One matter that should be addressed this year is the appeal of the FCC’s Open Internet Order currently pending before the D.C. Circuit.  Because this is such a prominent matter, we believe the non-prevailing parties likely will petition the Supreme Court for review.

FCC Taking a Fresh Look at Special Access Services.  In an earlier entry, we highlighted the FCC’s reassessment of the interstate special access services market.  Subsequently, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, setting out a comprehensive data request to  price cap ILECs and other services providers to determine the extent of competition among providers of special access services, principally, DS-1, DS-3 and Ethernet special access services.  Ethernet service broadly is undergoing rapid growth.  The FCC is taking a direct approach to determine whether special access rates are competitively priced.

We propose to perform a one-time, multi-faceted market analysis of the special access market designed to determine where and when special access prices are just and reasonable, and whether our current special access regulations help or hinder this desired outcome. We do not propose to conduct a simple market share or market concentration analysis.  Rather, we will use the data we are collecting in this Report and Order to identify measures of actual and potential competition that are good predictors of competitive behavior, for example, by demonstrating that prices tend to decline with increases in the intensity of various competition measures, holding other things constant.  In undertaking that analysis we will consider evidence as to what leads firms, including competitive providers, to undertake infrastructure investments.

Clearly, a fresh look at the special access services market (data for years 2010 and 2012 are being requested) is warranted. 

Two points merit further note.  First, the FCC is seeking comment on whether Internet access service is a competitive alternative to special access services.  Hopefully, the FCC will conclude the services are not substitutes.  Internet access service is not an “access service,” rather it is part and parcel of an end-to-end best efforts shared transport and information access and retrieval service.  Special access is basic transport between defined physical locations.  Second, the FCC is requesting comment on the “Petition to Reverse Forbearance Determinations,” filed late last year by an enterprise customer group, Sprint and several interexchange carriers that requests the FCC to reverse decisions issued prior to 2010 in which the FCC elected to forbear from (i) imposing certain Computer Inquiry requirements on the price cap ILECs, and (ii) regulating non-TDM based special access services offered by price cap ILECs, particularly Ethernet services.

Enterprise customers, as well as SMBs, buying TDM-based wireline voice and data services bear the full brunt of today’s elevated USF assessments (via carrier USF recovery pass-through charges).  Consistent with the migration to IP services, enterprise customers are compelled to explore strategies to minimize the USF burden.  Two ideas come to mind: (1) migrate voice as well as data traffic to Multiprotocol Label Switching (“MPLS”); and/or (2) where feasible, migrate data traffic to high speed Internet access service.

The manner in which services providers assess USF on MPLS revenues varies considerably.  MPLS services providers have sought a declaratory ruling that would impose a uniform, relatively modest USF contribution burden on MPLS revenues.  Moreover, as intra-corporate voice traffic is shifted to MPLS, a customer’s overall USF costs should decline as expenditures for standalone voice services decline.   

Subject to reliability and security considerations, migrating some portion of enterprise data traffic (alternatively, converting as many locations as feasible) to Internet access service yields several economic benefits.  Internet service is the least cost data communication option for a given capacity or data rate and, as an information service, is not subject to USF revenue contribution obligations at this time. 

AT&T Seeks a “Regulatory-Lite” Path to Deregulated, All-IP Networks. The National Broadband Plan viewed the transition to all-IP networks as a critical step to nationwide broadband deployment.  Local wireline networks have lagged in this transition.  In its “Petition to Launch A Proceeding Concerning the TDM-to-IP Transition” filed on November 7, 2012, AT&T requests the FCC grant local exchange carriers the option to conduct “trial runs of the transition to next-generation services, including the retirement of .  .  . [TDM] facilities and offerings and their replacement with IP-based alternatives.” AT&T is looking to eliminate regulations it believes impede this transition or extend legacy telecom regulation to the all-IP services environment. On the same date, AT&T announced “Project Velocity IP”, a series of multi-billion dollar investments intended to deliver broadband (either wireline or wireless) to all customers served by its legacy local telephone networks. 

In many respects, AT&T is looking for deregulation (classifying most, if not all, IP services as information services, not extending carrier interconnection obligations to IP services, etc.) and preemption of state regulation, including carrier of last resort (“COLR”) obligations.  A more conservative proposal for regulatory flexibility to support the migration to all-IP networks for local exchange carriers was offered by the National Telecommunications Communications Association.  The two petitions diverge on multiple points, including interconnection obligations of ILECs with regard to IP traffic.

Not surprisingly, most competitors to AT&T (for local and interexchange services) opposed multiple aspects of its proposal. The adverse impact of a rapid migration to an all-IP network on the Nation’s air traffic control network was highlighted by Harris Corporation.  Verizon offered vigorous support for AT&T’s petition.  A large corporate user group opposed AT&T’s deregulatory proposals, arguing that AT&T and other price cap ILECs remain dominant in the local exchange and access services markets. Sprint supported the more measured suggestions offered by NTCA.

A more dispassionate view supporting the transition is offered by Steven Cherry in his interview with David Berninger.  In this regard, the FCC recently exercised its forbearance authority regarding several legacy reporting issues raised in 2012 by USTelecom.

Judicial Review of the FCC’s Open Internet Order. From most perspectives, the FCC’s Open Internet Order is reasonable and warranted.  All persons should have ready access to lawful Internet content; entrepreneurs, retailers and manufacturers should be permitted to engage in e-commerce without concerns over preferential access or surcharges; and, providers of lawful content should have non-discriminatory access to the Internet, subject to reasonable network management rules. While the major facilities-based ISPs largely adhere to these concepts, the FCC’s underlying concerns and those of many stakeholders relate to the potential for substantial abuse by these ISPs.  In light of the breadth and nature of the rules adopted in the Order—an initial impression of the FCC’s decision was that it had fashioned a new “Title II.5, Broadband Competition” for the Communications Act, it was no surprise that Verizon and MetroPCS appealed this decision, maintaining the FCC lacks the statutory authority to adopt these rules.

Thus, the question is whether the D.C. Circuit and, potentially, the Supreme Court will affirm the FCC’s authority to adopt this order.  While the matter is now fully briefed, the D.C. Circuit has yet to set the date for oral argument. The recent D.C. Circuit decisions Cellco Partnership v. FCC (affirming the data roaming rules) and American Electric Power v. FCC (affirming substantially revised pole attachment rules) underscore the primacy of judicial deference to agency decision making under Chevron v. NRDC, suggesting the FCC may prevail in this instance, as well.  

