to Verizon and AT&T, but they do have ambitious plans of their own to try to tap into some of the more profitable niches in the telecom arena.
Recently, though, the FCC issued an order beginning an investigation into the competitive practices of these four carriers, and that could pose a threat to the business models that CenturyLink and Frontier in particular have pursued over the years. Let's take a look at what the FCC order says and what it means for the nation's telecom leaders.
What the FCC is investigating
Last week, the FCC issued an order initiating an investigation into how these four companies, which the Commission calls incumbent local exchange carriers, establish tariff pricing plans for business data services. These special access services typically involve dedicated transmission lines for clients that avoid the use of local switches. Unlike consumer broadband Internet services, which are not subject to rate regulation, the incumbent local exchange carriers still have to meet FCC regulatory requirements that cover dominant carriers.
Frontier, CenturyLink, AT&T, and Verizon have done a good job of maintaining their dominance over the dedicated transmission facility market despite the entry of competitors into the field. Yet their smaller competitors have asserted that the four carriers have established their pricing plans in a way that locks competitors out of market, with provisions like loyalty and term commitments as well as complicated penalties for breaching agreements. In the end, competitors often end up having to buy business data services from whichever of the four incumbent carriers has available capacity, and they argue that the contractual provisions surrounding such arrangements prevent them from building up their own infrastructure, slowing innovation and effectively denying a true competitive market from forming. Competitors also believe that what the incumbent carriers are doing is slowing the transition toward packet-based special access services like Ethernet.
In addition, smaller carriers assert that even though CenturyLink, Frontier, AT&T, and Verizon sometimes describe their tariff rates as discount plans, the pricing they offer is higher than what smaller competitors would provide. Some competitors cited specific situations in which their services would have been much cheaper than what some of the incumbent carriers charge. Combined with terms that require customers to commit to sustaining past purchase levels for services, competitors have found it extremely difficult to break into existing markets.
Should Frontier and CenturyLink worry?
The FCC order includes responses from the four carriers to these allegations, but most of those answers come from AT&T and Verizon. The named incumbent providers argue that their pricing plans only require percentage commitments in terms of purchases made through that carrier, thus leaving customers free to pursue other carriers at will. Moreover, with other ways to obtain services from these carriers other than through these particular pricing plans, the carriers assert that customers can make their own choices rather than being "locked in" to the tariff plans at issue. Offering discounts for various commitments, moreover, is an efficiency-enhancing measure that reduces risks for buyers and sellers alike, and these companies claim the market for business services in general is healthy and competitive.
CenturyLink spoke out against the FCC move, arguing that the regulatory commission "is searching for a problem that doesn't exist." Frontier didn't issue a statement concerning the order immediately after its release.
Both Frontier and CenturyLink have sought to hone in on the most promising areas of their business, and catering to corporate customers is one of the growth areas in the industry in which telecom players are all fighting for competitive position. Frontier has identified the enterprise market as a particularly important source of potential new business, especially among small and medium-sized businesses that traditionally haven't gotten as much attention from larger telecom companies. Anything that limits the ability of CenturyLink, Frontier, and their larger peers to take maximum advantage of their existing assets could reduce the value of the corporate strategies they're pursuing.
In the end, the massive number of residential customers that Frontier and CenturyLink serve should act as a buffer against any adverse decision from the FCC in the business data services arena. Nevertheless, if the FCC requires more competitive pricing practices, it could take away some of the leverage that these companies have over their peers, and that in turn could make investors a bit more wary of their growth plans going forward.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.