The Other Duopoly

Most of the anxiety about AT&T’s proposed merger with T-Mobile centers on the wireless market. Critics say that the deal will create a duopoly in which AT&T and Verizon control nearly 80 percent of the wireless business. But, in fact, that nightmare may already exist -- in an entirely different arena: the complex system of payments for landline services. As Rep. Darrell Issa (R-CA) complained at a hearing last month, “We’re reassembling a duopoly in the back end.”

That “back end” refers to landline communications companies that lease access to their networks -- a market variously referred to as backhaul, special access, or high capacity. The good news is that there is a fair amount of competition when it comes to carrying voice and data traffic between large cities. The bad news is that there are a lot fewer options -- and sometimes just one -- when it comes to the “last mile” connection between these competitive networks and, say, a medium-sized office building or a cell-phone tower next to a highway. Together, AT&T and Verizon own 70 percent of backhaul nationwide, according to the NoChokePoints coalition, an interest group. What the Federal Communications Commission does about it may come to define the telecommunications market for years to come. Ownership of those landline networks gives players a major competitive advantage. When the FCC deregulated the special-access market in the mid-1990s, interstate special-access fees made up only 5 percent of Verizon’s and AT&T’s total revenues. But consolidation, and the lack of competition, allowed them to raise the price for back-end use. By 2007, the service had jumped to almost 25 percent of Verizon’s revenue and about one-fifth of AT&T’s income, according to a 2009 report by the National Regulatory Research Institute that provides the latest available data. “The backhaul issue is the Rodney Dangerfield of telecom issues—it never gets the respect it deserves,” said Maura Corbett, executive director of NoChokePoints, whose coalition includes public-advocacy groups and wireless companies such as Sprint. “It is the plumbing of the Internet and wireless communications,” she said. The coalition is urging the FCC “to determine what changes are necessary to ensure reasonable prices.”