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This is the first of two entries on dark fiber arrangements for the dedicated, high-bandwidth requirements of businesses, medical and educational institutions, and state and local governments (collectively “enterprises”).

Enterprises should consider dark fiber arrangements for local and regional high capacity requirements. High-bandwidth, dedicated services (Gig-Ethernet and higher) within metropolitan areas are relatively expensive on a cost-per-mbps basis; special access service rates are not competitive and the major carriers are not aggressively competing for dedicated high capacity services in regional markets.

The second entry focuses on the two principal agreements under which enterprises may acquire dark fiber: indefeasible rights of use (“IRUs”) and leases.

Dark Fiber—In Brief

Dark fiber is a facility, comprised of glass fibers, placed in a loose tube with filler and strength members; multiple tubes may be placed within a sheath (collectively “fiber optic cable.”)  The unlit glass fibers are universally referred to as “the dark fibers.” The “fiber counts” in a fiber optic cable vary. Fiber optic cable may be installed in underground conduit (“underground”) or extended along utility poles and other aboveground infrastructure (“aerial”). Most dark fiber arrangements are between dark fiber providers and telecommunications carriers.

In dark fiber arrangements, the customer (carrier or end-user) is responsible for “lighting the fiber”—installing and maintaining the electronics, principally the transmitters to convert electrical signals into light and the receivers that convert the light back into electrical signals for processing and conveying communications. A dark fiber provider terminates its fiber optic cable in connectors or performs fiber splices between their dark fibers and its customer’s cabling or fiber at mutually agreed upon demarcation points (patch panels that may contain connectors or splice boxes or both).

Dark fiber customers typically do not physically access the dark fibers, but often require providers to perform tests to confirm the glass fibers meet end-to-end connectivity measures and that all splices connecting network fiber to the customers’ cables meet industry standards at delivery (acceptance) and that these measures and standards are maintained for the duration of the agreed upon term.

The Merits of Dark Fiber Connectivity

                  Dark Fiber is a Durable Asset. Fiber optic cables have useful lives of 20–30 years, or more.  Fiber optic technology (the cable and the electronics) is a building block of telecommunications networks throughout the world; wireless and wireline. Annual maintenance costs are modest, though fiber cuts do occur and permanent restoration is a significant undertaking that dark fiber providers price into their charges.

                  Derivable Bandwidth Will Increase Over Time. The electronics that “light” the dark fibers are part of a very large, well-funded technology ecosystem. Over the useful life of a fiber optic cable, the derivable bandwidth/capacity should increase substantially due to advances in the underlying technologies embedded in the electronics. This is why one major wireless carrier opts for dark fiber connectivity between its small cell sites and network.

                 Fiber Deployments Are Capital-Intensive. The “sunk costs” of fiber networks are substantial: right-of-way and easement acquisition, construction and other land use permitting, the installation of the fiber optic cable—underground or aerial, the fiber optic cable, and the splicing and testing of the fiber. Splicing is necessary throughout a fiber network because cable lengths are limited by amount of cable that can be rolled around spools for transport and ready deployment. Regenerators must also be installed in fiber networks as the signal must be regenerated to reach distant endpoints.

For these reasons, enterprise customers and technology companies rarely construct fiber networks extending beyond the contiguous real estate of their facilities. The major exceptions are electric utilities that have deployed fiber optic networks for years to support their operations. Utility easements and rights-of-way typically accommodate dark fiber installed for a utility’s internal telecommunications requirements.

                 Major Telecommunications Carriers Typically Do Not Offer Dark Fiber Arrangements. The three largest domestic wireline carriers: AT&T, Verizon and CenturyLink do not typically offer, if at all, dark fiber options to end user customers. It is doubtful this practice will change significantly despite Verizon’s acquisition of XO Communications and CenturyLink’s proposed acquisition of Level 3 Communications. The three largest cable operators—Comcast, Charter-Time Warner and Cox may prove more flexible.

Zayo is probably the largest, independent (as of the date of posting for this entry at least) dark fiber provider (that also offers services) in the United States. There are other metro-area fiber networks in the larger metropolitan areas. Service providers offering dark fiber arrangements exist in less densely populated areas as well, particularly along the Nation’s major North-South and East-West fiber routes.

