# Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking To Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2017-10713

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 2, 2017
- **Citation:** 82 FR 25660

## Text

FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 0, 1, 61, 63, and 69
[WC Docket Nos. 16-143, 05-25, GN Docket No. 13-5, and RM-10593; FCC 17-43]
Business Data Services in an Internet Protocol Environment; Technology Transitions; Special Access for Price Cap Local Exchange Carriers; AT&T Corporation Petition for Rulemaking To Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, a Report and Order provides a new framework for deregulating Business Data Services in areas where competitive forces are able to ensure just and reasonable rates. Acknowledging the presence of increased competition evidenced by the record in this proceeding, the Federal Communications Commission amends its rules to reflect changes in the business data services marketplace. By adopting this framework the Commission acts to further bolster competition and investment in business data services, and takes further steps to decrease the cost of broadband infrastructure deployment.

DATES:

Effective August 1, 2017, except for the amendments to §§ 1.776, 61.45, 61.201, 61.203, and 69.701, which shall become effective after OMB approval of those amendments. The Federal Communications Commission will publish documents in the
Federal Register
announcing the effective dates.

FOR FURTHER INFORMATION CONTACT:

Joseph Price, Wireline Competition Bureau, Pricing Policy Division at (202) 418-1423 or
Joseph.Price@fcc.gov
.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Report and Order, FCC 17-43, adopted April 20, 2017, and released April 28, 2017. The summary is based on the public redacted version of the document, the full text of which can be found at the following internet address:
https://apps.fcc.gov/edocs_public/attachmatch/FCC-17-43A1.pdf
. To request alternative formats for persons with disabilities (
e.g.,
accessible format documents, sign language, interpreters, CARTS, etc.), send an email to
fcc504@fcc.gov
or call the Commission's Consumer and Governmental Affairs Bureau at 202-418-0530 (voice) or 202-418-0432 (TTY).

Synopsis

I. Introduction

1. After more than ten years of studying the business data services (also referred to as BDS) market, numerous requests for comment, and a massive data collection, we at long last recognize the intense competition present in this market and adjust our regulatory structure accordingly. The record in this proceeding demonstrates substantial and growing competition in the provision of business data services in areas served by incumbent local exchange carriers (LECs) subject to price cap regulation. By adopting a framework which accounts for these dynamic competitive realities, we will create a regulatory environment that promotes long-term innovation and investment by incumbent and competitive providers alike which well-serves business data services customers.

2. The record indicates the market for business data services is dynamic with a large number of firms building fiber and competing for this business. The
2015 Collection
identified 491 facilities-based companies providing business data services in the enterprise market. Competitive LECs such as Zayo and Birch continue to invest and expand their competitive fiber networks with very successful results. Competitive LECs earned $23 billion of the $45 billion in business data services revenue in 2013. Cable providers have also emerged as formidable competitors in this market. Cable business data services are reported to have grown at approximately 20 percent annually for the past several years and, increasingly, they have emphasized Internet access and managed services, which directly compete with the products being offered by the incumbent and other competitive LECs.

3. Although incumbent LECs once dominated the business data services market selling circuit-based DS1s and DS3s, such technology is becoming obsolete. Significant increases in bandwidth demand are being driven by bandwidth-hungry applications, mainly video services (teleconferencing, training, etc.) as well as by web and cloud-based services. These rapidly increasing bandwidth demands will place an ever increasing demand for services such as Ethernet, especially over fiber, which can scale bandwidth to meet these requirements more effectively than can the old legacy services. Packet-based services, which include Ethernet, already make up a large part of the business data services marketplace. In 2013, more than 40 percent of the approximately $45 billion in dedicated service revenues were for packet-based services. Based on provider and analyst forecasts, we expect this shift from circuit-based to packet-based services to continue at a rapid pace.

4. Against this competitive backdrop, we now move away from the traditional model of intrusive pricing regulation for incumbent LECs, recognizing that ex ante pricing regulation is of limited use—and often harmful—in a dynamic and increasingly competitive marketplace. Indeed, there is a significant likelihood ex ante pricing regulation will inhibit growth and investment in many cases. In such circumstances, we should not continue unnecessary regulations, much less extend them to new services or providers. Instead, we adopt a framework based on our market analysis and a careful balancing of the costs and benefits of ex ante pricing regulation that deregulates counties where the provision of price cap incumbent LECs' business data services is deemed sufficiently competitive.

5. This Report and Order (Order), therefore, provides a new framework for business data services that minimizes unnecessary government intervention and allows market forces to continue working to spur entry, innovation, and competition. Our decisions stem from careful consideration of the data submitted in the proceeding and the thoughtful comments and ex parte communications submitted into the record. Our thinking on how to evaluate competition and design pricing regulation evolved as we engaged with economists, advocates, and others to develop an administrable approach to deregulate in areas where competitive forces are able to ensure just and reasonable rates. To a large extent in the business data services market, the competition envisioned in the Telecommunications Act of 1996 (1996 Act) has been realized, and this Order is an important step in updating our rules to adequately reflect such market developments. We reach these conclusions aware of the increased investment in facilities and service deployment that has occurred in response to similar deregulatory action by the Commission. In tandem with adoption of this new, more appropriate framework designed to maximize competition and investment in business data services, we are also taking further steps to decrease the costs of deploying our nation's broadband infrastructure.

II. Background

6. Business data services refers to the dedicated point-to-point transmission of

data at certain guaranteed speeds and service levels using high-capacity connections. Henceforth, we refer to special access services as a subset of business data services that we continue in some circumstances to subject to ex ante pricing regulation. Specifically, special access services include DS1 and DS3 interoffice facilities and channel terminations between an incumbent LEC's serving wire center and an interexchange carrier (IXC), and end user channel terminations, although ex ante pricing regulation would only apply to certain end user channel terminations. Businesses, non-profits, and government institutions use business data services to enable secure and reliable transfer of data, for example, as a means of connecting to the Internet or the cloud, and to create private or virtual private networks. Business data services support applications that require symmetrical bandwidth, substantial reliability, security, and connected service to more than one location. Business data services are significant to our nation's economy—revenues reported by providers in response to the
2015 Collection
total almost $45 billion for 2013, and revenues for the broader market for enterprise services, which include voice, Internet, private network, web-security, cloud connection, and other digital services, could exceed $75 billion annually. Moreover, these numbers do not capture the indirect contribution of business data services to the nation's economy as business customers rely on these services for their commercial operations.

7. The Commission has historically subjected the provision of business data services by incumbent LECs to dominant carrier safeguards. The focus of this proceeding is on areas where incumbent LECs are subject to price cap regulation in setting their business data services rates. Beginning in 1999, through a series of Commission actions, the Commission: (1) Began granting price cap incumbent LECs pricing flexibility by establishing both Phase I relief (which permitted the provision of volume and term agreements and contract tariffs) and Phase II relief (which relieved the carrier of price cap regulation) through “triggers” using collocation as a proxy for competition; (2) adopted the “CALLS plan,” which separated business data services into its own basket and applied separate “X-factors;” (3) initiated a rulemaking to examine a number of aspects of the business data services market, including whether to apply and how to calculate a productivity-based X-factor and whether to maintain or modify the pricing flexibility rules; and (4) granted a number of price cap incumbent LECs forbearance from dominant carrier regulation, including tariffing and price cap regulation for their newer packet-based and higher bandwidth optical transmission broadband services, including a “deemed grant” for Verizon from application of Title II to these services.

8. In August 2012, the Commission suspended its pricing flexibility rules because they were “not working as predicted, and . . . fail[ed] to accurately reflect competition in today's special access markets.” In December 2012, the Commission released the
Data Collection Order and FNPRM,
to collect data, analyze how competition, “whether actual or potential, affects prices, controlling for all other factors that affect prices,” and “determine what barriers inhibit investment and delay competition, including regulatory barriers, . . . and what steps the Commission could take to remove such barriers to promote a robust competitive market and permit the competitive determination of price levels.” The Commission planned to use the results of its analysis to evaluate whether to change its existing pricing flexibility rules “to better target regulatory relief in competitive areas” and evaluate remedies to address potentially unreasonable terms and conditions. The Bureau released the
Data Collection Implementation Order
on September 18, 2013, clarifying the scope of the collection. Pursuant to the Paperwork Reduction Act (PRA), the Office of Management and Budget (OMB) approved the data collection subject to modifications which the Bureau implemented in an order released on September 15, 2014. By February 27, 2015, the last group of filers were required to respond to the
2015 Collection.

9. Most recently, the Commission released the
Tariff Investigation Order and Further Notice
on May 2, 2016. The
Order and Further Notice
declared certain terms and conditions in the tariffs of the four largest incumbent LECs unlawful, proposed to replace the existing business data services regulatory structure with a new framework, and sought comprehensive comments on the proposed new framework.

III. Competitive Conditions for Business Data Services

10. In this section we consider competition among traditional and non-traditional providers of end-to-end business data services and the circumstances under which market conditions warrant a deregulatory approach for certain business data services consistent with our obligation to ensure that the rates for services offered by common carriers are just and reasonable. In the present rulemaking, the Commission has already determined that significant aspects of the pricing flexibility regulatory regime have failed. Thus, we must now decide whether to allow that failure to continue or to implement changes. As is often the case with complex problems, there is no ideal dataset available or which we could collect in a reasonable timeframe or expense, which would answer all doubts. Although the
2015 Collection
was critical to our analysis of competition in BDS markets, it was not the only data, or data analysis, relied upon to reach the conclusions here. Analysis of varying data and market realities in the record also are relied upon as part of the determination of where competitive pricing pressure exists, and the fuller analysis is considered within the context of our commitment to implement administrable regulatory changes. As such, we have carefully parsed the available evidence and apply reasoned judgment to decide the questions before us.

11. The Commission is charged with ensuring that the rates, terms, and conditions for services offered by common carriers are just and reasonable and that services are not offered on an unreasonably discriminatory basis pursuant to sections 201(b) and 202(a) of the Communications Act. We “may prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this Act.” In addition, section 706(a) of the 1996 Act states that the Commission:

shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

12. Our public interest evaluation “necessarily encompasses . . . among other things, a deeply rooted preference for preserving and enhancing competition in relevant markets [and] accelerat[ing] private sector deployment of advanced services.” A competition analysis is critical to our public interest evaluation and is informed by, but not

limited to, traditional antitrust principles designed to protect competition. The Commission, in conducting an analysis, may “consider technological and market changes as well as trends within the communications industry, including the nature and rate of change.” Analyzing the competitive nature of the market for business data services will allow us to make a determination about the appropriate way to balance the costs and benefits of applying ongoing regulation to particular business data services.

13. For business data services provided over DS1s and DS3s supplied by the incumbent LEC we find that a nearby potential business data services supplier, in the form of a wired communication network provider, generally tempers prices in the short term and results in reasonably competitive outcomes over three to five years (the medium term). For example, a cable company that has fiber nodes nearby, and hence the ability to provide both Ethernet-over-fiber and, even more readily Ethernet-over-Hybrid Fiber Coax (EoHFC), if a profitable opportunity arises, is particularly relevant to pricing decisions of a business data services provider wishing to retain a customer.

