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Sunday, March 16, 2014

Debunking the bulk

Many people in the E-Rate community seem to believe that consortia or other bulk purchasing schemes will lead to lower prices. Where's the evidence to support that hypothesis?

As far as I've seen, the only attempt at providing proof came in last summer's NPRM: “the Commission’s Rural Health Care Pilot Program showed that bulk buying through consortia coupled with competitive bidding can reduce the prices that recipients pay for services and infrastructure.” (paragraph 88)

Let's take a closer look.

The NPRM's footnote refers to paragraph 93 of the Healthcare Connect Fund Order,  which in turn refers to paragraph 83 of the Wireline Competition Bureau Interim Evaluation of Rural Health Care Pilot Program Staff Report. That report cites 4 examples:
  • a letter from a consortium (Colorado Telehealth Network Feb. 28 Ex Parte Letter) which states that the members got better pricing, 
  • a letter from a consortium stating that members negotiated individual agreements
  • two comments on phone calls that sharing reduced costs, not that prices were reduced (Pilot Conference Call Mar. 13 Ex Parte Letter (PMHA et al.) and Pilot Conference Call Mar. 26 Ex Parte Letter (WNYRAHEC et al.)). 
 The report also relies on USAC Data Reporting letters like this one, which says things like:
  • “Through conversations with Pilot projects, USAC observed that projects were able to obtain lower rates for services and to realize other purchasing efficiencies because the services were competitively bid and the projects purchased services for a consortium of HCPs. In situations where a project chose to bid as a whole network, service providers appeared more willing to provide large discounts because the Pilot projects had a large number of HCP sites.”
  • “Based on discussions with Pilot projects and observations during the course of the Pilot program, USAC believes that these consortium arrangements provided the individual HCPs with lower rates.” 
The assertion that consortia and bulk buying lower prices seems to be completely based on the anecdotal evidence that program participants told the program administrator that they had gotten good prices. Would anyone expect someone running a consortium to say that the consortium was increasing prices?

The only "evidence" that prices are lower are the self-serving comments from program participants.  There are no actual numbers.

So let me give some examples from here in NJ.

First, a couple of years back, the NJ State Library offered all the libraries in the state a deal: if you connect to one of our three nodes, we'll give you free Internet access.  At that time, they put out a state-wide bid for those connections, and they got incredible pricing on circuits from Verizon, which was the only company that had the infrastructure to supply bandwidth to every library in NJ.  So with great circuit pricing and a free Internet port, that had to be the best deal for libraries throughout the state, right?  For that product, yes.  But both Verizon and the cable companies have other Internet access products that are not enterprise-class (think FiOS or a cable modem), but are good enough, and the price is a small fraction of the cost of a circuit to the state library.  So for many libraries, the connection to the state library was a wonderful opportunity.  For others, there were better options.  And the state-wide nature of the bid precluded, for example, the cable companies from bidding, because cable coverage in this state is a patchwork of companies.

Second, we have had for years a statewide cooperative purchasing program for long distance.  The state wanted to encourage schools to use the program, so they passed a law saying that schools had to join the cooperative.  So I always advised clients to join it.  Was it the lowest price they could get?  No.  I could always find lower prices.  In fact,  I could get lower prices for individual schools from the same vendor that won the co-op bid.  Being a member of that co-op was never the cheapest way to go.  But a small district's long distance bill is a few hundred dollars a year, so the savings from lower prices would have been less than $100, so why fight the state?  Like many purchasing co-ops, this was more about administrative convenience than about price.

Third, we currently have a state-wide purchasing co-op for Internet bandwidth and VoIP.  When they went out to bid, they got good pricing, but not substantially better than members could have gotten on their own.  And at this moment, the price for an individual school is 24%-55% lower on bandwidth by contracting individually over joining the co-op.  For a 1 Gbps circuit, the co-op can be twice as expensive.  And to be clear, I am talking about the pricing from the two vendors that are on the co-op bid.  I'm not even talking about looking at alternative vendors like the cable companies, who couldn't bid on a state-wide contract.

Does consortium or bulk purchasing lower costs?  Sometimes.  Does consortium or bulk purchasing increase costs?  Sometimes.  Should the FCC be encouraging consortia or bulk purchasing?  No.  Because if the bulk purchase is the better deal, applicants will go that direction anyway.  If the FCC puts its thumb on the scale, it will only have an effect in those cases where the consortium would otherwise not be the most cost-effective, but are made so by E-Rate rules.  Do we want to encourage applicants to join consortia that are not otherwise cost-effective?

The FCC should take steps to remove barriers to bulk purchasing.  Here are some ideas:

  1. Put consortium applications at the head of the line for PIA.  Apparently, Chairman Wheeler did this.
  2. Get rid of LOAs. The consortium agreement should be enough.
  3. Reduce the need for the Form 479.  Take CIPA certification off the Form 486, and make a separate form.  Then allow us to look up online any applicant's CIPA certification status for a particular funding year.  Because right now, consortium leads have to chase down Forms 479 from members which have already certified CIPA compliance on a Form 486.
  4. Allow consortia and co-op members grow after a Form 470 is posted.  Currently, the Form 470 has to list the BENs covered, so if applicants later want to join the consortium, they aren't covered by the Form 470.  The FCC should allow them to be retroactively covered.
  5. Don't require consortia to file Forms 470.  Even better, scrap the Form 470 all together.


  1. If the FCC would enforce the LCP there would be no need for consortia. In Ohio AT&T charges all schools $800/month for a 100 Mbs Metro E WAN circuit irregradless of location. This pricing was negotiated years ago by the ORNET, the State network and is billed directly by AT&T to each district. Here in NC AT&T charges $1,200-1,400/month for the same service. I wonder what the price range is in other states.

    As far as I know the FCC has never enforced the LCP on any service provider.

  2. I've seen $100 Mbps circuit costs anywhere from $1,000 to $1,800 here in NJ.

    I'm with you on Lowest Corresponding Price (LCP).

    LCP made the summer NPRM, but I'm not holding my breath.