                 Total Cost of Ownership. The full cost of dark fiber arrangements includes the cost of the electronics, the lease/use charges for the dark fibers, the dark provider’s one-time costs particularly extending facilities to a customer’s locations, and the customer’s costs in managing the electronics and monitoring network connectivity. On the other hand, the USF charges are not imposed on dark fiber transactions and sales, use and gross receipts taxes applicable to “telecommunications services” may not apply though other state taxes may apply (to be confirmed by state transaction tax counsel).

This entry highlights the consequences of the FCC’s IP Transition orders for business customers and competitive carriers in terms of costs, changes in customer premises equipment (CPE), operational impacts and, for competitive carriers, interconnection agreements.

As noted in our 1st Entry in this two-part series, each ILEC sets its own plans and time lines for implementing its IP transition. There are no FCC mandated deadlines or due dates for initiating or completing the IP transition. Subject to the FCC’s rules and policies, the ILECs may implement their IP transitions locally, state-wide or throughout all of their service territories as they see fit. The same is true for copper loop retirements.

Business Customers

For business customers with locations having relatively modest voice and data requirements, such as many retail outlets, commercial and MDU property managers, and small government offices, the transition to IP voice services is the priority concern. For higher traffic locations, including major enterprise locations, call centers, hospitals, large government facilities and data centers, the transition to IP special access services may prove the most challenging.

Wireline Voice Services

1. The IP transition may disrupt (likely accelerate) enterprise planning for deploying IP-based CPE, including IP-PBXs, to implement VoIP and SIP trunking.

2. VoIP and SIP trunking customers must manage their CPE and business processes so that their end users can complete wireline 9 1 1 calls consistent with FCC rules and comply with state and, possibly, Federal versions of “Kari’s law” that require emergency calls be completed with three-digit “9 1 1” dialing and not “9 + 9 1 1” dialing. Compliance with local wireline “emergency phone service” regulations must also be addressed.

3. Wireline voice service rates should become more competitive for all business customers as VoIP services are not subject to federal or state legacy rate or tariff regulation and as the ILECs roll-out cloud-based VoIP service offerings.

a. Points of origination and termination for wireline voice pricing will be displaced by “all-distance” pricing comparable to mobile voice pricing, encompassing  local, intrastate, interstate and, increasingly, international voice communications.

b. Thus, business customers should become familiar with the pricing for VoIP services and SIP trunking in order to compare the rates for these services to the familiar pricing for circuit-switched voice services and PBX trunks

Special Access Services

1. The vast majority of end users acquire special access services (DS-1, DS-3, OCn and Ethernet equivalents) bundled with interexchange voice or data services provided by wide-area network (WAN) service providers (a/k/a interexchange carriers.)

2. The “reasonably comparable” standard of rates, terms and conditions for replacement Ethernet services adopted in the 2015 IP Transition Report and Order provides a reasonable measure of price stability. And, based on the latest Special Access Further Notice of Proposed Rulemaking, this standard should remain in place throughout the IP transition.

3. Except for very low latency applications, Ethernet special access service should be a functional equivalent to TDM dedicated access circuits.

4. The mechanics of converting to Ethernet service could prove challenging. Copper loops may support lower speed Ethernet services, but fiber or hybrid fiber-coax may be required for higher capacity services.

a. One point of reference as to what users might expect is the transition from one WAN service provider to another. This is probably the best case scenario.

b. The IP transition will be different from WAN service provider transitions (from incumbent to successor WAN service providers) in which customers and services providers share the objective of converting customer locations to the successor provider’s network in a timely manner. In the IP transition, the process will be driven by individual ILECs each transitioning to Ethernet service per its plans and timetable.

c. In theory, customer locations served by an ILEC affiliate of the WAN service provider should have a smoother transition, assuming closer coordination between the two affiliates.

Competitive Service Providers 

In many respects, the FCC’s IP Transition orders limit the ILECs’ discretion to do as they please. At this juncture, the rules governing the IP transition are set and the competitive service providers have limited opportunity to protest or delay the process—assuming the ILECs follow the rules. Competitive service providers must be prepared to act as the ILECs implement the transition to IP-based services.

