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Trends Impacting Wireline Procurements

The preeminence of cloud computing warrants a “fresh look” at wide-area network design, particularly for enterprises considering wide-area network procurements. Enterprises  have an important network design choice: either (i) maintain the current MPLS-based design with its uniform security policies, substantial traffic backhaul, and site-based defined routing, or (ii) migrate to one of several versions of software-defined wide-area network (SD-WAN) technology. A useful summary of SD-WAN technology with links to more detailed explanations is available here.

Proponents argue SD-WAN technology enables application-based routing with tailored security and defined redundancy at diverse enterprise locations. These proponents also maintain the technology improves connectivity to private and public clouds and application performance and allows for reductions in MPLS bandwidth.

As online conferencing and e-commerce remain on an upward trajectory, SD-WAN arguably provides enterprises with more flexibility in meeting a broader range of telecommunications requirements. Expanded use of offnet and intra-enterprise online conferencing may also reduce demand for outbound wireline and mobile voice services.

MPLS providers advance their tried and true solution. One major carrier’s preferred solution for connectivity to cloud resources is more extensive reliance on its MPLS network, emphasizing (i) the benefits of avoiding the security and reliability risks inherent in the Internet, and (ii) the carrier’s relationships with cloud providers that enable simplified access and provisioning to cloud resources. From an enterprise network management perspective, there is substantial appeal of simply establishing another MPLS node to access its cloud service providers.

SD-WAN and the Demand Set for RFPs

For planned telecom services procurements, the possible migration to an SD-WAN requires judgement in developing the demand set for an RFP. In addition to projecting usage and traffic growth or contraction on a site-by-site basis, the RFP should be based on current and projected applications, particularly cloud-based applications. A conservative approach is to maintain current MPLS capacity but reducing it as the benefits of SD-WAN technology are demonstrated. The customer should realize the cost savings of reduced MPLS capacity and not be penalized by seeking a minimum commitment level based on the cost savings of reduced MPLS network capacity. Whether an MPLS-focused carrier will agree is a different issue.

Best Practices in Telecom Services Procurements Continue to Apply

In other respects, the basics for achieving a successful telecommunications services procurement continues to apply, including a systematic approach, a realistic procurement timeline, the value of informed telecom procurement consultants, and an understanding of revenue commitments and pricing. Likewise, the challenges confronting counsel for enterprise customers in identifying and tracking the online documents incorporated in the Agreement both during negotiations and during the life of the agreement and limited remedies remain.

Two considerations related to SLAs merit note. The first pertains to SD-WANs. Separate SLAs should be in place; one for SD-WAN performance and one for the underlying transport services. Enterprises may have to push SD-WAN technology firms to establish their SLAs or explain how their tools accurately measure performance. This is true whether the SD-WAN is provided by the transport provider or a 3rd party. Network managers should know where troubles are arising.

The second pertains to high-speed Internet access SLAs. Though no longer offered on a “best efforts” basis, improvements in enterprise broadband SLAs are incremental at best. At least one leading carrier limits its SLA for latency measured between points within its network and reserves the exclusive right to determine SLA violations. It is an open question whether measuring latency for Internet access service between points within the carrier’s network is informative. Why not from the customer’s locations?

Interestingly, the Federal Communications Commission (FCC) requires broadband services providers that are recipients of USF funds to test the speed and latency of their broadband services at the downstream/upstream speeds and latency levels the providers committed to deliver. The FCC established annual testing windows and requires testing be conducted from the customer interface to an FCC-designated IXP, defined as a facility housing a public Internet gateway that has an interface to a transitive Internet Autonomous System (ASN).  The test results must be submitted to the FCC.

The overarching issue is not the amount of credits or whether credits should be paid, but rather what is the most useful measure for assessing the performance of the broadband service being delivered.

The Federal USF Contribution Factor Now Exceeding 25%

Broadly speaking, universal service contribution obligations are imposed on revenues from interstate and international (i) wireline voice services (interconnected VoIP and TDM, including standalone voice conferencing), special access services (a/k/a Business Data Services), and private line services, and (ii) wireless voice services. Intrastate service revenues are not subject to USF contribution obligations. The same international/interstate v. intrastate distinction applies to so-called “private carrier” service revenues. Unlike sales taxes and other state transaction taxes, the USF contribution obligation is imposed on the services providers, but may be (and is routinely) “passed through” to and recovered from customers.

Though no definitive ruling has been made by Universal Service Administrative Company (USAC) or the FCC, despite repeated requests, MPLS services are generally treated as information services, and not subject to USF contribution obligations. Importantly, highspeed Internet access services are also classified as information services and are not USF-assessable services.

When the Telecommunications Act of 1996 was enacted, the revenues from Internet access services and other information services were negligible – MPLS was not broadly deployed,  wireless voice and texting were the mobile services, and wireline voice, special access, and private line services generated the vast majority of carriers’ services revenues. Cable service revenues have never been subject to USF. In 2000, the USF contribution factor was under 6%. During the 3rd quarter of 2020, the contribution factor was 26.5%, and it is set to be 27.1% during the 4th quarter. The dramatic reversal reflects the transition in communications services expenditures.

As Federal universal service programs are now geared to supporting wireless and wireline broadband services to underserved communities, low-income individuals, schools and libraries, and rural healthcare institutions, the revenue requirements for these programs are on a steady, upward trajectory. The prevalent view is that Section 254 of the Communications Act must be amended to extend the contribution obligations to revenues derived from high-speed Internet access services. Were the USF revenue base expanded in this manner, the contribution factor could decline to “sales tax” levels.