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A highly respected antitrust professor wrote: “When Congress enacted the federal antitrust laws it chose not to foreclose state antimerger activity. The legislative histories of the antitrust laws indicate that the congressional purpose was to supplement, not supplant, state activity. This intention has repeatedly been affirmed by the Supreme Court. Critics fear negative effects from ascendant state merger scrutiny. Many believe that the government’s position towards exceptionally large transactions should be a fundamental matter of national economic policy. Enforcement and nonenforcement decisions, they say, should be made by officials appointed by the President with the approval of the U.S. Senate. Such critics fear that the prospect of challenge by any of fifty states adds uncertainty and delay into an already problematic process, and will cause beneficial transactions never to be attempted.” The year was 1989.[1]

Since the enactment of the Hart-Scott-Rodino Act in 1976, we have grown accustomed to premerger notification at the federal level for all larger mergers and acquisitions. For the most part, State Attorneys General have participated via comments or supplemental filings in large transactions subject to premerger review. A generation of antitrust lawyers have lived in this environment. Indeed, some years ago lawyers were surprised that the federal government could challenge mergers after the fact given the long lapse in the governments exercise of that power, but that power was never removed, and private merger enforcement action also remains possible.

Can the states seek to block the merger? Yes. Will FCC and US Department of Justice approval stop the state litigation? No. What’s the biggest obstacle facing the state challenge? Limited state funding. Antitrust litigation is often protracted and costly. T-Mobile and Sprint, with their largest stockholders — Deutsche Telekom AG and SoftBank Group Corp., respectively — will certainly dedicate resources to defeat the states via litigation siege. These pressures, coupled with Justice Department clearance, may push the states to settle, although the terms of a successful settlement for the states is unclear. Meanwhile, T-Mobile and Sprint may be delayed in completing the transaction, which is a costly complication without a certain outcome.

The Redacted Complaint filed by nine states and the District of Columbia, and later joined by an additional four states, presents a solid facial argument against the merger. There are only four companies with networks that serve at least 90% of the U.S. population. Verizon and AT&T are the largest. “T-Mobile and Sprint are the third and fourth largest [mobile network operators] MNOs in the United States and serve approximately 80 million and 55 million customers, respectively.”[2]

The states allege that T-Mobile’s controlling shareholder, Deutsche Telekom AG, believes that it could earn a greater return on its investment by reducing competition.[3] The states argue that:

“The proposed transaction would eliminate Sprint as a competitor and reduce the number of [mobile network operators] MNOs with nationwide networks in the United States from four to three. The combined company would have a retail market share larger than the two largest MNOs today, Verizon and AT&T. In some areas, including in the New York City metropolitan area, the combined company’s share of subscribers would exceed 50%. The combined market share of Sprint and T-Mobile would result in an increase in market concentration that significantly exceeds the thresholds at which mergers are presumed to violate the antitrust laws. This increased market concentration will result in diminished competition, higher prices, and reduced quality and innovation.”[4]

Although the data table is redacted, the Complaint claims that the nation’s top 50 cellular market areas (CMAs) encompass about 50% of the U.S. population, and competition would be substantially lessened in each of the top 50 CMAs. The complaint argues many, particularly those with lower incomes who cannot pass a credit check and must purchase mobile wireless telecommunications service on a prepaid basis, rely on mobile wireless telecommunications services as their primary form of communications and do not have traditional wireline phone or broadband connections. If the merger is permitted, the “merger will negatively impact all retail mobile wireless telecommunications service subscribers but will be particularly harmful to prepaid subscribers”[5]

The states rely upon these claims to allege that “the transaction likely would substantially lessen competition in these local markets,” creating an actionable harm to the state’s citizens that justify the states’ standing to challenge the merger.