Wireline Voice Services

1.  CLECs relying on ILEC copper loops and TDM-based wholesale platform services face the challenge of migrating to different facilities and technologies to operate in all-IP environments. The ILECs may transfer/sell their abandoned copper loops to requesting CLECs, but are not required to do so.

2. The status of local service interconnection remains an open question. CLECs will benefit from the FCC’s resolution of whether IP VoIP interconnection arrangements between ILECs and CLECs are voluntary commercial agreements or interconnection agreements subject to the Section 251/252 framework.

Special Access Services

1. WAN service providers (aka “interexchange carriers”) have either implemented or currently operate IP voice and data networks. Customer transitions to these interexchange IP services are ongoing. The IP transition poses the challenge of coordinating deployments of IP special access services to customer locations based on the ILECs’ timetables and schedules.

2. WAN service providers will benefit from the FCC’s requirement that ILECs’ Ethernet special access services be made available under rates, terms and conditions that are “reasonably comparable” to the corresponding ILEC TDM services.

The “reasonably comparable standard” likely will be retained as the FCC adopts its decision in the special access proceeding.

3. Competitive Access Providers that have deployed facilities in metro areas may offer more compelling IP special access services as compared to those of the ILECs.

The ongoing challenge/question is whether competitive access providers do or will extend their networks to an end-user’s location.

For several years, the major incumbent local exchange carriers (ILECs) have been heralding the benefits of transitioning their networks to IP technology. The FCC has supported this transition. Agreeing that “less is often more” and reviewing related decisions in one entry may be helpful, this entry highlights the FCC’s recent decisions on policies and procedures for implementing the IP transition.

This is the 1st entry in a two part-series. Implications for end users and competitive carriers will be the focus of the 2nd entry.

The rules on copper loop retirements and the IP transition for retail voice services apply to price cap and rural rate-of-return ILECs with minor distinctions. The rules on wholesale services pertain principally to the price cap ILECs as these carriers offer the vast preponderance of special access and wholesale platform voice services. The FCC deserves a “tip-of-the-hat” on these decisions; the agency evaluated the merits of numerous positions and made reasonable decisions on countless issues.

An important caveat is that each ILEC sets its own plans and time lines for implementing its IP transition. There are no deadlines or due dates. Subject to the rules adopted in these FCC decisions, the ILECs may implement their IP transitions locally, state-wide or throughout all of their service territories. The same is true for copper loop retirements.

The procedural paths that include notices to customers or competitors vary.

Copper Loop Retirements. The FCC updated copper retirement rules that had been in effect for years.  Importantly, the copper replacements are subject to notice obligations, but not FCC approval. Two major changes are (1) the agency declined to allow oppositions or objections to notices of copper loop replacements, but imposed a “good faith communication requirement” on ILECs to provide additional information so that interconnecting services providers can implement changes in their networks without service disruptions, and (2) increased the notice period to just over 180 days.

Each ILEC is required to provide notice of a copper loop retirement to the Commission on the same date it provides notice “to each information service provider and telecommunications service provider that directly interconnects” to the ILEC’s network as well as changes in prices, terms or conditions associated with a copper loop retirement. The Commission then issues a Public Notice announcing the filing, effectively starting the 180-day period. Within 90 days of the date of this Public Notice, the ILEC must submit a certification that attests to timely notifications and other matters.

In addition, an ILEC must provide 180 days written notice (via mail or e-mail if authorized by the customer) of copper retirements being replaced by FTTP services to business customers and schools and libraries, and 90 days to residential customers. The FCC declined to require the ILECs to make available retired copper loops to CLECs, but encouraged ILECs to negotiate the sale of abandoned copper loops.

The rules are now in effect. Among others, Verizon and CenturyLink, are implementing copper loop retirements, identifying retirement projects by reference to affected wire centers.

Wholesale Services. In order to discontinue wholesale services (special access services and wholesale voice service platforms), each ILEC must file applications to discontinue service under Section 214 of the Communications Act. In addition, the FCC denied USTelecom’s Petition for Reconsideration of the declaratory ruling in which the FCC concluded that the term “service” in section 214(a) is defined functionally and not solely by service definitions in ILEC tariffs.