In the many parts of the United States, Internet-based businesses have access to essential Internet infrastructure at reasonable rates. Companies that are not longstanding, nationwide retailers or multi-national corporations can establish an Internet presence with relative ease in terms of out-of-pocket expenditures and access to essential services and technologies. Entrepreneurs offering interesting or innovative on-line experiences, products or services can contract with web hosting, high speed Internet access service, data center and/or cloud computing, and content delivery network services providers and establish a sophisticated, on-line presence in a matter of months. Consultants that can assess scale enhancements due to rising traffic on web sites may not be as easy to identify.

High speed Internet access service, the essential “utility service” for e-commerce, is available from multiple providers in many metropolitan areas and high technology corridors such as Washington, DC and nearby Northern Virginia. Internet-based companies are not tied to Verizon or AT&T for connectivity; they don’t need the national or multi-national footprints that are major selling points for the major carriers. Multiple second and third tier, facilities-based services providers continue to extend their networks to more customer locations.

Second and third tier Internet Access services providers often do not demand the strict “take-or-pay” obligations imposed by the major carriers. These services providers are not locked into nationwide, volume-based pricing structures and, just as the major carriers, offer a “best efforts” high speed Internet access service. In this competitive environment it is not surprising that at least one major carrier has taken steps to minimize the ease with which its customers can migrate their high speed Internet access service requirements to more aggressive competitors.

Internet-based entrepreneurs achieve global presence and scale by acquiring content delivery network services. E-commerce site operators do not have to enter into the highly structured, multi-year enterprise services agreements of the major carriers. Rather, they can purchase content delivery network services from entities such as Akamai to ensure a predictable and reliable on-line presence in their geographic areas of interest and to accommodate episodic or seasonal peak demand periods.

This robust Internet eco-system bodes well for continued U.S. leadership in e-commerce and on-line content. 

Customers Bear the Risks. In terms of substance and process, the carriers’ standard agreements are as one-sided as ever. Mutuality is limited to the standard disclaimer of consequential, special and incidental damages. The artificially low cap on damages is often limited to the carrier. This cap is laughable in light of the potential adverse impact of poor service on customers’ businesses and operations. As to process, customers may raise billing issues, but the standard billing dispute resolution provision typically provides that the carrier’s determination is final. Whether the parties agree to resolve disputes by litigation, arbitration or another form of ADR, all disputes should be subject to the agreed-upon process.   

Chronic Service Problems—Customer Beware. In light of the standard damages cap, the meaningful remedy for chronic service problems is termination of the service or the agreement. Several carriers undercut this option by limiting the consequences for poor service to credits offered under their Service Level Agreements (“SLAs”). The challenge is negotiating a service impairment threshold for which there is no opportunity for cure. (As a practical matter, a chronic service issue cannot be “cured”). As noted in an earlier entry, site-specific remedies are meaningless for chronic service issues associated with workhorse corporate data services—such as MPLS—in which hundreds, a thousand or more customer locations may be impacted. 

While the “termination remedy” imposes its own set of hardships--unplanned procurements and transitions to replacement carriers, customers should preserve this option. This is accomplished by negotiating provisions that provide (i) a reduction in the minimum revenue commitment equal to the value of the discontinued services for the balance of the agreement, and (ii) a reasonable transition period—not less than 90 days; six months is more realistic—to migrate traffic to a replacement provider. In addition, the underperforming provider should be obligated to issue a credit or pay the customer an amount equal to any increased cost for the replacement service. 

Why is the Customer Indemnifying the Carrier? Indemnity obligations vary widely, based on the services provider and the services in question. Customer indemnities (for the carrier’s benefit) should be limited because the vast preponderance of the customer’s risks—poor or unavailable service—are not and cannot be reasonably addressed because of the standard disclaimer on consequential, special or incidental damages. Some carriers demand indemnities against claims from customer’s users who suffer serious injury as a result of not reaching the local Public Service Answering Points (“PSAPs”)— when the VoIP/SIP user dials 9 1 1 at a location other than its “primary registered” location. The FCC’s regulations on VoIP and 9 1 1 calling should be sufficient. While some carriers reserve the right to suspend service for violations of the carrier’s Authorized User Policy (“AUP”), demanding an indemnity from customers against claims arising from non-compliance with an AUP is over the top. 

One major carrier’s standard agreement disclaims all liability for unauthorized access to customer’s communications. While it may be reasonable for a carrier to disclaim liability for unauthorized access to the customer’s information conveyed over its services, it is quite another to attempt to insulate itself from the misdeeds of its employees and contractors. Sadly, the FCC is not helping customers in terms of reasonable privacy expectations. The FCC’s Enforcement Bureau recently acquiesced, in effect, to Google’s view that Sec. 705(a) of the Communications Act does not bar non-parties to a wireless communication from securing the contents of non-encrypted Wireless communications.  Shortly thereafter, the FCC rushed out guidance on how to encrypt WiFi communications. 

Wireless Agreements—It Couldn’t Get Much Worse. Customers face a far steeper challenge in regard to Wireless service. Meaningful SLAs are few and far between. Wireless carrier agreements provide, in effect, that “if a subscriber is within range of an operational cell site having capacity to initiate and maintain the Wireless connection, service may be available.” More favorable “commitments” are sometimes negotiated, but SLAs as to access, availability or quality are feeble to nonexistent. Wireless carriers do address problematic service for business customers—at major corporate locations—through the deployment of distributed antenna systems (“DAS”) or bi-directional amplifiers (“BDAs”). The cost and terms of these arrangements vary widely. Customer self-help remedies for in-building coverage gaps are adamantly opposed by the carriers.           

Consumers and business customers access the same networks and procure largely the same handsets and laptop plug-ins. The two-year handset minimum commitment period drives enterprise agreements almost to the same extent as consumer transactions. Only recently has some differentiation between consumer and business Wireless services emerged, such as M2M and, most recently, an integrated LTE-MPLS offering from Verizon Wireless. Unlike data communications supported by Wireline services, wireless carriers clearly intend to control aspects of M2M applications.    

As a result of handset IP infringement litigation and the bundled nature of Wireless services and handsets, smartphones and tablets, Wireless agreements should provide practical remedies in the event continued use of infringing devices is banned. Carrier statements that customers look to handset manufacturers for equipment issues are laughable, at best. Each carrier picks the models, specifies the frequencies and may restrict/suppress certain technologies in the Wireless devices it offers for sale for use on its networks.