The complaint contains other supporting arguments and detail. The merger “would cost Sprint and T-Mobile subscribers more than $4.5 billion annually.”[6] Other countries that have allowed consolidation from four to three competitors recorded an average price increase “between 17.2% and 20.5%.”[7] There are significant barriers to entry that will be faced by any new provider, so potential competition will not be a factor. Finally, the states argue that the proposed commitments made to the FCC are insufficient to protect competition.[8]

The states have set a solid foundation from which to proceed. There is no obvious precedent that will permit T-Mobile and Sprint to end the case quickly, but protracted litigation will test the resolve and resources of all the parties.

[1] Robert H. Lande, “When Should States Challenge Mergers: A Proposed Federal/State Balance” N.Y. L. School Rev. vol 35, pp. 1049 and 1047

[2] Complaint at 3.

[3] Complaint at 3.

[4] Complaint at 5.

[5] Complaint at pp. 2 and 5.

[6] Complaint at 29.

[7] To support this claim the Complaint cites the United Kingdom Office of Communications, A Cross-Country Econometric Analysis of the Effect of Disruptive Firms on Mobile Pricing (March 15, 2016)

[8] Complaint at pp. 31-33.

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On June 19, 2019, the FCC released a draft Notice of Proposed Rulemaking and Declaratory Order that is on the agenda for Commission consideration at the FCC’s July 10, 2019 Open Commission Meeting. The Commission may amend this draft prior to its adoption, but the final version will likely track this draft document.

The draft document focuses on wireline broadband, video and voice services agreements, rooftop leases, and distributed antenna system (DAS) agreements[1] between service providers and developers and owners of multi-tenant environments (MTEs) that the FCC defines “as commercial or residential premises such as apartment buildings, condominium buildings, shopping malls or cooperatives that are occupied by multiple entities.”

The Declaratory Ruling and the discussion on wireline broadband, video and voice service agreements in the Notice of Proposed Rulemaking (NPRM) relate principally to agreements between cable and broadband service providers and developers and owners of apartment buildings a.k.a multiple dwelling units (MDUs). The FCC’s apparent concerns with rooftop leases and DAS access agreements apply to all MTEs.

Overview

The draft NPRM poses a series of questions regarding multi-channel video and broadband exclusive marketing agreements and revenue sharing agreements negotiated by MDU owners on the one hand, and cable and broadband service providers on the other. These include the major service providers such as Comcast, Verizon, Charter, and AT&T (among others); regional service providers such as Wave; and services providers focused on off-campus student housing.

In 2010, the FCC found these agreements and bulk service agreements to be in the public interest, yet retained the longstanding rule prohibiting service providers from demanding “exclusive access agreements” with MDUs. Complaints from a handful of companies appear to have prompted a review of several of these policies.

The Declaratory Order preempts San Francisco’s Article 52 that authorizes a service provider to deliver service to a requesting resident by accessing in-use inside wiring, regardless of whether the service provider has an access agreement with the MDU owner.

Declaratory Ruling  

Unlike the proposals in the draft NPRM, for which the FCC is requesting comments, the Declaratory Ruling will be a final agency decision when adopted by the Commission.

As paraphrased by the FCC, San Francisco’s Article 52 prohibits a building owner from “ ‘interfer[ing] with the right of an occupant to obtain communications services from the communications services provider of the occupant’s choice,’ and provides that an owner so interferes by refusing to allow a communications services provider to (1) ‘install the facilities and equipment necessary to provide communications services,’ or (2) ‘use any existing wiring to provide communications services as required by this Article 52.’ ”

The FCC agreed with most services providers, MDU owners, and trade associations that the San Francisco ordinance should be pre-empted but limited its preemption to “in-use” inside wiring, noting that sharing in-use facilities “reduces investment, slows the deployment of new facilities in MTEs, poses significant technical issues and undermines the quality of communications services.” The FCC did not elaborate on how or why competitor access to “unused” inside wiring poses less of a chilling effect on investment or somehow will have a lesser impact on the quality of communications services.