Broadly speaking, ILECs must establish that replacement IP wholesale services are “reasonably comparable” to the existing TDM services in terms of capacity, price and quality of service. For example, 100 Mbps Ethernet access service priced at market rates is not a reasonably comparable replacement for DS-1 special access service; substantially more bandwidth priced at a noticeably higher rate is not “reasonably comparable.” Importantly, “price-per-Mbps” and the net cost of the IP replacement special access service cannot be significantly higher than the pricing for the DS-1 or DS-3 service being replaced.

As a Section 214 discontinuance application is filed with the FCC, a copy must be served on the ILEC’s customers—CLECs, IXCs, wireless carriers and end users that acquire special access services directly from ILECs—as well as government offices specified under Section 214. Assuming the ILEC’s application meets the “reasonably comparable” standard, the FCC will “automatically grant” an ILEC’s Section 214 discontinuance application thirty (30) days after the application is placed on Public Notice.

This “reasonably comparable” standard is an interim rule, subject to the outcome of the FCC’s ongoing investigation into the price cap ILECs’ rates, terms and conditions for special access services—particularly DS-1 and DS-3 services. A final decision in the FCC’s multi-year special access investigation is expected this fall.

Rather than move forward under rules that will expire as the IP transition concludes, USTelecom filed a petition for review with the D.C. Circuit. Pet. for Review, United States Telecom Assoc. v. FCC, et al., Case No. 15-1414 (D.C. Cir., Nov. 12, 2015). USTelecom maintains that Section 214 does not require ILECs discontinuing wholesale TDM services to consider the impact on competitive carriers’ customers, the FCC’s Declaratory Ruling is inconsistent with Section 214 and applicable precedent, and the “reasonably comparable standard” should not apply pending the outcome of the FCC’s special access investigation.

Retail Voice Services. The FCC’s decision to facilitate the IP transition for retail wireline voice services also establishes a series of rules for “automatic grants” of ILEC Section 214 applications to discontinue TDM retail voice services. If the requisite showings are made, the ILECs may begin the transition to IP services 31 days after the applications are filed. In addition to customer notices (via mail or e-mail as authorized by a customer), the ILECs must engage in community outreach activities on the IP transition.

In support of this flexible approach, the FCC determined that the market interstate switched access services (which is tied to TDM technology) is competitive, noting the migration to wireless voice services and VoIP services have largely eroded the relevance of ILECs’ switched access services.

In addressing retail customers’ concerns, the FCC requires that replacement IP wireline voice services must (i) have substantially similar network performance metrics (latency of 100 ms or less for 95% of all peak period round trip measurements and data loss not worse than 1% for packet-based networks); (ii) maintain service availability at 99.99%; and (iii) cover the same geographic footprint as the discontinued TDM service. These criteria are intended to be technology neutral; thus, a fixed wireless replacement that meets these criteria is an acceptable replacement technology. Each ILEC must certify that each IP service “platform” meets these requirements; in order to do so, the ILEC must follow the FCC test procedures, except ILECs having 100,000 or fewer subscribers may use other test procedures.

The cost of the replacement IP service cannot be substantially more than the TDM voice service being discontinued. The IP replacement services must support critical applications such as 9 1 1 and access for persons with physical disabilities and must be interoperable with widely adopted low-speed modem devices, such as fax machines and point of sale terminals, through 2025.

This is the second entry in a series on the “Industrial Internet,” focusing on the basic elements, legal issues and procurement implications, principally from the perspective of the end user.

Distinctions between the Industrial Internet and consumer IoT are not hard and fast. For example, many consumer IoT applications are implemented through smartphone apps.  On the other hand, some operating systems and related applications are intended for industrial settings such as General Electric’s Predix (which, in turn, may be accessible through smartphone/tablet based apps).  Telematics is one area in which the line between the Industrial Internet and consumer IoT is unrecognizable.  This entry looks to highlight several distinctions and areas of overlap.