Revenue Assurance

Fundamentally, standard Wireless and Wireline services agreements are drafted to ensure that customers spend the minimum amounts that they committed to spend.  After agreement on services and rates, negotiations inevitably shift to minimum revenue commitments.  Notions that the quality of services delivered or the support provided should impact this revenue stream are clearly lacking in carrier agreements and negotiating strategies.  It often seems that carriers are far more focused on revenue assurance, perhaps for internal revenue projections ultimately shared with stock analysts, than revenue growth.

Volume-Based Pricing—Yes and No.   Broadly speaking, pricing for Wireless and Wireline services are volume-based.  A study conducted by a leading consultant several years ago of publicly available data confirmed this point, but also disclosed substantial variability in rates for similar commitment levels.  Another theory, largely rejected by experienced customers and consultants, is that the larger the percentage commitment for a customer’s projected spend level, the more aggressive the pricing. 

Taxes, Surcharges and All Other Costs the Carriers Can Imagine.  Wireline and Wireless services are subject to an endless stream of taxes and surcharges imposed by the FCC, state agencies and state governments.  The largest surcharge is the Federal Universal Service Charge which the carriers have been permitted by the FCC to recover from their customers.  The current FUSF charge is 17.9% for interstate Wireline services; the so-called “safe harbor” percentages for Wireless service are noticeably less.

Unlike taxes imposed incident to the sale of goods to consumers, principally sales taxes, the carriers’ standard practice is to recover all surcharges and taxes imposed on them by state and local governments, from property taxes to gross receipts taxes, excluding only taxes on earned income.  These costs are typically recovered through one or more separate line items on customers’ bills.  The carriers also recover a range of  costs incurred in the operation of their businesses, such as regulatory compliance costs.

Thus, while rates may nominally be “fixed” under many services agreements, the recovery of taxes, surcharges and other variable costs is now approximating 20% of the net charges for Wireline services and because of the endless stream of state taxes, growing at a healthy clip for Wireless services.   The rising levels and litany of taxes and surcharges drive customers to renegotiate rates and re-procure services. They must do so to minimize substantial increases in expenditures for telecommunications services. 

Generally, customers strive for a single commitment, as opposed to several “sub-minimums.”  In an earlier entry, we noted that for some services, principally MPLS, customers cannot as an operational matter migrate a portion of these services to another carrier.  Subject to the discussion in the following paragraph, the single commitment allows customers to shift traffic without penalty among a carrier’s services or, so long as the minimum is achieved, to other carriers.

Carriers go beyond the minimum revenue commitment by (1) imposing “minimum payment periods” extending as long as the initial term of the agreement for particular services, or (2) tying credits to an expenditure level in excess of the minimum revenue commitment.  Another mechanism is the “minimum retention period” intended to recover waived non-recurring costs associated with access services acquired from local telephone companies.  

Wireless Service Revenue Lock-In Strategies.  For all services except M2M services in which the customer equipment is typically supplied by the customer, each Wireless line typically carries a “line term commitment” (typically two-years) which enables the carrier to recover at least some portion of the handset costs it may be subsidizing.  Failure to maintain the line (or the handset) for line term, results in an early termination fee (ETF) that typically declines monthly over the commitment period.  The discounts for various service plans set out in agreements are typically tied to a minimum number of lines in service, subject to adjustment based on the number of lines in service for given periods of time.  Carriers and customers may negotiate other service commitments to achieve improved pricing or discounts.  The range of additional commitments is subject only to the creativity and negotiating approaches of the carrier and customers.

Adjustments to Commitments.   All services agreements should be reviewed for the impact of service discontinuances on the commitments discussed above. As a general rule, if service is being discontinued for the customer’s convenience or preference, as opposed to service or support issues, customers typically incur some sort charge for failing to meet the applicable commitment(s).  The major exception is discontinuing Wireline service not subject to or not triggering a shortfall in the minimum commitment .   On the other hand, when service or lines are discontinued “for cause” the commitment level should be adjusted.  The carriers’ standard agreements typically do not include a (downward) commitment adjustment mechanism for services discontinued for cause.

There are also 3 frequently observed circumstances in which strict application of the “take or pay aspect” of minimum revenue commitments may be relaxed:

1. A significant downturn in, divestiture or sale of a line business that impairs the ability of the customer to meet the commitment.
2. A change in services that result in noticeably reduced revenues.
3. Under a competitive pricing review, rates are reduced such that aggregate expenditures can no longer meet the minimum revenue commitments.

By far, the most common is the contraction in the customer’s business resulting in a reduction in overall telecommunications expenditures.

There are a range of processes (principally an agreement to negotiate or discuss) and considerations that may be included in services agreements to address these circumstances. The carriers generally appreciate that a substantial shortfall payment may have an adverse impact on the customer, particularly the IT, Telecom or Procurement group that negotiated the agreement.

Wireline Agreements.  Customers and carriers typically negotiate an overall minimum revenue commitment that may be an annual or term commitment.  Customer expenditures for most services typically “contribute” to satisfying the minimum commitment with the possible exception of local exchange services which, in many cases, are still subject to tariffs.  Tariffs take precedence over contracts.  Whether local services “contribute” to the overall commitment is a point of negotiation.  A more recent twist is the offer of a major credit based on an actual expenditures over a given period, typically a year.

In addition to domestic services, Wireline agreements may include international and “rest of world” services.  The latter denotes services that do not originate or terminate in the United States.  International services originate or terminate in the United States.  The services in these agreements include dedicated internet access services, voice and data services, such as MPLS, high capacity access services and managed services—carrier monitoring of customer premises equipment—typically routers and sometimes PBXs—enabling more rapid identification of service/equipment troubles and resolution Firewall and other security services are offered, as well. 

Wireless Agreements.  Wireless agreements tend to be domestic-focused with options for business customers whose employees travel internationally.  Various volume-based incentives and disincentives are common in these agreements.  The carriers continue to push for “preferred provider” status. 

Minimum line commitments exist to recover the cost of discounted handsets.  As a practical matter, each carrier offers its own portfolio of handsets, tablets and wireless cards, in part, to ensure these devices have “backward compatibility” over its respective spectrum bands.  Thus, carrier assertions that customers must look exclusively to handset manufacturers in connection with equipment issues strain credibility.  The devices generally are not portable to other carriers’ networks.  Adverse customer impacts of IP litigation among handset technology owners is an emerging issue.

