A new research paper from Anna-Maria Kovacs of the Georgetown Center for Business and Public Policy details potential damage from FCC-mandated price cuts on Business Data Services (BDS). From the paper:

We model the effect of mandatory BDS price cuts on the free cash flows of BDS providers. We conclude that BDS rate-cuts are likely to do serious damage to the financials of competitive providers, i.e. non-incumbents, as well as incumbents who provide BDS infrastructure. Because company valuations reflect multiples of cash flow, decreases in cash flow are likely to result in lower valuations. The heaviest damage is likely to be to those who are primarily facilities-based, but the free cash flows and valuations of resellers are also likely to be harmed.

Also of note in the paper:

• Since all BDS providers will be hit financially, their ability to afford the network buildout both the Obama Administration and the FCC want to see by 2020 will also be affected.

• Mandating price cuts for high-capacity Ethernet and dark fiber will have a significant impact on the free cash flow of BDS providers, making it more difficult for them to make the business case for the costly migration from 4G to 5G technology.

Since both the buildout by 2020 and the migration to 5G listed above are a focal point for the FCC, why would the Commission want to undermine their own agenda by mandating BDS price cuts? Hopefully the FCC will provide an answer to this question — or better yet, move away from mandating price cuts altogether.

Kovacs’ paper is titled “Business data services: The potential harm to competitive facilities deployment.” You can check it out for yourself here.