Cyber Threats and Data Privacy.  Participants in the Industrial Internet are focused on insulating their “Industrial Intranets” from cyber threats and responding swiftly to cyberattacks. The consumer IoT focuses on personally identifiable information (PII) and other data collected from consumers that are subject to cyberattacks and other vulnerabilities.  The industrial sector is concerned with the Administration’s 2013 Executive Order—Improving Critical Infrastructure Cybersecurity, sharing cyber threat information without risk of litigation, and implementing industry-specific standards such as NERC Critical Infrastructure Protection (CIP) Cyber Security Reliability Standards.  In the context of the consumer IoT, protection of PII and other sensitive data is addressed under federal and state privacy, data security, and data breach notification laws and regulations, including sector-specific laws such as HIPPA, and industry guidelines.

Enhanced Analytics.  The Industrial Internet exists to acquire information from physical assets and implement real time response, make predictive judgements on wear and tear, adjust maintenance and replacement cycles, and to modify equipment design, materials or components based on increasingly sophisticated and powerful data processing capabilities.  This feedback will be implemented rapidly over the next several years as the software components of industrial machinery become more central to equipment design and operation.  Parallel developments in the consumer IoT are most apparent in the manufacture and maintenance of automobiles as car manufacturers send software updates to vehicles via wireless communications.  Presently, the consumer IoT is more focused on real time feedback (wearables) and operations such as app-based home security systems and smart thermostats; more in-depth analytics are on the horizon.

Industrial Intranets v. Consumer IoT — Communications.   The consumer IoT relies on unlicensed spectrum having varying propagation and coverage characteristics, commercial mobile service and, in most cases, backhaul via the public Internet to or from smart phones.  In some instances, consumer IoT applications may be routed from the mobile services provider to an entity’s MPLS port for delivery to its destination/data center.

Communications over Industrial Intranets are more diverse.  Critical infrastructure industry communications from the RF device to enhanced analytics resources may never traverse mobile wireless networks (but conveyed over privately licensed wireless networks), the public Internet or any carrier-provided service.  The challenge for critical infrastructure companies is that mobile broadband services and public Internet services are “best efforts” services.  SLAs for availability and latency, for example, are not offered.  Mobile services providers decline to set aside capacity to provide the wireless equivalents of private line or MPLS offerings.

In manufacturing and petrochemical facilities, communications to and from devices may be conveyed via fiber optic lines for on–premise, real- time review and response, and then  conveyed over carrier-provided services to the company’s enhanced analytics resources.  In other use cases, transport over the mobile broadband service is essential, such as data communications to and from farm machinery operating in fields or monitoring assets in transit.

Data Ownership.  Federal and state privacy laws presume that individuals own their on-line data that companies may collect. The myriad state and federal privacy laws dictate how online companies may acquire, use and share this data, and how this data must be secured, managed and discarded.  The questions of ownership and confidentiality of data generated on Industrial Intranets are more nuanced and will likely be a focal point for negotiations going forward.

Consider the operation of heavy equipment, such as jet engines or escalators used in rail commuter networks, such as the DC Metrorail system.  The escalator manufacturer and WMATA, respectively, have strong interests in acquiring the performance data of the Metrorail station escalators.  The “crunched data” could provide insights into whether recurring downtime events are attributable to improper or insufficient preventive maintenance; design, material or manufacture defects; or improper installation.  The data are important to the manufacturer (to implement changes in design or materials) and to end users (to implement changes in maintenance and for purchase decisions for replacement equipment).

A purchaser of capital equipment may also want to know how the performance of its equipment compares to the performance of the same or comparable equipment of other operators.  This “relative data” will indicate whether any significant maintenance/down time experienced by the operator are related to design, materials or manufacture defects or to operations or maintenance issues that the operator can address.  Over time, equipment warranties could be based on a given product’s performance relative to the performance of the same equipment sold to other companies.

 

This is the first entry in a series on the “Industrial Internet,” focusing on the basic elements, legal issues and procurement implications, principally from the perspective of the end user. The term is used to distinguish industrial and critical infrastructure applications from consumer “Internet of Things” applications, but similar concepts apply.

The unifying characteristic is that information on attributes of physical objects (or the human body with regard to wearables and medical telemetry) is acquired by sensors that digitize, analyze (to varying degrees) and transmit this data. Based on software programmed rules, the sensors may issue commands to actuators to change or modify the operation of physical assets.  Sometimes the data is simply displayed and stored locally. An important function of the Industrial Internet is that the data is almost always subject to more in-depth analysis.