Another feature of Wireless deals is the availability of corporate liable and individual liable service arrangements.  Under the latter, individual employees enter into individual agreements with the carriers, assuming responsibility for paying for their own services and handsets, but at the discounted rates negotiated in the enterprise’s agreement with the carrier.  Individually liable arrangements are part of the growing IT management challenges triggered by employees using their own remote devices to access corporate networks and data resources, often referred to as the Bring Your Own Device (“BYOD”) trend. 

Format of Agreements.  Schedules and attachments identify the services and describe the negotiated rates for the services being provided.  SLAs for Wireline data services such as MPLS and dedicated Internet access service are either provided as attachments or incorporated by reference, available on the carriers’ designated web sites, as are carriers’ Authorized User Policies (“AUPs”).  Service descriptions and the carriers’ “rack rates” are also set out in these online documents.  Some carrier web sites are among the worst on the Internet.  Useful indexing or navigational aids are lacking.

Wireless services agreements are more self-contained.  Sometimes there are no cross-references to online documents.  Service descriptions and standard SLAs are largely nonexistent, perhaps because the Wireless carriers deliver the same services and offer the same handsets to business and individual customers.  The emerging exception is M2M service that is geared solely to business customers.  Wireless carriers do not warrant and, in fact, explicitly disclaim any notion that coverage or service will be available or continuous throughout a service territory.

Precedence Clauses—Trying to Tie Loose Ends.   The order of precedence in services agreements is relatively straightforward: (1) the pricing schedules and attachments, (2) the general terms and conditions, and (3) online service provisions with some exceptions.  For Wireline agreements, tariffs for local and some interexchange services apply and take precedence over all other documents. 

The challenge is that the  carriers reserve the right to modify their online documents at their discretion, providing customers the option to discontinue the affected service if the impact is adverse and material so long as the customer provides timely notice of termination of the affected service. One topic for negotiation is the date on which the customer is deemed to have knowledge of the change to the online documents. 

A subtle aspect of the carrier changes to online documents encompasses modifications to the general terms and conditions for specific services.  For example,  one carrier imposes service-specific indemnities or insurance obligations in their online documents.  Standard precedence clauses do not conclusively establish that a service-specific provision “conflicts” with a provision on the same subject in the general terms and conditions.  The precedence clause should be expanded to ensure that generally applicable terms and conditions, which may be negotiated at length, cannot be added to or supplemented by provisions in online documents.

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. 

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.

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.  

Beware of the Tipping Point. 

It can also arise in connection with a well-executed RFP process.  This can occur after a successful procurement in which substantial business was awarded to an aggressive non-incumbent.  If, in the subsequent procurement cycle, the longstanding provider believes growth or future business is unlikely, the customer may be surprised by the longstanding carrier’s indifferent response to the RFP.  At this juncture, the customer’s business has reached the carrier’s “tipping point.” 

These outcomes are going to occur from time to time.  From an economic perspective, the customer can respond by migrating more business from the longstanding provider; sometimes the longstanding carrier controls access at customer locations, preserving a lucrative, albeit smaller, revenue stream.  The ability to migrate traffic also may be trumped by the customer’s interest in the maintaining diversity in carriers.  Diversity has a price.  Anticipating this possible outcome helps set reasonable expectations for upper management. 

Seize the Opportunity.  Recent experiences have confirmed the virtue of a practice we have followed over the years: When entering into an agreement with a services provider for the first time, or after a noticeable hiatus, push for as many changes as possible to the carrier’s one-sided standard agreement.  There never will be a better time. 

Two reasons underlie this recommendation.  First, the “new” services provider wants the business.  This tempers carrier intransigence to substantive changes to their standard agreements.  Second, carriers are far more inclined to amend existing agreements with new pricing schedules and other changes to the original agreement.  Carrier account teams would rather not re-visit all aspects of a negotiated agreement if at all possible.

Timeliness Makes a Difference:  New or amended services agreements typically implement new services or improved pricing or both.  Realizing these benefits quickly is a central objective for the enterprise.  While “keeping the process moving” is essential throughout the procurement process, as the terms of the deal are set out in the new agreement or amendment,  the customer’s team (enterprise staff, consultants and counsel) should complete their review and provide their inputs as timely as possible.  Providing comprehensive revisions as opposed to piece-meal edits is the only approach.  A timely, comprehensive response motivates effective carrier account representatives to bring together their offer managers, subject matter experts, and counsel to conclude the process quickly.

 1.  Above All, Carrier Agreements Are Drafted to Maintain Projected Revenue Streams

Minimum revenue commitments and early termination liability provisions are standard in Carrier Agreements, vestiges of the 20^th Century when interexchange (Wireline) services were offered under tariff.  Regulators either required or tolerated revenue shortfall protection for discounted rates.  Today, the economic justification for early termination liability is tenuous, at best, as (1) the services are no longer regulated and the carriers vigorously maintain the markets for their services are competitive;  (2) carriers’ costs consist largely of fixed, sunk network investments; and (3), from the customers’ perspective, the logistics and transaction costs in migrating enterprise- wide data services to successor carriers negates the option of readily switching carriers to optimize rates.

Billing for telecommunications services have been the carriers’ Achilles Heel for decades. A cottage industry of telecom expense management firms thrive because of challenged carrier billing systems.  Despite this reality, standard billing dispute clauses call for payment of disputed amounts after the carrier reaches its conclusion regarding the dispute.

Unrealistically low caps on direct damages is another 20^th Century vestige.  While problematic, the more significant concern is that Carrier Agreements do not provide meaningful resolution procedures for chronic service issues, as discussed in an earlier entry.  Site-specific or network-based Service Level Agreements are not adequate as the impact of chronic service issues on the enterprise go far beyond generally accepted notions of direct damages.

As telecommunications services were detariffed in the late 1990s, the carriers implemented tariff replacement documents that—in time—were loaded onto carriers’ web sites and referred to as “service guides” or “online documents.” Today, Carrier Agreements consist of 10--100 + pages and an array of non-indexed, online pages sprinkled throughout the carriers’ web sites. 

Initially, the service guides set out standard rates, some general terms and conditions, and service descriptions. The carriers reserved and continue to reserve the right to amend service guides without notice or consent by customers; often, offering the customer the right to terminate the affected service if changes are “material and adverse.”  Historically, few carrier-initiated changes were “material and adverse.”  Over time, the carriers have added indemnities to the their online documents, such as to their Authorized User Policies, even reserving the right to amend these policies.  In other cases, the general terms and conditions are online documents.