Notice of Proposed Rulemaking

The FCC raises a litany of alleged “anticompetitive” risks posed by exclusive marketing agreements and revenue sharing agreements, responsive to points previously raised by a limited subset of services providers. The FCC characterizes revenue sharing agreements as “consideration from the communications provider in return for giving the provider access to the building and its tenants,” either door fees or commissions on revenue, requesting comment on whether these arrangements effectively circumvent the ban on exclusive access arrangements.

Though originally targeted for multi-channel video programming distributors (principally cable companies), the industry practice is that the prohibition against exclusive access agreements extends to voice, video and broadband services. Exclusive access is rarely demanded by services providers or agreed to by developers and owners.

In many newbuilds, MDU developers typically build pathways or add additional conduit to accommodate the inbuilding infrastructure of more than a single service provider, as noted in the FCC’s preemption analysis of Article 52. To the extent the FCC is looking to encourage broadband deployment, shared investments by property owners and services providers in inbuilding infrastructure that extend broadband service should be fostered, not discouraged.

Distributed Antenna Systems and Rooftop Access

Another aspect of the NPRM reflects T-Mobile’s position that the FCC should review exclusive access provisions in rooftop leases and in-building DAS in MTEs. The NPRM appears to accept without question T-Mobile’s allegations that some property owners or 3rd party DAS providers charge “monopoly rents,” enter into exclusive access arrangements, or operate outdated DAS facilities incapable of supporting 5G technologies.  One of the largest, if not the largest operator of in-door DAS facilities in the United States, is a leading wireless tower owner-operator.

The irony with T-Mobile’s arguments is that wireless carriers often decline to participate in neutral-host DAS arrangements in MTEs. In countless conferences and industry forums, representatives of the major wireless carriers emphasize they lack the capital to extend their networks into many buildings and will not do so, even though owners and developers will commit to installing neutral-host DAS facilities.

The draft document emphasizes the FCC’s legal authority over wireless infrastructure extends to the rates, terms, and conditions in rooftop leases and DAS agreements. However, the FCC has never exercised this authority over the rates, terms and conditions in leases between the wireless carriers and the major tower companies regarding either freestanding outdoor structures or inbuilding facilities. Yet, now the FCC is inexplicably focusing on the business decisions of MTE developers and owners

As the FCC adopts the Notice of Proposed Rulemaking and Declaratory Ruling, it will announce the dates for filing comments and reply comments in response to the NPRM.

[1] A DAS is an in-building antenna network designed and deployed to distribute wireless carriers’ signals throughout the building.

 

 

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Earlier this week, FCC announced the agenda for the Agency’s July 10th Open Meeting. Chairman Ajit Pai also published a blog post detailing some of these items. This includes an announcement that Chairman Pai had circulated a draft Report and Order for consideration at the meeting next month.

The Report and Order is of keen interest to private wireless licensees – including critical infrastructure companies – as it would significantly change the landscape of the valuable 2.5 GHz band.

2.5 GHz Band Background. The band consists of 114 MHz of contiguous spectrum, the largest chunk of contiguous spectrum below 3 GHz. The FCC adopted rules in the mid-1990s hoping this band could be used to support the transmission of instructional/educational materials. The current rules governing the 2.5 GHz band require a licensee to be an accredited public or private institution engaged in formal educational activities. As a result, many of the active licenses are currently held by state governments, colleges and universities, community colleges, technical schools, and elementary/secondary schools. These entities are not using the spectrum in large swaths of the country, as the FCC has noted in the past that the 2.5 GHz band is unused across approximately half the United States.

Proceeding. The draft Report and Order that the Commission will consider at next month’s Open Meeting follows a Notice of Proposed Rulemaking the FCC issued in May 2018. The NPRM contemplated several proposed changes to the agency’s existing 2.5 GHz rules. The overarching goal of the Commission was to put this spectrum to greater use. To that end, the agency’s proposals included:

  • Potentially permitting 2.5 GHz licensees to assign or transfer existing licenses to commercial entities;
  • Eliminating the educational use requirement for the spectrum;
  • Confirm existing, active operations to where spectrum in the 2.5 GHz band is unused (much like the FCC has done in the C-Band); and
  • Potentially auctioning the unused portions of the band to commercial entities.