14. Our conclusion is based in part on record evidence indicating a cost structure for business data services that incentivizes suppliers with existing networks to compete vigorously for customers. We also base our conclusion on findings that the impact of the first entrant on price will be substantially higher than the impact of subsequent entrants and business data services pricing is often determined by a customer bidding or request for proposal (RFP) process in which even an uncommitted, though usually nearby, entrant can compete for the customer's business, and then build out to the customer. Consequently, the presence of nearby competitive facilities tempers pricing as competitors are generally aware of competitive facilities that can be expanded to reach an additional customer with reasonable costs should the incumbent's pricing exceed competitive levels (supracompetitive prices). Furthermore, where an incumbent sets supracompetitive prices it is vulnerable to competitors vying for customers.

15. Together the evidence demonstrates how even a single competitor exerts competitive pressure which results in just and reasonable rates. This evidence demonstrates that the significant network investment required to provide business data services to end users is increasingly being leveraged in ways that prevent substantial abuses of market power. Given such incentives, the presence of two current competitors or providers with their own fiber nodes within a half mile, hereafter referred to as medium-term entrants, or that will serve over the medium term, are sufficient to provide competitive pressure to adequately discipline prices. Our finding is also based on evidence of competition that is currently in place or likely to arise over the medium term.

16. In addition, we find that business data services with bandwidths in excess of the level of a DS3 generally experience reasonably competitive outcomes, and to the extent they do not today, will do so over the medium term even where a facility-based competitor has no nearby facilities. We come to this conclusion based on a record that shows almost no evidence of competitive problems in the supply of these higher bandwidth services, and which shows higher bandwidth opportunities are particularly attractive to competitive LECs. We make a similar finding for transport services, where the record presents little evidence of competitive problems, and where low bandwidth demand is quickly turning into high bandwidth demand. We make a similar finding for lower bandwidth packet-based services. We reach these conclusions because, compared with time division multiplex (TDM) services, competitive LECs are considerably more active in the supply of packet-based services, are on a considerably more level playing field in supplying these new services against incumbent LECs, and have better incentives to supply such future-proof services where demand is growing rapidly.

A. Introduction

17. We analyze the
2015 Collection,
and look to analyses and other evidence submitted in this proceeding, to reach findings concerning competiveness in the business data services industry. In conducting our analysis, we consider market concentration as highly relevant, but do not find it determinative absent consideration of market dynamics. We also look at specific market-based circumstances when considering actual and potential sources of competition.

18. In this section, we review the competitiveness of business data services, in general, as well as issues raised by commenters. We reach findings as to the degree of competitiveness in the business data services industry and consider industry trends on competitive entry. We look to see if services are reasonably substitutable to determine an appropriate product market, and, in the case of geographic markets, we look to areas “in which the seller operates and to which the purchaser can practicably turn for supplies.” As part of that analysis we observe high barriers to entry, but also observe a significant penetration of competitive business data services facilities being deployed and upgraded with a number of technologies throughout the country, particularly in areas with significant customer demand. Moreover, we observe a strong willingness on the part of providers to extend their networks half a mile to meet demand, especially over the medium term.

19. Consistent with antitrust principles, we distinguish product markets by generally looking at whether various services are reasonably interchangeable, with differences in price, quality, and service capability being relevant. In the case of geographic markets, we look at both supply and demand substitution. For both product and geographic markets, it is conventional to undertake a hypothetical monopolist test to determine market definitions. That approach begins with the smallest plausible market definition and considers likely consumer substitution if a hypothetical monopolist in that market imposed a small but significant and non-transitory increase in price (SSNIP). We do not have data that would enable a more formal application of such a test, but our market analysis considers purchasers' willingness and ability to substitute services, suppliers, and geographies. The extent to which supply is broadly competitive wherever the incumbent LEC also faces a facility-based rival is strengthened by our findings as to specific product markets, and refined by our analysis of geographic markets.

B. Product Market

20. When defining a product market, to ensure our action affects an appropriate group of services, we look to which services are sufficiently similar to reasonably be considered substitutes. We consider a number of factors, including the “practical indicia” identified by the Supreme Court, such as “industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Not all of these factors must be present to define the relevant product market. Perfect substitutability is not required as part of our broad review of business

data services markets and our narrow consideration of certain special access service inputs that comprise a full business data services customer circuit.

21. A product that substitutes for another demonstrates a possibility that consumers will purchase the competing service of a competitor, including a potential entrant. Consequently, we consider providers with facilities used to supply one service that could be used to provide another. For example, we see not only substitution between circuit- and packet-based business data services, but the capacity to supply both services over the same underlying facilities, indicating the two services are likely in the same market, and more importantly, that suppliers of either service are in the same market, as they could readily provide the other service over their facilities. Similarly, while best-efforts services do not generally appear to be a good substitute for business data services (and
vice versa
), legacy hybrid-fiber-coaxial (HFC) and copper (in fact, generally hybrid-fiber-copper) facilities are commercially used to provide low bandwidth business data services (if not always at the highest commercially available quality standards). Unbundled network elements (UNEs), dark fiber, and fixed wireless services and facilities used to provision business data services also play competitive roles in business data services markets.

1. Circuit- and Packet-Based Business Data Services

22. The legacy technology for providing business data services is circuit-based using TDM. Incumbent LECs are the primary facilities-based suppliers of TDM-based services, including DS1s and DS3s with symmetrical capacities of 1.5 Mbps and 45 Mbps, respectively. For decades, these workhorses were the only options available to meet the high-capacity needs of users. TDM circuits provide dedicated, secure, reliable and low-delay transmission service for moving voice, data, and video traffic, but do not effectively scale for data intensive applications. To increase bandwidth for DS1s/DS3s, providers must bond multiple circuits together. For example, providers can bond up to eight DS1s to achieve a maximum bandwidth of 12 Mbps. DS3s are rarely bonded, however, because with the increased cost, the more logical option is to use a newer technology, such as a packet-based service. In contrast, packet-based services have bandwidth options ranging from 2 Mbps up to 100 Gbps, depending on the connection medium, and are easily scaled over fiber to meet increasing data demands.

23. Because packet-based networks move packets over a shared transport channel, they are more efficient than a circuit-based network where transmission capacity is reserved even when not used. The routing and reassembling of data packets, however, can lead to packet loss, jitter, and latency, affecting the quality of service needed to support certain applications desired by users,
e.g.,
real-time and mission critical applications. Providers can mitigate these delays through packet prioritization and setting performance parameters, like assigning different classes of service and quality of service levels (with, for example, Service Level Agreements (SLAs)). In this way, providers can shape and differentiate networks to improve performance to meet the specific needs of users. Backed by performance guarantees, packet-based business data services can provide the same, if not better, level of security, reliability, and symmetrical speeds as a DS1 or DS3 service. Packet-based business data services can also accomplish this with greater efficiency and scalability to satisfy a user's growing bandwidth demands.

24. Functionally, TDM and packet-based services are broadly interchangeable in the business data services realm as both are used to provide connectivity for data network and point-to-point transmissions and both services can be delivered over the same network infrastructure. Incumbent and competitive LEC providers offer both types of services to similar types of customers and their marketing materials juxtapose these two technologies against each other. Customers of TDM-based services are also switching to packet-based services. And commenters representing suppliers agree, with limited exception, the services, whether circuit-based or packet-based, are substitutes and in the same product market.

25. Substitution between these two services, however, is generally one directional. New customers, more likely than not, are choosing to purchase Ethernet services, subject to their availability and pricing, and existing customers of TDM-based service are switching to Ethernet. There is no evidence suggesting Ethernet customers are switching to DS1s and DS3s. Nor as a policy matter would we want that to occur as the technology transition is moving towards the eventual termination of TDM service offerings altogether. We want to encourage that migration, while mitigating disruptions to existing customers, to help unleash the benefits of network innovation for American businesses and consumers. We note, however, that adopting a framework that promotes deployment of competitive services, as we do here, benefits even those customers who maintain TDM services due to static needs—or for whatever reason—because increased competition for these services is likely to place downward pressure on prices.

26. We find circuit- and packet-switched business data services that offer similar speed, functionality, and quality of service characteristics fall within the same product markets for the purposes of action taken here, even though there is evidence suggesting the two technologies have important distinctions. Indeed, the Commission has long considered TDM and packet-based business data services as functionally interchangeable at comparable capacities and has consistently included both types of business data services in its orders and forbearance decisions. Courts, in turn, have upheld the Commission's view. Although commenters have pointed out some differences between these technologies, there is considerable evidence in the record indicating that the Commission's view on sufficient substitutability of circuit and packet business data services still holds. We believe that legacy TDM business data services suppliers would be constrained by the threat of potential customer loss to packet-based business data services suppliers.

2. Ethernet Over Hybrid-Fiber Coax

27. Packet-based business data services over fiber are the gold standard for the industry because they provide the greatest flexibility to efficiently scale bandwidth to the highest speeds at the highest performance levels. There is debate in the record, however, on whether we should include the packet-based Ethernet services provided by cable companies using their HFC networks in the product market for business data services. Our review of the record now confirms that competitive pressure on low bandwidth packet-based services carried on fiber and legacy TDM services is significant, and should be taken into account as part of any competitive market test.

28. In many ways, EoHFC is much like other modes of business data services. Ethernet-over-HFC technology provides point-to-point wireline connection at symmetrical speeds, albeit limited to 10 Mbps. Although EoHFC is not as reliable as circuit-switched or fiber connections, some cable companies are able to guarantee 99.9 percent availability (as compared to fiber's 99.99 percent). In addition to

availability, some cable companies offer further performance guarantees, addressing jitter, latency, packet loss, availability, and mean time to repair their Ethernet over Data over Cable Service Interface Specification (DOCSIS) service. Comcast targets its EoHFC service to “[c]ustomers with low to medium bandwidth requirements that need enterprise features.” Wholesalers, for instance, are increasingly leaning on the cable industry's vast EoHFC network to address the needs of their multi-regional customers. AT&T “has certified both fiber-based and HFC-based Ethernet offerings from cable companies for use in [its business data] services, as well as for use in [its] backhaul services.” Similarly, Sprint has announced that it now provides business data services over cable company facilities, including EoHFC.

29. Cable network architecture is constantly evolving to meet bandwidth needs. Yet, some cable providers contend that their EoHFC business data services are not substitutable with fiber business data services because they do not offer SLAs, or where they do so, they are limited, for example, guaranteeing only repair intervals and availability for their Ethernet over DOCSIS service. Some wholesalers echo this view, reporting that they do not consider EoHFC (DOCSIS 3.0) as competitive with their services mainly because of limited availability, performance issues, and inadequate SLA guarantees. However, the record shows that while these performance levels may be undesirable for some customers, many others readily accept lower performance guarantees in exchange for lower prices. We believe that a significant tipping point has been reached in the evolution of these services when even incumbent LECs such as Verizon and AT&T are using these services for their own business customers out-of-region.

