November 2011

Last week, AT&T bowed to reality as it and Deutsche Telekom withdrew their transfer of control application from the FCC, reportedly as FCC Chairman Genachowski announced his recommendation that the Commission adopt an order designating the application for hearing.  Cecilia Kang reports on the applicants’ surprising move.

Harold Feld of Public Knowledge maintains that under the FCC’s rules, AT&T may not be in a position to withdraw its application.  On its Public Policy blog, AT&T contests this assertion, maintaining it withdrew the application prior to the FCC’s vote on the hearing designation order consistent with [Section 1.934(a)(1) of] the Commission’s rules.  An FCC clarification may be forthcoming.

AT&T and Deutsche Telekom elected to focus on the DoJ antitrust lawsuit, minimizing the consequences of an adverse FCC order and, apparently, believing the FCC will grant a revised application after a favorable court decision or approved settlement. An article by Bloomberg’s Scott Moritz in and Serena Saitto projects that AT&T is preparing a much more aggressive settlement offer in terms of divesting T-Mobile spectrum and customers.

In my view, the proposed merger, with or without spectrum and customer divestitures, remains adverse to the interests of enterprise customers.  AT&T and Verizon Wireless dominate the enterprise Wireless market.  Substantial acquisitions of spectrum or customers or both by AT&T—from a current competitor—will only raise the competitive challenges facing other Wireless carriers, individually or collectively, to compete against the two major carriers in this market segment.

The same is true for the consumer postpaid market in which sales of sophisticated smart phones and tablets are bundled with service.  In light of the FCC’s tolerance of exclusive handset arrangements between Wireless carriers and handset manufacturers, any further concentration of spectrum and customers in AT&T undermines competition in this market segment.

Do you know whether and how your websites use “cookies” or other technologies to collect information from users and/or target advertising?  Do you know what information is being collected and how it is being used?  The Federal Trade Commission has endorsed an online “Do Not Track” mechanism, and recent inquiries, investigations, and lawsuits relating to the use of cookies and other technologies online have put the issue in the spotlight:

  • Sen. Jay Rockefeller, who introduced a “Do Not Track” bill earlier this year, plans to hold a hearing on Facebook’s use of cookies following a USA TODAY report.  Rockefeller sent letters to Visa and MasterCard last month about their information collection practices.
  • Reps. Ed Markey and Joe Barton, who introduced a “Do Not Track Kids Act” earlier this year, have also made inquiries to Facebook about its information collection practices.
  • The FTC is reportedly close to reaching a settlement with Facebook over allegedly deceptive privacy practices.
  • Earlier this month, the FTC entered into a consent agreement with the online advertiser ScanScout regarding claims that consumers could opt-out of targeted ads by changing their browser settings to remove or block cookies, when in fact it that was not possible with flash cookies.
  • Several private lawsuits were brought in 2010 and 2011 relating to the use of tracking technologies on websites, which alleged violations of various federal and state laws.

It may be some time before a comprehensive federal privacy law is adopted, but we can expect that the FTC will continue to exercise its authority over unfair and deceptive practices and plaintiffs will continue to pursue privacy-related lawsuits.  With this evolving landscape, it is important for a company’s review of its privacy policies and information collection practices to encompass not only personal information, but also information that has historically been deemed “non personal” in nature (e.g., pages viewed, referring websites, and the like).

If you want any dispute arising from a services contract to be quickly resolved, you probably need to include a mandatory arbitration clause in the contract.  Why?  Because the delays in resolving civil cases in court continue to grow. This situation further supports our standard recommendation that enterprise customers should seriously consider seeking to resolve disputes under services agreements under mandatory arbitration clauses.

The Wall Street Journal announced recently that a “Glut of Criminal Cases Puts the Squeeze on Civil Case.”  The dirty little secret is out of the bag.  Simply put, if you have a case in federal court, you’re at the end of the line behind all of the criminal prosecutions and the other civil litigants who got there first.  According to the Journal, criminal prosecutions in federal court have increased 70% in the past ten year.  Criminal cases have priority over civil cases so as criminal cases increase, judicial time available for civil cases decreases.  Meanwhile, almost 300,000 new civil cases were filed in federal court in 2010.  While the workload has increased, the number of judges is falling because there is a 9.5% vacancy rate.  The end result is that the median time to trial in federal courts in 2010 was almost two years, which means that 50% of the trials took more than two years to begin.  This increasing delay for civil litigation probably is occurring in the state courts as well.

AT&T and Verizon capture the lion’s share of enterprise Wireline services business in the United States.  This year, Level 3 acquired Global Crossing and CenturyTel acquired Qwest (now “CenturyLink”).  These two companies could drive the return of the competitive environment of the mid-to-late 1990s that, unfortunately, collapsed in the wake of the WorldCom accounting fraud.

In some respects, these two companies face greater challenges today as AT&T and Verizon control so much of the market for special access services in addition to having extensive portfolios of voice and data services.  The following are “keys for success” for CenturyTel and Level 3 in pursuing enterprise Wireline customers.