Next Steps. It is possible that the draft Report and Order will change between now and the time it is voted on by the Commission. However, it appears likely that the FCC will remove the educational use requirement for this spectrum. Such a move could quickly transform the band by allowing existing educational licensees to assign or transfer active licenses to commercial entities.

The draft also proposes to establish a priority filing window for Indian tribes located in rural areas to provide these Tribal Nations with an opportunity to license 2.5 GHz spectrum to promote broadband deployment. Immediately following the completion of the Tribal priority filing window, the FCC plans to auction the remining unassigned 2.5 GHz spectrum to commercial entities.

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If you would like updates on this proceeding, please be sure you’ve subscribed to our complimentary Telecom Alert (which is distributed each Monday afternoon). Simply email announcements@khlaw.com and write “Telecom Alert Subscription” in the subject line, please include your full name, company name, title, email address and country in the body of the message. And, of course, stay tuned for the FCC’s July 10th Open Meeting!

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In its September 2018 small cell order, the FCC sought to speed carrier deployment of 5G wireless facilities in public rights-of-way by removing “barriers to infrastructure investment.”  As we noted in an earlier entry, the order greatly restricts the ability of state and local jurisdictions to manage their own rights-of-way or to receive more than costs for carrier use of municipal property. As expected, the order was appealed by numerous localities across the country on constitutional and other legal grounds and is currently pending before the 9th Circuit, with opening briefs now filed.

The FCC’s order, however, involves more than aesthetic and financial concerns for local jurisdictions and its citizens. The new 5G environment envisioned by carriers will rely on millimeter wavelengths that travel only short distances. As a result, small cell poles need to be placed within 100 feet or so from each other with transmitters about 30 feet above the ground in direct-line-of-sight with homes and businesses. This 5G densification is projected to lead to hundreds of thousands of small cell facilities across the country, subjecting the public to emissions from multiple transmitters at close ranges.

Prior to release of the order, a number of parties asked the FCC to first complete a stalled 2013 proceeding evaluating whether the Commission’s existing RF safety standards, adopted in 1996, would adequately protect the public’s health from RF emissions in this new 5G environment. Without any analysis of more recent health studies, the FCC refused to review its 23 years-old standards, simply stating “[w]e disagree” with concerns raised about RF emissions from 5G small cell facilities. In light of the FCC’s refusal to address the RF issue, Montgomery County, Maryland appealed the order on grounds that the FCC violated the National Environmental Policy Act and the Administrative Procedure Act by failing to reevaluate RF standards in light of recent research and to determine whether these standards remain protective of human health.

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Several weeks ago, Zayo announced that it had agreed to be acquired by private equity firms Digital Colony and EQT. Over several years, Zayo had expanded its network footprint significantly through network buildouts and a series of acquisitions. Interestingly, EQT recently completed its acquisition of regional fiber network operator Lumos Networks. In another May 2019 transaction, Great Plains Communications, controlled by Grain Management, acquired InterCarrier Networks.

Zayo, Lumos, and InterCarrier Networks shared several traits, including a focus on high capacity private line services, dedicated Internet access services and dark fiber offerings targeting enterprise customers and other services providers. Interestingly, Lumos and InterCarrier developed regional fiber networks extending into and connecting multiple 2nd and 3rd tier cities.

These transactions reaffirm the long-term value of fiber-based networks in the telecommunications marketplace. These companies’ services and product offerings underscore that high capacity services and dark fiber arrangements are meeting a critical demand among mid-to-large enterprises and government agencies that previously looked almost exclusively to the enterprise service offerings of the major carriers—AT&T, Verizon (now including XO) and CenturyLink (now including Level 3).