3. “Best-Efforts” Internet Access Services

30. Best-efforts Internet access services describe basic Internet access as generally marketed to residential and small business subscribers. At the most-basic level, best-efforts and dedicated business data services appear to be interchangeable: End users can use both services to access the Internet or create virtual private networks. However, best-efforts Internet access is provided with asymmetrical speeds and without service performance guarantees. Whereas dedicated packet-based business data services allow for packet prioritization and quality of service priority tiers, best-efforts services do not. Also, while dedicated business data services commonly provide at least 99.9 percent network reliability, with higher guarantees being available for fiber services, and guarantees for latency and jitter, best-efforts services generally do not offer any reliability guarantees, although some cable providers offer some non-binding performance “assurances.”

31. In the
Further Notice,
the Commission stated that “it is likely that best effort services may not be in the same product market or markets as BDS,” and sought comment on its analysis. However, the record includes evidence of incumbent LECs losing small- and medium-sized customers to cable's best-efforts offerings, despite noticeable differences in performance and prices between business data and best-efforts services. In many circumstances, customers are willing to trade guaranteed service levels for higher bandwidth and better prices while receiving some symmetricity. Cable providers routinely pitch their best-efforts business broadband services to customers as substitutable for legacy TDM services. Charter, for example, markets its Business Internet Essentials16 services as “more than 13 times faster than T1.” And the record shows cable has been largely successful in growing its best-efforts business broadband services: “Comcast reports a [REDACTED] increase for best efforts business broadband services from 2014-2015” and “TWT reports a [REDACTED] from 2014 to 2015 increase in its BIA (its best-efforts HFC service).” Incumbent LECs are noticing this competition. For example, AT&T explains that its sales team has discovered that “for the thirteen-month period from November 2014 through November 2015,

a very substantial portion of AT&T's competitive losses were to cable companies and a significant portion of those losses were to best efforts cable services.” We, therefore, observe substitution and best-efforts networks supporting business data services for certain customers, but we do not observe broad substitution or substantial performance similarities with fiber-based business data services sufficient to determine that best-efforts service and its underlying facilities are in the same product market. In that manner, best-efforts services can be distinguished from other business data services. Despite this, the underlying facilities used to provision best-efforts services, even over legacy media such as HFC, can be and are being repurposed to provide business data services.

4. Unbundled Network Elements

32. We find that the use of UNEs, where available, allow competitive providers to effectively compete in lower bandwidth services, and are particularly close substitutes for DS1s and DS3s. However, use and availability of UNEs is diminishing.

33. Incumbent LECs are required by section 251(c)(3) of the Act and section 51.319 of the Commission's rules to provide requesting common carriers with DS1s, DS3s, and bare copper loops as UNEs. UNE rates, as determined by the state public utility commissions, are based on forward-looking costs not on the incumbent LECs' historical costs, and are thus typically lower than the incumbent LEC rates for regulated DS1 and DS3 services. UNEs are intended to facilitate competition by lowering barriers to stimulate facilities-based entry into local markets, and the Commission has imposed unbundling obligations “in those situations where [it] find[s] that carriers genuinely are impaired without access to particular network elements and where unbundling does not frustrate sustainable, facilities-based competition.”

34. The availability of UNEs from incumbent LECs is limited based on the “impair” standard. DS1 and DS3 UNE loops are allowed only in those buildings located within the service area of an incumbent LEC wire center that falls below a certain business density line and fiber collocation threshold. As a practical matter, competitive LECs cannot rely on UNEs at a wire center in which the competitive LEC is not collocated. Moreover, with incumbent LECs increasingly retiring their copper-based infrastructure, the question also arises as to the extent to which UNEs will remain available in the future.

5. Dark Fiber

35. Dark fiber is a physical connection with no transmission functionality. As the Commission explained in the
Further Notice,
“the supply of BDS over dark fiber takes on significant aspects of facility-based competition” and “is particularly attractive for competitive LECs seeking to expand their network reach and mobile carriers needing cell site backhaul.” Also, the record indicates that mobile wireless service providers are purchasing and then self-equipping dark fiber as a substitute for a fiber-based Ethernet service. Accordingly, we find dark fiber is a substitute for special access services purchased for wireless backhaul. Similarly, dark fiber is a substitute outside of backhaul,
e.g.,
serving the

needs of retail business customers. The
2015 Collection
includes all competitive provider locations serviced over dark fiber, and staff and key economists that used that data considered competition over it as essentially equivalent to facility-based competition.

6. Satellite Services

36. Satellite providers also offer business data services that are currently relied upon by many end users as acceptable substitutes for all or part of their broadband demand requirements, particularly for those that find best efforts provisioning from competitors acceptable. General Communications (GCI), for example, reports that its “satellite network provides communications services to small towns and communities throughout rural Alaska.” Hughes Network Systems, LLC “provides advanced broadband satellite service throughout the United States, including high-speed internet and voice over internet protocol (`VoIP').” The record indicates that “Globalstar, a low Earth orbit satellite constellation for satellite phone and low-speed data communications, has proposed a service that could help to relieve some Wi-Fi congestion in anchor institutions.” And there is evidence that satellite service providers are increasingly competing for lower bandwidth business data service customers, which is a trend we anticipate will continue in the future. We do not find BDS provided by satellite currently to be in the relevant product market but note that its presence underscores the conservative nature of our approach. In that manner, we believe satellite broadband offerings have the potential to add competitive pressure to the BDS market, especially for customers that do not require high bandwidth or symmetrical service with significant service level or uptime guarantees.

7. Fixed Wireless Services

37. We find fixed wireless services are a substitute for cell site backhaul but are, at most, a gap filler for special access services providing last-mile access to buildings. While mobile wireless carriers have relied substantially on fixed wireless,
i.e.,
often self-provisioning microwave point-to-point links to backhaul traffic from their macro cell sites, the record on providers viably using fixed wireless to provide last-mile access to buildings is not as clear. In the
Further Notice,
the Commission found the record somewhat mixed on the use of fixed wireless technology to provide business data services. But the Commission also noted that the
2015 Collection
included locations served by fixed wireless technology and mobile providers “reported that about 40 percent of their cell sites have self-provisioned wireless backhaul facilities.” In response, commenters discussed at a high level, whether or not to include fixed wireless in the business data services product market, or for a competitive market test with few additional facts provided on the subject of substitutability. The record also indicates that XO and Windstream use fixed wireless service in their networks.

38. We continue to find fixed microwave is a competitive backhaul alternative for wireless providers. The record, however, on using fixed wireless to provide reliable last-mile access to end users is mixed, especially in urban areas where line-of-sight can be more of a concern than in rural areas. We do note the promise of 5G technology to provide quality high-bandwidth fixed wireless services to businesses in urban areas. AT&T and Verizon are currently engaged in 5G trials, but commercial service is not expected to launch until 2020. That said, given the very high capacity of 5G networks, they have the potential to represent a significant additional source of competition for the provision of business data services. We will continue to monitor these developments. For now, at a minimum, we consider fixed wireless an option for last-mile building access when wireline facilities are unavailable. Fixed wireless can also serve as a viable backup transmission option for business data services purchasers to increase network diversity. As such, for purposes of the relevant business data services product market, we find that fixed wireless services should be included in the product market discussion because they may have a competitive effect on the market.

C. Geographic Market

39. To determine an appropriate geographic market for competitive analysis purposes, we consider the area to which consumers can “practically turn for alternative sources,” and within which providers can reasonably compete. The geographic market “must . . . both correspond to the commercial realities of the industry and be economically significant.” Yet, as with product market delineation, a geographic market “cannot . . . be defined with scientific precision.” In this section we conclude that a half mile is the relevant geographic market for the analysis of competition in the business data services market.

40. In the
Further Notice,
the Commission described the relevant geographic market in the business data services industry as likely being larger than the average census block and sought comment on its analysis. Considering varying buildout distances in the record, the Commission observed in the
Further Notice
that competitors are willing to extend their facilities to reach potential customers “typically rang[ing] from [REDACTED] to [REDACTED] Commenters indicate that incumbent LECs and competitive providers have similar buildout criteria. For larger competitive LECs, the majority of buildouts are within [REDACTED] from a splice point and less commonly exceed [REDACTED] away from the nearest splice point on their fiber network. Accordingly, the Commission suggested that the relevant “geographic market definition for lower bandwidth BDS lies somewhere above the average area of the Census block with BDS demand and below” the Metropolitan Statistical Area (MSA).

41. While buildouts are common within a half mile from a competitor's facilities, the subsequent record shows buildouts of half mile and farther often occur. However, such buildouts become much less likely as the distance from a cost-effective and viable fiber junction point increases as well as due to variation in entry barriers. Some providers may be more risk tolerant and will build out farther than others, as they weigh location-specific factors, including the identities of the nearby competitors, the specifics of competing local networks, local geographic features (such as traversing rivers or highways), local building codes, the density of local demand, and bandwidth demanded. However, we find risk tolerant businesses and buildouts farther than a half mile to be the exception.

42. The nature of the customer's demand is particularly relevant to competitors' build decisions. As the Commission recognized recently when considering the likelihood of a competitor entering a building to provide business data services, “[t]he lower the demand in the building, the closer another competitive fiber provider must be to that building for entry to be profitable and thus likely.” Nevertheless, even when demand is too low to justify the buildout, competitive providers often consider whether there are any potential customers nearby and may even take a more circuitous route in anticipation of additional demand from businesses along the route. The
2015 Collection
indicates that in many areas of the country competitive facilities are sufficiently close to make deployment to buildings with low demand justifiable. In 2013, there was at

least one competitive provider in “more than 95 percent of MSA census blocks with BDS demand, and . . . those census blocks represented about 97 percent of the total BDS connections and 99 percent of business establishments.” The average distance between buildings with incumbent LEC business data services customers and competitive fiber was just 364 feet. About half of these buildings were within 88 feet of competitive fiber facilities and 75 percent were within 456 feet.

43. We tested the sensitivity of our finding that a location currently faces or likely will face competitive choices over the medium term if it is within a half mile of a location served over the facilities of at least one competitive provider. For example, based on the
2015 Collection,
64.1 percent of all locations with business data services demand in price cap areas were within a quarter mile of at least one competitive provider, as compared to 79.5 percent that were within a half mile, and 89.4 percent that were within a mile. Thus, our approach lies somewhat above the middle of these two extremes, each of which had limited record support. We also found 45.8 percent of locations with business data services demand to be within a half mile of at least two competitive providers, and 64.6 percent of all locations with business data services demand to be within a mile of at least two competitive providers. In addition, as discussed, cable competition is considerably more developed than it was in 2013. Given the nature of cable networks, we expect the percent of locations within range of a quarter mile of at least one facilities-based competitor, to be more similar to the percent of locations within a half mile of one such competitor today.