Thus, counsel have several challenges: (1) ascertaining and defining the scope of the agreement;  (2) understanding and monitoring the carriers’ unilateral changes to the agreement; and (3) limiting the extent of unilateral changes that impact the legal and business risks initially agreed to by the customer.  Standard precedence and entire agreement clauses are not adequate for these agreements.

3. Carriers Shift Regulatory Compliance Burdens to Customers

From time to time, Congress or the FCC adopt laws or regulations that impose restrictions or carriers, such as the protection of customer proprietary network information (“CPNI”).  Congress requires carriers to secure the customers express approval to disclose a customer’s CPNI to affiliates or 3^rd parties. Instead of allowing the customer to make a simple election to “opt-in” to CPNI sharing, the Carrier Agreements typically provide that the customer grants the carrier the right to share CPNI with affiliates and designated third parties, and requires customers to follow a detailed procedure to revoke this authorization, i.e., to “opt out.”

Another example lies in the FCC’s rules adopted to ensure that carriers apprise customers of the risks associated with the use of interconnected VoIP services in connection with 9 1 1 calls.  Because customers may utilize VoIP services wherever they secure Internet access, the telephone numbers of the calling party are not tied to a specific location.  Carrier Agreements place a variety of burdens and obligations on customers to mitigate carriers’ perceived risks in the event  9 1 1 calls don’t reach a public service answering point (PSAP) capable of alerting local emergency responders.

The ever-expanding clauses permitting the recovery of regulatory surcharges and taxes belie the notion that carriers offer fixed rate pricing.  These provisions have mutated from the recovery of surcharges or taxes imposed on the purchase of services to expansive provisions that permit carriers to recover virtually any tax imposed on them and any cost of doing business.

The Wireless Industry Arbitration rules are essentially the same as those for ordinary commercial disputes.  There are three tracks.  The Regular Track is for cases involving claims between $75,000 and $500,000 dollars.  Smaller claims are handled on using the Expedited Procedure and larger claims are handled on the Large/Complex Case Track.

In the Expedited Procedure, the AAA appoints a single arbitrator.  There is a presumption that the matter will be “tried” on the papers and there is a 45-day “time standard” for case completion.  In the Regular Track, there is presumptively one arbitrator and any discovery is at the discretion of the arbitrator.  Cases on the Large/Complex Track, are subject to mandatory pre-arbitration mediation and/or early neutral evaluation according to AAA.  Also, there is a presumption that there will be three arbitrators and the presumption that there will be discovery.  Finally, the parties can agree to an appellate type review of the initial award.  The Large/Complex case rules can be applied to claims that are smaller than $500,000 or that have no undetermined or nonmonetary claims at the request of any party.

As part of the program, AAA maintains a special panel of arbitrators known as the Telecommunications Panel.  The Telecommunications Panel includes many individuals who are engaged directly in the telecommunications industry.  According to AAA, attorney members of the Panel typically devote at least half of their practice to telecommunications matters.

Of course, any of the Rules can be altered by contract between the parties.

In assessing whether industry expertise is likely to be beneficial to reaching a fair and prompt resolution of a dispute, it is important to remember that most of the disputes that can arise relate to the contract between the disputing parties.  The Commercial Arbitration Panel members are experienced in resolving such disputes and experience with the wireless industry may not be an advantage unless the issues relate to the fine points of service structure or delivery.

If you believe that an arbitrator special expertise in the wireless industry will be advantageous, you should specify in your contracts that any dispute will be resolved by arbitration by the American Arbitration Association pursuant to the Wireless Industry Arbitration Rules.  Alternative, if agreement can be reached during the contracting process, you can identify a specific individual to act as arbitrator in the contract. 

From this perspective, the Justice Department’s complaint seeking to block the AT&T-T-Mobile merger was a welcome rush of fresh air.  It characterized a market subject to significant competitive challenges were the proposed merger consummated. While the Sprint complaint brought under the Clayton Act may be viewed as the legal equivalent of “piling on,” it provides a useful perspective on the domestic market for Wireless services.

It highlights the spectrum resources held by AT&T and Verizon (while deftly understating Sprint’s substantial spectrum resources), the competitive advantages realized by Verizon Wireless and AT&T by virtue of their exclusive/priority handset arrangements, and the dominance of AT&T and Verizon in regard to backhaul networks and special access services.  From the author’s perspective, the anti-competitive consequences of handset exclusivity remain largely ignored by regulators. The Sprint complaint highlights the various Wireless market segments, noting that the combination of AT&T and T-Mobile would result in AT&T and Verizon controlling 83%-85% of the postpaid market which is the Wireless segment of interest for business and government customers. 

As the District Court for the District Columbia moves forward with the complaints that have been brought by DoJ, Sprint and, most recently, Cellular South, a decision by the FCC may be forthcoming in less than 60 days. On August 26, 2011, the FCC “restarted” its informal 180-day “shot clock” for ruling on the merger.  Based on comments by FCC Chairman Genachowski and Commissioner Michael Copps issued shortly after DoJ filed its complaint,  AT&T may be hard-pressed to prevail at the agency even though its core argument that the merger will advance broadband deployment probably carries more weight before the FCC as compared to District Court Judge Ellen S. Huvelle presiding over the antitrust actions. 

Who are Telecom Consultants?  Generally speaking, Telecom Consultants are individuals, firms or groups within consulting firms that focus almost exclusively on Wireless or Wireline services procurements.  Many consultants previously worked in carrier sales or offer management positions and understand the internal incentives and strategies of the carriers.  Large, widely-known corporate consulting organizations, telecom technology trend advisers and telecom bill auditing firms are not necessarily experienced or as helpful as qualified consultants.

Services Provided By Telecom Consultants.  The services offered by Telecom Consultants vary.  While not every consultant offers each service, the principal services offered by Telecom Consultants may be summarized as follows:

1. Finalize the customer’s demand set for inclusion in customer’s RFPs.

- Many RFPs are based on consultants’ templates.

2. Share responsibility with the customer in managing the procurement process.

3. Negotiate the economic elements of the agreements, principally rates, custom plans and commitments.

4. Advise or participate directly in Wireline pricing refresh reviews.

5. Provide billing review, payment, reporting and audit services (telecom expense management services).

Some consultants focus exclusively on Wireless services, others concentrate on domestic and U.S.-centric international services, and some address Wireless and Wireline services for much of the developed world.