In over-simplified terms, in the Industrial Internet information is acquired from physical assets (electric generators) or local environments (refrigerated trailers (“reefers”)), by sensors affixed to or embedded in physical assets to measure specific parameters such as vibrations, pressure or temperature. Sensors often consist of software, firmware and a CPU and are connected to an RF transceiver or to a fixed wireline network (local or wide area).

As digitized, the data from sensors (different sensors measure different physical attributes) are transmitted (via wireless or wireline connectivity) to a local gateway, collection point or node (“node’) that, based on programmed rules and the information received, may issue commands to actuators (switches or valves) to shut down or modify operation of the equipment, lower the temperature, adjust the humidity, or trigger alarms for management intervention. In time-critical applications, the sensors may communicate with other sensors to take specific action.

After initial processing and commands by sensors or nodes (“at the edge”), the data is conveyed (real-time or not) to a “backend” (data processing capability (cloud-based or not)) that may either issue commands to the actuators or perform more in-depth analysis or both. This analysis may suggest changes in the prognostics or other programmed rules in the sensors or nodes, in data sampling frequency, or in the maintenance, manufacture or operation of the physical assets.

Except in enclosed facilities (such as factories or electric substations), the sensors or the nodes are often connected by one or more wireless pathways.  The wireless data are typically routed to a wireline Internet connection, a MPLS port or a private network on to the backend.  Industrial Internet communications are typically encrypted.  Advances in operating system software and miniaturization (to accommodate local processing and issuance of commands by the sensors), IP connectivity, data management software, and “big data” processing capabilities enable the Industrial Internet.

The term “Industrial Internet” is something of a misnomer.  An entity’s physical assets, its use of sensors (and nodes), and encrypted connectivity to the backend are typically a company-specific operation, not intended to be widely accessible.  Thus, these networks may better be referred to as “Industrial Intranets.”

Footnote:  This series is not focused on computer-controlled equipment, processes or technologies, such as robotics, used to produce refined products and chemicals, industrial equipment and consumer goods, collectively referred to as Industrial Control System (“ICS”) technologies.  Auto assembly plants, refineries and soft drink bottling plants utilize ICS technologies.

It is all-too-fitting that the annual USF report is due on April 1.  For many filers, OMB’s “Estimated Average Burden Hours Per Response” of 13.5 hours for completing the Form 499-A is laughable.  The FCC could substantially reduce USF reporting burdens by implementing a number of overdue changes.

Many process improvement proposals offered in comments filed in response to the FCC’s 2012 Further Notice of Proposed Rulemaking remain viable and doable.  These changes are independent of any FCC decision on whether, when or how to expand the base of USF-assessable revenues.  Here is a short list of USF reporting reforms the FCC should adopt.

1. Resolve appeals of USAC decisions consistent with the timelines in Section 54.724 of the FCC’s rules or revise the target dates for making decisions.

If the expert agency sits on its hands, inconsistent decisions by filers are inevitable.

2. Address USF contribution reporting questions through analogues to IRS Private Letter Rulings or      Revenue Rulings.

Determining USF contributions can be problematic because filers often must address the vexing question of whether a service is a telecommunications service or an information service.  Many of these questions remain unanswered for years. The FCC or the Wireline Competition Bureau is in the best position to answer these questions.

3. Balance the current asymmetrical periods for correcting USF reporting mistakes (5 years for underpayments and 1 year for refunds/adjustments for overpayments).

This is a no-brainer.

4. Limit adjustments to the USF contribution factor to once a year.

While USF contributions may not be “taxes,” it is noteworthy that state sales and use taxes typically are not adjusted quarterly.  This would be a “win-win” for filers and USAC.

5. Set “safe harbors” for determining interstate/international and intrastate traffic mixes for wireless and VoIP traffic that reasonably correspond to reported values.

Filers cannot be expected to remit USF contributions based on “safe harbors” that bear no relation toactual jurisdictional traffic mixes.  This would be another “win-win” for filers and USAC.