Keys for Success for CenturyTel

  1. Within its local service territories, leverage local services and special access facilities to deliver aggressively priced bundled services.
  2. Focus on enterprise customers having substantial operations in the “Qwest states.”

Keys for Success for Level 3

  1. Leverage its strengthened position as a Tier 1 ISP.  Focus on the most portable enterprise data service: high speed dedicated Internet access services.  This is consistent with its commitment to content delivery service.
  2. Focus on international and rest-of-world services.  As a result of the takeover of Global Crossing, Level 3 has substantial international facilities.

Common Keys for Success

  1. Partner with CLECs and CAPs, including the major cable operators (out-of-region for CenturyLink).  Minimize dependencies on Verizon and AT&T, however challenging.
  2. Commit to VoIP.  The FCC’s USF Order establishes a regime of declining terminating access rates and migration to bill and keep.  Enterprise customers increasingly accept SIP trunking.
  3. Position yourselves as secondary MPLS carriers.  Enterprises are looking for diversity/redundancy at critical locations.
  4. Deliver a positive customer experience.  Strengthen sales, offer management, and provisioning  processes.  When they choose to do so, AT&T and Verizon make very strong impressions in these areas.  Implement best in class billing and “help desk support.”
  5. Adopt more balanced standard services agreements.  The established carriers’ approach creates another hurdle for marketplace acceptance.

Enterprise Customers: Consider the Big Picture

Level 3 and CenturyLink must demonstrate a commitment to enterprise customers.  For the near term, wholesale replacement/displacement of AT&T or Verizon by either Level 3 or CenturyLink is neither likely nor unrealistic.  On the other hand, these carriers warrant consideration for no other reason that continuous reinforcement of a virtual duopoly is not desirable.  Enterprise customers should extend RFPs to these carriers other than as a formality or as straw-man competitors and consider procurement strategies other than the “winner take all” approach.

While the text of the FCC’s Report and Order and Further Notice of Proposed Rulemaking on universal service and intercarrier compensation reforms (“USF Order” or “the Further Notice,” as applicable) has not been released, the Executive Summary  of the agency’s decision allows us to project the more prominent “winners” and “losers.”

The Winners

Verizon Wireless, AT&T (Mobility), Sprint and SIP-Based Voice Services Providers.   These carriers will benefit as bill-and-keep replaces the current intercarrier compensation (“ICC”) scheme.  These services providers will realize substantial savings as terminating switched access rates decline progressively during the transition to “bill and keep.”  For the largest price cap incumbent local exchange carriers (“Price Cap ILECs”), the transition period is 6 years; for the rural ILECs subject to rate of return regulation (“Rural ILECs”), the transition is 9 years.  For local CMRS traffic terminating on the local ILEC’s network, bill-and-keep becomes the default pricing rule.

Mobile Wireless Broadband Providers.  Wireless competitive eligible telecommunications carriers (“ETCs”) must now support voice and broadband services.  Initially, the new Mobility Fund will provide mobile wireless broadband providers up to $300M in “one-time support” for deployment of 3G/4G services in census blocks in which wireless broadband service is not available.  This funding will be made available through a reverse auction tentatively set for the 3rd quarter of 2012.  Beginning in 2012, up to $500M will be available for annual support to mobile wireless broadband providers.  

Wireless Satellite Broadband and Unlicensed Wireless Broadband.   Taking a new approach,  the USF Order sets aside up to $100M annually for broadband satellite and unlicensed wireless broadband services to be provided to the most remote areas of the nation.  The rules governing the eligibility and service obligations for these providers will be established in the Further Notice.

The Rural ILECs.   For years, the Rural ILECs were the ‘whipping boys” for USF and ICC reform.   Even though the USF Order adopted numerous reforms relative to these carriers,  the Rural ILECs demonstrated their substantial investment in rural broadband infrastructure and the significant adverse impacts to customers and non-USF funding sources if radical changes to current support levels (particularly on top of ICC reforms) were implemented.  Until 2017, Rural ILECs will receive up to $2B annually in support, approximating current annual USF support.

The Further Notice will review the Rural ILECs’ current 11.25 % authorized rate of return and funding approaches under the Connect America Fund (CAF)—the broadband focused successor to USF.  To mitigate reductions in ICC payments but taking into account ongoing declines in ICC revenues, Rural ILECs will be allowed to recover some lost ICC revenues through a transitional Access Recovery Charge (“ARC”) mechanism, authorizing limited increases in subscriber line charges (“SLCs”) and supplemental funding from the CAF, if justified.

Price Cap ILECs (Principally Verizon, AT&T, CenturyLink, Frontier and Windstream).  The FCC froze USF support at current levels for these carriers, offering them the opportunity to pursue additional one-time funding to deploy broadband infrastructure in unserved areas of their service territories.  As with the Rural ILECs, continued support for these carriers (in rural areas) will reflect historical declines in ICC revenues which may be supplemented through the interim ARC mechanism described above.

Federal Communications Commission.  The FCC made a number of challenging policy decisions to promote broadband development in under- and un-served areas of the nation.  The agency deserves credit for addressing USF and ICC rules and policies in a comprehensive fashion.

Continue Reading Winners and Losers under the FCC’s USF Order