Zayo’s, Lumos’s, and InterCarrier’s focus on fiber offerings for business customers should be fully considered for, if not immediately incorporated in, the business plans of emerging fiber-based municipal and rural broadband providers. The incremental investment in business-oriented offerings is nominal, particularly for dark fiber. Network extensions to business locations can and should be accomplished through non-recurring, one-time charges. Unlike services to consumers, small businesses and anchor institutions, flexibility is the dominant theme in pricing enterprise-focused services and dark fiber offerings.

Emerging rural and municipal services providers should understand the two-dimensions of the concept of “location.” For consumer and small business customers, customer locations within a network’s physical footprint is paramount. These customers are looking for substantially upgraded, last-mile broadband connectivity for their homes and businesses. Providing connectivity to and from wireless carrier small cell locations may emerge in several years as even AT&T and Verizon do not have unlimited capital to extend fiber backhaul and fronthaul connectivity to all of their cell sites.

For larger businesses, government customers and other services providers, the 2nd dimension of location comes into play. This dimension relates to whether the entity’s network is located along or provides a leg in a path or route diversity for a major regional or multi-state east-west or north-south fiber route, a much-needed lateral route, or connectivity to a remote data center or even to an undersea cable landing location.

As noted above, fiber-based networks have long-term economic value. As with core assets in virtually all industries, maximizing the value of these assets is fundamental to business success.

Photo of Douglas JarrettPhoto of Tracy MarshallPhoto of Wesley Wright

On 6 March 2019, Democrats in the House and Senate introduced the “Save the Internet Act of 2019.” The three-page bill (1) repeals the FCC’s Restoring Internet Freedom Order released in early 2018, as adopted by the Republican-led FCC under Chairman Ajit Pai; (2) prohibits the FCC from reissuing the RIF Order or adopting rules substantively similar to those adopted in the RIF Order; and (3) restores the Open Internet Order released in 2015, as adopted by the Democratic-led FCC under Chairman Tom Wheeler.

Major Impacts:

  • Broadband Internet Access Service (BIAS) is reclassified as a “telecommunications service,” potentially subject to all provisions in Title II of the Communications Act.
  • The three bright line rules of the Open Internet Order are restored: (1) no blocking of access to lawful content, (2) no throttling of Internet speeds, exclusive of reasonable network management practices, and (3) no paid prioritization.
  • Reinstates FCC oversight of Internet exchange traffic (transit and peering), the General Conduct Rule that authorizes the FCC to address anti-competitive practices of broadband providers, and the FCC’s primary enforcement authority over the Open Internet Order’s rules and policies.
  • Per the Open Internet Order, BIAS and all highspeed Internet access services remain subject to the FCC’s exclusive jurisdiction and the revenues derived from these services remain exempt from USF contribution obligations.
  • The prescriptive service disclosure and marketing rules of the Open Internet Order, subject to the small service provider exemption, would apply in lieu of the Transparency Rule adopted in the RIF Order.

FCC Chairman Pai promptly issued a statement strongly defending the merits and benefits of the RIF Order.

KH Assessment

  • From a political perspective, Save the Internet Act of 2019 garners support from many individuals and major edge providers committed to net neutrality principles but faces challenges in the Republican-controlled Senate.
  • In comments filed in the proceeding culminating in the RIF Order, the major wireline and wireless broadband providers supported a legislative solution that codified the no blocking and no throttling principles but not the no-paid prioritization prohibition or classifying BIAS as a telecommunications service.

It is highly unlikely that the legislation will be enacted as introduced. Though still unlikely, there is a better chance that a legislative compromise may be reached.

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Tomorrow, March 1, 2019, telecommunications carriers and interconnected VOIP providers (“Filers”) will have filed their annual certification confirming they complied with the FCC’s Customer Proprietary Network Information (“CPNI”) rules.

The FCC’s CPNI rules require Filers to establish and maintain systems designed to ensure they adequately protect their subscribers’ CPNI.   Consumer data protected by the CPNI rules includes account information, call detail information (including what numbers are called and when), and other sensitive information.

In addition to safeguarding this information, the FCC’s rules also require Filers to submit an annual certification – due March 1st of each year – documenting their compliance with the rules and detailing any complaints they received against data brokers.  A template of the CPNI filing is available on the FCC’s website (here).