44. As we detail more fully below, there is strong evidence of rapid growth in competitive investment. Because of this ongoing investment, the average building with business data services demand over time will find itself closer and closer to a competing facilities-based competitor's network. The declining distances between buildings with business data services demand and the fiber networks of competitive providers in general, and those of cable providers with extensive fiber networks in particular, create a cycle of investment and benefits within an area outside of any particular building. Because even small businesses' bandwidth needs are constantly growing, the demand for additional investment is likely to be amplified. Greater fiber investment leads to lower costs of deploying facilities to neighboring buildings, which in turn leads to greater investment. As costs continue to drop through further fiber deployments, and potential revenues for each building served increase with growing demand for high bandwidth services, these competitive providers with significant legacy (in the case of cable) and newer networks have powerful economic incentives to enter and price their services aggressively. This effect will provide a strong disciplining force to the incumbent service providers of surrounding locations, and will grow over time. Importantly, all else equal, we expect competitors will be particularly likely to build out to locations where incumbents have priced supracompetitively, to the extent these are the most profitable locations. In this manner, over time, abuses of market power can be addressed through localized competitive pressures.

45. The record demonstrates that most business data services providers are willing and able to profitably invest and deploy facilities within a half mile of existing competitive facilities, and often have the ability to build out after winning a customer's bid for business, depending upon the scale of investment required to reach the customer. Accordingly, we conclude that the relevant geographic market for purposes of this market analysis is the region within a half mile of a location with business data services demand. We make this determination by focusing on the factors that influence suppliers of business data services, as opposed to customers, because in most instances a customer is unlikely to impact service pricing by moving its physical location in response to a material increase in price. This point is true for both single- and multi-location customers that seek dedicated connections to each location.

46. We also find that business data services providers commonly sell their service in bidding markets, and this is especially so for multi-site contracts. Winning bidders then build out to the customer within an agreed-upon provisioning timeframe. Consequently, competitors outside of the customer's location can affect pricing because the winning bid represents the competitive offer that others must beat, even if that competitor does not already have facilities in the customer's building. That competitor is increasingly relevant the closer the competitor's network facilities, actual or potential fiber splice points, are to the customer (because its costs likely fall with proximity, making its bid more likely to constrain the winning bid). Thus, the geographic range of the competition posed by a business data services provider is not limited to the specific locations of active circuits sold at a particular point in time.

47. Sprint and Windstream challenge our assertion that business data services markets are affected by bidding market dynamics. However, business data services contracts, being large-scale, winner-take-all awards, closely approximate the conditions laid out by Klemperer of an ideal bidding market environment. Moreover, nearby competition has similar cost to competition in the location itself (
i.e.,
“homogenous” products) and is therefore likely to effectively constrain prices.

D. Competitive Entry in Business Data Services Markets

48. As part of our analysis, we consider how varying market characteristics impact entry by competing providers in business data services markets, along with evidence of entry barriers being overcome by traditional and non-traditional competing providers. We then conclude that, while there can be high barriers to business data services entry, evidence shows that firms frequently choose to enter this market with significant investments, particularly in areas of significant demand, indicating sufficient competitive conditions that do not warrant direct regulatory intervention.

1. Barriers to Entry

49. Market analysis is incomplete without an evaluation of entry barriers. As antitrust principles explain, “[t]he prospect of entry into the relevant market will alleviate concerns about adverse competitive effects only if such entry will deter or counteract any competitive effects of concern . . . .” In evaluating the prospect of entry, agencies “examine the timeliness, likelihood, and sufficiency of the entry efforts an entrant might practically employ.”

50.
Timeliness.
Entry must be rapid enough to make an attempt by an incumbent to set a price above competitive levels unprofitable. Depending on the distance, buildout does not appear to take very long, about three to four months, relative to the typical multi-year contracts used in selling these services. Thus, in cases where demand is prospective and not urgent, and where a competitive LEC has existing facilities nearby, for example, within a half mile, buildout or even its threat would be timely enough to restrain a dominant provider in the relevant market. Instances in which

business data services are sold as part of a bidding or similar process also allow for timely entry, as providers are typically afforded an opportunity to provision a customer after a bid is accepted and before service must begin. Moreover, even if a competitor with a nearby wireline network (for example, perhaps a cable company) is not presently capable of entry over the short term, we expect it will become so over the medium term.

51.
Likelihood.
“Entry is likely if it would be profitable,” and profitability is precisely what competitive LECs consider when deciding whether to deploy fiber to a customer's location. Profitability depends on projected expenditures required for construction and anticipated revenues from the customer and potential customers. Indeed nearby wireline network providers are actively meeting nearby demand, a process that can be expected to accelerate over the next few years.

52. Competitive LECs rarely build on speculation and instead prefer to have a customer in place before undertaking the costs associated with buildouts. However, providers are also willing to consider potential customers nearby or along the route (and may even build a more circuitous route to pass by more potential customers). Providers generally look to recover construction costs within a certain period of time, [REDACTED] while taking into account potential customers. When the cost of construction is high, providers may lengthen the recoupment period.

53.
Sufficiency.
We found earlier that the presence of a second competitor in this industry is sufficient to place an effective competitive constraint on business data services supply. Given the likelihood of entry wherever a competitive wireline network is nearby, this will also ensure a similar effect over the medium term.

54. This evidence demonstrates that providers find ways to enter nearby geographic markets and win customers. They consider nearby demand and build circuitous routes, they lengthen the terms of their contracts to recover the cost of buildout, and they place spare splice points along their network routes to accommodate future demand. These facts show that once providers have sunk substantial costs into a network, it is in their interest to build laterals to as many customers as possible because the relative cost of a lateral is much lower than the cost of other network facilities. And this conclusion is corroborated by evidence of extensive competitive entry into the business data services marketplace.

2. Entry and Investment in Business Data Services Markets

55.
Evidence of Competitive Entry by Cable.
The entry of cable into business data services provisioning has been the most dramatic change in the market over the past decade. Cable companies began serving business customers using their “best-efforts” broadband networks with asymmetric speeds in the mid-2000s, but these services were not generally competitive with incumbent LECs' business data services. Cable companies now offer over fiber carrier-grade reliability, scalability, and quality of service functionality to compete for the largest enterprise customers across the country and also offer Carrier Ethernet services with symmetrical speeds up to 10 Mbps over their within-footprint near ubiquitous DOCSIS 3.0 EoHFC networks. As a result, incumbent LECs increasingly find themselves competing with cable for business data services customers. CenturyLink, for example, “views cable providers to be its primary special access competitors, given their expansive networks and rapid growth in business markets.”

56. The growth in consumer broadband demand has also lowered the costs to cable companies of deploying fiber to business locations. As consumer bandwidth demand grew exponentially over the past decade, cable providers were required to invest billions of dollars pushing fiber deeper into their networks as they needed to continually split nodes to keep pace with the demand. Sprint and Windstream challenge the reasonableness of relying on past cable deployment in response to growth in consumer broadband demand to project future cable build out to meet business data services demand. However, it is not unreasonable to acknowledge the fact that every increment of additional investment in cable networks brings fiber facilities closer to nearby business data services demand and lowers the cost of building to meet that demand. Compared to just ten years ago, fiber within the franchise areas of cable providers that offer high-speed DOCSIS services has dramatically lowered the cost of building out fiber to the surrounding business locations due to the shorter distances required to reach any location. For example, as a result of network expansion, in March of 2015, “approximately [REDACTED] percent of business locations [were] within 500 feet of Comcast's EoHFC facilities, an increase from [REDACTED] percent in 2013.”

57. Like other competing providers, cable companies have focused investment on building fiber networks for higher-bandwidth Ethernet services, which is enabling them to overcome limitations of traditional coaxial-based cable systems that cannot meet higher bandwidth demands. For example, after first entering the marketplace in 2009, Comcast “rolled out Metro Ethernet services to 20 of the top 25 metropolitan areas entirely over fiber, with plans ranging from 1 Mbps to 10 Gbps” in 2011. Comcast has invested “more than $5 billion since 2010” on network infrastructure to provide business data services. Comcast had connections, largely using fiber, to approximately [REDACTED] business locations in 2016, an increase of [REDACTED] since 2013. Comcast has also “added [REDACTED] over the 2012-2015 period.”

58. Charter, the second largest cable company and the [REDACTED] largest provider of fiber connections to buildings, has invested more than [REDACTED] annually, starting in 2013, towards the provision of business data services. In 2016, Charter acquired fellow cable companies, Legacy Time Warner Cable (TWC) and Bright House Networks, LLC, for $90 billion. A stated benefit of the merger was the increased ability of the combined entities to compete for “large enterprise and other multi-location customers.” Post-merger Charter plans to invest $2.5 billion into serving commercial areas within its footprint. Charter has “expanded its provision of BDS to approximately [REDACTED] new locations” since the beginning of 2013. As of the second quarter of 2016, Charter's commercial revenues driven by enterprise, small and medium business growth rose to over $2 billion, an increase of 12.6 percent over the prior-year period.

59. Cox, the third largest cable company, was one of the first cable companies entering the business data services market and by June 2016 served “more than [REDACTED] locations with dedicated point-to-point services,” primarily over its fiber facilities. Cox has invested more than [REDACTED] in fiber and equipment over the past 10 years, with [REDACTED] invested since 2013. In 2015, “Cox earned approximately [REDACTED] in annual revenue from its [business data services] . . . and projects earnings of [REDACTED] for 2016, up from [REDACTED] in 2013.”

60. In 2016, Altice, a European company, completed its roughly $10 billion acquisition of Cablevision Systems Corp. (Cablevision), which includes Cablevision's business service unit, Cablevision Lightpath Inc., making Altice the fourth largest cable provider. As of the end of 2015, Cablevision's

Lightpath unit had 7,700 buildings connected to its fiber network, compared to the 4,400 buildings serviced in 2010. Mediacom, the fifth largest cable operator serving “rural and exurban areas of the Midwest and Southeast. . . . began deploying BDS on a significant scale throughout its service territories in 2011.” The company has invested more than $4 billion on its “high capacity [fiber] network that serves thousands of small rural communities.” This network supports over 1,000 macro cell sites, and Mediacom is planning to expand its network coverage in downtown areas and commercial districts to connect tens of thousands of new business customer locations.

61. Even smaller cable operators are entering the business data services marketplace. ACA, representing a substantial number of small cable operators, estimates its members are “making at least tens of millions and upwards of $300 million of investments annually to deploy facilities to support the provision of BDS.” ACA's members primarily offer Ethernet business data services over fiber.

62. Cable business services are reported to have grown at approximately 20 percent annually for the past several years, and increasingly, they have emphasized Internet access and managed services (
i.e.,
security and routing, controlled and secured access to the cloud) showing a shift in demand to higher (and more competitive) bandwidths. Business services will reportedly generate more than $12 billion for U.S. cable providers in 2015, up 20 percent or so from their milestone total of $10 billion in 2014. According to one analyst, business revenues for cable companies will almost double their 2014 total by 2019.