The FCC should also adopt a self-disclosure program to encourage non-filers and late-filers to register and report and remit USF contributions and all other regulatory payments.  Under this approach, the services provider would pay the amounts owed, a reasonable measure of “economic benefit” for late payment, and a realistic forfeiture amount.  Let’s maximize support for important programs and try to keep services providers in the game.  This is far better than the treble damages methodology outlined in the 2015 Forfeiture Policy Statement.

As widely reported, Verizon has entered into an agreement to acquire the fiber network business and assets of XO Communications from its sole shareholder Carl Icahn for $1.8 Billion, plus an option to purchase XO’s spectrum that expires at the end of 2018. Verizon is also leasing the spectrum from XO, presumably to “test drive” the spectrum until it either exercises or passes on the option.

In Verizon’s words, “[Its] ownership of XO’s fiber-based IP (Internet protocol) and Ethernet networks will help better serve enterprise and wholesale customers.  In addition, acquired fiber facilities will help Verizon continue to densify its cell network.”  The XO acquisition is reminiscent of Verizon’s acquisition of MCI that closed just over 10 years ago and delivered a global network and a sizable customer base, though Verizon had to outbid Qwest International (now CenturyLink), paying $8.5 Billion.

For enterprise customers, the merits of the transaction are mixed.  XO had become a viable competitive MPLS carrier often as a customer’s secondary MPLS provider.  This role likely ends as the transaction closes.  While not having the size or scale of the MCI network, the XO assets are substantial and XO’s network will support both Verizon’s wireless and enterprise businesses.

The remaining domestic-based “competitive carriers” of substantial scale are dwindling.  The largest by far is Level 3 which recently acquired tw telecom.  The Verizon-XO transaction triggers speculation whether Comcast or, perhaps, Charter-Time Warner, assuming that deal closes, might pursue Level 3. Such an acquisition would secure a meaningful position in the global enterprise market and a valuable IP-backbone.

For better or worse, you decide, the FCC is challenged when adopting policies or making decisions that impact enterprise customers.  This is the second of two entries on enterprise customers and the FCC.

IP Transition.  Responding to persistent calls from AT&T, Verizon and CenturyLink, the FCC is in the midst of setting the ground rules for telecom carriers to migrate from copper networks and TDM services to fiber networks and all-IP services, consistent with Section 214 of the Act which requires the FCC to balance carriers’ and end-users’ (residential, SMB and enterprise) interests as carriers seek to discontinue existing services and facilities.

These rules may impact enterprise discretion on planned migrations to Ethernet private line, VoIP offerings and Ethernet special access service, shifting the timing and extent of migrations to the wireline carriers.  There are three major aspects to the FCC’s IP-transition rules.

1.   Wireline telcos retiring copper loops must provide at least six months’-notice to business customers by mail or e-mail (under certain circumstances) when retiring copper loops to the premises, unless the customer previously consented to copper retirements.

2.  The FCC is requiring the rates, terms and conditions for the replacement Ethernet special access services be “reasonably comparable” to the discontinued DS-1 and DS-3 access services.

3.  The FCC is developing principles to govern the discontinuance of TDM voice and private line services.

Recommendation.  Retailers, railroads, financial institutions and other enterprises with several hundred or even several thousand domestic locations should develop IP migration plans, mindful that carriers are not required to implement their IP transitions over a defined period or uniformly throughout their service territories.

USF Contribution Reform Lags—Badly.  The FCC’s most recent effort to implement USF contribution reform started and stalled in 2012.  Despite the numerous thoughtful comments and recommendations, inertia prevailed.  In its 2015 Open Internet Order, the FCC stated that contribution reform is being assessed in a separate proceeding.  Unfortunately, agency action is not eminent even though the USF Contribution Factor has now hit 18.2%.

For better or worse, you decide, the FCC is challenged when adopting policies or making decisions that impact enterprise customers.  This is the first of two entries on enterprise customers and the FCC.


Open Internet Order.  With no explanation, the FCC excluded high speed Internet access service sold to enterprise customers from the rules adopted last year in its Open Internet Order.  These customers do not benefit from the bright line rules, principally the rule that ISPs not block publication of or access to lawful Internet content, and the broadband Customer Proprietary Network Information (“CPNI”) rules.  By including mobile broadband service in the definition of regulated, mass market Broadband Internet Access Service (“BIAS”), the FCC appears to be saying that the Open Internet rules apply only when employees purchase wireless service directly, but not when purchased under enterprise wireless agreements.Assuming the Open Internet Order survives judicial review, the merits of two regulatory regimes for the same service will be determined in the marketplace.