The CPNI deadline filing kicks off the FCC’s “Spring Filing Season.”  On March 8th, facilities-based broadband providers must file data with the Commission on its Form 477 identifying where they offer Internet access service at speeds exceeding 200 kbps in at least one direction, as of December 31, 2018.  The filing deadline typically is March 1st, but this was recently extended for an additional week by the Commission.

The Form 477 requires fixed broadband providers to identify the census blocks in which “a provider does, or could, without an extraordinary commitment of resources, provide service.”  Mobile broadband providers file maps of their coverage areas for each broadband technology.  The Form 477 reporting portal is available here.

On April 1st, the FCC requires service providers and equipment manufacturers that are subject to the Commission’s rules implementing the 21st Century Communications and Video Accessibility Act (“CVAA”) to file annual recordkeeping certifications.  This certification confirms that the filer has taken steps to ensure its services and products are accessible by people with disabilities and that it maintains records detailing these accessibility considerations.  The Commission’s CVAA filing portal is available here.

Also on April 1st, telecommunications providers and many VoIP providers must file their annual FCC Forms 499-A with USAC, summarizing their 2018 revenues and USF contributions and making adjustments to their 2018 contributions based on the estimates in their 2018 quarterly filings.  Some states have established funds for universal service which  require contributions based on revenues from certain services and impose reporting obligations.

It can be challenging to track these deadlines and determine which obligations apply to your company or the specific services it offers.  Please contact us with questions about these – and other – ongoing compliance requirements.

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Last week, the government shutdown ended.  Shuttered government agencies re-opened on Monday morning.  The FCC announced yesterday that it has further extended the deadlines for filings that were due during the shutdown.  This new announcement supersedes all of the FCC’s previous extension announcements.

Accordingly, the FCC has established the following general deadline extensions for filings other than NORS and DIRS filings and filings related to spectrum auction activities:

  • All filings that were due between January 3 and January 7, are due today, January 30, 2019.
  • All filings that were due between January 8 and February 7 are due on February 8, 2019.

ULS Deadlines

The FCC’s Public Notice stated that all Universal Licensing System (ULS) applications and notifications that were originally due on January 3 through and including February 8 are now due on February 8, 2019.

All applications that were filed in ULS during the shutdown will be entered into ULS over the next few weeks with a January 29 receipt date.

Responsive Pleadings

Any reply or responsive pleadings that were due during the shutdown have also been extended and are now due on February 8, 2019.

Special Temporary Authority

Any Special Temporary Authority (STA) licenses that were scheduled to expire from January 3 through January 29 have been extended to February 8, 2019 (with the exception of STA’s related to post-incentive auction transitions).

Fee Payments

The Commission has extended all fee payments originally due between January 3 and February 7 to February 8, 2019.  However, this extension only applies to fee payments that can only be made through the FCC’s Fee Filer System.

Tower Construction Notification System

The Commission’s Tower Construction Notification System (TCNS) became operational this afternoon.  Because the system had been offline while the FCC suspended operations, deadlines and Tribal review timelines for filings in the TCNS system have been tolled between January 3 and January 30.  Therefore, the TCNS review clock for any Form 620 submissions filed prior to the shutdown were stopped on January 3 and resumed on January 30.

Additional Items

In addition to the extensions discussed above, Commission staff will consider requests for further extensions in individual matters on a case-by-case basis.

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For more information, please contact Tim Doughty (doughty@khlaw.com; 202.434.4271).

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The International Telecommunication Union (ITU) is a specialized organization of the United Nations which addresses international communications and information technology, regulatory, and policy issues.  Its origins date back to the formation of its predecessor in 1865, the International Telegraph Union. It plays a crucial role in promoting efficient sharing of spectrum and compatibility of communications technologies for all types of uses.