63.
Expansion by Other Competitive Providers.
Non-cable competitive LECs and other non-traditional providers also continue to invest and expand their network reach. For example, Zayo, founded in 2007, now has more than 25,000 buildings connected to its metro fiber network. Network connectivity makes up 45 percent of Zayo's business with 38 percent from dark fiber solutions. Zayo committed to investing an estimated $740 million in major network expansion projects from March 2014 to December 2015. For the quarter ending on June 30, 2016, Zayo reported $506.7 million of consolidated revenue, which includes $112 million from its Canadian operations. Zayo recently closed its purchase of Electric Lightwave adding an estimated 12,100 route miles to its network as well as connectivity to 3,100 enterprise buildings.

64. We reject Sprint/Windstream's argument that the Commission has not properly accounted for recent consolidation, including the CenturyLink/Level 3 and Verizon/XO mergers. The CenturyLink/Level 3 proposed merger is still pending regulatory approvals, and in approving transfer of control applications related to the Verizon/XO transaction, the Commission found that “Verizon's acquisition of XO within Verizon's incumbent LEC territory will have a
de minimis
impact on competition in the provision of BDS.” Sprint/Windstream's criticism that the two largest competitive LECs on the Vertical Systems Group Leaderboard for Ethernet providers will soon be incumbent LECs fails to take into consideration that the bulk of acquired facilities in these transactions is outside the incumbent LEC territory and in fact remains in the category of a competitive provider for the purposes of the Commission's BDS marketplace data. Moreover, our analysis herein takes into account the increased competition we have seen in the market since our 2013 data collection, including increased competitive pressure from cable providers.

65. Lightower has an all-fiber network with service to over 22,000 locations and more than 7,000 wireless towers and small cells in 17 states in the Northeast, Mid-Atlantic, and Midwest, serving “enterprise, government, carrier, and data center customers.” Lightower acquired regional fiber provider, Fibertech Networks, in 2015 for $1.9 billion, doubling its network reach, and acquired Sidera Networks in 2013 for$2 billion. The company spends about [REDACTED] percent of its revenues on capital investment. Lightower recently added over 350 route miles of fiber in North Carolina.

66.
Industry Concentration.
In the
Further Notice,
the Commission considered several measures of concentration in varying geographies, indicating “uniformly high levels of concentration.” On a national level, concentration among incumbent LECs was observed, based on 2013 reported business data services revenues. Degrees of incumbent LEC concentration also were observed at geographies of unique building locations, census blocks, and zip codes. The measures were difficult to determine precisely by geography due to certain biases. Putting the concentration measures in context, the Commission explained that it “d[id] not yet know how much competitive pressure different forms of supply place on other suppliers, or how many suppliers, accounting for their differences, are sufficient to make prices effectively competitive (matters we have sought comment on above).” We find the concentration measures alone are largely poor indicators of whether market conditions exist that will constrain business data services prices, and overstate the competitive effects of concentration.

67. Traditional and non-traditional providers of business data services constrain an incumbent's pricing outside of immediate geographies used to describe market concentration in the
Further Notice
in three ways. First, with nearby facilities, a business data services provider is able to expand its presence to timely reach a customer. Second, a business data services competitor does not need to be already offering service in a given building to constrain a supplier at that location. A nearby business data services competitor constrains pricing by responding to RFPs and participating in similar customer service bidding requests, which creates a pricing floor without any physical presence of the potential competitor in the nearby geography. Third, concentration is greater for the declining legacy DS1 and DS3 channel termination services, in which incumbent LECs have a historical advantage, compared to newer, and in-demand, Ethernet business data services, which are largely competitive. We therefore conclude that concentrated supplies of DS1s and DS3s in a particular building or cell tower or similar are not reliable indicators of whether business data services pricing decisions are made competitively.

E. Other Examples of Competitive Effects in the Business Data Services Market

68.
Increasing Ethernet Revenue.
Comments show that, as a result of more substitutes in the market, incumbent LECs face declining sales in TDM services, notably DS1s and DS3s, including customer loss to cable operators and other providers. A recent report by Frost & Sullivan found that the migration from TDM to Ethernet business data services is fueling double-digit revenue growth for Ethernet business data services, and that this growth rate is expected to increase as Ethernet networks expand. In particular, Ethernet-based services accounted for more than 40 percent of total dedicated service revenues in 2013, and Ethernet business data services revenues have been growing by over 20 percent a year since then. The Ethernet bandwidth of incumbent LECs grew by only 5.3

percent in 2013, while the bandwidth of competitive providers grew by 31.6 percent. Incumbent LEC business data services revenues also declined from 2013 to 2015, while competitive LEC and cable competitor revenue grew rapidly. Level 3 revenues increased 66 percent, Comcast revenues grew by 46 percent, and Time Warner cable revenues increased by 73 percent over the same time period. For cable overall, business revenues have grown at a 20 percent compound annual growth rate. Notably, this revenue growth came in spite of falling prices, which likely indicates expansion of market output and/or demand shifts to higher bandwidth and thus more competitive services. Vertical Systems Group found that Carrier Ethernet pricing fell by double-digit rates for all services and speed segments from 2010 to 2015.

69. Some of the growth in cable's competitive position has come at the expense of incumbent and competitive LECs. AT&T, for example, calculates it “lost
more than
[REDACTED] of its DS1 business from non-affiliates just between January 2013 and October 2015, and the rate of loss is accelerating.” In addition, “the number of new DS1 purchases from AT&T (
i.e.,
gross, not net, additions) declined by nearly [REDACTED] since the end of 2013.” A degree of those losses were to Ethernet, as AT&T reports “the number of new Ethernet purchases (
i.e.,
gross additions) during this period has more than [REDACTED]. Verizon reports that it sees similar competitive effects because of cable's increased entry into the business data services market. For example, comparing the same three-month period year-over-year Verizon saw a [REDACTED] percent decrease in Ethernet orders with its customers “telling Verizon that trend will continue and worsen as they send more business to cable.”

70.
Decreasing Ethernet Prices.
There is persuasive evidence of recent decreases in the prices for packet-based services across all bandwidths. According to Cox, Ethernet prices have declined [REDACTED] or more between 2012 and 2016.” ACA reports smaller cable operators have over the past five years “decreased prices for their Ethernet services by approximately 50 percent on average across all geographic areas and for all customer segments—with some members reporting that prices have decreased even more, by 70 percent.” Comcast observes “steady year-over-year decline in [retail] pricing for dedicated Internet access and Ethernet transport services,”
e.g.,
prices for its Ethernet Dedicated Internet service declined by [REDACTED] percent over the past 12 months. CenturyLink's Ethernet prices have on average, declined by [REDACTED] percent over the past five years.

71. Charter's monthly price for a 1 Gbps service as of the first quarter of 2016 [REDACTED]. Zayo reports price per unit decreases for GigE full rate (>1000 Mbps) from $3,300 to $2,800 from December 2013 to December 2015, about a 15 percent change. Per unit prices for fractional GigE (101-1000 Mbps) services decreased from $2,300 to $1,700 over the same period, a 26 percent drop.

72. Comcast once expected a price of between [REDACTED] per month in 2013 for its wholesale 100 Mbps fiber service but now charges less than [REDACTED] a month for the same service. Charter reports its “average regional price of a 100 Mbps dedicated service” was [REDACTED] per month in 2013 but by the first quarter of 2016, that per month price dropped to [REDACTED]. ACS has similarly experienced per month price declines for its [REDACTED]. Zayo's pricing trends show the monthly price per unit for Fast E Ethernet (10-100 Mbps) service decreasing from $1,300 to $1,200 (7.6 percent) from December 2013 to December 2015. CenturyLink reports prices for a 100 Mbps Ethernet backhaul circuit to a wireless tower have fallen [REDACTED] percent on average over the past five years.

73. There is also evidence that lower bandwidth packet-based services are experiencing price declines. For example, Legacy TWC's 10 Mbps service fell from [REDACTED] per month on average in 2013 to [REDACTED] per month by the first quarter of 2016, a 23 percent decrease. The company's 5 Mbps service decreased from a [REDACTED] monthly average to a [REDACTED] monthly average over the same period, a 28 percent change.

F. Incumbent LEC Pricing Regulation

74. We consider a large quantity of evidence in the record. A body of evidence particularly relevant to the foregoing discussion considered the benefits of current incumbent LEC price regulations. The evidence is mixed and we find does not in most locations support continued, much less additional, price regulation. Econometric studies performed by Dr. Marc Rysman, Commission staff, and commenters examined the relationship between incumbent LEC prices and the number of business data services competitors they face near a customer location. Based on the Commission's
2015 Collection,
the Revised Rysman Paper showed that incumbent LEC DS1 and DS3 prices were a statistically significant three percent and ten percent lower, respectively, in census blocks with one or more facilities-based competitors. However, these price changes often became statistically insignificant after implementing changes to the analysis in response to peer reviewers, suggesting that the data are too noisy to draw any firm conclusions.

75. Furthermore, as recognized by Dr. Rysman, and noted by peer reviewers and other commenters in the record, data and modeling limitations did not allow for a definitive conclusion that incumbent LECs were not pricing competitively. Despite Dr. Rysman's detailed analysis, a causal relationship could not be ascribed to his estimates due to the possibility that some factor not observed in the data (
e.g.,
lower costs of serving a given customer) could be simultaneously producing both a greater number of facilities-based competitors and lower prices. Further, while some (disputed) evidence was presented of incumbent LEC prices being lower where there was competition, other evidence was presented of dramatic increases in competitive entry, rapid price declines, and service growth. Moreover, analysts and forecasters expect strong competitive growth over the next decade in business data services, and we find that, all else equal, competitive growth will occur exactly where supracompetitive pricing is most prevalent.

76.
Current Prices at Cap.
In the
Further Notice,
the Commission suggested that “the fact that the price capped incumbent LECs have kept their prices at the top of the cap is additional evidence of market power.” Commenters are at odds over whether the lack of or minimal headroom between prices and the caps indicates the possession of market power. However, we disagree that prices at the cap demonstrate that incumbent LECs generally would have set materially higher prices wherever their prices were capped and that prices for business data services will increase significantly as a result of our actions in this Order. We expect that competition will continue to keep prices in check. Moreover, as we explain in our analysis of potential catch-up adjustments, the X-factors that were in effect between 1997 and 2005 may have been unreasonably high and therefore the current price cap indices may be too low. In view of these circumstances and our findings of competition in the business data services DS1, DS3, and transport markets, we find any concern about a

lack of headroom between prices and the caps to be unwarranted.