Criteria for Selecting Telecom Consultants.  Prior working relationships and referrals typically underlie the decision to engage a particular consultant.  We recommend that enterprise customers elicit the following information when looking to engage a Telecom Consultant:  (a) references from current or recent clients; (b) the services provided by the consultant; and (c) the number of recent procurements (prior 2 years to present) that equal or exceed the customer’s projected annual expenditures and approximate the customer’s mix of services, in terms of (i) wireless, wireline services or both, and (ii) geographic scope—primarily domestic, domestic and international, or domestic, international, and rest-of-world.  Relevant experience is essential.

Another consideration is the consultant’s fee structure.  The principal fee options include hourly rates, fixed fees or “percentage of savings realized” under the new agreement.  We have detected some “buyer’s remorse” by customers that entered into “percentage of savings realized” arrangements.

The “Value-Added” of Telecom Consultants.  Customer demand sets, trends in service options, bundles, and pricing change significantly over 3-5 years, the duration of many Wireline services agreements.  Wireless service pricing is very dynamic at this time, as well.  While many corporate IT and telecom departments monitor trends in technology and services, experienced consultants know the carriers’ current service migration strategies, pricing trends and service plans.  Consultants identify carrier ploys of emphasizing projected savings attributable to migrating from older to newer service offerings and redirect the customer’s focus to the market rates for the newer service offerings.  In sum, our experience is that customers secure better deals when engaging the services of competent Telecom Consultants.

Growth in enterprise Wireless services tracks society’s accelerating shift toward all things Wireless—smart phones, apps, tablets, and Wireless broadband. The following is our assessment of major trends and influences currently impacting enterprise Wireless deals.      

• If given the choice, telecom consultants would prefer—by a wide margin—to work on a Wireless procurement as compared to a Wireline procurement:  They believe the opportunity to deliver substantial savings is far greater on Wireless deals.  
• Telecom expense management companies are in strong demand; capturing and tracking Wireless expenditures is a growing cost management issue for many enterprises.  
• As in Wireline deals, pricing can vary considerably among comparable customers.  
• Taxes.  As with rental car charges, expenditures for Wireless services are subject to a daunting array of taxes and surcharges that can approximate 25% of monthly Wireless service charges. These fall within four categories:   

-State and local sales and excise state taxes, including E-911 surcharges/taxes, imposed directly on amounts paid for Wireless services,

-Property, gross receipts and other taxes imposed on carrier’s Wireless assets, operations and revenues (indirect taxes),

-Recovery of the Wireless carrier’s assessment for Federal and in some cases, state universal service fund contributions (USF surcharge recovery), and

-All-encompassing “regulatory cost recovery” surcharges. 

• The number of enterprises whose Wireless strategy is limited to employee Wireless cost reimbursement is declining rapidly, if not in free fall.  
• Multi-nationals must address globe-trotting staff and management, as well as foreign operations, in determining whether national, regional or global Wireless procurement strategies are appropriate.  
• The Wireless procurement cycle is heavily influenced by the handset cost recovery cycle. 
• Carrier’s standard Wireless agreements are far less convoluted than Wireline agreements; some are even readable, though terribly one-sided. 
• High level thoughts on Wireless agreements: 

-The right to audit bills is essential

-Fixed pricing (custom plans) is always preferable to adjustable pricing

-Exclusive provider arrangements should be avoided

-A strategy for replacing handsets whose continued use is threatened or prohibited due to IP infringement litigation merits serious consideration

-The relationship between the customer-specific agreement and the carrier’s online documents (which it can change without notice) should be clearly defined (requiring something more than standard precedence clauses)

-Meaningful SLAs (service availability, quality and reliability) for Wireless services remain elusive 

• While approval of the AT&T-T-Mobile merger (even with every condition imaginable) is far from certain, consider finalizing new Wireless deals or major amendments in 2011.  Wireless procurements could become even more challenging if AT&T prevails in its quest for T-Mobile.

The debacle of IP infringement litigation is playing out in Europe. In an action brought in the Netherlands, Computerworld reports that Apple “is demanding an extensive ban on all [Samsung]Galaxy series smart phones and tablets, including a complete recall of stock by European distributors and resellers.” Enterprise customers have little interest in revisiting the wireless IP infringement precipice of several years ago when RIM and NTP settled their patent infringement litigation at the 11^th hour, assuring continued use of Blackberry handsets.

One question raised by the Motorola-Google combination is whether there are options for Wireless customers to simply “rolling the dice” and hoping the Blackberry debacle is not reprised.  One approach is to secure an indemnity, running from the handset  manufacturer/operating system licensor or Wireless carrier or both to the customer to address 3^rd party IP infringement claims.   Securing the indemnity from the handset manufacturer may be doable for the largest customers.

The carriers’ preferred position is that the customer look to the equipment supplier for handset issues, such as warranty, indemnity, and continued use.  That argument would ring true, but for the fact that the Wireless carriers determine which equipment customers can use on their networks.  The carriers also have more insights into “ongoing smart phone patent disputes” than customers. While customers may have the option to procure and use equipment (subject to the carrier’s approval) that is not supplied by the carriers, most, if not all, of the latest and most desired handsets, particularly smart phones, and tablets are bundled with the carriers’ services. (WiFi-only tablets being the principal exception).   

A practical solution is appropriate.  If an IP infringement action threatens the continued use of a carrier-supplied handset, the carrier should be obligated to replace the unit with a comparable device at no incremental cost to the Customer.     

1.  Addressing Chronic Service Issues.  The principal benefits of MPLS service are “any-to-any” connectivity, scalability and ease in adding or deleting sites.  Readily available CPE supports voice-over-MPLS.  These benefits are maximized when MPLS is offered by a single carrier, although multi-national firms may maintain region-specific MPLS networks and some large enterprises maintain several MPLS networks (each provided by a different carrier) for redundancy purposes.

A glaring weakness in carriers’ standard services agreements is the failure to address reasonably the risk of chronic service problems in an MPLS environment.  The carriers’ standard (and antiquated) “partial discontinuance” clauses are limited to problems associated with services to a single customer location; potentially relevant for high volume call centers utilizing inbound toll free services, but not an MPLS network.  Even though Service Level Agreements (“SLAs”), such as mean time to repair and site availability are customer-oriented, the metrics remain largely site-specific.

