Title

Revenge of the Bellheads: How the Telecommunications Mindset Will Reshape the Internet

Abstract

Recent double digit billion dollar mergers of telecommunications firms consolidate both market share and market leadership by incumbent operators such as Verizon. These companies seek to exploit technological and market convergence by offering a triple play package of wired and wireless telephone service, video and Internet access. As well they need to develop new profit centers to compensate for declining revenues and market shares in traditional services such as wireline telephony.

While incumbent telecommunications operators have pursued new market opportunities, these ventures have not abandoned core management philosophies, operating assumptions and business strategies. Longstanding strategies for recovering investments, using a telecommunications template greatly contrast with the means by which information processing and content providers achieve profitability. Internet ventures have come up with many different business models including ones that offer free, subsidized or deliberately underpriced access as well as regularly increasing value propositions to consumers, e.g., more options for the same price. Incumbent telecommunications firms rarely deviate from a rigid cost recovery structure that identifies cost causers.

Internet and telecommunications business models rarely jibe, even though convergence and business transactions puts incumbent telecommunications firms in market leadership positions. Having such dominant market share now makes it likely that incumbent telecommunications firms will attempt to imprint their business models and their mindsets on Internet markets. Recently senior managers of several incumbent carriers have expressed displeasure with the apparent inability of their companies to recover the sizeable investment in broadband Internet access. With an eye toward recouping these investments, the companies have announced plans to replace, or offer alternatives to unmetered All You Can Eat Internet access and to oppose any initiative that restrains their pricing and operational flexibility.

The incumbent telecommunications companies characterize their new Internet pricing plans as offering “greater choice” to consumers. Different pricing points based on throughput caps makes sense to a “Bellhead” corporate officer who thinks he or she can identify cost causers and capture rents that otherwise would accrue to content providers. However, the Internet seamlessly blends content and conduit, making it difficult to identify the cost causer.

This article will examine Bellhead business models incorporating metering and other traditional cost recovery strategies with an eye toward determining what constitutes reasonable price discrimination and what represents an unfair trade practice or an anticompetitive strategy. The article will consider whether and how Bellhead management strategies will jeopardize the serendipity and positive networking externalities that have accrued when users can freely “surf the web” and content providers can bundle user sought content with advertising. Different pricing points based on throughput caps makes sense to Bellhead corporate officers who think they can capture rents that otherwise would accrue to content providers.

The article also will examine the clash of Bellhead and Nethead cultures with an eye toward identifying the stakes involved when Internet access pricing and interconnection primarily follows a telecommunications infrastructure cost recovery scheme in lieu of different commercial relationships favored by most Internet ventures. The article concludes that most Bellhead cost recovery models are lawful even though they will reduce for most consumers the real or perceived value proposition offered by an unmetered monthly Internet access subscription.

Disciplines

Communications Law

Date of this Version

March 2006