G. Competition in the Transport Market

77. Transport services are typically higher volume services between points of traffic aggregation which can more easily justify competitive investment and deployment. The Commission has traditionally regulated TDM-based special access services in two distinct segments: End user channel terminations and dedicated transport; and other special access services. The provision and sale of TDM-based special access services has reflected, and continues to reflect, the different competitive dynamics that characterize the two sets of services. When the Commission adopted the
Pricing Flexibility Order,
it distinguished between these two sets of TDM special access services and required price cap LECs to make different levels of competitive showings to obtain pricing flexibility for each. The Commission's pricing flexibility rules also reflect this distinction. Section 69.709 of the Commission's rules governs the grant of pricing flexibility for special access services other than the channel termination between the LEC end offices and customer premises, which includes interoffice facilities and channel terminations between an incumbent LEC's serving wire center and an IXC. Section 69.711 of the Commission's rules governs the grant of pricing flexibility for channel terminations between LEC end offices and customer premises. All of these elements comprise the service provided to the end user. The
Further Notice
followed the Commission's precedent by defining dedicated service as a service that “transports data between two or more designated points” and aspired to create a “framework [that] reflect[s] how the market operates today.”

78. Commenters, including competitive providers, support maintaining this distinction. Dr. Rysman also acknowledged the relevance of this distinction in his paper. This distinction is rooted both in the different functionalities these sets of services deliver and in the different rate elements price cap carriers use to price these services. We find that this distinction remains valid in the current special access marketplace and employ it in our approach to reforming our regulation of TDM transport services.

79. In analyzing the competitiveness of TDM transport services, based upon the
2015 Collection
and the record, we find strong evidence of substantial competition, as well as market conditions that suggest regulation of TDM transport and other non-end user channel termination services is not justified. Indeed competition for such services has been robust since a large proportion of TDM transport services were deregulated. As Frontier explains, a “substantial majority of transport revenue has been covered by Phase II pricing flexibility since the early 2000s.” AT&T further states that “the data collection strongly supports nationwide
Phase II
relief for transport.” It cites data showing the widespread deployment of competitive transport networks, including the fact that “as of 2013, competitive providers have deployed competing transport networks in more than 95% of census blocks with special access demand (and about 99% of business establishments are in these MSAs).” Although INCOMPAS asserts that Commission rules requiring certain incumbent LECs to provide unbundled transport services is evidence of underlying market power, the record overall reflects a competitive landscape where customers often combine competitive transport with channel terminations supplied by incumbents. According to CenturyLink, it uses incumbent LEC transport facilities for “less than half” of the end user channel terminations it purchases as a competitive provider outside of its incumbent footprint. Moreover, data from the
2015 Collection
show that “the vast majority of locations with special access demand have” competitive fiber within close proximity. AT&T identified a number of major urban areas that had as many as 28 competitive transport providers and cited a number of second tier MSAs which commonly have “over a dozen separate competitive transport providers.”

80. Competitive providers are split on the question of whether the transport market is competitive. XO, before becoming part of Verizon, found “considerable competition for transport” and that “numerous CLECs frequently are collocated in the offices where XO is located.” Other competitive providers dispute the competitive nature of transport services and assert that incumbent LECs are able to charge supracompetitive rates for TDM transport services and should therefore be price regulated. For example, Sprint alleges that “along many routes, competitive providers are simply unavailable” and asserts that competition for transport service is the exception rather than the rule. However, Sprint provides no data or anecdotal evidence to support its assertion and to rebut the evidence from the
2015 Collection
and from incumbent LEC commenters that show that competitive transport is available in the vast majority of census blocks in MSAs. As AT&T states, “[n]o party to this proceeding has attempted specifically to make a case that there is a lack of competition for transport, and certainly not on a national basis.”

81. Evidence of competitive providers investing in transport services, rather than purchasing from incumbent carriers, reinforces our observations. While business data services providers may choose to purchase transport—either as a long-term solution to reach a customer or a temporary cost while implementing self-provisioning plans—many have deployed transport instead of buying the service.

82. More broadly, we understand that transport service represents the “low-hanging fruit” of the business data services circuit, which makes it particularly attractive to new entrants. In the
Pricing Flexibility Order,
the Commission noted that competitors often enter the transport market before the channel termination market, and we continue to adhere to that view. The net present value of the cash flows associated with the relatively high expected per-unit cost of deploying a new, relatively low-capacity channel termination and the expected revenue derived from the sale of that channel termination, especially for DS1 and DS3 channel terminations, would be expected to be significantly less than the relatively low expected per-unit cost of deploying a new, relatively high-capacity inter-office transport facility, and the expected revenue derived from the sale of that facility. Thus, in the face of increased demand for transport services, we observe responsive market conditions that support the deployment of competitive facilities, through either new entry or conversion.

H. Conclusions

83.
Packet-based Services.
Packet-based services represent the future of business data services. We believe the higher bandwidth capabilities of these services will lead to greater returns on investment and in turn, greater incentives for facilities-based entry into the business data services market. In contrast, DS1s and DS3s are legacy services that now compete against packet-based broadband services such as EoHFC services in the same geographic market. We find this competition, or potential competition between legacy and packet-based services, sufficient enough to discipline pricing. In many instances, incumbent LECs are now on similar footing to entrants (even if they may still on

average be advantaged), as they often also deploy new facilities to meet customer demand (because even a relatively low demand customer today may not be a low demand customer tomorrow, and copper loop generally is incapable of meeting higher demands). As a result, we find the marketplace for packet-based business data services is competitive.

84.
TDM-based DS1s and DS3s.
Within the broader record, we acknowledge that, by the nature of legacy services, incumbent LECs have a degree of concentration in certain geographies for DS1 and DS3 services. We also recognize a changing industry with increasingly competitive options, particularly at higher bandwidths, and a decreasing demand for these legacy services. Our analysis suggests that any prior advantage an incumbent might have enjoyed at lower bandwidths is now less competitively relevant in light of customer demand that attracts a number of traditional and non-traditional competitors that are improving legacy cable networks and expanding with new facilities to meet demand. This is further supported by the degree of sunk investment made by traditional and non-traditional providers of business data services to compete. We conclude that incumbent LEC market power has been in many cases largely eliminated, and elsewhere is declining thanks to increased competition in business data services markets.

85.
Transport.
Based on the
2015 Collection,
the record, and our market observations, we find substantial evidence of competition in TDM-based transport markets, which, accordingly, suggests that price regulation is not required. For these reasons, we conclude that TDM-based transport is competitive.

IV. An Administrable Framework for Business Data Services Grounded in Our Market Analysis and the Record

86. We intend to apply ex ante rate regulation only where competition is expected to materially fail to ensure just and reasonable rates. As a matter of policy we prefer reliance on competition rather than regulation, wherever purchasers can realistically turn to a supplier beyond the incumbent LEC. Based on these principles and our market analysis, we find regulation is unnecessary for packet-based services, TDM transport services, and higher bandwidth (
i.e.,
above DS3) TDM end user channel terminations. We also conclude that we should refrain from ex ante pricing regulation for TDM end-user channel terminations in areas deemed competitive. We then outline a bright-line competitive market test for initially determining whether a given price cap area will be treated as competitive in the provision of DS1 and DS3 end user channel terminations and certain other business data services by the incumbent LEC. This test will treat as competitive a particular county if 50 percent of the locations with BDS demand in that county are within a half mile of a location served by a competitive provider based on the
2015 Collection
or 75 percent of the census blocks in that county have a cable provider present based on the Commission's Form 477 data. Any price cap incumbent LEC serving special access customers within that county will be relieved of ex ante pricing regulation. Furthermore, we adopt a process for regularly updating the list of competitive counties in a way that accounts for changing competitive conditions but also avoids the need to undergo burdensome data collections.

A. Regulatory Framework Applicable to Packet-Based Business Data Services and to TDM-Based Services Providing Bandwidths in Excess of a DS3

87. After reviewing the record and considering the Commission's goals to ensure that rates for business data services are just and reasonable, while also encouraging facilities-based competition and facilitating technology transitions, we decline to re-impose any form of price cap or benchmark regulation on packet-based business data services or on TDM-based services providing bandwidths in excess of the level of a DS3, and we eliminate that regulation to the extent it exists today. In so doing, we impose no new regulation on the packet-based and higher capacity TDM-based business data services marketplace, which will be free from ex ante pricing regulation, regardless of the type of entity providing the service. Our market analysis does not show compelling evidence of market power in incumbent LEC provision of these services, particularly for higher bandwidth services. Moreover, even if the record demonstrated insufficiently robust competition, proposals to apply price cap regulation to packet-based services were complex and not easily administrable and did not reflect the fact that costs to serve individual customers vary. Likewise, we decline to impose benchmark pricing regulation on incumbent LEC packet-based business data services or on TDM-based services of bandwidths in excess of the level of a DS3. Because our market analysis shows that such services are subject to competition, anchor or benchmark pricing is unnecessary and could in fact inhibit investment in this dynamic market by preventing providers from being able to obtain adequate returns on capital. Additionally, the benchmark pricing proposals in the record were administratively complex and unlikely to reliably result in just and reasonable rates.

88. We further find that packet-based services are best not subjected to tariffing and price cap regulation, even in the absence of a nearby competitor. Packet-based services represent the future of business data services and are readily scalable, so competitive LECs are generally very willing to deploy such services beyond their footprints because they can expect to earn increasing revenues from their initial investment with few additional costs. In contrast, the record shows that competitive LECs are generally unwilling to extend their legacy TDM networks, especially beyond a half mile to provide DSn services. Consequently, entrants are better placed to win customers in packet-based markets than in those for TDM services. Packet-based services are new services, experiencing both rapid growth, and rapid change in standards, throughput and usage, and so regulation is more likely to impose long-term costs by dissuading providers of packet-based services from entering.

89. We do, however, remind stakeholders that packet-based telecommunications services remain subject to the Commission's regulatory authority under sections 201, 202, and 208 of the Act. These statutory provisions allow the Commission to determine whether rates, terms, and conditions are just, reasonable, and not unreasonably discriminatory in the context of a section 208 complaint proceeding.

B. Regulatory Framework Applicable to TDM Transport Services

90. We eliminate all ex ante pricing regulation of price cap incumbent LEC provision of TDM transport and other transport (
i.e.,
non-end user channel termination) special access services. The
2015 Collection
and the record demonstrate widespread competition in the market for these services and generally support using a deregulatory approach for TDM transport and other non-end user channel termination services.

91. We conclude that competition for TDM transport services is sufficiently pervasive at the local level to justify relief from pricing regulation nationwide. Commission staff analysis of competitive provider responses to question II.A.5. of the
2015 Collection

shows that in all price cap territories, 92.1 percent of buildings served were within a half mile of competitive fiber transport facilities. Additionally, for all census blocks with business data services demand, 89.6 percent have at least one served building within a half mile of competitive LEC fiber. As we concluded in the foregoing market analysis, the presence or reasonable proximity of a single competitor's facilities represents competition given the high sunk cost nature of the business data services market. Our data are conservative given the fact that the
2015 Collection
includes only a subset of all hybrid fiber coax facilities deployed by cable providers (
i.e.,
only Metro-Ethernet headend-connected fiber feeder plant) and given that the
2015 Collection
data are from 2013 and therefore necessarily understate the level of actual competition for transport services by not including competitive facilities that have since been deployed. We find that the high percentage of locations within a half mile of competitive fiber and the high percentage of census blocks with at least one building within a half mile of competitive fiber justify our refraining from applying pricing regulation across all price cap areas to TDM transport services.