Special Access Service Investigations.  Since at least 2002, the FCC has been investigating—with varying degrees of focus—whether the rates charged by the price cap ILECs for special access services (principally DS-1 and DS-3) are or are not “just and reasonable”  under Title II of the Communications Act.  (In other words, are special access rates too high?)  The high water mark came in 2012 when the FCC suspended its rules granting price cap ILECs special access pricing flexibility because the FCC determined that the “collocation triggers [for pricing flexibility] are a poor proxy for the presence of competition sufficient to constrain special access prices.”  To assess the extent of competition, the FCC sought data on both TDM and Ethernet-based dedicated access services.  With data collection now complete, the FCC and services providers are engaged in a lengthy data review process.

Concerns raised by competing carriers prompted the FCC in 2015 to open another proceeding to investigate price cap carrier special access tariff pricing plans.  The FCC noted that the competing carriers allege these pricing plans “incorporate a complicated web of all-or-nothing bundling, loyalty and term commitments, complex enforcing penalties, circuit migration rules and other provisions.”

That the FCC recognizes special access pricing is problematic is positive.  The remaining questions are whether, when and how the FCC will respond.

This year’s mergers-and-acquisitions boom is re-shaping industries and contributing handsomely to the bottom lines of leading investment banks.  One statutory provision triggered in many transactions—not just those involving major wireless or satellite broadcasting companies—is Section 310(d) of the Communications Act of 1934, as amended. This provision requires that the FCC grant its prior consent to the assignment of radio station licenses or the transfer of control of a radio station licensee.

Radio licenses issued by the FCC are essential assets of commercial wireless carriers such as Verizon or AT&T, TV and radio broadcast licensees, and satellite broadcasting companies.  These are among the prized assets in transactions involving these companies. Section 310(d) is the principal lever available to the FCC and interested parties for assessing whether major transactions involving communications and media companies are in the public interest.

Section 310(d) is sometimes overlooked in transactions involving entities that are not telecommunications companies, but have obtained FCC licenses to operate mobile, fixed or satellite radio systems to support the target company’s internal wireless voice and data communications requirements.

These are often referred to as “private wireless systems” and are widely deployed by operators of oil and gas pipelines, refineries, exploration and production fields; electric distribution and transmission networks and power generation facilities; chemical plants; and railroads. Large retailers, some logistics companies, and many manufacturing companies also operate private wireless systems.

Investments in private wireless systems by a critical infrastructure company are often measured in millions of dollars.  Apart from the technology, these licenses are valuable in and of themselves because in many areas of the country the spectrum allocated for private wireless systems is exhausted or the company paid several million dollars to obtain area-wide licenses at an FCC auction or acquired the spectrum from auction winners—consistent with the FCC’s secondary markets rule.

Assignment and transfer of control applications pertaining to private wireless systems do not raise major public policy or competitiveness issues and almost always are reviewed and acted upon by the FCC’s Wireless Telecommunications Bureau or the Satellite Division of the International Bureau.  Timeliness is essential to avoid the possibility of an enforcement action as the FCC’s consent must be obtained prior to closing.

Generally, these applications should be filed no later than 60 days prior to the anticipated closing date.  The principal due diligence task is developing the inventory of the target company’s FCC licenses and confirming the licenses are in good order, as discussed below.

In reviewing applications for transfers of control or the assignment of licenses, the FCC focuses on whether the licenses subject to the transaction are in effect (not expired) and are “constructed,” or, as applicable, the geographic coverage requirement has been met;  the assignee or transferee (or an affiliate of the assignee or transferee) meets the FCC’s “eligibility requirements” for each license; direct and indirect foreign ownership questions regarding the assignee/transferee are addressed;  the required certifications are made, including whether the transferee or the assignee, or any controlling entity, has been convicted of a felony in state or federal court; and whether  the applicants are delinquent in fees owed the FCC.  In certain instances, the FCC license-holding entities of the acquiring company must be disclosed.