Dollar SignBusiness data services price regulation under consideration by the FCC would be harmful to competitive as well as incumbent providers, according to a report released today from the Georgetown Center for Business and Public Policy.

According to the analysis, a 15% decrease in business data services pricing could result in a decrease of 5% to 35% in unlevered free cash flow (UFCF) and decrease market valuations for incumbent and competitive providers.

“The damage from FCC-mandated price cuts to providers’ financial viability is likely to be magnified because their valuations reflect their cash flow, the expected growth of that cash flow, and the multiple investors are willing to pay on that cash flow,” writes report author Anna-Maria Kovacs. “As cash flow declines, so do multiples.”

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The impact of a mandated price decrease on UFCF would vary based on elasticity of demand and other factors, according to the author. Kovacs also finds that a 5% decrease in BDS prices could result in a decrease of up to 11% in UFCF and a 25% price decrease could result in a UFCF decrease of up to 62%.

According to the Georgetown Center research, competitive carriers would be harmed by potential price cuts because they would have to cut prices on their own services in many markets in response to incumbents’ new prices. The authors further argue that this is true even for competitive carriers that rely to a significant extent on purchasing connectivity from the incumbents, even though the competitive carriers would see lower prices for those connections.

Business Data Services Price Regulation
The Georgetown Center research, titled “Business data services:  The potential harm to competitive facilities deployment,” comes as the FCC considers whether to impose business data services price regulation and potentially to impose mandatory price decreases on business data services (BDS).

BDS services years ago were deregulated in some markets under the assumption that those markets were competitive. But when competitive service providers complained that markets were not as competitive as the FCC believed, the FCC put a freeze on deregulating any additional markets pending an investigation of BDS pricing.

That investigation has now been completed and, according to an FCC analysis, it shows a lack of competition in many markets – although incumbent telcos and cable companies have challenged that finding.

Other observations from the report:

  • A price decrease on BDS services will have the greatest impact on lower-speed TDM and Ethernet services. Therefore, despite assertions to the contrary, price decreases would do little to advance the migration from 4G to 5G wireless services. “5G will require far greater bandwidth than backhaul for current technologies,” the Georgetown Center report states.
  • Competitive carriers will be impacted by price regulation either indirectly or, in some cases, directly, according to the author. “If the FCC deems census blocks with fewer than four BDS providers to be non-competitive, about 98% of markets in which BDS is sold will be considered non-competitive,” the report states. “A test based on three or fewer providers is likely to result in over 90% of the markets in which competitive providers participate being deemed non-competitive.”

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