92. We recognize that our decision in all likelihood will leave a relatively small percentage of census blocks (with an even smaller percentage of overall demand) price deregulated and without the immediate prospect of competitive transport options. However, greater harm—primarily manifested in the discouragement of competitive entry over time—would result if we were to attempt to regulate these cases than is expected under our deregulatory approach. In contrast, lower entry barriers for deploying transport services than for end user channel termination services and increasing demand for transport means that regulatory relief will provide incentives for competitive providers to deploy additional transport facilities to compete for this demand. While competition may not be universal, it is sufficiently widespread for us to have confidence that a combination of these factors will broadly protect against the risk of supracompetitive rates being charged by price cap LECs over the short- to medium-term. To the extent there are points of aggregation that are not served by competitors, the relatively high demand at these points makes it likely that a competitor could justify investing in competitive transport facilities to serve that demand.

93. Moreover, our goal is not absolute mathematical precision but an administratively feasible approach that avoids imposing undue regulatory burdens on this highly competitive segment of the market. Refraining from pricing regulation for transport services nationally achieves the proper balance between precision and administrability. It also avoids unnecessary disruption of existing special access transport sales arrangements. The alternative would be to impose significant regulatory burdens on all participants in the market with an additional layer of regulatory complexity that would undermine predictability and ultimately hinder investment, including in entry, and growth. Instead, we believe that providing regulatory relief in this market segment will foster conditions that will continue to encourage competitive entry and provide incentive for further investment in fiber transport facilities. Finally, our section 208 complaint process represents a continuing safeguard against unjust and unreasonable rates.

C. Competitive Market Test Criteria for DS1 and DS3 End User Channel Terminations

94. As noted above, we decline to impose ex ante pricing regulation for packet-based business data services and eliminate entirely ex ante regulation for TDM-based services providing bandwidths in excess of a DS3 and for TDM-based transport services. Based on the record, we have determined that such forms of regulation are not necessary because we expect that competition will ensure just and reasonable rates for those services.

95. At the same time, many commenters have urged us to take a different approach with respect to ex ante regulation of DS1 and DS3 end user channel terminations that use legacy, circuit-based technology. They raise various arguments about why they believe this portion of the business data services market requires that we not eliminate ex ante price regulation altogether. To the extent commenters suggest that there are no circumstances in which we should eliminate ex ante pricing regulation, we disagree with those contentions. Our decision in this

Order will promote investment, deployment, and competition in the business data services market in a way that will benefit all end users, including those that currently use DS1s and DS3s.

96. We determine it is appropriate to take a different approach with respect to the elimination of ex ante pricing regulation of legacy, circuit-based DS1 and DS3 end user channel terminations. The market for these services is declining as customers opt for more flexible packet-based business data service offerings. Moreover, the economics of deploying facilities to end user locations makes competitive entry in response to demand less likely than with the TDM transport market segment, which is typically at higher-bandwidths and requires less investment per unit of traffic than required for channel terminations. In light of these considerations, we are providing additional protections for this portion of the business data services market as the market transitions to new technologies by not eliminating ex ante pricing regulation in every area. Instead, we adopt a competitive market test that will preserve ex ante price regulation in those limited number of areas where we predict there is a substantial likelihood that competition will fail to ensure just and reasonable rates. In addition, even in those areas where we eliminate ex ante pricing regulation, the protections of section 208 will continue to apply.

97. Specifically, the competitive market test we adopt today assesses the availability of actual and likely competitive options in the provision of last-mile services and subjects to ex ante pricing regulation only circuit-based DS1 and DS3 end user channel terminations and certain other business data services provided by price cap incumbent LECs in areas the test finds lack a competitive presence. We base the competitive market test on the geographic unit of a county or county-equivalent (hereinafter, county) which significantly reduces the over- and under-inclusivity issue posed by MSAs which the Commission highlighted in the
Suspension Order
and avoids the administrability issues posed by smaller geographic units of measure. The test uses data demonstrating the presence of competitive facilities from the
2015 Collection
in combination with the most recent data on cable deployment from the Form 477 data collection to determine which counties to regulate.

98. While there is no clear consensus in the record on the right approach to the competitive market test, we do see a few points of general agreement. The various proposals use bandwidth demarcation points and competition test criteria based on counting providers in or near a geographic area using the
2015 Collection
data. Beyond those few high-level points of agreement, there are vast differences of opinion among commenters on the current state of competition in the marketplace, on the need for a competitive market test, and on what a competitive market test should entail. Generally, competitive

LECs needing to purchase business data services as inputs at wholesale, mobile wireless providers not affiliated with an incumbent LEC, Windstream and Verizon (both net buyers), and end-user representatives, such as Ad Hoc, interpret the
2015 Collection
as largely showing a non-competitive market, requiring regulatory intervention at all but the highest service bandwidth levels,
i.e.,
in excess of 1 Gbps. On the other side, cable companies and competitive fiber providers that do not typically purchase business data services at wholesale, AT&T, and other incumbent LECs (net sellers) see a highly competitive marketplace with no need of regulatory intervention.

99. The test we adopt utilizes certain core attributes of a test on which there was consensus in the record, including establishing a threshold number of providers to find competition, employing a defined geographic area of measurement, and basing the test on data from the
2015 Collection
and updating the results of the test to ensure they continue to reflect the extent of competition in the market
.
That said, it also represents a departure from some of the proposals in the
Further Notice
in that rather than focus on burdensome pricing regulation, it takes a dynamic and forward-looking approach to evaluating the benefits and costs of regulation. The test will be updated periodically by relying on data the Commission routinely collects, so it does not require additional and potentially burdensome data collections. We find this approach strikes a reasonable balance between precision and administrability, will encourage continued investment in and deployment of business data services, and will foster a market-driven transition from legacy circuit-based services to newer packet-based services and other technologies.

100. We take a pragmatic approach to formulating a competitive market test by considering what data are available to us to evaluate competitive conditions both at present and in the future. We then determine what geographic unit is sufficiently granular and at the same time administrable for the Commission as well as the industry. Finally, we consider which criteria best reflect competitive conditions in the market while still furthering the Commission's policy objectives. The ultimate goal of the test, however, is not to definitively determine competitive market conditions but rather to determine on balance which areas are best positioned to benefit from price deregulation and which areas will benefit more from continued price cap regulation.

101. In determining where we can appropriately avoid applying ex ante price regulations for certain special access services, we balance the benefits and costs of such regulation. We recognize that in counties where there currently appears to be few competitive alternatives for consumers of DS1 and DS3 end user channel terminations that the benefits of ex ante price regulation likely outweigh the costs since this likely indicates broad entry in such regions may not occur. However, in counties where the competitive pressures are able to discipline prices for a large fraction of customers, as discussed in our market analysis, we see the opposite to likely be the case. Ex ante pricing regulation can have negative features. For example, in a county where entry is relatively widespread, the absence of entry in specific areas may be due to regulated prices inadvertently being set below competitive levels. Such prices make entry unprofitable, are harmful to long run incentives to invest, can lead to inefficient short run levels of production and consumption, and can prevent entry indefinitely. This counsels toward being especially wary of imposing price caps except where competitive service seems most unlikely to be available within a reasonable time horizon. This perspective of balancing the benefits and costs of regulating prices, as well as the importance of having an administrable system, leads us to adopt the framework discussed below. In our judgment, we expect this framework to appropriately balance our desire for fostering a dynamic and competitive marketplace with the need to ensure rates that are just and reasonable.

102. Some parties have expressed concern about a potential spike in prices in areas deregulated as a result of the competitive market test. We believe, however, the test adopted today strikes the appropriate balance to apply ex ante regulation where warranted and to allow competitive forces to thrive absent ex ante regulation where there is adequate competition. If prices were to rise following deregulation, then we anticipate that competition will work to drive these prices to competitive levels. Moreover, customers are protected in the near term from harm that would result from any rates, terms, or conditions that are unjust and unreasonable or unjust and unreasonably discriminatory because the Commission's section 208 complaint process continues to be available for common carriage services.

1. Availability of Data To Measure Competition

103.
2015 Collection.
The most intuitively relevant dataset in our toolbox is the one collected in response to the
Data Collection Order.
That data collection covered circuit- and packet-based business data services and required responses from providers of both dedicated and best-efforts last-mile access services (albeit exempting small providers of best-efforts services), as well as purchasers of business data services. In short, the data collection came as close as practicable at the time to providing a “clear picture of all competition in the marketplace.” Despite this, some commenters question the continued relevance of the data, citing cable providers' aggressive expansion into business data services since the data collection. These criticisms overstate the limitations of the
2015 Collection.
It is unprecedented in scope and remains a useful and appropriate basis for our new regulatory framework. That said, we acknowledge that while the
2015 Collection
is well suited for the initial evaluation of competition, it is unsuitable for measuring competition going forward. We also acknowledge that the
2015 Collection
does not fully capture the extent of cable deployment to date.

104. Although some commenters propose refreshing the data with periodic data collections, most commenters strongly oppose the idea as being too burdensome and even “an obstacle to competition.” To comply with the
2015 Collection,
for example, some carriers were “forced to pull data manually from numerous billing and data systems, diverting limited time and resources from other critical projects.” For an uncertain number of years, providers would be required “to continuously track and maintain . . . all company documents that may be responsive . . . requiring business employees and counsel to devote significant resources to conduct broad searches for such documents and evaluate their responsiveness.” We believe the costs of further data collections would not justify the benefits obtained from having updated data. Below we find that an alternative dataset can be used to update our competitive market test with no additional compliance burdens while still effectively capturing market competition as compared with a new more comprehensive data collection. We therefore decline to extend the
2015 Collection.

105.
Form 477 Data.
In 2013, as the National Broadband Map data collection

was nearing its completion, the Commission issued the
Modernizing Form 477 Order,
which redesigned and updated the requirements first spelled out in the
2000 Data Gathering Order.
To comply with the Form 477 data collection requirements, all facilities-based fixed broadband providers, including cable operators, are required to report data on all census blocks where they make fixed broadband services available to residential and business customers at bandwidth speeds exceeding 200 kbps in at least one direction. Among other things, providers also report “the maximum advertised speed for each technology used to offer service in each census block.” The Commission collects these data semi-annually and makes the data available to the public.

