New Networks Institute

Complaint Against Bell Atlantic, New York

Press Release 

Report 2: Bell Atlantic Should Pay Customers Compensation

 ============================================================================ OUR DIGITAL FUTURE:

A SERIES of EXECUTIVE REPORTS


EXECUTIVE REPORT 1

 

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NNI was asked to comment on Bell Atlantic's ADSL discount wholesale pricing to ISPs. It is a clear case of a monopoly using predatory pricing to eliminate competitors.

Based on Bell Atlantic’s "The ISP Term & Volume Program: Rates", dated October 1999 (which is a rewrite of a previous pricing sheet), Bell Atlantic's pricing will clearly result in competitors never being able to compete against Bell Atlantic retail. In fact, these companies will lose massive amounts of money for every customer they sign up.

The Details

Bell Atlantic’s ADSL pricing is based on volume discounts and, for the most part, is sold with a five-year contract. For the average ISP who wants to offer these services, the overwhelming majority of companies would fall into the 5% or 10% savings for the ADSL service. This equates to about $2 or $4 a month (not including the Internet service provision.)

As a reseller of ADSL, this makes the sale not worth offering. Of course, if you were to bring in One Million lines in five years, you would get a 25% discount. However, this number is laughable since only a few companies in all of America today have one million or more customers--- or could have in the New York Market in the foreseeable future.

Considering most resale agreements are based on the premise that company that sells a product should also make a profit, just on the face of it, small ISPs can never make any money from reselling ADSL. But this insult pales compared to the real predatory nature of offering this product.

ALL The Charges Equals Continuous Losses

In order to deliver ADSL, Asymmetric Digital Subscriber Lines, the ISP has many other additional hidden charges that they have to pay. When a customer orders ADSL, the company must purchase a number of switches, routers, etc. all of which cost a very large start-up fee. In order to deliver any product, the company has to invest $40,000 dollars to be able to handle the basic ADSL services. Rental agreements are common and the two pieces of hardware range from $1,500 –$3,000 a month.

Hardware leasing $1,500-$3,000 a month

Then there is something called a "Back haul", (the traffic from the central office to the ISP) which is also must be purchased to handle ADSL and it ranges about $2,500-$3,000 a month.

Backhaul $ 2,500 - $3,000 a month

Then there is a connection to the Internet and this is expensive. Bandwidth to the Internet is a variable cost---the more customers you have, the more bandwidth you need. The range is from $4,000 to $55,000.

Bandwidth to the Internet $4,000- 55,000+

Let’s walk through this slowly. When person orders a circuit that can deliver lets say a megabit service, (which is 1000Kbps), this service requires that the ISP company be able to deliver on that bandwidth… i.e., that the company deliver a large amount of data.

In order for an ISP to do this, they have to order "bandwidth" to fit their clients. So in a very simple model, if they had to order a one megabit (1mbps) circuit, then the company has to have a one megabit capacity, back to the Internet, as an ISP. However, since there are multiple users, who don’t use the service every moment of every day, then the ISP can purchase one circuit and be able to supply more customers.

So, a one megabit circuit can handle, somewhere around 15-20 one megabit clients. There is some industry argument about the amount of customers you can or should stuff onto a circuit as well.

A Megabit of Internet bandwidth cost roughly $1000 per megabit per month. 125 one megabit customers would require, at 20 to one usage about $5, 000 per month (125 divided by 20 per megabit) As you add more customers you also have to keep adding technology, capacity and staff.

The information in Appendix 1 goes through the details for discounts based on Bell Atlantic’s mandatory customers as well as the discount plans. It is not a pretty picture.

To summarize:

At a 5% discount, a competitive company selling Bell Atlantic ADSL and supplying Internet service will be unable to ever break even, but over five years, they will have lost more and more money. That is even assuming that they are able to sell ALL the circuits. In short, there is an ever mounting loss--- losing over $70,000 a year to over $300,000 a year--- over $500 a customer and never even getting close to break-even. This example uses 30 customers a megabit, a great deal more than is recommended.

Year 1

Year 2

Year 3

Year 4

Year 5

Monthly loss		$ 5,833	$ 7267	$ 8,700	$ 14, 650	$ 29, 250
Loss per year		$ 70,000	$ 87,200	$ 104,400	$ 175,800	$ 351,000
Loss per Customer		$ 560	$ 349	$278	$ 234	$351

But it does doesn’t get better at 10% either because the company will be hemorrhaging money, and the losses are even greater. The loss in year 5 for example has the company losing $3 million dollars and no end in site.