If  MPLS service to priority customer locations (data centers or corporate offices) are subject to chronic outages, the enterprise’s businesses and processes will be impacted severely and adversely.  The standard carrier insurance policy (to be purchased by the customer) of redundant ports, access and routers is not the answer.  The burden should not be shifted to the customer to insure that the carrier delivers the agreed-upon level of service.  In light of the limitations on potential damages demanded by carriers and the risks associated with chronic service issues, a tailored remedy or escalating remedial responses are warranted to more equitably address the risks borne by MPLS customers. 

There are three points to keep in mind with regard to MRCs.  (For purposes of discussion, we assume the customer has negotiated aggressive, fixed-rate pricing and rates are subject to the typical negotiated adjustments.)  First, experienced consultants and some studies (based on previously published AT&T “Tariff 12” customer-specific tariffs) confirm that higher MRCs do not necessarily result in better rates.

Second, the lower the MRC (as a percentage of projected expenditures), the greater the customer’s flexibility and leverage.  A relatively modest MRC allows the customer, in the absence of an express right in the agreement, to migrate to a different service offering that has improved performance or service qualities or to another service provider, perhaps in response to improved pricing, subpar customer support, or recurring billing disputes. 

Third, the business case for MRCs is diminished when a customer migrates to MPLS service. Absent serious service issues and assuming rates are and remain competitive, a customer has  little incentive to migrate to another MPLS network during the term of the agreement.  The virtues of MPLS, discussed above, are undermined as customer locations are removed from the MPLS network.  By contrast, private line and inbound toll-free services are largely standalone offerings that can be transitioned or ported to successor carriers with virtually no disruption and  relative ease.  In these instances, the MRC reinforces the customer’s ties to the carrier. 

For MPLS service customers, if there is an MRC, it should be based on a modest percentage of projected expenditures for high speed Internet access service, interexchange voice services (not provided over MPLS), any managed services, and other services being procured.

3.  Focus on the Transition Game.  All agreements end at some point.  A basic consideration in negotiating Wireline and Wireless services agreements is providing a realistic period for the customer to migrate to a successor provider upon the expiration or any earlier termination of the agreement.  Without adequate time to migrate to the services of a successor carrier, any right or option to terminate the agreement or discontinue service is significantly undermined.  The carriers’ insistence on very low caps on damages elevates the importance of a meaningful transition period.  The right to terminate or discontinue service is often the only real remedy.

Over and above planning and procuring services from a successor carrier, the migration process involves connecting physical circuits, establishing virtual connectivity, and, for some time, operating the incumbent’s and successor’s services in parallel.  This is particularly challenging for Wireline service customers having several hundred or several thousand sites.

To provide sufficient time for service migrations, Wireline services agreements should provide the customer a minimum six-month transition period upon the expiration or any earlier termination of an agreement or the discontinuance of service for cause.  For very large customers, a nine-month transition period is more than warranted.  For Wireless services agreements, ninety days is the bare minimum.  During the transition, the incumbent carrier should continue to provide and support the service per the rates in the agreement and assist the migration to the successor carrier; revenue commitments should not apply.

At the expiration of multi-year services agreements, inclusive of any rate-stabilized transition periods, a customer’s rates revert to the carrier’s standard, non-discounted rates that are prohibitively expensive. Relatedly, migrating from one services provider to another is always a resource-intensive and time-consuming process for major enterprises and state governments, particularly for Wireline services.  If the RFP process for securing a new agreement is not initiated in a timely manner, the odds for securing a better deal decline dramatically. The  customer typically finds itself in a defensive position, scrambling to negotiate an extension or new agreement with the incumbent carrier just to avoid these rate increases.

The timely release of an RFP maximizes the likelihood of receiving competitive bids because (prospective bidders will see) the customer likely will have sufficient time to (i) evaluate responses to its RFP and select its services provider(s), (ii) negotiate balanced agreements, and (3) transition from the incumbent’s services to those of one or more successors.  If the RFP is released too close to the existing agreement’s expiration,  potential successor carriers either will not bid aggressively or decline to bid altogether.  

For Wireline services, the RFP should be released 12-14 months prior to expiration of the current agreement.  On the other hand, for Wireless services, the timing for the RFP has two elements:  (1) the expiration date of the agreement, including any rate stabilized transition periods, and (2) the line-specific commitment periods keyed to minimum period of use for the discounted handsets.

What’s the Value Proposition?   From a service delivery perspective, the IT outsourcer is a “simple reseller” of telecommunications services. The carriers determine what services are offered, operate and maintain their networks, and set SLAs. Other than enhanced route diversity at its data centers, the IT outsourcer cannot improve nor enhance the quality of these services. When Wireline services are secured through the IT outsourcer, the enterprise still bears the disruption and costs of carrier transitions.  Even if not transitioning services,  the enterprise and the IT outsourcer must complete a detailed circuit and service inventory for the carrier to “transfer” the circuits and services to the outsourcer’s agreement with the carrier. 

Are the Cost Savings Substantial?  Securing voice and data services from the IT outsourcer may provide cost savings if the IT outsourcer (i) maintains substantially lower rates from the carriers for the term of the outsourcing deal, and (ii) qualifies for the “systems integrator exemption” to the FCC’s Universal Service Fund (“USF”) program.  The potential financial benefit of this exemption is substantial:  for example, the 2^nd Quarter 2011 USF contribution factor is 14.9%.  Our experience has been that IT outsourcers’ rates for Wireline services, while initially favorable, do not remain competitive for the duration of the outsourcing agreement.

The IT outsourcer must also recover staffing costs for (i) reviewing/auditing the carriers’ bills, (ii) billing the enterprise for these services,  (iii) placing orders for moves, adds, changes and deletes (“MACDs”) and, generally, (iv) acting as intermediary between the enterprise and the carrier. Yet, enterprise staff typically write checks,  review and audit bills, and initiate or approve requests for MACDs. 

Does it Otherwise Make Sense?  The economics of IT outsourcing agreements often dictate contracts having terms longer than five years. To “refresh” both pricing and technology for Wireline services, enterprises should be in a position to issue an RFP for Wireline services every three years. IT outsourcing agreements tend to be more complex; the services and functions are often customized; and negotiations more time consuming.  By contrast, the rates, service descriptions and SLAs in Wireline services agreements are expressed in standard formats.  

Weighing All  the Factors.  If the savings offered by IT outsourcers for Wireline services are not substantial and sustainable, neither the value proposition nor the projected benefits support adding Wireline services to IT outsourcing agreements.