106. We find the Form 477 data well suited for supplementing the
2015 Collection
in the initial analysis of market conditions and a conservative proxy for competitive deployment going forward. Form 477 broadband service availability data necessarily imply the presence of broadband-capable cable network facilities, which makes it an ideal dataset to ensure the competitive market test accounts for competition from cable operators. We recognize, however, that the Form 477 data do not measure the presence of other competitive providers. That being said, given the long-term sunk cost nature of competitive provision, it is unlikely that locations that were previously competitive (as evidenced in the
2015 Collection
) would become noncompetitive. The key question thus becomes whether the Form 477 data can be used as an updating mechanism, not merely for the extension of cable supply, but as a proxy for the extension of competitive end user channel terminations more generally. While the measure is unlikely to be perfect, we conclude the Form 477 portion of the competitive market test is a good match for the
2015 Collection
as a means of capturing future changes. Moreover, given cable operators' ongoing aggressive deployment of end user channel terminations, which dwarfs that of non-cable suppliers, it is highly likely the cable-only measure found in the Form 477 data will capture the vast bulk of additional deployments because it is likely that most non-cable competitive extension of business data services networks will occur where cable is also deploying or has already deployed. Importantly, these data are updated on a semiannual basis and, therefore, any periodic re-evaluation of competition in specific markets will always be relatively current. Moreover, because these data are collected by the Commission, we are confident in their integrity.

107. In fact, some commenters used Form 477 data to supplement the data from the
2015 Collection
in their analyses and proposed that we use it going forward. Other commenters, while advocating using Form 477 data, also suggested modifying Form 477 to replicate the
2015 Collection
going forward. We are reluctant, however, to impose additional reporting burdens on providers for the same reasons we rejected proposals to refresh the
2015 Collection,
and therefore decline to amend Form 477 to mirror the data gathered by the
2015 Collection.
We believe the data currently collected by the Form 477 is already well suited to the needs of the competitive market test. Further, we will implement sufficient safeguards to allow us to use Form 477 in its present state.

2. Appropriate Geographic Measure

108. In terms of granularity, our goal through the years of regulating the business data services market has been “to define . . . geographic areas narrowly enough so that the competitive conditions within each area are reasonably similar, yet broadly enough to be administratively workable.” After considering various possible geographic areas to use for the competitive market test, we conclude that basing the competitive market test at the county level strikes the best balance between being sufficiently granular and administratively feasible. We reject other proposals raised in the record, including use of MSAs, census blocks, census tracts, and ZIP codes.

109.
Counties.
As suggested by various commenters in the record, we agree that the geographic area we use for the competitive market test should be larger than census blocks or census tracks, but smaller than MSAs. We find that counties are granular enough to capture reasonably similar competitive conditions yet large enough to be administratively feasible and are supported in the record. Counties are significantly more granular geographic units than MSAs and thus reduce the risk of misidentifying competitive or noncompetitive geographic areas. Counties are subdivided into census blocks. Presently, there are 3,233 counties in the U.S., as compared to 389 MSAs, of which 204 had been granted pricing flexibility relief. Counties have another advantage over MSAs, in that MSAs do not cover all of the price cap incumbent LEC study areas, while counties do. Moreover, counties are a more stable unit of regulation than MSAs. While county boundaries occasionally change, and sometimes counties are split, or merged or new ones are created, such changes are relatively infrequent. For example, in the decade ending 2010, there were only two substantial county boundary changes, both in rural Alaska, and a merger of a county and a city. In contrast, MSA boundary changes are more frequent and far reaching. For example, in 2003, 41 counties were moved from an MSA to a micropolitan statistical area, and changes were made to statistical area boundaries in every state.

110. The Commission's
2015 Collection
shows an average of 376 buildings with last-mile access demand in a county, whereas the average number of buildings with last-mile access demand in an MSA is 2,713. This statistic shows that counties are much more granular geographic units for administering the competitive market test. Furthermore, using census data we can compare the number of firms and establishments and the employment levels in counties and MSAs. Those data also demonstrate that counties allow for a more granular analysis of competitive conditions than MSAs: [“Table 1. MSA-County Size Comparisons” omitted].

111. Counties are also significantly less granular than smaller geographic units such as buildings, census blocks, census tracks, and ZIP codes, and, thus, significantly more feasible for the Commission and industry to administer. Use of counties has another advantage as well: Counties do not cross MSAs. Consequently, there is a ready translation of the FCC's pricing flexibility regime to counties, which will minimize disruption where a county's regulatory status is not changed by this Order.

112. Counties provide a convenient, natural administrative unit for capturing competitive effects, and competitive effects from cable operators in particular. The competitive presence of cable operators will generally conform to county boundaries since cable franchises have historically been awarded, with some exceptions, on a county-by-county basis. Cable operators may not provide cable service without a franchise from a franchising authority. A franchise authorizes the construction of a cable system over public rights-of-way, and through easements, within the area to be served by the cable system. Thus, a franchise license allows a cable operator to overcome many entry barriers associated with buildouts and creates more certainty in anticipated buildout revenues. With those hurdles

out of the way, it is in the cable operator's interest to build out an extensive network in the jurisdiction. Indeed, a cable operator's franchised cable system is often extensive throughout the franchised county.

113.
Metropolitan Statistical Areas (MSAs).
We conclude that MSAs are not well suited to be used as the geographic area for determining competitive effects. The Office of Management and Budget (OMB) developed MSAs for purposes of compiling statistics for a set of certain geographic areas, defining MSAs as “geographic entities that contain a core urban area of 50,000 or more population, and often includes adjacent counties that have a high degree of social and economic integration with the urban core, as measured by commuting to work.” Furthermore, “OMB may add counties or principal cities to an MSA, remove them, or even create new MSAs.” Although OMB periodically updates its list of MSAs to reflect changes in social and economic integration between urban centers and outlying areas, the Commission “adopted a list of 306 MSAs based largely on data compiled from the 1980 census, and froze that list for use in all pricing flexibility petitions.” Thus, even if MSAs were an appropriate geographic area for competitive analysis and regulation, the Commission's list of MSAs does not reflect the current state of population and business conditions. This circumstance has caused confusion among providers that have submitted petitions to the Commission containing data calculated using different MSA definitions.

114. In addition, MSAs are too large to reflect the scope of competition. Competitive LECs have consistently argued throughout this proceeding that the Commission's previous MSA analysis “ignored the wide variability of competitive conditions across a large geographic area.” The Commission agreed in the
Suspension Order,
analyzing business density in six MSAs and finding significant “variance of competitive conditions within an MSA” because “[t]he resulting statistical entity can be large, including the entirety of distant counties if those counties contain exurban areas linked to the core by commuting behavior.” Even some incumbent LECs that initially had argued for the continued use of MSAs eventually accepted the use of more granular areas.

115.
Buildings and Census Blocks.
Some commenters express a strong preference for regulation focused on individual buildings with special access demand and, as a compromise, propose to regulate on a census block level. While this level of granularity might be more precise, it creates a range of other problems. For one, buildings with demand is a constantly changing statistic as businesses expand or downsize. Census blocks are also subject to change as the Census Bureau revises its measurements. Another issue is the administrative burden metrics like these are likely to impose on providers and the Commission: There were 658,485 census blocks and 1,216,977 buildings with last-mile access demand reported in our data collection. As a practical matter, regulation at such a granular level is not administratively feasible, either for incumbent carriers, competitive providers or the Commission. It “would inevitably lead to a patchwork of differing regulations from census block to census block (or from building-to-building).” It would make it exceptionally difficult for regulated carriers to set prices subject to regulation in some areas and not in others and for competitive providers to analyze their opportunities to enter a market. Finally, it would significantly complicate the Commission's efforts to oversee business data services markets or to conduct enforcement proceedings that could potentially involve hundreds or even thousands of individual census blocks or buildings. We therefore conclude that the geographic scope of the competitive market test must be larger than buildings and census blocks.

116.
Census Tracts and ZIP Codes.
Others suggest the Commission use census tracts or, alternatively, ZIP codes to analyze markets in the competitive market test. Census tracts are statistical subdivisions of a county updated each decennial census. Based on the
2015 Collection
data, the median census tract had a land area of 1.71 square miles. U.S. Postal Service ZIP codes identify the individual post office or metropolitan area delivery station associated with mailing addresses. ZIP codes are also subject to periodic updates, and zip code boundaries can be difficult to obtain. Census tracts are less granular than census blocks but more granular than ZIP codes and MSAs; census tracts and ZIP codes are considerably more granular than MSAs. As of the 2010 census, there were 73,057 census tracts in the U.S. compared to 11,078,297 census blocks and 389 MSAs. In 2016 there were 33,120 five digit ZIP Code
TM
Tabulation Areas (ZCTA
TM
) in the U.S. As with buildings and census blocks, the sheer number of census tracts and ZIP codes, along with their variability over time, significantly undermine the administrability of using them for the competitive market test for incumbent carriers, competitive providers and the Commission.

3. Appropriate Level of Competition

117. Upon examining the structure of the business data services industry and the record before us, we find that a combination of either one competitive provider with a network within a half mile from a location served by an incumbent LEC or a cable operator's facilities in the same census block as a location with demand will provide competitive restraint on the incumbent LEC that will be more effective than our legacy regulatory regime in ensuring rates, terms, and conditions are just and reasonable. Our conclusion that a “nearby BDS competitor” provides sufficient competition to forgo regulation of an incumbent LEC's provision of BDS is based on three findings: (1) A determination of the geographic scope within which a likely BDS provider can realistically compete with an incumbent LEC; (2) a finding that one such competitor in addition to the incumbent LEC provides a reasonable degree of competition in BDS supply; and (3) a finding that the benefits of such competition outweigh the potential unintended costs of regulation.

a. Effect of a Nearby BDS Competitor

118. The record in this proceeding indicates that providers actively compete for customers located within about a half mile from their networks by bidding on requests for proposals and sending their sales personnel to offer their services. When bidding on a contract, providers often “have no way of knowing with any reasonable degree of certainty which other providers are capable of serving that customer over their own facilities” and, therefore, when bidding on an RFP they “make much rougher assessments of the possibility of facing competitive bids”—a dynamic that “ensure[s] that the benefits of competition redound to all customers in an area where competitive facilities have been deployed, not just those who are located within a certain distance of a network, or that offer a certain level of revenues.” Accordingly, we determine nearby competitive network facilities exert competitive pressure on incumbent LECs whether or not their network is within a half mile of a customer's location.

119. We further find that wireline providers of BDS are commonly willing to extend their existing network out approximately a half mile, and in some instances further, to meet demand. That is, the cost of meeting demand within

one-half mile, including the costs of network extension and customer connection, is usually less than the present value of expected net revenues that buildout to that location will entail. This is true for cable companies who today are major and aggressive business data services suppliers. For example, in 2013 cable already supplied BDS, largely over fiber facilities, to more than one in ten locations with BDS demand, and may well reach 23.5 percent of locations today. We additionally assume as a reasonable approximation that a cable company competes for any BDS demand, or will do so within a few years, wherever it is supplying mass market broadband services over its own network, or will do so sometime over the next few years. We find this is so even for locations with BDS demand that are not currently connected to the cable company's network, and which may be more than a half mile from a fiber-node (because cable companies are actively driving fiber closer to all end users, and so extending fiber to a new location beyond that distan

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2017-10713. Public record. Not legal advice.