Beyond Telecom Law Blog

Several matters before the FCC could have substantial dollar and technology impacts for enterprise customers.  The FCC’s special access services and USF contribution reform proceedings could significantly affect pricing for enterprise services, beginning sometime in 2014.  A more open-ended proceeding focuses on whether the FCC will move aggressively in granting AT&T’s wish list included in its proposal to convert its local telephone networks to all-IP platforms. 

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.

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This is the third of three entries analyzing telecommunications services agreements. The first—Overview—highlighted the structure and basic components of telecommunications services agreements. The second—Revenue Assurance—focused on the carriers’ interest and mechanisms for locking-in projected revenues. This third entry—Risk Mitigation—looks at damage caps, termination rights and indemnity obligations in carriers’ standard agreements.  

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.

This is the first of three entries analyzing telecommunications services agreements.  This entry—Overview—highlights the structure and basic components of telecommunications services agreements.  The second entry—Revenue Assurance—will focus on the carriers’ interest of locking-in projected revenues. The third entry—Risk Mitigation—will take a closer look at the carriers’views on damages, termination rights and customer indemnities.

Overview

Wireline and Wireless services agreements include general terms and conditions, typically set out in a “Master Agreement.” Negotiated service-specific rates or, for Wireless services, plans and pooling arrangements are set out in attachments or schedules.  Wireless and Wireline services are generally procured separately, having  separate agreements, although one carrier opts for a single master agreement covering both service categories.  The benefits of consolidation are limited, in our view, if the customer’s total spend does not result in improved overall pricing or other tangible benefits. 

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. 

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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.

Beware of the Tipping Point.  Telecommunications services procurements do not always yield the targeted results.  This typically arises when a non-incumbent carrier concludes the incumbent is going to retain the business.  This can and does occur when the customer signals—intentionally or not—that  the RFP process is just a formality. 

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.

The American Arbitration Association (“AAA”), at the request of the Cellular Telecommunications Industry Association (CTIA) established a special arbitration program for the wireless industry and its customers.  The program has its own set of Rules and its own Panel of arbitrators.  This program is designed to address any dispute relating to the provision of cellular and broadband PCS services although any arbitration agreement can elect to employ the rules.  Any AAA arbitration arising within the wireless industry is handled under this program by default, unless other rules are stipulated by contract.

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.

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Most enterprises initiating Wireline and Wireless services procurements retain the services of consultants (“Telecom Consultants”).  Current pricing information for enterprise Wireless and Wireline services is not publicly available.  Competent consultants know trends in service offerings and market pricing.

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.

The combination of Google and Motorola has elicited a flood of comments and analyses.  Those relating to Motorola’s patent portfolio are of most immediate importance for enterprise Wireless customers. As noted by Verizon’s deputy general counsel John Thorne, “the extent that this deal might bring some stability to the ongoing smart phone patent disputes, that would be a welcome development." This point was amplified by Marguerite Reardon, highlighting how the Motorola patents could bolster Google’s position against patent infringement actions by competitors. Android is now the top-selling smart phone operating system worldwide, reportedly commanding around 43% of the market as of the second quarter of 2011.

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.     

Whether hitting a baseball, landing a triple axel on the ice, or striking a header in soccer, timing is essential.  In telecommunications services procurements, timing is a critical consideration even for the largest corporate and government customers looking to realize a measure of bargaining leverage in today’s environment.   While the proposed AT&T and T-Mobile combination raises concerns of a virtual duopoly in Wireless services, many would argue the market for Wireline services for large businesses and state governments is already a duopoly. 

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.

A fundamental expectation of clients in any commercial transaction is that counsel understand the business deal.  When procuring Wireline voice and data communications services,  major businesses, institutions and state governments make five fundamental business decisions.  The first four apply to Wireless services procurements.  

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.

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