1. Services
2. Choice of Carriers
3. Pricing
4. Minimum Purchase Commitments
5. Wireline Service for Enterprise Data Communications

1.       Services

The major domestic Wireline carriers are AT&T, Verizon, Sprint and Qwest/CenturyTel .  The core services these carriers offer to enterprise customers include long distance, VoIP, audio conferencing and various data services—high-speed Internet access, frame relay, private line (TDM and Ethernet), and Multi-Protocol Label Switching (“MPLS”) services.   As a rule, local exchange service remains regulated and is not included in these deals.  These carriers offer related services, such as network (router) management , data center (collocation) and network security services, but are not yet substantial providers of cloud computing or content delivery services.   Customer premises equipment  (routers and switches) typically are not bundled with these services.

All of these carriers offer international services ( i.e., services between the US and other countries).   Multinational enterprises also are interested in Rest-of- World (“ROW”) services (i.e., services between and sometimes within foreign countries).  Several domestic carriers and foreign carriers such as Telefonica and BT offer ROW services.

The Wireless voice and data services available to enterprise customers are largely the same as those offered to consumers, although pricing options are different.  Handsets are bundled with Wireless services.  The principal domestic providers are AT&T, Verizon Wireless, Sprint and T-Mobile.  Available handset options, in-country coverage, Wireless data options  and the extent to which domestic carriers coordinate or manage wireless services in other countries are among the critical decision points.  Wireless service offerings tend to be country-centric. 

2.         Choice of Carriers

Wireline and Wireless services are highly commoditized offerings with high  market entry barriers.  Enterprise customers typically utilize RFPs and consultants specializing in procuring these services.   Properly crafted RFPs include substantial information regarding enterprise traffic and bandwidth requirements and service preferences.  As discussed below,  the real-world prices paid by enterprise customers are not publicly available.

Enterprise customers have a strong interest in limiting the number of Wireline and Wireless carriers, respectively, from which they obtain service, principally to clarify responsibility for service quality, provisioning and trouble resolution, maximize bargaining leverage, and develop a mutually beneficial business relationship.  Typically, Wireline and Wireless carrier selection decisions are made independent of each other.

 The rates for Wireless and Wireline services  are not tariffed or regulated in the United States or in most developed countries.  The “rack rates” charged to  enterprise customers for these services are prohibitively expensive.  Not surprisingly, the rates actually being paid for these services are not publicly available.  The RFP process and use of telecom consultants are best practices for securing competitively priced services, a central objective of these procurements.  

Volume discounts of one type or another are common.   The distinction between fixed rates and fixed discounts of the Wireline carrier’s on-line rate tables is important.  Carriers reserve the right to adjust these tables at their discretion.  Rates based on fixed discounts  can change as the carrier adjusts its on-line rate tables.  

4.       Minimum Purchase Commitments

The minimum purchase commitment is often subject to significant negotiation.   For Wireline services, the amount is expressed as a fixed dollar amount; typically per year, sometimes for the term of the agreement.  The point of contention is the percentage of projected expenditures that the dollar amount represents.  Failure to meet the commitment triggers a shortfall payment. 

For Wireless services, the commitment may be expressed as an annual expenditure requirement or in terms of the number of lines, among other approaches.  Individual line commitments tied to minimum use periods for wireless handsets are often part of Wireless deals.

The carriers prefer high minimum commitments because of their strong interest in revenue assurance.   A lower commitment better positions the customer to handle business cycles and downsizing while maintaining competitive rates, as most Wireline Services have a term of three years with at least a single, one-year renewal option. The terms for Wireless deals can track the familiar consumer two-year cycle.   While the volume of services being purchased influences  pricing, a higher commitment level does not necessarily mean better rates. 

5.       Wireline Service for Enterprise Data Communications

 A noticeable majority of enterprise customers select data services such as MPLS or frame relay as the principal service to meet their internal data communications requirements.   Private line services are also widely used. Data services may also support a substantial portion of  a customer’s long distance voice calling requirements.  As compared to the public Internet, these services pose less significant security risks and are supported by multiple Service Level Agreements (“SLAs”). 

Virtually all enterprises purchase Wireline high-speed Internet access service for Internet search and e-commerce applications, but some rely on the public Internet  as the transport service for some or all of  their internal data communications requirements.  Internet service pricing tends to be more favorable though the cost savings are offset to some extent by expenditures for additional security measures.

 A less obvious benefit of  utilizing Wireline Internet access service as the corporate data service is that many of the taxes and the Universal Service Fund (“USF”) charges assessed on the rates paid by customers for other data and voice services do not apply.  This is a substantial savings.  The proposed USF assessment for the 2nd quarter of 2011 is 14.9%.   

Amazon’s analysis of its extended cloud computing outage, as summarized in Richi Jennings IT Blogwatch, raises an important question for counsel advising clients negotiating agreements to procure cloud computing, content delivery and data communications services:  Should the agreement include a provision defining a service problem threshold and/or a series of problems threshold that triggers a right to terminate the agreement? We believe such a provision should be included, notwithstanding significant service provider pushback.    

Several reasons underlie this position:  

• The concept of “cure” in standard breach and default provisions doesn’t really work.   Telecommunications and technology services agreements call for a service to be provided for a defined period of time.  When the service is unavailable or substandard during this period, the lost operating time cannot be recaptured.     
• The widespread use of service level agreements (“SLAs”) impliedly recognizes that the “opportunity for cure” approach is largely irrelevant in circumstances when service is inadequate or unavailable.    
• Standard SLAs are premised on the assumption that outages and periods of degraded service will be limited in duration and that credits and escalated response provide a sort of rough equity and reasonable compensation.   
• When an outage is extended, standard SLA remedies do not begin to compensate the customer for the disruption to its business.  

The potential termination of a problematic service relationship may give rise to the concern of “the cure being worse than the disease” because migrating from one services provider to another is often time-and resource-intensive and disruptive for the customer.  Thus, a service provider transition clause should always be included so the customer has adequate time to re-procure the service and migrate to a replacement provider.  During this transition, the service provider must be obligated to continue to provide and support the service and the customer must continue to pay for the service.    

Clearly, reasonable contract provisions do not obviate the need for redundancy and contingency plans, as noted in a thoughtful blog post on the Amazon outage by Sharon Machlis.  On the other hand, a customer’s decision to procure back-up or alternative service should not negate a customer’s right to terminate an agreement when the primary service is degraded or unavailable for extended periods.  The service provider has put the Customer’s business at serious risk.  The customer purchased the insurance (redundant or back-up service) for its protection, not the services provider’s.