The ITU is headed by five full-time elected officials: Secretary General, Deputy Secretary General, and Directors of the Telecommunication Development (D), Radiocommunication (R), and Telecommunication Standardization (S) Bureaus.  These officials are elected roughly every four years at Plenipotentiary Conferences by the nearly 200 member countries of the ITU.  These positions are important to countries as a reflection of their technological expertise and for the opportunity to influence the priorities and work of the ITU.

From 1950 on, U.S. nationals often filled one of the full-time elected positions, with special emphasis on the Radiocommunications activities of the ITU.  U.S. nationals served as the ITU Secretary General from 1960-1965 and as the head of the R sector from 1966-1994.  However, in 1994, a new U.S. candidate to head the R sector was defeated.  From that election loss until 2018, the U.S. did not run a candidate for any of the full-time elected positions at the ITU.

Happily, this extended absence of any U.S. national as a full-time elected official at the ITU has come to an end.  At the Plenipotentiary Conference in November 2018, U.S. national Doreen Bogdan-Martin was elected Director of the Telecommunication Development Sector of the ITU beginning effective January 1 of this year.  She is the first woman ever elected to a full-time elected position at the ITU.

The Telecommunication Development function at the ITU fosters international cooperation in training, technical assistance, and the development and improvement of telecommunication equipment and networks in developing countries.  Its work facilitates understanding of competitive market principles in the sector and promotes confidence in developing countries to select and deploy new communications technologies and equipment.

Doreen Bogdan-Martin is eminently qualified for this position.  She worked from 1989-1994 at NTIA in the Department of Commerce on telecommunications development issues.  From 1994-2018, she worked at the ITU in the D bureau and other offices culminating in ten years as the first woman to head of the Strategic Planning and Membership department, which is the highest-ranking staff position at the ITU.

Congratulations to Doreen Bogdan-Martin and to the U.S. government for her election and an overdue renewal of U.S. participation on the elected leadership team of the ITU!

For more information, please contact Mike Fitch (fitch@khlaw.com; 202.434.4264).

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This Update is intended for enterprise IT, telecom, procurement staffs, and in-house counsel responsible for telecommunications management and procurements, focusing on strategies to maximize savings and optimize services to meet projected enterprise requirements.

Industry Consolidation

XO Communications is now part of Verizon, CenturyLink has acquired Level 3, and, among the cable operators, Charter has acquired Time Warner Cable.  The environment is more favorable for multinationals that can look to Orange, BT, Tata, or Telefonica to compete for their international and rest-of-world services.  Whether DoJ and the FCC, respectively, approve the T-Mobile and Sprint merger will remain an open question for several months.

Best Practices

Unlike the markets for cars and publicly traded stocks, there are no publicly available resources on pricing trends or terms and conditions for telecommunications service agreements.  The rack rates in carrier service guides do not reflect the best available pricing for any given expenditure level or mix of services.  Timely, well-planned procurements with assistance of experienced consultants remain the baseline for a successful procurement.  Additional background is available on our blog: Telecommunications Services Agreements—The Underlying Business Deal.

Importance of RFPs

Requests for proposals are the starting point for negotiations.  In addition to the essential description of a customer’s current network, desired services, and projected growth in usage, bandwidth and locations, the enterprise’s proposed terms and conditions (both business and legal) should be set out in the RFP.  Even if the carrier declines to accept certain provisions, compromise positions can be negotiated.  If preferred provisions or customer interests are not set out in the RFP, negotiations are more challenging.

Transitioning to New Services

Wireline carriers deploy new services to achieve efficiencies, remain competitive, and deliver innovative offerings and savings to customers. Many enterprises have just concluded or are working through the transition to IP voice services, principally to SIP trunking.  A newer offering is SD-WAN. It enables network flexibility, redundancy, and cost savings as compared to exclusive reliance on MPLS for corporate data communications.  Enterprises should assess the value (or accept the reality) of these services and structure their RFPs accordingly.