				Year 1		Year 2		Year 3		Year 4		Year 5
Monthly loss			$ 6,767		$ 11,500		$ 16,233		$ 31367		$ 261,650
Loss per year			$ 81,200		$ 138,000		$ 194,000		$ 376,400		$ 719,800
LOSS PER CUSTOMER			$ 325		$ 184		$ 156		$ 151		$ 144

These statistics are based solely on industry standards and Bell Atlantic can say whatever it wants, but it would be contradicting the wisdom of the current industry players.

 Who is Subsidizing Bell Atlantic.net? (Bell Atlantic.net BA’s ISP)

These two models show a $10 Internet ISP fee as a standard. And the reason is that Bell Atlantic is currently bundling their ADSL with their ISP service at that price. It is clear from this model that Bell Atlantic must be also losing money by selling the services below cost. Obviously Bell Atlantic's own ISP must also be subsidized. This brings up some very serious issues. Who is paying the difference? Is Bell Atlantic charging customers extra in other services to subsidize its Internet Services?  And even though it's a separate sub, doesn't this subsidization strategy still show cross-subsidization--- while one part of the company loses money, the other side is removing competitors and making money?

 

HOW BELL ATLANTIC'S DSL PRICING ELIMINATES INTERNET COMPETITION
			At 5% Bell Atlantic DSL Discount
	Revenues		Year 1	Year 2	Year 3	Year 4	Year 5
	Accounts to be sold		125	250	375	750	1000
	DSL revenue		$ 250	$ 500	$ 750	$ 1,500	$ 2,000
	ISP revenue		$ 1,250	$ 2,500	$ 3,750	$ 7,500	$ 10,000
	Monthly Revenue		$ 1,500	$ 3,000	$ 4,500	$ 9,000	$ 12,000
	Expenses
	Hardware		$ 1,500	$ 1,500	$ 1,500	$ 1,500	$ 1,500
	Additional hardware		$ -	$ -	$ -	$ 1,500	$ 1,500
	Backhaul from CO to ISP		$ 2,500	$ 2,500	$ 2,500	$ 2,500	$ 2,500
	Internet Bandwidth 30:1 oversell		$ 2,667	$ 5,333	$ 8,000	$ 16,000	$ 32,000
	SUBTOTAL: Supply chain costs		$ 6,667	$ 9,333	$ 12,000	$ 21,500	$ 37,500
	Marketing and sales (10%)		$ 667	$ 933	$ 1,200	$ 2,150	$ 3,750
	Monthly Total: Direct Expenses		$ 7,333	$ 10,267	$ 13,200	$ 23,650	$ 41,250
	Monthly Profit (Loss)		$ (5,833)	$ (7,267)	$ (8,700)	$ (14,650)	$ (29,250)
	Loss per year		$ (70,000)	$ (87,200)	$ (104,400)	$ (175,800)	$ (351,000)
	Profit (Loss) per Customer		$ (560)	$ (349)	$ (278)	$ (234)	$ (351)
			At 10% Bell Atlantic Discount
	Revenues		Year 1	Year 2	Year 3	Year 4	Year 5
	Accounts to be sold		250	750	1250	2500	5000
	DSL revenue		$ 1,000	$ 3,000	$ 5,000	$ 10,000	$ 20,000
	ISP revenue		$ 2,500	$ 7,500	$ 12,500	$ 25,000	$ 50,000
	Monthly Revenue		$ 3,500	$ 10,500	$ 17,500	$ 35,000	$ 70,000
	Expenses
	Hardware		$ 1,500	$ 1,500	$ 1,500	$ 1,500	$ 1,500
	Additional hardware		$ -	$ -	$ 1,500	$ 3,000	$ 7,500
	Backhaul from CO to ISP		$ 2,500	$ 2,500	$ 2,500	$ 2,500	$ 2,500
	Internet Bandwidth 30:1 oversell		$ 5,333	$ 16,000	$ 26,667	$ 53,333	$ 106,667
	SUBTOTAL: Supply chain costs		$ 9,333	$ 20,000	$ 30,667	$ 60,333	$ 118,167
	Marketing and sales (10%)		$ 933	$ 2,000	$ 3,067	$ 6,033	$ 11,817
	Monthly Total: Direct Expenses		$ 10,267	$ 22,000	$ 33,733	$ 66,367	$ 129,983
	Monthly loss		$ (6,767)	$ (11,500)	$ (16,233)	$ (31,367)	$ (59,983)
	Loss per year		$ (81,200)	$ (138,000)	$ (194,800)	$ (376,400)	$ (719,800)
	LOSS PER CUSTOMER		$ (325)	$ (184)	$ (156)	$ (151)	$ (144)