Limits of RFPs

In terms of enterprise telecommunications priorities, network security is now on equal footing with service reliability and availability.  The relative efficacy of carriers’ internal network security practices cannot reasonably be reduced to comparisons of responses to RFP questions.  A qualitative assessment, possibly based upon independent third-party investigations or reviews, is required.   RFPs may be structured to compare the elements and pricing of carriers’ network cybersecurity offerings, but in 2019 the relative efficacy of competing carriers’ offerings likely requires independent assessments, as well.

Negotiating Tips

Assuming the incumbent carrier submits the most compelling bid, don’t look to negotiate a new master agreement.  Focus on minimum commitment levels, lowest rates as opposed to incentive pricing schemes, migration strategies to newer, preferred services, customer support, mid-term benchmarking, service levels, and the transition period at contract expiration.  The more recent carrier master agreement templates are progressively more one-sided.  If the incumbent carrier insists on a new master agreement (or a more onerous set of general online terms and conditions), core terms and conditions in the RFP and previously negotiated provisions provide the customer’s baseline for negotiations.

If migrating to a successor carrier, be prepared for the successor’s master services agreement with a compilation of preferred clauses (which should track those included in the RFP) and propose a scope of work for the network transition, striving to limit the period during which services from the incumbent and successor carriers overlap while recognizing the carriers are loathe to negotiate a detailed transition plan as part of contract negotiations. (This intransigence makes little sense as the successful bidder typically acquires a detailed picture of a company’s existing network and locations in the customer’s RFP that, in turn, is central to the service provider’s RFP responses.) 

Dark Fiber.  Bandwidth requirements have a persistent, upward trajectory.  The questions are how fast and to what extent.  For local or regional requirements (such as connectivity to disaster recovery sites or among large, geographically concentrated facilities), an optimum solution may be a dark fiber lease or indefeasible right of use.  Additional background on dark fiber leases and IRUs is available on our blog: Enterprise Customers and Dark Fiber: An Important Connection, Part 2.

The virtue of dark fiber is that over time the enterprise can upgrade the electronics to derive more bandwidth from a given quantity of dark fibers. The challenges are that dark fiber is not ubiquitously available and the major wireline carriers and cable operators do not routinely offer or even negotiate dark fiber arrangements.  Even in markets where dark fiber is available, new construction likely will be required to establish connectivity between or among the enterprise’s locations.

Telecommunications Surcharges and State Taxes

The cost impact of telecommunications regulatory surcharges and taxes on enterprise services varies significantly based on the services being provided and is underappreciated by many enterprise customers.

The aggregate surcharge and tax burden for an interstate private line or a special access circuit can exceed 30% of the monthly charge.  Conversely, no surcharges or taxes are imposed on the charges for high speed Internet access service, but up to 65.8% of the revenues from VoIP (SIP) services are “USF-assessable.”

This disparity is driven by three considerations.  First, state and local jurisdictions need revenue and have targeted telecommunications services (wireline and wireless) as a prime revenue source.  Second, the Internet Tax Freedom Act prohibits the imposition of state taxes on charges for Internet access services.  Third, the FCC’s Universal Service Fund rules require USF contributions from service provider’s revenues from interstate and international telecommunications services and VoIP services, but excludes revenues from information services such as Internet access service.  The FCC allows services providers to recover their USF contributions via pass-throughs to customers.

The USF contribution factor (% of assessable revenues) is adjusted quarterly.  For the first quarter of 2019, the contribution factor is 20%.  Local state and sales taxes range from 3.5% to 6.0% of telecommunications services and VoIP (SIP) revenues. The major carriers also recover property taxes, gross receipts taxes, and costs of regulatory compliance, as set out in their service guides.  Adding insult to injury, these tax and cost recovery charges are added to the carrier’s USF-assessable revenues.

Questions/Follow-Up Discussion.  Keller and Heckman is pleased to offer a no-fee ½ hour follow-up conversation to discuss these topics in greater detail or respond to questions on telecom procurements.  To schedule a conversation, please contact Doug Jarrett: jarrett@khlaw.com; 202.434.4180.